================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
Commission File 0-20889
AVTEAM, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0313187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3230 Executive Way 33025
Miramar, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 431-2359
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of November 10, 1999, 10,996,176 shares of Class A Common Stock, par
value $.01 per share, of the Registrant were outstanding and 439,644 shares of
Class B Common Stock, par value $.01 per share, of the Registrant were
outstanding.
================================================================================
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998..................... 1
Condensed Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1999 and 1998........................................ 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998.............. 3
Notes to Condensed Consolidated Financial Statements............... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 12
SIGNATURES.................................................................. 13
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,479 $ 1,745
Trade accounts receivable, net...................... 25,342 12,823
Inventory........................................... 76,823 84,057
Prepaid expenses.................................... 1,342 1,382
Deposits............................................ 1,215 935
Deferred tax asset.................................. -- 427
-------- --------
Total current assets....................................... 106,201 101,369
Revenue producing equipment, at cost....................... 14,508 9,284
Accumulated depreciation............................ (1,512) (705)
-------- --------
12,996 8,579
Property and equipment, at cost............................ 6,581 5,602
Accumulated depreciation............................ (2,073) (1,169)
-------- --------
4,508 4,433
Goodwill, net.............................................. 25,920 26,739
Other assets............................................... 1,386 694
-------- --------
Total assets...................................... $151,011 $141,814
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................... $ 63,350 $ 60,800
Accounts payable.................................... 11,589 12,280
Accrued expenses.................................... 2,781 3,016
Customer deposits................................... 3,408 2,513
Current portion of notes payable-lease financing.... 343 318
Current portion of capital lease obligations........ 131 106
-------- --------
Total current liabilities.................................. 81,602 79,033
Notes payable - lease financing............................ 3,116 3,348
Capital lease obligations, net of current portion.......... 147 81
Deferred tax liability..................................... 369 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, no shares issued or outstanding... -- --
Class A Common Stock, $.01 par value,
77,000,000 shares authorized,
10,996,176 shares issued and outstanding...... 110 110
Class B Common Stock, $.01 par value,
3,000,000 shares authorized, 439,644
shares issued and outstanding................. 4 4
Additional paid-in capital.......................... 49,080 49,177
Retained earnings................................... 16,583 10,061
-------- --------
Total shareholders' equity..................... 65,777 59,352
-------- --------
Total liabilities and shareholders' equity..... $151,011 $141,814
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 1
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................................. $ 30,835 $ 14,765 $ 95,615 $ 48,982
Cost of sales.............................. 21,655 10,471 68,507 35,475
----------- ----------- ----------- -----------
Gross profit............................... 9,180 4,294 27,108 13,507
Operating expenses......................... 4,358 2,098 12,586 6,108
----------- ----------- ----------- -----------
Income from operations..................... 4,822 2,196 14,522 7,399
Interest expense, net...................... 1,300 507 4,226 816
----------- ----------- ----------- -----------
Income before provision
(credit) for income taxes.................. 3,522 1,689 10,296 6,583
Provision (credit) for income taxes:
Current........................... 843 581 2,978 2,518
Deferred.......................... 434 50 796 (81)
----------- ----------- ----------- -----------
1,277 631 3,774 2,437
----------- ----------- ----------- -----------
Net income................................. $ 2,245 $ 1,058 $ 6,522 $ 4,146
=========== =========== =========== ===========
Net income per common share - basic........ $ 0.20 $ 0.10 $ 0.57 $ 0.37
=========== =========== =========== ===========
Weighted average number of
common equivalent shares
outstanding - basic........................ 11,446,452 11,105,383 11,452,373 11,105,383
=========== =========== =========== ===========
Net income per common equivalent
share - diluted............................ $ 0.20 $ 0.10 $ 0.57 $ 0.37
=========== =========== =========== ===========
Weighted average number of
common equivalent shares
outstanding - diluted...................... 11,509,730 11,115,969 11,498,727 11,135,447
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 6,522 $ 4,146
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 2,414 1,242
Bad debt expense....................................... 172 (14)
Deferred tax expense (credit).......................... 796 (81)
Changes in operating assets and liabilities:
Trade accounts receivable....................... (12,691) (3,711)
Inventory....................................... 7,234 (44,306)
Prepaid expenses and deposits................... (240) (2,122)
Other assets.................................... (692) 230
Accounts payable................................ (691) 5,527
Accrued expenses and customer deposits.......... 660 (24)
-------- --------
Net cash provided by (used in)
operating activities.............. 3,484 (39,113)
INVESTING ACTIVITIES
Purchases of revenue producing equipment......................... (6,396) (8,039)
Purchases of property and equipment.............................. (987) (1,231)
Net proceeds from sale of revenue producing equipment............ 1,143 4,785
Other............................................................ 56 --
-------- --------
Net cash used in investing activities.. (6,184) (4,485)
FINANCING ACTIVITIES
Payments on capital leases....................................... (102) (93)
Net proceeds from capital leases................................. 193 --
Net payments on notes payable.................................... (207) (2,563)
Net proceeds from notes payable financing........................ -- 2,147
Net proceeds from short-term line of credit...................... 2,550 26,500
-------- --------
Net cash provided by
financing activities................ 2,434 25,991
-------- --------
Net decrease in cash and
cash equivalents.................... (266) (17,607)
Cash and cash equivalents
at beginning of period.............. 1,745 18,676
-------- --------
Cash and cash equivalents
at end of period.................... $ 1,479 $ 1,069
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid.................................................... $ 3,900 $ 868
======== ========
Income taxes paid................................................ $ 3,214 $ 2,532
======== ========
Shares released from escrow in connection with
investment in M&M Aircraft Services.......................... $ 97 $ --
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. For further information, refer
to the financial statements and footnotes thereto included in the Company's 1998
Annual Report on Form 10-K for the year ended December 31, 1998.
The Company has in the past and may in the future experience
substantial fluctuations in its results of operations as a result of seasonal
effects. The Company believes that demand for aircraft engines, engine parts and
airframe components ("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,
certain aircraft are removed from service during the summer months due to the
failure of those particular aircraft engines to comply with certain exhaust gas
temperature limitations. Aircraft engines of the same type and model can have
different performance capabilities. The summer months also include peak travel
periods during which aircraft utilization levels are high. In addition, the
timing of whole aircraft engine sales, at greater unit purchase prices than the
installed parts and components, may cause significant fluctuations in the
Company's quarterly results of operations.
2. 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. 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 September 30, 1999 and for the three month and nine
month periods then ended include the accounts of AVTEAM, Inc., AVTEAM Engine
Repair Corp. ("M&M") and AAFS, collectively (the "Company") after elimination of
intercompany accounts and transactions.
3. 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.
Page 4
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
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. Parts
received as a result of a customer exchange are valued at the lower of cost or
market based on the relationship of the historical cost of similar parts and
estimated sales price.
Inventory consists of the following:
<TABLE>
<CAPTION>
AS OF
-------------------------------------------
IN THOUSANDS SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Parts, Whole Engines & Aircraft.... $73,990 $79,897
Work in Process.................... 2,694 3,924
Other.............................. 179 236
------- -------
$76,823 $84,057
======= =======
</TABLE>
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.
Revenues from engine overhaul and repair services are recognized at the
time of performance test acceptance of engines and/or 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 nine months ended
September 30, 1999, accounts payable totaling approximately $1,266,000 were
offset against accounts receivable.
PROPERTY AND EQUIPMENT
Property and equipment (including assets under capital leases) is
carried at cost and is depreciated using accelerated and straight-line methods
over the lesser of the lease terms or the estimated useful lives of the assets.
The lives used are as follows:
Office furniture and equipment.............. 3-7 years
Warehouse and transport equipment........... 5-7 years
Leasehold improvements...................... 3-10 years
Page 5
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
REVENUE PRODUCING EQUIPMENT
Revenue producing equipment is comprised of engines and aircraft leased
to users on a short-term basis. Such engines and aircraft are carried at cost
and are depreciated using the straight-line method over periods between five and
ten years. Four of such engines are the subject of a sale/leaseback arrangement.
The proceeds under the arrangement are recorded as a financing obligation and
will be reduced by payments under the lease over its five-year term. The lease
agreement provides the Company with an option to terminate the lease and to
repurchase the engines at any time after one year at varying rates based on the
original sales price.
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Management reviews long-lived assets
and the related intangible assets for impairment whenever events or changes in
circumstances indicate the assets may be impaired.
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of assets acquired and is amortized on the straight-line basis over 30
years. The carrying value of goodwill is reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, the carrying value will be adjusted accordingly. At September
30, 1999, accumulated amortization of goodwill was approximately $703,000.
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.
Page 6
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
and net income per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net income .......................... $ 2,245,000 $ 1,058,000 $ 6,522,000 $ 4,146,000
=========== =========== =========== ===========
Denominator:
Denominator for basic net income
per share-weighted average shares.... 11,446,452 11,105,383 11,452,373 11,105,383
----------- ----------- ----------- -----------
Effect of dilutive securities
Employee stock options............... 63,278 10,586 46,354 30,064
----------- ----------- ----------- -----------
Dilutive potential common shares 63,278 10,586 46,354 30,064
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions....... 11,509,730 11,115,969 11,498,727 11,135,447
=========== =========== =========== ===========
Net income per common share - basic......... $ 0.20 $ 0.10 $ 0.57 $ 0.37
=========== =========== =========== ===========
Net income per common share - diluted....... $ 0.20 $ 0.10 $ 0.57 $ 0.37
=========== =========== =========== ===========
</TABLE>
DEPOSITS AND CUSTOMER DEPOSITS
The Company has entered into various contracts for the purchase and sale
of whole engines. Occasionally, these contracts require a substantial
down-payment to fix the consideration of such engines and to allow the time to
perform due diligence work. These deposits are refundable.
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. Also, AVTEAM leases whole engines and whole aircraft.
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 and
repairs engine components.
The Company evaluates performance based on several factors, of which
income before provision for income taxes is the primary financial measure. The
following tables present the Company's operating segment information:
Page 7
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL REVENUES TOTAL REVENUES
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
IN THOUSANDS 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVTEAM $ 21,308 $ 14,264 $ 62,714 $ 47,561
AAFS 1,141 813 4,086 2,274
M & M 13,007 -- 38,828 --
Eliminations (4,621) (312) (10,013) (853)
---------- ---------- ---------- ----------
Consolidated $ 30,835 $ 14,765 $ 95,615 $ 48,982
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INCOME BEFORE PROVISION INCOME BEFORE PROVISION
FOR INCOME TAXES FOR INCOME TAXES
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
IN THOUSANDS 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVTEAM(a) $ 1,229 $ 1,590 $ 3,587 $ 6,414
AAFS 98 99 641 169
M & M 2,598 -- 7,153 --
Eliminations (403) -- (1,085) --
---------- ---------- ---------- ----------
Consolidated $ 3,522 $ 1,689 $ 10,296 $ 6,583
========== ========== ========== ==========
</TABLE>
- ------------
(a) CORPORATE OVERHEAD AND INTEREST EXPENSE ARE included in AVTEAM AND ARE NOT
ALLOCATED.
<TABLE>
<CAPTION>
TOTAL ASSETS
-------------------------------------------
IN THOUSANDS SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
AVTEAM $137,519 $132,540
AAFS 1,562 1,396
M & M 27,873 19,295
Eliminations (15,943) (11,417)
-------- --------
Consolidated $151,011 $141,814
======== ========
</TABLE>
4. NOTES PAYABLE TO BANK
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 (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 was used by the Company to
finance the acquisition of M&M. 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. 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 September 30,
1999, the Company has drawn an aggregate of $38.35 million under the Working
Capital Revolving Loan Facility and $25.0 million was drawn under the
Acquisition Revolving Loan Facility. At September 30, 1999, the Company had
additional availability of approximately $6.65 million under the Working Capital
Revolving Loan Facility. Interest rates under the Company's Credit Agreement
ranged from 7.81% to 9.25% as of September 30, 1999.
Page 8
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
AVTEAM is a global supplier of aftermarket commercial aircraft engines,
engine parts and aircraft components ("Engines and Components") serving over 700
customers, including other aftermarket suppliers, independent repair facilities,
aircraft operators and original equipment manufacturers ("OEMs"). The Company
has historically focused on the Pratt & Whitney JT8D series of engines, which
are the most widely used jet aircraft engines in the world and power
approximately 33% of the world's commercial aircraft. In 1997, AVTEAM expanded
its product line to include the CFM56 series of engines manufactured by CFM
International and DC-9 airframe parts. The CFM56 series of engines had the
highest production volume of any engine series in 1998 and power nearly 40% of
all single-aisle, narrow-body aircraft ordered since 1987. In 1998, the Company
acquired its first wide-body DC-10 aircraft which was disassembled and is being
sold as airframe parts and whole CF6 engines. 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 purchased
for eventual disassembly and sold as parts by the Company. The Company resells
Engines and Components to other aftermarket suppliers, independent repair
facilities, aircraft operators and OEMs.
On December 15, 1998, the Company, through its wholly-owned subsidiary,
AVTEAM Engine Repair Corp. completed the acquisition of substantially all of the
assets and the assumption of certain liabilities of M&M Aircraft Services, Inc.
("M&M"). The Company believes that M&M was one of the largest privately held
independent aircraft engine maintenance, repair and overhaul ("MRO") operations
in the world. As a result of this acquisition, the Company has begun to realize
synergies between its Engines and Components business and its engine MRO
business, including bringing to market on a more timely basis engines and engine
parts held for resale.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
contained in the Company's statements of operations expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales......................... 100% 100% 100% 100%
Cost of sales..................... 70 71 72 73
--- --- --- ---
Gross profit...................... 30 29 28 27
Operating expenses................ 14 14 13 12
--- --- --- ---
Income from operations............ 16 15 15 15
Interest expense, net............. 5 4 4 2
--- --- --- ---
Income before income taxes........ 11 11 11 13
Provision for income taxes........ 4 4 4 5
--- --- --- ---
Net income........................ 7% 7% 7% 8%
=== === === ===
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. Net sales increased 108.8% to $30.8 million for the third
quarter of 1999 from $14.8 million for the third quarter of 1998. For the first
nine months of 1999, net sales increased 95.2% to $95.6 million from $49.0
million for the first nine months of 1998. This increase is primarily due to the
MRO revenue of approximately $12.4 million for the third quarter of 1999 and
approximately $37.0 million for the first nine months, contributed by AVTEAM
Engine Repair Corp., which was acquired in December 1998. In addition, revenue
from whole engine sales increased by 40.0% to $5.6 million for the third quarter
of 1999 from $4.0 million for the third quarter of 1998. For the first nine
months of 1999, revenue from whole engine sales increased 33.9% to $23.3 million
from $17.4 million for the first nine months of 1998. Component sales also
increased for the quarter and for the year to date.
Page 9
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
GROSS PROFIT. Gross profit increased 113.8% to $9.2 million for the
third quarter of 1999 from $4.3 million for the third quarter of 1998. For the
first nine months of 1999, gross profit increased 100.7% to $27.1 million from
$13.5 million for the first nine months of 1998. Gross margin increased to 29.8%
for the third quarter of 1999 from 29.1% for the third quarter of 1998. Gross
margin increased to 28.4% for the first nine months of 1999 from 27.6% for the
first nine months of 1998. Such changes in gross margin were caused by a change
in product mix within the distribution business. Gross margin generated by the
MRO operation was slightly higher than the gross margin generated by the
distribution business.
OPERATING EXPENSES. Operating expenses increased 107.7% to $4.4 million
for the third quarter of 1999 from $2.1 million for the third quarter of 1998.
For the first nine months of 1999, operating expenses increased 106.1% to $12.6
million from $6.1 million for the first nine months of 1998. As a percentage of
net sales, such expense decreased to 14.1% in the third quarter of 1999 from
14.2% for the third quarter of 1998. As a percentage of net sales, such expense
increased to 13.2% in the first nine months of 1999 from 12.5% in the first nine
months of 1998. The expense increase is primarily attributable to the operating
expenses of AVTEAM Engine Repair Corp of $3.8 million and $1.1 million, the
amortization of goodwill of $666,000 and $220,000 for the nine month and three
month periods ended September 30,1999 respectively, as well as, increased
personnel expense resulting from additional staffing in the Florida headquarters
office and increased professional fees.
NET INTEREST EXPENSE. Net interest expense increased significantly to
$1.3 million for the third quarter of 1999 from $507,000 for the third quarter
of 1998. For the first nine months of 1999, net interest expense increased to
$4.2 million from $816,000 for the nine months of 1998. For the third quarter of
1999, net interest expense as a percentage of net sales increased to 4.2% from
3.4% of net sales for the third quarter of 1998. For the first nine months of
1999, net interest expense as a percentage of net sales increased to 4.4% from
1.7% of net sales for the first nine months of 1998. The increased interest
expense is a result of higher borrowing levels to finance the acquisition of M&M
and for general working capital purposes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity has been from
financing activities and cash flow generated by operations. During the first
nine months of 1999, the operating activities of the Company provided
approximately $3.5 million in cash. This increase primarily resulted from net
income net of non-cash expenses of approximately $9.9 million and a decrease in
inventory of approximately $7.2 million offset by an increase in accounts
receivable of approximately $12.7 million. Net cash provided by financing
activities, derived primarily from borrowing on the credit agreement mentioned
below, was $2.4 million during the first nine months of 1999.
On April 30, 1998, the Company, as borrower, and AAFS and AVTEAM Engine
Repair Corp., as guarantors, entered into a 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 in the maximum
aggregate principal amount of up to $70.0 million. The 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
(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 was used by the Company to finance the M&M acquisition.
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. 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 September 30, 1999, the Company has drawn an
aggregate of $38.35 million under the Working Capital Revolving Loan Facility
and $25.0 million was drawn under the Acquisition Revolving Loan Facility. At
September 30, 1999, the Company had additional availability of approximately
$6.65 million under the Working Capital Revolving Loan Facility and no
availability under the Acquisition Revolving Loan Facility.
Page 10
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On December 15, 1998, the Company, through its wholly-owned subsidiary,
AVTEAM Engine Repair Corp., completed its acquisition of substantially all of
the assets and the assumption of certain liabilities of M&M for an aggregate
purchase price of $30 million and the issuance of 350,000 shares of Class A
Common Stock. Concurrent with the Acquisition, the Company made a debt repayment
of $3.4 million to M&M's lender. The Acquisition was financed from available
cash and AVTEAM's existing credit facility with Bank of America, N.A. AVTEAM
utilized substantially all of its available borrowings under the acquisition
portion of the Credit Facility for the Acquisition, and had additional
availability of approximately $9.2 million under the Credit Facility at December
31, 1998.
On May 17, 1999, the Company announced that it retained Credit Suisse
First Boston to assist the Company in exploring possible alternatives to improve
shareholder value. A range of possible transactions that may include a sale,
recapitalization, refinancing, and establishment of strategic relationships with
other companies was examined. On October 18, 1999, the Company announced that it
will continue its present operating strategy.
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, 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 and the
timing of whole engine sales.
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-ready 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
that may affect the Company as a result of its vendors and customers ensuring
that their computer systems and software are Year 2000-ready. 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.
RISKS RELATING TO FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this report on Form
10-Q, the matters discussed in this report on Form 10-Q are "forward-looking
statements" within the meaning of the federal securities law and are not
guarantees of future performance. For a variety of reasons, the Company's actual
results could differ materially from any forward-looking statements made in this
report on Form 10-Q. Among the factors that could cause actual results to differ
from predicted or expected results are the following: the Company's ability to
effectively integrate acquired companies and the effects of increased
indebtedness as a result of the Company's acquisitions; 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, engines 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 and the
condition of the airline industry, which could result in pricing, supply and
demand, and other pressures on
Page 11
<PAGE>
AVTEAM, INC. AND SUBSIDIARIES
RISKS RELATING TO FORWARD-LOOKING STATEMENTS (CONTINUED)
profitability and market share; and other risks and uncertainties set forth in
the Company's filings with the Securities and Exchange Commission, including but
not limited to the Company's annual report on Form 10-K for the year ended
December, 31, 1998. Consequently, the reader is cautioned to consider all
forward-looking statements in light of the risks to which they are subject.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27.1 Financial Data Schedule
for the period ended September 30, 1999
(b) Reports on Form 8-K
The Company filed a Form 8-K on September 10, 1999.
Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
AVTEAM, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVTEAM, Inc.
Date: November __, 1999 By: /s/ DONALD A. GRAW
------------------------------------------
Donald A. Graw
President and Chief Executive Officer
Date: November __, 1999 By: /s/ MARK S. KOONDEL
------------------------------------------
Mark S. Koondel
Chief Financial Officer and Treasurer
Page 13
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule
for the period ended September 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,479
<SECURITIES> 0
<RECEIVABLES> 25,342
<ALLOWANCES> 570
<INVENTORY> 76,823
<CURRENT-ASSETS> 106,201
<PP&E> 6,581
<DEPRECIATION> 2,073
<TOTAL-ASSETS> 151,011
<CURRENT-LIABILITIES> 81,602
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 49,084
<TOTAL-LIABILITY-AND-EQUITY> 151,011
<SALES> 95,615
<TOTAL-REVENUES> 95,615
<CGS> 68,507
<TOTAL-COSTS> 68,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 172
<INTEREST-EXPENSE> 4,226
<INCOME-PRETAX> 10,296
<INCOME-TAX> 3,744
<INCOME-CONTINUING> 6,522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,522
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
