<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  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, 1999

                                       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 February 29, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $79,102,117 based on
the closing price on that date of $6 15/16 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.


<PAGE>   2


                           Kellstrom Industries, Inc.
                           Annual Report on Form 10-K

                                      Index
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<CAPTION>

                                                                                                           PAGE NUMBER
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<S>             <C>                                                                                             <C>
                                                      PART I
Item 1.         Business .....................................................................................  4
Item 2.         Properties ................................................................................... 18
Item 3.         Legal Proceedings ............................................................................ 19
Item 4.         Submission of Matters to a Vote of Security Holders........................................... 19

                                                      PART II

Item 5.         Market for Registrant's Common Equity and Related Stockholder Matters ........................ 20

Item 6.         Selected Financial Data ...................................................................... 21

Item 7.         Management's Discussion and Analysis of Financial Condition and
                Results of Operations ........................................................................ 22

Item 7A.        Quantitative and Qualitative Disclosures About Market Risk ................................... 28

Item 8.         Financial Statements and Supplementary Data .................................................. 29

Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 29

                                                     PART III

Item 10.        Directors and Executive Officers of the Registrant............................................ 30

Item 11.        Executive Compensation ....................................................................... 35

Item 12.        Security Ownership of Certain Beneficial Owners and Management ............................... 40

Item 13.        Certain Relationships and Related Transactions ............................................... 41

                                                      PART IV

Item 14.        Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................. 45


</TABLE>





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                                     PART I

         This report contains or incorporates by reference forward-looking
statements that are subject to risks and uncertainties. Forward-looking
statements include information concerning the financial condition, results of
operations, plans, objectives, future performance and business of Kellstrom
Industries, Inc. (the "Company"). The Company includes forward-looking
statements in descriptions of future earnings and cash flows, anticipated
capital expenditures and management's strategies, plans and objectives.
Statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions are generally considered to be
forward-looking statements.

         Forward-looking statements involve both known and unknown risks and
uncertainties and actual results or performance may therefore differ materially
from the expected results or performance expressed or implied by the
forward-looking statements. The following important factors, in addition to
factors the Company discusses elsewhere in this report and in the documents that
are incorporated into this report by reference, could affect the Company's
actual results or performance:

         o  the Company's continuing ability to effectively integrate acquired
            companies and the effects of increased indebtedness as a result of
            the Company's business acquisitions;

         o  the Company's continuing ability to acquire adequate inventory and
            to obtain favorable pricing for such inventory;

         o  the Company's ability to arrange for the repair of aircraft engines
            and engine parts by third-party contractors prior to resale or
            lease;

         o  the Company's ability to control costs;

         o  competitive pricing for the Company's products;

         o  customer concentration;

         o  fluctuations in demand for the Company's products, which are
            dependent upon the condition of the airline industry and the
            Company's ability to collect receivables;

         o  changes in government regulation;

         o  the availability to the Company of acquisition and expansion
            opportunities on attractive terms;

         o  the Company's ability to develop and implement systems to manage
            rapidly growing operations;

         o  the availability of capital to fund growth and acquisition
            opportunities; and

         o  adverse conditions in the capital markets or in the general economy.

         In light of these risks and uncertainties the forward-looking events
discussed in this report might not occur. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.



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ITEM 1. BUSINESS.

GENERAL

         The Company is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchasing, overhauling (through subcontractors), reselling and leasing
of aircraft, avionics and aircraft rotables, and aircraft engines and engine
parts. The Company specializes in providing:

         - Engines and after-market engine parts for large turbo-
           fan engines manufactured by CFM International, General Electric,
           Pratt & Whitney and Rolls Royce.
         - Aircraft parts and turbojet engines and engine parts for large
           transport aircraft and helicopters.
         - Aircraft rotables and expendable components including flight data
           recorders, electrical and mechanical equipment and radar and
           navigation equipment.

         The Company is a supplier to a broad base of approximately 1,000
domestic and international customers representing nearly all segments of the
worldwide aviation industry, including commercial airlines such as American,
Delta, Lufthansa, Swiss Air and Singapore Airlines, and original equipment
manufacturers ("OEMs") and engine overhaul facilities such as Daimler-Benz, GE
Aircraft Engine Services and Pratt & Whitney. The Company enables customers to
reduce their inventory, inventory carrying costs and airborne equipment
maintenance costs by offering a broad inventory of engines and engine parts on a
timely basis and at competitive prices. For the year ended December 31, 1999,
the Company generated revenues of $330.9 million, earnings before interest,
taxes, depreciation and amortization ("EBITDA") of $86.7 million and net
earnings of $20.5 million (or $1.48 per diluted share).

         The Company's business strategy is focused on strong and controlled
internal growth, supplemented by strategic inventory purchases and acquisitions
of competing and complementary businesses meeting pre-defined criteria. In
evaluating acquisition opportunities, the Company's management considers the
following criteria in addition to customary business and operational due
diligence: the effects on earnings per share, the expected stability and
inherent strength of gross margins and a comparative analysis of returns on
invested capital and assets. The Company pursues acquisitions to strengthen
current product lines, increase access to customers in its existing markets and
expand into new product lines and markets.

         The Company's operating approach enables it to pursue its growth plans
while maintaining and improving operating efficiencies and results. As the
Company's operations team strives to enhance internal procedures and controls,
streamline distribution channels and maintain and expand customer relationships
and account management, the Company's acquisition team works continuously with
outside advisors to identify, structure and consummate acquisitions. This
operating approach enables the Company to manage the internal growth of its
business and to integrate acquired businesses while continuing to evaluate
acquisition opportunities.

         The Company's principal executive office is located at Sawgrass
International Corporate Park, 1100 International Parkway, Sunrise, Florida
33323. Its telephone number is (954) 845-0427.

MARKETS AND BUSINESS STRATEGIES

Markets

         The airline industry is forecasted to grow at a higher pace than the
economy as a whole over the next 10 and 20 years, respectively. According to the
Boeing 1999 Current Market Outlook (the "Boeing Report"), passenger traffic is
forecasted to grow at 4.7% over the next 10 and 20 years as compared to overall
economic growth of 2.7% and 2.8% over the next 10 and 20 years, respectively.
The Boeing Report projects that the worldwide fleet of commercial aircraft is
expected to increase more than 50% from approximately 12,600 at the end of 1998
to over 19,100 by 2008.



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         The increase in worldwide air travel has resulted in a corresponding
increase in demand for aircraft, avionics and aircraft rotables, and engines and
engine parts. In light of the requirements of the Federal Aviation
Administration (the "FAA") that aircraft engines and engine parts be serviced at
scheduled intervals of flying hours, the increase in worldwide air travel has
resulted in the need for more frequent servicing cycles and a corresponding
increase in demand for engines and engine parts. The Company believes that, due
to cost constraints, many airlines and repair and maintenance facilities that
historically purchased parts from new parts manufacturers are increasingly
utilizing after-market parts sold by resellers such as the Company.

         At the same time that demand for aircraft, avionics and aircraft
rotables, and aircraft engines and engine parts has been increasing, the
competitive environment of the commercial airline industry has led many airlines
to "outsource" a larger percentage of non-core functions, including ownership of
such inventory, in order to focus resources on improving passenger and freight
services. As a result, airlines are increasingly turning to operating leases and
inventory management providers to maximize operational and financial flexibility
while minimizing upfront capital requirements.

         The aircraft engine and engine parts market is estimated by the United
States Department of Commerce to exceed $18 billion annually. The resale segment
of this market is highly fragmented, characterized by a limited number of large
suppliers with broad product offerings and numerous smaller competitors serving
niche markets. Several notable trends in the industry have recently emerged to
improve safety, reduce costs and increase efficiency, including increasing
emphasis on documentation and traceability of parts, outsourcing of inventory
management functions, implementing "just-in-time" inventory management systems
and reducing the number of approved suppliers. The Company believes that only
those companies with superior quality assurance programs, sophisticated
information systems and adequate capital will succeed in this changing
environment. The Company is an active participant in the consolidation of the
industry, having completed six acquisitions with combined annual revenues in the
years preceding the respective acquisitions of approximately $212 million since
1995.

         The airborne equipment segment of the worldwide aviation services
industry is being affected by the following trends:

         INCREASING EMPHASIS ON DOCUMENTATION AND TRACEABILITY. As safety
requirements have become more stringent, regulatory authorities have increased
the level of documentation required of aircraft operators. Operators have, in
turn, extended this requirement to the independent dealers from which they
purchase after-market parts. The expense and sophistication required to track
the history of inventory consisting of thousands of components is considerable
and provides a barrier to entry into the engine parts after-market. In addition
to the barriers created by documentation requirements, management believes that
the potential adoption of tighter regulations by government and industry
regulators regarding the operating procedures of resellers may eliminate smaller
participants and create additional barriers to entry.

         OUTSOURCING OF INVENTORY MANAGEMENT FUNCTION. Some airlines have
streamlined their operations by outsourcing the entire inventory management
function to independent third parties. These independent third parties (such as
the Company) acquire directly or through consignment arrangements a large
inventory and make such inventory attractive to a broad customer base. Under
consignment agreements, the supplier is granted the right to sell spare parts
from the airlines' inventory, with the proceeds divided between the supplier and
the airline itself. This improves the airline's profitability, as measured by
return on assets, by removing parts inventory from the balance sheet.
Outsourcing allows airlines to secure parts on an "as-needed" basis without
incurring the costs associated with carrying their own expensive inventory.

         LEASING. Similar to outsourcing, leasing engines or engine parts
enables airlines to meet short-term operating needs while lowering their
overhead and/or working capital requirements. Short-term leases, often 30-90
days in duration, are used by some carriers that do not wish to maintain a pool
of spare engines or engine parts. Intermediate and long-term leases (up to 10
years) are used by many larger carriers as they upgrade their fleets. A
significant portion of the new aircraft flown by the major carriers are leased
and such carriers typically prefer to lease rather than purchase spare engines
for their fleet. In addition, many of the new entrant jet carriers are



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capital-constrained and thereby prefer to lease rather than own aircraft and
engines in order to minimize upfront capital outlays.

         REDUCTION IN NUMBER OF SUPPLIERS AND CONSOLIDATION OF THE ENGINE PARTS
AFTER-MARKET. In order to ensure better control of their safety standards and
reduce their administrative costs, airlines are limiting the number of suppliers
with which they do business. To remain a supplier to the airlines, dealers must
maintain high standards of quality control, enabling customers to trace the
complete history of any part. This move to limit the number of suppliers is
causing a realignment among independent dealers. A small number of dealers
continue to do business directly with airlines, and a new tier of dealers sell
to these approved suppliers. The Company believes that this reduction in
supplier base will continue to lead to consolidation in the market for aircraft
spare parts.

         INCREASED IMPORTANCE OF CAPITAL. Suppliers need ready access to capital
in order to take advantage of various profitable opportunities, including
purchasing large portfolios of assets to be made available for outsourcing and
leasing. Larger inventories, sophisticated information technology systems and
more expensive jet engines require increased access to capital.

Business Strategies

         The Company has experienced significant growth over the past few years.
The Company believes that the following strategies should provide opportunities
for continued growth:

         STRONG AND CONTROLLED INTERNAL GROWTH. The Company has achieved strong
and controlled internal growth by increasing business with its existing
customers, expanding its customer base and constantly improving the efficiency
of its operations. On a pro forma basis , the total revenue of the Company
increased by 25% from 1998 to 1999. During this time period, the Company has
expanded its management team and continued to focus on its marketing efforts in
order to support its customer base. The Company believes that the focus of its
core business on purchasing, overhauling (through subcontractors), reselling and
leasing of aircraft, avionics and aircraft rotables, and aircraft engines and
engine parts results in cost-efficient operations which maximize its profit
margins and minimize its dependence on expensive machinery, equipment and labor.

         E-COMMERCE INITIATIVE. Since inception, the Company has invested
heavily in building a state-of-the-art information technology infrastructure,
believing that the industry would become increasingly dependent on information
processing and dissemination. The Company is combining off-the-shelf e-commerce
facilities with proprietary software modules, now in an advanced stage of
development, to supply tools designed to enable each of the Company's divisions
to achieve a level of process automation unprecedented in our industry. The
system, which is being built with internet development tools, is expected to be
the cornerstone of the Company's business-to-business e-commerce strategy. The
Company expects that this software will also enable a unique level of
integration with our customers' technology environment through an `e-commerce
engine' that is incorporated within. The first module of this new system is
planned to be up-and-running by the close of the first quarter of 2000 and the
entire system is expected to be fully operational one year later.

         STRATEGIC INVENTORY PURCHASES. The Company believes that its potential
to increase revenues from its existing business is largely dependent on its
ability to deliver aircraft, avionics and aircraft rotables, and engines and
engine parts on a "just-in-time" basis. The lead time between purchasing
aircraft, avionics and aircraft rotables, and engines and engine parts and
having a ready-for-sale product is generally 60 to 90 days. The Company focuses
on developing new sources of supply, such as OEMs and overhaul facilities, as
well as airlines which are replacing portions of their fleets or disposing of
excess inventory. By broadening its sources of supply, the Company is better
able to maintain a strategic stock of inventory in order to remain responsive to
customer delivery requirements. The Company relies on its market expertise and
industry network to analyze both short and long-term trends in supply and demand
in the aviation industry.

         AIRBORNE EQUIPMENT LEASING. In 1997, the Company established Kellstrom
Commercial Aircraft, Inc. ("KELLCAD"), a wholly-owned subsidiary, which manages
a portfolio of aircraft and aircraft engines that are available to the Company's
customers on short to medium term (approximately 3 to 60 month) operating
leases. These operating leases allow carriers to improve their balance sheets by
leasing, rather than owning, spare engines from a reliable, proven engine
leasing source. KELLCAD is an integral part of the Company's plan to provide
total inventory management solutions. As previously announced, the Company is
evaluating a proposed off-balance sheet initiative for this lease portfolio,
pursuant to which the Company would sell its aircraft and engine portfolio to
one or more partnerships between the Company and appropriate third parties.
Under the proposed initiative, the Company expects that it would retain a
minority ownership stake in the proposed partnerships and continue to manage the
operations of those partnerships. The Company expects to implement this
initiative if and when one or more appropriate financial/leasing organizations
are identified and transaction terms are finalized. As of December 31, 1999, the
Company leased 8 aircraft and 48 engines to third parties.





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<PAGE>   7


         ACQUISITIONS IN EXISTING COMMERCIAL AVIATION MARKETS. As a result of
its concentration in certain niche markets, the Company's management develops
in-depth knowledge of other resellers serving similar product lines that may be
potential acquisition candidates. The Company's acquisition of Certified
Aircraft Parts, Inc. ("Certified") in April of 1999 expanded the Company's
ability to offer parts, after-market support and logistics for the Lockheed
Martin C-130/L100 Hercules aircraft. The acquisition of Certified will
complement the Company's Defense segment, which supplies inventory management
for C-130 aircraft and engines.

         ACQUISITIONS IN ADJACENT MARKETS. As a result of its position in the
industry, the Company's management also becomes familiar with companies serving
complementary markets that may be attractive acquisition candidates. The Company
continually works with outside advisors to evaluate and pursue companies that
will enable it to expand into product lines and markets in which the Company
does not have a significant presence. As a result of the acquisition of Solair,
Inc. ("Solair") in December 1998, the Company is able to offer avionics
equipment, a complimentary product line, which was not previously sold by the
Company. The Company believes that the continued expansion may be achieved
through the acquisition of companies offering different product lines than those
of the Company.

PRODUCTS

         The Company's principal business is the purchasing, overhauling
(through subcontractors), reselling and leasing of aircraft, avionics and
aircraft rotables and engines and engine parts.

         AFTER-MARKET SALES BUSINESS. Customers in both the commercial and
military sectors purchase spare and replacement parts and other airborne
equipment. The Company is active in both the commercial aircraft sector, which
is divided into large jet transports, smaller commercial aircraft (known as
general aviation aircraft) and helicopters, and the military sector. General
aviation includes both jet and propeller-driven planes for business and personal
use. The Company's Commercial Engine Parts division specializes in engine parts
for the large jet segment of the commercial aircraft sector. Through Certified,
its Defense segment, the Company also services certain military customers for
aircraft parts and turbojet engines and engine parts for large transport
aircraft and commercial customers for helicopters. Solair, the Company's
Airframe Avionics and Rotables segment, provides aircraft rotables and
expendable components.

         Boeing (which acquired McDonnell Douglas) and Airbus Industries
dominate the market for the production of large commercial aircraft. A small
number of suppliers provide the bulk of engines used to power these large
commercial jet aircraft. The suppliers include the Pratt & Whitney division of
United Technologies, General Electric, Rolls Royce and CFM International. The
following is a brief description of the products which the Company supports:

         THE JT9D ENGINE. JT9D engines, introduced by Pratt & Whitney in the
late 1960's, are used in Boeing 747 and 767 aircraft, the McDonnell Douglas
DC-10 and Airbus A300/310's. The JT9D was the first commercial turbo fan with a
high bypass ratio, enabling the engine to provide unprecedented thrust with
outstanding fuel efficiency and relatively low noise. The JT9D engine has flown



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more than 135 million hours. Approximately 3,000 of these engines were built
until production ceased in 1990; approximately 2,700 are still flying on wide
body aircraft operated by over 60 airlines. The Company estimates that JT9D
engines will be widely used for the next 10-15 years. Pratt & Whitney continues
to upgrade and improve in-service engines to meet current noise and emissions
requirements, thus increasing the life span of these engines.

         THE JT8D ENGINE. JT8D engines, a derivative military J-52 Turbojet,
were originally developed by Pratt & Whitney for the Boeing 727 airliner in
1963. The engine is the most widely used engine in commercial aviation history.
More than 13,000 of the JT8D family of engines have been produced and the engine
is still in production today. A variant of the basic JT8D, called the 200
Series, was introduced in 1977. The older, less fuel efficient JT8D engines are
used in the Boeing 727 and 737, the McDonnell Douglas DC-9, the Aerospatiale
Carvelle, Dassualt Mercure and the C-9 and C-22, U.S. military versions of the
DC-9 and 727 aircraft. The newer 200 Series JT8D engines are used throughout the
McDonnell Douglas MD-80 range of aircraft models. The Company estimates that the
older JT8D engines will be in service for at least ten more years, and the 200
Series JT8D engines will be in service for at least 20 more years.

         THE PWA 2000 ENGINE. Pratt & Whitney began development in 1974 of a
series of advanced technology aircraft engines to power the commercial
transports of the mid-1980s and beyond. The PWA 2037 engine model, the first in
the series of such models, was awarded FAA certification in December 1983. These
highly fuel efficient engines feature high thrust, low noise and reduced
emissions. The PWA 2000 series engines are used to power the Boeing 757 and are
considered to be current technology engines that are likely to continue in
service for at least 25 more years.

         THE PWA 4000 ENGINE. In 1982, Pratt & Whitney launched development of
the PWA 4000 Series turbo fan - an all new commercial jet engine series with
improved fuel efficiency and higher takeoff thrust rating. The PWA 4000 entered
commercial service in mid 1987. The PWA 4000 is designed for use on current and
advanced versions of such wide-body aircraft as the Airbus A300, A310, A330, the
Boeing 747, 767, 777 and the McDonnell Douglas MD-11. These engines are
considered to be current technology engines and are likely to continue in
service for at least 25 more years.

         THE ROLLS ROYCE RB-211 ENGINE. The RB-211 was built by Rolls Royce
beginning in 1970 for the Lockheed L-1011, the majority of which were purchased
by Delta and Eastern. Approximately 928 aircraft are still in use which use the
RB-211.

         THE CFM-56 ENGINE. The CFM-56 is manufactured by CFM International, a
joint venture between General Electric and SNECMA, and is the second most
popular engine as measured by number of aircraft in the worldwide fleet powered
by this engine type. The CFM-56 is used to power the Boeing 737 and the Airbus
A320, A321, A340 and the McDonnell Douglas DC-8. These engines are considered to
be current technology engines and are likely to continue in service for at least
25 more years.

         THE T56/501 ENGINE. The T56/501 engine is used to power the widely used
military transport aircraft, the Hercules C-130, manufactured by Lockheed. Over
17,000 engines have been produced.

         THE A250 ENGINE. The A250 engine is used to power a wide range of
helicopters manufactured by Bell, McDonnell Douglas and Eurocopter. There are
approximately 17,000 engines currently in use by approximately 2,700 helicopter
operators.

         THE C-130/L100. In 1953, Lockheed Martin began manufacturing the C-130
aircraft. The C-130 is a versatile aircraft which can be used for troop
transport, inflight refueling, rescue, fire fighting and other uses. There are
approximately 1,600 aircraft in use of over 2,200 originally produced. The
largest operator of the C-130 is the United States military.

         AIRCRAFT ROTABLES AND EXPENDABLE COMPONENTS. Aircraft rotables are
major aircraft components which are regularly removed, replaced and overhauled




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in the course of aircraft operation and maintenance. Aircraft rotables supplied
by the Company include flight data recorders, electrical and mechanical
equipment and radar and navigation systems. The Company stocks a wide variety of
rotables and expendables for all commercial jet aircraft types manufactured by
Boeing, McDonnell-Douglas, Airbus, British Aerospace and Fokker Aircraft.

QUALITY CONTROL

         Airborne equipment is typically highly engineered as to dimension,
composition and performance characteristics. In addition, engine parts are
generally more expensive, flight critical, technically complex and utilize more
specialized heat tolerant metals than other aircraft parts. A high standard for
quality control and documentation is an absolute necessity. The history of a
given part from the date of original manufacture must be documented and
available to regulators and maintenance personnel. The Company works closely
with third-party FAA certified repair facilities to perform repair services to
bring surplus aircraft engines held for resale and certain engine components
into a condition of airworthiness so that the Company can sell such equipment.

         The Company's management believes that its ability to continue to act
as an approved supplier for the major airlines, OEMs and overhaul facilities is
heavily dependent on quality assurance, and that the Company's comprehensive
quality assurance program is among the best in its industry. The Company is (i)
a member of the Coordinating Agency for Supplier Evaluation ("CASE"), a
self-governing organization formed by the airlines that evaluates and audits
parts suppliers and repair stations (ii) a member of the Airline Suppliers
Association for which the Company is an accredited reseller under the provisions
of FAA AC 00-56, and (iii) listed in the European Aerospace Suppliers Register.
In addition, in August 1998, the Company received its recertification under ISO
9002 which was originally received in 1996. The ISO 9002 designation indicates a
quality assurance standard recognized by leading companies throughout the world.
The Company believes it was the first after-market supplier of commercial jet
engines and engine parts in the world to receive such a certification. In
addition, the Company believes that it is one of the few vendors in the industry
to have invested in a sophisticated optical imaging system for document storage
and retrieval. This system provides a high degree of traceability by serial
number for engine parts sold by the Company.

CUSTOMERS

         The Company's customers include airlines, OEMs, lessors, operators of
overhaul facilities and other independent dealers. These customers include
American, Daimler-Benz, Delta, Lufthansa, GE Aircraft Engine Services, Pratt &
Whitney, SwissAir and Singapore Airlines. For the years ended December 31, 1999,
1998 and 1997, the five largest customers collectively accounted for
approximately 36%, 42% and 38%, respectively of the Company's consolidated
revenues. Certain significant customers vary from period to period as a result
of the large unit prices associated with whole aircraft engine sales.

OPERATING APPROACH

         The principal elements of the Company's operating approach are as
follows:

         CONTINUE STRONG QUALITY ORIENTATION. The Company's management believes
that its comprehensive quality program is among the best in the industry. The
Company is a member of CASE, a self-governing organization formed by the
airlines that evaluates and audits parts suppliers and repair stations. The
Company believes it is one of the few resellers of commercial jet engines and
engine parts in the world to receive ISO 9002 certification which the Company
believes provides it with a distinctive competitive advantage. ISO's
comprehensive evaluation system seeks to ensure satisfaction of customer
requirements, documentation of quality management systems and verification that
a product or service is designed, delivered and maintained in accordance with
specific requirements. The ISO 9002 designation indicates a quality assurance
standard recognized by leading businesses throughout the world. In response to
recent airline tragedies and resultant increased scrutiny of airline safety,
airlines and maintenance repair facilities are demanding internationally
recognized quality assurance certification as a condition of doing business.

         The Company believes that it is one of the few vendors in the industry
to have invested in a sophisticated optical imaging system for documentation
storage and



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retrieval. This system, which includes a WORM (write once, read many) drive,
provides a high degree of traceability by serial number for engine parts sold by
the Company. The FAA and customers accept this form of electronic documentation
as the equivalent of original documents. In addition, the Company is working to
make such documentation available online to customers worldwide.

         ADDITIONAL KNOWLEDGEABLE PERSONNEL. The market for engine parts is
highly specialized and technically complex. The Company believes that its
success depends heavily on the high level of technical and engineering knowledge
and experience possessed by its personnel. The Company continues to hire
technically proficient personnel as its business expands both internally and
through the acquisition of competing and complementary businesses.

         OPTIMIZE INVENTORY. The Company manages its inventory carefully by
purchasing both whole engines and individual engine parts through
well-structured transactions, disassembling engines for parts when market
conditions are favorable, and closely monitoring the overhauling of selected
parts by high quality subcontractors, while maintaining a high level of
documentation at all stages of the process and storing the engine parts in a
carefully controlled environment. In addition to management's expertise of
market forces and conditions, the Company has developed a series of management
procedures to assess demand for engines and engine parts. In such assessments,
the Company compiles a periodic analysis of the industry's supply and demand on
a product-by-product basis, reevaluates its available supply of inventory and
interfaces with customers and suppliers to forecast supply and demand. The
Company believes that its ability to structure and finance inventory purchase
transactions is critical to success.

         EXPAND MARKETING RELATIONSHIPS. The Company maintains and strives to
expand its close relationships with a variety of key customers, including OEMs,
repair facilities, domestic and international airlines and other distributors.
The Company continually seeks to expand its customer base, by among other
things, regularly attending industry trade conferences.

         INCREASE CAPITAL RESOURCES. It is critical for the Company to have the
capital to act quickly when purchasing opportunities present themselves. In
addition, increasing the Company's access to capital markets to finance working
capital requirements will allow the Company to take advantage of opportunities
such as leasing, inventory outsourcing and long-term inventory management
contracts.

COMPETITION

         The aviation after-market is highly competitive. Competition is based
on product quality, price, and the ability to provide needed parts quickly. The
largest segment of the after-market is served by OEMs. However, the relatively
high overhead and slow response times which characterize these large
organizations can present a handicap in a fast-moving, price-sensitive
marketplace. OEMs generally concentrate on selling new parts, leaving the market
in serviceable and overhauled parts to other suppliers. OEM-manufactured new
parts generally do not compete with overhauled parts.

         The largest resellers include companies such as AAR Corp. and The AGES
Group. There are approximately 10 to 15 midsize competitors, including the
Company. Over 50 small after-market suppliers and brokers generate a large
portion of the market revenue. As a result of industry consolidation, management
expects that a number of these smaller operators will either be acquired or will
have difficulty competing in this changing market. The Company competes based on
its ability to deliver parts on a "just-in-time" basis, the breadth of its
product offering, quality assurance and part traceability, proven technical
capabilities and price.

         In addition, the engine parts supply business has been reshaped by the
widespread adoption of parts listing services and Web based auction services.
The parts listing services list the availability of thousands of types of engine
parts from brokers, resellers, repair facilities and airlines. The listing
includes the quantity of parts available, the condition of the parts, when the
parts are available and a contact for more information. The listing services
have created a much freer flow of information concerning the supply and demand
for particular parts. Dealers now must compete not only on the basis of their
relationships with customers and knowledge regarding a potential source for
products, but also on the quality of the parts available, the documentation
tracing the history of the parts and the price.




                                       10
<PAGE>   11


GOVERNMENT REGULATION

         The aviation industry is highly regulated by the FAA in the United
States and the equivalent regulatory agencies in other countries. While the
business of selling after-market engines and engine parts is not regulated by
the FAA, the aircraft engines, engine components and airframe materials supplied
by after-market suppliers must be accompanied by documentation which enables the
customers to comply with applicable regulatory requirements. Aircraft operators
must maintain logs concerning the utilization and condition of aircraft engines,
life-limited engine components and airframes.

         Before engine components may be installed in an aircraft engine, they
must meet certain standards of airworthiness established by the FAA or the
equivalent regulatory agencies in other countries. Specific regulations vary
from country to country, although regulatory requirements in other countries are
generally satisfied by compliance with FAA requirements. Engine components must
also be traceable to sources deemed acceptable by such agencies. Although the
Company believes it complies with the highest level of such regulatory
standards, standards may change in the future, requiring engine components
already contained in the Company's inventory to be scrapped or modified.
Aircraft engine manufacturers may also develop new engine components to be used
in lieu of engine components already contained in the Company's inventory. In
all such cases, to the extent that the Company has such engine components in its
inventory, their value may be reduced.

         Management believes that the industry will be subject to continued
regulatory activity. Increased oversight has and will continue to originate with
quality assurance departments at airline operators. The Company has been able to
meet all such requirements to date, and believes that it will meet any
additional requirements that may be imposed.

STRATEGIC ACQUISITIONS

         IASI ACQUISITION. On January 15, 1997, the Company completed the
acquisition of substantially all of the assets and certain liabilities of
International Aircraft Support, L.P. ("IASI") for $25.1 million in cash and
warrants to acquire 500,000 shares of the Company's common stock, par value
$.001 per share ("Common Stock"), at $9.25 per share, expiring January 15, 1999.
IASI was a worldwide seller of new and used aircraft engine parts to maintenance
and overhaul facilities, major commercial airlines and other redistributors.
Along with the engine parts sales, IASI was a lessor of jet engines and offered
engine repair management programs through its technical services business.
IASI's mix of business and its purchasing activities ultimately contributed to
its position as a "market-maker" in redistributed engines and various engine
parts.

         The IASI acquisition enabled the Company to enter into markets for
additional engine types, including the JT8D, PWA 2000 and CFM-56 markets.
According to industry analysts, these engine types power aircraft which, as of
the date of the IASI Acquisition, constituted a majority of the world aircraft
fleet. In addition, the IASI acquisition accelerated the Company's entry into
the engine leasing business, an area in which IASI had been an active
participant. The IASI acquisition also expanded and diversified the Company's
customer base, particularly in European markets. IASI's customers included major
airlines, engine overhaul facilities including those operated by airlines,
independent overhaul and maintenance organizations and aircraft engine
manufacturers. Following the acquisition, IASI's senior management joined the
Company, further broadening the Company's management team.




                                       11
<PAGE>   12


         AERO SUPPORT ACQUISITION. On September 10, 1997, the Company completed
the acquisition of substantially all of the assets and liabilities of Aero
Support for approximately $2.7 million in cash, three promissory notes in the
aggregate principal amount of $11.7 million, and three warrants. One warrant
provides for the purchase of 75,000 shares of Common Stock at an exercise price
of $22.00 per share, expiring on September 9, 2000. The other two warrants
provide for the purchase of an aggregate of 175,000 shares of Common Stock at an
exercise price of $19.00 per share, expiring on September 9, 2002. Up to an
additional $5.0 million cash consideration may be paid by the Company in the
form of an earn-out payable over three years based upon certain specified
criteria, of which $1.7 million and $1.3 million was earned during 1998 and
1999, respectively.

         Aero Support was an international after-market reseller of turbojet
engines and engine parts for helicopters and large transport aircraft. Aero
Support had a customer base that included domestic and foreign operators,
commercial and industrial enterprises and engine overhaul facilities. Aero
Support's primary focus was on the Allison (Rolls Royce) T56/501 engine, which
powers the military's Hercules C-130 aircraft, a widely used military transport
aircraft, and the Allison 250, with approximately 16,000 units actively in use
by helicopters. Prior to its acquisition, Aero Support served 495 customers
worldwide from its headquarters in New York and its additional facility in
Louisiana. With the addition of Aero Support's business, the Company entered the
large transport aircraft and commercial helicopter engine and engine parts
market.

         ITC ACQUISITION. On April 1, 1998, the Company completed the
acquisition of substantially all of the assets and liabilities of 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 $3.3 million and $1.1 million was earned during 1998 and
1999, respectively. In addition, the Company received a three-year option to
purchase a 49% interest in a related FAA-approved overhaul facility.

         ITC was an after-market supplier of jet engines and jet engine parts
for the airline industry. It also provided related services such as engine
leasing. ITC's principal product line featured the Rolls Royce RB-211, Pratt &
Whitney JT8D and Rolls Royce Allison models, and, to a lesser extent, it
supplied Pratt & Whitney JT9D engines and engine parts. ITC had some 75
customers worldwide, including major commercial airlines and jet engine repair
facilities.

         AEROCAR ACQUISITION. On June 17, 1998, the Company acquired all of the
outstanding capital stock of Aerocar for $42.3 million in cash, warrants to
purchase an aggregate of 250,000 shares of the Company's Common Stock at an
exercise price of $26.00 per share, expiring on June 17, 2001, plus an
additional $5.0 million 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 the acquisition. Aerocar was engaged in the
sale and leasing of aircraft engines and aircraft engine parts to major airlines
and regional carriers. Aerocar's primary focus was on the Pratt & Whitney JT8D
engine.

         SOLAIR ACQUISITION. On December 31, 1998, the Company acquired all of
the outstanding capital stock of Solair, a wholly-owned subsidiary of Banner
Aerospace, Inc., for approximately $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. Solair 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.
Through the acquisition of Solair, the Company expanded into the adjacent
avionics and aircraft rotables business.

         CERTIFIED ACQUISITION. On April 29, 1999, the Company acquired all of
the outstanding capital stock of Certified for $16.7 million in cash and the
assumption of $2.7 million in debt. Certified was engaged in the sale of parts,
after-market support and logistics for the Lockheed Martin C-130/L100 Hercules
aircraft. The acquisition of Certified expanded the Company's presence in the
after-market for military transport aircraft.




                                       12
<PAGE>   13


TRADEMARKS AND DESIGN PATENTS

The Company either owns or has applied for various trade names and trademarks in
the United States (and abroad), for use with its products. The Company believes
that its trade names and trademarks are well recognized within the aviation
industry. The Company believes that its trade name and trademarks are not
critical to its continued business success and that the loss of any trade name
and/or trademark would not have a material adverse effect on its business
operations.

ENVIRONMENTAL MATTERS

         The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations and, due to the current
nature of the Company's business, there is little or no direct cost associated
with such compliance.

PRODUCT LIABILITY

         The Company's business exposes it to possible claims for personal
injury or death that may result from the failure of an aircraft or engine owned
and leased by it or an engine part sold by it. The Company currently maintains
product liability insurance coverage in the amount of $750 million on an
aggregate and per claim basis.

CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS

         The Company does not provide financial performance forecasts. The
Company's operating results and financial condition have varied in the past and
may in the future vary significantly depending on a number of factors. Except
for the historical information in this report, the matters contained in this
report include forward-looking statements that involve risks and uncertainties.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time. Such factors,
among others, may have a material adverse effect upon the Company's business,
results of operation and financial condition.

         LIMITED OPERATING HISTORY; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS.
The Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. Although the Company has historically
experienced increasing net revenues, the Company may experience significant
fluctuations in its net revenues, gross margins and operating results in the
future, both on an annual and a quarterly basis, caused by various factors,
including general economic conditions, specific economic conditions in the
aviation industry, the availability and price of surplus aviation equipment, the
size and timing of customer orders and the cost of capital to the Company. In a
strategic response to a changing, competitive environment, the Company may elect
from time to time to make certain pricing, product or marketing decisions, and
any such decisions could have a material adverse effect on the Company's
periodic results of operations, including net revenues and net income from
quarter to quarter. A large portion of the Company's operating expenses are
relatively fixed. Since the Company typically does not obtain long-term purchase
orders or commitments from its customers with respect to the sale of aircraft,
avionics and aircraft rotables, and engines and engine parts, it must anticipate
the future volume of orders based upon the historic purchasing patterns of its
customers and upon its discussions with its customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on the Company's
business, financial condition and results of operations. Therefore, recent net
revenues and operating results of the Company should not be taken as indicative
of the results of operations that can be expected in the future. There can be no
assurance that the net revenues and operating results of the Company will
continue at their current levels or will grow, or that the Company will be able
to achieve sustained profitability on a quarterly or annual basis.

         MANAGEMENT OF GROWTH. The Company has recently experienced significant
expansion that has placed substantial demands upon its management, systems and
resources. The Company's ability to manage its future growth, if any, will
require the Company continually to improve its financial controls, management
controls, reporting systems and procedures on a timely basis, implement new
systems as necessary and expand, train and manage its workforce. There can be no
assurance that the Company's controls, systems or procedures will continue to be
adequate to support the Company's operations. The failure of the Company's



                                       13
<PAGE>   14

management to respond effectively to changing business conditions would have a
material adverse effect upon the Company's business, financial condition and
results of operations.

         GROWTH STRATEGY AND RISKS RELATING TO ACQUISITIONS. A key element of
the Company's strategy involves growth through the acquisition of additional
inventories of aircraft, avionics and aircraft rotables, and engines and engine
parts and the acquisition of other companies, assets or product lines that would
complement or expand the Company's existing business. The Company's ability to
grow by acquisition is dependent upon, and may be limited by, the availability
of suitable aircraft, avionics and aircraft rotables, and engines and engine
parts inventories, acquisition candidates and capital, and by restrictions
contained in the Company's credit agreements. The company completed the IASI
acquisition in January 1997, the Aero Support acquisition in September 1997, the
ITC acquisition in April 1998, the Aerocar acquisition in June 1998, the Solair
acquisition in December 1998 and the Certified acquisition in April 1999. The
process of seeking to integrate an acquired company's business into the
Company's operations may result in ongoing and extraordinary operating
difficulties and expenditures, may absorb significant management attention that
would otherwise be available for the ongoing development of the Company's
business and may result in charges against income. In addition, future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's operating results and
financial condition. There can be no assurance that the Company will be able to
consummate any future acquisitions on satisfactory terms or that it will be able
to successfully integrate newly acquired businesses into its existing
operations.

         UNCERTAIN SUPPLY OF INVENTORY. The Company obtains its inventories of
aircraft, avionics and aircraft rotables, and engines and engine parts by
purchasing surplus inventory from airlines, overhaul facilities and other
suppliers. There is not an organized market for surplus aircraft, avionics and
aircraft rotables, and engines and engine parts, and the Company must rely on
field representatives and personnel, advertisements and its reputation as a
buyer of surplus inventory in order to generate opportunities to purchase such
equipment. The market for bulk sales of surplus aircraft, avionics and aircraft
rotables, and engines and engine parts is highly competitive, in some instances
involving a bidding process. While the Company has been able to purchase surplus
inventory in this manner successfully in the past, there can be no assurance
that surplus aircraft, avionics and aircraft rotables, and engines and engine
parts of the type required by the Company's customers will be available on
acceptable terms when needed in the future or that the Company will continue to
compete effectively in the purchase of such surplus equipment.

         DEPENDENCE ON THIRD-PARTY AIRCRAFT ENGINE REPAIR FACILITIES. The
Company is dependent on third-party FAA-approved repair facilities to perform
repair services to bring surplus aircraft, avionics and aircraft rotables, and
engines and engine parts into a condition of airworthiness so that the Company
can then sell or lease such equipment to its customers. Third-party repair
facilities may experience heavy workloads or may allocate their resources to
customers with whom they have entered into long-term, regularly scheduled
aircraft engine and airframe maintenance agreements and thereby delay the
services to be provided to the Company. The repair facilities utilized by the
Company are responsible for inspecting and certifying engines and engine parts
to be of serviceable quality. The Company does not have direct control over the
quality of repairs performed by such repair facilities or the accuracy of the
airworthiness condition designated by such facility. It is possible that engines
and engine parts could pass inspection by the Company, be sold by the Company
and be incorporated into an aircraft, and subsequently be determined to be
unsafe or in need of further repair. In such event, the FAA has the authority to
take actions that may include the grounding of an aircraft that contains such
parts. Additionally, the customer who purchased such engines or engine parts
could demand a replacement from the Company. While the Company has insurance
coverage to cover related losses, the effect of such a development on passenger
confidence and customer relations could have a material adverse effect upon the
Company.

         CUSTOMER CONCENTRATION. The Company's five largest customers accounted
for approximately 36% of total revenue for the year ended December 31, 1999.
While the relative significance of customers varies from period to period as a
result of the large unit prices associated with whole aircraft engine sales, the
loss of, or significant curtailments of purchases by, one or more of the
Company's significant customers at any time could have a material adverse effect
on the Company's business, financial condition and results of operations.



                                       14
<PAGE>   15


         CUSTOMER CREDIT RISKS. The Company's inability to collect receivables
from a substantial sale could adversely affect the Company's financial position
and results of operations for a particular period, although Company policy is
generally to sell whole engines for cash at closing. The Company's bad debt
expense was 1.1% of revenues for the year ending December 31, 1999 and less than
0.5% of revenues for the years ended December 31, 1997 and 1998. The Company
anticipates that it may incur greater bad debt losses in the future as its
customer base grows and the Company experiences greater exposure to its
customers as a result, in part, of the implementation of a program for the
leasing of aircraft engines and airframes. There can be no assurance that the
Company will not incur significant bad debt losses in the future that
individually, or in the aggregate, could have a material adverse effect on the
Company's business, financial condition and results of operations.

         ADVERSE CONSEQUENCES OF DEBT AND LEVERAGE. As a result of incurring
debt, the Company is subject to the risks normally associated with debt
financing, including, without limitation, the following: (i) a substantial
portion of the Company's net cash provided by operations may be committed to the
payment of the Company's interest expense and principal repayment obligations
and will not be available to the Company for other purposes; (ii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures or acquisitions may be limited; and (iii) the Company's
level of indebtedness could limit its flexibility in reacting to changes in its
industry and general economic conditions. The Company's ability to pay interest
on its debt and to satisfy its other debt obligations will depend upon its
future 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 the Company's
control. If the Company is unable to 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. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, or that the Company's failure to service any of its indebtedness will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

         RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS. The Company has debt
obligations which restrict, among other things, the ability of the Company
and/or its subsidiaries to: (i) incur additional indebtedness; (ii) incur liens;
(iii) pay dividends or make certain other restricted payments; (iv) consummate
certain asset sales; (v) enter into certain transactions with affiliates; (vi)
merge or consolidate with any other person; or (vii) sell, assign, transfer,
lease, convey or otherwise dispose of its assets. In addition, the Company's
senior credit facility requires the Company to maintain specified financial
ratios and satisfy certain financial tests. The Company's ability to maintain
those financial ratios and to satisfy those tests will be affected by events
beyond its control, and there can be no assurance that the Company will be able
to do so. A breach of any of the financial covenants in the senior credit
facility, or certain other debt obligations could result in a default under each
of the governing agreements. Upon the occurrence of an event of default under
the senior credit facility, the respective lenders could elect to declare all
amounts outstanding, together with accrued interest, to be immediately due and
payable. Substantially all of the assets of the Company and each of its U.S.
subsidiaries are pledged as collateral security for the senior credit facility.
If the Company were unable to repay all such outstanding amounts, the lenders
could proceed against the collateral granted to them to secure that
indebtedness, and any proceeds realized upon the sale of such collateral would
be used first to satisfy all amounts outstanding under the senior credit
facility, and thereafter, any other liabilities of the Company. If the
indebtedness under the senior credit facility were to be accelerated, there can
be no assurance that the assets of the Company would be sufficient to repay in
full that indebtedness and any other indebtedness of the Company, which could
have a material adverse effect upon the Company's business, financial condition
and results of operations.

         DEPENDENCE UPON KEY PERSONNEL. The Company depends upon the efforts of
its officers and directors. The loss of the services of such key personnel could
have a material adverse effect on the Company's ability to successfully achieve
its business objectives. Although each of the key employees has executed an
employment agreement that prohibits the employee from competing against the
Company for a specified period of time, there can be no assurance that such
remedy will be available to the Company or that such protection will mitigate
any losses incurred as a result of termination of employment.



                                       15
<PAGE>   16


         PRODUCT LIABILITY. The Company's business exposes it to possible claims
for personal injury or death that may result from the failure of an aircraft or
engine owned and leased by it or an engine part sold by it. The Company
currently maintains product liability insurance coverage in the amount of $750
million on an aggregate and per claim basis. There can be no assurance that
claims will not arise in the future, that such insurance coverage can be
maintained in the future at an acceptable cost or that such coverage will be
adequate to cover any future liability of the Company. Any such liability not
covered by insurance could have a material adverse effect on the financial
condition of the Company.

         DEPENDENCE ON THE CONDITION OF THE AIRLINE INDUSTRY. Aircraft engine
and engine parts pricing 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 engine parts is driven primarily by flying
hours or cycles. Regardless of the profitability of the airline industry, parts
must be serviced or replaced at scheduled intervals. As such, the demand for
after-market parts is a function of the level of worldwide air traffic.
Additionally, factors such as the price of fuel affect the aircraft parts
market, since older aircraft (into which 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
aircraft, avionics and aircraft rotables, and engines and engine parts, lower
selling prices for the Company's products and increased credit risk associated
with doing business with industry participants. There can be no assurance that
economic and other factors that might affect the airline industry will not have
an adverse impact on the Company's business, financial condition and results of
operations.

         COMPETITION. The aviation parts after-market is highly competitive.
Competition is based on product quality, price and the ability to provide needed
parts quickly. The largest segment of the after-market is served by OEMs.
However, the relatively high overhead and slow response times often associated
with such large organizations can present a handicap in a fast-moving, price-
sensitive marketplace. OEMs generally concentrate on selling new parts, leaving
the market in serviceable and overhauled parts to other suppliers.
OEM-manufactured new parts generally do not compete with overhauled parts. The
largest resellers include companies such as AAR Corp. and The AGES Group. There
are approximately 10 to 15 midsize resellers, including the Company. A large
portion of the market revenue is generated by over 50 small after-market
suppliers and brokers. As a result of industry consolidation, management expects
that a number of these smaller operators will either be acquired or will have
difficulty competing in this changing market. In addition, the engine parts
supply business has been reshaped by the widespread adoption of parts listing
services. The parts listing services list the availability of thousands of types
of parts from brokers, distributors, repair facilities and airlines. The listing
includes the quantity of parts available, the condition of the parts, when the
parts are available and a contact for more information. The parts listing
services have created a much freer flow of information concerning the supply and
demand for particular parts. Dealers now must compete not only on the basis of
their relationships with customers and knowledge regarding a potential source
for products, but also on the quality of the parts available, the documentation
tracing the history of the parts and the price. There can be no assurance that
the Company will continue to compete effectively against present and future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.

         GOVERNMENT REGULATION. The aviation industry is highly regulated by the
FAA in the United States and the equivalent regulatory agencies in other
countries. While the Company's reselling business is not regulated, the
aircraft, avionics and aircraft rotables, and engines and engine parts that the
Company sells to its customers must be accompanied by documentation that enables
the customer to comply with applicable regulatory requirements. There can be no




                                       16
<PAGE>   17


assurance that new and more stringent government regulations will not be adopted
in the future or that any such new regulations, if enacted, would not have an
adverse impact on the Company. Before engine parts may be installed in an
aircraft engine, they must meet certain standards of airworthiness established
by the FAA or the equivalent regulatory agencies in other countries. Specific
regulations vary from country to country, although regulatory requirements in
other countries are generally satisfied by compliance with FAA requirements.
Engine components must also be traceable to sources deemed acceptable by such
agencies. Although the Company believes it complies with the highest level of
such regulatory standards, standards may change in the future, requiring engine
components already contained in the Company's inventory to be scrapped or
modified. Aircraft engine manufacturers may also develop new engine components
to be used in lieu of engine components already contained in the Company's
inventory. In all such cases, to the extent that the Company has such engine
components in its inventory, their value may be reduced and the Company's
business, financial condition and results of operations could be adversely
affected.

         NO DIVIDENDS. The Company intends to retain all earnings for the
foreseeable future for use in the operations and expansion of its business.
Consequently, the Company does not anticipate paying any cash dividends on its
Common Stock to its stockholders for the foreseeable future. In addition, the
debt financing agreements to which the Company is a party contain restrictions
on the Company's ability to declare dividends.

EMPLOYEES

         As of December 31, 1999, the Company had approximately 340 full-time
employees. None of the Company's employees are members of a labor union. The
Company believes that its relations with its employees are good.

STOCK OPTION PLANS

         CORPORATE POLICY. The Company is operating in a unique environment
where its relatively small number of employees (consisting of 23 executives and
317 employees) make the daily decisions that directly effect the Company's
operational and financial results. The Company continually strives to build and
maintain a team comprised of the best executives and employees in their field by
offering the most attractive work environment and performance based compensation
packages available. The Board believes that the Company's stock option plans are
an essential component of the Company's compensation package which promote the
interests of the Company and its stockholders by strengthening the Company's
ability to attract, retain and incentivize competent employees and executives
and making service on the Company's Board of Directors more attractive to
present and prospective non-employee directors. Such stock option plans
encourage stock ownership and proprietary interest in the Company by the
individuals upon whose judgment, initiative and efforts the financial success
and growth of the Company largely depend.

         STOCK OPTION PLAN FOR NEW EXECUTIVES AND EMPLOYEES AND OUTSIDE
DIRECTORS. Consistent with the corporate policy placing importance on stock
options as part of compensation packages, the Company intends to continue to use
stock options as part of the performance based compensation packages used to
attract and incentivize new executives and employees. The Company also intends
to use stock options in lieu of cash compensation to continue to make service by
present and prospective outside directors attractive. For these reasons, the
Board adopted, subject to shareholder approval, a 1998 Stock Option Plan (the
"Plan") effective as of November 15, 1998 and intends to only grant options
under this 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. The Plan authorizes the issuance of stock options to purchase an
aggregate of 170,000 shares of the Company's Common Stock and contains
substantially the same terms as the Company's 1997 Stock Option Plan. The
Company obtained shareholder approval of the Plan at the 1999 Annual Meeting of
Shareholders.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC REVENUES

         Total revenues derived from domestic and international customers
accounted for 64% and 36%, respectively, for the year ended December 31, 1999,
67% and 33%, respectively, for the year ended December 31, 1998, and 79% and



                                       17
<PAGE>   18


21%, respectively, for the year ended December 31, 1997. See Footnote 15 to the
Consolidated Financial Statements.

ITEM 2. DESCRIPTION OF PROPERTIES.

The Company owns its 193,000 square foot headquarters and warehouse facility
located on 11.5 acres in the Sawgrass International Corporate Park, Sunrise,
Florida which is near Fort Lauderdale, Florida. The Company's address is 1100
International Parkway, Sunrise, Florida 33323. The property is subject to a
mortgage held by Bank of America, N.A. to secure the Company's obligations under
its bank credit facility.

The Company owns its previous 45,000 square foot office and warehouse facility
located on 2.5 acres in the Sawgrass International Corporate Park, Sunrise,
Florida which is near Fort Lauderdale, Florida at 14000 N.W. 4th Street,
Sunrise, Florida 33325. The property is subject to a mortgage held by Bank of
America, N.A.

The Company leases a 20,000 square foot facility of office and warehouse space,
assumed in connection with the acquisition of Aerocar, located at 1495 N. Park
Drive, Weston, Florida 33326. The lease was recently negotiated for a term
ending December 31, 2010 at a base rent of approximately $18,000 per month.

The Company leases a 12,000 square foot facility of office and warehouse space,
assumed in connection with the acquisition of Certified, located at 2870
Stirling Road, Hollywood, Florida 33020. The month to month lease provides for a
base rent of approximately $10,000 per month.

The Company leases a 4,000 square foot facility of warehouse space, assumed in
connection with the acquisition of Certified, located at RT 10 Box 916, Lake
City, Florida 32025. The month to month lease provides for a base rent of
approximately $1,000 per month.

The Company leases a 4,000 square foot facility of warehouse space, assumed in
connection with the acquisition of Certified, located at 2060-G Tigertail
Boulevard., Dania, Florida 33004. The month to month lease provides for a base
rent of approximately $2,000 per month.

The Company leases a 8,614 square foot facility of warehouse space, assumed in
connection with the acquisition of Certified, located at 2201-2385 Stirling
Road, Fort Lauderdale, Florida, 33312. The lease provides for a term ending
March 31, 2000 at a base rent of approximately $4,800 per month.

The Company leases a 12,000 square foot facility of warehouse space, assumed in
connection with the acquisition of Certified, located at 5030 N.W. 109 Avenue,
Suites E & H, Sunrise, Florida 33313. The month to month lease provides for a
base rent of approximately $7,500 per month.




                                       18
<PAGE>   19


The Company leases a 44,000 square foot facility of office and warehouse space,
assumed in connection with the acquisition of Solair, located at 3380 S.W. 11th
Avenue, Fort Lauderdale, Florida 33315. The lease provides for a term ending
August 31, 2007 at a base rent of $20,000 per month through August 31, 2002 and
$23,000 per month through August 31, 2007.

The Company leases a 40,000 square foot facility of warehouse space located at
3301 S.W. 9th Avenue, Fort Lauderdale, Florida 33315. The lease provides for a
term ending August 31, 2001 at a base rent of $15,045 per month.

The Company leases a 2,000 square foot facility of office and warehouse space,
assumed in connection with the acquisition of Solair, located at Unit 15
Farnborough Business Centre, Pelmoor Rd., Farnborough England. The lease
provides for a term ending April 7, 2003 at a base rent of approximately $19,000
plus value added taxes per year.

ITEM 3. LEGAL PROCEEDINGS.

         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.

         There are 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.



                                       19
<PAGE>   20


                                     PART II

 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         Since June 1997, the Company's Common Stock has been listed on The
Nasdaq Stock Market ("NASDAQ")-National Market under the symbol "KELL." Prior to
that date, the Company's Common Stock was listed on the NASDAQ-SmallCap Market
under the same symbol.

         The following table sets forth the range of high and low bid prices for
the Common Stock for the period from January 1998 to December 1999, as reported
by NASDAQ. The quotes represent "Inter-dealer" prices without retail markups,
markdowns or commissions and may not necessarily represent actual transactions.

                                                    COMMON STOCK
                                              ------------------------
                                              HIGH                 LOW
                                              ----                 ---

Year Ended December 31, 1998:
First Quarter                                 $27 3/4              $20
Second Quarter                                $27 3/4              $23
Third Quarter                                 $27 1/8              $12 7/8
Fourth Quarter                                $28 3/4              $9  1/8

Year Ended December 31, 1999:
First Quarter                                 $28 3/4              $12 1/4
Second Quarter                                $20 5/8              $14 5/8
Third Quarter                                 $18 1/2              $9  1/2
Fourth Quarter                                $10 9/16             $7  1/2

         As of February 29, 2000, there were 11,910,981 shares of Common Stock
outstanding, held by 73 stockholders of record. The Company believes that
certain holders of record hold a substantial number of shares of Common Stock as
nominees for a significant number of beneficial owners. The closing price for
the Company's Common Stock on February 29, 2000 was $6 15/16 per share.

         The Company has not paid any cash dividends on its Common Stock to
date. The payment of dividends is within the discretion of the Board of
Directors. The debt financing arrangements to which the Company is a party
contain restrictions on the Company's ability to pay dividends. It is the
present intention of the Board of Directors to retain all earnings for use in
the Company's business operations and, accordingly, the Board does not
anticipate declaring any dividends in the foreseeable future.

ISSUANCE OF UNREGISTERED SECURITIES DURING 1999

         All of the transactions listed below involve the issuance of securities
of the Company in reliance upon Section 4(2) of the Securities Act of 1933, as
amended.

         On March 23, 1999, in connection with the acquisition of Solair, the
Company issued to Helix a warrant to acquire 2,250 shares of Common Stock at an
exercise price of $27.50 per share, expiring on December 31, 2002, in partial
consideration for the services performed by Helix in connection with the
transaction.



                                       20
<PAGE>   21
ITEM 6. SELECTED FINANCIAL DATA

         The financial data set forth below should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere herein. See also "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."


<TABLE>
<CAPTION>

                                                                                 YEARS ENDED DECEMBER 31,
                                          ---------------------------------------------------------------------------------------
                                                1999             1998              1997             1996              1995
                                                ----             ----              ----             ----              ----
                                                                              (IN THOUSANDS)
<S>                                       <C>               <C>              <C>               <C>              <C>
STATEMENT OF OPERATIONS DATA:
Total revenues                            $     330,944     $     180,049    $      79,439     $      24,922    $       8,579
Total operating expenses                        276,751           139,019           61,828            20,169            7,062
Net operating income                             54,193            41,030           17,611             4,753            1,517
Interest   expense,   net  of   interest         21,268             9,773            3,991               645             (225)
income
Non-operating expenses                              --                --               --                --             1,110
Income taxes                                     12,390            11,679            5,077             1,462              258
                                           ------------      ------------     ------------      ------------     ------------
Net income                                 $     20,535      $     19,578     $      8,543      $      2,646     $        374
                                           ============      ============     ============      ============     ============
</TABLE>

<TABLE>
<CAPTION>

                                                                               DECEMBER 31,
                                          ---------------------------------------------------------------------------------------
                                                1999             1998              1997             1996              1995
                                                ----             ----              ----             ----              ----
                                                                              (IN THOUSANDS)

<S>                                        <C>               <C>              <C>               <C>              <C>
BALANCE SHEET DATA:
Total current assets                       $    361,053      $    272,530     $     74,215      $     19,655     $     15,689
Total current liabilities                        38,193            42,147           19,020             8,565            6,019
Total assets                                    541,445           434,050          134,361            29,545           21,918
Non-current obligations                         332,039           242,144           65,430             2,819            2,760
Stockholders' equity                            171,213           149,759           49,912            18,161           13,139

</TABLE>

                                       21



<PAGE>   22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.

         THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE HEREIN.

GENERAL

         The Company is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's net revenues have
increased from $79.4 million for the year ended December 31, 1997 to $330.9
million for the year ended December 31, 1999. During the same time period, the
Company's net income increased from $8.5 million to $20.5 million. The increase
in revenues and net income is the result of a number of factors, including the
expansion of the Company's product lines, customer base and market share,
increases in the Company's internal growth, cost controls and overall operating
efficiencies, acquisitions in existing and adjacent markets and significant
capital investments.

         The Company is organized based on the products that it offers. Under
this organizational structure, 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.

         The Company has completed 6 acquisitions during the period from 1997 to
1999. These acquisitions were accounted for using the purchase method of
accounting for business combinations and accordingly, those companies' operating
results have been included in the Company's results of operations since the date
of acquisition.

RESULTS OF OPERATIONS

         For the periods indicated, the following table sets forth the
percentage of certain income statement items to total revenues derived from the
Company's consolidated statements of earnings.
<TABLE>
<CAPTION>

                                                                           PERCENTAGE OF TOTAL REVENUES
                                                                        -----------------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                        -----------------------------------
                                                                           1999         1998       1997
                                                                        ------------ ----------  ----------
<S>                                                                          <C>          <C>       <C>
Revenues:
  Sales Revenues, net                                                        87.3%        82.7%     90.1%
  Rental Revenues                                                            12.7         17.3       9.9
        Total Revenues                                                      100.0        100.0     100.0
Operating Expenses:
  Cost of Goods Sold                                                         60.7         55.7      58.9
  Depreciation of Equipment Under Operating Leases                            8.2          9.3       5.7
  Selling, General and Administrative Expenses                               12.4         10.6      11.2
</TABLE>


                                       22
<PAGE>   23



<TABLE>
<CAPTION>

                                                                           PERCENTAGE OF TOTAL REVENUES
                                                                        -----------------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                        -----------------------------------
                                                                           1999         1998       1997
                                                                        ------------ ----------  ----------
<S>                                                                          <C>          <C>       <C>
  Depreciation and Amortization Expense                                       1.6          1.7       2.0
  Other non-recurring expenses                                                0.7          --        --
        Total Operating Expenses                                             83.6         77.3      77.8
Interest Expense (net of Interest Income)                                     6.4          5.4       5.0
        Income before income taxes                                            9.9         17.3      17.2
Income Taxes                                                                  3.7          6.4       6.4
        Net Income                                                            6.2         10.9      10.8
</TABLE>

YEARS ENDED DECEMBER 31, 1999 AND 1998

         Consolidated sales revenues increased by 94% to $288.9 million for the
year ended December 31, 1999 as compared to $148.9 million for the year ended
December 31, 1998. The increase in sales revenues was impacted by the results of
the Company's Solair division which was acquired in December 1998 and generated
revenues of $54.0 million for the year ended December 31, 1999. Sales revenues
from the Company's commercial engine parts segment increased to $75.0 million
from $41.5 million in the prior year. The increase in sales of commercial engine
parts was primarily due to higher levels of inventory availability as a result
of the Company's increased capital resources as well as the impact of the
acquisition of ITC during 1998. Sales revenues from the Company's defense
segment increased by $23.8 million to $48.0 million partially due to internal
growth as a result of the Company's significant investment in marketing and
higher levels of inventory availability and partially the result of the
acquisition of Certified in April 1999. Sales of whole aircraft and engines
increased 34.5% in 1999 primarily due to higher levels of inventory availability
as a result of the Company's increased capital resources. In connection with the
proposed off-balance sheet initiative for the Company's aircraft and engine
lease portfolio discussed in the liquidity and capital resources section below,
the Company believes sales of whole aircraft and engines will decrease in the
future.

         Rental revenues increased by 35% to $42.0 million for the year ended
December 31, 1999 as compared to $31.1 million for the year ended December 31,
1998, primarily due to an increase in the Company's aircraft and engine lease
portfolio partially offset by higher levels of idle equipment. In connection
with the proposed off-balance sheet initiative for the Company's aircraft and
engine lease portfolio discussed in the liquidity and capital resources section
below, the Company believes sales of whole aircraft and engines will decrease in
the future.

         Cost of goods sold increased by 101% to $200.9 million for the year
ended December 31, 1999 as compared to $100.2 million for the year ended
December 31, 1998. Gross profit margin on sales decreased to 30.5% in 1999 from
32.7% in 1998. The increase in cost of goods sold was primarily due to the
increase in revenues. The decrease in the gross profit margin was primarily due
to lower gross profit margins on the sales of whole aircraft and engines of
28.3% as compared to 31.1% in 1998 along with expected lower margins from the
Company's Airframe Avionics and Rotables segment. Gross profit margins in the
Company's commercial engine parts and defense segments were relatively stable as
compared with 1998.

         Depreciation of equipment under operating leases increased by 62% to
$27.1 million for the year ended December 31, 1999 as compared to $16.7 million
for the year ended December 31, 1998. Gross profit margin on rental revenues
decreased to 35.5% in 1999 from 46.4% in 1998. The increase in depreciation of
equipment under operating leases was primarily due to the increase in the
Company's aircraft and engine lease portfolio. The decrease in gross profit
margin was primarily due to a continued shift in the Company's lease portfolio
to longer term leases and newer equipment as well as the impact of depreciation
expense incurred in connection with the slightly higher levels of idle
equipment. In connection with the proposed off-balance sheet initiative for the
Company's aircraft and engine lease portfolio discussed in the liquidity and
capital resources section below, the Company believes depreciation of equipment
under operating leases will decrease in the future.



                                       23
<PAGE>   24


         Selling, general and administrative expenses increased by 116% to $41.1
million for the year ended December 31, 1999 as compared to $19.1 million for
the year ended December 31, 1998. As a percentage of total revenues, selling,
general and administrative expenses increased to 12.4% in 1999 from 10.6% in
1998. The increase in selling, general and administrative expenses was primarily
due to (i) the acquisitions of ITC, Aerocar, Solair and Certified being combined
into Kellstrom, (ii) the Company's continued investment in personnel and
facilities for the defense, commercial engine parts and airframe avionics and
rotables segments in order to support the Company's growth model, (iii)
increased professional service fees incurred in connection with (a) the design
of the Company's new management information system and (b) pre-settlement legal
fees incurred in connection with defending the lawsuit brought by the Estate of
a late Director of the Company and (iv) an increase in bad debt expense as
a result of the expansion of the Company's customer base. The Company believes
selling, general and administrative expenses will continue to increase due to
the Company's growth plans and need for additional personnel and facilities to
support the Company's operations.

         Depreciation and amortization expense increased by 77% to $5.4 million
for the year ended December 31, 1999 as compared to $3.1 million for the year
ended December 31, 1998; however, as a percentage of total revenues,
depreciation and amortization expense decreased to 1.6% in 1999 from 1.7% in
1998. The increase in depreciation and amortization expense was primarily due to
amortization of goodwill related to the ITC, Aerocar, Solair and Certified
acquisitions in addition to depreciation of the Company's new headquarters
facility which was completed in December 1998.

         Other non-recurring expenses for 1999 reflect a $2.2 million charge to
fulfill the Company's obligation under the settlement of a lawsuit brought by
the Estate of a late Director of the Company, with respect to, among other
things, a claim alleging entitlement to a stock option grant in late 1996, and
for accrued legal expenses incurred in connection with the settlement.

         Interest expense (net of interest income) increased by 118% to $21.3
million for the year ended December 31, 1999 as compared to $9.8 million for the
year ended December 31, 1998. The increase in interest expense was primarily
driven by an increase in the Company's average debt levels during 1999,
resulting from the acquisitions of ITC, Aerocar, Solair and Certified and growth
in inventories and equipment under operating leases. Except for the expected
impact on interest expense of the proposed off-balance sheet initiative for the
Company's aircraft and engine lease portfolio discussed in the liquidity and
capital resources section below, the Company believes interest expense will
continue to increase as the Company continues to expand its inventory levels and
facilities to support future growth in operations and completes acquisitions
funded by debt. There can be no assurance, however, that the Company's
operations will expand or that it will complete any material acquisitions.

         The Company's effective tax rate for the year ended December 31, 1999
was 37.6% as compared to 37.4% for the year ended December 31, 1998.

         Net income increased by 5% to $20.5 million for the year ended December
31, 1999 as compared to $19.6 million for the year ended December 31, 1998.
Basic earnings per common share decreased by 11% to $1.73 for the year ended
December 31, 1999 as compared to $1.94 for the year ended December 31, 1998.
Diluted earnings per common share decreased by 3% to $1.48 for the year ended
December 31, 1999 as compared to $1.53 for the year ended December 31, 1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

         Sales revenues increased by 108% to $148.9 million for the year ended
December 31, 1998 as compared to $71.5 million for the year ended December 31,
1997. The increase in sales was primarily due to (i) growth of sales of
approximately $38.4 million due to additional inventory availability as a result
of the Company's increased capital resources as well as the acquisition of
Aerocar being combined into Kellstrom, and (ii) incremental sales of
approximately $39.0 million related to the acquisition of Aero Support and ITC.
Commercial engine parts revenues increased to $41.5 million in 1998 from $37.0



                                       24
<PAGE>   25


million in 1997 due in part to the acquisition of ITC. Sales revenues from the
Company's defense segment increased 255% in 1998 to $24.2 million as a result of
the acquisition of Aero Support. Sales of whole engine and aircraft increased
200% in 1998 to $83.2 million due to additional inventory availability as a
result of the Company's increased capital resources as well as the acquisition
of Aerocar being combined into Kellstrom.

         Rental revenues increased by 294% to $31.1 million for the year ended
December 31, 1998 as compared to $7.9 million for the year ended December 31,
1997. The increase in rental revenues was primarily due to (i) the Company's
continued expansion into the leasing business through purchases of individual
assets as well as the acquisition of Aerocar being combined into Kellstrom
resulting in increased rental revenues of approximately $20.0 million, and (ii)
incremental rental revenues of approximately $3.2 million related to the
acquisition of the ITC operations.

         Cost of goods sold increased by 114% to $100.2 million for the year
ended December 31, 1998 as compared to $46.8 million for the year ended December
31, 1997. Gross profit margin decreased to 32.7% in 1998 from 34.6% in 1997. The
increase in cost of goods sold was primarily due to the increased revenues
across all segments. The decrease in the gross profit margin was primarily due
to lower gross profit margins on sales from the Company's defense segment of
34.7% in 1998 compared to 39.6% in 1997.

         Depreciation of equipment under operating leases increased by 263% to
$16.7 million for the year ended December 31, 1998 as compared to $4.6 million
for the year ended December 31, 1997. The increase in depreciation of equipment
under operating leases was primarily due to (i) the Company's continued
expansion into the leasing business through purchases of individual assets as
well as the acquisition of Aerocar being combined into Kellstrom, resulting in
increased depreciation of approximately $10.2 million, and (ii) incremental
depreciation of approximately $1.9 million related to the acquisition of ITC.

         Selling, general and administrative expenses increased by 115% to $19.1
million for the year ended December 31, 1998 as compared to $8.9 million for the
year ended December 31, 1997; however, as a percentage of total revenues,
selling, general and administrative expenses decreased to 10.6% in 1998 from
11.2% in 1997. The increase in selling, general and administrative expenses was
primarily due to (i) expenses of approximately $5.2 million related to the
continuing operations of Aero Support and ITC, and (ii) expenses of
approximately $5.0 million related to the continued expansion of the Company's
sales and warehouse operations. This expansion consisted of greater resources to
support a higher level of revenue and a corresponding greater number of whole
engine and engine component transactions, and the continued addition of
marketing and management personnel necessary to achieve and administer the
revenue growth opportunities that are available due to the Company's expanded
level of inventory investment as well as the acquisition of Aerocar being
combined into Kellstrom. Selling, general and administrative expenses as a
percentage of total revenues decreased during 1998 primarily due to economies of
scale and operating efficiencies derived from the consolidation of operations
related to completed acquisitions.

         Depreciation and amortization expense increased by 97% to $3.1 million
for the year ended December 31, 1998 as compared to $1.6 million for the year
ended December 31, 1997; however, as a percentage of total revenues,
depreciation and amortization expense decreased to 1.7% in 1998 from 2.0% in
1997. The increase in depreciation and amortization expense was primarily due to
amortization of goodwill related to the Aero Support, ITC and Aerocar
acquisitions.

         Interest expense (net of interest income) increased by 145% to $9.8
million for the year ended December 31, 1998 as compared to $4.0 million for the
year ended December 31, 1997. The increase in interest expense was primarily
driven by an increase in the Company's average debt levels during 1998,
resulting from the acquisition of ITC and growth in inventories and equipment
under operating leases.

         The Company's effective tax rate for the year ended December 31, 1998
was 37.4% as compared to 37.3% for the year ended December 31, 1997.

         Net income increased by 129% to $19.6 million for the year ended
December 31, 1998 as compared to $8.5 million for the year ended December 31,
1997. Basic earnings per common share increased by 64% to $1.94 for the year



                                       25
<PAGE>   26


ended December 31, 1998 as compared to $1.18 for the year ended December 31,
1997. Diluted earnings per common share increased by 61% to $1.53 for the year
ended December 31, 1998 as compared to $0.95 for the year ended December 31,
1997.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1999, the Company's liquidity and capital resources
included cash and cash equivalents of $0.3 million and working capital of $322.9
million. At December 31, 1999, total outstanding debt was $326.1 million as
compared to $239.9 million as of December 31, 1998. As of December 31, 1999, the
outstanding principal balance on the Company's convertible subordinated notes
was $140.3 million and the Company had contractual lines of credit totaling
$256.7 million, of which $172.4 million was outstanding and $36.6 million was
available.

         Cash flows used in operating activities for the year ended December 31,
1999 was $48.6 million compared with $89.0 million for the year ended December
31, 1998. The primary uses of cash for operating activities during the year
ended December 31, 1999 was for increases in inventories and equipment under
operating leases of $33.2 million and $36.7 million, respectively, and an
increase in trade receivables of $25.1 million. The increases in inventories,
equipment under operating leases and trade receivables were to support the
Company's growth. The primary sources of cash from operating activities for the
year ended December 31, 1999 was from net income of $20.5 million, adjusted for
non-cash expenses related to depreciation and amortization of $32.5 million.

         Cash flows used in investing activities for the year ended December 31,
1999 was $36.1 million compared with $130.1 million for the year ended December
31, 1998. The primary uses of cash for investing activities for the year ended
December 31, 1999 was related to the acquisitions of Certified for $16.7
million, a $3.3 million purchase price adjustment payment related to the Solair
acquisition, earn-out payments in connection with the acquisitions of Aero
Support and ITC of $5.1 million in the aggregate and purchases of property,
plant and equipment for $11.1 million.

         Cash flows provided by financing activities for the year ended December
31, 1999 was $83.9 million compared with $219.7 million for the year ended
December 31, 1998. The primary sources of cash for financing activities for the
year ended December 31, 1999 related to borrowings under line of credit
agreements of $88.5 million, offset by repayments of debt of $5.0 million.

         The Company is evaluating the possibility of establishing partnerships
with financial/leasing organizations for the continued expansion of its aircraft
and engine sales and leasing business. Under the proposed initiative, the
Company expects that it would retain a minority ownership stake in the proposed
partnerships and continue to manage the operations of those partnerships.
Although there are no guarantees that it will happen, this action, if
consummated, could give the Company a cash infusion which it expects would be
used to pay down a substantial portion of its line of credit with its commercial
banks. The proposed initiative is expected to take place if and when one or more
appropriate financial/leasing organizations are identified and transaction terms
are finalized.

         The Company expects that the proposed initiative, if implemented, would
have the effect of reducing debt and interest expense, improving cash flow, and
freeing up capital for strategic business initiatives. While the Company would
forego the revenues and some of the profits expected to be generated by its
existing lease portfolio, the Company would continue to receive a pro-rata share
of any partnership profits.

         The Company maintains a $256.7 million syndicated credit facility with
Bank of America, N.A. (formerly NationsBank, N.A.) ("Bank of America") as the
agent bank, 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
for a total of $306.7 million throughout the term, subject to the approval of
Bank of America and the satisfaction of certain conditions. The credit facility
bears interest ranging from prime rate plus 0 to 50 basis points, or at the



                                       26
<PAGE>   27


Company's option, LIBOR plus 150 to 250 basis points. The letter of credit
component of the $256.7 million syndicated credit facility was specifically
committed to the permanent financing of the Company's new world headquarters.
The $6.7 million financing was completed by the Company on February 22, 1999.

         The Company intends to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. It is anticipated
that such growth opportunities will require the investment of cash into
inventories of aircraft and aircraft parts, engines and engine parts and
avionics and rotables. Greater availability of such inventories will better
enable the Company to continue to increase its revenues as well as to encourage
the development of strategic relationships with new customers. The Company
intends to finance its inventory expansion program through its syndicated credit
facility, and through its cash flows. In the future, the Company may require
additional sources of capital to continue to fund its expansion.

         The Company's management believes that free cash flow (net income plus
depreciation of property, plant and equipment and amortization of goodwill),
combined with the Company's syndicated credit facility should be sufficient for
the Company's current level of operations. However, the Company may elect to
seek equity capital or other debt financing in the future depending upon market
conditions and the capital needs of the Company.

YEAR 2000 ISSUE

         The Year 2000 problem is primarily the result of computer programs
being written using two digits rather than four to define the applicable year.
Such programs will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, including possible
miscalculations, and a disruption in the operation of such systems. This is
commonly referred to as the Year 2000 issue.

         The Company and each of its operating subsidiaries have executed a plan
to identify and address any possible business issues related to the impact of
the Year 2000 problem on both its information technology ("IT") and non-IT
systems (e.g., embedded technology). This plan addressed the Year 2000 issue in
multiple phases, including (i) determining an initial inventory of the Company's
systems, equipment (including embedded technology in the Company's aircraft,
engine and parts inventory as well as leased equipment), vendors, customers and
third party administrators that may be vulnerable to system failures or
processing errors as a result of Year 2000 issues, (ii) assessment and
prioritization of inventoried items to determine risks associated with their
failure to be Year 2000 compliant, (iii) testing of systems and equipment to
determine Year 2000 compliance, (iv) remediation and implementation of systems
and equipment, and (v) contingency planning to assess reasonably likely
worst-case scenarios. As part of the Company's plan, the Company retained a
third party Year 2000 solution provider to assist with a risk analysis of the
Company's Year 2000 issue and assist with project office management. For those
systems which the Company determined were not Year 2000 compliant,
implementation of the required changes was completed during 1999. Risk
assessment, readiness evaluation, action plans and contingency plans related to
the Company's suppliers, vendors and other third parties were also completed
during 1999.

         Incremental costs, which include consulting costs and costs associated
with internal resources to modify existing systems in order to achieve Year 2000
compliance, were charged to expense as incurred. The Company's cost of making
the required system changes did not exceed $250,000.

         To date, the Company has experienced no significant disruptions in its
information technology systems as a result of the Year 2000 date change. The
Company will continue to monitor for undetected Year 2000 matters that may
arise.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which amended SFAS 133 to change the effective date to fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. Management does not
anticipate a significant impact of the adoption of SFAS No. 133 on the Company's
consolidated financial position, results of operations or cash flows.



                                       27
<PAGE>   28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company's exposure to market risk is limited primarily to the
fluctuating interest rates associated with variable rate indebtedness
outstanding under the Company's $256.7 million bank credit facility. The bank
credit facility, which expires in 2003, bears interest at the bank's prime rate
plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis
points. These variable interest rates are subject to interest rate changes in
the United States and Eurodollar markets. The Company does not currently use,
and has not historically used, derivative financial instruments to hedge against
such market interest rate risk. At December 31, 1999, the Company had
approximately $172.4 million in variable rate indebtedness outstanding under the
credit facility, representing approximately 53% of the Company's total debt
outstanding, at an interest rate of 8.75% as of December 31, 1999. An increase
in interest rates by 1% would not have a material impact on the financial
condition, results of operations or cash flows of the Company.


                                       28
<PAGE>   29


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Company's consolidated financial statements for the years ended
December 31, 1999, 1998 and 1997, and the respective notes thereto, are set
forth elsewhere in this report. An index of these financial statements appears
in Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         None.


                                       29
<PAGE>   30

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company, their ages and
their position with the Company are as follows:

<TABLE>
<CAPTION>

NAME                           AGE                POSITION
----                           ---                --------
<S>                            <C>               <C>
Yoav Stern                     46                 Chairman

Zivi R. Nedivi                 41                 President, Chief Executive Officer and Director

John S. Gleason                50                 Executive Vice President

Fred von Husen                 55                 Executive Vice President

Robert V. Hogan                45                 Senior Vice President

Moti Markowicz                 46                 Senior Vice President

Michael Navon                  39                 Senior Vice President

Paul F. Steele                 40                 Senior Vice President

Ami Zelcer                     51                 Senior Vice President

Oscar E. Torres                29                 Chief Financial Officer

Lance Berberian                37                 Chief Information Officer

William J. Crowe, Jr.          75                 Director

Niv Harizman                   35                 Director

William J. Lyon                76                 Director

David Jan Mitchell             38                 Director
</TABLE>



         YOAV STERN is the Chairman of the Board of Directors and an executive
officer of the Company. From the Company's inception until June 1995, Mr. Stern
was the Co-Chief Executive Officer and Co-President of the Company. Mr. Stern
was a founder of the Company, and has served as a director of the Company since
its inception. Since August 1995, Mr. Stern has served as a director and member
of the executive committee of Bogen Communication International, Inc. ("Bogen"),
a company engaged in the digital voice processing business whose shares are
traded on the Nasdaq National Market, and since November 1997, Mr. Stern has





                                       30
<PAGE>   31


served as Co-Chairman of Bogen. Prior to August 1995, Mr. Stern was a Co-Chief
Executive Officer of Bogen's predecessor company. Earlier, until 1994, Mr. Stern
was President and a director of WordStar International, Inc. (NYSE: TLC), and
Vice President of Business Development of Elron Electronic Industries Ltd.
(NASDAQ: ELRNF). He also served as a director of Random Access, Inc. Mr. Stern
previously served in the Israeli Air Force for ten years as an F-15, A-4, Mirage
and Kfir fighter pilot, avionic systems officer, commander of Operational
Training Unit and a Deputy Squadron Commander. Mr. Stern earned a Practical
Engineering Diploma (MAGNA CUM LAUDE) in advance mechanics and automation from
ORT Technological College, Israel, graduated from the Israel Air Force Academy
and earned a B.S. degree (MAGNA CUM LAUDE) in mathematics and computer science
from Tel Aviv University.

         ZIVI R. NEDIVI has been the Chief Executive Officer, President and a
director of the Company since June 1995. Mr. Nedivi was the founder, President
and Chief Executive Officer of the predecessor of the Company, an indirectly
wholly-owned subsidiary of Rada Electronic Industries Ltd. ("Rada"), from its
establishment in 1990 until June 1995. From September 1994 until June 1995, Mr.
Nedivi also served as Corporate Vice President of Rada, a public company traded
on the Nasdaq National Market which is engaged in the business of avionics for
the commercial and military aviation industries. From October 1984 to September
1990, Mr. Nedivi was co-founder and General Manager of Maakav Ltd., a private
aviation management company based in Israel. Maakav represented certain American
companies in Israel, including companies active in the distribution of aircraft
parts. In 1988 and 1989, Mr. Nedivi was also co-founder and director of NBC
Aviation Inc., a private company based in Texas active in the sale of commercial
jet engines and related components. Mr. Nedivi also serves as a director of
Bogen Communication International, Inc. A graduate of the Israel Air Force
Academy, Mr. Nedivi served in the Israel Air Force as an F-15 fighter pilot for
seven years and held the rank of Major. He also served as a Human Engineering
Consultant to Israel Aircraft Industries Ltd. on the Lavi fighter aircraft
program.

         JOHN S. GLEASON has served as Executive Vice President of the Company
since January 1997. From July 1997 until March 1999, Mr. Gleason served as a
director of the Company, and from July 1995 until October 1997, Mr. Gleason
served as Chief Financial Officer of the Company. From October 1997 until March
1999, Mr. Gleason served as President of Kellstrom Commercial Aircraft, Inc., a
wholly owned subsidiary of the Company. From January 1986 until July 1995, Mr.
Gleason served as the Vice President of Finance of International Aircraft
Support L.P. ("IASI"), a seller of new and used aircraft engine parts. Mr.
Gleason was also responsible for buying, selling and leasing IASI's commercial
jet engines on a worldwide basis, as well as the procurement of jet engine
inventory consignment arrangements. The company acquired the assets of IASI in
January 1997. Mr. Gleason is a Certified Public Accountant and earned a B.B.A.
degree from Florida Atlantic University in 1971.

         FRED VON HUSEN joined the Company in January 1997 as its Executive Vice
President. From 1987 to January 1997, Mr. von Husen was IASI's President and
Chief Executive Officer. Mr. von Husen has 34 years of experience in the
aviation industry, primarily in engine and aircraft maintenance and financial
and organization management. Prior to joining IASI, he served as Vice President


                                       31
<PAGE>   32



of Operations and earlier as Vice President of Technical Services at AirCal, a
passenger airline based in California. Mr. von Husen also spent 17 years at
United Airlines in various positions including engine maintenance, engineering,
and corporate planning. Mr. von Husen received a B.S.B.A. degree in organization
management and finance from the College of Notre Dame.

         ROBERT V. HOGAN has served as a Senior Vice President of the Company
and General Manager of the Company's Commercial Engine Parts Division since
October 1999. From 1995 to 1999, Mr. Hogan held various positions with AAR
Corporation including Vice President of P&W Large Commercial Products. Prior to
joining AAR, Mr. Hogan spent 15 years with Pratt & Whitney at various positions
including Manager of P&W's High Thrust Engine Product Line. Hr. Hogan also
served in the U.S. Navy and logged nearly 2,000 flight hours in P3-B & C
aircraft and is a Vietnam era veteran. Mr. Hogan holds an associate in science
degree in business management from Post College and a Bachelor of Science degree
from Teikyo Post University. Mr. Hogan attended the Hartford Graduate Center's
Executive Masters degree Program (EMP) for his master of science in management.

         MOTI MARKOWICZ has served as a Senior Vice President of the Company
since January 1999, and as a General Manager of the Company's Certified Division
since April 1999. From September 1997 until January 1999, Mr. Markowicz served
as an Executive Vice President of Aero Support Holdings, Inc., a wholly owned
subsidiary of the Company, and from 1985 until September 1997, as an Executive
Vice President of Aero Support USA Inc. ("Aero Support"). The assets of Aero
Support were acquired by the Company in September 1997. Mr. Markowicz received a
B.S. in Electrical Engineering from Polytechnic University and an M.B.A. from
New York Institute of Technology.

         MICHAEL NAVON has served as a Senior Vice President of the Company
since January 1999, and as a General Manager of the Company's Certified Division
since April 1999. From September 1997 until January 1999, Mr. Navon served as an
Executive Vice President of Aero Support Holdings Inc., and from 1989 until
September 1997, Mr. Navon served in various positions with Aero Support. Mr.
Navon received a B.S. in Marketing and an M.B.A.from Baruch.

         PAUL F. STEELE has been a Senior Vice President of the Company since
1997. From 1995 until 1997, Mr. Steele was a Vice President of the Company. From
1994 until 1995, Mr. Steele was the Vice President of Purchasing for the
predecessor of the Company, and from 1993 until 1994, Mr. Steele served as a
Director of Operations of such company. Prior to 1993, Mr. Steele held the
position of Vice President of Technical Sales at The AGES Group, a subsidiary of
Volvo Flygmotor and supplier of commercial aircraft engines. Mr. Steele
graduated from Bolton Street College, Dublin.

         AMI ZELCER has been a Senior Vice President of the Company since
February, 1999. From 1996 until 1999, Mr. Zelcer was President of AAR Aircraft
Component Services. From 1991 until 1995, Mr. Zelcer was the Vice President of
Marketing with TAT Technologies in Israel. From 1976 to 1991, Mr. Zelcer held
various positions with Vickers Incorporated, Sundstrand Corporation, Urdan
Corporation (in Israel) and Speco Corporation. Mr. Zelcer received a Bachelor's
Degree in Mechanical Engineering and a Master's degree in Mechanical Engineering
from Ohio State University.

         OSCAR TORRES has served as Chief Financial Officer of the Company since
February 2000. From January 1999 until February 2000, Mr. Torres served as Vice
President of Finance and Corporate Controller of the Company. Prior to joining
the Company, Mr. Torres was a Manager at KPMG LLP at which he held various
positions since July 1993. Mr. Torres is a Certified Public Accountant licensed
in Florida and earned his undergraduate degree in Accounting from Florida
International University in 1991 and an M.B.A. from the University of Miami in
1992.



                                       32
<PAGE>   33


         LANCE BERBERIAN has served as Senior Vice President and Chief
Information Officer of the Company since January 2000. From 1997 to 1999, Mr.
Berberian was Chief Information Officer at Interim Healthcare. Prior to joining
Interim, Mr. Berberian also spent 3 years at Corning Clinical Laboratories as
Chief Information Officer. Mr. Berberian received a B.A. degree in Business
Administration from Thomas Edison State College in New Jersey.

         ADMIRAL WILLIAM J. CROWE, JR. has served as a director of the Company
since March 1999. From 1985 until 1989, Admiral Crowe held the position of
Chairman of the Joint Chiefs of Staff under President Reagan. After retirement
from the military in 1989, Admiral Crowe was a Counselor at the Center for
Strategic and International Studies in Washington and a Professor of Geopolitics
at the University of Oklahoma. He served as Chairman of the President's Foreign
Intelligence Advisory Board from 1993 to 1994, and from 1994 until 1997, Admiral
Crowe served as U.S. Ambassador to the United Kingdom and Northern Ireland.
Admiral Crowe has previously served as a director of several public companies,
including Merrill Lynch, Texaco and General Dynamics, and currently serves as a
director of several private companies. From 1997 until 1999, Admiral Crowe
served as a part-time professor at George Washington University. Admiral Crowe
currently serves as a part-time professor at the United States Naval Academy,
and as a senior advisor to Global Options L.L.C. Admiral Crowe is a graduate of
the United State Naval Academy, and received an M.A. in education from Stanford
University and a Ph.D. in politics from Princeton University.

         NIV HARIZMAN has served as a director of the Company since December
1997. From January 1998 until the present, Mr. Harizman has served as a
Principal with BT Alex.Brown Incorporated ("BT Alex. Brown"), the investment
banking subsidiary of Bankers Trust New York Corporation. From June 1996 until
January 1998, Mr. Harizman was a Vice President with BT Alex. Brown. He started
with BT Alex. Brown in 1995. While at BT Alex. Brown, he has advised companies
in a broad range of manufacturing and service industries in their merger and
acquisitions activities and helped clients finance targeted acquisitions. Prior
to working at BT Alex. Brown, from 1994 until 1995, Mr. Harizman was a member of
the mergers and acquisitions group at the investment banking firm of Wasserstein
Perella & Co., where he performed comprehensive strategic advisory assignments
including financial restructuring, leveraged buyouts, recapitalizations,
acquisitions, and divestitures. Prior to working at Wasserstein, Mr. Harizman
was an investment analyst for Henry Crown and Company in Chicago, where he was
involved in transactions in the cellular, media, manufacturing, entertainment
and agricultural industries. Mr. Harizman also worked at the Chicago Board
Options Exchange in equity and index options trading. Mr. Harizman received a
B.B.A. in Finance from the College of Business Administration at the University
of Texas at Austin, and an M.B.A. with a specialization in Finance from the
University of Chicago Graduate School of Business.

         GENERAL WILLIAM LYON has served as a director of the Company since
October 1998. General Lyon is Chairman of the Board, President and Chief



                                       33
<PAGE>   34


Executive Officer of William Lyon Homes, Inc. General Lyon also serves as
Chairman of the Board of The Presley Companies, a public company traded on the
New York Stock Exchange which is engaged in the home design, construction and
sales business. General Lyon has previously served as Chairman, President and
Chief Executive and Operating Officer of AirCal, a Southern California-based
regional airline which was sold to American Airlines in 1987. From 1987 until
1995, General Lyon served on the Board of Directors of American Airlines. In
1989, General Lyon established Air/Lyon, Inc., a private company which provides
ground service to airlines and aircraft maintenance services. General Lyon is a
retired United States Air Force General, and has received 17 awards and
decorations including the Distinguished Service Medal Legion of Merit, the
Distinguished Flying Cross, the Air Medal with two oak leaf clusters and the
Presidential Unit Citation. From 1975 through 1979, General Lyon served as Chief
of the U.S. Air Force Reserve. General Lyon currently serves as a director of
Board of Fidelity National Financial, Inc., and is a Life Member of the
University of Southern California Board of Trustees. In addition, General Lyon
is Chairman of the Falcon Foundation, which provides scholarships to youths
hoping to attend the Air Force Academy, and is Chairman of the Academy of the
Research and Development Institute, also at the Air Force Academy. General Lyon
attended the University of Southern California and Dallas Aviation School and
Air College.

         DAVID JAN MITCHELL has served as a director of the Company since
December 1993. Since January 1991, Mr. Mitchell has been the President of
Mitchell & Co., Ltd., a New York-based merchant banking company founded by him
which is engaged in venture capital investments and financing. Mr. Mitchell is a
director of Moto Guzzi, a publicly traded Italian motorcycle company. Mr.
Mitchell is also Chairman and President of North Atlantic Acquisition
Corporation, a publicly traded acquisitions company, and since March 1998, Mr.
Mitchell has served as the Chairman of Direct Furniture and Empire Card
MasterCard. Since March 1995, Mr. Mitchell has served as a director of Bogen
Communication International, Inc. Mr. Mitchell serves as a director of several
private companies, including Madah-Com Inc., a company involved in sound
transmission, and SoftCom, Inc., a developer of interactive video technology to
be used over the Internet.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The Exchange Act requires the Company's executive officers, directors
and beneficial owners of more than 10% of a class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Based solely upon a
review of Forms 3, 4 and 5, and amendments thereto, furnished to the Company
during its most recent fiscal year, except for one report disclosing no
transactions filed by Robert Hogan and one report disclosing one transaction
filed by William J. Crowe, the Company believes that during the year ended
December 31, 1999, all reporting persons timely complied with all filing
requirements applicable to them.



                                       34
<PAGE>   35


ITEM 11.  EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Company's Compensation Committee, which was formed in 1998,
consists of Niv Harizman and David Jan Mitchell. There were no interlocks with
other companies within the meaning of the SEC's proxy rules during 1999.

COMPENSATION TABLES

         The following table summarizes the aggregate compensation paid during
each of the years ended December 31, 1997, 1998 and 1999 to the Company's Chief
Executive Officer (the "CEO") and the Company's four most highly compensated
executive officers other than the CEO in 1999. The CEO and such other executive
officers are sometimes referred to herein as the "Named Executives."


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                        LONG-TERM
                                         ANNUAL COMPENSATION           COMPENSATION
                                     ----------------------------     ---------------

                                                                        SECURITIES
         NAME AND                                                       UNDERLYING    ALL OTHER COMPEN-
    PRINCIPAL POSITION        YEAR     SALARY ($)      BONUS ($)       OPTIONS (#)        SATION ($)
    ------------------        ----     ----------      ---------       -----------    ----------------
<S>                         <C>          <C>            <C>              <C>               <C>
Zivi R. Nedivi (1),           1997       240,000         345,600         421,000           9,095(2)
Chief Executive               1998       480,000         720,000         283,000(3)        8,057(4)
Officer, President and        1999       480,000         157,736            --             8,095(4)
Director

Yoav Stern (1)(5), Chairman   1997         --                 --         421,000           1,000(6)
                              1998         --                 --         283,000(3)           --
                              1999       320,000         157,736            --                --

John S. Gleason,              1997       190,000         129,600         165,000           1,262(6)
Executive                     1998       225,000         187,500         115,000(7)       11,250(8)
Vice President                1999       240,000          41,077            --            12,000(8)

Fred von Husen(9),            1997       190,000         129,600          75,000           1,333(6)
Executive Vice President      1998       200,000         150,000          55,000          10,000(8)
                              1999       220,000          36,148          --            10,008(8)
</TABLE>



                                       35
<PAGE>   36
<TABLE>
<CAPTION>

                                                                       LONG-TERM
                                         ANNUAL COMPENSATION          COMPENSATION
                                     ----------------------------     ------------

                                                                      SECURITIES
         NAME AND                                                     UNDERLYING     ALL OTHER COMPEN-
    PRINCIPAL POSITION        YEAR     SALARY ($)      BONUS ($)      OPTIONS (#)        SATION ($)
    ------------------        ----     ----------      ---------      -----------    ----------------
<S>                         <C>          <C>            <C>           <C>               <C>
Gideon Vaisman (10),          1997         --             --             --                 --
Senior Vice President         1998       200,000        112,500       150,000           2,292(11)
                              1999       200,000        32,862           --             16,000(8)

</TABLE>

(1)  Until its dissolution in August 1999, Messrs. Nedivi and Stern owned
     interests in Helix Management Company II, L.L.C., which until March 30,
     1999, provided certain merger, acquisition and financial advisory services
     to the Company pursuant to an engagement letter agreement under which it
     received a retainer and was entitled to certain transaction fees under
     certain circumstances. Amounts reported exclude amounts paid to Helix
     Management Company II, L.L.C. See "Certain Relationships and Related
     Transactions."

(2)  Consisting of a $8,095 life insurance premium and a $1,000 holiday bonus.

(3)  Includes an option to purchase 176,000 shares, originally granted in 1997
     and repriced (and vesting schedule extended) as of October 8, 1998.

(4)  Consisting of a life insurance premium.

(5)  Mr. Stern became an executive officer of the Company in March 1999.

(6)  Consisting of a holiday bonus.

(7)  Includes an option to purchase 65,000 shares, originally granted in 1997
     and repriced (and vesting schedule extended) as of October 8, 1998.

(8)  Consisting of a contribution to an employee-directed investment fund.

(9)  Mr. von Husen joined the Company in January 1997.

(10) Mr. Vaisman joined the Company in April 1998.

(11) Consisting of the Company's matching contribution to its 401(k) Savings
     Plan.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

         No options or stock appreciation rights were granted to the Named
Executives in the fiscal year ended December 31, 1999.




                                       36
<PAGE>   37


         The following table sets forth information concerning the value
realized by the Named Executives upon exercise of stock options during the
fiscal year ended December 31, 1999, and the value of unexercised stock options
held by the Named Executives at December 31, 1999.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                        AND FY-END OPTION/SAR VALUES (1)

<TABLE>
<CAPTION>

                     SHARES          VALUE        NUMBER OF SECURITIES UNDERLYING         VALUE OF UNEXERCISED
                   ACQUIRED ON     REALIZED        UNEXERCISED OPTIONS AT FISCAL        IN-THE-MONEY OPTIONS AT
NAME               EXERCISE (#)      ($)                   YEAR-END (#)                    FISCAL YEAR-END ($)
----               ------------    ---------       -----------------------------        ------------------------
                                                   EXERCISABLE     UNEXERCISABLE     EXERCISABLE    UNEXERCISABLE
                                                   -----------     -------------     -----------    --------------

<S>                     <C>            <C>           <C>               <C>              <C>              <C>
Zivi R. Nedivi           --             --          589,000            88,000           534,150           --

Yoav Stern               --             --          589,000            88,000           534,150           --

John S. Gleason        120,000      1,412,707        98,332            76,668            57,200           --

Fred von Husen           --             --           61,666            73,334            52,333         26,167

Gideon Vaisman           --             --           50,000           100,000            --               --
</TABLE>

-----------------
(1)      No stock appreciation rights are held by any of the Named Executives.

COMPENSATION OF DIRECTORS

         All directors are reimbursed for out-of-pocket expenses incurred in
attending Board meetings or for otherwise acting on behalf of the Company.
Messrs. Nedivi and Stern did not receive any compensation for service as
directors of the Company beyond that paid to them under their respective
Employment Agreements on account of their services as executive officers of the
Company. During 1999, the other directors each received stock options on account
of their service as directors of the Company to purchase 30,000 shares each at
an exercise price of $19.00 per share.

         The options granted to the Company's directors in 1999 were granted
under the Company's 1998 Stock Option Plan. During 1999, this Plan was
administered by the Board and by the Compensation Committee. Under the Company's
1998 Stock Option Plan, options are granted by the Board or the Compensation
Committee on such terms and at such prices as may be determined by the Board or
the Compensation Committee, except that the exercise price per share of stock
options may not be less than the fair market value of a share of Common Stock at
the time of grant. Each option is for a term of not more than 10 years and vests
at such time or times and during such period as determined by the Board or the
Compensation Committee. Under the terms of the Company's 1998 Plan, in the event
of a change in control of the Company (as defined in such plans), unless



                                       37
<PAGE>   38


otherwise determined by the Board, the purchaser of the Company's assets or
stock may, in its sole discretion, deliver the same consideration as is
delivered to the stockholders of the Company as a result of such transaction or
the Board may cancel all outstanding options in exchange for cash or other
consideration equal in value to the value of the consideration that the option
holder would have received had the option been exercised (to the extent then
exercisable) prior to such transaction, less the exercise price therefor. Upon
any such transaction, the Plan provides that all outstanding options generally
become immediately exercisable in full.

EMPLOYMENT AGREEMENTS

         NEDIVI EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Nedivi, effective as of March 30, 1999 and amended as of
December 27, 1999, pursuant to which Mr. Nedivi is employed as President and
Chief Executive Officer of the Company. The Employment Agreement provides for
the employment of Mr. Nedivi through December 31, 2004, at an annual base salary
of $480,000, subject to annual review and upward adjustment, and a bonus of
between $0 and an amount equal to 150% of the then-current salary, based upon
the Company's net income during each calendar year in relation to the Company's
target net income, as determined in advance by the Compensation Committee, for
such year. In addition, the Employment Agreement provides that Mr. Nedivi will
be paid severance equal to two years of the then-current base salary, plus an
amount equal to the bonus paid to Mr. Nedivi on account of each of the two
then-preceding calendar years, if employment is terminated without cause. Under
the Employment Agreement, Mr. Nedivi may not compete with the Company during the
term of the Agreement or for three years following termination other than
involuntary termination or termination by Mr. Nedivi for good reason (as defined
therein). Under the terms of the Employment Agreement, the Company continues to
pay the premium on a life insurance policy on the life of Mr. Nedivi which had
been maintained by the Company and transferred to Mr. Nedivi.

         STERN EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Stern, effective as of March 30, 1999 and amended as of March
31, 1999 and December 27, 1999, pursuant to which Mr. Stern is employed as
Chairman of the Company through December 31, 2004, on substantially the same
terms as those included in the Employment Agreement with Mr. Nedivi. Under the
terms of such Employment Agreement, Mr. Stern is responsible for the development
and implementation of the strategic plans for the growth and development of the
Company's business and operations, including overseeing all aspects of the
Company's mergers and acquisitions activities (including, without limitation,
analyzing, structuring, negotiating and effecting acquisitions and integrating
newly acquired businesses with the business and operations of the Company).

         GLEASON EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Gleason, effective as of May 18, 1995 and amended as of
February 14, 1997 and December 27, 1999, pursuant to which Mr. Gleason is
employed as an executive officer of the Company. The agreement, as amended,
provides for the employment of Mr. Gleason through July 1, 2000, at an annual
base salary of $190,000, subject to annual review and upward adjustment, and a
bonus of between $0 and $135,000, based upon the net income of the Company and
of the Company's Kellcad division during each calendar year in relation to the



                                       38
<PAGE>   39


target net incomes of the Company and the Kellcad division, respectively, as
determined in advance by the Compensation Committee, for such year. If Mr.
Gleason's employment is terminated without cause, the employment agreement
provides that Mr. Gleason will be paid a severance payment equal to four months
of his base salary, provided that if termination is in connection with a change
of control, Mr. Gleason will be paid an amount equal to twelve months of his
base salary. A change of control is defined in the agreement as (i) any
transaction which results in the stockholders of the Company immediately before
the transaction ceasing to own at least 51% of the voting stock of the Company
or of the entity which results from the transaction, (ii) a merger,
consolidation or other transaction where the Company is not the surviving entity
or (iii) a disposition of all or substantially all of the assets of the Company.
Under the Employment Agreement, Mr. Gleason may not compete with the Company
during the term of the Employment Agreement or for two years following
termination other than involuntary termination or termination by Mr. Gleason for
good reason (as defined therein). Under the terms of the Employment Agreement,
the Company maintains a life insurance policy on the life of Mr. Gleason in the
amount of $2 million, and transferred such policy without consideration to Mr.
Gleason in January 1999 pursuant to the terms of the Employment Agreement.

         VON HUSEN EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. von Husen, effective as of October 25, 1996 and amended as of
December 27, 1999, pursuant to which Mr. von Husen is employed as an executive
officer of the Company. The agreement provides for the employment of Mr. von
Husen through January 15, 2002, at an annual base salary of $190,000, subject to
annual review and upward adjustment, and a bonus of between $0 and $135,000,
based upon the Company's net income during each calendar year in relation to the
Company's target net income, as determined in advance by the Compensation
Committee, for such year. If Mr. von Husen's employment is terminated without
cause, the Employment Agreement provides that Mr. von Husen will be paid
severance payment equal to four months of his base salary, provided that if
termination is in connection with a change of control (as previously defined),
Mr. von Husen will be paid an amount equal to eight months of his base salary.
Under the Employment Agreement, Mr. von Husen may not compete with the Company
during the term of the Agreement or for two years following termination other
than involuntary termination (in which case the non-compete period expires one
year after termination), termination in the event of a change of control (in
which case the non-compete period expires six months after termination) or
termination by Mr. von Husen for good reason (as defined therein).

         VAISMAN EMPLOYMENT AGREEMENT. The Company (through its wholly-owned
subsidiary, Integrated Technology Holdings Corp.) entered into an Employment
Agreement with Mr. Vaisman, effective as of February 27, 1998 and amended as of
September 15, 1998, pursuant to which Mr. Vaisman was employed as an executive
officer of the Company through January 1, 2000. The agreement, as amended,
originally provided for the employment of Mr. Vaisman through April 1, 2001, at
an annual base salary of $200,000, subject to annual review and upward
adjustment, and a bonus of between $0 and $150,000. Mr. Vaisman was also granted
options to purchase 150,000 shares of Common Stock pursuant to the Employment
Agreement. Under the Employment Agreement, unless the Company is determined to
be in default of its obligation to make certain payments under the Purchase



                                       39
<PAGE>   40



Agreement pursuant to which the Company purchased the assets of Integrated
Technologies Corp., Mr. Vaisman may not compete with the Company during the term
of the Agreement or for two years following termination other than termination
by Mr. Vaisman for good reason (as defined therein). Effective as of January 1,
2000, the Company and Mr. Vaisman entered into an agreement pursuant to which
the Employment Agreement was terminated, and Mr. Vaisman was retained by the
Company as a consultant for a period of three months. In connection with the
termination of the Employment Agreement, the stock options previously granted to
Mr. Vaisman were also terminated. The restrictions on competition by Mr. Vaisman
under the Employment Agreement remain in effect in accordance with their
original terms.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information as of March 1, 2000
regarding the beneficial ownership of Common Stock by (i) each stockholder known
to the Company to beneficially own more than five percent (5%) of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each executive officer of the Company named in the Summary Compensation Table
which appears in Item 11; and (iv) all directors and executive officers as a
group. The percentage of beneficial ownership for each person or entity in the
table is based on 11,910,981 shares of Common Stock outstanding as of March 1,
2000, including for each person or entity any shares of Common Stock which may
be acquired by such person or entity within 60 days upon exercise of outstanding
options, warrants or other rights to acquire shares of Common Stock.

<TABLE>
<CAPTION>

                                                                    SHARES BENEFICIALLY OWNED
                                                                    -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                              NUMBER          PERCENT
------------------------------------                                  ------          -------
<S>                                                                      <C>           <C>
Yoav Stern(2)(3)                                                         793,035       6.2%
Zivi R. Nedivi(2)(4)                                                     782,535       6.2%
David Jan Mitchell(5)                                                    185,787       1.5%
John S. Gleason(6)                                                       114,332      *
Niv Harizman(7)                                                           46,000      *
Gideon Vaisman                                                              --        *
Fred von Husen(8)                                                         89,333      *
General William Lyon(9)                                                   35,000      *
Admiral William J. Crowe, Jr.(10)                                         33,000      *
All executive officers and directors as a group (16 persons)(11)       2,284,361      16.1%
</TABLE>


*        Less than 1%



                                       40
<PAGE>   41


(1)  The address of each person named is 1100 International Parkway, Sunrise,
     Florida 33323.

(2)  Excludes certain shares of Common Stock that may be deemed to be
     beneficially owned as a member of a "group" for the purposes of Section
     13(d) under the Exchange Act by virtue of a Stockholders Agreement, dated
     August 24, 1995, as amended, between Messrs. Stern and Nedivi. Each party
     thereto agreed not to sell, encumber or otherwise dispose of any shares of
     Common Stock beneficially owned by him except in accordance with the terms
     of said agreement. In addition, each party thereto agreed to vote all
     shares of Common Stock beneficially owned by him as directed by a majority
     of such parties. As a result, each of Messrs. Stern and Nedivi may be
     deemed to share voting and dispositive power, and therefore to beneficially
     own, the shares of Common Stock beneficially owned by the other.

(3)  Includes 589,000 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days, and 6,636
     shares issuable upon the exercise of warrants which are currently
     exercisable.

(4)  Includes 589,000 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days, and 6,636
     shares issuable upon the exercise of warrants which are currently
     exercisable.

(5)  Includes 104,750 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(6)  Includes 98,332 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(7)  Includes 45,000 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(8)  Includes 88,333 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(9)  Consists of 35,000 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(10) Includes 30,000 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days.

(11) Includes 1,681,082 shares issuable upon the exercise of options to purchase
     Common Stock, which options are exercisable within 60 days, and 96,772
     shares issuable upon the exercise of warrants which are currently
     exercisable.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The following is a summary of certain agreements and transactions
between or among the Company and certain related parties. It is the Company's
policy to enter into transactions with related parties on terms that, on the
whole, are no less favorable than those that would be available from
unaffiliated parties. It is also the Company's policy to submit any such
proposed transactions to the Independent Committee for review and approval.
Based on the Company's experience in the industries in which it operates and the
terms of its transactions with unaffiliated parties, it is the Company's belief


                                       41
<PAGE>   42

that all of the transactions described below involving the Company met that
standard at the time such transactions were effected.

         The Company has previously engaged Helix Management Company II, L.L.C.
("Helix"), a company which had been controlled by Messrs. Stern and Nedivi, to
act as the Company's exclusive financial advisor with respect to merger and
acquisition transactions and as principal financial adviser with respect to
other transactions for a term that commenced effective January 1, 1997. The
Company and Helix terminated the agreement effective as of March 30, 1999,
pursuant to a Termination Agreement (the "Helix Termination Agreement"). Under
the terms of the original agreement with Helix, entered into as of March 28,
1997, Helix received a monthly retainer of $25,000 and a success fee that was
determined by the Company and Helix on a per transaction basis, but not less
than 2% of the aggregate consideration paid in connection with the applicable
transaction. Payments under the agreement with Helix by the Company were in lieu
of any fees payable to Mr. Stern as Chairman of the Board. A significant portion
of the retainer was paid by Helix to Mr. Stern, who as Chairman of the Board of
the Company actively participates in leading business development efforts and
the strategic growth and direction of the Company. As a result of ownership
interests held by Messrs. Stern and Nedivi in Helix, a portion of the
transaction fees paid by the Company to Helix were distributed by Helix to
Messrs. Stern and Nedivi during 1999. The Company paid Helix $1.5 million in
connection with certain merger and acquisition transactions that occurred during
1999. Under the terms of the Helix Termination Agreement, the Company was
required to pay Helix success fees only in those transactions procured by Helix
which had either been consummated or signed prior to the date of termination.
Helix waived all other fees to which it may have been entitled, including
monthly retainer fees on account of the ninety day period following termination
and success fees on account of any transactions procured by Helix and undertaken
by the Company within one year of termination. Helix also agreed to provide, for
no additional consideration, the Company such assistance (including access to
its members and employees and copies of its records and files) as necessary to
assure an orderly transition in the services previously provided by Helix.

         Until March 30, 1999, the Company was a party to a management agreement
with East Shore Ventures, Inc. ("East Shore"), an entity wholly owned by Mr.
Nedivi, pursuant to which Mr. Nedivi provided the services of Chief Executive
Officer to the Company. The Management Agreement provided for an annual base fee
of $240,000, subject to annual review and upward adjustment, and a bonus of
between $0 and $360,000, depending solely on the profitability of the Company.
Under the terms of the Management Agreement, the Company maintained a life
insurance policy on the life of Mr. Nedivi in the amount of $4 million, which
policy was transferred without consideration to Mr. Nedivi in January 1999
pursuant to the terms of such Management Agreement. The Company entered into a
Termination Agreement with East Shore effective as of March 30, 1999, pursuant


                                       42
<PAGE>   43


to which the parties agreed to terminate the Management Agreement and agreed
that East Shore would only be paid management fees and related benefits prorated
through the date of termination.

         The Company has from time to time loaned money to certain of its
executive officers and directors for the purpose of purchasing shares of Common
Stock in the open market (including loans pursuant to the Company's 1998 Stock
Purchase Plan which was approved by the Company's stockholders at the 1998
Annual Meeting of Stockholders), or pursuant to the terms of employment
agreements between the Company and its executive officers. The following table
sets forth, with respect to each executive officer or director who was indebted
to the Company in an amount in excess of $60,000 at any time since January 1,
1999, the largest aggregate amount of indebtedness outstanding at any time
during such period, the date such indebtedness was incurred, the amount thereof
outstanding as of March 1, 2000, the rate of interest charged thereon and the
nature of the loan.
<TABLE>
<CAPTION>

                                        LARGEST AGGREGATE
                                        AMOUNT OUTSTANDING                             AMOUNT OUTSTANDING AS OF    INTEREST RATE
           NAME                                 ($)                  DATE INCURRED         MARCH 1, 2000 ($)             (%)
           ----                         --------------------         -------------      -------------------------   ---------------

           <S>                                  <C>                         <C>                  <C>                      <C>
          Zivi R. Nedivi(1).........            135,000                     7/24/97              120,000                  6.54%
             President                          250,000                     6/15/98              225,000                  5.69%
                                                 80,400                     8/05/98               72,360                  5.69%
                                                 55,500                     8/10/98               49,950                  5.69%
                                                -------                                           ------
              Total.................            520,900                                          467,310

          Yoav Stern(1).............            135,000                     2/28/97              120,000                  6.10%
           Chairman                             250,000                     6/15/98              225,000                  5.69%
                                                134,000                     8/05/98              120,600                  5.69%
                                                -------                                           ------
                  Total.............            519,000                                          465,600

          John Gleason(1)...........             45,000                     4/02/97               40,000                  6.10%
            Executive Vice                       98,861                     6/15/98               88,975                  5.69%
            President                           100,000                     9/28/98               90,000                  5.47%
                                                -------                                           ------
                  Total.............            243,861                                          218,975

          Michael Wallace(1)........            100,000                     6/15/98               70,000                  5.69%
            Former Chief
            Financial Officer

          Ami Zelcer................            100,000(1)                  8/23/99              100,000                  5.87%
            Senior Vice                          75,000(2)                  2/17/99               75,000                  4.66%
             President                           75,000(2)                  5/28/99               75,000                  5.15%
                                                -------                                           ------
                  Total.............            250,000                                          250,000

          Robert Hogan(3)...........            150,000                    10/05/99              150,000                  5.35%
            Senior Vice President

          David Mitchell(1).........             83,633                     8/25/99               83,638                  5.87%

</TABLE>



                                       43
<PAGE>   44


------------------------

(1)      These loans were granted for the purpose of purchasing shares of Common
         Stock on the open market. Such loans are payable over four years for
         employees or five years for directors at an interest rate based on the
         "Applicable Federal Rate" at the time of the loan. Accrued interest is
         to be paid annually in arrears beginning on the first anniversary of
         the date of the loan. The loans provide for mandatory prepayment if the
         officer or director sells any shares of the Company's Common Stock.
         While the loans are unsecured, officers and directors are obligated to
         repay such loans in full regardless of the market value of the Common
         Stock upon any such sale.

(2)      These loans were granted pursuant to the terms of the Employment
         Agreement between the Company and Mr. Zelcer dated February 1, 1999.
         Such loans are payable in three equal installments on each of the
         third, fourth and fifth yearly anniversaries of the grant dates, at an
         interest rate based on the "Applicable Federal Rate" at the time of the
         loan. The Employment Agreement provides that in the event of the
         termination of the Employment Agreement prior to the end of the
         Employment Period (as defined therein), the full principal amount of
         the loans then outstanding, together with all accrued interest thereon,
         will be immediately due and payable.

(3)      This loan was granted pursuant to the terms of the Employment Agreement
         between the Company and Mr. Hogan dated October 6, 1999. Interest
         accrues on the loan at an interest rate based on the "Applicable
         Federal Rate" at the time of the loan. The Employment Agreement
         provides that at the end of each of the first, second and third yearly
         anniversaries of the commencement of Mr. Hogan's employment under the
         Employment Agreement, provided that Mr. Hogan is then employed by the
         Company, $50,000 of the principal amount of the loan will be forgiven,
         together with any interest which shall have accrued on the loan during
         such year. The Employment Agreement further provides that in the event
         of the termination of the Employment Agreement prior to the end of the
         Employment Period (as defined therein), the full principal amount of
         the loans then outstanding, together with all accrued interest thereon,
         will be immediately due and payable.



                                       44
<PAGE>   45

                                     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, 1999 and 1998

         Consolidated Statements of Earnings for the years ended December 31,
           1999, 1998 and 1997

         Consolidated Statements of Stockholders' Equity and Comprehensive
            Income for the years ended December 31, 1999, 1998 and 1997

         Consolidated Statements of Cash Flows for the years ended December 31,
            1999, 1998 and 1997

         Notes to Consolidated Financial Statements

   (2) The following financial statement schedule is filed as part of this Form
       10-K:

         Schedule II - Valuation and Qualifying Accounts

   (3) See Index of Exhibits included elsewhere herein.

(b) Reports on Form 8-K:

         None


                                       45
<PAGE>   46

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Date: March 30, 2000                        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.

<TABLE>
<CAPTION>

SIGNATURE                                      TITLE                                        DATE
---------                                      -----                                        ----

<S>                                            <C>                                         <C>
/s/ ZIVI R. NEDIVI                             President and Chief Executive                March 30, 2000
---------------------------------              Officer and Director
Zivi R. Nedivi                                 (principal executive officer)

/s/ YOAV STERN                                 Chairman of the Board of Directors           March 30, 2000
---------------------------------
Yoav Stern

/s/ OSCAR E. TORRES                            Chief Financial Officer                      March 30, 2000
---------------------------------              (principal financial and
Oscar E. Torres                                accounting officer)

/s/ DAVID JAN MITCHELL                         Director                                     March 30, 2000
---------------------------------
David Jan Mitchell

/s/ NIV HARIZMAN                               Director                                     March 30, 2000
---------------------------------
Niv Harizman

                                               Director
---------------------------------
General William Lyon

                                               Director
---------------------------------
Admiral William J. Crowe, Jr.

</TABLE>

                                       46
<PAGE>   47

                                  EXHIBIT INDEX

EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------

3.1      The Company's Restated Certificate of Incorporation, as amended
         (incorporated by reference to the Current Report on Form 8-K filed with
         the Commission on June 22, 1995).

3.2      The Company's By-laws, as amended (incorporated by reference to the
         Current Report on Form 8-K filed with the Commission on June 22, 1995).

3.3      Form of Certificate of Designations setting forth the terms of the
         Series A Junior Participating Cumulative Preferred Stock, par value
         $.001 per share (incorporated by reference to Exhibit 1 to the
         Registration Statement on Form 8-A filed with the Commission on January
         16, 1997).

4.1      Indenture dated as of October 10, 1997 by and between the Company and
         First Union National Bank (incorporated by reference to the Quarterly
         Report on Form 10-QSB filed with the Commission on November 12, 1997).

4.2      Form of Note (included in Exhibit 4.1).

4.3      Registration Rights Agreement dated as of October 10, 1997 by and
         between the Company and BT Alex. Brown Incorporated (incorporated by
         reference to the Quarterly Report on Form 10-QSB filed with the
         Commission on November 11, 1997).

4.4      Indenture dated June 17, 1998 by and between the Company and First
         Union National Bank (incorporated by reference to Amendment No. 2 to
         Registration Statement on Form S-3, Number 333-52917 filed with the
         Commission on June 11, 1998).

4.5      Form of Note (included in Exhibit 4.4)

4.6      Indenture of Trust dated as of February 1, 1999 between the Company and
         Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference to
         the Annual Report on Form 10-K filed with the Commission on March 31,
         1999).

4.7      Form of Note (included in Exhibit 4.6).

4.8      Form of Warrant dated August 31, 1999 between the Company and Zivi
         Nedivi, Yoav Stern and Yehuda Perry (filed herewith).

4.9      Form of Warrant dated August 31, 1999 between the Company and Zivi
         Nedivi, Yoav Stern and Yehuda Perry (filed herewith).

4.10     Form of Warrant dated August 31, 1999 between the Company and Zivi
         Nedivi, Yoav Stern and Yehuda Perry (filed herewith).

4.11     Form of Warrant dated August 31, 1999 between the Company and Zivi
         Nedivi, Yoav Stern and Yehuda Perry (filed herewith).

10.1     Letter Agreement among each of the Stockholders of the Company, the
         Company, and GKN Securities Corp. (without schedules) (incorporated by
         reference to Registration Statement on Form S-1, Number 33- 75750,
         filed with the Commission on February 25, 1994).

10.2     Asset Purchase Agreement dated February 15, 1995 among ITAC, Rada
         Electronic Industries Limited, Tasco Electronics Inc. and the Company
         (incorporated by reference to the Current Report on Form 8-K/A filed
         with the Commission on March 14, 1994).



                                       47
<PAGE>   48


10.3*    Employment Agreement dated January 1, 1996 between Paul F. Steele and
         the Company (incorporated by reference to the Annual Report on Form
         10-KSB filed with the Commission on March 31, 1997).

10.4*    Employment Agreement dated May 18, 1995 between John Gleason and the
         Company (incorporated by reference to the Annual Report on Form 10-KSB
         filed with the Commission on March 30, 1996).

10.5*    Employment Agreement dated October 25, 1996 between Fred von Husen and
         the Company (incorporated by reference to the Annual Report on Form
         10-KSB filed with the Commission on March 31, 1997).

10.6*    Amendment No. 1 to Employment Agreement dated February 14, 1997 between
         John Gleason and the Company (incorporated by reference to the Annual
         Report on Form 10-KSB filed with the Commission on March 31, 1997).

10.7*    Employment Agreement dated March 30, 1999 between Zivi R. Nedivi and
         the Company (incorporated by reference to the Annual Report on Form
         10-K filed with the Commission on March 31, 1999).

10.8*    Employment Agreement dated March 30, 1999 between Yoav Stern and the
         Company (incorporated by reference to the Annual Report on Form
         10-K filed with the Commission on March 31, 1999).


10.9     Stockholders Agreement dated August 24, 1995 between Zivi R. Nedivi and
         Yoav Stern (incorporated by reference to the Annual Report on Form
         10-KSB filed with the Commission on March 30, 1996).

10.10    Amendment, dated January 15, 1996, to Stockholders Agreement dated
         August 24, 1995 between Zivi R. Nedivi and Yoav Stern (incorporated by
         reference to the Annual Report on Form 10-KSB filed with the Commission
         on March 31, 1997).

10.11    Asset Purchase Agreement dated October 28, 1996 by and among the
         Company, a wholly owned subsidiary of the Company and IASI
         (incorporated by reference to the Quarterly Report on Form 10-QSB filed
         with the Commission on November 14, 1996).

10.12    Securities Purchase Agreement dated as of January 15, 1997 between the
         Company and The Equitable Life Assurance Society of the United States
         (incorporated by reference to the Annual Report on Form 10-KSB filed
         with the Commission on March 31, 1997).

10.13    Amendment No. 1 to Securities Purchase Agreement dated February 14,
         1997 between the Company and The Equitable Life Assurance Society of
         the United States (incorporated by reference to the Annual Report on
         Form 10-KSB filed with the Commission on March 31, 1997).

10.14    Warrant dated January 15, 1997 between the Company and The Equitable
         Life Assurance Society of the United States (incorporated by reference
         to the Annual Report on Form 10-KSB filed with the Commission on March
         31, 1997).

10.15    Note Purchase Agreement dated as of January 9, 1997 by and among the
         Company and the Purchasers listed on Schedule I thereto (incorporated
         by reference to the Annual Report on Form 10-KSB filed with the
         Commission on March 31, 1997).

10.16    Amendment No. 1 to the Note Purchase Agreement dated January 15, 1997
         by and among the Company and the Purchasers listed on Schedule I
         thereto (incorporated by reference to the Annual Report on Form 10-KSB
         filed with the Commission on March 31, 1997).

10.17    Form of Warrant between the Company and the Purchasers listed on
         Schedule I to the Note Purchase Agreement (incorporated by reference to
         the Annual Report on Form 10-KSB filed with the Commission on March 31,
         1997).



                                       48
<PAGE>   49


10.18    Amended and Restated Loan and Security Agreement dated as of December
         14, 1998 among the Company, certain of its subsidiaries, the lenders
         party thereto, from time to time, Bank of America, N.A. (as successor
         to NationsBank, N.A.), as agent for the lenders, and NationsBanc
         Montgomery Securities, LLC, as syndication agent (incorporated by
         reference to the Annual Report on Form 10-K filed with the Commission
         on March 31, 1999).

10.19    Form of Revolving Credit Note (incorporated by reference to the Annual
         Report on Form 10-K filed with the Commission on March 31, 1999).

10.20    Rights Agreement, dated January 14, 1997, by and between the Company
         and Continental Stock Transfer and Trust Company (incorporated by
         reference to the Registration Statement on Form 8-A filed with the
         Commission on January 16, 1997).

10.21    Amendment No. 1, dated February 27, 1997, to Rights Agreement dated
         January 14, 1997 by and between the Company and Continental Stock
         Transfer and Trust Company (incorporated by reference to the Current
         Report on Form 8-K/A filed with the Commission on March 7, 1997).

10.22*   1995 Stock Option Plan of the Company (incorporated by reference to the
         Proxy Statement of the Company filed with the Commission on May 15,
         1995).

10.23*   1996 Stock Option Plan of the Company, as amended (incorporated by
         reference to the Annual Report on Form 10-K filed with the Commission
         on March 31, 1999).


10.24*   1997 Stock Option Plan of the Company, as amended (incorporated by
         reference to the Annual Report on Form 10-K filed with the Commission
         on March 31, 1999).


10.25*   1998 Stock Option Plan of the Company (incorporated by reference to the
         Annual Report on Form 10-K filed with the Commission on March 31,
         1999).


10.26    Asset Purchase Agreement, dated September 10, 1997, by and among
         Kellstrom Industries, Inc. and Aero Support Holdings, Inc., on the one
         hand and Aero Support, U.S.A. Inc. Zvi Bar-On, Mordechai Markowicz and
         Michael Navon, on the other hand. (incorporated by reference to the
         Current Report on Form 8-K filed with the Commission on September 24,
         1997).

10.27    Form of Warrant between the Company and Aero Support, USA, Inc.
         (incorporated by reference to the Quarterly Report on Form 10-QSB filed
         with the Commission on November 11, 1997).

10.28    Asset Purchase Agreement dated as of February 27, 1998 among the
         Company, Integrated Technology Holdings Corp., Integrated Technology
         Corp. and Gideon Vaisman (incorporated by reference to the Current
         Report on Form 8-K filed with the Commission on April 14, 1998).

10.29    Amendment No. 1, dated as of March 13, 1998, to the Asset Purchase
         Agreement dated as of February 27, 1998 among the Company, Integrated
         Technology Holdings Corp., Integrated Technology Corp. and Gideon
         Vaisman (incorporated by reference to the Quarterly Report on Form 10-Q
         filed with the Commission on November 12, 1998).

10.30    Amendment No. 2, dated as of September 15, 1998, to the Asset Purchase
         Agreement dated as of February 27, 1998 among the Company, Integrated
         Technology Holdings Corp., Integrated Technology Corp. and Gideon
         Vaisman (incorporated by reference to the Quarterly Report on Form 10-Q
         filed with the Commission on November 12, 1998).

10.31*   Employment Agreement dated February 27, 1998 between Gideon Vaisman and
         the company (incorporated by reference to the Annual Report on Form
         10-K filed with the Commission on March 31, 1999).

10.32*   Amendment No. 1, dated as of September 15, 1998, to the Employment
         Agreement dated February 27, 1998 between Gideon Vaisman and the
         Company (incorporated by reference to the Quarterly Report on Form 10-Q
         filed with the Commission on November 12, 1998).



                                       49
<PAGE>   50


10.33    Stock Purchase Agreement dated as of May 6, 1998 among the Company,
         Aerocar Parts, Inc., Aerocar Aviation Corp., Rosa Shashua and Carmel
         Shashua (incorporated by reference to the Current Report on Form 8-K
         filed with the Commission on May 18, 1998).

10.34    Warrant dated June 17, 1998 between the Company and Carmel Shashua
         (incorporated by reference to the Current Report on Form 8-K filed with
         the Commission on August 11, 1998).

10.35    Warrant dated June 17, 1998 between the Company and Rosa Shashua
         (incorporated by reference to the Current Report on Form 8-K filed with
         the Commission on August 11, 1998).

10.36    Warrant dated December 18, 1998 between the Company and Helix
         Management Company II, LLC (incorporated by reference to the Annual
         Report on Form 10-K filed with the Commission on March 31, 1999).


10.37    Stock Purchase Agreement dated as of December 5, 1998, by and between
         the Company, Solair, Inc. and Banner Aerospace, Inc. (incorporated by
         reference to the Current Report on Form 8-K filed with the Commission
         on January 14, 1999).

10.38    Warrant dated December 31, 1998 between the Company and Banner
         Aerospace, Inc. (incorporated by reference to the Current Report on
         Form 8-K/A filed with the Commission on March 16, 1999).

10.39    Stock Purchase Agreement dated March 27, 1999 among the Company,
         Certified Aircraft Parts, Inc., R. Dean Stickler and Donald E. Marshall
         (incorporated by reference to the Annual Report on Form 10-K filed with
         the Commission on March 31, 1999).

10.40    Joinder Agreement dated January 15, 1999 between Solair, Inc., the
         Company and NationsBank, N.A., as agent for the lenders party thereto
         (incorporated by reference to the Annual Report on Form 10-K filed with
         the Commission on March 31, 1999).

10.41    Letter of Credit Reimbursement Agreement dated as of February 1, 1999
         between the Company and NationsBank, N.A. (incorporated by reference to
         the Annual Report on Form 10-K filed with the Commission on March 31,
         1999).


10.42*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Zivi R. Nedivi (filed herewith).

10.43*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and John S. Gleason (filed herewith).

10.44*   Employment Agreement dated October 6, 1999 between Kellstrom and Robert
         V. Hogan (filed herewith).

10.45*   Employment Agreement dated December 17, 1998 between Kellstrom and
         Oscar Torres (filed herewith).

10.46*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Oscar Torres (filed herewith).

10.47*   Amendment No. 1 to Employment Agreement dated March 31, 1999 between
         Kellstrom and Yoav Stern (filed herewith).

10.48*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Yoav Stern (filed herewith).

10.49*   Employment Agreement dated September 10, 1997 between Aero Support
         Holdings, Inc. and Mordechai Markowicz (filed herewith).

10.50*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Mordechai Markowicz (filed herewith).



                                       50
<PAGE>   51


10.51*   Employment Agreement dated September 10, 1997 between Aero Support
         Holdings, Inc. and Michael Navon (filed herewith).

10.52*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Michael Navon (filed herewith).

10.53*   Employment Agreement dated February 1, 1999 between Kellstrom and Ami
         Zelcer (filed herewith).

10.54*   Amendment to Employment Agreement dated December 27, 1999 between
         Kellstrom and Ami Zelcer (filed herewith).

10.55*   Amendment to Employment Agreement dated December 27, 1999 bewteen the
         Company and Fred von Husen (filed herewith)

10.56    Joinder Agreement dated May 13, 1999 between Certified Aircraft Parts,
         Inc., the Company and NationsBank, N.A., as agent for the lenders party
         thereto (filed herewith).

10.57    Letter agreement dated September 16, 1999 among the Company,
         Integrated Technology Holdings Corp., Gideon Vaisman and Integrated
         Technology Corp. (filed herewith).

21       Subsidiaries of the Registrant (filed herewith).

23       Consent of KPMG LLP (filed herewith).

27       Financial Data Schedule (filed herewith).

* Compensatory plan or agreement.


                                       51
<PAGE>   52

                           Kellstrom Industries, Inc.
                 Schedule II - Valuation and Qualifying Accounts
              For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>

                                                     ADDITIONS -                        DEDUCTIONS -
                                    BALANCE AT       CHARGED TO        ADDITIONS -      UNCOLLECTIBLE     BALANCE AT
                                    BEGINNING        COSTS AND           DUE TO           ACCOUNTS           END
DESCRIPTION                         OF PERIOD        EXPENSES          ACQUISITIONS      WRITTEN OFF      OF PERIOD
-----------                         ----------       ----------       -------------     -------------    -----------
<S>                                  <C>             <C>              <C>               <C>                <C>
1999

Allowance for returns and
   doubtful accounts                 $5,417,996      $4,211,707                         $1,054,019        $8,575,684

Accumulated amortization - goodwill   3,782,525       3,165,302               --                           6,947,827


1998

Allowance for returns and
   doubtful accounts                  $ 335,786      $  830,914       $4,296,755         $  45,459        $5,417,996
Accumulated amortization - goodwill   1,555,526       2,226,999               --                --         3,782,525

1997

Allowance for returns and
   doubtful accounts                  $ 150,000       $  35,592       $  167,990         $  17,796        $  335,786
Accumulated amortization - goodwill     409,863       1,145,663               --                --         1,555,526
</TABLE>


                                       52
<PAGE>   53


The following Consolidated Financial Statements are attached hereto:
<TABLE>
<CAPTION>

                                                                                                          PAGE
                                                                                                          ----
<S>                                                                                                         <C>

Kellstrom Industries, Inc. Consolidated Financial Statements:

Independent Auditors' Report                                                                              F-1

Consolidated Balance Sheets at December 31, 1999 and 1998                                                 F-2

Consolidated Statements of Earnings for the years ended December 31, 1999,
  1998 and 1997                                                                                           F-3

Consolidated Statements of Stockholders' Equity and Comprehensive Income
  for the years ended December 31, 1999, 1998 and 1997                                                    F-4

Consolidated Statements of Cash Flows for the years ended December 31, 1999,
  1998 and 1997                                                                                           F-5

Notes to Consolidated Financial Statements                                                                F-7
</TABLE>


<PAGE>   54






                          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, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three year
period ended December 31, 1999. 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,
1999, 1998 and 1997. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, in conformity with generally accepted
accounting principles. 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
February 18, 2000



                                      F-1
<PAGE>   55





ITEM I.   FINANCIAL STATEMENTS

                           KELLSTROM INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                           ------------------------------------
                                                                                1999                1998
                                                                           ---------------     ----------------
<S>                                                                            <C>                <C>
                                 ASSETS

Current Assets:
      Cash and cash equivalents                                                $  272,140         $  1,107,102
      Trade receivables, net of allowances for returns and
          doubtful accounts of $8,575,684 and $5,417,996
          for 1999 and 1998, respectively                                      60,674,708           31,367,337
      Inventories, net (Note 3)                                               194,490,995          149,957,320
      Equipment under short-term operating leases (Note 4)                     92,135,910           77,201,289
      Prepaid expenses                                                          5,199,429            3,166,158
      Deferred tax assets (Note 11)                                             8,280,101            9,730,577
                                                                           ---------------     ----------------

             Total current assets                                             361,053,283          272,529,783

Equipment under long-term operating leases, net (Note 4)                       58,001,190           63,323,008
Property, plant and equipment, net (Note 5)                                    25,339,940           16,755,185
Goodwill, net                                                                  87,825,058           71,501,153
Other assets                                                                    9,225,952            9,941,367
                                                                           ---------------     ----------------
             Total Assets                                                   $ 541,445,423        $ 434,050,496
                                                                           ===============     ================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
      Short-term notes payable (Note 8)                                      $  2,145,920         $  2,317,982
      Current maturities of long-term debt  (Note 8)                              200,000            --
      Accounts payable                                                         17,713,220           13,333,709
      Accrued expenses (Note 7)                                                18,133,718           25,715,518
      Income taxes payable                                                       --                    779,972
                                                                           ---------------     ----------------
             Total current liabilities                                         38,192,858           42,147,181

Long-term debt, less current maturities (Note 8)                              183,493,805           97,336,821
Convertible subordinated notes (Note 9)                                       140,250,000          140,250,000
Deferred tax liabilities (Note 11)                                              8,295,682            4,557,256
                                                                           ---------------     ----------------
             Total Liabilities                                                370,232,345          284,291,258

Stockholders' Equity: (Note 12)
      Common stock, $ .001 par value; 50,000,000 shares authorized; 11,910,981
             shares and 11,762,015 shares issued and outstanding
             in 1999 and 1998, respectively                                        11,911               11,762
      Additional paid-in capital                                              121,103,653          120,007,268
      Retained earnings                                                        51,668,184           31,133,280
      Accumulated other comprehensive income                                        2,060            --
      Loans receivable from directors and officers                             (1,572,730)          (1,393,072)
                                                                           ---------------     ----------------
             Total Stockholders' Equity                                       171,213,078          149,759,238
                                                                           ---------------     ----------------
             Total Liabilities and Stockholders' Equity                     $ 541,445,423        $ 434,050,496
                                                                           ===============     ================
</TABLE>

           See accompanying notes to consolidated financial statements



                                      F-2
<PAGE>   56



                           KELLSTROM INDUSTRIES, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                         -----------------------------------------------------
                                                                                1999             1998              1997
                                                                          ----------------- ---------------- -----------------
<S>                                                                          <C>              <C>                <C>
Sales revenues, net                                                          $ 288,912,304    $ 148,901,686      $ 71,534,539
Rental revenues                                                                 42,031,720       31,147,123         7,904,610
                                                                          ----------------- ---------------- -----------------
     Total revenues                                                            330,944,024      180,048,809        79,439,149

Cost of goods sold                                                            (200,888,797)    (100,221,300)      (46,800,589)
Depreciation of equipment under operating leases                               (27,114,198)     (16,688,141)       (4,594,399)
Selling, general and administrative expenses                                   (41,149,634)     (19,051,869)       (8,877,598)
Depreciation and amortization                                                   (5,398,198)      (3,057,847)       (1,555,673)
Other non-recurring expenses (Note 16)                                          (2,200,000)        --                --
                                                                          ----------------- ---------------- -----------------

     Total operating expenses                                                 (276,750,827)    (139,019,157)      (61,828,259)

Operating income                                                                54,193,197       41,029,652        17,610,890

Interest expense                                                               (22,009,229)     (10,259,749)       (4,390,384)

Interest income                                                                    740,872          486,857           399,172
                                                                          ----------------- ---------------- -----------------
    Income before income taxes                                                  32,924,840       31,256,760        13,619,678

Income taxes (Note 11)                                                         (12,389,936)     (11,678,641)       (5,077,159)
                                                                          ----------------- ---------------- -----------------

     Net income                                                              $  20,534,904     $ 19,578,119      $  8,542,519
                                                                          ================= ================ =================

Earnings per common share - basic                                               $     1.73       $     1.94        $     1.18
                                                                          ================= ================ =================

Earnings per common share - diluted                                             $     1.48       $     1.53        $     0.95
                                                                          ================= ================ =================

Weighted average number of common shares outstanding - basic                    11,855,483       10,086,875         7,266,534
                                                                          ================= ================ =================

Weighted average number of common shares outstanding - diluted                  16,674,000       15,060,512         9,394,439
                                                                          ================= ================ =================
</TABLE>

           See accompanying notes to consolidated financial statements



                                      F-3
<PAGE>   57


                           KELLSTROM INDUSTRIES, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


<TABLE>
<CAPTION>

                                                                                             LOANS
                                                                                           RECEIVABLE
                                                  COMMON STOCK                   RETAINED     FROM      ACCUMULATED
                                               -------------------  ADDITIONAL   EARNINGS/  DIRECTORS      OTHER         TOTAL
                               OMPREHENSIVE    NUMBER                PAID-IN   (ACCUMULATED   AND      COMPREHENSIVE  STOCKHOLDERS'
                                  INCOME      OF SHARES   AMOUNT     CAPITAL      DEFICIT)  OFFICERS       INCOME       EQUITY
                               -------------  ---------   ------    ---------  ------------ ---------  -------------  ------------

<S>                             <C>            <C>        <C>       <C>            <C>       <C>         <C>           <C>
Balances, December 31,1996                      3,315,308 $ 3,315  $ 14,871,559 $ 3,012,642          --  $ 273,225     $ 18,160,741

Exercise of warrants                            4,564,048   4,564    20,771,856          --          --         --       20,776,420

Issuance of warrants related
  to the IASI and Aero
  Support acquisitions                                 --      --     1,853,192          --          --         --        1,853,192

Issuance of warrants in lieu of
  financing fees provided with
  respect to IASI acquisition                          --      --     1,530,446          --          --         --        1,530,446

Net income                     $ 8,542,519             --      --            --   8,542,519          --         --        8,542,519

Unrealized loss on investment
   securities, net
   of reclassification
   adjustments (net of taxes
   of $346,817)                   (588,983)            --      --            --          --          --   (588,983)        (588,983)

                               -----------
     Comprehensive income      $ 7,953,536
                               ===========

Borrowings on loans receivable                         --      --            --          --    (362,415)        --         (362,415)
-----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997                     7,879,356   7,879    39,027,053  11,555,161    (362,415)  (315,758)      49,911,920

Issuance of common stock                        3,882,659   3,883    78,423,642          --          --         --       78,427,525

Issuance of warrants related
  to the Aerocar and Solair
  acquisition                                         --       --     2,556,573          --          --         --        2,556,573

Net income                     $19,578,119            --       --            --  19,578,119          --         --       19,578,119

Unrealized gain on investment
   securities, net of
   reclassification adjustments
   (net of taxes of $190,506)      315,758            --       --            --          --           --   315,758          315,758
                               -----------
     Comprehensive income      $19,893,877
                               ===========

Borrowings on loans receivable                         --      --            --          --  (1,030,657)        --       (1,030,657)
-----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998                    11,762,015  11,762   120,007,268  31,133,280  (1,393,072)        --      149,759,238

Issuance of common stock                          148,966     149     1,096,385          --          --         --        1,096,534

Net income                     $20,534,904             --      --            --  20,534,904          --         --       20,534,904

Cumulative translation
 adjustment                          2,060                                                                   2,060            2,060
                               -----------
     Comprehensive income      $20,536,964
                               ===========

Borrowings on loans receivable                         --      --            --          --    (179,658)        --         (179,658)
-----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999                    11,910,981 $11,911  $121,103,653 $51,668,184 $(1,572,730)   $ 2,060     $171,213,078
===================================================================================================================================
</TABLE>




           See accompanying notes to consolidated financial statements



                                      F-4
<PAGE>   58




                           KELLSTROM INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                         YEARS ENDED DECEMBER 31,
                                                                             -------------------------------------------------
                                                                                   1999             1998            1997
                                                                             ----------------- --------------- ----------------
<S>                                                                           <C>                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                    $ 20,534,904       $  19,578,119       $  8,542,519
Adjustments to reconcile net income to net cash
  Used in operating activities:

     Depreciation of equipment under operating leases                           27,114,198          16,688,141          4,594,399
     Depreciation and amortization                                               5,398,198           3,057,847          1,555,673
     Amortization of deferred financing costs                                    2,042,492           1,376,807            760,019
     Deferred income taxes                                                         891,937           1,722,246             80,631
     Loss on sales of investment securities                                           --               119,472             38,051
     Gain on sales of property, plant and equipment                                   --              (102,145)              --

Changes in operating assets and liabilities:
     Increase in trade receivables, net                                        (25,108,652)         (2,922,492)        (2,392,056)
     (Increase) decrease in inventories                                        (33,213,134)        (46,121,637)         8,768,582
     Increase in equipment under operating leases                              (36,727,001)        (91,947,589)       (41,862,819)
     Increase in prepaid expenses                                               (1,579,410)           (308,659)        (3,042,546)
     (Increase) decrease in other assets                                          (950,713)          2,492,539            330,878
     Decrease in accounts payable                                                 (278,739)         (5,114,524)        (2,748,832)
     (Decrease) increase in accrued expenses                                    (5,513,892)         11,175,219          3,706,570
     (Decrease) increase in income taxes payable                                (1,203,407)          1,311,734           (687,551)
                                                                              ------------       -------------       ------------
           Net cash used in operating activities                               (48,593,219)        (88,994,922)       (22,356,482)
                                                                              ------------       -------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sales of investment securities                                     --               812,553            428,499
     Purchase of property, plant and equipment                                 (11,065,188)        (10,729,964)        (2,418,677)
     Proceeds from sales of property, plant and equipment                           72,461             104,607            744,744
     Acquisitions, net of cash acquired                                        (20,090,330)       (120,252,474)       (27,709,430)
     Acquisition earn-out payments                                              (5,058,887)               --                 --
     Other                                                                            --               (24,321)             2,115
                                                                              ------------       -------------       ------------
           Net cash used in investing activities                               (36,141,944)       (130,089,599)       (28,952,749)
                                                                              ------------       -------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net borrowings under line of credit agreement                              88,494,390          79,878,811          1,086,699
     Proceeds from the issuance of debt                                               --                  --           21,000,000
     Proceeds from the issuance of subordinated debentures                            --            86,250,000         54,000,000
     Debt repayment                                                             (5,036,692)        (18,679,625)       (40,450,696)
     Proceeds from the issuance of common stock                                  1,096,534          78,427,525         20,776,420
     Loans to directors and officers                                              (179,658)         (1,030,657)          (362,415)
     Payment of deferred financing costs                                          (474,373)         (5,117,107)        (4,432,355)
                                                                              ------------       -------------       ------------
           Net cash provided by financing activities                            83,900,201         219,728,947         51,617,653
                                                                              ------------       -------------       ------------

NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS                                (834,962)            644,426            308,422

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                                     1,107,102             462,676            154,254
                                                                              ------------       -------------       ------------

CASH & CASH EQUIVALENTS, END OF PERIOD                                        $    272,140       $   1,107,102       $    462,676
                                                                              ============       =============       ============

</TABLE>

                                   (continued)

           See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>   59




                           KELLSTROM INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                              --------------------------------------------------
                                                                                   1999              1998             1997
                                                                              ---------------   ---------------   --------------

<S>                                                                                <C>              <C>               <C>
Supplemental disclosures of non-cash investing and financing activities:

            Aerocar assets acquired for warrants                                   $      --        $  1,405,000      $       --
                                                                                   ===========      ============      ============

            Solair assets acquired for warrants                                    $      --        $  1,151,573      $       --
                                                                                   ===========      ============      ============

            IASI assets acquired for warrants                                      $      --        $       --        $  1,173,134
                                                                                   ===========      ============      ============

            Aero Support assets acquired for warrants                              $      --        $       --        $    680,058
                                                                                   ===========      ============      ============

            Deferred financing costs paid through the issuance of warrants         $      --        $       --        $  1,530,446
                                                                                   ===========      ============      ============

            Unrealized gain/(loss) on investment securities, net                   $      --        $    315,758      $   (588,983)
                                                                                   ===========      ============      ============

Supplemental disclosures of cash flow information:
            Cash paid during the period for:

            Interest                                                               $19,198,091      $  8,481,524      $  2,436,209
                                                                                   ===========      ============      ============

            Income taxes                                                           $13,789,408      $  8,644,661      $  5,685,502
                                                                                   ===========      ============      ============

Supplemental disclosures of fair value of assets acquired and
liabilities assumed in connection with acquisitions:

                  Cash                                                             $      --        $  1,068,867      $    463,638
                  Receivables                                                        3,570,615        18,255,763         3,773,728
                  Inventory                                                         13,014,566        68,021,060        32,366,924
                  Prepaid expenses and other assets                                    453,861           210,870         1,491,653
                  Equipment under operating leases                                        --          25,332,461              --
                  Property, plant and equipment                                           --           1,597,434           112,791
                  Deferred tax asset                                                      --           4,519,663              --
                  Goodwill                                                          13,329,754        40,887,719        27,253,726
                  Other assets                                                          85,280           158,703         1,110,191
                                                                                   -----------      ------------      ------------
                                    Total assets                                   $30,454,076      $160,052,540      $ 66,572,651
                                                                                   ===========      ============      ============

                  Accrued expenses                                                 $   368,219      $  4,543,338      $  2,589,083
                  Accounts payable                                                   4,658,250        12,264,471         4,692,106
                  Income taxes payable                                                 423,435              --                --
                  Notes payable                                                      2,727,224        19,366,817        17,577,335
                  Deferred tax liabilities                                           2,186,618              --                --
                                                                                   -----------      ------------      ------------
                                    Total liabilities                              $10,363,746      $ 36,174,626      $ 24,858,524
                                                                                   ===========      ============      ============

                                    Net acquisition cost                            20,090,330       123,877,914        41,714,127

                  Less warrants issued to seller                                          --           2,556,573         1,853,192
                  Less notes payable to sellers                                           --                --          11,687,867
                                                                                   -----------      ------------      ------------

                  Cash paid to seller at closing                                    20,090,330       121,321,341        28,173,068
                  Less cash acquired                                                      --           1,068,867           463,638
                                                                                   -----------      ------------      ------------
                                    Net cash used in acquisition                   $20,090,330      $120,252,474      $ 27,709,430
                                                                                   ===========      ============      ============

</TABLE>

           See accompanying notes to consolidated financial statements



                                      F-6
<PAGE>   60



                           KELLSTROM INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Kellstrom Industries, Inc.'s (the "Company") principal business is the
purchasing, overhauling (through subcontractors), reselling and leasing of
aircraft, avionics and aircraft rotables, and 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. The Company's business enables customers to
reduce their engine maintenance costs by providing Federal Aviation
Administration approved engine parts on a timely basis and at competitive
prices.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.

REVENUE RECOGNITION

Revenue is recognized upon shipment of the product to the customer net of an
estimated allowance for sales returns. Revenue from equipment under operating
leases is recognized as rental revenue on a straight-line basis over the lease
term.

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 market. 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.

INVESTMENT IN SECURITIES

Unrealized holding gains and losses, net of the related tax effect, on available
for sale securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Realized gains and losses from
the sale of available for sale securities are determined on a specific
identification basis.

A decline in the market value of any available for sale security below cost that
is deemed to be other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new cost basis for
the security is established. Dividend and interest income are recognized when
earned.



                                      F-7
<PAGE>   61


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 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
$3.2 million, $2.2 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, 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 reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved. Accumulated amortization of
goodwill was $7.0 million and $3.8 million at December 31, 1999 and 1998,
respectively.

DEFERRED FINANCING COSTS

Deferred financing costs are capitalized and amortized on a straight-line basis
over the life of the related debt, which currently approximates one to seven
years. Amortization expense was $2.0 million, $1.4 million, and $0.8 million for
the years ended December 31, 1999, 1998 and 1997, 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, and notes payable
to banks, is based on the short maturity of these instruments which approximates
book value at December 31, 1999 and 1998. The fair value of the convertible
subordinated debt is estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers which were as
follows at December 31, 1999:


5 1/2% Convertible Subordinated Notes


    Recorded value....................................  $86,250,000

    Fair value........................................  $73,325,000


5 3/4% Convertible Subordinated Notes

    Recorded value....................................  $54,000,000

    Fair value........................................  $47,229,000



                                      F-8
<PAGE>   62


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 PER SHARE

The Company computes earnings 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 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 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.



                                      F-9
<PAGE>   63


ACCOUNTING CHANGES

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (FAS) No. 130, "Reporting Comprehensive Income." Comprehensive income
presents a measure of all changes in shareholders' equity except for changes
resulting from transactions with shareholders in their capacity as shareholders.
The Company's total comprehensive income in 1998 consisted of net income and
unrealized gain/(loss) on investment securities. The Company's total
comprehensive income in 1999 consists of net income and translation adjustment.
The statement also requires the separate presentation of the accumulated balance
of comprehensive income other than net earnings in the Consolidated Balance
Sheets.

Effective December 31, 1998, the Company adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for reporting information about a company's operating segments and
related disclosures about its products, services, geographic areas of operations
and major customers. Adoption of this statement did not impact the Company's
results of operations or financial position. The "Segment Reporting" note
provides further information.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which amended SFAS 133 to change the effective date to fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. Management does not
anticipate a significant impact of the adoption of SFAS No. 133 on the Company's
consolidated financial position, results of operations or cash flows.

RECLASSIFICATIONS

Certain 1998 financial statement amounts have been reclassified to conform with
the 1999 presentation.

2.  ACQUISITIONS

On January 15, 1997, the Company, through a wholly-owned subsidiary, completed
the acquisition of substantially all of the assets and assumed certain of the
liabilities of International Aircraft Support, L.P. ("IASI") for $25.1 million
in cash and warrants to purchase an aggregate of 500,000 shares of the Company's
common stock, exercisable at $9.25 per share, expiring on January 15, 1999.

On September 10, 1997, the Company, through a wholly-owned subsidiary, completed
the acquisition of substantially all of the assets and liabilities of Aero
Support USA, Inc. ("Aero Support") for approximately $2.7 million in cash, a
promissory note in the aggregate principal amount of $9.0 million, which matured
and was fully repaid on September 17, 1997, two promissory notes in the
aggregate principal amount of $2.7 million, which matured and were fully repaid
on January 15, 1998, and three warrants. One warrant is for the purchase of
75,000 shares of common stock at an exercise price of $22.00 per share, expiring
on September 9, 2000. The other two warrants are for the purchase of an
aggregate 175,000 shares of common stock at an exercise price of $19.00 per
share, expiring on September 9, 2002. Up to an additional $5,000,000 cash
consideration may be paid in the form of an earn-out payable over three years
based on certain specified criteria, of which $1.3 million and $1.7 million was
earned during 1999 and 1998, respectively.

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 and $3.3 million was earned during 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,


                                      F-10
<PAGE>   64



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.

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.

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. Unaudited
pro forma consolidated statements of earnings have been provided in Note 18(b)
to report the results of operations for the years ended December 31, 1999 and
1998 as though the acquisitions had occurred at the beginning of the period
being reported.

3.  INVENTORIES

At December 31, 1999 and 1998, inventories consist of the following:
<TABLE>
<CAPTION>

                                                       1999                      1998
                                                       ----                      ----
<S>                                              <C>                       <C>
Engine parts                                     $    122,092,545          $     99,325,400
Whole engines                                           8,849,052                 9,260,316
Airframe avionics and aircraft rotables                63,549,398                41,371,604
                                                 ------------------        ------------------
                                                 $    194,490,995          $    149,957,320
                                                 ==================        ==================
</TABLE>


4.  EQUIPMENT UNDER OPERATING LEASES, NET

At December 31, 1999 and 1998, equipment under operating leases, primarily
aircraft and engines, consists of the following:

<TABLE>
<CAPTION>
                                                      1999                1998
                                                      -----                ----
<S>                                              <C>                 <C>
Equipment under operating leases                 $ 179,609,590       $ 153,365,577
Accumulated depreciation                           (29,472,490)        (12,841,280)
                                                 -------------       -------------
                                                   150,137,100         140,524,297
Equipment under short-term operating leases         92,135,910          77,201,289
                                                 -------------       -------------
Equipment under long-term operating leases       $  58,001,190       $  63,323,008
                                                 =============       =============
</TABLE>


Equipment under long-term operating leases represents equipment under lease
agreements with an original term greater than one year.

5.  PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment at December 31, 1999 and 1998 consists of the
following:

                                  1999                 1998
                                  ----                 ----

Land                           $  5,260,644       $  2,140,140
Building and Improvements        13,920,526         11,316,046
Machinery and Equipment           7,206,146          3,089,800
Furniture and Fixtures            3,299,448          3,213,401
                               ------------       ------------
                                 29,686,764         19,759,387
Accumulated Depreciation         (4,401,965)        (3,004,202)
                               ------------       ------------
                                 25,284,799         16,755,185
Construction in Progress             55,141               --
                               ------------       ------------
                               $ 25,339,940       $ 16,755,185
                               ============       ============



                                      F-11
<PAGE>   65


6.  INVESTMENT IN SECURITIES

Upon consummation of the acquisition of the assets of KST, the Company received
warrants to purchase 400,000 shares of common stock of Rada (the "Rada
Warrants") at $3.00 per share, commencing on July 1, 1995 and expiring on or
before July 1, 2000. The Rada Warrants were originally recorded at their fair
value on the date of the acquisition. The Company classifies these warrants as
"available for sale." In December 1996, the Company exercised the Rada Warrants
upon payment of $1,200,000. As a result of certain antidilution provisions
contained in the Rada Warrant, the Company received 464,643 shares of Rada,
representing 5.6% of the outstanding shares of Rada at the time of exercise. The
Company classifies the shares of Rada as "available for sale." As of December
31, 1997, the Company's ownership of Rada common stock was 309,643 shares,
representing approximately 3.7% of the then current outstanding shares. 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 years ended December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                                 1998           1997
                                                                 ----           ----

<S>                                                            <C>           <C>
Unrealized holding gains (losses) arising during the year      $386,795      $(973,851)
Plus: reclassification adjustment for losses included in
     net income                                                 119,472         38,051
                                                               --------      ---------
Net unrealized gains (losses) on securities                    $506,267      $(935,800)
                                                               ========      =========
</TABLE>


7.  ACCRUED EXPENSES

Accrued expenses at December 31, 1999 and 1998 consists of the following:

                                                 1999             1998
                                                 ----             ----

Employee bonuses                             $ 1,255,137      $ 2,140,914
Acquisition costs and earn-out payments        3,087,863        6,978,417
Accrued interest                               2,529,572        1,760,926
Customer deposits                              4,666,174        6,659,814
Commissions                                      306,870        1,103,562
Deferred income                                   15,795        1,598,721
Other                                          6,272,307        5,473,164
                                             -----------      -----------
                                             $18,133,718      $25,715,518
                                             ===========      ===========




                                      F-12
<PAGE>   66


8.  LONG-TERM DEBT

Long-term debt at December 31, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                                                              1999               1998
                                                                              ----               ----

<S>                                                                      <C>                 <C>
Senior subordinated debt due 2002 - 2004 at 11.75%                       $  11,250,000       $ 11,250,000
Senior secured revolving credit facility expiring 2003 at 8.75% and
     7.75% as of December 31, 1999 and 1998, respectively                  165,773,805         83,949,415
Notes payable due 1999 - 2000 at 8.25%                                       2,145,920          4,455,388
Notes payable - variable rate demand note at 6.25% in 1999                   6,670,000               --
                                                                         -------------       ------------
Total debt obligations                                                     185,839,725         99,654,803
Less short-term notes payable                                               (2,145,920)        (2,317,982)
Less current maturities on long-term debt                                     (200,000)              --
                                                                         -------------       ------------
Long-term debt less current maturities                                     183,493,805         97,336,821
                                                                         =============       ============
</TABLE>


The Company may, at its option, redeem up to an additional $750,000 (along with
a prepayment penalty of 1%) of principal amount of the senior subordinated debt
concurrently or within five days after the occurrence of any public offering of
the Company's common stock as long as the principal balance is not reduced below
$10.5 million.

In December 1998, the Company entered into a five-year, $256.7 million
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 new 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. At December 31, 1999, borrowings of $172.4
million were outstanding under the revolving credit facility and the Company had
$36.6 million available under the agreement.

Debt maturities for each of the five years subsequent to December 31, 1999 are
as follows: 2000, $2,345,920; 2001, $0; 2002, $3,750,000; 2003, $169,523,805;
2004, $3,750,000; and thereafter $6,470,000.

9.  CONVERTIBLE SUBORDINATED NOTES

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-13
<PAGE>   67

10.  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 1999,
1998 and 1997 were $10.8 million, $8.3 million and $2.5 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, 1999, 1998 and 1997 amounted to $1.5 million, $0.6 million
and $0.3 million, respectively.

LEASE PAYMENTS. At December 31, 1999, future minimum lease payments are as
follows:

                           OPERATING LEASES
               -------------------------------------------
                      AS LESSOR          AS LESSEE
               -----------------        ------------------

2000                 $15,782,680      $1,171,962
2001                   6,956,380         864,629
2002                   1,201,916         809,322
2003                     402,982         298,116
2004                     235,020         215,347
Thereafter                  --         1,059,322
                     -----------      ----------
                     $24,578,978      $4,418,698
                     ===========      ==========

The amounts in the previous table are based upon the assumption that equipment
under operating leases 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.

11.  INCOME TAXES

Income tax expense for the years ended December 31, 1999, 1998 and 1997 is
summarized as follows:

                                   1999              1998            1997
                                   ----              ----            ----
Current:
       Federal                  $10,471,028      $ 8,795,142      $4,393,569
       State and local            1,026,971        1,161,253         602,959
                                -----------      -----------      ----------
                                 11,497,999        9,956,395       4,996,528
Deferred                            891,937        1,722,246          80,631
                                -----------      -----------      ----------
Provision for income taxes      $12,389,936      $11,678,641      $5,077,159
                                ===========      ===========      ==========

The actual tax expense differs from the "expected" tax expense for the years
ended December 31, 1999, 1998 and 1997 (computed by applying the U.S. federal
corporate tax rate of 35% for the year ended December 31, 1999 and 1998 and 34%
for the year ended December 31, 1997, to income before income taxes), as
follows:

<TABLE>
<CAPTION>
                                                  1999               1998              1997
                                                  ----               ----              ----

<S>                                                <C>                <C>               <C>
Computed "expected" tax expense               $ 11,508,900       $ 10,939,866       $ 4,630,691
State income tax, net of federal benefit           848,543            845,960           573,245
Foreign sales corporation benefit                 (257,625)          (155,255)         (123,771)
Other                                              290,118             48,070            (3,006)
                                              ------------       ------------       -----------
Actual tax expense                            $ 12,389,936       $ 11,678,641       $ 5,077,159
                                              ============       ============       ===========
</TABLE>



Total income tax expense for the years ended December 31, 1999, 1998 and 1997
was allocated as follows:


                                      F-14
<PAGE>   68



<TABLE>
<CAPTION>
                                                1999             1998              1997
                                                ----             ----              ----

<S>                                          <C>              <C>              <C>
Income from continuing operations            $12,389,936      $11,678,641      $ 5,077,159
Stockholders' equity, for unrealized
   gain/(loss) on investment securities             --            190,506         (346,817)
                                             -----------      -----------      -----------
                                             $12,389,936      $11,869,147      $ 4,730,342
                                             ===========      ===========      ===========
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
<TABLE>
<CAPTION>

                                                                              1999                  1998
                                                                              ----                  ----
<S>                                                                           <C>                <C>
Deferred tax assets:
              Accounts receivable, principally due to allowance for
                 doubtful accounts                                            3,184,395          3,841,131
              Inventories, principally due to additional costs
                 inventoried for tax purposes pursuant to the Tax
                 Reform Act of 1986                                           4,165,408          4,381,547
              Accrued liabilities, principally for financial reporting
                 Purposes                                                       309,930            602,990
              Deferred rental and leasing revenue                               738,719            599,520
              State net operating losses                                        364,743            561,979
              Other                                                              13,700             13,810
                                                                            -----------       ------------
Total gross deferred tax assets                                               8,776,895         10,000,977
Less valuation allowance                                                           --                 --
                                                                            -----------       ------------
Deferred tax assets                                                           8,776,895         10,000,977

Deferred tax liabilities:
              Property, plant and equipment                                    (222,167)            (2,465)
              Equipment under operating leases                               (7,403,404)        (4,550,455)
              Intangible assets                                              (1,166,906)          (274,736)
                                                                            -----------       ------------
Deferred tax liabilities                                                     (8,792,477)        (4,827,656)
                                                                            -----------       ------------
Net deferred tax (liabilities) assets                                       $   (15,582)      $  5,173,321
                                                                            ===========       ============
</TABLE>

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 asset. 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 $4,519,663
from Solair in 1998 and net deferred tax liabilities of $2,186,618 from
Certified in 1999 which are included in the consolidated net deferred tax
liabilities position of $15,582.

12.  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 and 11,762,015 shares of common stock outstanding at December 31,
1999 and 1998, respectively.



                                      F-15
<PAGE>   69


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.

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 1999 and 1998, the Board of Directors of the Company approved loans in
the aggregate amount of $0.3 million and $1.1 million, respectively, to certain
officers and directors of the Company for the purposes of purchasing shares of
common stock. 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, 1999 and 1998 was 5.9%
and 5.8%, respectively. Interest will be paid annually by officers and will
accrue and be paid at maturity by directors. As of December 31, 1999 and 1998,
the outstanding balance on the loans receivable was $1.6 million and $1.4
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 February 1997 the Company called its publicly traded warrants pursuant to
their terms. The Company received proceeds of $22,961,950 from the exercise of
these warrants during the period from October 1996 to March 1997.

The Company had 1,147,030 warrants outstanding at December 31, 1999 and 1998.
Each warrant entitles the holder to the purchase of one share of the Company's
common stock at an average stated price of $19.15. These warrants are
exercisable at various times principally commencing in June 1995 and expiring on
or before December 2002. The Company has reserved 5.0 million common shares for
the exercise of these warrants.

13.  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



                                      F-16
<PAGE>   70


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. In 1995 the Company granted 235,000 stock options
at an exercise price of $5.00; all of which provide that such options fully vest
over a period of three years from 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
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.

The following table summarizes the status of the Company's stock option plans:

<TABLE>
<CAPTION>
                                                                                                  WEIGHTED
                                                                                                AVERAGE OPTION
                                                                                  SHARES        EXERCISE PRICE
                                                                                  ------       --------------
<S>                                                                              <C>                <C>

Outstanding at December 31, 1996                                                   608,000           6.61
     Granted                                                                     1,542,000          12.66
     Exercised                                                                      (5,499)          5.00
     Expired or Canceled                                                           (81,000)          6.94
                                                                                ----------       --------
Outstanding at December 31, 1997                                                 2,063,501          11.12
     Granted                                                                     1,819,412          15.33
     Exercised                                                                     (80,147)          7.46
     Expired or Canceled                                                        (1,180,998)         21.47
                                                                                ----------       --------
Outstanding at December 31, 1998                                                 2,621,768           9.51
     Granted                                                                       407,250          18.74
     Exercised                                                                    (148,966)          7.38
     Expired or Canceled                                                            (6,334)         21.37
                                                                                ----------       --------
Outstanding at December 31, 1999                                                 2,873,718          10.90
                                                                                ==========       ========
At December 31, 1999:
Exercisable options                                                              1,854,719           9.66
Shares Available for Future Grant                                                   55,000             --
</TABLE>



The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1999, by range of exercise price:



                                      F-17
<PAGE>   71

<TABLE>
<CAPTION>

                                                 REMAINING          WEIGHTED                                    WEIGHTED
                                                CONTRACTUAL          AVERAGE                                    AVERAGE
 RANGE OF EXERCISE           OPTIONS               TERM             EXERCISE              OPTIONS               EXERCISE
       PRICES              OUTSTANDING          (IN YEARS)            PRICE             EXERCISABLE               PRICE
---------------------     ---------------      --------------     --------------     ------------------     -----------------

<S>                            <C>                   <C>               <C>                 <C>                   <C>
$5.00 - $8.00                  475,352               6.3               $6.80               465,362               $6.78
$8.01 - $12.00               1,906,032               7.6               $9.50             1,192,700               $9.20
$12.01 - $20.00                302,834               9.0              $17.92               165,001              $18.48
$20.01 - $25.75                189,500               8.5              $24.11                31,667              $23.30
                          ---------------                                            ------------------
                             2,873,718                                                   1,854,730
                          ===============                                            ==================
</TABLE>

The weighted average per share fair values of options granted under the
Company's stock option plans during 1999, 1998 and 1997 were $14.11, $18.13 and
$12.66, 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 and earnings per share would have reflected the pro forma
amounts shown below:
<TABLE>
<CAPTION>

                                                                    1999                   1998                  1997
                                                              ------------------      ----------------      ----------------
<S>                                                           <C>                     <C>                   <C>
Net earnings:
     As reported                                              $     20,534,904        $    19,578,119       $   8,542,519
     Pro forma                                                      14,594,402             15,052,692           7,193,698

Earnings per share - basic:
     As reported                                                         1.73                    1.94                1.18
     Pro forma                                                           1.23                    1.49                0.99

Earnings per share - diluted:
     As reported                                                         1.48                    1.53                0.95
     Pro forma                                                           0.89                    1.02                0.77
</TABLE>

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 1999, 1998 and 1997; expected volatility of
80% in 1999 and 59% in 1998 and 20% in 1997; a risk-free interest rate of 5.35%
in 1999 and 1998 and 6.59% in 1997; and an expected holding period of 10
years. Increased pro forma compensation expense in 1999 is the result of the
additional options granted and further vesting of 1995, 1996, 1997 and 1998
grants during 1999. Pro forma expense for 2000 is expected to increase over 1999
for the same reasons.

14.  EARNINGS PER SHARE

Diluted earnings per share for the years ended December 31, 1999, 1998 and 1997
were calculated as follows:
<TABLE>
<CAPTION>

                                                                    1999                   1998                  1997
                                                              ------------------      ----------------      ----------------
<S>                                                           <C>                     <C>                   <C>
Net income                                                    $     20,534,904        $    19,578,119       $    8,542,519
Income adjustment relating to reduction of debt based
     on the if converted method                                      4,155,590              3,423,047              405,921
                                                              ------------------      ----------------      ----------------
Net income available to common and common equivalent
     shares                                                         24,690,494             23,001,166            8,948,440
                                                              ==================      ================      ================

Weighted average number of common shares outstanding -
     basic                                                          11,855,483             10,086,875            7,266,534
Dilutive common stock equivalents from stock options
     and warrants based on the treasury stock method                   864,496              3,542,904            1,712,196

Dilutive convertible subordinated notes based on the if
     converted method                                                3,954,021              1,430,733              415,709
                                                              ------------------      ----------------      ----------------
Weighted average number of common shares outstanding -
     diluted                                                        16,674,000             15,060,512            9,394,439
                                                              ==================      ================      ================
</TABLE>



                                      F-18
<PAGE>   72

At December 31, 1997, 1998 and 1999, options and warrants to purchase 726,000,
726,167 and 2,807,492 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.

15.  SEGMENT REPORTING

The Company is organized based on the products that it offers. Under this
organizational structure, 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.

The Company's reportable segments are managed separately because each business
requires different technology and marketing strategies. 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.
<TABLE>
<CAPTION>

                                                                    1999                   1998                  1997
                                                              ------------------      ----------------      ----------------
<S>                                                                 <C>                  <C>                <C>
REVENUES
Commercial Engine Parts                                             $75,021,184          $ 41,529,164          $  37,026,607
Defense                                                              47,977,353            24,185,460              6,817,932
Whole Engine and Aircraft                                           153,903,720           114,334,185             35,594,610
Airframe Avionics and Rotables                                       54,041,767                    --                     --
                                                              ------------------      ----------------      ----------------
   Total revenue                                                   $330,944,024         $ 180,048,809            $79,439,149
                                                              ==================      ================      ================

GROSS MARGIN
Commercial Engine Parts                                             $25,576,962           $14,424,598         $   13,095,159
Defense                                                              16,998,409             8,388,648              2,702,402
Whole Engine and Aircraft                                            46,600,079            40,326,122             12,246,600
Airframe Avionics and Rotables                                       13,765,579                    --                     --
                                                              ------------------      ----------------      ----------------
   Total gross margin                                              $102,941,029           $63,139,368            $28,044,161
                                                              ==================      ================      ================

INVENTORIES AND EQUIPMENT UNDER LEASE
Commercial Engine Parts                                            $108,512,892          $ 84,277,674            $27,495,671
Defense                                                              40,594,349            19,870,137              8,469,705
Whole Engine and Aircraft                                           150,137,099           144,962,202             39,932,388
Airframe Avionics and Rotables                                       45,383,755            41,371,604                     --
                                                              ------------------      ----------------      ----------------
   Total inventories                                               $344,628,095         $ 290,481,617            $75,897,764
                                                              ==================      ================      ================

GEOGRAPHIC REVENUE INFORMATION
Revenue from domestic customers                                     210,911,226           120,632,702             62,756,928
Revenue from international customers                                120,032,798            59,416,107             16,682,221
                                                              ------------------      ----------------      ----------------
   Total revenue                                                   $330,944,024         $ 180,048,809            $79,439,149
                                                              ==================      ================      ================
</TABLE>



                                      F-19
<PAGE>   73
For the years ended December 31, 1999, 1998 and 1997, the Company's five largest
customers collectively accounted for approximately 36%, 42% and 38%,
respectively, of the Company's consolidated revenues.

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.

16.  OTHER MATTERS

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.

At December 31, 1999 there were no other 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.

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 $172,277 in 1999.



                                      F-20
<PAGE>   74
17.  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, 1999, 1998 and 1997, the Company paid $1.5 million, $2.0 million and $0.5
million, respectively, and issued warrants for the purchase of 7,500 shares in
1997 and 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.

18. SUPPLEMENTAL FINANCIAL DATA

(A) QUARTERLY DATA - UNAUDITED
<TABLE>
<CAPTION>

                                                                                  QUARTERS
                                                        -------------------------------------------------------------
                                                            FIRST          SECOND          THIRD          FOURTH
                                                        -----------     ------------   -------------   --------------
<S>                                                        <C>            <C>             <C>            <C>
Total revenues:
    1999                                                   $79,056,009    $88,226,899     $70,730,702    $92,930,414
    1998                                                   $29,090,571    $38,063,117     $52,806,517    $60,088,604

Earnings from continuing operations:
    1999                                                    $7,148,328     $6,032,995      $3,411,352     $3,942,229
    1998                                                    $2,941,610     $3,681,064      $6,203,317     $6,752,128

Net earnings:
    1999                                                    $7,148,328     $6,032,995      $3,411,352     $3,942,229
    1998                                                    $2,941,610     $3,681,064      $6,203,317     $6,752,128

Earnings from continuing operations per common share - diluted:
    1999                                                         $0.47          $0.41           $0.27          $0.31
    1998                                                         $0.29          $0.34           $0.42          $0.45

Net earnings per common share - diluted:
    1999                                                         $0.47          $0.41           $0.27          $0.31
    1998                                                         $0.29          $0.34           $0.42          $0.45
</TABLE>



                                      F-21
<PAGE>   75


(B) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

The condensed consolidated statement of earnings of the Company for the 12
months ended December 31, 1999 are the Company's actual results, as they reflect
the operations of ITC, Aerocar and Solair for the entire period being presented.
The pro forma consolidated statements of earnings for the year ended December
31, 1998 is based on historical financial statements of the Company and have
been adjusted to reflect the acquisitions of ITC, Aerocar, and Solair 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.

The pro forma consolidated statements of earnings for the year ended December
31, 1998 reflects the effect of the Company's secondary public offering of
common stock and convertible subordinated notes as though it had occurred at the
beginning of the period being reported.



                                      F-22
<PAGE>   76

                           KELLSTROM INDUSTRIES, INC.
                 PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                  1999              1998
                                                              ------------      ------------
                                                                 ACTUAL           PRO FORMA
<S>                                                           <C>               <C>
Sales revenue, net                                            $288,912,304      $230,047,078
Rental revenues                                                 42,031,720        35,139,470
                                                              ------------      ------------
          Total revenues                                       330,944,024       265,186,548

Cost of goods sold                                            (200,888,797)     (161,522,112)
Inventory write-down (see below)                                        --        (5,628,643)
Depreciation of equipment under operating leases               (27,114,198)      (17,735,353)
Selling, general and administrative expenses                   (41,149,634)      (37,208,774)
Depreciation and amortization                                   (5,398,198)       (4,137,877)
Other non-recurring expenses                                    (2,200,000)               --
                                                              ------------      ------------
          Total operating expenses                            (276,750,827)     (226,232,759)
Operating income                                                54,193,197        38,953,789
Interest expense, net of interest income                       (21,268,357)      (16,032,522)
                                                              ------------      ------------
Income before income taxes                                      32,924,840        22,921,267
Income taxes                                                   (12,389,936)       (8,571,664)
                                                              ============      ============
Net income                                                    $ 20,534,904      $ 14,349,603
                                                              ============      ============
Earnings per common share -- basic                            $       1.73      $       1.24
                                                              ============      ============
Earnings per common share -- diluted                          $       1.48      $       0.87
                                                              ============      ============
Weighted average number of common shares outstanding -- basic   11,855,483        11,550,779
                                                              ============      ============
Weighted average number of common shares
  outstanding -- diluted                                        16,674,000        16,524,416
                                                              ============      ============
</TABLE>

Solair's historical results for the year ended December 31, 1998 reflects
charges to income of $5.6 million for the write-down of inventory. If these
charges were excluded from the pro forma statements of earnings, net income and
earnings per share on a basic and diluted basis would be $17.9, $1.55 and $1.08,
respectively for the years ended December 31, 1998.

Unaudited -- See accompanying notes to pro forma consolidated statements of
earnings.

                                      F-23
<PAGE>   77
                           KELLSTROM INDUSTRIES, INC.
                  PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
                          Year Ended December 31, 1998
                                   (Unaudited)

<TABLE>
<CAPTION>

                                               -----------------------------------------------------------
                                                                      HISTORICAL
                                                 KELLSTROM        ITC          AEROCAR        SOLAIR
                                               ------------- -------------  -------------  -------------
<S>                                             <C>              <C>          <C>           <C>

 Sales revenues, net                           $148,901,686   $ 8,036,576    $ 3,458,512   $ 69,650,304
 Rental revenues                                 31,147,123       538,306      3,454,041             --
                                               ------------- -------------  -------------  -------------
    Total revenues                              180,048,809     8,574,882      6,912,553     69,650,304

 Cost of goods sold                            (100,221,300)   (4,997,742)    (1,724,577)   (54,578,493)
 Inventory write-down                                    --            --             --     (5,628,643)
 Depreciation of equipment under operating
   leases                                       (16,688,141)     (289,317)      (757,895)            --
 Selling, general and administrative expenses   (19,051,869)     (640,591)    (1,443,646)   (16,787,829)
 Depreciation and amortization                   (3,057,847)       (3,498)            --       (480,545)
                                               ------------- -------------  -------------  -------------
    Total operating expenses                   (139,019,157)   (5,931,148)    (3,926,118)   (77,475,510)

 Operating income                                41,029,652     2,643,734      2,986,435     (7,825,206)

 Interest expense, net of interest income        (9,772,892)     (160,492)       (87,257)    (5,289,158)
                                               ------------- -------------  -------------  -------------

 Income before income taxes                      31,256,760     2,483,242      2,899,178    (13,114,364)

 Income taxes                                   (11,678,641)            --            --             --
                                               ------------- -------------  -------------  -------------
 Net income                                    $ 19,578,119   $ 2,483,242    $ 2,899,178   $(13,114,364)
                                               ============= =============  =============  =============
 Earnings per common share - basic                   $ 1.94
                                               =============
 Earnings per common share - diluted                 $ 1.53
                                               =============

 Weighted average number of common shares
    outstanding - basic                          10,086,875
                                               =============

 Weighted average number of common shares
    outstanding - diluted                        15,060,512
                                               =============
</TABLE>

<TABLE>
<CAPTION>

                                               ------------------------------------------------------------------
                                                   PRO FORMA        PRO FORMA       PRO FORMA        PRO FORMA
                                                 ADJUSTMENTS (A)  ADJUSTMENTS (B) ADJUSTMENTS (C)    COMBINED
                                                -----------------------------------------------------------------
<S>                                                     <C>             <C>             <C>          <C>

 Sales revenues, net                                        --               --               --   $ 230,047,078
 Rental revenues                                            --               --               --      35,139,470
                                                ---------------  --------------- ---------------  ---------------
    Total revenues                                          --               --              --      265,186,548

 Cost of goods sold                                         --               --              --     (161,522,112)
 Inventory write-down                                       --               --              --       (5,628,643)
 Depreciation of equipment under operating
   leases                                                   --               --              --      (17,735,353)
 Selling, general and administrative expenses           43,161          132,000         540,000      (37,208,774)
 Depreciation and amortization                         (52,963)        (431,194)       (111,830)      (4,137,877)
                                                ---------------  --------------- ---------------  ---------------
    Total operating expenses                            (9,802)        (299,194)        428,170     (226,232,759)

 Operating income                                       (9,802)        (299,194)        428,170       38,953,789

 Interest expense, net of interest income              160,492          219,633       5,479,680      (16,032,522)
                                                      (532,331)      (2,061,530)     (3,988,667)
                                                ---------------  --------------- ---------------  ---------------

 Income before income taxes                           (381,641)      (2,141,091)      1,919,183       22,921,267

 Income taxes                                         (785,233)        (283,248)      4,175,458       (8,571,664)
                                                ---------------  --------------- ---------------  ---------------
 Net income                                       $ (1,166,874)    $ (2,424,339)    $ 6,094,641     $ 14,349,603
                                                ===============  =============== ===============  ===============
 Earnings per common share - basic                                                                        $ 1.24
                                                                                                  ===============
 Earnings per common share - diluted                                                                      $ 0.87
                                                                                                  ===============

 Weighted average number of common shares
    outstanding - basic                                                                               11,550,779
                                                                                                  ===============

 Weighted average number of common shares
    outstanding - diluted                                                                             16,524,416
                                                                                                  ===============
</TABLE>



 Unaudited - See accompanying notes to pro forma consolidated statement of
earnings.





                                      F-24
<PAGE>   78



                           KELLSTROM INDUSTRIES, INC.
             NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
                                   (Unaudited)

(A) For the purpose of presenting the pro forma consolidated statements of
earnings, the following adjustments have been made for the ITC acquisition:
<TABLE>
<CAPTION>

                                                                                                                  YEAR ENDED
                                                                                                               DECEMBER 31, 1998
                                                                                                               -----------------
<S>                                                                                                                    <C>
Increase (decrease) in income:
Reduction in selling, general and administrative expense due to elimination of pension expense                         $ 43,161
Amortization of goodwill and non-compete agreement related to ITC acquisition                                           (52,963)
Reduction in interest expense due to pay-off of debt on ITC line of credit                                              160,492
Interest expense on acquisition debt and debt incurred to repay existing ITC line of credit                            (532,331)
                                                                                                                ----------------
                                                                                                                       (381,641)
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes                        (785,233)
                                                                                                                ----------------
Net adjustment                                                                                                     $ (1,166,874)
                                                                                                                ================
</TABLE>

(B) For the purpose of presenting the pro forma consolidated statements of
earnings, the following adjustments have been made for the Aerocar Aviation and
Aerocar Parts acquisitions:

<TABLE>
<CAPTION>
                                                                                                                  YEAR ENDED
                                                                                                               DECEMBER 31, 1998
                                                                                                               -----------------

<S>                                                                                                                   <C>
Increase  (decrease)  in income:
Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus                                          $ 132,000
Amortization of goodwill related to Aerocar Aviation and Aerocar Parts acquisitions                                    (431,194)
Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit               219,633
Interest expense on acquisition debt and debt incurred to repay existing Aerocar
Aviation and Aerocar Parts line of credit                                                                            (2,061,530)
                                                                                                                ----------------
                                                                                                                     (2,141,091)
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes                        (283,248)
                                                                                                                ----------------
Net adjustments                                                                                                    $ (2,424,339)
                                                                                                                ================
</TABLE>

(C) For the purpose of presenting the pro forma consolidated statements of
earnings, the statement of operations of Solair for the twelve months ended
December 31, 1998 has been used and the following adjustments have been made for
the Solair acquisition:
<TABLE>
<CAPTION>

                                                                                                                  YEAR ENDED
                                                                                                               DECEMBER 31, 1998
                                                                                                               -----------------

<S>                                                                                                                   <C>
Increase (decrease) in income:
Reduction in selling, general and administrative expenses for elimination of Banner management fees                   $ 540,000
Amortization of goodwill related to Solair acquisition                                                                 (111,830)
Reduction in interest expense due to pay-off of Solair debt                                                           5,479,680
Increase in interest expense from acquisition debt                                                                   (3,988,667)
                                                                                                                ----------------
                                                                                                                      1,919,183
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes                       4,175,458
                                                                                                                ----------------
Net adjustment                                                                                                      $ 6,094,641
                                                                                                                ================
</TABLE>

                                      F-25