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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______
Commission File Number 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
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 March 24, 1998, (a) 10,665,739 shares of Class A Common Stock, par
value $.01 per share, of the Registrant (the "Class A Common Stock") were
outstanding and 439,644 shares of Class B Common Stock, par value $.01 per
share, of the Registrant were outstanding; (b) the number of shares of Class A
Common Stock held by non-affiliates was 4,835,567; and (c) the aggregate market
value of the Class A Common Stock (based on the closing price on the Class A
Common Stock on March 24, 1998 as quoted on the Nasdaq Stock Market's National
Market, which was $11.50 per share) held by non-affiliates was approximately
$55,609,000.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this Annual Report is incorporated by
reference to portions of Registrant's 1998 Proxy Statement for the 1998 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission on or before April 30, 1998.
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AVTEAM, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PART I
Item 1 Business....................................................................... 2
Item 2 Properties..................................................................... 11
Item 3 Legal Proceedings.............................................................. 11
Item 4 Submission of Matters to a Vote of
Security Holders............................................................... 11
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters......................................... 11
Item 6 Selected Financial Data........................................................ 12
Item 7 Management's Discussion and Analysis
Of Financial Condition and Results of Operations............................... 12
Item 8 Financial Statements and Supplementary Data.................................... 17
Item 9 Changes in and Disagreements with Auditors on
Accounting and Financial Disclosure............................................ 17
PART III
Item 10 Directors and Executive Officers of the Registrant............................. 17
Item 11 Executive Compensation......................................................... 17
Item 12 Security Ownership of Certain
Beneficial Owners and Management............................................... 17
Item 13 Certain Relationships and Related Transactions................................. 17
PART IV
Item 14 Exhibits, Financial Statement Schedules
And Reports on Form 8-K........................................................ 18
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PART I
THIS ANNUAL REPORT ON FORM 10-K OF AVTEAM, INC. ("AVTEAM" OR THE
"COMPANY") CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE.
"FORWARD LOOKING STATEMENTS" INCLUDE STATEMENTS THAT EXPRESS, OR INVOLVE
DISCUSSIONS AS TO EXPECTATIONS, BELIEFS, PLANS, OBJECTIVES, ASSUMPTIONS OR
FUTURE EVENTS OR PERFORMANCE (OFTEN, BUT NOT ALWAYS, THROUGH THE USE OF WORDS OR
PHRASES, SUCH AS "WILL RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS
ANTICIPATED," "PLANS," "INTENDS," "ESTIMATED," "PROJECTION" AND "OUTLOOK"). FOR
A VARIETY OF REASONS, THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
ANY FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT. AMONG THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER FROM PREDICTED OR EXPECTED RESULTS ARE THE
FOLLOWING: A DECLINE IN THE DEMAND FOR AFTERMARKET AIRCRAFT ENGINES, ENGINE
PARTS AND AIRFRAME COMPONENTS, WHICH COULD MATERIALLY ADVERSELY AFFECT THE
COMPANY'S REVENUES; THE AVAILABILITY OF AIRCRAFT ENGINES, ENGINE PARTS AND
AIRFRAME COMPONENTS FOR RESALE, WHICH COULD HAMPER THE COMPANY'S ABILITY TO
MAINTAIN ADEQUATE LEVELS OF INVENTORY AND MEET CUSTOMER DEMAND; THE POSSIBILITY
THAT REGULATORY CHANGES AND UNFORESEEN EVENTS COULD IMPACT THE COMPANY'S ABILITY
TO PROVIDE PRODUCTS AND SERVICES TO ITS CUSTOMERS; EXISTING COMPETITION FROM
NATIONAL AND REGIONAL COMPETITORS, WHICH COULD RESULT IN PRICING AND OTHER
PRESSURES ON PROFITABILITY AND MARKET SHARE; AND OTHER RISKS AND UNCERTAINTIES
SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC"), INCLUDING BUT NOT LIMITED TO THE COMPANY'S PROSPECTUS DATED OCTOBER
30, 1997, FOR ITS INITIAL PUBLIC OFFERING, THE COMPANY'S FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1997, AND THIS REPORT. CONSEQUENTLY, THE READER IS
CAUTIONED TO CONSIDER ALL FORWARD-LOOKING STATEMENTS IN LIGHT OF THE RISKS TO
WHICH THEY ARE SUBJECT.
ITEM 1. BUSINESS
GENERAL
AVTEAM is a global supplier of aftermarket aircraft engines, engine
parts and airframe components ("Engines and Components"). The Company has
historically focused on the purchase and resale of Engines and Components for
the Pratt & Whitney JT8D series of engines, which power approximately 40% of the
world's commercial aviation fleet. The Company has recently expanded its product
line to include the CFM56 series of engines, which had the highest production
volume of any commercial engine series in 1997. The Company works with its
worldwide network of industry contacts to identify and evaluate Engines and
Components and surplus aircraft for potential acquisition. Engines and
Components are either made available for immediate resale or repaired by
FAA-licensed repair facilities and then resold. Surplus aircraft are
disassembled and sold as parts by the Company. The Company resells Engines and
Components to other aftermarket suppliers, independent repair facilities,
aircraft operators and original equipment manufacturers. Since its inception,
the Company has substantially increased its revenue base, broadened the range of
products and services offered and taken consistent steps to ensure the quality
of its products and services. From $3.9 million in 1993, the Company's net sales
reached $52.9 million in 1997, when the Company supplied over 600 customers
worldwide. The Company's revenue growth from 1996 to 1997 was 66.7%. In November
1996, the Company became the first aftermarket supplier to receive quality
accreditation from the Airline Suppliers Association, an FAA-recognized
independent quality assurance organization. The Company believes that there are
currently fewer than 25 accredited aftermarket suppliers who compete directly
with AVTEAM.
RECENT EVENTS
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 (the "Offering"). 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., a shareholder of the Company. 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 upon the exercise of an underwriters'
over-allotment option. The Company received aggregate net proceeds from the
Offering of approximately $25.5 million. Of this amount, $12.5 million was used
to repay outstanding indebtedness, $200,000 was used for payment of accrued
compensation and the balance of approximately $12.8 million will be used for
working capital and general corporate purposes, including the purchase of
surplus aircraft and Engines and Components for the Company's inventory and the
funding of the acquisition of complementary businesses.
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INDUSTRY OVERVIEW
The Company believes that the annual worldwide aftermarket for Engines
and Components is approximately $10 billion of which approximately $1 billion
represents sales and leases of JT8D Engines and Components. The aftermarket for
Engines and Components is highly fragmented, with a limited number of
well-capitalized companies selling a broad range of products and numerous
smaller competitors serving distinct market niches. The Company believes that
the following factors will contribute to the continued growth of the aftermarket
for Engines and Components and will accelerate the trend towards consolidation
in the industry: (i) growth in air transit activity; (ii) increase in the number
of older commercial aircraft; (iii) aircraft operators' demand for full service
suppliers; and (iv) increased regulatory scrutiny.
GROWTH IN AIR TRANSIT ACTIVITY. According to Boeing's 1997 Market
Outlook, by the year 2006, global air travel will increase approximately 75%,
and the number of passenger and cargo aircraft in service will increase by
approximately 48%. The Company believes that growth in air transit activity will
continue to increase the demand for aftermarket Engines and Components.
INCREASE IN THE UTILIZATION OF OLDER COMMERCIAL AIRCRAFT. Increased
demand for air travel and the need for aircraft operators to reduce operating
and capital costs have prompted many airlines to extend the useful life of older
equipment. The installation of FAA-approved hushkits and extended life
maintenance programs have increased the useful life of aircraft utilizing JT8D
engines for many operators. In addition, many second-tier foreign and domestic
aircraft operators are increasing their fleets through the acquisition of less
expensive used aircraft, which typically require more maintenance and
replacement parts than new aircraft.
AIRCRAFT OPERATORS' DEMAND FOR FULL SERVICE SUPPLIERS. Cost
considerations are causing aircraft operators to reduce the size of their spare
parts inventories, while cost and quality concerns cause them to maintain
relationships with a more limited number of approved suppliers. As a result,
many airlines today require full service suppliers that provide a broad array of
products and services.
INCREASED REGULATORY SCRUTINY. Increased regulatory scrutiny by the FAA
of the airline industry has created opportunities for aftermarket parts
suppliers with the infrastructure and quality systems to satisfy increased
regulatory standards. In September 1996, the FAA issued an advisory circular
recommending voluntary industry oversight and accreditation of aftermarket parts
suppliers. In response to regulatory scrutiny, aircraft operators have increased
their documentation requirements for products purchased in the aftermarket. The
Company believes that regulatory scrutiny will continue to increase, forcing
aftermarket suppliers to meet higher quality standards, which may strain the
resources of smaller competitors.
BUSINESS STRATEGY
The Company believes that its industry experience and capabilities
position it to expand its market presence in the growing aftermarket for Engines
and Components. The Company intends to build upon its success and exploit
favorable industry dynamics by: (i) capitalizing on its worldwide sourcing
network; (ii) continuing its commitment to quality leadership; (iii) broadening
its product line; (iv) increasing sales to aircraft operators by providing
value-added services; and (v) pursuing strategic acquisitions.
CAPITALIZE ON WORLDWIDE SOURCING NETWORK. The Company believes that
purchasing Engines and Components on a timely basis and at favorable prices is
critical. Although there are well-developed channels for distribution of Engines
and Components by aftermarket suppliers, there is no consistent, reliable and
organized market for aftermarket suppliers to acquire their inventory.
Accordingly, the Company has developed a sourcing network of independent agents
operating throughout the world that assists management in identifying available
products and facilitates quick evaluation of products and execution of
purchasing decisions.
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CONTINUE COMMITMENT TO QUALITY LEADERSHIP. The Company emphasizes
adherence to high quality standards at each stage of its operations (product
acquisitions, overhaul, documentation, inventory control and delivery). Of the
approximately 2,500 world-wide distributors offering parts to civil aviation
purchasers, the Company was the first aftermarket supplier to meet the voluntary
accreditation quality system standard of the Airline Suppliers Association as
endorsed by the FAA.
BROADEN PRODUCT LINE. The Company has recently expanded its product
line to include higher thrust models of the JT8D series of engines and other
high thrust engines, such as the CFM56 engine. The CFM56 has been in service
since 1982 and an active aftermarket in this engine has begun to emerge. The
installed base of these engines is expected to approximate the size of the
current installed base of the JT8D within the next few years. The Company
acquired two CFM56 engines in 1997. One of these engines has been disassembled
to provide the Company with its initial inventory of CFM56 engine parts. The
other engine was sold as a whole engine. The Company also plans to increase its
availability of airframe components as it continues to acquire surplus aircraft
for disassembly and additional supply of engine inventory.
INCREASE SALES TO AIRCRAFT OPERATORS BY PROVIDING VALUE-ADDED SERVICES.
The Company believes that aircraft operators' increased demand for full service
creates considerable opportunities for larger, well-capitalized aftermarket
suppliers. The Company intends to take advantage of this trend and differentiate
itself from other aftermarket suppliers by providing a full range of products
and services, including an expanded range of engine field services, such as
borescoping and hushkit installations, a full range of on-wing maintenance
services, engine and aircraft leasing programs and engine management services.
PURSUE STRATEGIC ACQUISITIONS. The Company's facilities, management
information systems and management structure have been designed to support
future growth and to enable the Company to benefit from the trend towards
industry consolidation. The Company may selectively acquire companies that
complement its existing business.
PRODUCTS
The Company's product line includes Engines and Components for all
models of the JT8D series and airframe components for DC-9 and Boeing 707 and
727 aircraft. Although production of most models of the JT8D ceased in 1987, the
JT8D engine continues to power approximately 40% of the world's commercial
aircraft. Since there currently is no cost-effective replacement for the JT8D
engine with which to power existing narrow-body aircraft, operators continue to
maintain their older engines. The Company believes that there will be continuing
demand for JT8D products. The Company has recently expanded its product line to
include Engines and Components for higher thrust engines, such as the CFM56
manufactured by CFM International, which are owned by approximately 210
companies worldwide. The Company acquired two CFM56 engines in 1997. One of
these engines has been disassembled to provide the Company with its initial
inventory of CFM56 engine parts. The other engine was sold as a whole engine.
The following chart indicates the Company's estimate of the number of JT8D and
CFM56 engines currently in service, as well as the principal types of aircraft
utilizing such engines.
<TABLE>
NUMBER
ENGINE TYPE IN SERVICE AIRCRAFT APPLICATION
- ----------- --------------- ----------------------------------------
<S> <C> <C>
Pratt & Whitney
JT8D-7-17............................. 10,300 DC-9, B727, B737
-200.................................. 2,700 B727, MD-80
CFM International
CFM56-3, -5........................... 7,700 B737, A319, A320, A321, A340
</TABLE>
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Engines and Components are classified within the industry as "factory
new", "new surplus", "overhauled", "serviceable" and "as removed". A new engine
or part is one that has never been installed. Factory new Engines or Components
are purchased from manufacturers or their authorized distributors. New surplus
parts are purchased from excess stock of airlines, repair facilities or other
suppliers. An overhauled Engine or Component is one which has been completely
disassembled, inspected, repaired, reassembled and tested by an FAA-licensed
repair facility. An Engine or Component is classified as serviceable if it is
repaired by an FAA-licensed repair facility rather than being completely
disassembled and overhauled. An Engine or Component may also be classified as
serviceable if it is removed by the operator while operating under an approved
maintenance program, is functional and meets the manufacturer's time and cycle
restrictions applicable to the part. A new, overhauled or serviceable
designation indicates that the engine or part can be immediately placed in
service on an aircraft. An Engine or Component in "as removed" condition
requires functional testing, repair or overhaul by an FAA-licensed repair
facility prior to being returned to service in an aircraft and is classified as
"non-serviceable."
ENGINE PARTS. The Company's inventory of engine parts consists
primarily of parts for the JT8D series of engines and includes a broad selection
of over 4,000 items. The Company obtains most of its components by purchasing
and disassembling engines. The Company prices individual components based upon
their classification, condition and general level of availability in the
aftermarket. Greater than 80% of the Company's engine parts inventory is
purchased in "as removed" condition and therefore requires inspection and
possible overhaul by FAA-licensed repair facilities prior to installation.
FAA-licensed repair facilities specialize in different inspection and overhaul
procedures and the Company has an approved vendor list consisting of over 50
FAA-licensed repair facilities.
The Company has designed and equipped a disassembly facility for JT8D
engines, with flexibility to accommodate substantial growth in volume and
expansion into other types of aircraft engines, and hired personnel to conduct
engine disassembly operations. As a result, the Company has significantly
improved aircraft engine disassembly turnaround time.
WHOLE ENGINES. The Company purchases either serviceable engines for
immediate resale or non-serviceable engines that are repaired and/or overhauled
for the Company by FAA-licensed repair facilities and then resold. In certain
cases, the Company specifies the workscope of repair based on the specifications
of its customers. The Company uses engine parts from its inventory to minimize
the repair costs to benefit its customers. Prices for engines depend on the
level of thrust, availability of the engine type at time of sale and the buyer's
circumstances. In the event that an aircraft requires a replacement engine, a
customer may be willing to pay a premium for a serviceable engine which can be
delivered immediately.
AIRFRAME COMPONENTS. The Company provides a full range of DC-9 rotable
airframe components which it acquires through the purchase of whole DC-9
aircraft. A rotable is a component which is removed periodically as mandated by
an operator's maintenance procedure or on an "as needed" basis and is typically
repaired or overhauled and reused an indefinite number of times. Sales of
rotable airframe components include avionics equipment (for example, fuel and
altitude indicators) and actuators (for example, devices that perform certain
mechanical functions). The Company expects to increase its inventory of airframe
components as part of its growth strategy.
SERVICES
FIELD SERVICES. The Company offers engine borescoping services, a
diagnostic procedure utilizing a video camera attached to the end of a thin tube
which is inserted into engine sections to analyze the condition of an engine
without disassembly. The service is performed by a Company technician certified
by the OEM. The Company also utilizes its borescoping capabilities to evaluate
substantially all engines which the Company has the opportunity to purchase. In
February 1997, the Company, through AAFS, its newly-formed subsidiary, entered
into a 40-month lease of approximately 5,300 square feet in Dallas, Texas, from
which it began to conduct expanded borescope, repair and other service
operations. AAFS has received FAA certification to perform a broad range of
on-wing maintenance services, including the installation of hush-kits on JT8D
engines and the repair and replacement of a limited number of engine parts and
components. In March 1997, AAFS entered into a licensing
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agreement with Pratt & Whitney pursuant to which Pratt & Whitney has designated
AAFS as an approved source of borescope, repair and certain on-wing maintenance
services for Pratt & Whitney engines (the "Pratt & Whitney Field Services
Agreement"). See " -- Relationship with Pratt & Whitney." In August 1997, AAFS
entered into an agreement with Southwest Airlines Co. whereby AAFS was engaged
on an exclusive basis to install hushkits on its Pratt & Whitney JT8D-9A
engines. As of March 1998, the Company has 11 employees with an average of 21
years of industry experience performing these activities.
ENGINE MANAGEMENT SERVICES. In 1998, the Company began offering engine
management services to its customers. Services provided by the Company includes
arranging for volume discounts and competitive bids for third party services,
preparing workscopes for the repair of engines, monitoring engines through the
entire repair process, providing cost-effective replacement parts, and auditing
repair invoices. By offering engine management services, the Company is able to
leverage the expertise it has developed in managing the repair of engines which
it has acquired.
ENGINE AND AIRCRAFT LEASING SERVICES. In May 1997, the Company began to
offer operating leases of aircraft engines. In February 1998, the Company began
to offer operating leases of aircraft to airlines. The Company intends to
capitalize on the increasing demand by aircraft operators for operating leases
which are being used as an alternative to traditional aircraft and aircraft
engine financing arrangements. By entering into such leases, the Company will be
better able to control its future supply of engines and aircraft and retain the
potential benefit of the residual value of such engines and aircraft.
QUALITY ASSURANCE
The Company adheres to stringent quality control standards and
procedures in the purchase and sale of its products. In November 1996, the
Airline Suppliers Association, an FAA-recognized independent quality assurance
organization, accredited the Company as an aftermarket supplier after the
completion of an extensive operational audit and numerous meetings with the
Company's management. The Company was the first aftermarket supplier to receive
such accreditation, and the Company believes that there are currently fewer than
25 accredited aftermarket suppliers who directly compete with the Company.
Because aircraft operators require a readily available and identifiable
source of inventory meeting regulatory requirements, the Company has implemented
a total quality assurance program. This program consists of numerous quality
procedures, including the following:
o Inspection procedures mandating that procured Engines and
Components be traceable to a source approved by the Company
o Detailed inspections of overhauled Engines and Components
o Training and supervision of personnel to properly carry out
the total quality assurance program
o On-going quality review board meetings to oversee the total
quality assurance program
In addition, as part of its total quality assurance program, the
Company has implemented a repair facility performance monitoring program which
requires each FAA-licensed repair facility used by the Company to perform a
self-audit of its operations on a regular basis and to submit to a facility
audit performed by an independent quality assurance organization retained by the
Company.
PURCHASING
The Company's business is substantially dependent on its purchasing
activities because its net sales are directly influenced by the level of
inventory available for sale. Accordingly, senior management of the Company
takes a significant role in identifying, negotiating and acquiring surplus
aircraft and Engines and Components. Because the size of the Company's inventory
is critical to its results of operations and because there is no organized
market to procure surplus inventory, the Company's operations are materially
dependent on the success
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of management in identifying potential sources of inventory and effecting timely
purchases at acceptable prices. In order to acquire inventory effectively, the
Company's purchasing procedures include:
o Deploying field personnel to identify potentially available
surplus aircraft and Engines and Components
o Appointing representatives domestically and abroad to identify
purchase opportunities
o Purchasing for cash rather than seeking extended payment terms
o Maintaining a streamlined review process in order to make
timely offers
o Involving senior management in negotiating and closing
purchases
The Company historically acquired its inventories of Engines and Components
primarily through the purchase of surplus aircraft and engines and engine parts
inventories and acquired its airframe component inventory on a consignment
basis. The Company's experience is that, while consignments are a means to
obtain inventory with a minimum commitment of capital, outright purchases
generally result in higher gross margins on sales of such inventory.
Accordingly, the Company is seeking to increase its outright purchase of
airframe components to supplement its consignment inventory. "Bulk" purchase
opportunities often arise when airlines, in order to reduce expenses or change
fleet, sell large amounts of inventory in a single transaction. The Company has
completed three large bulk inventory purchases since 1992 and intends to pursue
additional bulk inventory purchase opportunities if and as they become
available.
SALES AND MARKETING
The majority of the Company's day-to-day sales are accomplished through
its sales force, which currently consists of 14 employees, supplemented by eight
consultants and representatives worldwide for attracting and maintaining
relationships with customers. The Company is a member of various trade and
business organizations which provides appropriate industry exposure.
The Company advertises its available inventories held for sale on the
Inventory Locator System "ILS," an aviation parts information network which
enables approximately 2,300 buyers, including major airlines and repair
facilities, to access the Company's inventory. The Company is able to market all
available Engines and Components through the ILS and customers can locate the
Company's inventory noting quantities, part numbers, and condition. Customers
may request quotes for any specific part through direct electronic interface
with the Company. Pricing information is not available on the ILS and the
Company bases its pricing for particular parts on its extensive industry
knowledge.
RELATIONSHIP WITH PRATT & WHITNEY
In connection with the Pratt & Whitney Field Services Agreement, AAFS
is recognized by Pratt & Whitney as an approved source of borescope, repair and
certain on-wing maintenance services for Pratt & Whitney engines. The Company
believes that AAFS was selected by Pratt & Whitney primarily because of the
significant industry experience of AAFS' employees in performing these field
services. Pratt & Whitney has agreed to list AAFS in engine manuals as an
approved source of such field services, direct inquiries for such field services
to AAFS and provide on going qualification training to AAFS' employees. In
return, Pratt & Whitney is entitled to a fee based on AAFS' revenues related to
such field services. The Pratt & Whitney Field Services Agreement expires
December 1999. As of March 1998, the Company was one of only three companies
worldwide recognized by Pratt & Whitney as an approved source of these field
services.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems include a customized
inventory information technology system which is fully integrated with the
Company's accounting system and assists management in planning, operating and
controlling its business activities.
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The information system contains the most current information regarding
each item in the Company's inventory. By accessing the information system, the
Company can document: (i) full traceability to the FAA-approved point of origin
for any part (whether to the OEM, an approved agent of the OEM or an
FAA-licensed repair facility); (ii) the aircraft or engine from which the part
originated; (iii) the availability and condition of parts in the Company's
inventory and, if at an FAA-licensed repair facility, when such parts are due to
be returned; (iv) the sales history regarding the type of parts sold to the
Company's customers (including dates and sales prices); (v) the status of
customer orders; and (vi) any relevant purchase commitments. The information
system also provides time and usage cycles for life-limited parts.
The information system has an automatic interface that transfers sales
and customer accounts receivable transactions to the primary accounting records
and subsidiary ledger. Purchase and sales commitment data, real-time inventory
levels, recording of inventory movements and current assessment of supply and
demand for various parts are the subject of daily reports to management.
The Company recently completed an upgrade which increased the capacity
of its management information system to accommodate higher inventory levels and
additional users. The Company is in the process of upgrading its management
information system to include a state-of-the-art document scanning system,
thereby allowing for improved accuracy and faster retrieval of inventory
traceability documents that must accompany all sales for regulatory compliance.
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.
REGULATION
The aviation industry is highly regulated in the United States by the
FAA and in other countries by similar regulatory agencies. These regulations are
designed to insure that all aircraft and aviation equipment are continuously
maintained in proper condition for the safe operation of aircraft. While the
Company's principal operations are not currently regulated directly by the FAA,
the independent facilities that repair and overhaul the Company's products and
the aircraft operators that ultimately utilize the Company's products are
subject to extensive regulation. Accordingly, the Company must consider the
regulatory requirements of its customers and provide them with Engines and
Components that comply with airworthiness standards established by the FAA and
the OEMs, together with required documentation which enables these customers to
comply with other applicable regulatory requirements. The inspection,
maintenance and repair procedures for the various types of aircraft and aviation
equipment are prescribed by regulatory authorities and can be performed only by
FAA-licensed repair facilities utilizing certified technicians. Compliance with
the applicable FAA and OEM standards are required prior to installation of a
part on an aircraft. The Company only utilizes FAA-licensed repair facilities to
repair and certify aircraft engines and parts. The Company has recently expanded
the range of services that it offers to include on-wing engine maintenance
consisting of the installation of hush-kits on JT8D engines and the repair and
replacement of a limited number of engine parts and components that required
AAFS to obtain FAA certification, which it obtained in April 1997.
In June 1996, the FAA articulated a series of changes in the FAA's
inspection policies to enhance its oversight of aircraft operators that rely on
third-party maintenance. The effect on the Company of such changes to the FAA's
inspection policies may be to reduce the number of third-party maintenance
providers that provide services to the Company. To date, the Company's
operations have not been materially adversely effected as a result of such
regulations.
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In September 1996, the FAA issued an advisory circular to support the
implementation of a voluntary accreditation program for civil aircraft parts
suppliers. This accreditation program establishes quality standards applicable
to aftermarket suppliers, such as the Company, and designates FAA approved
organizations to perform quality assurance audits for initial accreditation of
aftermarket suppliers. Quality assurance audits are required on an on-going
basis to maintain accreditation. In November 1996, the Airline Suppliers
Association, an FAA-recognized independent quality assurance organization,
accredited the Company as an aftermarket supplier after the completion of an
extensive facilities audit and numerous meetings with the Company's management.
The Company was the first aftermarket supplier to receive such quality
accreditation, and the Company believes that there are currently fewer than 25
accredited aftermarket suppliers who compete directly with AVTEAM. The FAA
considers that obtaining civil aircraft parts through accredited suppliers is a
sound safety practice. Parts procured from an accredited supplier convey
assurance to the purchaser that the quality is as stated and the appropriate
documentation is on a file at the supplier's place of business. Furthermore,
accreditation provides assurance that the supplier has implemented an
appropriate quality assurance system and has demonstrated the ability to
maintain that system. The Company believes that ongoing quality assurance audits
and strict adherence to its quality assurance system is essential to meeting the
needs of its existing and future customers.
Because the Company's sales consist largely of older series JT8D
engines and parts, regulations promulgated by the FAA governing noise emission
standards for older aircraft and the FAA's Aging Airplane Program Plan (the
"Aging Airplane Program") have a material impact on the market for the Company's
products. Substantially all of the aircraft powered by the JT8D engine must
install hush-kits pursuant to such noise emission standards or be phased out of
operation in the United States by December 31, 1999 and in the European Union by
April 1, 2002. The Aging Airplane Program requires aircraft operators to perform
structural modifications and inspections to address airframe fatigue and to
implement corrosion prevention and control programs, which increase the
operating and maintenance costs of JT8D-powered aircraft. Furthermore, the EPA
and the various agencies of the European Union have sought the adoption of
stricter standards limiting the emission of nitrous oxide from aircraft engines.
The Company believes that notwithstanding the substantial costs imposed by noise
emission standards and the Aging Airplane Program on older aircraft powered by
JT8D engines, estimated by the Company to average approximately $4 million per
aircraft, certain aircraft operators will continue to utilize older aircraft due
to the substantially greater cost of acquiring new replacement aircraft.
The core operations of the Company may in the future be subject to FAA
or other regulatory requirements. The Company closely monitors the FAA and
industry trade groups in an attempt to understand how possible future
regulations might impact the Company.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal
injury or death which may result from the failure of an aircraft spare part sold
by it. While the Company maintains what it believes to be adequate liability
insurance to protect it from such claims, and while no material claims have, to
date, been made against the Company, no assurance can be given that claims will
not arise in the future or that such insurance coverage will be adequate.
Additionally, there can be no assurance that insurance coverages can be
maintained in the future at an acceptable cost. Any such liability not covered
by insurance could have a material adverse effect on the financial condition of
the Company.
CUSTOMERS
The Company sells its products and provides its services primarily to
other aftermarket suppliers of Engines and Components, repair facilities, OEMs,
aircraft operators and others. While the Company sold Engines and Components to
over 600 different customers during 1997, sales of products and services to the
Company's five largest customers accounted for 47%, 44% and 52% of the Company's
net sales during 1997, 1996 and 1995, respectively. One customer, United
Airlines, Inc., accounted for 19% of the Company's 1997 net sales. Another
customer, Aerothrust Corporation, accounted for 12% of the Company's 1997 net
sales. A small number of customers may account for a significant portion of the
Company's revenues from period to period due to the
9
<PAGE> 11
substantial cost of acquiring aircraft engines and certain parts and a
significant portion of the Company's sales are expected to continue to be
concentrated in a small number of customers.
COMPETITION
The aftermarket for Engines and Components is highly fragmented, with a
limited number of well-capitalized companies selling a broad range of products;
and numerous smaller competitors serving distinct market niches and is
characterized by intense competition. The Company believes that range and depth
of inventories, full product traceability, product knowledge, quality, service
and price are the key factors in distinguishing the Company from other
aftermarket suppliers. Certain of the Company's competitors have substantially
greater financial, marketing and other resources than the Company. In addition,
OEMs, aircraft maintenance providers, leasing companies and FAA-licensed repair
facilities may vertically integrate into the supply industry, thereby
significantly increasing competition. There are established competitors that
provide many of the services the Company intends to offer, many of whom have
substantially greater financial, marketing and other resources than the Company.
BACKLOG
The Company's backlog of unfilled orders at March 1, 1998 was
approximately $6.2 million. A substantial portion of the Company's backlog is
typically scheduled for delivery within 60 days. Moreover, variations in the
size and delivery dates of orders received by the Company, as well as changes in
customers' delivery requirements, may result in substantial backlog fluctuations
from period to period. Accordingly, the Company believes that backlog cannot be
considered a meaningful indicator of future financial results.
ENVIRONMENTAL MATTERS
The Company has registered its aircraft engine disassembly facility in
Miramar, Florida with the U.S. Environmental Protection Agency (the "EPA") and
the State of Florida Department of Environmental Protection as a potential small
quantity generator of hazardous materials. During the disassembly of used
aircraft engines, residual oil is removed from aircraft engines and engine parts
are cleaned with a mineral spirits based solvent, resulting in the generation of
certain waste materials which require disposal. An EPA approved laboratory has
reviewed the Company's cleaning operations and determined that the cleaning
solvent and the waste materials generated during the cleaning operations are
non-hazardous substances. The Company is therefore not required to obtain
permits for the generation, handling, storage, transportation or disposal of the
cleaning solvent or the waste materials. The Company believes it is in material
compliance with applicable environmental laws and regulations.
INSURANCE
The Company is a named insured under various policies which include the
following coverage: (i) products liability; (ii) personal property, inventory
and business income at the Company's two principal facilities; (iii) commercial
general; (iv) hangarkeepers' liability (damages due to loss of aircraft
occurring while such aircraft is in the care, custody or control of the Company
for safekeeping, storage or repair); (v) employee benefit liability; (vi)
international commercial liability (including contractual liability) for bodily
injury or property damage; (vii) umbrella liability; (viii) directors' and
officers' liability coverage; and (ix) employment practices' liability coverage.
The Company believes that the extent of these coverages are consistent with
industry standards and adequate to insure against the various liability risks of
its business.
EMPLOYEES
As of March 1, 1998, the Company had 65 full-time employees. None of
its employees are represented by a union. The Company has not experienced any
labor-related work stoppages and considers its relations with employees to be
good.
10
<PAGE> 12
ITEM 2. PROPERTIES.
The Company's corporate headquarters occupy a facility containing
office, warehouse and other operational space in Miramar, Florida, with an
aggregate of 96,000 square feet under a lease with an initial term expiring on
December 31, 2002, which may be extended at the Company's option until December
31, 2007. The Company's engine disassembly operation is located at another
facility in the same office park containing 18,500 square feet of office and
warehouse space with an initial term expiring on December 31, 2000, which may be
extended at the Company's option until July 31, 2005. Monthly rent of $60,307
and $10,877 is payable under the leases for the Company's headquarters and
disassembly facility, respectively. The Company's facilities are designed to
allow efficient processing, warehousing, and inventory management of
substantially greater volumes than currently handled.
In February 1997, the Company entered into a 40-month lease of
approximately 5,300 square feet in Dallas, Texas, where AAFS conducts its
borescoping and other field service operations. Monthly rent for this facility
is $3,773.
See Note 8 of Notes to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's security
holders during the quarter ended December 31, 1997.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The following information relates to the Class A Common Stock, which
currently is listed on the Stock Market's National Market under the symbol
"AVTM." At March 23, 1998, there were approximately 22 shareholders of record of
the Class A Common Stock. While the foregoing number does not include beneficial
holders of the Class A Common Stock, the company estimates that it has a total
of approximately 900 shareholders. The high and low sales prices of the Class A
Common Stock for each quarter since the effective date of the Offering, October
31, 1997, as reported by the Nasdaq Stock Market, are set forth below:
1997
HIGH LOW
Fourth Quarter $9.00 $8.125
The Company did not declare any cash dividends in 1997. See Note 10 to
the Notes to the Consolidated Financial Statements for information concerning
restrictions in the Company's credit agreements with financial institutions
regarding the payment of dividends and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales ...................................... $ 52,881 $ 31,724 $ 18,299 $ 9,062 $ 3,891
Cost of sales .................................. 38,385 22,641 11,848 6,373 3,489
----------- ----------- ----------- ----------- -----------
Gross profit ................................... 14,496 9,083 6,451 2,689 402
Operating expenses (1) ......................... 7,312 4,312 5,162 1,941 588
----------- ----------- ----------- ----------- -----------
Income (loss) from operations .................. 7,184 4,771 1,289 748 (186)
Offering expenses(2) ........................... -- 1,154 -- -- --
Interest (expense) income, net ................. (991) (757) (191) 6 (14)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item ........................... 6,193 2,860 1,098 754 (200)
Extraordinary item(3) .......................... -- -- -- -- 150
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes ................................. 6,193 2,860 1,098 754 (50)
Provision (credit) for
income taxes(4) .............................. 2,259 (370) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)(4) ........................... 3,934 3,230 1,098 754 (50)
Adjustments for pro forma
(provision) credit for
income taxes (5) ............................. -- (1,538) (417) (286) 18
----------- ----------- ----------- ----------- -----------
Pro forma net income
(historical for 1997) ........................ $ 3,934 $ 1,692 $ 681 $ 468 $ (32)
=========== =========== =========== =========== ===========
Pro forma net income per common share
(historical for 1997)(4) ..................... 0.65 0.34 0.17 0.12
=========== =========== =========== ===========
Weighted average number of common
shares outstanding(6) ........................ 6,073,694 5,000,000 4,000,000 4,000,000
=========== =========== =========== ===========
Pro forma net income per common share -
assuming dilution (historical for 1997) ...... $ 0.52 $ 0.33 $ 0.17 $ 0.12
=========== =========== =========== ===========
Weighted average number of common
equivalent shares outstanding - diluted(6) ... 7,622,194 5,121,096 4,000,000 4,000,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) ........... $47,425 $16,930 $ 2,312 $ 2,433 $ (40)
Inventory .............................. 24,480 14,505 8,563 2,771 3,304
Total assets ........................... 58,954 22,417 13,793 6,439 4,149
Total debt ............................. 4,446 3,048 3,287 350 --
Total shareholders' equity (capital
deficiency) ........................... 58,954 14,993 2,613 2,634 (40)
</TABLE>
- ----------------
(1) From inception and until July 21, 1994, the Company consigned all of its
inventory to Turbine Engine Sales Group, Inc. ("Turbine"), and paid Turbine
compensation equal to one half of the gross profit on consigned materials
sold. The Company had no facilities and limited staffing during this
period. Accordingly, income (loss) from operations prior to 1995 may not
reflect the full level of operating expenses necessary to support the
Company's operations during such periods.
(2) Represents a one-time charge against earnings in the third quarter of 1996
in the approximate amount of $1.2 million for the write-off of the costs
associated with a public offering which was withdrawn in August 1996 due to
market conditions. See Note 4 of Notes to Consolidated Financial
Statements.
(3) Represents gain on the extinguishment of debt to a related party.
(4) The Company was an S corporation for federal and state income tax purposes
for the taxable periods from January 1, 1994 through December 6, 1996. As a
result, the net income of the Company was taxed, for federal and state
income tax purposes, directly to the Company's shareholders rather than to
the Company. See Note 5 of Notes to Consolidated Financial Statements.
(5) Assumes that the Company was subject to federal and state income taxes
during the periods presented (at an effective tax rate of approximately
38%).
(6) See Note 2 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company's net sales and its sales practices have been substantially
affected by the amount of capital available to acquire its inventory of Engines
and Components. In developing its business, the Company has
12
<PAGE> 14
emphasized the rapid sale of whole engines rather than obtaining maximum profit
margins on each particular sale. The Company anticipates that the proceeds of
its recent public offering will enable it to continue to build its inventory to
support increased sales and to sell its inventory on a more strategic basis to
capitalize on the fluctuations in demand for Engines and Components caused by
seasonal and other factors.
In order to enable the Company to sell Engines and Components which it
did not have the capital to acquire, the Company entered into an agreement on
September 5, 1995 with Parati Corporation ("Parati") providing for Parati's
acquisition of new and surplus aircraft engines for disassembly and resale by
the Company (the "Parati Agreement"). The parties acquired Pratt & Whitney
engines under the Parati Agreement. The Parati Agreement provided for an equal
sharing of gross profits between the Company and Parati following the recovery
by Parati of all costs borne by Parati and the recovery by the Company of all
overhaul costs borne by the Company. Accordingly, since such date, the Company's
cost of sales include the portion of the gross profit due Parati from the sale
of engine parts of disassembled aircraft engines subject to the Parati
Agreement. Net sales under the Parati Agreement were approximately $224,000,
approximately $1.9 million and approximately $495,000 in 1995, 1996 and 1997,
respectively. The cost of the engines acquired by Parati under the Parati
Agreement was approximately $1.7 million. The Company and Parati terminated the
Parati Agreement on August 21, 1997 and the Company does not intend to utilize
similar agreements to acquire Engines or Components in the future.
The Company records whole engines held for resale at the lower of cost
or market. Gross margin on whole engine sales has fluctuated significantly from
period to period, and can be expected to do so in the future, as a result of the
conditions and circumstances under which whole engines are sold. For example,
the Company may opportunistically sell whole engines at margins lower than those
realized by the Company on its component sales to capitalize on market demand or
to broaden its customer base.
Engine parts and airframe components acquired by the Company are
initially recorded at cost. Cost of sales relative to engine parts and airframe
components shipped are recorded during an initial period following disassembly
of the related whole engine or aircraft at the Company's historical ratio of
cost of sales to net sales for engine parts from such engine types or at the
Company's estimated ratio of cost of sales to net sales for airframe components.
Thereafter, management evaluates the remaining engine parts and airframe
components, estimates future sales and related overhaul costs and, if necessary,
adjusts the ratio of costs of sales to net sales on a prospective basis.
Thereafter, the Company records the cost of each engine part and airframe
component sold at the time the related net sales are recognized, based on such
ratios.
The Company has recently expanded its product line to include higher
thrust models of the JT8D series of engines and other high thrust engines, such
as the CFM56 engine. These higher thrust engines are more expensive than the
engines historically sold by the Company. As the Company's net sales increase,
the Company expects that related operating expenses will increase at a lower
rate, thereby creating higher operating margins.
On December 6, 1996, the Company amended its employment agreements with
Donald Graw and Jaime Levy. The rate of compensation for each of them was
reduced from the prior level of 20% of adjusted net income as defined in such
agreements (approximately $430,000 and $1.3 million, respectively, for each of
them in 1994 and 1995), to provide for annual base salaries of $260,000 and
$220,000 for Messrs. Graw and Levy, respectively, for an initial term of three
years expiring December 1999. The Company also terminated its status as an S
corporation on this date and became subject to federal and state income taxes.
Historically, the Company did not record a provision for income taxes as a
result of its S corporation status for 1994 and 1995 and recorded a $370,000 net
benefit for income taxes in 1996.
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. The Company
received aggregate net proceeds from the Offering of approximately $25.5
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 Engines and Components for the
Company's inventory and the funding of the acquisition of complementary
businesses. See "Liquidity and Capital Resources."
13
<PAGE> 15
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>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales .................................................. 100% 100% 100%
Cost of sales .............................................. 73 71 65
---- ---- ----
Gross profit ............................................... 27 29 35
Operating expenses ......................................... 13 14 28
---- ---- ----
Income from operations ..................................... 14 15 7
Offering expenses(1) ....................................... -- 4 --
Interest expense, net ...................................... 2 2 1
---- ---- ----
Income before income taxes ................................. 12 9 6
Provision (credit) for income taxes(2) ..................... 4 (1) --
---- ---- ----
Net income(2) .............................................. 8 10 6
Adjustment for pro forma provision for income taxes (3) .... -- (5) (2)
---- ---- ----
Pro forma net income (historical for 1997) ................. 8% 5% 4%
==== ==== ====
</TABLE>
________________
(1) Represents a one-time charge against earnings in the third quarter of
1996 in the approximate amount of $1.2 million for the write-off of the
costs associated with a public offering which was withdrawn in August
1996 due to market conditions. See Note 4 of Notes to Consolidated
Financial Statements.
(2) The Company was an S corporation for federal and state income tax
purposes for the taxable periods from January 1, 1994 through December
6, 1996. As a result, the net income of the Company was taxed, for
federal and state income tax purposes, directly to the Company's
shareholders rather than to the Company. See Note 5 of Notes to
Consolidated Financial Statements.
(3) Assumes that the Company was subject to federal and state income taxes
during 1995 and 1996 (at an effective tax rate of approximately 38%).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased 66.7% to $52.9 million in 1997 from
$31.7 million in 1996. This increase is primarily due to an increase in whole
engine sales of 183.0% over whole engine sales in 1996. In addition, airframe
component sales increased significantly due to higher levels of inventory
resulting from the disassembly of recently purchased whole aircraft.
GROSS PROFIT. Gross profit increased 59.6% to $14.5 million in 1997
from $9.1 million in 1996. Gross margin decreased to 27.4% in 1997 from 28.6% in
1996 principally because of the lower margins achieved through the quick sale of
the Company's first CFM56 engine and the purchase and immediate sale of two
engines as an accommodation to a first tier airline.
OPERATING EXPENSES. Operating expenses increased 69.6% to $7.3 million
in 1997 from $4.3 million in 1996. As a percentage of net sales, such expense
increased to 13.8% in 1997 from 13.6% in 1996. The expense increase is primarily
attributable 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 and start-up costs related to
the Company's new Texas-based field services operation. Officers' compensation
increased to $1.3 million in 1997 from $800,000 in 1996. The increase in amount
reflects the effect of the amendment to the employment agreements of the two
senior executives of the Company, which became effective subsequent to December
6, 1996, the hiring of a Chief Financial Officer in April 1996, the appointment
of an
14
<PAGE> 16
executive officer in the fourth quarter of 1996, and the hiring of a vice
president at the end of the first quarter of 1997.
NET INTEREST EXPENSE. Net interest expense increased 30.9% to $991,000
in 1997 from $757,000 in 1996. As a percentage of net sales, such expense
decreased to 1.9% in 1997 from 2.4% in 1996. The increased interest expense is a
result of higher borrowing levels, prior to the initial public offering in
October 1997, in order to increase the amount of inventory available for sale.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 73.4% to $31.7 million in 1996 from
$18.3 million in 1995. This increase is primarily due to an increase in sales of
engine components related to a substantial increase in available inventory for
sale. In addition, average unit prices of the 17 whole engines sold in 1996
increased to $550,000, compared with $250,000 for the 22 whole engines sold in
1995. This unit price increase was primarily attributable to a change in the
product mix of whole engines to more expensive, higher thrust JT8D engines.
GROSS PROFIT. Gross profit increased 40.8% to $9.1 million in 1996 from
$6.5 million in 1995. Gross margin decreased to 28.6% in 1996 from 35.3% in
1995. The margin decline is attributable to higher margins from the sale of
engines acquired in a bulk purchase by the Company and sold in 1995 and an
increase in sales of certain engine parts subject to gross profit sharing under
the Parati Agreement.
OPERATING EXPENSES. Operating expenses decreased 16.5% to $4.3 million
in 1996 from $5.2 million in 1995. Operating expense declined as a percentage of
net sales to 13.6% in 1996 from 28.2% in 1995. This decrease reflects the effect
of amendments to the employment agreements of Messrs. Graw and Levy on December
6, 1996, and a one-time bonus to Messrs. Graw and Levy in the amount of $1.2
million in 1995. Offsetting the decline in officers' compensation expense were
increases in other compensation resulting from recent additions to staff,
facility expenses resulting from the May 1995 relocation to the company's
current facility and the equipping of the disassembly facility during the first
quarter of 1996. See Note 11 of Notes to Consolidated Financial Statements.
NET INTEREST EXPENSE. Net interest expense increased to $757,000 in
1996 from $191,000 in 1995. Such expense increased as a percentage of net sales
to 2.4% in 1996 from 1.0% in 1995. The increase is a result of the Company's
increased borrowing to support the purchase of substantially more 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 and sales under the Parati Agreement. Net cash
provided by financing activities, derived primarily from the sale of common
stock in 1997 was $29.7 million, from the sale of preferred stock in 1996 was
$7.0 million and from bank lines of credit and advance from shareholders in 1995
was $2.3 million. The Company also obtained airframe components on consignment
and may enter into other consignment arrangements in the future. 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 provide working capital for the purchase
of additional aircraft engines.
On February 20, 1997, the Company obtained from NationsBank a Credit
Facility which provides working capital of up to $20.0 million with interest at
either the lender's prime rate or LIBOR plus 2.75% per annum, as determined by
the Company at the time of each advance, subject to an availability calculation
based on the eligible borrowing base. The eligible borrowing base includes
certain receivables and inventories of the Company. The Credit Facility also
permits NationsBank to issue letters of credit on behalf of the Company of up to
$5.0 million, and the aggregate principal amount of any letters of credit so
issued will reduce amounts available under the Credit Facility. The Credit
Facility matures in May 1998 and the term of any letters of credit issued
thereunder must expire prior to May 1999. At March 1, 1998, the Company was
obligated under a letter of credit in the amount of approximately $132,000 and
had additional availability of approximately $16.2 million under the Credit
Facility. The Company is in the process of establishing a new credit facility
with NationsBank to replace its existing credit facility.
15
<PAGE> 17
On December 6, 1996, the Company issued and sold 1,480,000 shares of
Class A Preferred Stock and 220,000 shares of Class B Preferred Stock to The
Clipper Group for an aggregate purchase price of $11.9 million. The net proceeds
of this sale were applied toward the payment of certain distributions to the
Company's shareholders in respect of earnings by the Company prior to the change
in its status from an S corporation to a C corporation for federal and state
income tax purposes, the repayment of advances to the Company from Messrs.
Sragowicz and Preston, the repayment of loans from Barnett Bank of South
Florida, N.A. to the Company, accrued bonuses payable to Messrs. Graw and Levy
and the purchase by the Company of surplus aircraft and Engines and Components.
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.
The Company, at its option, may repurchase any of these engines at a
predetermined percentage of the original leased amount beginning in July 1998.
The engines subject to this agreement are currently on lease by the Company to
third parties. Payments under such leases provide sufficient cash flow to exceed
the Company's payments to NBLC. 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, with the proceeds being used to reduce the
outstanding balance of its credit facility with NationsBank. See Note 15 of
Notes to Consolidated Financial Statements.
Also, on August 21, 1997, the Company issued and sold 327,772 shares of
Class A Common Stock to Mr. 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 the Parati Agreement
valued at $270,648. See Note 8 of Notes to Consolidated Financial Statements.
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. 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 Engines and Components for the
Company's inventory.
The Company has established a capital expenditure budget of
approximately $1.0 million during 1998, including approximately $100,000 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 $200,000 for
additional leasehold improvements related to planned increases in personnel,
approximately $100,000 for additional equipment to be utilized by the Company's
field service subsidiary 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 Engines and 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,
16
<PAGE> 18
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this Annual Report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is hereby incorporated by reference
from the Registrant's 1998 Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed with the SEC on or before April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference
from the Registrant's 1998 Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed with the SEC on or before April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference
from the Registrant's 1998 Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed with the SEC on or before April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference
from the Registrant's 1998 Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed with the SEC on or before April 30, 1998.
17
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The balance sheets as of December 31, 1996 and December 31, 1997 and the
related statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997 are filed as part
of this report.
(1) Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1995, 1996 and 1997
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT (1)
------ -----------
<S> <C>
3.1 Third Amended and Restated Articles of Incorporation of Registrant
3.2 Second Amended and Restated By-Laws of Registrant
10.1 Loan Agreement dated February 19, 1997 between Registrant and
NationsBank, N.A. (South)
10.2 Surplus Parts Supply Agreement dated June 12, 1995 between Registrant
and United Technologies Corporation (confidential treatment of certain
portions of Exhibit 10.02 has been granted by the Commission)
10.3 Letter Agreement dated September 5, 1995 between Registrant and
Parati Corporation
10.4 Amended and Restated Employment Agreement dated December 6, 1996
between Registrant and Donald A. Graw
10.5 Amended and Restated Employment Agreement dated December 6, 1996
between Registrant and Jaime J. Levy
10.6 AVTEAM Tax Allocation and Indemnification Agreement dated December 5,
1996 between Registrant and Donald A. Graw
10.7 Lease Agreement dated December 28, 1994 between Registrant and
Sunbeam Properties, Inc.
10.8 Lease Agreement dated November 13, 1995 between Registrant and
Sunbeam Properties, Inc.
10.9 Indemnification Agreement between Registrant and Donald A. Graw effective
as of April 12, 1996
10.10 Indemnification Agreement between Registrant and Jaime J. Levy effective as
of April 12, 1996
10.11 Indemnification Agreement between Registrant and Mark S. Koondel effective
as of April 12, 1996
10.12 Indemnification Agreement between Registrant and Leon Sragowicz effective as
of April 12, 1996
10.13 Indemnification Agreement between Registrant and Robert Munson effective as
of April 12, 1996
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C>
10.14 Indemnification Agreement between Registrant and Richard Preston effective as
of April 12, 1996
10.15 Indemnification Agreement between Registrant and Dallas Cobb effective as of
March 20, 1997
10.16 Indemnification Agreement between Registrant and Bryan Thomas McFarland
effective as of March 20, 1997
10.18 AVTEAM, Inc. 1996 Stock Option Plan
10.19 AVTEAM, Inc. Key Executive Annual Incentive Plan
10.20 Stock Purchase Agreement dated December 6, 1996 between Registrant and
The Clipper Group
10.21 Registration Rights Agreement dated December 6, 1996 between Registrant and
The Clipper Group
10.22 AVTEAM Tax Allocation and Indemnification Agreement dated
December 5, 1996 between Registrant and Leon Sragowicz
10.23 AVTEAM Tax Allocation and Indemnification Agreement dated
December 5, 1996 between Registrant and Richard Preston
10.24 AVTEAM Tax Allocation and Indemnification Agreement dated
December 5, 1996 between Registrant and Jaime J. Levy
10.25 Lease Modification Agreement dated August 28, 1997 between
Registrant and Sunbeam Properties, Inc.
10.26 Agreement for Purchase of Additional Securities dated August 21,
1997 between Registrant and The Clipper Group
10.27 Agreement dated August 21, 1997 between Registrant, Parati Corporation
and Leon Sragowicz
10.28 Indemnification Agreement between Registrant and Paula Sparks
10.29 Underwriting Agreement dated October 31, 1997 among Registrant,
Credit Suisse First Boston Corporation, SBC Warburg
Dillon Read, Inc., Leon Sragowicz and Sragowicz
Foundation, Inc.
21.1 List of Subsidiaries of Registrant
27.1 Financial Data Schedule for the year ended December 31, 1997
</TABLE>
------------------
(1) All of the exhibits except exhibits 10.29, 21.1 and 27.1 were previously
filed as exhibits to Registrant's Registration Statement on Form S-1 (File
No. 333-23829), filed with the Securities and Exchange Commission on March
24, 1997 and are incorporated herein by reference. Exhibits 10.29, 21.1 and
27.1 are being filed with this report.
19
<PAGE> 21
AVTEAM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants............................................ F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Income............................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity.................................... F-5
Consolidated Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
AVTEAM, Inc.
We have audited the accompanying consolidated balance sheets of AVTEAM,
Inc. and Subsidiary (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 consolidated financial position of
AVTEAM, Inc. and Subsidiary at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 16, 1998
F-2
<PAGE> 23
AVTEAM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $18,676 --
Trade accounts receivable, less allowance for doubtful accounts of $274 and $189,
and allowance for sales returns of $428 and $211, in 1997 and 1996, respectively .............. 5,751 5,030
Inventory ..................................................................................... 24,480 14,505
Prepaid expenses .............................................................................. 1,153 219
Deposits ...................................................................................... 432 1,250
Due from affiliate ............................................................................ -- 343
Deferred tax asset ............................................................................ 80 432
------- -------
Total current assets ............................................................................ 50,572 21,779
Revenue producing equipment, net ................................................................ 6,935 --
Property and equipment, net ..................................................................... 938 502
Other assets .................................................................................... 509 136
------- -------
Total assets ........................................................................... $58,954 $22,417
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank ......................................................................... $ -- $ 404
Accounts payable .............................................................................. 706 2,540
Accrued expenses .............................................................................. 1,654 1,034
Customer deposit .............................................................................. 344 510
Current portion of notes payable-lease financing .............................................. 328 --
Current portion of capital lease obligations .................................................. 115 69
Due to shareholders and affiliates ............................................................ -- 292
------- -------
Total current liabilities .............................................................. 3,147 4,849
Capital lease obligations, net of current portion ............................................... 186 62
Notes payable - lease financing ................................................................. 3,817 --
Notes payable - shareholders .................................................................... -- 2,513
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized, no shares
issued or outstanding in 1997, 1,974,642 shares of Class A Preferred Stock
and 439,644 shares of Class B Preferred Stock issued and outstanding in 1996 ................ -- 17
Class A Common Stock, $.01 par value, 77,000,000 shares authorized, 10,665,739
shares issued and outstanding in 1997, 5,000,000 shares issued and outstanding in 1996 ...... 107 50
Class B Common Stock, $.01 par value, 3,000,000 shares authorized, 439,644 shares
issued and outstanding in 1997, no shares issued and outstanding in 1996 .................... 4 --
Additional paid-in capital .................................................................... 47,444 14,611
Retained earnings ............................................................................. 4,249 315
------ ------
Total shareholders' equity ............................................................. 51,804 14,993
------- -------
Total liabilities and shareholders' equity ............................................. $58,954 $22,417
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
AVTEAM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................................. $ 52,881 $ 31,724 $ 18,299
Cost of sales ......................................... 38,385 22,641 11,848
----------- ----------- -----------
Gross profit ..................................... 14,496 9,083 6,451
Operating expenses .................................... 7,312 4,312 5,162
----------- ----------- -----------
Income from operations ................................ 7,184 4,771 1,289
----------- ----------- -----------
Offering expenses ..................................... -- 1,154 --
Interest expense, net ................................. 991 757 191
----------- ----------- -----------
Income before provision (credit) for income taxes ..... 6,193 2,860 1,098
Provision (credit) for income taxes:
Current .......................................... 1,907 62 --
Deferred ......................................... 352 (432) --
----------- ----------- -----------
2,259 (370) --
----------- ----------- -----------
Net income ............................................ 3,934 3,230 1,098
Adjustments for pro forma provision for income
taxes ............................................ -- (1,538) (417)
----------- ----------- -----------
Pro forma net income (historical for 1997) ............ $ 3,934 $ 1,692 $ 681
=========== =========== ===========
Pro forma net income per common share - basic
(historical for 1997) ........................... $ 0.65 $ 0.34 $ 0.17
=========== =========== ===========
Weighted average number of common shares
outstanding - basic .............................. 6,073,694 5,000,000 4,000,000
=========== =========== ===========
Pro forma net income per common share - diluted
(historical for 1997) ........................... $ 0.52 $ 0.33 $ 0.17
=========== =========== ===========
Weighted average number of common equivalent
shares outstanding - diluted .................... 7,622,194 5,121,096 4,000,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
AVTEAM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED CLASS A COMMON CLASS B COMMON
PREFERRED STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .. -- $ -- 4,000,000 $ 40 -- $ --
Class A Common Stock
issued in connection
with stock option plan ... -- -- 1,000,000 10 -- --
Net income .................. -- -- -- -- -- --
Distributions ............... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 .. -- -- 5,000,000 50 -- --
Issuance of Preferred
Stock, net of issuance
costs of $543 .............. 1,700,000 17 -- -- -- --
Cash received for notes
receivables from officers .. -- -- -- -- -- --
Net income .................. -- -- -- -- -- --
Distributions ............... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 .. 1,700,000 17 5,000,000 50 -- --
Issuance of Preferred
Stock ..................... 714,286 7 -- -- -- --
Issuance of Class A
Common Stock for loans and
inventory ................. -- -- 327,772 3 -- --
Issuance of Class A Common
Stock, net of issuance
costs of $987 .............. -- -- 3,363,325 34 -- --
Conversion of Preferred
Stock to Class A and Class B -- -- --
Common Stock ........... (2,414,286) (24) 1,974,642 20 439,644 4
Net income .................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .. -- $ -- 10,665,739 $ 107 439,644 $ 4
========== ========== ========== ========== ========== ==========
<CAPTION>
NOTES
ADDITIONAL RECEIVABLES
PAID-IN RETAINED FROM
CAPITAL EARNINGS OFFICERS TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 .. $ 2,594 $ -- $ -- $ 2,634
Class A Common Stock
issued in connection
with stock option plan ... 1,609 -- (708) 911
Net income .................. -- 1,098 -- 1,098
Distributions ............... (932) (1,098) -- (2,030)
---------- ---------- ---------- ----------
Balance at December 31, 1995 .. 3,271 -- (708) 2,613
Issuance of Preferred
Stock, net of issuance
costs of $543 .............. 11,340 -- -- 11,357
Cash received for notes
receivables from officers .. -- -- 708 708
Net income .................. -- 3,230 -- 3,230
Distributions ............... -- (2,915) -- (2,915)
---------- ---------- ---------- ----------
Balance at December 31, 1996 .. 14,611 315 -- 14,993
Issuance of Preferred
Stock ..................... 4,993 -- -- 5,000
Issuance of Class A
Common Stock for loans and
inventory ................. 2,291 -- -- 2,294
Issuance of Class A Common
Stock, net of issuance
costs of $987 .............. 25,549 -- -- 25,583
Conversion of Preferred
Stock to Class A and Class B
Common Stock ........... -- -- -- --
Net income .................. -- 3,934 -- 3,934
---------- ---------- ---------- ----------
Balance at December 31, 1997 .. $ 47,444 $ 4,249 $ -- $ 51,804
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 26
AVTEAM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................... $ 3,934 $ 3,230 $ 1,098
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ............................ 562 158 101
Bad debt expense ......................................... 136 88 145
Deferred tax provision (credit) .......................... 352 (432) --
Changes in operating assets and liabilities:
Trade accounts receivable ............................. (857) (457) (2,112)
Inventory ............................................. (9,975) (5,940) (5,792)
Prepaid expenses and deposits ......................... (116) (1,284) (164)
Due from affiliate .................................... 343 (343) --
Other assets .......................................... (373) (50) (28)
Accounts payable ...................................... (1,978) (1,740) 2,540
Accrued expenses/Customer deposit ..................... 598 1,057 362
Due to shareholders and affiliates .................... (292) (936) 916
-------- -------- --------
Net cash used in operating activities ............... (7,666) (6,649) (2,934)
INVESTING ACTIVITIES
Purchases of revenue producing equipment ...................... (2,878) -- --
Purchases of property and equipment ........................... (516) (314) (103)
-------- -------- --------
Net cash used in investing activities ............... (3,394) (314) (103)
FINANCING ACTIVITIES
Payments on capital leases .................................... (95) (48) (22)
Net proceeds from (payments on) notes payable ................. (129) 1,550 (350)
Net proceeds from (payments on) short-term line of credit ..... (404) (2,752) 3,156
Advances from shareholders .................................... -- 2,250 4,203
Payments of shareholders' advances/loans ...................... (2,513) (2,479) (2,671)
Net proceeds from sale of preferred stock ..................... 5,000 11,357 --
Net proceeds from sale of common stock ........................ 27,877 -- --
Distributions ................................................. -- (2,915) (2,030)
-------- -------- --------
Net cash provided by financing activities ........... 29,736 6,963 2,286
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 18,676 -- (751)
Cash at beginning of year ........................... -- -- 751
======== ======== ========
Cash and cash equivalents at end of year ............ $ 18,676 $ -- $ --
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ................................................. $ 1,097 $ 795 $ 145
======== ======== ========
Income taxes paid ............................................. $ 2,810 $ -- $ --
======== ======== ========
SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Notes receivable from officers offset against amounts due
to shareholders .......................................... $ -- $ 708 $ 912
======== ======== ========
Shareholder advances converted to notes payable ............... $ -- $ 1,511 $ --
======== ======== ========
Revenue producing equipment acquired under capital leases ..... $ 4,274 $ -- $ --
======== ======== ========
Office furniture and equipment acquired under capital leases .. $ 265 $ 48 $ 153
======== ======== ========
Preferred shares converted to common shares ................... $ 16,357 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 27
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS
AVTEAM, Inc. was incorporated in Florida in 1991 and is a global
supplier of aftermarket aircraft engines, engine parts and airframe components.
AVTEAM, Inc. supplies its products to other aftermarket suppliers, independent
repair facilities, aircraft operators and original equipment manufacturers.
Beginning in April, 1997, AVTEAM, Inc., through its wholly-owned subsidiary,
AVTEAM Aviation Field Services, Inc. ("AAFS"), began providing certain on-wing
maintenance and repair and borescope services. The accompanying consolidated
financial statements as of December 31, 1997 and for the year then ended include
the accounts of AVTEAM, Inc. and AAFS (the "Company") after elimination of
intercompany accounts and transactions.
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 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 overhaul 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.
F-7
<PAGE> 28
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The Company buys inventory from certain of its customers and
periodically offsets amounts owed to customers for inventory purchases against
the accounts receivable for sales to such customers. For the years ended
December 31, 1997, 1996 and 1995, accounts payable totaling $5,709,000,
$3,175,000 and $980,000, respectively, 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 leased to users on
a short-term basis. Such engines are carried at cost and are depreciated using
the straight-line method over periods between five and ten years. Three 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.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME INFORMATION
In conjunction with the closing of the private offering of its
preferred stock on December 6, 1996, the Company terminated its status as an S
corporation. Pro forma net income reflects adjustments for income taxes which
would have been recorded if the Company had not been an S corporation for the
years ended December 31, 1996 and 1995 (see Note 5).
F-8
<PAGE> 29
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA 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 between earnings per share
presented by the Company in its previous SEC filings and the presentation
required by the new statement and the new interpretation required by the SEC 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 pro forma net income per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Pro forma net income (historical for 1997) $3,934,000 $1,692,000 $ 681,000
========== ========== ==========
Denominator:
Denominator for basic pro forma net income
per share - weighted - average shares 6,073,694 5,000,000 4,000,000
Effect of dilutive securities
Convertible preferred stock 1,546,849 121,096 --
Employee stock options 1,651 -- --
---------- ---------- ----------
Dilutive potential common shares 1,548,500 121,096 --
---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted - average shares and
assumed conversions 7,622,194 5,121,096 4,000,000
========== ========== ==========
Pro forma net income per common share - basic $ 0.65 $ 0.34 $ 0.17
========== ========== ==========
Pro forma net income per common share - diluted $ 0.52 $ 0.33 $ 0.17
========== ========== ==========
</TABLE>
3. ACCOUNTS RECEIVABLE
On November 8, 1995, the Company entered into a Limited Recourse
Receivable Discount Facility Agreement with a bank (the "Agreement") under which
the bank agreed to purchase certain trade receivables older than 30 days, with a
maximum maturity of 100 days, for the principal amount of the trade receivables
less a discount rate of LIBOR plus 1/4% (5.88% at December 31, 1995). The
Agreement provided that the aggregate principal amount of uncollected purchased
receivables could not exceed $10,000,000 at any one time, provided for the
purchase of a maximum of $60,000,000 of receivables over the term of the
Agreement and included certain recourse provisions related to returned inventory
only. The Agreement expired on November 1, 1996. In 1996, the Company sold trade
receivables under the Agreement with a carrying amount of approximately
$5,272,000 for approximately $5,204,000.
4. OFFERING EXPENSES
During 1996, the Company initiated a public offering of its common
stock. Due to uncertain market conditions, the Company decided to withdraw the
offering. As a result, the costs associated with the offering were charged
against earnings in 1996.
F-9
<PAGE> 30
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
HISTORICAL
The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes (FASB 109)". Deferred income tax assets and
liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
The components of the income tax provision (benefit) are as follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
------ ------
Current.................... $1,907 $ 62
Deferred................... 352 (432)
------ ------
Total...................... $2,259 $ (370)
====== ======
Concurrent with the December 6, 1996 private placement (see Note 15),
the Company's S corporation election was terminated, making it subject to
corporate income taxes. The consolidated financial statements reflect a net
income tax benefit of approximately $370,000 for the year ended December 31,
1996, comprised of the following two significant components:
o A net tax benefit of $432,000 representing the net deferred
tax asset recognized for the cumulative temporary differences
between the carrying amounts of assets and liabilities for
financial reporting and tax reporting purposes as of December
6, 1996.
o Current period expense of approximately $62,000 pertaining to
the Company's income before taxes of approximately $203,000
subject to taxation for the period from December 6, 1996 to
December 31, 1996.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets as of December 31, 1997 and 1996
are as follows (in thousands):
DECEMBER 31,
-----------------
1997 1996
----- -----
Allowance for doubtful accounts ..... $ 100 $ 68
Allowance for sales returns ......... 155 77
Insurance ........................... (20) --
Depreciation ........................ (414) 11
Warranty provision .................. 36 --
Accrued compensation ................ -- 130
Interest ............................ 3 --
Uniform inventory capitalization .... 220 146
----- -----
Net deferred tax asset ..... $ 80 $ 432
===== =====
F-10
<PAGE> 31
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the expected income tax expense at federal
statutory rates is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DEC 6, 1996 TO
DEC 31, 1997 DEC 31, 1996
------------ --------------
<S> <C> <C>
Tax at federal statutory rate ............................... 34.00% 34.00%
State income taxes, net of federal benefit .................. 2.35 2.19
Deferred tax benefit recorded in conjunction
with the conversion to a C corporation .................... -- (223.28)
Permanent differences ....................................... .13 4.81
--------- --------
36.48% (182.28)%
========= =========
</TABLE>
PRO FORMA
The adjustments for pro forma provision for income taxes for the two
years ended December 31, 1996, reflect the adjustments needed to reflect income
tax expense as if the Company had been taxed as a C corporation.
The pro forma provision (credit) for income taxes (including the
historical component in 1996) is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
------- -------
Current .......... $ 827 $ 1,138
Deferred ......... 341 (721)
------- -------
Total ...... $ 1,168 $ 417
======= =======
The pro forma income tax provision (credit) differs from the amounts
computed by applying the federal statutory rate of 34% to income before income
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
-------- -------
<S> <C> <C>
Tax at federal statutory rate ................. 34.00% 34.00%
State income taxes, net of federal benefit .... 2.45 3.69
Permanent differences ......................... 4.35 .28
-------- -------
40.80% 37.97%
======== ========
</TABLE>
On December 6, 1996, the date of the termination of S corporation
status, the Company declared a cash distribution to the shareholders. The
distribution, paid prior to January 1, 1997, was determined based on the
Company's accumulated adjustment account, as defined in the Internal Revenue
Code, calculated through the date of termination of the Company's S corporation
status.
Also on December 6, 1996, the Company entered into a tax allocation and
indemnification agreement with the existing common shareholders relating to
their respective income tax liabilities and certain related matters. The tax
indemnification agreements generally provide that the existing common
shareholders will be indemnified by the Company with respect to federal and
state income taxes (plus interest and penalties) arising due to taxable income
shifted from a C corporation taxable year in which the Company was an S
corporation, and that the Company will be indemnified by the existing common
shareholders with respect to federal and state income taxes (plus interest and
penalties) arising due to taxable income shifted from an S corporation taxable
year to a C corporation taxable year.
F-11
<PAGE> 32
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------
1997 1996
------- -------
Office furniture and equipment .... $ 649 $ 203
Warehouse and transport
equipment ....................... 672 532
Leasehold improvements ............ 222 54
------- -------
1,543 789
Less accumulated depreciation
and amortization ................ (605) (287)
======= =======
$ 938 $ 502
======= =======
7. LEASES
On April 1, 1995, the Company entered into a lease agreement for new
warehouse and office space under an operating lease which expires on June 30,
2000. Effective January 1, 1998, the Company leased additional warehouse and
office space and together with the original space extended the lease term to
December 31, 2002. In addition, effective January 1, 1996, the Company signed a
lease agreement for additional warehouse and office space under an operating
lease which expires on December 31, 2000. Future minimum lease payments by year
and in the aggregate under operating leases are as follows (in thousands):
1998 .................... $ 806
1999 .................... 813
2000 .................... 773
2001 .................... 615
2002 .................... 629
------
$3,636
======
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $449,000 $390,000 and $266,000, respectively.
The Company has entered into various capital leases for office
furniture, computer equipment, and warehouse and transportation equipment
expiring in various years through 1999. Equipment under capitalized lease
obligations had an original cost of approximately $433,000 at December 31, 1997,
$201,000 at December 31, 1996, and $153,000 at December 31, 1995 and accumulated
amortization was approximately $148,000, $75,000 and $26,000 at December 31,
1997, 1996 and 1995, respectively.
Future minimum lease payments by year and in the aggregate under these
capital leases were as follows at December 31, 1997 (in thousands):
1998 ....................................................... $ 145
1999 ....................................................... 122
2000 ....................................................... 70
2001 ....................................................... 25
-----
Total minimum lease payments ............................... 362
Less amounts representing interest at 13.9% ................ (61)
-----
Present value of net minimum lease payments
under capital leases (including current portion of $115) ... $ 301
=====
F-12
<PAGE> 33
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
On September 5, 1995, the Company entered into an agreement (the
"Parati Agreement") with Parati Corporation ("Parati"), a corporation
wholly-owned by the Chairman of the Board of Directors of the Company, which
provided that Parati would purchase up to $10 million of certain aftermarket
engines and up to $40 million of new engines and that the Company would oversee,
disassemble and handle all of the operational and administrative aspects related
to such engines. The Parati Agreement further provided that all proceeds from
the sale of engines or parts would be divided equally between Parati and the
Company after payment to Parati of amounts equal to Parati's investment in such
engines less overhaul costs incurred by the Company on behalf of Parati.
Overhaul costs were incurred on a component basis and were not incurred until a
customer was interested in purchasing a component upon its overhaul. The Company
was reimbursed for overhaul costs through a reduction of the Company's payable
to Parati regardless of whether such parts were sold. In 1997, 1996 and 1995,
the Company recorded sales under this agreement of approximately $495,000,
$1,925,000 and $224,000, respectively, with a gross profit of approximately
$247,000, $395,000 and $45,000, respectively. On August 21, 1997, the Company
issued 38,664 shares of Class A Common Stock as payment for the remaining
inventory valued at $270,647 and terminated the Parati Agreement.
The Company purchased accounting services totaling $25,000, $50,000 and
$38,000 for each of the three years 1997, 1996 and 1995, respectively, from a
firm that is owned in part by a shareholder of the Company.
Management believes that compensation received from or paid to related
parties under the Parati Agreement and in connection with purchased accounting
services, described above, materially approximate those which would have been
received from or paid to non-affiliated third parties.
At December 31, 1996, the Company owed two officers accrued
compensation of $292,000.
At December 31, 1996, notes payable-shareholders consist of the
following (in thousands):
<TABLE>
<S> <C>
Non-interest bearing notes payable to shareholders due within sixty
days of the consummation of an initial public offering or during the
second fiscal quarter of 2000, whichever is earlier(a) ................... $1,511
Notes payable to shareholders bearing interest at 40% of the
original issue discount as calculated under the Internal Revenue Code
(6.57% at December 31, 1996) and due either within sixty days of the
consummation of an initial public offering or during the second fiscal
quarter of 2000, whichever is earlier(b) ................................. 1,002
------
$2,513
======
</TABLE>
- ----------
(a) On December 6, 1996, in conjunction with the private placement, the
Company agreed to convert the outstanding balance of advances due to
shareholders to notes payable. See Note 15.
(b) On December 6, 1996, in conjunction with the private placement, the
existing common shareholders agreed to lend a portion of the
previously undistributed S corporation earnings to the Company. See
Note 15.
F-13
<PAGE> 34
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 21, 1997, the Company issued 289,108 shares of Class A Common
Stock to the Chairman of the Board of Directors as payment for notes payable in
the amount of $2,023,757. On November 5, 1997, the Company paid the remaining
outstanding amounts to the shareholders.
9. NOTES PAYABLE TO BANK AND NOTES PAYABLE - LEASE FINANCING
On February 20, 1997, the Company replaced its existing credit facility
with a new credit facility with a different bank which provides working capital
of up to $20.0 million with interest at either the lender's prime rate or LIBOR
plus 2.75% per annum, as determined by the Company at the time of each advance,
subject to its availability calculation based on the eligible borrowing base.
The eligible borrowing base includes certain receivables and inventories of the
Company. The credit facility also permits the bank to issue letters of credit on
behalf of the Company of up to $5.0 million, and the aggregate principal amount
of any letters of credit so issued will reduce amounts available under the
credit facility. The credit facility contains provisions which: (I) restrict the
Company's ability to make capital expenditures and dispose of assets; (II) limit
the payment of dividends or other distributions to stockholders; (III) limit the
incurrence of additional indebtedness, and; (IV) prohibit the repurchase,
redemption or retirement of any of the Company's stock. The credit facility
matures in May 1998 and the term of any letters of credit issued thereunder must
expire prior to May 1999. At December 31, 1997, approximately $16.0 million was
available under this credit facility and a letter of credit of approximately
$132,000 was outstanding.
On May 12, 1995, the Company executed a revolving line of credit
agreement with a bank. This line of credit was amended on September 29, 1995 and
again on June 13, 1996, and was paid in full on February 20, 1997.
The weighted average interest rate on short term borrowings for the
years ended December 31, 1997, 1996 and 1995 was approximately 11%, 10% and 11%,
respectively.
On July 25, 1997, the Company entered into a sale/leaseback arrangement
in which three engines were sold for $4,274,000 and leased back by the Company
under a five-year lease which requires monthly payments of approximately $56,300
plus applicable fees and taxes. The lease agreement provides the Company with an
option to terminate the lease and to repurchase the engines at any time at
varying rates based on the original sales price. This transaction is accounted
for as a financing, wherein the aircraft engines remain on the books of the
Company and are depreciated. The proceeds under the sale/leaseback arrangement
is recorded as a financing obligation and will be reduced by payments under the
lease. The aggregate annual maturities under this agreement are approximately as
follows: 1998, $328,000; 1999, $358,000; 2000, $391,000; 2001, $426,000, and;
2002, $2,642,000.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, short-term borrowings
and notes payable-lease financing in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of notes payable and notes payable-lease financing
because such instruments bear variable interest rates which approximate market.
11. EMPLOYMENT AGREEMENTS
Effective January 1, 1994, the Company entered into employment
agreements with two key employees which were amended on December 31, 1995, as
described in the following paragraph. Under the terms of the original
agreements, each employee received through December 31, 1995 compensation equal
to 20% of Adjusted Net Income, as defined in such agreements. Additionally, each
of these key employees were granted options to purchase shares equivalent to up
to 10% of the Company's outstanding common shares at a price equal to the
Company's book value on the last day of the month subsequent to the exercise of
such options. On January 1, 1995, 33% of the options were exercised in exchange
for non-interest bearing notes receivable from the officers totaling
approximately $259,000.
F-14
<PAGE> 35
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 31, 1995, the employment agreements' terms were amended to
(1) reduce, effective January 1, 1996, the amount of Adjusted Net Income each of
these two officers may receive as compensation from 20% to 5%, effective January
1, 1996; (2) pay an additional aggregate one time bonus of approximately
$1,179,000 to these officers and (3) change the exercise price of the
unexercised options to the fair market value of the Company's Class A Common
Stock as of the exercise date. The employees exercised their remaining options
on December 31, 1995 in return for noninterest bearing notes receivable from the
officers payable on demand at any time after May 31, 1996, totaling
approximately $1,360,000. On the same day, approximately $912,000 of these notes
from officers were offset against amounts due to the officers, resulting in an
outstanding balance on notes receivable from officers totaling $707,000, which
was repaid on December 12, 1996.
On December 6, 1996, the two key employees entered into the Amended and
Restated Employment Agreements (collectively, the "Employment Agreements") with
the Company. The Employment Agreements provide that the two key employees will
receive an annual base salary of $260,000 and $220,000, respectively, for an
initial term of three years expiring December 1999, as well as the right to
participate in the Company's 1996 Stock Option Plan (see Note 16) and the
Incentive Plan (as defined below). Upon termination without cause, the two key
employees will be entitled to receive two years' base salary.
The Company adopted a Key Executive Annual Incentive Plan (the
"Incentive Plan"), pursuant to which key executives of the Company may receive
bonus compensation based on the Company's performance during any fiscal year, as
determined by the Compensation Committee of the Board of Directors (the
"Committee"). Under the Incentive Plan, the Company's President and Chief
Executive Officer and Executive Vice President and other key executives
designated by the Committee are assigned a target award expressed as a
percentage of base salary in varying amounts (not to exceed 100% of the base
salary for the President and Chief Executive Officer and the Executive Vice
President and 50% for other key executives). The actual award is subject to
achievement by the Company of minimum levels of pre-tax income. The Committee
has the authority to select participants other than the President and Chief
Executive Officer and the Executive Vice President, to establish target awards
and to determine final awards in the event that the Company's operating income
is less than the level's established under the Incentive Plan during any year
the Incentive Plan remains in effect.
12. SIGNIFICANT CUSTOMERS
Pratt & Whitney accounted for 1%, 9% and 21% of the Company's net sales
for the years ended December 31, 1997, 1996 and 1995, respectively. Accounts
receivable from Pratt & Whitney accounted for 1%, 4% and 28% of total accounts
receivable at December 31, 1997, 1996 and 1995, respectively.
Dallas Aerospace accounted for 5%, 16% and 13% of net sales for the
years ended December 31, 1997, 1996 and 1995, respectively, and 10%, 10% and 24%
of total accounts receivable at December 31, 1997, 1996 and 1995, respectively.
A third customer accounted for 19% of 1997 net sales.
A fourth customer accounted for 12% of 1997 net sales.
13. CONSIGNMENT SALES
The Company has an agreement with an airline to sell certain consigned
inventory. Net sales related to this agreement include approximately $2,032,000,
$1,295,000 and $882,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
14. GEOGRAPHIC AREA INFORMATION
The Company had export sales for the years ended December 31, 1997,
1996 and 1995 of approximately $3,613,000, $722,000 and $2,422,000,
respectively, primarily to customers in Latin America.
F-15
<PAGE> 36
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SHAREHOLDERS' EQUITY
On March 21, 1996, the Company amended and restated its Articles of
Incorporation pursuant to which each $1 par value outstanding share of Class A
Common Stock was converted to 4,000 shares of Class A Common Stock at a per
share par value of $.01. In addition, the Company authorized 20,000,000 shares
of $.01 per share par value preferred stock and increased the number of
authorized Class A Common Stock to 80,000,000 shares. On December 5, 1996, the
authorized shares of Common Stock was amended to be 77,000,000 shares of Class A
Common Stock and 3,000,000 shares of Class B Common Stock. All references in the
financial statements to number of shares, per share amounts and market prices of
the Company's outstanding shares have been retroactively restated to reflect the
effect of the stock conversion.
On December 6, 1996, the Company sold to a group of limited
partnerships (the "Clipper Group") in a private placement transaction an
aggregate of 1,480,000 shares of Class A Preferred Stock and 220,000 shares of
Class B Preferred Stock for an aggregate purchase price of $11,900,000 pursuant
to a Stock Purchase Agreement. Two of the limited partnerships are affiliates of
Credit Suisse First Boston Corporation. Pursuant to the Company's Second Amended
and Restated Articles of Incorporation, all of such shares of Class A Preferred
Stock have been automatically converted into an aggregate of 1,480,000 shares of
Class A Common Stock and all of such shares of Class B Preferred Stock were
converted into an aggregate of 220,000 shares of Class B Common Stock upon the
Company's initial public offering. The Clipper Group has transferable
registration rights for their shares of Common Stock.
On August 21, 1997, the Company issued and sold to The Clipper Group in
a private placement transaction an aggregate of 494,642 shares of Class A
Preferred Stock and 219,644 shares of Class B Preferred Stock for an aggregate
purchase price of $5,000,002. Pursuant to the Company's Second Amended and
Restated Articles of Incorporation, all of such shares of Class A Preferred
Stock have been automatically converted into an aggregate of 494,642 shares of
Class A Common Stock and all of such shares of Class B Preferred Stock were
converted into an aggregate of 219,644 shares of Class B Common Stock upon the
Company's initial public offering. The Clipper Group has transferable
registration rights for their shares of Common Stock.
Also, on August 21, 1997, the Company issued 327,772 shares of Class A
Common Stock valued at $2,294,404 to the Chairman of the Board of Directors of
the Company as payment for a $1,322,479 non-interest bearing note and a $701,278
interest bearing note included in notes payable to shareholders at June 30,
1997, and as payment for the purchase of the remaining inventory valued at
$270,647 under the Parati Agreement in connection with the termination of the
Parati Agreement.
On October 30, 1997, the Company, through an initial public offering,
sold 3.033 million shares of Class A Common Stock. The proceeds before deduction
of expenses amounted to $23,960,700. A portion of the proceeds was used to repay
the outstanding balance owned under the Company's existing Credit Facility, to
repay loans to shareholders and to pay officers' accrued compensation.
Also on October 30, 1997, the Company granted to employees a total of
250,000 options to purchase Class A Common Stock at $8.50 per share under the
Company" 1996 Stock Option Plan. The options vest over a three-year period and
are exercisable over a period of ten years. At December 31, 1997, 350,000 shares
of Class A Common Stock remain reserved for issuance under future option grants.
On November 28, 1997, the Company issued 330,325 additional shares of
Class A Common Stock pursuant to the exercise of the over-allotment option
granted to the underwriters. Net proceeds before deduction of expenses amounted
to approximately $2,611,000.
F-16
<PAGE> 37
AVTEAM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. STOCK OPTIONS
The Company, under its 1996 Stock Option Plan, may grant a maximum of
600,000 options to purchase Class A Common Shares at prices not less than 100%
of the fair market value at the date of option grant. On October 31, 1997, the
date of its initial public offering, the Company granted a total of 250,000
options to all of its employees. Such options vest over a three-year period at
rates of 35%, 35% and 30%. The option exercise price is $8.50 per share. The
options have a maximum term of ten years. A total of 350,000 options remain
available for future grants.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plan. Had compensation cost for the Company's plan been determined
based on the fair value at the grant date for awards in 1997 consistent with the
provisions of SFAS No. 123, the Company's net earnings would have been changed
to the pro forma amounts indicated below (in thousands):
1997
----
Net income As reported $3,934
Pro forma $3,861
Earnings per common share - As reported $ 0.65
basic Pro forma $ 0.64
Earnings per common share - As reported $ 0.52
assuming dilution Pro forma $ 0.51
The fair value of each option grant is estimated at $8.21 on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions used: dividend yield of 0%, expected volatility of 1.849%; risk-free
interest rate of 5%; and expected lives of five years.
F-17
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
AVTEAM, Inc.
We have audited the consolidated financial statements of AVTEAM, Inc.
and Subsidiary as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report theron dated
February 16, 1998 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedule listed in Item 14(a) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 16, 1998
S-1
<PAGE> 39
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AVTEAM, INC. AND SUBSIDIARY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 53 $145 $ 84 (1) $114
Allowance for sales returns ... 162 669 162 (2) 669
---- ---- ---- ----
Total .................. $215 $814 $246 $783
==== ==== ==== ====
Year Ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $114 $ 88 $ 13(1) $189
Allowance for sales returns ... 669 211 669(2) 211
---- ---- ---- ----
Total .................. $783 $299 $682 $400
==== ==== ==== ====
Year Ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $189 $136 $ 51(1) $274
Allowance for sales returns ... 211 428 211(2) 428
---- ---- ---- ----
Total .................. $400 $564 $262 $702
==== ==== ==== ====
</TABLE>
________________
(1) Uncollectible accounts written off, net of recoveries.
(2) Application of credit memos against reserve.
S-2
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Miramar, Florida on the 30th day of March, 1998.
AVTEAM, Inc.
By: /s/ Donald A. Graw
-------------------------------
Donald A. Graw
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ DONALD A. GRAW
- ---------------------------------- Chairman of the Board, President, March 30, 1998
Donald A. Graw Chief Executive Officer
(Principal Executive Officer)
/s/ MARK S. KOONDEL
- ---------------------------------- Chief Financial Officer, March 30, 1998
Mark S. Koondel Treasurer, Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ JAIME J. LEVY
- ---------------------------------- Executive Vice President, March 30, 1998
Jaime J. Levy Director
/s/ RICHARD PRESTON
- ---------------------------------- Secretary, Director March 30, 1998
Richard Preston
/s/ ROBERT MUNSON
- ---------------------------------- Director March 30, 1998
Robert Munson
/s/ EUGENE P. LYNCH
- ---------------------------------- Director March 30, 1998
Eugene P. Lynch
- ---------------------------------- Director
Sanford Miller
</TABLE>
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C> <C>
10.29 Underwriting Agreement dated October 31, 1997 among Registrant,
Credit Suisse First Boston Corporation, SBC Warburg Dillon Read, Inc.,
Leon Sragowicz and Sragowicz Foundation, Inc.
21.1 List of Subsidiaries of Registrant
27.1 Financial Data Schedule for the year ended December 31, 1997
</TABLE>
<PAGE> 1
Exhibit 10.29
4,500,000 SHARES
AVTEAM, INC.
CLASS A COMMON STOCK,
$.01 PAR VALUE
UNDERWRITING AGREEMENT
----------------------
October 31, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
SBC WARBURG DILLON READ INC.,
As Representatives of the Several Underwriters
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, N.Y. 10010
Dear Sirs:
1. INTRODUCTORY. AVTEAM, Inc., a Florida corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule A
hereto (the "Underwriters") 3,033,000 shares of its Class A Common Stock, $.01
par value per share (the "Securities") and Sragowicz Foundation, Inc. (the
"Selling Shareholder") proposes to sell an aggregate of 1,467,000 outstanding
shares of the Securities (such 4,500,000 shares of Securities being hereinafter
referred to as the "Firm Securities"). The Company also proposes to sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
675,000 additional shares of its Securities, as set forth below (such 675,000
additional shares being hereinafter referred to as the "Optional Securities").
The Firm Securities and the Optional Securities are herein collectively referred
to as the "Offered Securities." This Underwriting Agreement, as amended,
supplemented or modified from time to time is referred to herein as the
"Agreement." The Company and the Selling Shareholder severally and not jointly
hereby agree with the Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company
represents and warrants to, and agrees with, the several Underwriters that:
(i) A registration statement on Form S-1 (No. 333-23829) relating
to the Offered Securities, including a form of prospectus, has been
filed with the Securities and Exchange Commission (the "Commission")
and either (A) has been declared effective under the Securities Act of
1933, as amended (the "Act"), and is not proposed to be amended or (B)
is proposed to be amended by amendment or post-effective amendment. If
such registration statement (the "initial registration statement") has
been declared effective, either (A) an additional registration
statement (the "additional registration statement") relating to the
Offered Securities may have been filed with the Commission pursuant to
Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities
all have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the
<PAGE> 2
additional registration statement or (B) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment to either
such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case
of the additional registration statement, Rule 462(b). For purposes of
this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (A) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (B) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration statement,
as amended at its Effective Time, including all information contained
in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the rules and regulations of the Commission
("Rules and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B)
on the Effective Date of the
2
<PAGE> 3
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations,
and does not include, or will not include, with respect to each
Registration Statement, any untrue statement of a material fact or does
not omit, or will not omit to state, a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or with respect to the Prospectus, any untrue statement of
a material fact or does not omit, or will not omit to state, a material
fact necessary in order to make the statements therein, in light of the
circumstances under which such statements were made, not misleading. If
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all material respects to
the requirements of the Act and the Rules and Regulations, and will not
include, with respect to the Initial Registration Statement, any untrue
statement of a material fact or will not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or with respect to the Prospectus, any untrue
statement of a material fact or will not omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which such statements were made, not misleading,
and no Additional Registration Statement has been or will be filed. The
two preceding sentences do not apply to statements in or omissions from
a Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in
Section 7(c).
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Florida, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and
the Company is duly qualified to do business as a foreign corporation
in good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure to be so qualified or in good
standing would not have a material adverse effect on the condition
(financial or otherwise), business, properties or results of operations
of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect").
(iv) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification except where the
failure to be so qualified or in good standing would not have a
Material Adverse Effect; all of the issued and outstanding capital
stock of each subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the capital
stock of each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects.
3
<PAGE> 4
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized and are validly
issued, fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; and the shareholders of the
Company have no preemptive rights with respect to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment as a result of the consummation of the transactions
contemplated by this Agreement.
(vii) No person or entity has any right, not effectively
satisfied or waived, to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered pursuant
to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under
the Act.
(viii) The Offered Securities have been approved for listing
on the Nasdaq Stock Market's National Market, subject to notice of
issuance.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the sale
of the Offered Securities, except such as have been obtained and made
under the Act and such as may be required under state or foreign
securities laws.
(x) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them, in each case free
from liens, encumbrances and defects that would materially affect the
value thereof or materially interfere with the use made or to be made
thereof; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the
4
<PAGE> 5
Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is
threatened that might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can
acquire on reasonable terms adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of infringement of or conflict with asserted rights of
others with respect to, any intellectual property rights that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute, any
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, " environmental laws"), owns or
operates any real property contaminated with any substance that is
subject to any environmental laws, is liable for any off-site disposal
or contamination pursuant to any environmental laws, or is subject to
any claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect, and the Company is not aware
of any pending investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company
or any of its subsidiaries or any of their respective properties that,
if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect,
or would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are, to the Company's knowledge,
threatened or contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
except as otherwise disclosed in the Prospectus, such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent
basis and the assumptions used in preparing the pro forma financial
statements included in each Registration Statement and the Prospectus
provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein,
the related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or event
that may result in a prospective Material Adverse Effect; and,
5
<PAGE> 6
except as disclosed in or contemplated by the Prospectus, there has
been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(b) The Selling Shareholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) The Selling Shareholder has, and on the First Closing Date
hereinafter mentioned will have valid and unencumbered title to Offered
Securities to be delivered by the Selling Shareholder on such First
Closing Date, and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by the Selling Shareholder on such First
Closing Date hereunder; and upon the delivery of any payment for the
Offered Securities on such First Closing Date hereunder the several
Underwriters will acquire valid and unencumbered title to the Offered
Securities to be delivered by the Selling Shareholder on such First
Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, to
the knowledge of the Selling Shareholder: (A) on the Effective Date of
the Initial Registration Statement, the Initial Registration Statement
conformed in all material respects to the requirements of the Act and
the Rules and Regulations and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B)
on the Effective Date of the Additional Registration Statement (if
any), each Registration Statement conformed, or will conform in all
material respects to the requirements of the Act and the Rules and the
Regulations, and did not include, or will not include, with respect to
each Registration Statement, any untrue statement of a material fact or
did not omit, and will not omit to state, a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or with respect to the Prospectus, any untrue statement of
a material fact or did not omit, and will not omit to state, a material
fact necessary in order to make the statements therein, in light of the
circumstances under which such statements were made, not misleading,
and (C) on the date of this Agreement, the Initial Registration
Statement and, if the Effective Time of the Additional Registration
Statement is prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the time of
filing of the Prospectus pursuant to Rule 424(b) or (if no such filing
is required) at the Effective Date of the Additional Registration
Statement in which the Prospectus is included, each Registration
Statement and the Prospectus will conform, in all material respects to
the requirements of the Act and the Rules and Regulations, and neither
of such documents includes, or will include, any untrue statement of a
material fact or omit, or will omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the
Rules and Regulations, will not include, with respect to the Initial
Registration Statement, any untrue statement of a material fact or will
not omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or with
respect to the Prospectus, any untrue statement of a material fact or
will not omit to state a material fact
6
<PAGE> 7
necessary in order to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
The two preceding sentences apply only to the extent that any
statements in or omissions from a Registration Statement or Prospectus
are based on written information furnished to the Company by the
Selling Shareholder specifically for use therein.
(c) Leon Sragowicz, an individual and a resident of the State of
Florida (the "Additional Shareholder"), represents and warrants to, and agrees
with, the several Underwriters that:
(i) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, to
the knowledge of the Additional Shareholder: (A) on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the
Act and the Rules and Regulations and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed,
or will conform in all material respects to the requirements of the Act
and the Rules and the Regulations, and did not include, or will not
include, with respect to each Registration Statement, any untrue
statement of a material fact or did not omit, and will not omit to
state, a material fact required to be stated therein or necessary to
make the statements therein not misleading, or with respect to the
Prospectus, any untrue statement of a material fact or did not omit,
and will not omit to state, a material fact necessary in order to make
the statements therein, in light of the circumstances under which such
statements were made, not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution
and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to
Rule 424(b) or (if no such filing is required) at the Effective Date of
the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform,
in all material respects to the requirements of the Act and the Rules
and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omit, or will omit,
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. If the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all material respects to the requirements of
the Act and the Rules and Regulations, will not include, with respect
to the Initial Registration Statement, any untrue statement of a
material fact or will not omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or with respect to the Prospectus, any untrue statement of
a material fact or will not omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances
under which such statements were made, not misleading. The two
preceding sentences apply only to the extent that any statements in or
omissions from a Registration Statement or Prospectus are based on
written information furnished to the Company by the Additional
Shareholder specifically for use therein.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and the Selling
Shareholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and the Selling Shareholder, at a purchase price of $7.90 per share, the
respective number of shares of Firm Securities set forth below the caption
"Company" or "Selling Shareholder", as the case may be, and opposite the name of
such Underwriter in Schedule A hereto.
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<PAGE> 8
The Selling Shareholder agrees that the Offered Securities represented
by the certificates it holds as of the date of this Agreement are subject to the
interests of the Underwriters hereunder, and that the obligations of the Selling
Shareholder hereunder shall not be terminated by operation of law, whether by
the occurrence of any event, or in the case of a trust, by the death of any
trustee or trustees or the termination of such trust. If any such trustee or
trustees should die, or if any other such event should occur, or if any of such
trusts should terminate, before the delivery of the Offered Securities
hereunder, certificates for such Offered Securities shall be delivered by the
successors to the trusts or trustees in accordance with the terms and conditions
of this Agreement as if such death or other event or termination had not
occurred.
The Company and the Selling Shareholder will deliver the Firm
Securities to the Representatives for the accounts of the Underwriters, against
payment of the purchase price at a bank acceptable to Credit Suisse First Boston
Corporation ("CSFBC") in federal reserve funds immediately available by wire
transfer to the account of the Company payable to the Company in the case of
3,033,000 shares of Firm Securities, and in federal reserve funds immediately
available by wire transfer to the account of the Selling Shareholder payable to
the Selling Shareholder in the case of 1,467,000 shares of Firm Securities, at
the office of King & Spalding, Atlanta, Georgia, at 10:00 A.M., New York time,
on November 5, 1997, or at such other time not later than seven full business
days thereafter as CSFBC and the Company determine, such time being herein
referred to as the "First Closing Date." The certificates for the Firm
Securities so to be delivered, will be in definitive form, in such denominations
and registered in such names as CSFBC requests upon reasonable notice and will
be made available for checking and packaging at the above office of King &
Spalding at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in federal reserve funds immediately available by
wire transfer to the account of the Company at a bank acceptable to CSFBC,
payable to the Company. The certificates for the Optional Securities being
purchased on each Optional Closing Date, will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of King & Spalding at a reasonable
time in advance of such Optional Closing Date.
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<PAGE> 9
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY AND THE SELLING SHAREHOLDER.
The Company agrees with the several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier
of (A) the second business day following the execution and delivery of
this Agreement or (B) the fifteenth business day after the
Effective Date of the Initial Registration Statement. The Company will
advise CSFBC promptly of any such filing pursuant to Rule 424(b). If
the Effective Time of the Initial Registration Statement is prior to
the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not
occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related Prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent (which consent shall not be unreasonably
withheld), and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, the Company becomes aware of the
occurrence of any event as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which such
statements were made, not misleading, or the Company becomes aware that
if it is necessary at any time to amend or supplement the Prospectus to
comply with the Act, the Company will promptly notify CSFBC of such
event and will promptly prepare and file with the Commission, at its
own expense, an amendment or supplement which will correct such
statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery
of, any such amendment or supplement shall constitute a waiver of any
of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
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<PAGE> 10
Section 11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (three of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC reasonably
requests. The Prospectus shall be so furnished on or prior to 3:00
P.M., New York time, on the business day following the later of the
execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other documents shall be so
furnished as soon as available. The Company will pay the expenses of
printing and distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and will continue such qualifications in effect so
long as required to complete the distribution of the Offered
Securities; provided that the Company shall not be required to register
as a foreign corporation or generally be subject to service of process
in such jurisdictions as a result of such qualification.
(g) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to shareholders for such year; and
the Company will furnish to the Representatives (i) as soon as
available, a copy of each report or definitive proxy statement of the
Company filed with the Commission under the Securities Exchange Act of
1934, as amended, or mailed to shareholders, and (ii) from time to
time, such other information concerning the Company as CSFBC may
reasonably request.
(h) The Company, its officers and directors will not offer,
sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or, in the case of the
Company, file with the Commission a registration statement under the
Act relating to any additional shares of their Securities or securities
convertible into or exchangeable or exercisable for any shares of their
Securities, without the prior written consent of CSFBC for a period of
180 days after the date of the Prospectus, except for issuances of
Securities pursuant to the exercise of employee stock options granted
under an employee stock option plan in effect on the date hereof.
Notwithstanding the foregoing, officers and directors of the Company
shall be permitted to transfer shares of their Securities or other
securities convertible into or exchangeable or exercisable for
Securities of which such officers and directors are currently the
beneficial owner to:
(i) the Company;
(ii) shareholders of the Company who are bound by the
terms of a lock-up agreement; and
(iii) any donee(s) of the officers and directors of
the Company who receive such securities of the Company as a
bona fide gift or any "affiliate" of the undersigned (within
the meaning of Rule 144 of the Securities Act of 1933, as
amended), provided that such donee(s) or affiliate(s) agree in
writing to be bound by the restrictions contained in a lock-up
agreement.
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The Company and the Selling Shareholder, severally and not jointly,
agree with the several Underwriters that the Company will pay all expenses
incident to the performance of the obligations of the Company and the Selling
Shareholder, as the case may be (except for the underwriting discounts and
commissions payable with respect to the Selling Shareholder's shares sold in the
Offering, which the Selling Shareholder will bear in proportion to amounts
sold), under this Agreement, any filing fees and other expenses (including fees
and disbursements of counsel not to exceed $10,000) incurred in connection with
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee of the National Association of Securities Dealers,
Inc. relating to the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Shareholder of the Offered Securities to the Underwriters and for expenses
incurred in distributing preliminary prospectuses and the Prospectus (including
any amendments and supplements thereto) to the Underwriters.
The Selling Shareholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group, on or prior to the First Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
The Selling Shareholder agrees for a period of 180 days after the date
of the Prospectus, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any additional shares of the Securities of
the Company or securities convertible into or exchangeable or exercisable for
any shares of Securities, or publicly disclose the intention to make any such
offer, sale, pledge or disposition, without the prior written consent of CSFBC.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholder herein, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholder of their
obligations hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Ernst & Young LLP, confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
(i) in their opinion the financial statements
examined by them and included in the Registration Statements
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
Rules and Regulations;
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<PAGE> 12
(ii) on the basis of a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting matters
and other specified procedures, nothing came to their attention that
caused them to believe that:
(A) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than three
days prior to the date of this Agreement, there was any change in the
capital stock or any increase in short-term indebtedness or long-term
debt of the Company and its consolidated subsidiaries or, at the date
of the latest available balance sheet read by such accountants, there
was any decrease in consolidated net current assets or consolidated net
assets, as compared with amounts shown on the latest balance sheet
included in the Prospectus; or
(B) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the latest
available income statement read by such accountants there were any
decreases, as compared with the corresponding period of the previous
year, and with the period of corresponding length ended the date of the
latest income statement included in the Prospectus, in consolidated net
sales or consolidated net operating income or in the total or per share
amounts of income before extraordinary items or net income;
(C) any unaudited pro forma financial statements included in
the Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published
rules and regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of
those statements;
except in all cases set forth in clauses (A), (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of the
Company and its subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly from such records
by analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statements is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration Statement
is subsequent to such execution and delivery, "Registration Statements" shall
mean the Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective Time, and
(iii) "Prospectus" shall mean the prospectus included in the Registration
Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M.,
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<PAGE> 13
New York time, on the date of this Agreement or such later date as shall have
been consented to by CSFBC. If the Effective Time of the Additional Registration
Statement (if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus is
printed and distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this Agreement.
Prior to such Closing Date, no stop order suspending the effectiveness of a
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company, the
Selling Shareholder or the Representatives, shall be contemplated by the
Commission.
(c) Subsequent to the execution and delivery by the Company of this
Agreement, there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or otherwise),
business, properties or results of operations of the Company which, in the
judgment of a majority in interest of the Underwriters including the
Representatives, would have a Material Adverse Effect upon the Company and its
subsidiaries taken as a whole and makes it impractical or inadvisable to proceed
with completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt securities of
the Company by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act), or any public announcement
that any such organization has under surveillance or review its rating of any
debt securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange or any setting of minimum
prices for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market;
(iv) any banking moratorium declared by U.S. Federal or New York authorities; or
(v) any outbreak or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Baker & McKenzie, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Florida,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification except where
the failure to do so would not have a Material Adverse Effect.
(ii) AVTEAM Aviation Field Services, Inc. ("Subsidiary") has
been duly incorporated and is an existing corporation in good standing
under the laws of the State of Florida, with corporate power and
authority to own its properties and conduct its business as described
in the Prospectus; and Subsidiary is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of
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<PAGE> 14
property or the conduct of its business requires such qualification
except where the failure to do so would not have a Material Adverse
Effect.
(iii) The Offered Securities delivered on such Closing Date
and all other outstanding shares of the Securities of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the shareholders of the Company have no preemptive
rights with respect to the Offered Securities; and, to the knowledge of
such counsel, there are no other rights to subscribe for or purchase
any shares of capital stock issued by the Company and (except as
described in the Prospectus) no outstanding securities or obligations
of the Company convertible into, exercisable for or exchangeable for
any capital stock of the Company.
(iv) To the knowledge of such Counsel, no person or entity has
any right, not effectively satisfied or waived, to require the Company
to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(v) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an "
investment company " as defined in the Investment Company Act of 1940.
(vi) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or, to the knowledge of
such counsel, any court is required to be obtained or made by the
Company for the consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered Securities, except
such as have been obtained and made under the Act and such as may be
required by the NASD or under state securities laws.
(vii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or, to the
knowledge of such counsel, any court having jurisdiction over the
Company or any subsidiary of the Company or any of their properties,
or, to the knowledge of such counsel, any material agreement or
instrument to which the Company or any such subsidiary is a party or by
which the Company or any such subsidiary is bound or to which any of
the properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary.
(viii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed and
became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was included
in the Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
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<PAGE> 15
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
(ix) This Agreement has been duly authorized, executed and
delivered by the Company.
(x) The statements in the Registration Statement and the
Prospectus under the captions "Business -- Regulation," "Description of
Capital Stock" and "Shares Eligible For Future Sale," insofar as they
are descriptions of laws, regulations and rules, of legal and
governmental proceedings or of contracts, agreements, leases and other
legal documents known to such counsel, or refer to statements of law or
legal conclusions, are complete and accurate in all material respects.
In addition, such counsel shall state that it has participated
in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company
and the Representatives and counsel to the Underwriters at which the
contents of the Registration Statement and Prospectus and related
matters were discussed and, although such counsel has not undertaken to
investigate or verify independently and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and Prospectus
(except as otherwise expressly set forth herein), on the basis of the
foregoing, no facts have come to such counsel's attention that caused
such counsel to believe that any part of the Registration Statement
(other than the financial statements and notes thereto and other
financial, statistical and accounting data or schedules included
therein, or omitted therefrom, as to which such counsel need express no
opinion), as amended or supplemented, at the time such part of the
Registration Statement became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or the Prospectus (other than the financial statements and
notes thereto and other financial, statistical and accounting data or
schedules included therein, or omitted therefrom, as to which such
counsel expresses no opinion), as amended or supplemented, on the date
of filing thereof with the Commission and on the date hereof, contained
an untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., counsel
for the Selling Shareholder, to the effect that:
(i) The Selling Shareholder had valid and unencumbered title
to the Offered Securities delivered by the Selling Shareholder on such
Closing Date and had full right, power and authority to sell, assign,
transfer and deliver the Offered Securities delivered by the Selling
Shareholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Shareholder on such
Closing Date hereunder;
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<PAGE> 16
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by the Selling Shareholder
for the consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered
Securities sold by the Selling Shareholder, except such as
have been obtained and made under the Act and such as may be
required under state securities laws;
(iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions therein and
herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default
under any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction
over the Selling Shareholder or any of its properties or any
agreement or instrument to which the Selling Shareholder is a
party or by which the Selling Shareholder is bound or to which
any of the properties of the Selling Shareholder is subject;
and
(iv) This Agreement has been duly authorized,
executed and delivered by the Selling Shareholder.
(f) The Representatives shall have received from King & Spalding,
counsel for the Underwriters, such opinion or opinions, dated such Closing Date,
with respect to the incorporation of the Company, the validity of the Offered
Securities delivered on such Closing Date, the Registration Statements, the
Prospectus and other related matters as the Representatives may require, and the
Selling Shareholder and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling them to
pass upon such matters.
(g) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice-President and a principal financial
or accounting officer of the Company in which such officers, to the best of
their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and, to the best of their knowledge, no
proceedings for that purpose have been instituted or are contemplated by the
Commission; the Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to
Rule 462(b), including payment of any applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed
and distributed to any Underwriter; and, subsequent to the date of the most
recent financial statements in the Prospectus, there has been no material
adverse change, nor any development or event likely to result in a material
adverse change, in the condition (financial or otherwise), business, properties
or results of operations of the Company except as set forth in or contemplated
by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
(i) The Selling Shareholder shall have executed and delivered this
Agreement.
(j) The Additional Shareholder shall have executed and delivered this
Agreement.
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<PAGE> 17
The Selling Shareholder and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided, further,
that such indemnity with respect to any untrue statement or omission of a
material fact contained in any preliminary prospectus, shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares that are subject thereof if
such person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) at or prior to the confirmation of the sale of such shares to such
person in any case where delivery is required under the Act and such untrue
statement or omission of a material fact contained in any preliminary prospectus
was corrected in the Prospectus (or the Prospectus as supplemented).
(b) The Selling Shareholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (in each case only to
the extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or any Underwriter by the Selling
Shareholder specifically for use therein) and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Selling Shareholder will not be liable to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission from any of such documents in reliance
upon and conformity with written information furnished to the Company by an
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below; and provided, further, that such indemnity with respect to any untrue
statement or omission of a
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material fact contained in any preliminary prospectus, shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares that are subject thereof if
such person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) at or prior to the confirmation of the sale of such shares to such
person in any case where delivery is required under the Act and such untrue
statement or omission of a material fact contained in any preliminary prospectus
was corrected in the Prospectus (or the Prospectus as supplemented).
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and the Selling Shareholder against any losses, claims,
damages or liabilities to which the Company or the Selling Shareholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company or the Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legend concerning over-allotments and stabilizing on the
inside front cover page and the concession and reallowance figures appearing in
the paragraph and statement under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action. The indemnifying party shall not be
liable for settlements effected without its prior written consent, which shall
not be unreasonably withheld.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholder on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholder on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims,
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damages or liabilities as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Shareholder on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholder bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Shareholder or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Shareholder under
this Section shall be in addition to any liability which the Company and the
Selling Shareholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on any Closing
Date and the aggregate number of shares of Offered Securities that such
defaulting Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of shares of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date, CSFBC may make
arrangements satisfactory to the Company and the Selling Shareholder for the
purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Shareholder for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholder, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased
previously. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers, the Selling Shareholder and of the
19
<PAGE> 20
several Underwriters set forth in or made pursuant to this Agreement will remain
in full force and effect, regardless of any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the Selling
Shareholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Shareholder shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Shareholder, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed or delivered and confirmed to the
Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010, Attention: Investment Banking Department -
Transactions Advisory Group, with a copy to King & Spalding, 191 Peachtree
Street, N.E., Atlanta, GA 30303-1763, Attention: Jeffrey M. Stein, Esq., or, if
sent to the Company, will be mailed or delivered and confirmed to it at 3230
Executive Way, Miramar Park of Commerce, Miramar, Florida 33025, Attention:
Donald A. Graw, with a copy to Baker & McKenzie, 701 Brickell Avenue, Suite 700,
Miami, Florida 33131-2827, Attention: Andrew Hulsh, Esq., or, if sent to the
Selling Shareholder, will be mailed, delivered or telegraphed and confirmed to
the Selling Shareholder at Sragowicz Foundation, Inc., 166 Bal Bay Drive, Bal
Harbour, Florida 33154, Attn: Leon Sragowicz, President, with a copy to
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., 1221 Brickell Avenue,
Miami, Florida 33131-3324, Attention: Gary M. Epstein, Esq., provided, however,
that any notice to an Underwriter pursuant to Section 7 will be mailed or
delivered and confirmed to such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. REPRESENTATION. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives, jointly or by
CSFBC, will be binding upon all the Underwriters.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company and the Selling Shareholder hereby submit to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company three
counterparts hereof, whereupon this Agreement will become a binding agreement
among the Selling Shareholder, the Company and the several Underwriters in
accordance with its terms.
20
<PAGE> 21
Very truly yours,
THE SELLING SHAREHOLDER: SRAGOWICZ FOUNDATION, INC.
By: /s/ Leon Sragowicz
---------------------------------
Name: Leon Sragowicz
Title: President
THE ADDITIONAL SHAREHOLDER: LEON SRAGOWICZ
/s/ Leon Sragowicz
---------------------------------
THE COMPANY: AVTEAM, INC.
By: /s/ Donald A. Graw
---------------------------------
Name: Donald A. Graw
Title: President and Chief
Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SBC WARBURG DILLON READ INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters.
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ F. Perkins Hixon, Jr.
----------------------------------
Name: F. Perkins Hixon, Jr.
Title: Managing Director
21
<PAGE> 22
SCHEDULE A
<TABLE>
<CAPTION>
TOTAL NUMBER OF
NUMBER OF FIRM SECURITIES FIRM SECURITIES
UNDERWRITER TO BE SOLD BY TO BE PURCHASED
- ----------- -------------------------- ---------------
SELLING
COMPANY SHAREHOLDER
-------- ------------
<S> <C> <C> <C>
Credit Suisse First Boston Corporation ........... 1,297,450 627,550 1,925,000
SBC Warburg Dillon Read Inc. ..................... 1,297,450 627,550 1,925,000
William Blair & Company, L.L.C ................... 33,700 16,300 50,000
Dain Bosworth Incorporated ....................... 33,700 16,300 50,000
Gabelli & Company, Inc. .......................... 33,700 16,300 50,000
Invemed Associates, Inc. ......................... 67,400 32,600 100,000
C.L. King & Associates, Inc. ..................... 33,700 16,300 50,000
McDonald & Company Securities, Inc. .............. 33,700 16,300 50,000
Raymond James & Associates, Inc. ................. 33,700 16,300 50,000
Charles Schwab & Co., Inc. ....................... 67,400 32,600 100,000
Southeast Research Partners, Inc. ................ 33,700 16,300 50,000
Stifel, Nicolaus & Company, Incorporated ......... 33,700 16,300 50,000
Wedbush Morgan Securities, Inc. .................. 33,700 16,300 50,000
Total ............................................ 3,033,000 1,467,000 4,500,000
========= ========= =========
</TABLE>
22
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES OF AVTEAM, INC.
AVTEAM Aviation Field Services, Inc., a Florida corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS 1997
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,676
<SECURITIES> 0
<RECEIVABLES> 5,751
<ALLOWANCES> 702
<INVENTORY> 24,480
<CURRENT-ASSETS> 50,572
<PP&E> 1,543
<DEPRECIATION> 605
<TOTAL-ASSETS> 58,954
<CURRENT-LIABILITIES> 3,147
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 51,693
<TOTAL-LIABILITY-AND-EQUITY> 58,954
<SALES> 52,881
<TOTAL-REVENUES> 52,881
<CGS> 38,385
<TOTAL-COSTS> 38,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 136
<INTEREST-EXPENSE> 991
<INCOME-PRETAX> 6,193
<INCOME-TAX> 2,259
<INCOME-CONTINUING> 3,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,934
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.52
</TABLE>
