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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 JUNE 30, 2000
Commission File 0-20889
AVTEAM, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0313187
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3230 Executive Way 33025
Miramar, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 431-2359
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of August 10, 2000, 11,000,218 shares of Class A Common Stock, par
value $.01 per share, of the Registrant were outstanding and 439,644 shares of
Class B Common Stock, par value $.01 per share, of the Registrant were
outstanding.
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AVTEAM, INC.
TABLE OF CONTENTS
<TABLE>
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999............................................................................... 1
Condensed Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 2000 and 1999 (unaudited)........................................................ 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (unaudited).............................................................. 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................................................................ 15
SIGNATURES ............................................................................................... 17
</TABLE>
i
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AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 3,488 $ 382
Trade accounts receivable, net ........................................... 21,185 21,891
Inventory ................................................................ 74,223 79,746
Prepaid expenses and other current assets ................................ 2,747 1,375
Deposits ................................................................. 721 495
Deferred tax asset ....................................................... 5,752 3,666
----------- -----------
Total current assets ............................................................ 108,116 107,555
Revenue producing equipment, at cost ............................................ 12,325 12,074
Accumulated depreciation ................................................. (1,569) (1,228)
----------- -----------
10,756 10,846
Property and equipment, at cost ................................................. 8,199 6,987
Accumulated depreciation ................................................. (2,982) (2,404)
----------- -----------
5,217 4,583
Goodwill, net ................................................................... 25,206 25,651
Other assets .................................................................... 1,022 1,057
----------- -----------
Total assets ........................................................... $ 150,317 $ 149,692
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 11,488 $ 13,917
Accrued expenses ......................................................... 2,198 2,247
Customer deposits ........................................................ 761 1,398
Notes payable to bank .................................................... 68,500 62,990
Current portion of notes payable-lease financing ......................... 349 350
Current portion of capital lease obligations ............................. 117 119
----------- -----------
Total current liabilities ....................................................... 83,413 81,021
Capital lease obligations, net of current portion ............................... 74 123
Notes payable - lease financing, net of current portion ......................... 2,800 2,969
Deferred income taxes ........................................................... 2,766 1,985
----------- -----------
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,
11,000,218 and 10,996,176 shares issued and outstanding in 2000 and 110 110
1999, respectively
Class B Common Stock, $.01 par value, 3,000,000 shares authorized, 439,644
shares issued and outstanding ...................................... 4 4
Additional paid-in capital ............................................... 49,104 49,080
Retained earnings ........................................................ 12,046 14,400
----------- -----------
Total shareholders' equity .......................................... 61,264 63,594
----------- -----------
Total liabilities and shareholders' equity .......................... $ 150,317 $ 149,692
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
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AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales .................................................. $ 21,130 $ 35,488 $ 50,040 $ 64,780
Cost of sales .............................................. 16,549 26,212 40,609 46,852
------------ ------------ ------------ ------------
Gross profit ............................................... 4,581 9,276 9,431 17,928
Operating expenses ......................................... 5,160 4,150 9,785 8,228
------------ ------------ ------------ ------------
(Loss) income from operations .............................. (579) 5,126 (354) 9,700
Interest expense, net ...................................... 1,749 1,545 3,303 2,926
------------ ------------ ------------ ------------
(Loss) income before provision (credit) for income taxes ... (2,328) 3,581 (3,657) 6,774
Provision (credit) for income taxes:
Current ........................................... -- 1,198 2 2,135
Deferred .......................................... (826) 130 (1,305) 362
------------ ------------ ------------ ------------
(826) 1,328 (1,303) 2,497
------------ ------------ ------------ ------------
Net (loss) income .......................................... $ (1,502) $ 2,253 $ (2,354) $ 4,277
============ ============ ============ ============
Net (loss) income per common share - basic ................. $ (0.13) $ 0.20 $ (0.21) $ 0.37
============ ============ ============ ============
Weighted average number of common shares outstanding - basic 11,439,862 11,455,383 11,438,456 11,455,383
============ ============ ============ ============
Net (loss) income per common equivalent share - diluted .... $ (0.13) $ 0.20 $ (0.21) $ 0.37
============ ============ ============ ============
Weighted average number of common equivalent shares
outstanding - diluted ...................................... 11,439,862 11,493,352 11,438,456 11,487,117
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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AVTEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income .................................................................. $(2,354) $ 4,277
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization ............................................ 1,506 1,565
Bad debt expense ......................................................... 22 128
Deferred tax expense (credit) ............................................ (1,305) 362
Changes in operating assets and liabilities:
Trade accounts receivable ......................................... 684 (8,351)
Inventory ......................................................... 7,509 6,508
Prepaid expenses and deposits ..................................... (1,598) (372)
Other assets ...................................................... 35 (49)
Accounts payable .................................................. (2,429) 623
Accrued expenses/customer deposits ................................ (686) (2,026)
------- -------
Net cash provided by operating activities ................ 1,384 2,665
------- -------
INVESTING ACTIVITIES
Purchases of revenue producing equipment ........................................... (2,381) (5,990)
Purchases of property and equipment ................................................ (1,210) (812)
Net proceeds from sale of revenue producing equipment .............................. -- 709
Other .............................................................................. -- 10
------- -------
Net cash used in investing activities .................... (3,591) (6,083)
------- -------
FINANCING ACTIVITIES
Payments on capital leases ......................................................... (51) (60)
Proceeds from exercise of stock options ............................................ 24 --
Proceeds from capital leases ....................................................... -- 88
Net payments on notes payable ...................................................... (170) (83)
Net proceeds from notes payable to bank ............................................ 5,510 3,550
------- -------
Net cash provided by financing activities ................. 5,313 3,495
------- -------
Net increase in cash and cash equivalents ................. 3,106 77
Cash and cash equivalents at beginning of period .......... 382 1,745
------- -------
Cash and cash equivalents at end of period ................ $ 3,488 $ 1,822
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ...................................................................... $ 2,741 $ 2,811
======= =======
Income taxes paid .................................................................. $ 520 $ 1,985
======= =======
Transfer of inventory to revenue producing equipment ............................... $ 1,986 $ --
======= =======
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 10Q and all
of the requirements of Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month periods ended June 30, 2000, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For further
information, refer to the financial statements and footnotes thereto included in
the Company's 1999 Annual Report on Form 10-K for the year ended December 31,
1999.
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. Demand for aircraft engines, engine parts and airframe components
("Engines and Components") has historically been 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. The Company has in the past and may
in the future experience substantial quarterly fluctuations in sales as a result
of these seasonal effects.
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. ("AERC"),
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 June 30, 2000 and December 31, 1999 and for the six
months ended June 30, 2000 and 1999 include the accounts of AVTEAM, Inc., AERC
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.
4
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AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
AERC'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 June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Parts & Whole Engines & Aircraft $70,919 $76,987
Work in Process 3,106 2,570
Other 198 189
======= =======
$74,223 $79,746
======= =======
</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 AERC, 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. AERC'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. As of June 30,
2000, and December 31, 1999, accounts payable totaling approximately $2,054,000,
and $1,363,000 respectively, were offset against accounts receivable.
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it estimates to be uncollectible based on management's best
estimates. Recoveries are recognized in the period in which they are received.
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, if applicable, 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
5
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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 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 and charged to
earnings. At June 30, 2000 and December 31, 1999, accumulated amortization of
goodwill was approximately $1,366,000 and $923,000, respectively.
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 materially differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 was amended by SFAS No. 138 to be effective for fiscal years beginning
after June 15, 2000. The Company has not determined what effect, if any,
adopting SFAS No. 133 will have on its financial statements.
6
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AVTEAM, INC. AND SUBSIDIARIES
NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
(loss) income per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income .................... $(1,502,000) $ 2,253,000 $(2,354,000) $ 4,277,000
=========== =========== =========== ===========
Denominator:
Denominator for basic net (loss) income
per share-weighted average shares .... 11,439,862 11,455,383 11,438,456 11,455,383
----------- ----------- ----------- -----------
Effect of dilutive securities:
Employee stock options ............... -- 37,969 -- 31,734
----------- ----------- ----------- -----------
Dilutive potential common shares ............ -- 37,969 -- 31,734
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted - average
shares and assumed conversions .............. 11,439,862 11,493,352 11,438,456 11,487,117
=========== =========== =========== ===========
Net (loss) income per common share - basic .. $ (0.13) $ 0.20 $ (0.21) $ 0.37
=========== =========== =========== ===========
Net (loss) income per common share - diluted $ (0.13) $ 0.20 $ (0.21) $ 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. (AERC) 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:
7
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AVTEAM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Total Revenues Total Revenues
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
IN THOUSANDS 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVTEAM .......... $ 11,543 $ 24,368 $ 33,714 $ 41,406
AAFS............. 895 1,805 2,218 2,945
AERC............. 10,864 12,178 21,919 25,821
Eliminations..... (2,172) (2,863) (7,811) (5,392)
-------- -------- -------- --------
Consolidated..... $ 21,130 $ 35,488 $ 50,040 $ 64,780
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Income (Loss) Before Provision Income (Loss) Before Provision
(Credit) for Income Taxes (Credit) for Income Taxes
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
IN THOUSANDS 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
AVTEAM (a) .......... $(3,091) $ 1,529 $(3,850) $ 2,358
AAFS................. 19 427 307 543
AERC ................ 800 2,030 833 4,555
Eliminations......... (56) (405) (947) (682)
------- ------- ------- -------
Consolidated......... $(2,328) $ 3,581 $(3,657) $ 6,774
======= ======= ======= =======
</TABLE>
(A) CORPORATE OVERHEAD AND INTEREST EXPENSE ARE INCLUDED IN AVTEAM AND ARE NOT
ALLOCATED.
<TABLE>
<CAPTION>
Total Assets
----------------------------------------
IN THOUSANDS June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
AVTEAM $134,453 $137,146
AAFS 1,661 1,656
AERC 32,573 29,905
Eliminations (18,370) (19,015)
-------- --------
Consolidated $150,317 $149,692
======== ========
</TABLE>
4. NOTES PAYABLE TO BANK AND NOTES PAYABLE - LEASE FINANCING
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 ("the Lenders") led by Bank of America, N.A., as administrative agent
(the "Agent"), 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 was used by the Company to
finance the acquisition of M&M Aircraft Services, Inc. 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 June 30, 2000, the Company has outstanding loans
aggregating $45.0 million under the Working Capital Revolving Loan Facility and
$23.5 million under the Acquisition Revolving Loan Facility. At June 30, 2000,
the Company had no additional availability under the Working Capital Revolving
Loan Facility. The weighted average interest rate under the Company's Credit
Agreement was 10.25% at June 30, 2000. Beginning on January 31, 2000 and every
three months thereafter, the Company is required to make payments of $750,000 in
order to reduce the Acquisition Revolving Loan Facility.
8
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AVTEAM, INC. AND SUBSIDIARIES
At December 31, 1999 the Company was not in compliance with certain
financial covenants of the Credit Agreement. On May 25, 2000, the Lenders
informed the Company that it was in default under certain provisions of the
Credit Agreement. These provisions included "Delivery of Annual Financial
Statements for the Fiscal Year ended December 31, 1999," "Delivery of Quarterly
Financial Statements for Fiscal Quarter ended March 31, 2000," "Delivery of the
Borrowing Base Certificate as of January 31, 2000, February 29, 2000 and March
31, 2000" and certain provisions related to economic ratios. As a result of
these defaults, the Lenders informed the Company that beginning May 26, 2000,
the loans and all other obligations outstanding under the Credit Agreement would
be subject to the per annum rate of interest equal to the otherwise applicable
rate plus two (2) percent, while in default. In addition, on May 25, 2000, the
Bank advised that overdrafts would not be honored in the future. On June 7,
2000, the Company obtained waivers of the provisions referred to above and
entered into a second amendment to the Credit Facility (the "Second Amendment")
whereby events of default were waived and certain financial covenants under the
Credit Agreement were amended for the year-ended December 31, 1999 and
subsequent periods. The Second Amendment waives all financial covenants for the
periods ended December 31, 1999, March 31, 2000, and June 30, 2000 and increases
interest rates by 0.25%. The Second Amendment requires the Company to deliver to
the Lenders monthly consolidated balance sheets and consolidated statements of
income, retained earnings, shareholders' equity and cash flows as well as
periodic reports detailing actual cash expenditures and cash flow projections.
The Second Amendment further gives the Agent the ability to determine, in its
reasonable discretion, which items may be considered "eligible receivables" and
"eligible inventory." In connection with the Second Amendment, the Lenders and
the Company entered in to a Lockbox Agreement whereby all of the Company's
proceeds received by its account debtors are placed in an account held by the
Agent for the benefit of the Lenders. These funds are used to repay the
Company's obligations under the Credit Agreement. Such repayments have the
effect of creating availability under the Working Capital Facility, subject to
satisfaction of all other relevant borrowing conditions.
PART I
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 28% 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. ("AERC") 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.
Since its inception, the Company has substantially increased its
revenue base, broadened the range of products and services offered and taken
consistent steps to ensure the quality of its products and services. From $3.9
million in 1993, the Company's net sales reached $129.8 million in 1999. From
1998 to 1999, the Company's net sales grew 72.3%. In April 2000, The Company
received FAA certification for its new CFM56-3 engine repair facility, which the
Company believes will begin to generate revenue in the second half of 2000.
9
<PAGE> 12
AVTEAM, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
contained in the Company's statements of operations expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ......................... 100% 100% 100% 100%
Cost of sales ..................... 78 74 81 72
---- ---- ---- ----
Gross profit ...................... 22 26 19 28
Operating expenses ................ 25 12 20 13
---- ---- ---- ----
(Loss) income from operations ..... (3) 14 (1) 15
Interest expense, net ............. 8 4 6 4
---- ---- ---- ----
(Loss) income before income taxes . (11) 10 (7) 11
Provision (credit) for income taxes 4 4 2 4
---- ---- ---- ----
Net (loss) income ................. (7%) 6% (5%) 7%
==== ==== ==== ====
</TABLE>
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales decreased 40.5% to $21.1 million for the second
quarter of 2000 from $35.5 million for the second quarter of 1999. For the first
six months of 2000, net sales decreased 22.8% to $50.0 million from $64.8
million for the first six months of 1999. Each business segment experienced a
decline in its revenue for the three months ended and for the six months ended
June 30, 2000 versus the same periods ended June 30, 1999. The revenue decline
reflects the current soft industry market conditions, which management currently
believes will not continue for a prolonged period of time.
GROSS PROFIT. Gross profit decreased 50.6% to $4.6 million for the
second quarter of 2000 from $9.3 million for the second quarter of 1999. For the
first six months of 2000, gross profit decreased 47.4% to $9.4 million from
$17.9 million for the first six months of 1999. Gross margin decreased to 21.7%
for the second quarter of 2000 from 26.1% for the second quarter of 1999. Gross
margin decreased to 18.8% for the first six months of 2000 from 27.7% for the
first six months of 1999. The changes in gross margin were caused by the current
market softness.
OPERATING EXPENSES. Operating expenses increased 24.3% to $5.2 million
for the second quarter of 2000 from $4.2 million for the second quarter of 1999.
For the first six months of 2000, operating expenses increased 18.9% to $9.8
million from $8.2 million for the first six months of 1999. As a percentage of
net sales, such expense increased to 24.4% in the second quarter of 2000 from
11.7% for the second quarter of 1999. As a percentage of net sales such expense
increased to 19.6% in the first six months of 2000 from 12.7% in the first six
months of 1999. The expense increase is primarily attributable to start-up
expenses related to the CFM56 repair operations at AERC, increased professional
fees related to the completion of the 1999 year-end audit and the amortization
of fees associated with the Second Amendment to the Credit Facility.
NET INTEREST EXPENSE. Net interest expense increased 13.2% to $1.7
million for the second quarter of 2000 from $1.5 million for the second quarter
of 1999. For the first six months of 2000, net interest expense increased 12.9%
to $3.3 million from $2.9 million for the first six months of 1999. For the
second quarter of 2000, net interest expense as a percentage of net sales
increased to 8.3% from 4.4% of net sales for the second quarter of 1999. For the
first six months of 2000, net interest expense as a percentage of net sales
increased to 6.6% from 4.5% of net sales for the first six months of 1999. The
increased interest expense is a result of higher borrowing levels to finance the
start-up of the Company's CFM56 repair operations and for general working
capital purposes and as a result of rising interest rates.
10
<PAGE> 13
AVTEAM, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been from
financing activities and cash flow generated by operations. Operating activities
of the Company provided approximately $3.7 million and $1.4 million in cash
during the three months and six months ended June 30, 2000, respectively. The
increase during the first six months of 2000 primarily resulted from the $7.5
million decrease in inventory offset by the net loss net of non-cash expenses
and benefits of approximately $2.1 million and a decrease in current liabilities
of approximately $3.1 million. Net cash provided by financing activities,
derived primarily from borrowing on the credit agreement mentioned below, was
$1.4 and $3.6 million and during the second quarter of 2000 and the first six
months of 2000, respectively.
THE COMPANY'S CREDIT AGREEMENT
On May 25, 2000, the Lenders informed the Company that it was in
default under certain provisions of the Credit Agreement (the "Credit
Agreement"). These provisions included "Delivery of Annual Financial Statements
for the Fiscal Year ended December 31, 1999," "Delivery of Quarterly Financial
Statements for Fiscal Quarter ended March 31, 2000," "Delivery of the Borrowing
Base Certificate as of January 31, 2000, February 29, 2000 and March 31, 2000"
and certain provisions related to economic ratios. As a result of these
defaults, the Lenders informed the Company that beginning May 26, 2000, the
loans and all other obligations outstanding under the Credit Agreement would be
subject to the per annum rate of interest equal to the otherwise applicable rate
plus two (2) percent while in default. In addition, on May 25, 2000, the Bank
advised that overdrafts would not be honored in the future.
On June 7, 2000, the Company obtained waivers of certain covenants and
entered into a second amendment to the Credit Facility whereby events of default
were waived and certain financial covenants under the Credit Agreement were
amended for the year-ended December 31, 1999 and subsequent periods. The Second
Amendment waived all financial covenants for the periods ended December 31,
1999, March 31, 2000, and June 30, 2000 and increased interest rates by 0.25%.
The Second Amendment requires the Company to deliver to the Lenders monthly
consolidated balance sheets and consolidated statements of income, retained
earnings, shareholders' equity and cash flows as well as periodic reports
detailing actual cash expenditures and cash flow projections. The Second
Amendment further gives the Agent the ability to determine, in its reasonable
discretion, which items may be considered "eligible receivables" and "eligible
inventory." In connection with the Second Amendment, the Lenders and the Company
entered in to a Lockbox Agreement whereby all of the Company's proceeds received
by its account debtors are placed in an account held by the Agent for the
benefit of the Lenders. These funds are used to repay the Company's obligations
under the Credit Agreement. Such repayments have the effect of creating
availability under the Working Capital Facility, subject to satisfaction of all
other relevant borrowing conditions.
SEASONALITY
Demand for Engines and Components has historically been 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.
11
<PAGE> 14
AVTEAM, INC. AND SUBSIDIARIES
RISKS RELATING TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of AVTEAM, Inc. ("AVTEAM" or the
"Company") contains certain "forward-looking statements" within the meaning of
the federal securities laws and are not guarantees of future performance.
"Forward looking statements" include statements that express, or involve
discussions as to expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases, such as "will or should result," "are expected to," "will or should
continue," "is anticipated," "plans," "intends," "estimated," "projection" and
"outlook"). For a variety of reasons, the Company's actual results could differ
materially from any forward-looking statements made in this report. Among the
factors that could cause actual results to differ from predicted or expected
results are the following: the effects of increased indebtedness, interest rates
and bank fees, airline industry profitability, reduced availability of funds for
operations and expansion, the inability of the Company to retain highly skilled
employees, the loss of a major customer, the failure to attract sufficient
customers for its CFM56-3 repair services, difficulties in executing the
Company's plans to significantly expand CFM56 capability, the decline in overall
usage of the JT8D aircraft engine, increased fuel prices and interest charges, a
decline in the demand for aftermarket aircraft engines, engine parts and
airframe components, seasonal fluctuations, rescheduling or cancellation of
customer orders, which could materially adversely affect the Company's revenues;
the possibility that regulatory changes and unforeseen events could impact the
Company's ability to provide products and services to its customers; existing
competition from national and regional competitors, which could result in
pricing and other pressures on profitability and market share; and other risks,
investor considerations and uncertainties set forth in the Company's filings
with the Securities and Exchange Commission ("the Commission"), the Company's
Form 10-K for the year-ended December 31, 1999, and this quarterly report.
Consequently, the reader is cautioned to consider all forward-looking statements
in light of the risks to which they are subject.
INVESTOR CONSIDERATIONS
LIQUIDITY
The Company may experience liquidity difficulties. The Company has a
Credit Agreement with a syndicate of lenders led by Bank of America, N.A., as
administrative agent (the "Lenders"), pursuant to which the Lenders have made
available to the Company a revolving credit facility in the maximum aggregate
amount of up to $70 million. The Credit Facility consists of (i) a working
capital revolving loan facility (the "Working Capital Facility") in the
aggregate principal amount of up to $45 million and (ii) an acquisition
revolving loan facility (the "Acquisition Facility") in the aggregate principal
amount of up to $25 million. At June 30, 2000, the Company had no availability
under either facility. As of August 8, 2000, the Company had $2.1 million of
available borrowing capacity under the Working Capital Facility. Under the
second amendment of the Credit Facility effective June 7, 2000, beginning with
the third quarter of 2000, the Company must meet certain operating and financial
covenants. Considering the existing market conditions, there is no assurance
that the Company will be able to meet such covenants. See Management's
Discussion and Analysis "Liquidity and Capital Resources" and "The Company's
Credit Agreement" and the Notes to Condensed Consolidated Financial Statements.
DEPENDENCE ON THE JT8D ENGINE
The Company's business, financial condition and results of operations
are dependent upon the aftermarket for JT8D Engines and Components. Aircraft
utilizing JT8D engines have been in service since the early 1960s. Aircraft
utilizing older engines are generally more expensive to maintain and to operate,
due primarily to higher fuel usage. Noise and other regulations in many
countries also significantly increase the cost of operating aircraft utilizing
older engines. Specifically, most JT8D engines are required to be hush-kitted or
removed from service in the United States and the European Union by 1999 and
2002, respectively. A decline in passenger confidence in older aircraft could
also lead to a decline in the aftermarket for JT8D Engines and Components. Any
of these factors could cause the unanticipated retirement of aircraft utilizing
JT8D engines. Any significant decline in the aftermarket for JT8D engines would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company has, however, recently expanded its
product line to include the CFM56 and CF6 series engines and parts and other
series and types of engines and airframe parts but has limited experience with
respect to the purchase and sale of such engines and parts. There can be no
assurance that the Company will have the same level of success with CFM56, CF6
and other series and types of engines and airframe parts that it has had with
JT8D Engines and Components.
12
<PAGE> 15
AVTEAM, INC. AND SUBSIDIARIES
IMPACT OF GOVERNMENT REGULATION
The aviation industry is highly regulated by the Federal Aviation
Administration (the "FAA") and similar regulatory agencies of other countries.
Before Engines and Components are installed on an aircraft, they must meet
certain standards as to their condition and have appropriate documentation, and
aircraft must also meet standards with respect to noise, emissions and
maintenance. While the Company's aftermarket sale operations are not currently
regulated directly by the FAA, AERC, the Company's repair and overhaul facility,
and the aircraft operations that ultimately utilize the Company's products are
subject to extensive regulation. Through AVTEAM Aviation Field Services, Inc., a
subsidiary of the Company ("AAFS"), the Company provides services that also
require AAFS to have an FAA certification.
In addition, the Company is currently subject to a voluntary FAA
accreditation program which establishes quality standards applicable to
aftermarket suppliers, such as the Company, and designates FAA-approved
organizations to perform quality assurance audits for initial and continued
accreditation of such aftermarket suppliers.
Standards established by the FAA and other regulatory agencies relating
to the operation and maintenance of aircraft have significant effects on
aircraft operators and the composition of their fleets. Noise and emission
regulations, and additional maintenance requirements for older aircraft, may
increase the cost of operating aircraft utilizing JT8D engines, which could lead
to a decline in the demand for the products and services provided by the
Company.
The inability of the Company to supply its customers with Engines and
Components on a timely basis, or any occurrence of the Company providing
products subsequently determined unsafe, may adversely affect the Company's
relationships with its customers and have a material adverse effect on its
business, financial condition and results of operations. There can also be no
assurance that new and more stringent government regulations will not be adopted
in the future or that any such new regulations, if enacted, would not have a
direct or indirect adverse impact on the Company.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; DEPENDENCE ON AVIATION INDUSTRY
The Company may experience significant fluctuations in its operating
results in the future, both on an annual and a quarterly basis, caused by
various factors, many of which are beyond the control of the Company. These
factors include: general economic conditions; specific economic conditions
affecting the commercial aviation industry; higher fuel costs; labor disputes or
strikes; accelerated changes in engine or aircraft design and usage; the
availability, timing and price of Engines and Components; the size and timing of
customer sales; the mix of products sold and services provided by the Company;
and unanticipated engine lease terminations or a default by a lessee, or parts
or repair service customer.
Demand for aftermarket Engines and Components has historically been
seasonal, with increased demand during the summer months. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality." In addition, the commercial aviation industry is cyclical and has
been subject to periodic fluctuations in its operating results. The aviation
industry has recently experienced a significant downturn or a "soft market".
During such a downturn, there may be reduced overall demand for Engines and
Components, lower selling prices for the Company's products, and increased
credit risk associated with doing business with industry participants. An
increase in the availability of Engines and Components coupled with limited
demand may also cause a downturn in the Company's operating results. Factors
such as fuel prices have in the past and may continue in the future to affect
the commercial aviation industry and the aftermarket for older model Engines and
Components. Increases in fuel prices and interest costs have caused an airline
to recently delay discretionary purchases of maintenance services and related
products. In addition, older, typically less fuel-efficient aircraft (into which
the Company's products are most often placed) have been and may continue in the
future to be removed from service at an increased rate. Each of these factors,
individually or in the aggregate, have also have the effect of depressing
airline margins.
The Company obtains its supply of Engines and Components principally by
purchasing surplus aircraft and parts inventory. There can be no assurance that
Engines and Components required by the Company's customers will be available on
acceptable terms or at the times required by the Company or that current
economic and other factors which affect the aviation industry will not continue
to have a material adverse effect on the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations".
13
<PAGE> 16
AVTEAM, INC. AND SUBSIDIARIES
RISKS ASSOCIATED WITH AIRCRAFT ENGINE LEASES
The Company leases Pratt & Whitney JT8D engines under operating leases to
a limited number of customers. The success of an operating lease depends on the
re-lease of engines on favorable terms on a timely basis and the ability to sell
engines at favorable prices at the end of the lease term. In addition, the
success of an operating lease depends in part upon having aircraft engines
returned to the Company in marketable condition as required by the lease for
such engines. Numerous factors, many of which are beyond the control of the
Company, may have an impact on the Company's ability to re-lease or sell Engines
and Components. These factors include general market conditions, regulatory
changes (particularly those imposing environmental, maintenance and other
requirements on the operation of aircraft engines), changes in the supply or
cost of aircraft engines and technological developments. Consequently, there can
be no assurance that the Company's estimated residual value for aircraft engines
will be realized. If the Company is unable to re-lease or sell its engines on
favorable terms on a timely basis upon expiration of the related lease, its
business, financial condition and results of operations may be adversely
affected. All engines currently leased by the Company are being leased, directly
or indirectly, to domestic passenger airlines which may be affected by numerous
factors, including the factors identified above and factors having an impact on
the airline industry generally. In the event that a lessee defaults in the
performance of its obligations, the Company may be unable to enforce its
remedies under a lease. The Company's inability to collect lease payments when
due or to repossess engines in the event of a default by a lessee could effect
our profitability and our ability to sell leases as well as have an adverse
effect on the Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH
The rapid growth experienced by the Company to date has placed, and is
expected to continue to place, significant demands on the Company's
administrative, operational and financial resources. The Company recently
broadened its product line and services, including entry into the repair and
overhaul maintenance business through an acquisition. This expansion could
present further challenges to and demands upon the Company's resources. To date,
the Company has not begun generating revenue from CFM56-3 engine repairs. It is
therefore difficult to predict how these operations will be integrated by the
Company and accepted by the market. There can be no assurance that the Company
will be able to anticipate business demand accurately, attract and retain the
personnel required, manage or finance such growth successfully, and the failure
to do so could have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success is substantially dependent on the performance,
contributions and expertise of its executive officers and key employees. The
Company's success to date has been significantly dependent on the contributions
of Donald Graw, its President and Chief Executive Officer, and Jaime Levy, its
Executive Vice President, each of whom has entered into an employment agreement
with the Company expiring September 1, 2002. The Company does not carry
substantial key man life insurance on its executive officers. The Company is
also dependent on its ability to attract, retain and motivate additional
personnel, especially in management. The loss of the services of any of its
executive officers or other key employees or the Company's inability to attract,
retain or motivate the necessary personnel could have a material adverse effect
on the Company.
CUSTOMER CONCENTRATION
The Company sells its products and provides its services primarily to
other aftermarket suppliers of Engines and Components, repair facilities, OEMs,
aircraft operators and others. While the Company sold Engines and Components to
over 700 different customers during 1999, sales of products and services to the
Company's five largest customers accounted for 21%, 31% and 47% of the Company's
net sales during 1999, 1998 and 1997, respectively. While the Company has
recently reduced its reliance upon such customers, there can be no assurance
that a small number of customers in the future will not account for a
significant portion of the Company's net sales and revenues from period to
period due to the substantial cost of acquiring Engines and Components. The loss
of or significant curtailment of purchases by any of the Company's, significant
customers could have a material adverse effect upon the Company.
14
<PAGE> 17
AVTEAM, INC. AND SUBSIDIARIES
PRODUCT LIABILITY
The commercial aviation industry periodically experiences catastrophic
losses which may exceed insurance policy limits. The Company currently has in
force aviation products insurance, with coverage limits for each occurrence and
in the aggregate which it believes to be in amounts and on terms that are
generally consistent with industry practice. To date, the Company has not
experienced any significant aviation-related claims, and has not experienced any
significant product liability claims related to its products or services.
However, an uninsured or partially insured claim, or a claim for which
third-party indemnification is not available, could have a material adverse
effect upon the Company.
COMPETITION
The aftermarket for Engines and Components is highly fragmented, with a
limited number of well-capitalized companies selling a broad range of products,
and numerous smaller competitors serving distinct market niches, and is
characterized by intense competition. The Company believes that the range and
depth of inventories, full product traceability, product knowledge, quality,
competitive prices and its broad array of products and services are key factors
in distinguishing the Company from other aftermarket suppliers. Certain of the
Company's competitors have substantially greater financial, marketing and other
resources than the Company. In addition, OEMs, aircraft maintenance providers,
leasing companies and FAA-licensed repair facilities may vertically integrate
into the aftermarket supply industry, thereby significantly increasing
competition. There are established competitors that provide many of the services
the Company offers, many of whom have substantially greater financial, marketing
and other resources than the Company. In particular, OEM's have aggressively
entered the distribution and repair aftermarket. OEM's present significant
competitive threats because of their materially greater financial resources and
long-standing relationships with airlines. There can be no assurance that the
Company will continue to compete effectively against present and future
competitors or that competitive pressures, including those intensified by the
current soft market for the Company's services and products, will not have a
material adverse effect on the Company.
Most recently there have been a number of acquisitions and the
formation of strategic partnerships within the aftermarket. The effect of these
transactions is to concentrate market share with fewer companies. This
contraction may have a detrimental effect on the Company's ability to attract
new customers and to maintain relationships with existing customers.
FACTORS INHIBITING TAKEOVER
Certain provisions of the Articles and Bylaws may delay or prevent a
takeover attempt that a shareholder might consider in its best interest. These
provisions establish certain advance notice procedures for shareholder proposals
to be considered at the shareholders' meetings and provide that only the Board
of Directors may call special meetings of the shareholders. In addition, the
Board of Directors can authorize and issue shares of Preferred Stock, par value
$.01 per share (the "Preferred Stock"), issuable in one or more series, with
voting or conversion rights that could adversely affect the voting or other
rights of holders of the Class A Common Stock. The terms of the Preferred Stock
that might be issued could potentially prohibit the Company's consummation of
any merger, reorganization, sale of substantially all of its assets, liquidation
or other extraordinary corporate transaction without the approval of the holders
of the outstanding shares of such stock. Furthermore, certain provisions of the
Florida Business Corporation Act may have the effect of delaying or preventing a
change in control of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
15
<PAGE> 18
AVTEAM, INC. AND SUBSIDIARIES
(a) Exhibits
10.1 Second Amendment to the Credit Agreement dated as of December
31, 1999 between the Company and Bank of America, N.A. and
certain lenders identified therein previously filed with the
Commission as an exhibit to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A filed on June 8, 2000 and is
incorporated herein by reference.
27.1 Financial Data Schedule for the period ended June 30, 2000
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Commission on June 26,
2000 announcing a change in the Company's certifying accountant and is
incorporated herein by reference.
A current report on Form 8-K/A was filed with the Commission on June
27, 2000 announcing a change in the Company's certifying accountant and
is incorporated herein by reference.
A current report on Form 8-K was filed with the Commission on August
14, 2000 announcing the engagement of Deloitte & Touche as the
Company's certifying accountant and is incorporated herein by
reference.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVTEAM, Inc.
Date: August 14, 2000 By: /s/ Donald a Graw
-----------------------------------------
Donald A. Graw
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 /s/ Mark S. Koondel
-----------------------------------------
Mark S. Koondel
Chief Financial Officer, Treasurer,
and Assistant Secretary
(Principal Financial and Accounting
Officer)
17
<PAGE> 20
EXHIBIT INDEX
Exhibit Index Description
------------- -----------
27.1 Financial Data Schedule for the period ended June 30, 2000
18
