<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1998
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, par value $.01per share
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 15, 1999, (a) 11,015,739 shares of Class A Common Stock, par
value $.01 per share, of the Registrant (the "Class A Common Stock") were
outstanding and 439,544 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 25, 1999 as quoted on the NASDAQ Stock Market's National
Market, which was $4.875 per share) held by non-affiliates was approximately
$23,573,000.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this Annual Report is incorporated by
reference to portions of Registrant's Proxy Statement for the 1999 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission on or before April 30, 1999.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
The Registrant hereby amends and restates in its entirety the Financial
Statements of AVTEAM, Inc. and subsidiaries set forth on pages F-1 to F-20 of
its Annual Report on Form 10-K to correctly state the amount of the Deferred
Tax Asset and Retained Earnings for the year ended December 31, 1998.
2<PAGE> 3
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 23rd day of April, 1999.
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, April 23, 1999
- -------------------------------------- Chief Executive Officer
Donald A. Graw (Principal Executive Officer)
/s/ MARK S. KOONDEL Chief Executive Officer, April 23, 1999
-------------------------------------- Treasurer, Assistant Secretary
Mark S. Koondel (Principal Financial and
Accounting Officer)
/s/ JAIME J. LEVY Executive Vice President April 23, 1999
- -------------------------------------- Director
Jaime J. Levy
/s/ RICHARD PRESTON Secretary, Director April 23, 1999
- --------------------------------------
Richard Preston
Director
- --------------------------------------
Robert Munson
Director
- --------------------------------------
Eugene P. Lynch
Director
- --------------------------------------
Sanford Miller
/s/ JAMES McLELLAN Director April 23, 1999
- --------------------------------------
James McLellan
</TABLE>
<PAGE> 4
AVTEAM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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
F-1
<PAGE> 5
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 Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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 Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 12, 1999
F-2
<PAGE> 6
AVTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents 1,745 $ 18,676
Trade accounts receivable, less allowance for doubtful accounts of $179 and $274,
and allowance for sales returns of $570 and $428, in 1998 and 1997, respectively 12,823 5,751
Inventory 84,057 24,480
Prepaid expenses 1,382 1,153
Deposits 935 432
Deferred tax asset 427 80
-------- --------
Total current assets 101,369 50,572
Revenue producing equipment, net 8,579 6,935
Property and equipment, net 4,433 938
Goodwill, net 26,739 --
Other assets 694 509
-------- --------
Total assets $141,814 $ 58,954
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 60,800 $ --
Accounts payable 12,280 706
Accrued expenses 3,016 1,654
Customer deposit 2,513 344
Current portion of notes payable-lease financing 318 328
Current portion of capital lease obligations 106 115
-------- --------
Total current liabilities 79,033 3,147
Capital lease obligations, net of current portion 81 186
Notes payable - lease financing 3,348 3,817
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized, no shares issued
or outstanding in 1998 and 1997 -- --
Class A Common Stock, $.01 par value, 77,000,000 shares authorized, 11,015,739
shares issued and outstanding for 1998, 10,665,739 shares issued and outstanding
in 1997 110 107
Class B Common Stock, $.01 par value, 3,000,000 shares authorized, 439,644
shares issued and outstanding in 1998 and 1997 4 4
Additional paid-in capital 49,177 47,444
Retained earnings 10,061 4,249
-------- --------
Total shareholders' equity 59,352 51,804
-------- --------
Total liabilities and shareholders' equity $141,814 $ 58,954
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
F-3
<PAGE> 7
AVTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 75,357 $ 52,881 $ 31,724
Cost of sales 55,515 38,385 22,641
------------ ------------ ------------
Gross profit 19,842 14,496 9,083
Operating expenses 8,862 7,312 4,312
------------ ------------ ------------
Income from operations 10,980 7,184 4,771
------------ ------------ ------------
Offering expenses -- -- 1,154
Interest expense, net 1,774 991 757
------------ ------------ ------------
Income before provision (credit) for income taxes 9,206 6,193 2,860
Provision (credit) for income taxes:
Current 3,741 1,907 62
Deferred (347) 352 (432)
------------ ------------ ------------
3,394 2,259 (370)
------------ ------------ ------------
Net income 5,812 3,934 3,230
Adjustments for pro forma provision for income
taxes -- -- (1,538)
------------ ------------ ------------
Pro forma net income (historical for 1998 and 1997) $ 5,812 $ 3,934 $ 1,692
============ ============ ============
Pro forma net income per common share - basic
(historical for 1998 and 1997) $ 0.52 $ 0.65 $ 0.34
============ ============ ============
Weighted average number of common shares
outstanding - basic 11,120,725 6,073,694 5,000,000
============ ============ ============
Pro forma net income per common share - diluted
(historical for 1998 and 1997) $ 0.52 $ 0.52 $ 0.33
============ ============ ============
Weighted average number of common equivalent
shares outstanding - diluted 11,129,902 7,622,194 5,121,096
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE> 8
AVTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A
PREFERRED CLASS A COMMON CLASS B
PREFERRED STOCK COMMON STOCK COMMON
SHARES AMOUNT SHARES AMOUNT SHARES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Common Stock (2,414,286) (24) 1,974,642 20 439,644
Net income -- -- -- -- --
---------- -------- ----------- -------- -----------
Balance at December 31, 1997 -- -- 10,665,739 107 439,644
Issuance of Class A Common
Stock for purchase of
certain assets and
liabilities of M&M
Aviation Services, Inc. -- -- 350,000 3 --
Net income -- -- -- -- --
---------- -------- ----------- -------- -----------
Balance at December 31, 1998 -- -- $11,015,739 $110 $ 439,644
========== ======== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
CLASS B NOTES
COMMON ADDITIONAL RECEIVABLE
STOCK PAID-IN RETAINED FROM
AMOUNT CAPITAL EARNINGS OFFICERS TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Common Stock 4 -- -- -- --
Net income -- -- 3,934 -- 3,934
--------- -------- -------- -------- --------
Balance at December 31, 1997 4 47,444 4,249 -- 51,804
Issuance of Class A Common
Stock for purchase of
certain assets and
liabilities of M&M
Aviation Services, Inc. -- 1,733 -- -- 1,736
Net income -- -- 5,812 -- 5,812
--------- -------- -------- -------- --------
Balance at December 31, 1998 $ 4 $ 49,177 $ 10,061 $ -- $ 59,352
========= ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE> 9
AVTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,812 $ 3,934 $ 3,230
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,764 562 158
Bad debt expense -- 136 88
Deferred tax provision (credit) (347) 352 (432)
Changes in operating assets and liabilities, net of effects
from purchase of M&M Aircraft Services, Inc.:
Trade accounts receivable (4,646) (857) (457)
Inventory (47,548) (9,975) (5,940)
Prepaid expenses and deposits (371) (116) (1,284)
Due from affiliate -- 343 (343)
Other assets 4 (373) (50)
Accounts payable 6,837 (1,978) (1,740)
Accrued expenses/Customer deposit (606) 598 1,057
Due to shareholders and affiliates -- (292) (936)
-------- -------- --------
Net cash used in operating activities (39,101) (7,666) (6,649)
INVESTING ACTIVITIES
Purchase of certain assets and liabilities of M&M Aircraft
Services, Inc. (34,196) -- --
Purchases of revenue producing equipment (7,238) (2,878) --
Purchases of property and equipment (1,570) (516) (314)
Net proceeds from sale of revenue producing equipment 7,114 -- --
-------- -------- --------
Net cash used in investing activities (35,890) (3,394) (314)
FINANCING ACTIVITIES
Payments on capital leases (114) (95) (48)
Net proceeds from (payments on) notes payable - lease financing (2,626) (129) 1,550
Net proceeds from (payments on) short-term line of credit 60,800 (404) (2,752)
Advances from shareholders -- -- 2,250
Payments of shareholders' advances/loans -- (2,513) (2,479)
Net proceeds from sale of preferred stock -- 5,000 11,357
Net proceeds from sale of common stock -- 27,877 --
Distributions -- -- (2,915)
-------- -------- --------
Net cash provided by financing activities 58,060 29,736 6,963
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (16,931) 18,676 --
Cash at beginning of year 18,676 -- --
-------- -------- --------
Cash and cash equivalents at end of year $ 1,745 $ 18,676 $ --
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 1,765 $ 1,097 $ 795
======== ======== ========
Income taxes paid $ 3,774 $ 2,810 $ --
======== ======== ========
SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Notes receivable from officers offset against amounts due
to shareholders $ -- $ -- $ 708
======== ======== ========
Shareholder advances converted to notes payable $ -- $ -- $ 1,511
======== ======== ========
Revenue producing equipment acquired under capital leases $ 2,147 $ 4,274 $ --
======== ======== ========
Office furniture and equipment acquired under capital leases $ -- $ 265 $ 48
======== ======== ========
Preferred shares converted to common shares $ -- $ 16,357 $ --
======== ======== ========
Stock issued in connection with acquisition $ 1,736 $ -- $ --
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE> 10
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND ACQUISITION
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. On December 15, 1998, AVTEAM,
Inc., through its wholly owned subsidiary, AVTEAM Engine Repair Corp., a Florida
corporation, completed its acquisition (the "Acquisition") of substantially all
of the assets and the assumption of certain liabilities of M&M Aircraft
Services, Inc., a Florida corporation, an FAA licensed aircraft engine
maintenance, repair and overhaul facility. The accompanying consolidated
financial statements as of December 31, 1998 and for the year then ended include
the accounts of AVTEAM, Inc., AVTEAM Engine Repair Corp. ("M&M") for the two
weeks ended December 31, 1998, and AAFS, collectively (the "Company") after
elimination of intercompany accounts and transactions.
The Acquisition was made pursuant to an Asset Purchase Agreement dated
October 12, 1998 by and among AVTEAM, AVTEAM Engine Repair Corp., the Seller and
the shareholders of the Seller. The consideration in the acquisition consisted
of $30 million in cash, debt repayment of $3.4 million and the issuance of
350,000 shares of Class A Common Stock.
Including the fair value of the common shares issued, fees and other
expenses, the total cost of the acquisition amounted to approximately $35.9
million. The Acquisition was accounted for as a purchase and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on estimates of their underlying fair values. The excess of the purchase
price over the fair value of net assets acquired of $26.8 million is classified
as goodwill and is being amortized over 30 years.
The following is a summary of the purchase price allocated to M&M (U.S.
Dollars in millions):
Net working capital..................................... $ 5.9
Property, plant and equipment........................... 2.5
Revenue producing assets................................ .5
Other assets............................................ .2
Excess of purchase price over the fair value of
net assets acquired................................. 26.8
--------
$ 35.9
========
The following unaudited pro forma data presents a summary of 1998
consolidated results of operations of the Company as if the Acquisition had
occurred at the beginning of the periods presented (U.S. Dollars in millions,
except share data):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
------------ ----------
<S> <C> <C>
Net sales............................................... $ 119.1 $ 79.0
Net income.............................................. $ 6.0 $ 1.6
Net income per share - basic............................ $ 0.52 $ 0.26
Weighted average number of shares - basic............... 11,455,383 6,423,694
Net income per share - diluted.......................... $ 0.52 $ 0.21
Weighted average number of shares - diluted............. 11,464,560 7,972,194
</TABLE>
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.
F-7
<PAGE> 11
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
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.
M&M's inventories are valued at the lower of cost or market, based on
the specific identification method and by the first-in, first-out method. Work
in process inventory includes parts inventory, valued at the lower of cost or
market and labor and overhead, valued at actual cost.
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.
Revenues from engine overhaul and repair services are recognized at the
time of performance test acceptance of engines and completion of services.
WARRANTIES AND PRODUCT RETURNS
The Company, other than for services performed by M&M, 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. M&M's warranty costs are accrued based on management's
estimates of such costs and historical sales percentages.
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, 1998, 1997 and 1996, accounts payable totaling $5,451,000,
$5,709,000, and $3,175,000 respectively, were offset against accounts
receivable.
F-8
<PAGE> 12
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
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
Machinery and equipment................................... 5-7 years
Leasehold improvements.................................... 3-10 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. Four of such
engines are the subject of a sale/leaseback arrangement. The proceeds under the
arrangement are recorded as a financing obligation and will be reduced by
payments under the lease over its five-year term. The lease agreement provides
the Company with an option to terminate the lease and to repurchase the engines
at any time after one year at varying rates based on the original sales price.
CONCENTRATION OF CREDIT RISK
Accounts receivable are primarily from domestic and foreign passenger
airlines, freight and package carriers, charter airlines, aircraft leasing
companies and service providers to such companies. The Company performs ongoing
evaluations of its trade accounts receivable customers, monitors its exposure
for credit losses and sales returns and generally 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
year-ended December 31, 1996 (see Note 5).
F-9
<PAGE> 13
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
PRO FORMA NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
and pro forma net income per share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (pro forma for 1996) $ 5,812,000 $ 3,934,000 $ 1,692,000
=============== =============== ===============
Denominator:
Denominator for basic net income
per share - weighted average shares 11,120,725 6,073,694 5,000,000
Effect of dilutive securities:
Convertible preferred stock -- 1,546,849 121,096
Employee stock options 9,177 1,651 --
--------------- --------------- ---------------
Dilutive potential common shares 9,177 1,548,500 121,096
--------------- --------------- ---------------
Denominator for diluted earnings per share -
adjusted weighted - average shares and
assumed conversions 11,129,902 7,622,194 5,121,096
=============== =============== ===============
Pro forma net income per common share - basic $ 0.52 $ 0.65 $ 0.34
=============== =============== ===============
Pro forma net income per common share - diluted $ 0.52 $ 0.52 $ 0.33
=============== =============== ===============
</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.
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.
F-10
<PAGE> 14
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Current........................... $3,741 $1,907 $ 62
Deferred......................... (347) 352 (432)
------ ------ ------
Total.............................. $3,394 $2,259 $ (370)
====== ====== ======
</TABLE>
Concurrent with the December 6, 1996 private placement (see Note 16),
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, 1998 and 1997
are as follows (in thousands):
DECEMBER 31,
------------------------
1998 1997
---- ----
Allowance for doubtful accounts.............. $ 78 $ 100
Allowance for sales returns.................. 206 155
Insurance.................................... -- (20)
Depreciation................................. (867) (414)
Warranty provision........................... -- 36
Goodwill amortization........................ (14) --
Interest .................................... -- 3
Uniform inventory capitalization............. 1,024 220
------ ------
Net deferred tax asset.............. $ 427 $ 80
====== ======
The reconciliation of the expected income tax expense at federal
statutory rates is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC 31, 1998 DEC 31, 1997
------------ ------------
<S> <C> <C>
Tax at federal statutory rate........................... 34.00% 34.00%
State income taxes, net of federal benefit.......... 2.33 2.35
Permanent differences.................................. .54 .13
------------ ------------
36.87% 36.48%
============ ============
</TABLE>
PRO FORMA
The adjustments for pro forma provision for income taxes for the year
ended December 31, 1996, reflect the adjustments needed to reflect income tax
expense as if the Company had been taxed as a C corporation.
F-11
<PAGE> 15
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma provision for income taxes (including the historical
component in 1996) is as follows:
YEAR ENDED
DEC 31, 1996
------------
Current............................................... $ 827
Deferred.............................................. 341
------
Total................................................. $1,168
======
The pro forma income tax provision differs from the amounts computed by
applying the federal statutory rate of 34% to income before income taxes as
follows:
YEAR ENDED
DEC 31, 1996
------------
Tax at federal statutory rate........................... 34.00%
State income taxes, net of federal benefit.............. 2.45
Permanent differences................................... 4.35
-----
40.80%
=====
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 then existing common shareholders relating to
their respective income tax liabilities and certain related matters. The tax
indemnification agreements generally provide that the then 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.
6. INVENTORY
Inventory consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------- --------
Parts............................... $48,853 $18,053
Whole Engines & Aircraft............ 31,044 6,361
Work in Process..................... 3,924 --
Other............................... 236 66
------- -------
$84,057 $24,480
======= =======
F-12
<PAGE> 16
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. REVENUE PRODUCING EQUIPMENT AND PROPERTY AND EQUIPMENT
At December 31, 1998 and 1997, revenue producing equipment is net of
accumulated depreciation of $488 and $217, respectively.
Property and equipment consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
Office furniture and equipment....... $ 1,316 $ 649
Machinery and equipment.............. 2,816 672
Leasehold improvements............... 1,470 222
-------- ------
5,602 1,543
Less accumulated depreciation
and amortization................... (1,169) (605)
-------- ------
$ 4,433 $ 938
======== ======
8. 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. On June 1, 1997, M&M began leasing
their new office and operating facilities under a noncancelable operating lease
that expires May 31, 2005. The lease contains two consecutive options to extend
for a period of forty-eight consecutive months each. Future minimum lease
payments by year and in the aggregate under operating leases are as follows (in
thousands):
1999............................ $ 1,928
2000............................ 1,882
2001............................ 1,756
2002............................ 1,788
2003............................ 1,086
---------------
$ 8,440
===============
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,129,000, $449,000 and $390,000, respectively.
The Company has entered into various capital leases for office
furniture, computer equipment, and warehouse and transportation equipment
expiring in various years through 2001. Equipment under capitalized lease
obligations had an original cost of approximately $377,000 at December 31, 1998,
and $433,000 at December 31, 1997 and accumulated amortization was approximately
$202,000 and $148,000 at December 31, 1998 and 1997, respectively.
Future minimum lease payments by year and in the aggregate under these
capital leases were as follows at December 31, 1998 (in thousands):
1999......................................................... $ 122
2000......................................................... 66
2001......................................... ............... 23
--------
Total minimum lease payments................................. 211
Less amounts representing interest at 14.03%................. (24)
--------
Present value of net minimum lease payments
under capital leases (including current portion of $106) $ 187
========
F-13
<PAGE> 17
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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 and 1996 the
Company recorded sales under this agreement of approximately $495,000 and
$1,925,000, respectively, with a gross profit of approximately $247,000 and
$395,000. 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 $37,000, $39,000 and
$50,000 for each of the three years 1998, 1997 and 1996, 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 had notes payable to shareholders
totaling $2.5 million. 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.
10. NOTES PAYABLE TO BANK AND NOTES PAYABLE - LEASE FINANCING
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.
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.
F-14
<PAGE> 18
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 30, 1998, the Company, as borrower, and AAFS, as guarantor,
entered into a new Credit Agreement (the "Credit Agreement") with a syndicate of
lenders led by Bank of America, N.A., as administrative agent (the "Lenders"),
pursuant to which the Lenders agreed to make available to the Company a
revolving credit facility (the "Revolving Credit Facility") in the maximum
aggregate principal amount of up to $70.0 million. The Revolving Credit Facility
consists of (i) a working capital revolving loan facility (the "Working Capital
Revolving Loan Facility") in the aggregate principal amount of up to $45.0
million and a (ii) an acquisition revolving loan facility (the "Acquisition
Revolving Loan Facility") in the aggregate principal amount of up to $25.0
million. The Working Capital Revolving Loan Facility is being used by the
Company to finance working capital, capital expenditures and general corporate
purposes. The Acquisition Revolving Loan Facility will be used by the Company to
finance acquisitions permitted under the Credit Agreement. Borrowings under the
Credit Agreement are secured by a senior security interest in all of the assets
of the Company. The Company may borrow, repay and re-borrow funds under the
Credit Agreement until April 30, 2001. Borrowings are 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 Agreement requires the Company to make certain mandatory prepayments of
principal and interest. The Credit Agreement contains certain restrictions,
including restrictions on (i) incurring debt, (ii) declaring or paying any
dividend or other distribution on account of any class of stock of the Company,
(iii) creating liens on the Company's properties or assets, (iv) entering into a
merger or other business combination or (v) a change in control (as defined in
the Credit Agreement). As of December 31, 1998, the Company has drawn an
aggregate of $35.8 million under the Working Capital Revolving Loan Facility and
$25.0 million under the Acquisition Revolving Loan Facility. At December 31,
1998, the Company had additional availability of approximately $9.2 million
under the Working Capital Revolving Loan Facility. For a period of 150 days from
December 15, 1998, the Lenders agreed to amend the Credit Agreement to allow for
less restrictive covenants.
On July 25, 1997, the Company entered into an agreement with
NationsBanc Leasing Corporation ("NBLC") whereby the Company sold three Pratt &
Whitney JT8D engines to NBLC for approximately $4.3 million and subsequently
leased-back such engines for a period of five years at fixed monthly payments.
On April 23, 1998, the Company added an additional two JT8D engines to this
agreement. Net proceeds were approximately $2.1 million. The Company, at its
option, may repurchase any of these engines at a predetermined percentage of the
original leased amount. This transaction is accounted for as a financing,
wherein the aircraft engines remain on the books of the Company and are
depreciated. 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. The aggregate annual
maturities under this agreement are approximately as follows: 1999, $654,000;
2000, $654,000; 2001, $654,000; 2002, $1,567,000, and; 2003, $1,318,000.
The weighted average interest rate on short-term borrowings for the
years ended December 31, 1998, 1997 and 1996 was approximately 9%, 11% and 10%,
respectively.
11. SEGMENT FINANCIAL DATA
The Company operates in various segments of the aviation services industry.
The Company's operations have been aggregated primarily on the basis of products
or services into three reportable segments:
AVTEAM sells whole engines, whole aircraft, engine parts and airframe
components.
AVTEAM Aviation Field Services (AAFS) provides on-wing maintenance and
repairs including hush-kit installation and engine borescoping.
AVTEAM Engine Repair Corp. (d/b/a M&M Aircraft Services) performs
maintenance, repair and overhaul services for certain aircraft engines.
F-15
<PAGE> 19
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company evaluates performance based on several factors, of which income
before provision for income taxes is the primary financial measure. Operating
segment information for the years ended December 31 follows (in thousands of
dollars):
IN THOUSANDS OF DOLLARS TOTAL REVENUES
------------------------------------
1998 1997 1996
------- ------- -------
AVTEAM $70,165 $52,202 $31,724
AAFS 3,370 1,148 --
M&M 3,418 -- --
Eliminations (1,596) (469) --
------- ------- -------
Consolidated $75,357 $52,881 $31,724
======= ======= =======
INCOME BEFORE PROVISION
FOR INCOME TAXES
-----------------------------------
1998 1997 1996
------- ------- -------
AVTEAM $10,287 $7,632 $ 4,771
AAFS 269 (448) --
M&M 544 -- --
Eliminations (83) -- --
General corporate expenses (37) -- (1,154)
Interest expense (1,774) (991) (757)
------- ------- -------
$ 9,206 $6,193 $ 2,860
======= ====== =======
EXPORT SALES
--------------------------------------
1998 1997 1996
------- ------ ------
AVTEAM $ 3,072 $3,613 $ 722
AAFS 190 -- --
M&M 1,145 -- --
------- ------ ------
$ 4,407 $3,613 $ 722
======= ====== ======
CAPITAL EXPENDITURES
--------------------------------------
1998 1997 1996
------- ------ ------
AVTEAM $10,796 $3,133 $ 314
AAFS 95 261 --
M&M 64 -- --
------- ------ ------
$10,955 $3,394 $ 314
======= ====== ======
DEPRECIATION EXPENSE
-----------------------------------
1998 1997 1996
------ ----- ----
AVTEAM $1,656 $ 516 $ 158
AAFS 43 46 --
M&M 28 -- --
------ ----- ------
$1,727 $ 562 $ 158
====== ===== ======
LONG-LIVED ASSETS
------------------------
1998 1997
---- ----
AVTEAM $11,479 $ 8,434
AAFS 318 261
M&M 3,089 --
------- -------
$14,886 $ 8,695
======= =======
F-16
<PAGE> 20
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOTAL ASSETS
--------------------------
1998 1997
--------- -------
AVTEAM $ 132,540 $58,368
AAFS 1,396 878
M&M 19,295 --
Eliminations (11,417) (292)
--------- --------
Consolidated $ 141,814 $58,954
========= =======
12. 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.
13. 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.
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 non-interest 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.
F-17
<PAGE> 21
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SIGNIFICANT CUSTOMERS
Dallas Aerospace accounted for 2%, 5% and 16% of net sales for the
years ended December 31, 1998, 1997 and 1996, respectively, and 6% and 10% of
total accounts receivable at December 31, 1998 and 1997 respectively.
A second customer accounted for 19% of 1997 net sales.
A third customer accounted for 12% of 1997 net sales.
In 1998 no single customer accounted for more than 10% of net sales.
15. CONSIGNMENT SALES
The Company had an agreement with an airline to sell certain consigned
inventory. Net sales related to this agreement include approximately $882,000
and $1,295,000 for the years ended December 31, 1997 and 1996, respectively.
Such consigned inventory was purchased during 1998.
16. 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 $2,4,404 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.
F-18
<PAGE> 22
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 owed 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's 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.
On December 15, 1998, in connection with the purchase of certain assets
and liabilities of M&M Aircraft Services, Inc., the Company issued 350,000
additional shares of Class A Common Stock.
17. 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 of which 226,600 options are outstanding as of
December 31, 1998. 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 373,400 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
Net income As reported $ 5,812 $ 3,934
Pro forma $ 5,075 $ 3,861
Earnings per common share - As reported $ .52 $ .65
basic Pro forma $ .46 $ .64
Earnings per common share - As reported $ .52 $ .52
assuming dilution Pro forma $ .46 $ .51
</TABLE>
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-19
<PAGE> 23
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Exercise
Shares Price Price
--------- ------ ---------
<S> <C> <C> <C>
Options outstanding at January 1, 1997 -- -- --
Granted at market price 250,000 $ 8.50 $ 8.50
Exercised -- -- --
Canceled -- -- --
----------------
Options Outstanding at December 31, 1997 250,000 $ 8.50 $ 8.50
Granted at market price -- -- --
Exercised -- -- --
Canceled (23,400) -- --
----------------
Options outstanding at December 31, 1998 226,600 $ 8.50 $ 8.50
================
</TABLE>
On February 11, 1999 the Company granted a total of 271,800 options to
employees at a price equal to the market price at the date of grant.
Note 18. Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $13,117 $21,100 $14,765 $26,375
Gross profit 3,885 5,328 4,294 6,335
Net income 1,352 1,736 1,058 1,666
Net income per common share:
Basic 0.12 0.16 0.10 0.15
Diluted 0.12 0.16 0.10 0.15
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $8,413 $10,519 $13,269 $20,680
Gross profit 2,697 3,267 3,551 4,981
Net income 775 821 803 1,535
Net income per common share:
Basic 0.16 0.16 0.16 0.17
Diluted 0.12 0.12 0.11 0.15
</TABLE>
F-20
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------ -------- ------------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, independent Certified Public Accountants
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-72431) pertaining to the AVTEAM, Inc. 1996 Stock
Option Plan of our reports dated February 12, 1999, with respect to the
consolidated financial statements and schedules of AVTEAM, Inc. included in its
Annual Report on Form 10-K/A for the year ended December 31, 1998, filed with
the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Miami, Florida
April 21, 1999
