10-Q 1 g65447e10-q.txt AVTEAM, INC. 1 =============================================================================== 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, 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 November 13, 2000, 11,439,862 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. ================================================================================ 2 AVTEAM, INC. TABLE OF CONTENTS

i 3 AVTEAM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) PART I FINANCIAL INFORMATION Item 1. Financial Statements.

See notes to condensed consolidated financial statements. 1 4 AVTEAM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA)

See notes to condensed consolidated financial statements. 2 5 AVTEAM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See notes to condensed consolidated financial statements. 3 6 AVTEAM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 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 nine-month period ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending 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 September 30, 2000 and December 31, 1999 and for the nine months ended September 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 7 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:

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 September 30, 2000 and December 31, 1999, accounts payable totaling approximately $2,693,000 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. 5 8 AVTEAM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment (including assets under capital leases) is carried at cost and is depreciated using accelerated and straight-line methods over the lesser of the lease terms, 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

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 September 30, 2000 and December 31, 1999, accumulated amortization of goodwill was approximately $1,589,000 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. 6 9 AVTEAM, INC. AND SUBSIDIARIES NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued 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. 137 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. NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net (loss) income per share:

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. 7 10 AVTEAM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:

[FN] (a) Corporate overhead and interest expense are included in AVTEAM and are not allocated.

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 (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. 8 11 AVTEAM, INC. AND SUBSIDIARIES 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 September 30, 2000, the Company had outstanding loans aggregating $44.2 million under the Working Capital Revolving Loan Facility and $22.8 million under the Acquisition Revolving Loan Facility. At September 30, 2000, the Company had additional availability of $109,000 under the Working Capital Revolving Loan Facility. The weighted average interest rate under the Company's Credit Agreement was 10.43% at September 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. 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 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 operations, 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. The Lenders charged the Company approximately $500,000 in connection with the Second Amendment which is being amortized over the remaining term of the Credit Facility. At September 30, 2000, the Company was again not in compliance with certain financial covenants of the Credit Agreement. In early November, the Lender entered into a Third Amendment to the Credit Facility (the "Third Amendment") whereby (i) waivers were given for the financial covenants with which the Company was not in compliance at September 30, 2000, (ii) all LIBOR-based borrowings were converted to the base rate plus 2.0% effective October 1, 2000; and (iii) cumulative minimum net sales requirements for the three months of the fourth quarter of 2000 were established. In addition, the Lenders required the retention of a financial advisor to assist the Company in providing the Lenders with periodic financial information and required the Company to provide the Lenders, on a weekly basis, certain sales and cash flow information. The Lenders charged the Company approximately $200,000 in connection with the Third Amendment which is being amortized over the remaining term of the Credit Facility. The Company is diligently looking for alternatives to the Credit Facility which expires on April 30, 2001. These alternatives include an equity infusion, a strategic partnership, replacement financing or a combination of any of the other alternatives. No assurances can be given as to the extent to which or when the Company may be successful in its efforts. If the Company is not successful in these efforts, it could lead to an adverse effect on its operations and its ability to meet certain of its obligations as they become due. 9 12 AVTEAM, INC. AND SUBSIDIARIES 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 the capacity to market on a more timely basis engines and engine parts held for resale. Since its inception, the Company has substantially broadened its 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 the declining market since 1999, the Company's net sales have declined 32.8%. 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 first half of 2001. In October 2000, the Company was also certified by the FAA to repair CFM56-2 engines in its new facility. 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:

10 13 AVTEAM, INC. AND SUBSIDIARIES Three Months and Nine Months Ended September 30, 2000 compared to Three Months and Nine Months Ended September 30, 1999 Net Sales. Net sales decreased 53.8% to $14.2 million for the third quarter of 2000 from $30.8 million for the third quarter of 1999. For the first nine months of 2000, net sales decreased 32.8% to $64.3 million from $95.6 million for the first nine months of 1999. Each business segment experienced a decline in its revenue for the three months ended and for the nine months ended September 30, 2000 versus the same periods ended September 30, 1999. The revenue decline reflects the continuing soft and deteriorating industry market conditions. Management is unable to predict the period over which these severe market conditions may continue. Additionally, at the end of the third quarter of 2000, certain engines were repaired but did not meet the performance standards established to be labeled as "serviceable". The revenue for these engine repairs are expected to be reported in the three months ended December 31, 2000. Gross Profit. Gross profit decreased 73.5% to $2.4 million for the third quarter of 2000 from $9.2 million for the third quarter of 1999. For the first nine months of 2000, gross profit decreased 56.2% to $11.9 million from $27.1 million for the first nine months of 1999. Gross margin decreased to 17.1% for the third quarter of 2000 from 29.8% for the third quarter of 1999. Gross margin decreased to 18.5% for the first nine months of 2000 from 28.4% for the first nine months of 1999. The changes in gross margin were caused by the current market decline. Operating Expenses. Operating expenses increased 7.2% to $4.7 million for the third quarter of 2000 from $4.4 million for the third quarter of 1999. For the first nine months of 2000, operating expenses increased 14.9% to $14.5 million from $12.6 million for the first nine months of 1999. As a percentage of net sales, such expense increased to 32.8% in the third quarter of 2000 from 14.1% for the third quarter of 1999. As a percentage of net sales such expense increased to 22.5% in the first nine months of 2000 from 13.2% in the first nine 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 amendments to the Credit Facility. Net Interest Expense. Net interest expense increased 39.5% to $1.8 million for the third quarter of 2000 from $1.3 million for the third quarter of 1999. For the first nine months of 2000, net interest expense increased 21.1% to $5.1 million from $4.2 million for the first nine months of 1999. For the third quarter of 2000, net interest expense as a percentage of net sales increased to 12.7% from 4.2% of net sales for the third quarter of 1999. For the first nine months of 2000, net interest expense as a percentage of net sales increased to 8.0% from 4.4% of net sales for the first nine 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. 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 $334,000 and $1.7 million in cash during the three months and nine months ended September 30, 2000, respectively. The increase during the first nine months of 2000 primarily resulted from the $5.6 million decrease in inventory purchased and the $2.4 million decrease in accounts receivable offset by the net loss net of non-cash expenses and benefits of approximately $5.5 million. Net cash provided by financing activities, derived primarily from borrowing on the credit agreement mentioned below, was $4.0 million during the first nine months of 2000. The Company is diligently looking for alternatives to the Credit Facility which expires on April 30, 2001. These alternatives include an equity infusion, a strategic partnership, replacement financing or a combination of any of the other alternatives. No assurances can be given as to the extent to which or when the Company may be successful in its efforts. If the Company is not successful in these efforts, it could lead to an adverse effect on its operations and its ability to meet certain of its obligations as they become due. 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. 11 14 AVTEAM, INC. AND SUBSIDIARIES 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. At September 30, 2000, the Company was again not in compliance with certain financial covenants of the Credit Agreement. In early November, the Lender entered into a Third Amendment to the Credit Facility (the "Third Amendment") whereby (i) waivers were given for the financial covenants with which the Company was not in compliance at September 30, 2000, (ii) all LIBOR-based borrowings were converted to the base rate plus 2.0% effective October 1, 2000; and (iii) cumulative minimum net sales requirements for the three months of the fourth quarter of 2000 were established. In addition, the Lenders required the retention of a financial advisor to assist the Company in providing the Lenders with periodic financial information and required the Company to provide the Lenders, on weekly basis, certain sales and cash flow information. The Lenders charged the Company approximately $200,000 in connection with the Third Amendment which is being amortized over the remaining term of the Credit Facility. 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. 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 in a timely manner sufficient customers for its CFM56-3 and CFM56-2 repair services, difficulties in executing the Company's plans to further 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 12 15 AVTEAM, INC. AND SUBSIDIARIES 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 September 30, 2000, the Company had additional availability of $109,000 under the Working Capital Revolving Loan Facility. As of November 10, 2000, the Company had $2.6 million of available borrowing capacity under the Working Capital Facility. Under the Third Amendment to the credit facility effective as of September 30, 2000, the Company must meet certain financial covenants including newly established net sales requirements. Considering the existing market conditions, there is no assurance that the Company will be able to meet such requirements. See Management's Discussion and Analysis - "Liquidity and Capital Resources" and "The Company's Credit Agreement" and the Notes to Condensed Consolidated Financial Statements. The Company is diligently looking for alternatives to the Credit Facility which expires on April 30, 2001. These alternatives include an equity infusion, a strategic partnership, replacement financing or a combination of any of the other alternatives. If the Company is not successful in these efforts, it could lead to an adverse effect on its operations and its ability to meet certain of its obligations as they become due. No assurances can be given as to the extent to which or when the Company may be successful in its efforts. 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. 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. 13 16 AVTEAM, INC. AND SUBSIDIARIES 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 expects to continue to 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 and protracted downturn or a "soft market". During the current downturn, there has been materially 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 are expected to 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 airlines to 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 had 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". 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. 14 17 AVTEAM, INC. AND SUBSIDIARIES MANAGEMENT OF GROWTH AND INDUSTRY CONDITIONS The rapid growth experienced by the Company through 1999 and the severe decline in industry conditions since that date have placed, and are expected to continue to place, material demands on the Company's administrative, operational and financial resources. The Company broadened its product line and services, including entry into the repair and overhaul maintenance business through an acquisition completed in 1999. 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 and CFM56-2 engine repairs. It is therefore difficult to predict how these operations will be integrated by the Company and accepted by the market, especially during the current adverse market conditions. 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. 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 and declining market for the Company's services and products, will not have a material adverse effect on the Company. 15 18 AVTEAM, INC. AND SUBSIDIARIES Most recently there have been a number of acquisitions, bankruptcies and the formation of strategic partnerships within the aftermarket. The effect of these transactions is to concentrate market share with fewer companies and to adversely impact sales and profit margins. 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 (a) Exhibits 10.1 Third Amendment to the Credit Agreement dated as of September 30, 2000 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 September 30, 2000 (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K for the period ended September 30, 2000. 16 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. By: /s/ DONALD A GRAW Date: November 14, 2000 ----------------------------------- Donald A. Graw Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ MARK S. KOONDEL Date: November 14, 2000 ---------------------------------- Mark S. Koondel Chief Financial Officer, Treasurer, and Assistant Secretary (Principal Financial and Accounting Officer) 17 20 EXHIBIT INDEX

AVTEAM INC 10-Q