UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 15, 1998
AVTEAM, INC.
(Exact name of registrant as specified in its charter)
Florida 0-20889 65-0313187
--------------------------------- -------------------------------- ------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File Number) Identification No.)
3230 Executive Way
Miramar, Florida 33025
----------------------------------------------------------------------
(Address, including zip code, of principal executive office)
(954) 431-2359
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and fiscal year, if changed since last report)
EXPLANATORY NOTE
This Form 8-K/A amends the Form 8-K (the "Form 8-K") filed with the
Securities and Exchange Commission (the "Commission") on December 30, 1998
relating to the acquisition by AVTEAM, Inc. of substantially all of the assets
and the assumption of certain liabilities of M&M Aircraft Services, Inc. This
Form 8-K/A amends the information referred to in Item 7 of the Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The following statements of M&M Aircraft Services, Inc. are
filed herewith on the pages subsequent hereto:
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 1996 and 1997
Statements of Operations for the Years Ended December 31,
1995, December 31, 1996 and December 31, 1997
Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1995, December 31, 1996 and December 31,
1997
Statements of Cash Flows for the Years Ended December 31,
1995, December 31, 1996 and December 31, 1997
Notes to Financial Statements for the Years Ended December 31,
1995, December 31, 1996 and December 31, 1997
Balance Sheet at September 30, 1998
Statements of Operations for the Nine Months Ended September
30, 1998 and September 30, 1997
Statements of Cash Flows for the Nine Months Ended September
30, 1998 and September 30, 1997
Notes to Financial Statements for the Nine Months Ended
September 30, 1998 and September 30, 1997
(b) Pro Forma Financial Information. The following Pro Forma
Financial Information (Unaudited) filed herewith on the pages
subsequent hereto gives effect to the acquisition of M&M
Aircraft Services, Inc. on December 15, 1998
Pro Forma Statements of Operations for the Year Ended
December 31, 1997 and the Nine Months Ended September 30, 1998
and Notes thereto.
Pro Forma Balance Sheet at September 30, 1998
2
(c) Exhibits.
2.1 Asset Purchase Agreement dated October 12, 1998, by
and among AVTEAM, Inc., AVTEAM Engine Repair Corp.,
M&M Aircraft Services, Inc., James McLellan, Leon
Sacco and Mark Schuldiner. (Incorporated herein by
reference to the Registrant's Current Report on Form
8-K which was filed with the Commission on October
15, 1998.)
23.1 Consent of Ernst & Young LLP, independent Certified
Public Accountants.
99.1 Press Release dated December 15, 1998. (Incorporated
herein by reference to the Registrant's Current
Report on Form 8-K which was filed with the
Commission on December 30, 1998.)
3
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 hereunto duly authorized.
AVTEAM, INC.
Date: March 1, 1999 By: /s/ Donald A. Graw
-------------------------------------
Donald A. Graw
President and Chief Executive Officer
4
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
M&M Aircraft Services, Inc.
We have audited the accompanying balance sheets of M&M Aircraft Services, Inc.
(the Company) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of M&M Aircraft Services, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 8, 1999
5
M&M Aircraft Services, Inc.
Balance Sheets
DECEMBER 31
1996 1997
------------------------------------
ASSETS
Current assets:
Cash $ 150 $ 150
Trade accounts receivable, less allowance for doubtful accounts of
$234,594 and $395,741 in 1996 and 1997, respectively 1,847,267 2,987,752
Inventory 4,225,920 5,911,687
Prepaid expenses and other current assets 160,522 379,600
----------------------------------
Total current assets 6,233,859 9,279,189
Property and equipment, net 1,246,136 2,453,834
Deposits and other assets 77,874 135,888
----------------------------------
Total assets $ 7,557,869 $11,868,911
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,510,247 $ 4,610,807
Accrued expenses 725,363 946,947
Customer deposits 319,648 1,222,310
Line of credit 625,030 1,854,692
Current portion of long-term debt 150,451 380,065
----------------------------------
Total current liabilities 4,330,739 9,014,821
Long-term debt, less current maturities 206,717 832,790
Notes payable--stockholders 38,906 9,226
Stockholders' equity:
Common stock, no par value, 50 shares authorized,
15 shares issued and outstanding 1,500 1,500
Retained earnings 2,980,007 2,010,574
----------------------------------
Total stockholders' equity 2,981,507 2,012,074
----------------------------------
Total liabilities and stockholders' equity $ 7,557,869 $11,868,911
==================================
SEE ACCOMPANYING NOTES.
6
M&M Aircraft Services, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1995 1996 1997
------------------------------------------------
Net sales $ 15,419,158 $ 18,510,266 $26,643,649
Cost of sales 11,995,394 15,263,205 22,951,791
------------------------------------------------
3,423,764 3,247,061 3,691,858
Operating expenses:
Selling, general, and administrative 2,031,131 2,455,637 3,526,419
Depreciation and amortization 315,958 352,278 527,624
------------------------------------------------
2,347,089 2,807,915 4,054,043
------------------------------------------------
Income (loss) from operations 1,076,675 439,146 (362,185)
Other income 5,780 7,954 7,485
Interest expense, net (115,865) (88,533) (184,857)
Loss on disposal of fixed assets - (7,968) (9,876)
------------------------------------------------
Net income (loss) $ 966,590 $ 350,599 $ (549,433)
================================================
SEE ACCOMPANYING NOTES.
7
M&M Aircraft Services, Inc.
Statements of Changes in Shareholders' Equity
COMMON
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------------------------------------------------------------------
Balance at January 1, 1995 15 $1,500 $2,472,818 $2,474,318
Net income - - 966,590 966,590
Distributions - - (36,000) (36,000)
--------------------------------------------------------------------
Balance at December 31, 1995 15 1,500 3,403,408 3,404,908
Net income - - 350,599 350,599
Distributions - - (774,000) (774,000)
--------------------------------------------------------------------
Balance at December 31, 1996 15 1,500 2,980,007 2,981,507
Net loss - - (549,433) (549,433)
Distributions - - (420,000) (420,000)
--------------------------------------------------------------------
Balance at December 31, 1997 15 $1,500 $2,010,574 $2,012,074
====================================================================
SEE ACCOMPANYING NOTES.
8
M&M Aircraft Services, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1996 1997
---------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 966,590 $ 350,599 $ (549,433)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization 315,958 352,278 527,624
Bad debt expense 368,454 132,309 238,695
Changes in operating assets and liabilities:
Trade accounts receivable (1,656,596) 595,679 (1,379,180)
Inventory (768,039) (1,558,122) (1,685,767)
Prepaid expenses and other current assets (21,950) (64,853) (219,078)
Deposits and other assets (13,041) (1,259) (58,014)
Accounts payable 627,474 1,166,089 2,100,559
Accrued expenses 36,483 526,568 221,584
Customer deposits (230,142) 178,018 902,662
---------------------------------------------------
Net cash (used in) provided by operating activities (374,809) 1,677,306 99,652
INVESTING ACTIVITY
Purchases of property and equipment (259,671) (302,706) (1,717,536)
---------------------------------------------------
Net cash used in investing activity (259,671) (302,706) (1,717,536)
FINANCING ACTIVITIES
Payments on note payable to related party 30,837 (90,891) (29,680)
Net proceeds from (payments on) notes payable (35,338) (98,520) 837,901
Net proceeds from (payments on) short-term
line of credit 923,968 (698,939) 1,229,663
Distributions (36,000) (774,000) (420,000)
---------------------------------------------------
Net cash provided by (used in) financing activities 883,467 (1,662,350) 1,617,884
---------------------------------------------------
Net (decrease) increase in cash 248,987 (287,750) -
Cash at beginning of year 38,913 287,900 150
---------------------------------------------------
Cash at end of year $ 287,900 $ 150 $ 150
===================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 118,838 $ 94,542 $ 179,806
====================================================
SEE ACCOMPANYING NOTES
9
M&M Aircraft Services, Inc.
Notes to Financial Statements
December 31, 1997
1. BUSINESS
M&M Aircraft Services, Inc. (the Company) was incorporated in Florida in 1984.
The Company repairs and overhauls aircraft engines, engine parts and
accessories.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventories are valued at the lower of cost or market, based on the specific
identification method and by the first-in, first-out method. Work in process
inventory includes parts inventory, valued at the lower of cost or market, and
labor and overhead, valued at actual cost.
REVENUE RECOGNITION
Revenues from engine overhaul and repair services are recognized at the time of
performance test acceptance of engines and completion of services. Revenues
from the sale of engine parts are recognized upon shipment to customers.
WARRANTIES
Warranty costs are accrued based on management's estimate of such costs and
historical sales percentages.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and is depreciated using the
straight-line method. Leasehold improvements are amortized over the lesser of
the lease terms or the estimated useful lives of the assets. The lives used are
as follows:
Machinery and equipment 5 - 7 years
Office furniture and equipment 5 - 7 years
Leasehold improvements 4 - 10 years
10
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Accounts receivable are primarily from airlines, aftermarket aircraft engine and
engine part suppliers, aircraft and aircraft engine leasing companies and
service providers to such companies. The Company performs ongoing evaluations of
its trade accounts receivable customers, monitors its exposure for credit losses
and sales returns and generally does not require collateral.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
The Company has elected S-Corporation status under the Internal Revenue Code,
which provides that the corporation's taxable income is taxable to the
stockholders, rather than at the corporate level.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31
1996 1997
---------------------------------
Machinery and equipment $ 2,987,590 $ 3,290,245
Office furniture and equipment 575,668 902,043
Leasehold improvements 229,131 951,820
---------------------------------
Less accumulated depreciation
and amortization (2,546,253) (2,690,274)
---------------------------------
$ 1,246,136 $ 2,453,834
=================================
11
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
4. INVENTORY
Inventory consists of the following:
DECEMBER 31
1996 1997
---------------------------------
Parts $2,548,192 $2,764,380
Work in process 1,677,728 3,147,307
---------------------------------
$4,225,920 $5,911,687
=================================
5. LINE OF CREDIT
The Company has a line of credit with a bank which provides for availability of
up to $2.5 million with interest at the lender's prime rate (8.75% and 9.0% at
December 31, 1996 and 1997, respectively). The eligible borrowing base includes
certain receivables and inventories of the Company. The line of credit contains
covenants requiring the Company to maintain certain minimum financial ratios.
The line of credit is collateralized by substantially all of the Company's
assets and is guaranteed by the Company's stockholders. At December 31, 1997,
approximately $2.5 million was available under this credit facility.
On April 15, 1998, the line of credit was increased to a maximum of $3.5
million.
12
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
6. LONG-TERM DEBT
DECEMBER 31,
1996 1997
-------------------------------
Note payable, allowing for borrowings up to $500,000 to finance the purchase of
new machinery and equipment, requiring interest only payments through
February 1998 at the bank's prime rate (8.5% at December 31, 1997) plus 1%
per annum; due in forty-eight equal principal payments plus accrued interest
beginning March 1998, based on the February 26, 1998 outstanding principal
balance with final payment due on February 2, 2002. $ - $ 500,000
Note payable, allowing for borrowings up to $500,000 to finance leasehold
improvements and office equipment requiring monthly principal payments of
$9,167 plus accrued interest at the bank's prime rate (8.5% at December 31,
1997) plus 1% per annum; with final payment due on August 26, 2002. - 522,500
Note payable, requiring monthly principal payments of $10,000 plus accrued
interest at the bank's prime rate (8.25% and 8.5% at December 31, 1996 and
1997, respectively) plus 1% per annum, with a balloon payment in the amount
of $49,158 due on September 15, 1998. 249,158 129,158
Note payable, requiring monthly principal payments of $3,825 plus accrued
interest at the bank's prime rate (8.25% and 8.5% at December 31, 1996 and
1997, respectively), plus 1% per annum, with final payment due on
May 15, 1999. 99,296 61,197
Other 8,714 -
-------------------------------
357,168 1,212,855
Less: current portion (150,451) (380,065)
===============================
$ 206,717 $ 832,790
===============================
13
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
LONG-TERM DEBT (CONTINUED).
Maturities of long-term debt at December 31, 1997 are as follows:
1998 $ 380,065
1999 259,457
2000 235,000
2001 235,000
2002 103,333
===========
$ 1,212,855
===========
The terms of the long-term debt includes covenants requiring the Company to
maintain certain minimum financial ratios and is collateralized by substantially
all of the Company's assets and has been guaranteed by the Company's
stockholders.
7. LEASE COMMITMENTS
On June 1, 1997, the Company began leasing their new office and operating
facilities under a noncancelable operating lease that expires May 31, 2005. The
lease contains two consecutive options to extend for a period of forty-eight
consecutive months each.
The Company is also leasing the office and operating facilities at their
previous location under a noncancelable operating lease that expires April 30,
1999. In 1997, the Company elected to terminate this lease as of April 30, 1998
by paying the lessor $113,000, which is included in rent expense in 1997.
Total rent expense was approximately $371,000 and $895,000 for the years ended
December 31, 1996 and 1997, respectively.
Minimum future rental payments under these noncancelable operating leases for
the years ended December 31 are as follows:
1998 $ 643,000
1999 662,000
2000 682,000
2001 702,000
2002 723,000
Thereafter 1,837,000
============
$ 5,249,000
============
14
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan (the Plan) covering substantially
all employees who are at least eighteen years of age and have completed six
months of service. The Plan allows eligible participants to defer a portion of
their current compensation and have these amounts contributed to the Plan on
their behalf.
The Company provides a matching contribution of 20% of the first 4% of the
employee's contribution and may also make discretionary contributions to the
Plan as authorized by the Company's board of directors. Amounts contributed to
the Plan by employees are fully vested when contributed and contributions made
by the Company, if any, vest fully after three years. Matching contributions
made by the Company totaled $22,018 and $25,152 for the years ended December 31,
1996 and 1997, respectively.
9. SIGNIFICANT CUSTOMERS AND SUPPLIERS
At December 31, 1996, one of the Company's customers accounted for 23% of total
accounts receivable, another customer accounted for 20% of accounts receivable,
another customer accounted for 14% of accounts receivable, and another customer
accounted for 12% of accounts receivable. At December 31, 1997, one of the
Company's customers accounted for 28% of total accounts receivable, another
customer accounted for 23% of total accounts receivable, and three other
customers each accounted for 12% of total accounts receivable.
In 1995, two customers accounted for 27% of net sales. In 1996, one customer
accounted for 20% of net sales, another customer accounted for 18% of net sales,
and another customer accounted for 10% of net sales. In 1997, one customer
accounted for 15% of net sales, another customer accounted for 13% of net sales,
and another customer accounted for 11% of net sales.
Purchases from one supplier accounted for approximately 42% and 37% of net
purchases for the years ended December 31, 1996 and 1997, respectively.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and short-term borrowings in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, and in the case of notes payable
because such instruments bear variable interest rates which approximate market.
15
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
11. SUBSEQUENT EVENT
On December 15, 1998, AVTEAM, Inc., a global supplier of aftermarket aircraft
engines, engine parts and airframe components, acquired substantially all of
the assets and liabilities of the Company for approximately $35.7 million,
pursuant to an Asset Purchase Agreement.
12. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 Issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the Year 2000 Issue for the services it has
provided.
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project not later than June 1999, which is
prior to any anticipated impact on its operating systems.
16
M&M Aircraft Services, Inc.
Notes to Financial Statements (continued)
12. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The total cost of the Year 2000 project are not expected to have a material
effect on the results of operations.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
17
M&M Aircraft Services, Inc.
Balance Sheet
September 30, 1998
(Unaudited)
ASSETS
Current assets:
Cash $ 150
Trade accounts receivable, net 5,029,077
Inventory 11,239,141
Prepaid expenses and other current assets 244,914
--------------
Total current assets 16,513,282
Property and equipment, net 2,582,268
Deposits and other assets 192,457
--------------
Total assets $19,288,007
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,607,252
Accrued expenses 1,284,770
Customer deposits 4,069,014
Line of credit 1,484,496
Current portion of long-term debt 261,774
--------------
Total current liabilities 13,707,306
Long-term debt, less current maturities 632,083
Stockholders' equity:
Common stock, no par value, 50 shares authorized,
15 shares issued and outstanding 1,500
Retained earnings 4,947,118
--------------
Total stockholders' equity 4,948,618
--------------
Total liabilities and stockholders' equity $ 19,288,007
==============
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
18
M&M Aircraft Services, Inc.
Statements of Operations
For the Nine Months Ended
September 30,
1998 1997
----------------------------
(Unaudited)
Net sales $35,149,472 $19,162,688
Cost of sales 27,020,863 16,421,105
----------------------------
8,128,609 2,741,583
Operating expenses:
Selling, general, and administrative 4,548,607 2,547,162
Depreciation and amortization 443,800 469,432
----------------------------
4,992,407 3,016,594
----------------------------
Income (loss) from operations 3,136,202 (275,011)
Other income 10,248 10,585
Interest expense, net (209,906) (126,274)
Loss on disposal of fixed assets - (48,825)
----------------------------
Net income (loss) $ 2,936,544 $ (439,525)
============================
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
19
M&M Aircraft Services, Inc.
Statements of Cash Flows
For the Nine Months Ended
September 30,
1998 1997
---------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 2,936,544 $ (439,525)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 443,800 469,432
Bad debt expense 577,355 238,695
Changes in operating assets and liabilities:
Trade accounts receivable (2,618,680) 7,072
Inventory (5,327,454) (415,540)
Prepaid expenses and other current assets 134,686 (79,747)
Deposits and other assets (56,569) (65,434)
Accounts payable 1,996,445 24,606
Accrued expenses 337,823 282,182
Customer deposits 2,846,704 174,852
---------------------------------
Net cash provided by operating activities 1,270,654 196,593
INVESTING ACTIVITY
Purchases of property and equipment (572,234) (1,686,502)
---------------------------------
Net cash used in investing activity (572,234) (1,686,502)
FINANCING ACTIVITIES
Payments on note payable to related party (9,226) (29,905)
Net proceeds from (payments on) notes payable (318,998) 927,671
Net proceeds from (payments on) short-term
line of credit (370,196) 592,143
---------------------------------
Net cash provided by (used in) financing activities (698,420) 1,489,909
---------------------------------
Net (decrease) increase in cash - -
Cash at beginning of period 150 150
---------------------------------
Cash at end of period $ 150 $ 150
=================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 204,842 $ 117,042
=================================
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
20
M&M Aircraft Services, Inc.
Notes to Financial Statements
September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements as of September 30, 1998 and for
the nine months ended September 30, 1998 and 1997 are unaudited.
In the opinion of management, the financial statements reflect all adjustments
(which consist only of normal recurring adjustments) necessary to present the
financial position of M&M Aircraft Services, Inc. as of September 30, 1998 and
the results of operations and cash flows for the nine-month periods ended
September 30, 1998 and 1997. The results of operations for such interim periods
are not necessarily indicative of the results for the full year.
2. ACQUISITION
On December 15, 1998, AVTEAM, Inc., a global supplier of aftermarket aircraft
engines, engine parts and airframe components, acquired substantially all of
the assets and liabilities of M&M Aircraft Services, Inc. for approximately
$35.7 million, pursuant to an Asset Purchase Agreement.
21
AVTEAM, Inc.
Pro Forma Financial Data (unaudited)
The following unaudited pro forma statements of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998 and the pro forma
balance sheet at September 30, 1998 reflect the statements of operations and the
historical balance sheet of the Company, adjusted to reflect the effects of the
acquisition of M&M Aircraft Services, Inc. (M&M) and related transactions as if
such transactions had occurred as of September 30, 1998 for the balance sheet
and at the beginning of the earliest period presented for the statements of
operations.
On December 15, 1998, the Company acquired substantially all of the assets and
liabilities of M&M Aircraft Services, Inc. for approximately $35.7 million,
pursuant to an Asset Purchase Agreement. The purchase price exceeded the fair
value of the net assets acquired by approximately $30.1 million, which will be
amortized on a straight line basis over 30 years as goodwill.
The summary unaudited pro forma financial data are not necessarily indicative of
the operating results or the financial condition that would have been achieved
had these events been consummated on the date indicated and should not be
construed as representative of future operating results or financial condition.
The summary historical consolidated and unaudited pro forma financial data
should be read in conjunction with the consolidated financial statements and
related notes thereto of the Company. The purchase price allocation is based on
preliminary data.
22
AVTEAM, Inc.
Pro Forma Statement of Operations
For the Year Ended December 31, 1997
(In thousands, except share and per share data)
(Unaudited)
M&M Aircraft Pro Forma
AVTEAM, Inc. Services, Inc. Adjustments Pro Forma
--------------------------------------------------------------------------
Net sales $52,881 $26,644 $ (523) (1) $ 79,002
Cost of sales 38,385 22,952 (491) (1) 60,846
--------------------------------------------------------------------------
14,496 3,692 (32) 18,156
Operating expenses:
Selling, general, and administrative 6,750 3,526 (205) (2) 10,071
Depreciation and amortization 562 528 986 (3) 2,076
--------------------------------------------------------------------------
7,312 4,054 781 12,147
--------------------------------------------------------------------------
Income (loss) from operations 7,184 (362) (813) 6,009
Other income - 7 - 7
Interest income (expense), net (991) (185) (2,309) (4) (3,485)
Loss on disposal of fixed assets - (10) - (10)
--------------------------------------------------------------------------
Income (loss) before income taxes 6,193 (550) (3,122) 2,521
Provision for income taxes 2,259 - (1,382) (5) 877
--------------------------------------------------------------------------
Net income (loss) $ 3,934 $ (550) $ (1,740) $ 1,644
==========================================================================
Basic and diluted:
Net income per share data $0.65 $0.26
Weighted average number of shares -
basic 6,073,694 6,423,694
================= ================
Net income per share data - diluted $0.52 $0.21
================= ================
Weighted average number of shares -
diluted 7,622,194 7,972,194
================= ================
23
AVTEAM, Inc.
Notes to Pro Forma Financial Statements
(In 000s)
(Unaudited)
Pro Forma Statement of Operations - Year Ended December 31, 1997
(1) Reflects sales and cost of sales between AVTEAM and M&M for the year ended
December 31, 1997, as if the acquisition had occurred as of the beginning of the
period presented, as follows:
Sales
-------------------
Elimination of AVTEAM sales to M&M for the year ended December 31, 1997 $ (264)
Elimination of M&M sales to AVTEAM for the year ended December 31, 1997 (259)
-------------------
Pro forma adjustment $ (523)
Cost of Sales
-------------------
Elimination of AVTEAM cost of sales to M&M for the year ended December 31, 1997 $ (262)
Elimination of M&M cost of sales to AVTEAM for the year ended December 31, 1997 (229)
-------------------
Pro forma adjustment $ (491)
(2) Reflects reduction in compensation expense to three officers of M&M based on new
employment agreements signed at the time of the M&M acquisition. $ (205)
(3) Reflects increase in amortization of intangibles resulting from the M&M
acquisition. Goodwill totaling approximately $30.1 million is being amortized over
30 years. $ 986
(4) Reflects increased interest expense on additional borrowings on the
Company's existing credit facility of $30 million to fund the M&M acquisition,
as if such debt was outstanding as of the beginning of the period presented.
The funds were borrowed in two installments, $25 million bearing interest at
LIBOR (currently 7.75%), and $5 million bearing interest at the prime rate (currently 7.73%). $ (2,309)
(5) Reflects recognition of income tax benefit associated with the following:
Income tax provision as if M&M were a C-Corporation as of January 1, 1997 $ (207)
Tax effect of pro forma adjustments at statutory rates (1,175)
-------------------
Pro forma adjustment $ (1,382)
24
AVTEAM, Inc.
Pro Forma Statement of Operations
For the Nine Months Ended September 30, 1998
(In thousands, except shares and per share data)
(Unaudited)
M&M Aircraft Pro Forma
AVTEAM, Inc. Services, Inc. Adjustments Pro Forma
------------------------------------------------------------------------
Net sales $ 48,982 $ 35,150 $ (1,199) (1) $ 82,933
Cost of sales 35,475 27,021 (1,032) (1) 61,464
------------------------------------------------------------------------
13,507 8,129 (167) 21,469
Operating expenses:
Selling, general, and administrative 4,866 4,549 (448) (2) 8,967
Depreciation and amortization 1,242 444 740 (3) 2,426
------------------------------------------------------------------------
6,108 4,993 292 11,393
------------------------------------------------------------------------
Income from operations 7,399 3,136 (459) 10,076
Other income - 10 - 10
Interest expense, net (816) (210) (1,732) (4) (2,758)
------------------------------------------------------------------------
Income before income taxes 6,583 2,936 (2,191) 7,328
Provision for income taxes 2,437 - 281 (5) 2,718
------------------------------------------------------------------------
Net income $ 4,146 $ 2,936 $ (2,472) $ 4,610
========================================================================
Basic and diluted:
Net income per share data $0.37 $0.40
================ ================
Weighted average number of shares -
basic 11,105,383 11,455,383
================ ================
Net income per share data - diluted $0.37 $0.40
================ ================
Weighted average number of shares -
diluted 11,135,447 11,485,447
================ ================
25
AVTEAM, Inc.
Notes to Pro Forma Financial Statements
(Unaudited)
Pro Forma Statement of Operations - Nine Months Ended September 30, 1998
(1) Reflects sales and cost of sales between AVTEAM and M&M for the nine months
ended September 30, 1998, as if the acquisition had occurred as of the beginning
of the period presented, as follows:
Sales
--------------
Elimination of AVTEAM sales to M&M for the nine months ended September 30, 1998 $ (349)
Elimination of M&M sales to AVTeam for the nine months ended September 30, 1998 (850)
--------------
Pro forma adjustment $ (1,199)
Cost of Sales
--------------
Elimination of AVTEAM cost of sales to M&M for the nine months ended September 30, 1998 $ (318)
Elimination of M&M cost of sales to AVTeam for the nine months ended September 30, 1998 (714)
--------------
Pro forma adjustment $ (1,032)
(2) Reflects reduction in compensation expense to three officers of M&M based on new
employment agreements signed at the time of the M&M acquisition. $ (448)
(3) Reflects increase to amortization of intangibles for the M&M acquisition. Goodwill
totaling approximately $30.1 million is being amortized over 30 years. $ 740
(4) Reflects increased interest expense on additional borrowings on the
Company's existing credit facility of $30 million to fund the M&M acquisition,
as if such debt was outstanding as of the beginning of the period presented.
The funds were borrowed in two installments, $25 million bearing interest at
LIBOR (currently 7.75%), and $5 million bearing interest at the prime rate (currently 7.73%). $ (1,732)
(5) Reflects recognition of income tax expense (benefit) associated with the
following:
Income tax provision as if M&M were a C-Corporation as of January 1, 1998 $ $1,105
Tax effect of pro forma adjustments at statutory rates (824)
--------------
Pro forma adjustment $ 281
26
AVTEAM, Inc.
Pro Forma Balance Sheet
September 30, 1998
(In thousands)
(Unaudited)
M&M Aircraft Pro Forma
AVTEAM, Inc. Services, Inc. Adjustments Pro Forma
-----------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 1,069 $ 0 $ (6,418)(3) $ (5,349)
Trade accounts receivable, net 9,476 5,029 (397)(1) 14,108
Inventory 68,115 11,239 442 (2)(4) 79,796
Prepaid expenses and other current assets 1,881 245 - 2,126
Deposits 1,826 - - 1,826
Deferred tax asset 161 - - 161
-----------------------------------------------------------------------
Total current assets 82,528 16,513 (6,373) 92,668
Revenue producing equipment, net 9,971 - 9,971
Property and equipment, net 1,816 2,582 (44)(4) 4,354
Deposits and other assets 279 193 - 472
Goodwill, net - - 30,082 (4) 30,082
-----------------------------------------------------------------------
Total assets $ 94,594 $ 19,288 $ 23,665 $ 137,547
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 26,500 $ 1,484 $ (1,484)(3) $ 26,500
Accounts payable 6,233 6,607 (397)(1) 12,443
Accrued expenses 1,279 1,285 (179)(4) 2,385
Customer deposits 695 4,069 - 4,764
Current portion of capital leases 129 - - 129
Current portion of long-term debt - 262 (262)(3) -
Other current liabilities 654 - - 654
-----------------------------------------------------------------------
Total current liabilities 35,490 13,707 (2,322) 46,875
Capital lease obligation, less current 79 - - 79
Long-term debt, less current maturities - 632 29,368 (4) 30,000
Non-current capital leases 3,075 - - 3,075
Stockholders' equity:
Class A Common stock, $.01 par value
77,000,000 shares authorized,
11,015,739 shares issued and
outstanding 107 - 4 (3) 111
Class B Common stock, $.01 par value,
3,000,000 shares authorized, 439,644
shares issued and outstanding 4 - - 4
Common stock - 2 (2)(4) -
Additional paid-in capital 47,444 - 1,731 (3) 49,175
Retained earnings 8,395 4,947 (5,114) 8,228
-----------------------------------------------------------------------
Total stockholders' equity 55,950 4,949 (3,381) 57,518
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 94,594 $ 19,288 $ 23,665 $ 137,547
========================================================================
27
AVTEAM, Inc.
Notes to Pro Forma Financial Statements
(Unaudited)
Pro Forma Balance Sheet - September 30, 1998
(1) Reflects the elimination of intercompany receivables/payables between AVTEAM
and M&M at September 30, 1998, as if the acquisition had occurred on that date,
as follows:
Reversal of AVTEAM receivables from M&M at September 30, 1998 $ (198)
Reversal of M&M receivables from AVTEAM at September 30, 1998 (199)
--------------
Pro forma adjustment $ (397)
(2) Reflects the elimination of intercompany profit in inventories at September
30, 1998 as if the acquisition had occurred on that date, as follows:
Reversal of profit for AVTEAM purchases of inventories from M&M at September 30, 1998 $ (136)
Reversal of profit for M&M purchases of inventories from AVTEAM at September 30, 1998 (31)
--------------
Pro forma adjustment $ (167)
(3) In connection with the acquisition of M&M for approximately $35.7 million,
AVTEAM borrowed $30 million and used an additional $6,418 in cash to pay $4,040
of the acquisition price, and to extinguish $2,378 of M&M debt.
Additionally, pursuant to the Purchase Agreement, AVTEAM issued 350,000 shares
of common stock, which were valued at the average closing price of AVTEAM's
common stock for the period of 3 days before and after the date on which the
terms of the acquisition were agreed and announced ($4.96)
(4) For purposes of presenting the pro forma balance sheet, the following
estimated adjustments have been made for the M&M acquisition as if the
acquisition had occurred on September 30, 1998, as follows:
Excess of purchase price over fair value of net assets acquired $ 30,082
Elimination of other assets not purchased (44)
Elimination of accrued liabilities not assumed 179
Adjust work in process to estimated fair value 609
Recording of debt to fund the M&M acquisition (30,000)
Recording of additional paid in capital on the issuance of 350,000 shares (1,731)
Elimination of M&M common stock 2
Elimination of M&M retained earnings 4,949
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement dated October 12, 1998, by and among
AVTEAM, Inc., AVTEAM Engine Repair Corp., M&M Aircraft Services, Inc.
James McLellan, Leon Sacco and Mark Schuldiner. (Incorporated herein
by reference to the Registrant's Current Report on Form 8-K which
was filed with the Commission on October 15, 1998.)
23.1 Consent of Ernst & Young LLP, independent Certified Public
Accountants.
99.1 Press Relase dated December 15, 1998. (Incorporated herein by
reference to the Registrant's Current Report on Form 8-K which was
filed with the Commission on December 30, 1998.)