10-K/A 1 g69947a1e10-ka.txt KELLSTROM INDUSTRIES, INC. 12/31/2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-23764 KELLSTROM INDUSTRIES, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3753725 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1100 INTERNATIONAL PARKWAY SUNRISE, FLORIDA 33323 (Address of Principal Executive Offices) (Zip Code) (954) 845-0427 (Registrant telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share (Nasdaq National Market) Preferred Stock Purchase Rights (Nasdaq National Market) (Title of Each Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 6, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $21,352,014 based on the closing price on that date of $2.20 per share. As of that date, there were 11,910,981 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits listed in Part IV of this Annual Report on Form 10-K are incorporated by reference from prior filings made by the registrant under the Securities Act of 1934, as amended. 2 Explanatory Note This Amendment on Form 10-K/A to Kellstrom Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2000 is being filed to amend in its entirety Item 14(a)(1) of Kellstrom's Annual Report on Form 10-K in order to provide audited guarantor/non-guarantor financial statements and to comply with formal requirements regarding the presentation of certain pro forma information. 3 Kellstrom Industries, Inc. Amendment No. 1 to Annual Report on Form 10-K/A Index

2 4 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements are filed as part of this Form 10-K: Kellstrom Industries, Inc. Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Earnings for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 3 5 The following Consolidated Financial Statements are attached hereto:

6 Independent Auditors' Report The Board of Directors and Stockholders Kellstrom Industries, Inc.: We have audited the accompanying consolidated balance sheets of Kellstrom Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2000. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts for the years ended December 31, 2000, 1999 and 1998. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kellstrom Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Ft. Lauderdale, Florida March 28, 2001 F-1 7 ITEM I. FINANCIAL STATEMENTS KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts)

See accompanying notes to consolidated financial statements F-2 8 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)

See accompanying notes to consolidated financial statements F-3 9 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (In thousands, except share data)

See accompanying notes to consolidated financial statements F-4 10 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

(continued) See accompanying notes to consolidated financial statements F-5 11 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

See accompanying notes to consolidated financial statements F-6 12 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 (In thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Kellstrom Industries, Inc.'s (the "Company") principle business is the purchasing, overhauling (through subcontractors), reselling and leasing of aircraft parts, aircraft engines and engine parts. The Company's customers include major domestic and international airlines, engine manufacturers, engine part distributors and dealers and overhaul service suppliers throughout the world. PRINCIPLES OF CONSOLIDATION The Company has ownership in wholly-owned subsidiaries as well as a 50% ownership in KAV Inventory LLP ("KAV"), a joint-venture formed on December 1, 2000 with Aviation Sales Company. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries; however, because the Company does not exercise control over KAV, they do not consolidate the accounts of KAV. All significant intercompany transactions have been eliminated. The Company does not recognize equity method gains and losses in KAV based solely on its percentage ownership but rather on the Company's claim on KAV's book value. REVENUE RECOGNITION Revenue is recognized when the product is shipped and the risks of ownership transfer to the customer. Revenue from equipment under operating leases is recognized as rental revenue on a straight-line basis over the lease term, except for fees related to the usage of the equipment. Fees charged related to the usage of the equipment is recognized at the time of usage. Revenue from the sale of inventory consigned to the Company is recorded gross with revenue recognized upon shipment of the product, with the associated cost of sales equal to revenue less the agreed upon consignment fee. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or net realizable value. Cost is primarily determined using the specific identification method for individual part purchases and whole engines and on an allocated cost basis for dismantled engines and aircraft and bulk inventory purchases. Inventories are made up primarily of new, refurbished and as removed engines, engine parts, rotables and expendables. NOTES RECEIVABLE Notes receivable are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the note receivable may not be recoverable. Recoverability of notes receivable is determined based upon the Company's assessment as to whether the maker of the note has the ability to make the required payments. If notes receivable are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds management's estimated amount to be collected. F-7 13 EQUIPMENT UNDER OPERATING LEASES The cost of equipment under operating leases is the original purchase price plus overhaul costs. Depreciation of the cost is computed based on a usage-variable method, which adjusts straight-line depreciation to reflect the usage levels of the equipment. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (including assets acquired under capital leases) are stated at cost. Depreciation on property, plant and equipment is calculated on the straight-line method over the following estimated useful lives: building and improvements - 25 years, machinery and equipment - 3 to 10 years and furniture and fixtures - 7 years. GOODWILL Goodwill represents the excess of purchase price over fair value of net assets acquired, which is amortized on a straight-line basis over the expected periods to be benefited, generally 15 to 35 years. Amortization expense of goodwill was $3.5 million, $3.2 million and $2.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The Company assesses the recoverability of the carrying value of goodwill by determining whether the carrying value can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate commensurate with the risks of the acquired operation. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization of goodwill was $10.4 million and $6.9 million at December 31, 2000 and 1999, respectively. DEFERRED FINANCING COSTS The costs associated with obtaining financing are included in the accompanying balance sheets as deferred financing costs and are being amortized on a straight-line basis over the life of the related debt, which currently ranges from one to seven years. Amortization expense was $2.1 million, $2.0 million, and $1.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments, consisting of cash and cash equivalents, trade accounts receivables, other current assets, equipment under operating leases, trade accounts payables, accrued expenses, capital lease obligations and notes payable to banks, is based on the short maturity of these instruments which approximates book value at December 31, 2000 and 1999. The book value of the notes receivable approximates its fair value due to what management believes to be adequate reserves for collectibility and due to the stated interest rate approximating market rates. The Key Notes' book value approximates fair value. The fair value of the convertible subordinated debt, which is estimated by the current market price, was approximately as follows at December 31, 2000 (in thousands): 5 1/2% Convertible Subordinated Notes Recorded value........................................................ $86,250 Fair value............................................................ $34,500 5 3/4% Convertible Subordinated Notes Recorded value........................................................ $54,000 Fair value............................................................ $21,600 F-8 14 COMMITMENTS AND CONTINGENCIES The Company records liabilities for loss contingencies, including those arising from claims, assessments, litigation, fines and penalties, and other sources when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. EARNINGS (LOSS) PER SHARE The Company computes earnings (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 established standards for computing and presenting basic and diluted earnings per share and applies to entities with publicly held common stock or potential common stock. Basic earnings (loss) per share ("EPS") is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Common equivalent shares assume the exercise of all dilutive stock options and warrants. Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets, including intangible assets, used in the Company's operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to appraisals in conjunction with future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. STOCK-BASED COMPENSATION Stock-based compensation is recognized in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. For disclosure purposes, pro forma net income and pro forma earnings per share are provided as if the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation," had been applied. ACCOUNTING CHANGES In December 1999, the SEC issued SAB 101, "Revenue Recognition in Financial Statements" which establishes criteria for revenue recognition and disclosure. The Company adopted the provisions of SAB 101 in the fourth quarter of fiscal 2000. The adoption of SAB 101 did not have an impact on the Company's consolidated financial position, results of operations or cash flows. F-9 15 In March 2000, the FASB issued FIN No. 44, "Accounting for Certain Transactions Involving Stock Compensation." FIN No. 44 clarifies the application of APB No. 25, "Accounting for Stock Issued to Employees." The provisions of FIN No. 44 were effective July 1, 2000. The adoption of FIN No. 44 did not have an impact on the Company's consolidated financial position, results of operations or cash flows. RECENT ACCOUNTING PRONOUNCEMENTS In June, 1998 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on January 1, 2001, did not have an impact on the Company's consolidated financial position, results of operations or cash flows. RECLASSIFICATIONS Certain 1998 and 1999 financial statement amounts have been reclassified to conform with the 2000 presentation. 2. LIQUIDITY The Company is highly leveraged. Furthermore, the Company's liquidity and ability to meet its obligations as they become due in 2001 are subject to, among other things, continued access to the Senior Revolving Credit Facility and compliance with the terms and covenants of the Company's debt agreements. The Company's senior debt requires it to maintain specified financial ratios and satisfy certain financial tests. At December 31, 2000, the Company was not in compliance with the financial covenants relating to net worth, debt to EBITDA, fixed charge coverage and net income contained in the Senior Credit Facility and the Key Notes. The Company has obtained waivers from its lenders for its non-compliance as to prior periods. In addition, the Company has amended the financial covenants under its Senior Credit Facility and the Key Notes for future periods. A breach of any of the financial covenants in the Company's debt instruments could result in a default under these debt instruments. Upon the occurrence of an event of default under the senior debt, the respective lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. Substantially all of the Company's assets are pledged as collateral security for the Senior Credit Facility. If the Company were unable to repay all outstanding amounts under its senior debt, the lenders could proceed against the collateral granted to them to secure that indebtedness, and any proceeds realized upon the sale of this collateral would be used first to satisfy all amounts outstanding under the Company's Senior Credit Facility, and thereafter, any of the Company's other liabilities. In addition, the Company may be prevented from making new borrowings or drawing down further on its Senior Credit Facility. The Company does not currently believe that it will have sufficient available liquid resources to repay the principal balance of the Convertible Subordinated Notes at maturity. Other than cash flow from operations, the Company's primary source of cash is its Senior Credit Facility. The commitments under the Senior Credit Facility expire on the earlier of December 14, 2003 or six months before the first maturity of the Convertible Subordinated Notes if the Company has not secured a commitment to refinance the Convertible Subordinated Notes satisfactory to the lenders under the Senior Credit Facility. The Convertible Subordinated Notes mature in October 2002 ($54.0 million) and June 2003 ($86.3 million). Furthermore, the Senior Credit Facility prohibits prepayment of the Convertible Subordinated Notes. In addition, the Company believes that there is uncertainty regarding its ability to refinance the Convertible Subordinated Notes. The Company's ability to repay or refinance any Convertible Subordinated Notes and to meet its other financial obligations, depends on the availability of new sources of funding, which will in turn depend on the Company's operating performance, the state of the financial markets and other factors at the time that the Company wants to repay or refinance these outstanding notes. Accordingly, the Company makes no assurance that it will be able to meet its obligations to repay or refinance the Convertible Subordinated Notes, and the Senior Credit Facility indebtedness, when they become due. If the Company is unable to repay or refinance the Convertible Subordinated Notes, the Company will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. F-10 16 The Company has commenced an exchange offer for all $54.0 million of its outstanding series of 5 3/4% convertible subordinated notes due October 15, 2002 and all $86.3 million of its outstanding series of 5 1/2% convertible subordinated notes due June 15, 2003 (collectively, the "old notes"). Under the offer, holders can elect to exchange their old notes for either new 8 1/2% senior subordinated notes due 2008 or new 6% convertible subordinated notes due 2008 (collectively, the "new notes"). Holders will receive $1,000 principal amount of new notes for each $1,000 principal amount of their old notes, and will receive accrued and unpaid interest on their old notes in cash. The new 8 1/2% senior subordinated notes will rank equal in right of payment to the Company's existing senior subordinated notes, which were issued in November 2000. Both the new 8 1/2% senior subordinated notes and the 6% convertible subordinated notes will rank senior in right of payment to any old notes remaining outstanding after completion of the offer. No more than $30 million principal amount of new 8 1/2% senior subordinated notes will be issued in exchange for old notes. If the 8 1/2% note option is oversubscribed, the $30 million of 8 1/2% notes will be issued in exchange for old notes of either series tendered for the 8 1/2% note option, depending on the total participation of that series in the offer. The balance of the old notes tendered for the 8 1/2% note option over $30 million will be exchanged for new 6% convertible subordinated notes. There can be no assurance that the exchange offer will be successful. Economic and other factors that are affecting the airline industry have negatively impacted, and may continue to negatively impact, the Company's business. Pricing of the inventory the Company needs for its business is affected to a degree by the overall economic condition of the airline industry, which has historically been volatile. The demand for after-market engines and aircraft and engine parts is driven primarily by flying hours or cycles. These parts must be serviced or replaced at scheduled intervals. As a result, the demand for after-market parts is a function of the volume of worldwide air traffic. Additionally, factors such as the price of fuel affect the aircraft parts market, since older aircraft (into which repaired or overhauled aircraft parts are most often placed) become less economically viable as the price of fuel increases. During a downturn in the aviation industry, there may be reduced overall demand for the equipment the Company provides, lower selling prices for its products and increased credit risk associated with doing business with industry participants. The airframe and engine parts after-market has experienced a downturn during the latter part of 2000, which has continued into 2001. A number of companies in the industry have encountered financial difficulties as a result of it. Consequently, many companies within the industry have been forced to sell inventory at reduced prices in order to generate cash. The Company's gross margin and fair value of inventory have been negatively affected by these deteriorating conditions. Additionally, according to reports by a few large airlines, during the first quarter of 2001, the airline industry has began to experience a slowdown in overall traffic, which the Company's management believes has reduced demand for after-market parts. As a result, during the fourth quarter of 2000, the Company recorded inventory write-down and impairment of equipment under operating lease of $50.6 million. The Company's ability to maintain compliance with the covenants and terms of its debt agreements, and its ability to service its debt and to satisfy its other obligations will depend upon, among other factors, the Company's operating performance, including its ability to implement its business strategy, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond its control. If the Company is unable to maintain compliance with its debt agreements or service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. This could impact the carrying values and classification of the Company's assets and liabilities. 3. CONCENTRATION OF CREDIT RISK The Company's business is impacted by the general economic conditions of the commercial aviation industry. Airlines and other operators recognize the need to cut costs, shift inventory requirements, and conserve capital to sustain profitability. The Company's industry is also subject to regulation by various governmental agencies with responsibilities over civil aviation. Increased regulations imposed by organizations such as the Federal Aviation Administration may significantly affect industry operations. Accordingly, economic and regulatory changes in the marketplace may significantly affect management's estimates and future performance. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. For the years ended December 31, 2000, 1999 and 1998, the Company's five largest customers collectively accounted for approximately 34%, 36% and 42%, respectively, of the Company's consolidated revenues. For the year ended December 31, 2000, one customer accounted for approximately 10% of the Company's consolidated revenue. 4. ACQUISITIONS On April 1, 1998, the Company, through a wholly-owned subsidiary, completed the acquisition of substantially all of the assets and assumed certain liabilities of Integrated Technology Corp. ("ITC") for $20.5 million in cash, plus up to $10.0 million cash consideration which may be paid in the form of an earn-out payable over three years based on certain specified criteria, of which $1.1 million, $1.1 million and $3.3 million was earned during 2000, 1999 and 1998, respectively. In addition, the Company received a three-year option to purchase a 49% interest in a related FAA-approved overhaul facility. On June 17, 1998, the Company completed the acquisition of the outstanding capital stock of Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts," and together with Aerocar Aviation, "Aerocar") for $42.3 million in cash, warrants to purchase an aggregate of 250,000 shares of the Company's common stock, exercisable at $26.00 per share, expiring on June 17, 2001 plus an additional $5.0 million note, payable within a two-year period after closing, either in cash, or at the option of the Company, in shares of common stock having an equivalent value as of the date of acquisition, such note was fully paid in cash in 1999 and 2000. On December 31, 1998, the Company acquired all of the outstanding capital stock of Solair, Inc. ("Solair"), a wholly-owned subsidiary of Banner Aerospace, Inc. for $57.4 million in cash and a warrant to purchase 300,000 shares of common stock at an exercise price of $27.50 per share, expiring on December 31, 2002. On April 29, 1999, the Company acquired all of the outstanding capital stock of Certified Aircraft Parts, Inc. ("Certified") for $16.7 million in cash and assumed $2.7 million in debt. On December 1, 2000, the Company acquired the aircraft and engine parts resale business of Aviation Sales Company ("AVS"), which had been operated through AVS' subsidiary, Aviation Sales Distribution Company ("AVSDC"). AVSDC was a leading provider of aviation inventory and inventory management services. AVSDC sold aircraft spare parts and provided inventory management services to commercial passenger airlines, air cargo carriers, maintenance and repair facilities and other redistributors throughout the world. F-11 17 The aggregate purchase (net of assumed liabilities) paid by the Company to AVSDC for the assets was approximately $21.7 million (which included $13.7 million for a subordinated note issued by the JV described below) and warrants which the Company may issue to other entities to purchase up to 220,000 shares of the Company's common stock. In connection with the transaction, the Company acquired a portion of AVSDC's non-inventory assets and assumed a portion of AVSDC's accounts payable and accrued expenses. Also, in connection with the acquisition, the Company and AVS established an off-balance sheet joint venture, KAV Inventory LLC ("KAV"), which acquired substantially all of the inventory of AVSDC for an aggregate purchase price of approximately $148.6 million, of which approximately $105.5 million was paid in cash, $27.4 million was paid by delivery of two 14% five-year senior subordinated notes (each in the original principal amount of $13.7 million) and approximately $15.7 million which was paid by delivery of a 14% five-year subordinated note. One of the $13.7 million senior subordinated notes was purchased by the Company as part of the acquisition. The inventory purchase was funded by KAV through a senior credit facility provided by Bank of America, N.A. and through seller-financing. Each of AVS and the Company have agreed to share equally the operational expenses of KAV beyond the amount which KAV is permitted to pay under its senior credit facility. AVS and the Company posted letters of credit in favor of Bank of America, N.A., as agent under KAV senior credit facility, in the amounts of $8.5 million and $6.5 million, respectively. The letters of credit may be drawn upon by Bank of America if there shall occur an event of default under KAV senior credit facility. In connection with the inventory purchase, KAV entered into an exclusive arrangement with the Company pursuant to which the Company will have the right to sell the inventory acquired by KAV (the "Consignment Agreement"). The Consignment Agreement provides for a consignment fee to the Company of 20% of net sales until all amounts outstanding under KAV's senior credit facility and the senior subordinated notes issued by KAV in connection with the inventory purchase have been paid, and 35% thereafter. The Consignment Agreement generally terminates on the later to occur of December 1, 2005 or the date on which all amounts outstanding under the KAV's senior credit facility and the subordinated notes issued by the KAV in connection with the inventory purchase have been paid. In addition to the leases discussed in note 5, the Company leased the 545,000 square foot corporate headquarters and redistribution warehouse of AVSDC for a period of five years at a monthly rental rate of the lesser of $384,000 or the actual monthly lease payments paid by the lessor on the facility. The Company has the option to renew the term of the headquarters and redistribution warehouse lease for five consecutive five year periods, at the then fair market value rental rate. Pursuant to the terms of a Cooperation Agreement entered into in connection with the acquisition of assets and the inventory purchase, the Company and AVS entered into a supply arrangement pursuant to which AVS will purchase parts inventory for its maintenance repair and overhaul operations through the Company and will sell any excess parts inventory through the Company. Pursuant to the terms of a Non-Competition Agreement entered into in connection therewith, AVS is restricted for up to five years from engaging in the business of purchasing for resale, exchange or lease aircraft for disassembly, aircraft engines, aircraft parts and aircraft engine parts. Each of the companies acquired are in the business of purchasing, overhauling (through subcontractors), reselling or leasing of aircraft, avionics and aircraft rotables, or engines and engine parts. Each of these acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, the consolidated financial statements reflect the results of operations of the acquired businesses from the dates of acquisition. The following table sets forth selected pro forma information of the Company for the 12 months ended December 31, 2000 and 1999. The pro forma information is based on historical financial statements of the Company and has been adjusted to reflect the acquisition of AVSDC as though the companies had combined at the beginning of the periods being reported. The pro forma information is based on certain assumptions and does not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor does it purport to be indicative of the results that will be obtained in the future. Years Ended December 31, ------------------------ 2000 1999 ---------- ------------ (In Thousands, except per share amounts) Revenues $ 527,282 $ 558,838 (Loss) income before extraordinary items (29,192) 11,743 Net (loss) income (30,541) 11,743 (Loss) income per share - basic (2.56) .99 (Loss) income per share - diluted (2.56) .86 5. CAPITAL LEASE OBLIGATIONS In connection with the AVSDC acquisition, the Company entered into a lease with AVSDC pursuant to which the Company agreed to lease certain furniture, fixtures and equipment of AVSDC ("FF&E") for a period of one year at a monthly rental rate of approximately $77,000. The Company has the option to purchase the FF&E, which consists primarily of computer systems, computer equipment and furniture, at any time during the term and for a period of sixty days thereafter and AVSDC may require the Company to purchase the FF&E at any time during the sixty days following the term, in each case, for a purchase price of approximately $7.7 million. The Company may defer its obligation to purchase the FF&E (and extend the term of the lease) for up to six months under certain circumstances. The FF&E is included in the Company's property, plant and equipment, net on the accompanying consolidated balance sheet. Also in connection with the AVSDC acquisition, the Company also agreed to lease AVS' parts distribution facility in Pearland, Texas. The lease provides for a term of one year at a monthly rental of approximately $16,000. During the term of the lease and for a period of sixty days thereafter, the Company may purchase the facility and AVSDC may require the Company to purchase the facility at any time during the sixty days following the term for a purchase price of approximately $1.6 million. The Company may defer its obligation to purchase the facility (and extend the term of the lease) for up to six months under certain circumstances. The property is included in property, plant and equipment, net in the accompanying consolidated balance sheet. F-12 18 6. RESTRUCTURING, IMPAIRMENT OF ASSETS AND OTHER CHARGES The Company is restructuring its operations in conjunction with the acquisition of AVSDC. The Company is in the process of reorganizing its operations and organization structure from four product-oriented divisions to two customer/market focused business units: the Commercial Business Unit and the Defense Business Unit. The Company will continue to have four reportable segments within the new structure since management will continue to monitor its business by product orientation. In connection with the restructuring plan committed to in the fourth quarter of 2000, the Company plans to eliminate approximately 220 positions ranging from warehouse staff to vice president, of which 120 positions were eliminated prior to December 31, 2000 and 100 positions will be eliminated in the first quarter of 2001. Employee termination costs related to those positions eliminated in 2000 are reflected in the charges summarized in the table below. Additionally, in connection with the restructuring plan the Company is moving all of its inventory and most of the operations into the new 545,000 square foot facility in Miramar, Florida which was leased as part of the acquisition of AVSDC. Therefore, the Company is actively pursuing the disposition of seven facilities, which it either owns or leases by selling or subleasing the facilities. The facilities owned by the Company that are to be disposed of are shown as property and plant held for sale in the balance sheet with a net book value of $19.9 million. The Company recorded restructuring charges, which are included in restructuring, impairment of assets and other charges in the accompanying consolidated financial statements, of $3.0 million in 2000, of which $1.2 million represents assets written-down as a result of the restructuring. The following table displays the activity and balances of the accrued restructuring and other charges for the year ended December 31, 2000 (in thousands): Charges Amount Payments Accrued Paid Remaining ------- ------ --------- Employee termination costs $ 107 $-0- $ 107 Facilities exit costs 1,262 -- 1,262 Other 381 96 285 ------ --- ------- Total $1,750 $ 96 $ 1,654 ====== ==== ======= The Company recorded an impairment charge in connection with the write-down of certain equipment held for lease in the whole engine and aircraft segment. The total amount of the impairment charge recorded during the fourth quarter of 2000 was $5.1 million which was determined by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the asset. The impairment was caused by the downturn the airframe and engine parts after-market has experienced during the latter part of 2000. This charge is included in restructuring, impairment of assets and other charges in the accompanying consolidated financial statements. In addition, the Company recorded an impairment charge during the fourth quarter of 2000 of $0.4 million for the write-off of capitalized software development costs related to an inventory system that was not implemented. These charges are included in restructuring, impairment of assets and other charges in the accompanying consolidated financial statements. On July 7, 1999, the Company settled a lawsuit brought by the Estate of the late Mr. Joram Rosenfeld (a former Director of the Company) with respect to, among other things, a claim alleging entitlement to a stock option grant in late 1996. The settlement was entered into in order to limit the expense of litigating the suit as well as the protracted use of management's time and related corporate resources. The Company recorded a one-time pre-tax charge of approximately $2.2 million during the second quarter of 1999 to fulfill its obligation under the settlement and for accrued legal expenses. This charge is included in restructuring, impairment of assets and other charges in the accompanying consolidated financial statements. 7. INVENTORIES At December 31, 2000 and 1999, inventories consist of the following: 2000 1999 -------- -------- Engine parts $108,897 $122,093 Whole engines 13,199 8,849 Airframe avionics and aircraft rotables 73,544 63,549 -------- -------- $195,640 $194,491 ======== ======== F-13 19 During the fourth quarter of 2000, the Company recorded an adjustment to the carrying value of inventory of $45.5 million. The adjustment was required as a result of a rapid decline in the value of the Company's inventory due to several significant changes in the commercial aviation market and specifically in the commercial aviation aftermarket industry. Most notably, during the latter part of 2000 and continuing into 2001, some of Kellstrom's competitors experienced significant financial difficulties. These companies were forced to liquidate inventories in order to generate the necessary cash to reduce debt levels. As a result of these factors, certain of Kellstrom's inventory was affected by a rapid decline in pricing and increases in the supply of those inventory types, which in turn resulted in lower of cost or market adjustments recorded by the Company. 8. EQUIPMENT UNDER OPERATING LEASES, NET At December 31, 2000 and 1999, equipment under operating leases, primarily aircraft and engines, consists of the following (in thousands): 2000 1999 --------- --------- Equipment under operating leases $ 127,056 $ 179,610 Accumulated depreciation (28,501) (29,473) --------- --------- 98,555 150,137 ========= ========= The Company recorded an impairment of $5.1 million during the fourth quarter of 2000 related to equipment under operating leases considered to be impaired due to factors described above in note 7 - Inventories. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 9. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment at December 31, 2000 and 1999 consists of the following (in thousands): 2000 1999 -------- -------- Land $ -- $ 5,261 Building and Improvements 2,827 13,921 Machinery and Equipment 17,402 7,206 Furniture and Fixtures 5,329 3,299 -------- -------- 25,558 29,687 Accumulated Depreciation (5,662) (4,402) -------- -------- 19,896 25,285 Construction in Progress -- 55 -------- -------- $ 19,896 $ 25,340 ======== ======== 10. INVESTMENT IN SECURITIES In December 1996, the Company exercised warrants to purchase 400,000 shares of common stock of Rada Electronic Industries, Inc. upon payment of $1.2 million. During the year ended December 31, 1998, the Company sold all the remaining shares of its investment in Rada for $812,553 and recorded a realized loss of $119,472. Reclassification adjustments related to the investment in Rada included in comprehensive income for the year ended December 31, 1998 are as follows (in thousands): 1998 --------- Unrealized holding gains (losses) arising during the year $ 386.8 Plus: reclassification adjustment for losses included in net income 119.5 --------- Net unrealized gains (losses) on securities $ 506.3 ========= F-14 20 11. ACCRUED EXPENSES Accrued expenses at December 31, 2000 and 1999 consists of the following (in thousands): 2000 1999 ------- ------- Employee bonuses $ 1,247 $ 1,255 Acquisition costs and earn-out payments 5,078 3,088 Accrued inventory purchases 11,165 4,256 Accrued interest 2,040 2,530 Customer deposits 2,647 4,666 Commissions 1,170 307 Restructuring and other charges 1,648 -- Other 6,464 2,032 ------- ------- $31,459 $18,134 ======= ======= 12. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES Long-term debt and convertible subordinated notes at December 31, 2000 and 1999 consists of the following (in thousands):

In December 1998, the Company entered into a five-year, $256.7 million senior syndicated credit facility consisting of a $250.0 million revolving credit facility and a letter of credit in the amount of up to $6.7 million, with an option by the Company to increase the revolving credit facility by an additional $50.0 million, subject to approval from the agent bank and the satisfaction of certain conditions, for a total of $306.7 million. The credit facility bears interest ranging from the banks prime rate plus 0 to 50 basis points, or at the Company's option, LIBOR plus 150 to 250 basis points and is secured by substantially all of the Company's assets. The total amount available to the Company under the revolving credit facility is determined by applying certain advance rate factors to eligible receivables, inventories and equipment under operating leases. The letter of credit component of the $256.7 million syndicated credit facility was specifically committed to the permanent financing of the Company's former headquarters. The $6.7 million financing was completed by the Company in February 1999. No compensating balances are required under the revolving credit facility but the agreement contains restrictions on the Company's ability to pay dividends, among other things. At December 31, 2000, borrowings of $173.7 million were outstanding under the revolving credit facility and the Company had $28.5 million available under the revolving facility. The commitments under the Senior Credit Facility expire on the earlier of December 14, 2003 or six months before the first maturity of the Convertible Subordinated Notes if the Company has not secured a commitment to refinance the Convertible Subordinated Notes satisfactory to the lenders under the Senior Credit Facility. Furthermore, the Senior Revolving Credit Facility prohibits prepayment of the Convertible Subordinated Notes. Although the Senior Credit Facility expires in 2003, it is classified as a current liability due to certain provisions within the agreement related to subjective acceleration clauses and the fact that the agreement requires the Company maintain a lockbox arrangement whereby cash deposits are automatically utilized to reduce amounts outstanding under the facility. F-15 21 In November 2000, the Company sold $30 million of senior subordinated notes to Key Principal Partners, L.L.C., an affiliate of Key Corporation of Cleveland, Ohio ("Key Notes"). The Key Notes are due on November 13, 2007, bear interest at 13% and are subordinated to the Company's senior credit facility. In connection with the Key Notes, the Company issued warrants to purchase 368,381 shares of the Company's common stock for $0.01 per share which are still outstanding at December 31, 2000. The warrants are immediately exercisable and expire on November 13, 2007. The value of the warrants as determined using the Black-Scholes method at $1.3 million has been recorded as a discount which will be amortized over the life of the loan to interest expense using the straight-line method which approximates the effective interest method. In November 2000, approximately $12.7 million of the proceeds from the Key Notes was used to prepay the Company's 11.75% senior subordinated notes (including accrued interest and prepayment fees) held by The Equitable Life Assurance Society, of which $5.0 million in principal was due in January 2002, $5.0 million in principal was due in January 2003 and $1.25 million in principal was due in January 2004. The prepayment resulted in an extraordinary loss of $1.3 million, net of the tax benefit. The Company's senior debt requires it to maintain specified financial ratios and satisfy certain financial tests. At December 31, 2000, the Company was not in compliance with the financial covenants contained in the senior credit facility and the Key Notes. The Company has obtained waivers from its lenders for its non-compliance as to prior periods. In addition, the Company has amended the financial covenants under its senior credit facility and senior subordinated notes for future periods. A breach of any of the financial covenants in the Company's debt instruments could result in a default under these debt instruments. Upon the occurrence of an event of default under the senior debt, the respective lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. Substantially all of the Company's assets are pledged as collateral security for the senior credit facility. If the Company were unable to repay all outstanding amounts under its senior debt, the lenders could proceed against the collateral granted to them to secure that indebtedness, and any proceeds realized upon the sale of this collateral would be used first to satisfy all amounts outstanding under the Company's senior credit facility, and thereafter, any of the Company's other liabilities. In addition, the Company may be prevented from making new borrowings or drawing down further on its senior credit facility. During October 1997, the Company completed the offering and sale in a private placement transaction of $50.0 million of 5 3/4% Convertible Subordinated Notes (the "5 3/4% Notes") maturing in October 2002. In November 1997, the underwriters of the 5 3/4% Notes exercised their over-allotment option for $4.0 million. The principal amount is convertible into shares of common stock at the option of the holders at a conversion price equal to $27.50, subject to adjustment in certain events. In addition, the Company may at any time on or after October 2000, 2001, and 2002 redeem all or any part of the 5 3/4% Notes at prices (expressed in percentages of the principal amount) of 102.30%, 101.15%, and 100%, respectively. Interest on the 5 3/4% Notes is payable semi-annually. During June 1998, the Company completed a public offering of $75.0 million of 5 1/2% Convertible Subordinated Notes (the "5 1/2% Notes") maturing in June 2003. In July 1998, the underwriters of the 5 1/2% Notes exercised their over-allotment option for $11.3 million. The principal amount is convertible into shares of common stock at the option of the holders at a conversion price equal to $32.50, subject to adjustment in certain events. In addition, the Company may at any time on or after June 2000, 2001, and 2002 redeem all or any part of the 5 1/2% Notes at prices (expressed in percentages of the principal amount) of 102.30%, 101.15%, and 100%, respectively. Interest on the 5 1/2% Notes is payable semi-annually. F-16 22 To provide the Company with greater flexibility in connection with the integration of the AVSDC business, four investors (the "LOC Lenders") posted letters of credit in the aggregate amount of $8.0 million for the benefit of Bank of America, as agent under the Company's Senior Credit Facility. Under the original terms of this agreement Bank of America had the right to draw upon the letters of credit in the event that the Company defaulted under its Senior Credit Facility. Because the Company was not in compliance with the financial covenants contained in its Senior Credit Facility for the fiscal year ended December 31, 2000, Bank of America is presently entitled to draw down on the letters of credit. The letters of credit by their terms expire on June 1, 2001. The Company is presently in discussions with the LOC Lenders to extend the expiration of the letters of credit. The Company believes that Bank of America will draw on such letters of credit prior to their expiration if the maturities of such letters of credit are not extended or the Company's headquarters facility in Sunrise, Florida is not sold prior to expiration of the letters of credit. The amounts of such draws are deemed term loans from the LOC Lenders to the Company and bear interest at the rate of 18% per annum until paid. Such term loans mature upon the earlier to occur of December 1, 2001 or the sale by the Company of its headquarters facility; provided, however, that the Company is not obligated to repay the principal of any such term loans until the sale of its Sunrise facility is completed. In the event that a sale of the headquarters facility is not completed by the time a draw has been made on the letters of credit, the LOC Lenders have the right to acquire the Company's Sunrise facility and lease such facility to the Company. Contractual debt maturities for each of the five years subsequent to December 31, 2000 are as follows (in thousands): Year ending December 31, ------------ 2001 $ 200 2002 54,000 2003 253,527 2004 -- 2005 -- Thereafter 36,270 -------- $343,997 ======== 13. LEASES OPERATING LEASES AS LESSOR. One of the Company's product offerings is the leasing of aircraft and engines. These lease agreements have typical lease terms of 3 to 60 months and provide for a fixed time charge plus a usage charge based on flight hours and cycles. Contingent rentals included in income during 2000, 1999 and 1998 were $6.9 million, $10.8 million and $8.3 million, respectively. OPERATING LEASES AS LESSEE. The Company has several operating leases, primarily for transportation equipment and facilities that expire over the next five years. These leases generally require the Company to pay all executory costs such as maintenance and insurance and provide for early termination at stipulated values. Total rent expense for all operating leases for the years ended December 31, 2000, 1999 and 1998 amounted to $1.6 million, $1.5 million and $0.6 million, respectively. CAPITAL LEASES AS LESSEE. In connection with the acquisition of AVSDC, the Company entered into leases with AVSDC pursuant to which the Company agreed to lease certain assets including facilities, furniture, fixtures and equipment for a period of one year. AVSDC may require the Company to purchase the leased assets at any time during the sixty days following the term of the lease. See Note 5 - Capital Lease Obligations for more information on these leases. F-17 23 LEASE PAYMENTS. At December 31, 2000, future minimum lease payments, including imputed interest on capital leases of $1.1 million, are as follows (in thousands): Operating Leases Capital Leases ------------------------------- -------------- As Lessor As Lessee As Lessee --------- --------- -------------- 2001 $11,304 $ 5,498 $10,657 2002 6,019 5,610 -- 2003 4,202 5,034 -- 2004 2,965 4,771 -- 2005 108 4,744 -- Thereafter -- 1,059 -- ------- ------- ------- $24,598 $26,716 $10,657 ======= ======= ======= The lease income amounts in the previous table are based upon the assumption that equipment will remain on lease for the length of time specified by the respective lease agreements. This is not a projection of future lease revenue; no effect has been given to renewals, new business, cancellations, contingent rentals, sales of equipment under lease or future rate changes. 14. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2000, 1999 and 1998 is summarized as follows (in thousands): 2000 1999 1998 -------- -------- -------- Current: Federal $ 662 $ 10,471 $ 8,795 State and local 229 1,027 1,162 -------- -------- -------- 891 11,498 9,957 Deferred (18,821) 892 1,722 -------- -------- -------- Provision for income taxes $(17,930) $ 12,390 $ 11,679 ======== ======== ======== The actual tax expense differs from the "expected" tax expense for the years ended December 31, 2000, 1999 and 1998 (computed by applying the U.S. federal corporate tax rate of 35% for the years ended December 31, 2000, 1999 and 1998 to income before income taxes), as follows (in thousands):

Total income tax expense for the years ended December 31, 2000, 1999 and 1998 was allocated as follows (in thousands):

F-18 24 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below (in thousands):

The Company's management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. As such, no valuation allowance has been established. On December 31, 1998 and April 29, 1999, the Company acquired all of the outstanding stock of Solair, Inc. and Certified Aircraft Parts, Inc., respectively. The Company files a consolidated income tax return which will include both Solair and Certified. Thus, deferred taxes were calculated on a consolidated basis as of the acquisition dates. Therefore, the Company, as a result of the acquisitions, has recognized net deferred tax assets of $4.5 million and $10.0 million from Solair in 1998 and 2000, respectively and net deferred tax liabilities of $2.2 million from Certified in 1999 which are included in the consolidated net deferred tax asset position of $28.8 million for December 31, 2000. 15. STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. The Company is authorized to issue 50,000,000 shares of common stock, $.001 par value. In June 1998, the Company completed a secondary public offering of 2,750,000 shares of common stock at $26.00 per share, resulting in net proceeds of $67.4 million. In July 1998, the Company's underwriters exercised their over-allotment option to purchase an additional 412,500 shares of common stock at $26.00, resulting in additional net proceeds of $10.2 million. The Company had 11,910,981 shares of common stock outstanding at December 31, 2000 and 1999. In January 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock ("Series Preferred Stock") at an exercise price of $80.00. F-19 25 The Rights are not exercisable, or transferable apart from the common stock, until the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common stock of the Company or (ii) ten business days (or such later date, as defined) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 19% or more of the outstanding common stock of the Company. Furthermore, if the Company enters into a consolidation, merger, or other business combination, as defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of Series A Preferred Stock, that number of shares of common stock of the acquiring company having a value of two times the exercise price of the Right, as defined. The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain defined restrictions, for $.01 per Right, and expire in January 2007. As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as Series A Preferred Stock. Series A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend declared on the Company's common stock. The Series A Preferred Stock has a liquidation preference, as defined. In addition, each share will have 100 votes and will vote together with the shares of common stock. During 2000 and 1999, the Board of Directors of the Company approved loans in the aggregate amount of $0.4 million and $0.3 million, respectively, to certain officers and directors of the Company for the purposes of purchasing shares of common stock in the open market. The loans will be unsecured and payable over four years for employees or five years for directors at an interest rate based on the applicable federal rate, as defined by the agreement, at the time of the loan. The average interest rate for these loans at December 31, 2000 and 1999 was 6.3% and 5.9%, respectively. Interest will be paid annually by officers and will accrue and be paid at maturity by directors. As of December 31, 2000 and 1999, the outstanding balance on the loans receivable was $1.7 million and $1.6 million, respectively. Upon consummation of the acquisitions of Aero Support, Aerocar and Solair, the Company issued warrants to purchase an aggregate of 800,000 shares of the Company's common stock at stated prices of $19.00-$27.50, expiring three to five years from the dates of issuance. The amounts recorded by the Company as a result of the issuance of the warrants was determined based on the fair value of the warrants on the closing date of the acquisitions. In connection with certain advisory services performed in connection with the acquisition of assets from AVSDC, on December 1, 2000, the Company issued warrants to Deutsche Banc Alex. Brown Inc. to purchase up to 100,000 shares of the Company's Common Stock at an exercise price of $3.59 per share. The warrants become exercisable on March 1, 2002 and expire on December 1, 2007. In connection with the acquisition of assets from AVSDC, on November 30, 2000, the Company issued warrants to purchase up to 10,000 shares of the Company's Common Stock at an exercise price of $3.59 per share to each of the four investors ("the LOC Lenders") who posted letters of credit in the aggregate amount of $8.0 million for the benefit of Bank of America, as agent under the Company's Senior Credit Facility. The LOC Lenders are entitled to receive additional warrants to purchase up to 80,000 shares of Common Stock if the letters of credit remain outstanding. All warrants issued to the LOC Lenders are exercisable at any time within five years after the applicable date of issuance. In connection with the Key Notes, the Company issued warrants to purchase 368,381 shares of the Company's common stock for $0.01 per share which are still outstanding at December 31, 2000. The warrants are immediately exercisable and expire on November 13, 2007. The Company had 1,281,291 and 1,147,030 warrants outstanding at December 31, 2000 and 1999, respectively. Each warrant entitles the holder to the purchase of one share of the Company's common stock at various stated prices. These warrants are exercisable at various times. The Company has reserved 5.0 million common shares for the exercise of these warrants. 16. EMPLOYEE STOCK OPTION PLANS The 1995 Stock Option Plan provides for the granting of stock options to purchase up to 250,000 shares of common stock to key employees, with no individual granted options to purchase more than 100,000 shares of common stock during the ten-year period commencing on June 22, 1995, at a price which will not be less than the fair market value of common stock on the date of grant. These options will be exercisable at such times, in such amounts and during such intervals as determined on the date of grant. However, no option will be exercisable during the first six months after the date of grant or more than 10 years after the date of grant. The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of incentive stock options to purchase shares of common stock at not less than the fair market value on the date of the option grant or the granting of F-20 26 nonqualified options and stock appreciation rights ("SARs") with any exercise price. SARs granted in tandem with an option have the same exercise price as the related option. The total number of shares with respect to which options and SARs may be granted under the 1996 Plan is currently 1,100,000. No option or SAR may be granted under the 1996 Plan after July 9, 2006, and no option or SAR may be outstanding for more than ten years after its grant. The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of incentive stock options to purchase shares of common stock at not less than the fair market value on the date of the option grant and the granting of nonqualified options. The total number of shares with respect to which options may be granted under the 1997 Plan is currently 1,000,000. No option may be granted under the 1997 Plan after October 27, 2007, and no option may be outstanding for more than ten years after its grant. The 1998 Stock Option Plan (the "1998 Plan") provides for the granting of stock options to purchase shares of common stock at not less than the fair market value on the date of the option grant. The total number of shares with respect to which options may be granted under the 1998 Plan is 175,000. No option may be granted under the 1998 Plan after November 15, 2008, and no option may be outstanding for more than ten years after its grant. The Company intends to only grant options under the 1998 Plan to newly hired executives and employees as an inducement to enter into employment arrangements with the Company, and to outside members of the Board, in lieu of cash compensation, as an incentive for their service on the Board. In October 1998, the Company's Board of Directors approved the extension of the vesting schedule and repricing of all outstanding employee stock options with an exercise price above $10.125. Employees who accepted the Company's repricing offer were subject to, in general, a 50% extension to the vesting term for that option. All other terms of the existing options remained unchanged. As a result, 1,170,998 employee stock options were cancelled and reissued by the Company at the new exercise price of $10.125. The new exercise price was determined based on the closing market price of the Company's common stock on October 8, 1998. F-21 27 The following table summarizes the status of the Company's stock option plans: Weighted Shares Average Option (in thousands) Exercise Price ------------ -------------- Outstanding at December 31, 1997 2,064 $ 11.12 Granted 1,819 15.33 Exercised (80) 7.46 Expired or Canceled (1,181) 21.47 ------ ----- Outstanding at December 31, 1998 2,622 9.51 Granted 407 18.74 Exercised (149) 7.38 Expired or Canceled (6) 21.37 ------ ----- Outstanding at December 31, 1999 2,874 10.90 Granted 535 4.69 Exercised -- -- Expired or Canceled (385) 13.00 ------ ----- Outstanding at December 31, 2000 3,024 $ 9.53 ====== ===== At December 31, 2000: Shares Available for Future Grant 87 -- EXERCISABLE OPTIONS: December 31, 1998 749 $ 7.32 December 31, 1999 1,855 9.66 December 31, 2000 2,135 9.95 The following table summarizes the status of stock options outstanding and exercisable as of December 31, 2000, by range of exercise price:

The weighted average per share fair values of options granted under the Company's stock option plans during 2000, 1999 and 1998 were $3.99, $14.11 and $18.13, respectively. Had the fair value of the grants under these plans been recognized as compensation expense over the vesting period of the awards, the Company's net earnings (loss) and earnings (loss) per share would have reflected the pro forma amounts shown below (in thousands, except per share amounts):

F-22 28 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0% in 2000, 1999 and 1998; expected volatility of 80% in 1999 and 2000 and 59% in 1998; a risk-free interest rate of 6.13% in 2000 and 5.35% in 1999 and 1998; and an expected holding period of 10 years. 17. (LOSS) EARNINGS PER SHARE Diluted earnings (loss) per share for the years ended December 31, 2000, 1999 and 1998 were calculated as follows (in thousands):

At December 31, 1998, 1999 and 2000, options and warrants to purchase 726,000, 2,807,000 and 4,306,000 shares of common stock, respectively were outstanding but were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares during the period. Conversion of the Convertible Subordinated Notes were not assumed in 2000 due to the Company's net loss position. 18. SEGMENT REPORTING The Company has four reportable segments: (i) Commercial Engine Parts, (ii) Defense, (iii) Whole Engine and Aircraft and (iv) Airframe Avionics and Rotables. The Commercial Engine Parts segment is involved in the business of purchasing, overhauling (primarily through subcontractors), reselling and leasing of engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The Defense segment is an after-market reseller of aircraft parts and turbojet engines and engine parts for helicopters and large transport aircraft. The segment's primary focus is on the Lockheed Martin C-130 Hercules aircraft, a widely used military transport aircraft, the Allison (Rolls Royce) T56/501 engine, which powers this aircraft and the Allison 250, with approximately 16,000 units actively in use by helicopters. The Company entered the small engine segment in 1997 with the acquisition of Aero Support. The acquisition of Certified on April 29, 1999 enhanced the Company's presence in this market segment. The Whole Engine and Aircraft segment leases and resells whole engines and aircraft. The Airframe Avionics and Rotables segment is engaged in the sale of a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Company entered the avionics and rotables segment in 1998 with the acquisition of Solair and expanded it's presence with the acquisition of AVSDC in 2000. F-23 29 The Commercial Engine Parts, Whole Engine and Aircraft, and Airframe Avionics and Rotables segments operate as the Commercial business unit. The Defense segment operates independently as the Defense business unit. The Company has not historically allocated selling, general and administrative expenses, depreciation and amortization, interest expense or income taxes to its business segments. Rather, the Company has evaluated performance of the business segments based on revenue and gross margins. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

19. OTHER MATTERS At December 31, 2000 there were no material legal proceedings pending against the Company or any of its property. However, the Company may become party to various claims, legal actions and complaints arising in the ordinary course of business or otherwise. The Company cannot determine whether such actions would have a material impact on the financial condition, results of operations or cash flows of the Company. F-24 30 The Company has certain employment agreements with officers with terms of up to five years. The employment agreement provides that such officers may earn bonuses, based on the Company achieving certain target net income levels. Further, each of the employment agreements provide that in the event of termination without cause, the employment agreement shall be terminable by the mutual agreement between the Company and the officers, or by either party upon sixty days notice and provides for certain levels of severance compensation. In February 1998, the Company established a defined contribution savings plan that covers substantially all eligible employees. Company contributions to the plan are based on employee contributions and the level of company match. Company contributions to the plan totaled approximately $310,000, $172,000 and $32,000 in 2000, 1999 and 1998, respectively. 20. RELATED PARTY TRANSACTIONS In March 1997, the Company engaged Helix Management Company II, LLC ("Helix"), a company owned by Yoav Stern, Chairman of the Company's Board of Directors, and Zivi Nedivi, President, Chief Executive Officer and a Director of the Company, to act as the Company's exclusive financial advisor with respect to merger and acquisition transactions and as principal financial advisor with respect to other transactions for an initial term of eighteen months beginning January 1, 1997, renewable for additional 12 month terms (as amended, the "Helix Engagement Agreement"). As discussed below, on March 24, 1999, the Company entered into a termination agreement with Helix, pursuant to which the Company agreed to terminate the Helix Engagement Agreement. Under the terms of the agreement, Helix received a monthly retainer of $25,000. In addition, under the terms of the agreement, a success fee was to be paid by the Company on a per transaction basis, based upon the aggregate consideration in connection with the applicable transaction. During the years ended December 31, 2000, 1999 and 1998, the Company paid $44,000, $1.5 million and $2.0 million, respectively, and issued warrants for the purchase of 7,250 shares in 1998 of the Company's common stock at exercise prices between $19.00 and $27.50 per share, expiring in three to five years, to Helix relating to such agreement. On March 24, 1999, the Company entered into a Termination Agreement (the "Helix Termination Agreement") with Helix, pursuant to which the Company agreed to terminate the Helix Engagement Agreement dated as of March 28, 1997. Under the terms of the Helix Termination Agreement, the Company will only be required to pay Helix success fees on those transactions procured by Helix which have either been consummated or signed prior to the date of termination. Helix has waived all other fees which it is entitled to under the terms of the Helix Engagement Agreement, including monthly retainer fees on account of the ninety-day period following termination and success fees on account of transactions procured by Helix which are undertaken by the Company within one year of termination. Helix has also agreed that it will, for no additional consideration, provide the Company such assistance (including access to its members and employees and copies of its records and files) as is necessary to assure an orderly transition in the services provided by Helix. At December 31, 2000, the Company had notes receivable from KAV totaling $3.4 million. In addition, under the terms of the Consignment Agreement with KAV, at December 31, 2000, the Company was obligated to pay KAV $7.8 million for KAV inventory which was sold by the Company during the year ended December 31, 2000. F-25 31 21. SUBSEQUENT EVENT As more fully disclosed in Note 2, on March 8th, 2001, the Company commenced an exchange offer for all $54 million of its outstanding 5-3/4% notes and all $86.3 million of its outstanding 5-1/2% notes. The following consolidating financial information presents balance sheet, income statement and cash flow information related to the Company's business. Each Guarantor, as defined, is a direct or indirect wholly owned subsidiary of the Company and will fully and unconditionally guarantee the 8 1/2% senior subordinated notes to be issued by the Company, on a joint and several basis. The Non-Guarantors are the Company's foreign subsidiaries. Separate financial statements and other disclosures concerning the Guarantors have not been presented because management believes that such information is not material to investors. F-26 32 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES BALANCE SHEET INFORMATION December 31, 2000 (In thousands)

F-27 33 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS INFORMATION For the Year Ended December 31, 2000 (In thousands)

F-28 34 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000 (In thousands)

F-29 35 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES BALANCE SHEET INFORMATION December 31, 1999 (In thousands)

F-30 36 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS INFORMATION For the Year Ended December 31, 1999 (In thousands)

F-31 37 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS INFORMATION For the Year Ended December 31, 1999 (In thousands)

F-32 38 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS INFORMATION For the Year Ended December 31, 1998 (In thousands)

F-33 39 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS INFORMATION For the Year Ended December 31, 1998 (In thousands)

F-34 40 22. SUPPLEMENTAL FINANCIAL DATA (A) QUARTERLY DATA - UNAUDITED

F-35 41 (B) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED The condensed consolidated statement of operations of the Company for the 12 months ended December 31, 2000 is based on historical financial statements of the Company and has been adjusted to reflect the acquisition of AVSDC as though the companies had combined at the beginning of the periods being reported. The pro forma consolidated financial information does not purport to be indicative of results that would have occurred had the acquisitions been in effect for the period presented, nor does it purport to be indicative of the results that will be obtained in the future. The pro forma consolidated financial information is based on certain assumptions and adjustments described in the notes hereto and should be read in conjunction therewith. F-36 42 (B) KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Statements of Operations Twelve Months Ended December 31, 2000 (In thousands, except per share amounts) (Unaudited)

Unaudited - See accompanying notes to pro forma condensed consolidated statement of operations F-37 43 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES Notes to Pro Forma Condensed Consolidated Statements of Operations Twelve Months Ended December 31, 2000 (In thousands) (Unaudited) Note (A) For the purpose of presenting the pro forma condensed consolidated statement of operations, the following adjustments have been made for the AVSDC acquisition (in thousands):

(i) Adjustment to reflect terms under the consignment agreement between Kellstrom and KAV was calculated based on historical sales and adjusting the gross margin to arrive at an 18% margin based on the 20% consignment fee stipulated in the consignment agreement adjusted for estimated repair and overhaul costs. (ii) Amortization period for goodwill is 30 years. Amortization period for deferred financing costs is over the remaining life of the debt instrument. (iii) Pro forma income tax expense adjusted to reflect Kellstrom consolidated effective tax rate. (iv) In connection with the acquisition, the Company implemented several initiatives designed to reduce the operating costs of the combined Company. These initiatives resulted in the identification of approximately 220 employees whose jobs were terminated and seven facilities which will be closed. Note (B) In connection with the acquisition, the Company is expected to incur expenses associated with the acquisition of approximately $1.9 million, net of tax, and expenses associated with the prepayment of the ELAS note of $1.3 million, net of tax benefit. Note (C) Pro forma weighted average number of common shares outstanding - diluted excludes the 368,381 of warrants which were issued in connection with the Key Notes and all of the warrants related to the assumed conversion of the Convertible Subordinated Notes due to the fact that their inclusion would be anti-dilutive. F-38 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment on Form 10-K/A to be signed on its behalf by the undersigned thereunto duly authorized. Date: June 7, 2001 KELLSTROM INDUSTRIES, INC. (Registrant) By: /s/ Zivi R. Nedivi ------------------------------------ Title: Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

KELLSTROM INDUSTRIES INC 10-K/A