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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended June 30, 1998
Commission File 0-20889
AVTEAM, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0313187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3230 Executive Way 33025
Miramar, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 431-2359
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of August 13, 1998, 10,665,739 shares of Class A Common Stock, par
value $.01 per share, of the Registrant were outstanding and 439,644 shares of
Class B Common Stock, par value $.01 per share, of the Registrant were
outstanding.
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AVTEAM, INC.
TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements..................................................... 1 - 6
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997................. 1
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 1998 and 1997.......................................................................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997.......................................................................... 3
Notes to Condensed Consolidated Financial Statements............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 6
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................. 10
Item 5. Other Information............................................................................... 10
Item 6. Exhibits and Reports on Form 8-K................................................................ 10
SIGNATURES ........................................................................................ 11
</TABLE>
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AVTEAM, INC.
Condensed Consolidated Balance Sheets
(In thousands)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,357 $ 18,676
Trade accounts receivable, net ........................................... 6,812 5,751
Inventory ................................................................ 57,521 24,480
Prepaid expenses ......................................................... 899 1,153
Deposits ................................................................. 6,229 432
Deferred tax asset ....................................................... 211 80
-------- --------
Total current assets ............................................................ 73,029 50,572
Revenue producing equipment, at cost ............................................ 10,181 7,152
Accumulated depreciation ................................................. (526) (217)
-------- --------
9,655 6,935
Property and equipment, at cost ................................................. 2,421 1,543
Accumulated depreciation ................................................. (806) (605)
-------- --------
1,615 938
Other assets .................................................................... 272 509
-------- --------
Total assets ........................................................... $ 84,571 $ 58,954
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank .................................................... $ 19,000 $ --
Accounts payable ......................................................... 4,600 706
Accrued expenses ......................................................... 1,337 1,654
Customer deposits ........................................................ 699 344
Current portion of notes payable-lease financing ......................... 654 328
Current portion of capital lease obligations ............................. 131 115
-------- --------
Total current liabilities ....................................................... 26,421 3,147
Capital lease obligations, net of current portion ............................... 109 186
Notes payable - lease financing ................................................. 3,149 3,817
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
no shares issued or outstanding .................................... -- --
Class A Common Stock, $.01 par value, 77,000,000 shares authorized,
10,665,739 shares issued and outstanding ........................... 107 107
Class B Common Stock, $.01 par value, 3,000,000 shares authorized,
439,644 shares issued and outstanding .............................. 4 4
Additional paid-in capital ............................................... 47,444 47,444
Retained earnings ........................................................ 7,337 4,249
-------- --------
Total shareholders' equity ...................................................... 54,892 51,804
-------- --------
Total liabilities and shareholders' equity ...................................... $ 84,571 $ 58,954
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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AVTEAM, INC.
Condensed Consolidated Statements of Income
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ......................................... $ 21,100 $ 10,519 $ 34,217 $ 18,932
Cost of sales ..................................... 15,772 7,252 25,004 12,968
------------ ------------ ------------ ------------
Gross profit ............................. 5,328 3,267 9,213 5,964
Operating expenses ................................ 2,321 1,638 4,010 2,987
------------ ------------ ------------ ------------
Income from operations ............................ 3,007 1,629 5,203 2,977
Interest expense, net ............................. 259 340 309 469
------------ ------------ ------------ ------------
Income before provision (credit) for income taxes . 2,748 1,289 4,894 2,508
Provision (credit) for income taxes:
Current .................................. 1,119 589 1,937 1,134
Deferred ................................. (107) (121) (131) (222)
------------ ------------ ------------ ------------
1,012 468 1,806 912
------------ ------------ ------------ ------------
Net income ........................................ $ 1,736 $ 821 $ 3,088 $ 1,596
============ ============ ============ ============
Net income per common equivalent share - basic .... $ 0.16 $ 0.16 $ 0.28 $ 0.32
============ ============ ============ ============
Weighted average number of common equivalent shares
outstanding ....................................... 11,105,383 5,000,000 11,105,383 5,000,000
============ ============ ============ ============
Net income per common equivalent share - diluted .. $ 0.16 $ 0.12 $ 0.28 $ 0.24
============ ============ ============ ============
Weighted average number of common equivalent shares
outstanding - diluted ............................. 11,143,113 6,700,000 11,139,387 6,700,000
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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AVTEAM, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
-------- --------
(UNAUDITED)
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OPERATING ACTIVITIES
Net income .................................................................. $ 3,088 $ 1,596
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ............................................. 796 118
Bad debt expense .......................................................... (46) 65
Deferred tax credit ....................................................... (131) (222)
Changes in operating assets and liabilities:
Trade accounts receivable .............................................. (1,015) (3,452)
Inventory .............................................................. (33,041) (7,843)
Prepaid expenses and deposits .......................................... (5,543) (3,772)
Other assets ........................................................... 237 68
Accounts payable ....................................................... 3,894 451
Accrued expenses/customer deposits ..................................... 38 41
Due to shareholders and affiliates ..................................... -- 123
-------- --------
Net cash used in operating activities .............................. (31,723) (12,827)
INVESTING ACTIVITIES
Purchases of revenue producing equipment .................................... (8,100) --
Purchases of property and equipment ......................................... (878) (325)
Net proceeds from sale of revenue producing equipment ....................... 4,785 --
-------- --------
Net cash used in investing activities .............................. (4,193) (325)
FINANCING ACTIVITIES
Payments on capital leases .................................................. (61) (33)
Net payments on notes payable ............................................... (2,489) --
Net proceeds from notes payable financing ................................... 2,147 --
Net proceeds from short-term line of credit ................................. 19,000 14,849
-------- --------
Net cash provided by financing activities .......................... 18,597 14,816
-------- --------
Net (decrease) increase in cash and cash equivalents ............... (17,319) 1,664
Cash and cash equivalents at beginning of period ................... 18,676 --
-------- --------
Cash and cash equivalents at end of year ........................... $ 1,357 $ 1,664
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ............................................................... $ 389 $ 460
======== ========
Income taxes paid ........................................................... $ 857 $ --
======== ========
Office furniture and equipment acquired under capital leases ................ $ -- $ 112
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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AVTEAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
of AVTEAM, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Company's 1997 Annual Report on Form 10-K for the year ended December 31,
1997.
The Company has in the past and may in the future experience
substantial fluctuations in its results of operations as a result of seasonal
effects. The Company believes that demand for aircraft engines, engine parts and
airframe components is seasonal, with increased demand during the summer months.
This seasonality exists because aircraft engine performance is directly related
to ambient temperature (as temperatures rise it is more difficult for aircraft
engines to perform properly). As a result, certain aircraft are removed from
service during the summer months due to the failure of those particular aircraft
engines to comply with certain exhaust gas temperature limitations. Aircraft
engines of the same type and model can have different performance capabilities.
The summer months also include peak travel periods during which aircraft
utilization levels are high. In addition, the timing of whole aircraft engine
sales, at greater unit purchase prices than the installed parts and components,
may cause significant fluctuations in the Company's quarterly results of
operations.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid
investments with a maturity of three months or less at the time of purchase.
INVENTORY
Inventory of aircraft engines is stated at the lower of specific cost
(including overhaul costs) or market. Initially, cost of sales of engine parts
from disassembled engines are recognized based on margins realized from recently
sold, similar groups of engine parts. Once the remaining parts have been fully
inspected and their condition has been determined, the cost of subsequent sales
of engine parts from that engine are determined using the relationship of the
remaining costs of that engine to estimated sales. Cost of sales for individual
parts purchased for resale are reflected based on the specific identification
method. Cost of sales of airframe components are recognized using margins based
on the relationship of cost to revenue estimates as determined by the Company
through the analysis of the market price of such airframe components.
REVENUE RECOGNITION
Revenues from the sale of engine parts and airframe components are
recognized when shipped.
Revenues from the sale of aircraft engines are recognized when title
and risk of ownership are transferred to the customer, which generally is upon
shipment or customer pick-up. In certain instances prior to shipment or customer
pick-up, certain customers request the Company to hold aircraft engines until
the customer determines the most economical means of taking possession. The
Company records revenues under such circumstances only if: (1) payment is
received or is receivable within 30 days; (2) title and risk of ownership is
transferred to the
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AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
customer; (3) the customer's request that the transaction be on a bill-and-hold
basis is in writing; (4) there is a fixed schedule for delivery of the engines
that is within 30 days of the sale; (5) the Company does not have any specific
performance obligations; (6) the engines are segregated from other engines and
are not subject to being used to meet other customer's needs and (7) the engines
are ready for shipment.
The Company enters into consignment arrangements in which it warehouses
items, determines sales prices, arranges for shipment to customers, and collects
accounts receivable. The Company reflects sales under such arrangements in net
sales and the cost of such sales in cost of sales, since the Company bears the
risk of ownership once the items are sold.
WARRANTIES AND PRODUCT RETURNS
The Company does not provide service warranties in addition to those
provided by repair facilities and as a result does not record accruals for
warranties. The Company has established programs which, under specific
conditions, enable its customers to return inventory. The effect of these
returns is estimated based on a percentage of sales and historical experience
and sales are recorded net of a provision for estimated returns.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The Company buys inventory and revenue producing equipment from certain
of its customers and periodically offsets amounts owed to customers for
inventory and revenue producing equipment against the accounts receivable for
sales to such customers. For the six months ended June 30, 1998, accounts
payable totaling approximately $4,828,000 were offset against accounts
receivable.
PROPERTY AND EQUIPMENT
Property and equipment (including assets under capital leases) is
carried at cost and is depreciated using accelerated and straight-line methods
over the lesser of the lease terms or the estimated useful lives of the assets.
The lives used are as follows:
Office furniture and equipment ...... 3-7 years
Warehouse and transport equipment.... 5-7 years
Leasehold improvements .............. 3-5 years
REVENUE PRODUCING EQUIPMENT
Revenue producing equipment is comprised of engines and aircraft leased
to users on a short-term basis. Such engines and aircraft are carried at cost
and are depreciated using the straight-line method over periods between five and
ten years. Four of such engines are the subject of a sale/leaseback arrangement.
The proceeds under the arrangement are recorded as a financing obligation and
will be reduced by payments under the lease over its five year term. The lease
agreement provides the Company with an option to terminate the lease and to
repurchase the engines at any time after one year at varying rates based on the
original sales price.
CONCENTRATION OF CREDIT RISK
Accounts receivable are primarily from domestic and foreign passenger
airlines, freight and package carriers, charter airlines, aircraft leasing
companies and service providers to such companies. The Company performs ongoing
evaluations of its trade accounts receivable customers, monitors its exposure
for credit losses and sales returns and does not require collateral.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" which requires the Company to replace its presentation of
primary earnings per share with a presentation of basic earnings per share and
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. The principal difference required by the new statement
and the new interpretation required by the Securities and Exchange Commission is
the inclusion of the 2,414,286 shares of preferred stock only from their date of
issue until their conversion to common shares on October 30, 1997, the date of
the Company's initial public offering, for the purposes of calculating diluted
earnings per share only. Previously these shares were included in the
calculation of both primary and fully diluted earnings per share for all periods
presented.
The following table sets forth the computation of basic and diluted net income
and net income per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
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Numerator:
Net income ......................... $ 1,736,000 $ 821,000 $ 3,088,000 $ 1,596,000
=========== =========== =========== ===========
Denominator:
Denominator for basic net income
per share-weighted average shares .. 11,105,383 5,000,000 11,105,383 5,000,000
----------- ----------- ----------- -----------
Effect of dilutive securities
Convertible preferred stock ........ -- 1,700,000 -- 1,700,000
Employee stock options ............. 37,730 -- 34,004 --
----------- ----------- ----------- -----------
37,730 1,700,000 34,004 1,700,000
----------- ----------- ----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions ..... 11,143,113 6,700,000 11,139,387 6,700,000
=========== =========== =========== ===========
Net income per common share - basic ....... $ 0.16 $ 0.16 $ 0.28 $ 0.32
=========== =========== =========== ===========
Net income per common share - diluted ..... $ 0.16 $ 0.12 $ 0.28 $ 0.24
=========== =========== =========== ===========
</TABLE>
DEPOSITS AND CUSTOMER DEPOSITS
The Company has entered into various contracts for the purchase and sale
of whole engines. Occasionally, these contracts require a substantial
down-payment to fix the consideration of such engines and to allow the time to
perform due diligence work. These deposits are refundable.
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is a global supplier of aftermarket aircraft engines,
engine parts and airframe components. The Company supplies its products to other
aftermarket suppliers, independent repair facilities, aircraft operators and
original equipment manufacturers. Beginning in April 1997, the Company, through
its wholly-owned subsidiary, AVTEAM Aviation Field Services, Inc. ("AAFS"),
began providing certain on-wing maintenance and repair and borescope services.
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AVTEAM, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
contained in the Company's statements of operations expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................ 100% 100% 100% 100%
Cost of sales ............ 75 69 73 69
--- --- --- ---
Gross profit ............. 25 31 27 31
Operating expenses ....... 11 16 12 16
--- --- --- ---
Income from operations ... 14 15 15 15
Interest expense, net .... 1 3 1 2
--- --- --- ---
Income before income taxes 13 12 14 13
Provision for income taxes 5 4 5 5
--- --- --- ---
Net income ............... 8% 8% 9% 8%
=== === === ===
</TABLE>
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NET SALES. Net sales increased 100.6% to $21.1 million for the second
quarter of 1998 from $10.5 million for the second quarter of 1997. For the first
six months of 1998, net sales increased 80.7% to $34.2 million from $18.9
million for the first six months of 1997. The increases are primarily due to
increased whole engine sales and a whole aircraft sale and higher levels of
airframe component inventory available for sale resulting from purchases of
whole aircraft which were disassembled.
GROSS PROFIT. Gross profit increased 63.1% to $5.3 million for the
second quarter of 1998 from $3.3 million for the second quarter of 1997. For the
first six months of 1998, gross profit increased 54.5% to $9.2 million from $6.0
million for the first six months of 1997. Gross margin decreased to 25.3% for
the second quarter of 1998 from 31.1% for the second quarter of 1997. Gross
margin decreased to 26.9% for the first six months of 1998 from 31.5% for the
first six months of 1997. The margin decline is as a result of the increase in
sales of higher thrust whole engines, which result in lower margins than the
sale of aircraft engine parts. Total whole engine sales accounted for 43.0% of
the Company's net sales for the second quarter of 1998 and 39.2% of the
Company's net sales for the six months of 1998.
OPERATING EXPENSES. Operating expenses increased 41.7% to $2.3 million
for the second quarter of 1998 from $1.6 million for the second quarter of 1997.
For the first six months of 1998, operating expenses increased 34.2% to $4.0
million from $3.0 million for the first six months of 1997. The expense
increases are primarily attributed to increased personnel expense resulting from
additional staffing in the Florida headquarters office, increased insurance
expense as a result of higher inventory levels and volume of shipments,
additional occupancy costs associated with the acquisition of an additional
50,000 square feet of rental warehouse and office space, and increased legal and
investor relations expenses as a result of being a publicly-owned company.
Operating expenses as a percentage of net sales decreased to 11.0% for the
second quarter of 1998 from 15.6% for the second quarter of 1997. For the first
six months of 1998, operating expenses as a percentage of net sales decreased to
11.7% from 15.8% for the first six months of 1997. The decreases in operating
expenses as a percentage of net sales are primarily attributed to net sales
increasing at a higher rate than operating expenses.
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AVTEAM, INC. AND SUBSIDIARY
NET INTEREST EXPENSE. Net interest expense decreased 23.8% to $259,000
for the second quarter of 1998 from $340,000 for the second quarter of 1997. For
the first six months of 1998, net interest expense decreased 34.1% to $309,000
from $469,000 for the six months of 1997. Net interest expense, as a percentage
of net sales, decreased to 1.2% for the second quarter of 1998 from 3.2% for the
second quarter of 1997. For the first six months of 1998, net interest expense
as a percentage of net sales decreased to 0.9% from 2.5% of net sales for the
first six months of 1997. The decreased interest expense is a result of lower
average borrowing levels subsequent to the Company's initial public offering in
October 1997. It is anticipated that interest expense will continue to increase
as the Company seeks to increase its level of available inventory.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been from
financing activities and cash flow generated by operations and, to a lesser
extent, from consignment sales. During the first six months of 1998, the Company
used approximately $31.7 million in operating activities, principally for the
purchase of inventory. Net cash provided by financing activities, derived
primarily from the sale of common stock in 1997, was $29.7 million. In May 1997,
the Company launched a program in conjunction with third-party financing sources
under which the Company leases aircraft engines to its customers, which has
increased the Company's liquidity and provides working capital for the purchase
of additional aircraft engines.
On April 30, 1998, the Company, as borrower, and AAFS, as guarantor,
entered into a Credit Agreement (the "Credit Agreement") with a syndicate of
lenders led by NationsBank, N.A., as administrative agent (the "Lenders"),
pursuant to which the Lenders agreed to make available to the Company a
revolving credit facility (the "Revolving Credit Facility") in the maximum
aggregate principal amount of up to $70.0 million. The Revolving Credit Facility
includes (i) a working capital revolving loan facility (the "Working Capital
Revolving Loan Facility") in the aggregate principal amount of up to $45.0
million and a (ii) an acquisition revolving loan facility (the "Acquisition
Revolving Loan Facility") in the aggregate principal amount of up to $25.0
million. The Working Capital Revolving Loan Facility is being used by the
Company to finance working capital, capital expenditures and general corporate
purposes. The Acquisition Revolving Loan Facility will be used by the Company to
finance acquisitions permitted under the Credit Agreement. The Credit Agreement
is secured by a senior security interest in all of the assets of the Company. In
addition, the obligations of the Company under the Credit Agreement are
guaranteed by AAFS. The Company may borrow, repay and re-borrow funds under the
Credit Agreement until April 30, 2001. The Credit Agreement requires the Company
to make certain mandatory prepayments of principal and interest. The Credit
Agreement contains certain restrictions, including restrictions on (i) incurring
debt, (ii) declaring or paying any dividend or other distribution on account of
any class of stock of the Company, (iii) creating liens on the Company's
properties or assets, (iv) entering into a merger or other business combination
or (v) a change in control (as defined in the Credit Agreement). As of June 30,
1998, the Company has drawn an aggregate of $19.0 million under the Working
Capital Revolving Loan Facility and no funds were drawn under the Acquisition
Revolving Loan Facility. At July 1, 1998, the Company was obligated under a
letter of credit in the amount of approximately $132,000 and had additional
availability of approximately $6.1 million under the Working Capital Revolving
Loan Facility.
On July 25, 1997, the Company entered into an agreement with
NationsBanc Leasing Corporation ("NBLC") whereby the Company sold three Pratt &
Whitney JT8D engines to NBLC for approximately $4.3 million and subsequently
leased-back such engines for a period of five years at fixed monthly payments.
On April 23, 1998, the Company added an additional two JT8D engines to this
agreement. Net proceeds were approximately $2.1 million. The Company, at its
option, may repurchase any of these engines at a predetermined percentage of the
original leased amount. The proceeds from the sale of these engines were used by
the Company to reduce the outstanding balance of its credit facility with
NationsBank. On February 18, 1998, the Company repurchased one of the engines in
order to sell it to a third party leasing company.
On August 21, 1997, the Company issued and sold Class A Preferred Stock
and Class B Preferred Stock to The Clipper Group for an aggregate purchase price
of approximately $5.0 million, the proceeds of which were used to reduce the
outstanding balance of its credit facility with NationsBank.
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AVTEAM, INC. AND SUBSIDIARY
Also, on August 21, 1997, the Company issued and sold 327,772 shares of
Class A Common Stock to Leon Sragowicz for an aggregate purchase price of
approximately $2.3 million as payment for loans made by Mr. Sragowicz to the
Company in the amount of approximately $2.0 million and payment for the
remaining inventory of Pratt & Whitney engine parts under an agreement between
the Company and Parati Corporation valued at $270,648.
On November 3, 1997, the Company completed an initial public offering
of 4,500,000 shares of its Class A Common Stock at an offering price of $8.50
per share. Of the shares of Class A Common Stock offered thereby, 3,033,000
shares were sold by the Company and 1,467,000 shares were sold by Sragowicz
Foundation, Inc. On December 3, 1997, the Company sold an additional 330,325
shares of its Class A Common Stock at an offering price of $8.50 per share price
upon the exercise of an underwriters' over-allotment option (collectively, the
"Offering"). The Company received aggregate net proceeds from the Offering of
approximately $25.6 million. Of this amount, $12.5 million was used to repay
outstanding indebtedness, $200,000 was used for payment of accrued compensation
and the remainder is being used for working capital and general corporate
purposes, including the purchase of surplus aircraft and aircraft engines,
engine parts and airframe components for the Company's inventory.
The Company has established a capital expenditure budget of
approximately $1.75 million during 1998, including approximately $750,000 for
additional engine tooling in the Company's disassembly operations, approximately
$150,000 for enhancements to the Company's management information systems,
approximately $400,000 for warehouse improvements, approximately $300,000 for
additional leasehold improvements related to planned increases in personnel,
approximately $100,000 for additional equipment to be utilized by AAFS and
$50,000 for additional office furniture and equipment.
The Company's principal working capital requirements relate to the
acquisition of inventory and carrying of receivables. The Company believes that
the current level of working capital and amounts available under the Credit
Facility will enable it to meet its liquidity requirements for the next twelve
months.
SEASONALITY
The Company believes that demand for aircraft engines, engine parts and
airframe components is seasonal, with increased demand during the summer months.
This seasonality exists because aircraft engine performance is directly related
to ambient temperature (as temperatures rise it is more difficult for aircraft
engines to perform properly). As a result, certain aircraft engines are removed
from service during the summer months due to the failure of those particular
aircraft engines to comply with exhaust gas temperature limitations. Aircraft
engines of the same type and model can have different performance capabilities.
The summer months also include peak travel periods during which aircraft
utilization levels are high. In addition, the timing of whole aircraft engines
sold, which have a substantially greater purchase price than the installed parts
and components, may cause significant fluctuations in the Company's quarterly
operating results. The Company has in the past and may in the future experience
substantial quarterly fluctuations in sales as a result of these seasonal
effects.
IMPACT OF YEAR 2000
The Company believes that it has prepared its computer systems and
related software to accommodate data sensitive information relating to the Year
2000. The Company expects that any additional costs related to ensuring such
systems and software to be Year 2000-compliant will not be material to the
financial condition or results of operations of the Company. In addition, the
Company is discussing with its vendors and customers the possibility of any
difficulties which may affect the Company as a result of its vendors and
customers ensuring that their computer systems and software are Year
2000-compliant. To date, no significant concerns have been identified. However,
there can be no assurance that no Year 2000-related computer operating problems
or expenses will arise with the Company's computer systems and software or in
the computer systems and software of the Company's vendors and customers.
Page 9
<PAGE> 12
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company held on June 3,
1998, Sanford Miller was elected as a director of the Company and Donald A.
Graw, Jaime J. Levy, Richard Preston, Robert Munson and Eugene P. Lynch were
re-elected as directors of the Company each to serve for one-year terms. Votes
cast for each of the directors were 10,187,370 and votes withheld for each of
the directors were 1,000. Also, at that annual meeting, a proposal to approve an
amendment to the Company's Articles of Incorporation to create three classes of
the Company's Board of Directors was defeated. Total votes cast for the
amendment to the Articles of Incorporation were 6,415,350, votes cast against
the amendment were 3,008,732 and there were 7,500 abstentions. In addition, at
that annual meeting, a proposal to ratify the selection of Ernst & Young LLP as
independent accountants of the Company for 1998 was approved. Total votes cast
for the selection of Ernst & Young LLP as independent accountants of the Company
for 1998 were 10,185,270, votes cast against the selection of Ernst & Young LLP
as independent accountants of the Company for 1998 were 1,500 and there were
1,600 abstentions.
ITEM 5. Other Information
On April 30, 1998, the Company, as borrower, and AAFS, as guarantor,
entered into a Credit Agreement with a syndicate of Lenders led by NationsBank,
as administrative agent, pursuant to which the Lenders agreed to make available
to the Company the Revolving Credit Facility in the maximum aggregate principal
amount of up to $70.0 million. The Revolving Credit Facility includes (i) the
Working Capital Revolving Loan Facility in the aggregate principal amount of up
to $45.0 million and (ii) the Acquisition Revolving Loan Facility in the
aggregate principal amount of up to $25.0 million. The Working Capital Revolving
Loan Facility is being used by the Company to finance working capital, capital
expenditures and general corporate purposes. The Acquisition Revolving Loan
Facility will be used by the Company to finance acquisitions permitted under the
Credit Agreement. The Credit Agreement is secured by a senior security interest
in all of the assets of the Company. In addition, the obligations of the Company
under the Credit Agreement are guaranteed by AAFS. The Company may borrow, repay
and re-borrow funds under the Credit Agreement until April 30, 2001. The Credit
Agreement requires the Company to make certain mandatory prepayments of
principal and interest and permits the Company to make optional prepayments of
principal and interest. The Credit Agreement contains certain restrictions,
including restrictions on (i) incurring debt, (ii) declaring or paying any
dividend or other distribution on account of any class of stock of the Company,
(iii) creating liens on the Company's properties or assets, (iv) entering into a
merger or other business combination or (v) a change in control (as defined in
the Credit Agreement). As of June 30, 1998, the Company had drawn an aggregate
of $19.0 million under the Working Capital Revolving Loan Facility and no funds
were drawn under the Acquisition Revolving Loan Facility. At July 1, 1998, the
Company was obligated under a letter of credit in the amount of approximately
$132,000 and had additional availability of approximately $6.1 million under the
Working Capital Revolving Loan Facility.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule for the period ended
June 30, 1998
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the period ended
June 30, 1998.
Page 10
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
AVTEAM, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVTEAM, Inc.
Date: August 13, 1998 By: /s/ DONALD A. GRAW
-------------------------------------
Donald A. Graw
President and Chief Executive Officer
Date: August 13, 1998 By: /s/ MARK S. KOONDEL
-------------------------------------
Mark S. Koondel
Chief Financial Officer and Treasurer
Page 11
<PAGE> 14
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule for the period ended June 30, 1998
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