AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2001, and the results of its operations for the three month ended March 31, 2001, and 2000, and cash flows for the three month periods ended March 31, 2001 and 2000. The results of operations and cash flows for the three month period ended March 31, 2001, are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2001.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying unaudited interim consolidated financial statements should be read in connection with the Company’s December 31, 2000 financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB.
NOTE 2 - REALIZATION OF ASSETS
The Company is highly leveraged. Furthermore, the Company’s liquidity and ability to meet its obligations as they become due in 2001 are subject to, among other things, continued access to the Company’s Credit Facility and compliance with the terms and covenants of the Company’s Credit Facility.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company sustained substantial losses in 1999 and 2000; has used, rather than provided, cash in its operations in 1999 and 2000; and has deficits in working capital and stockholders’ equity at December 31, 2000 and March 31, 2001.
Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets are dependent upon continued operations of the Company. This in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. A breach of any of the financial covenants in the Company’s Credit Facility could result in a default under this Credit Facility. Upon the occurrence of an event of default under the Credit Facility, the lender could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable.
Management has taken steps to revise its operations and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in existence. In 2000, the Company extended its Credit Facility due date to June 24, 2010 and the maximum availability under its line of credit to $26.8 million. The Company has also entered into an agreement on March 19, 2001 with a financial advisor to use its best efforts to raise gross proceeds of approximately $3.5 million. No proceeds have been raised under this agreement. The class action lawsuits against the Company have been settled.
NOTE 3 - CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS:
In October 1997, the Company, its founder, its directors, certain of its officers, a former officer and director, its former auditor and its underwriter were named in three civil suits filed as class actions on behalf of individuals claiming to have purchased the Company's Common Stock during the period from March 1997 to September 1997, and seeking damages for violation of federal securities laws. The federal court approved the settlement of these three suits in March 1999. In connection with the settlement, the Company incurred a total expense of $620,000 in 1999, of which $140,000 was paid in cash and $480,000 was the value of 80,000 shares of Common Stock issued to the plaintiffs at the time of the settlement.
In May 2000, in connection with an investigation by the Securities and Exchange Commission (the "SEC") of alleged violations of federal securities laws by the Company, the Company consented to the entry of a federal court injunction enjoining the Company from future violations of the federal securities laws. The Company did not admit or deny any allegations made by the SEC in the investigation.
In October 2000, the Company entered into a plea agreement with the U.S. Attorney's Office in Los Angeles, California under which the Company entered a guilty plea to a three-count criminal information alleging that the Company conspired to violate Title 15, United States Code, Sections 77q(a)and 77x, and violated Title 15, United States Code, Sections 77x,78m(b)(2)(A), 78m(b)(5) and 78ff, and Title 17, Code of Federal Regulations, Section 240.13b2-1 in connection with the preparation of the Company's financial records and the filing of the Company's financial statements during the period through approximately August 1997. As a part of the plea agreement, the Company agreed to pay a total fine of $750,000 payable $50,000 at the time of sentencing (which occurred in November 2000), $150,000 on March 31, 2001, $250,000 on March 31, 2002, and $300,000 on March 31, 2003. In addition the Company was placed on probation until the fine is paid in full or until December 31, 2002, whichever is later. The settlement fine has been recorded as $642,016, in the Company's statement of operations as of September 30, 2000 based on the present value on that date of the proposed payments (using a 10% interest assumption).
The U.S. Attorney’s Office in Los Angeles has indicted the Company’s founder, Osamah S. Bakhit, and Mr. Bakhit's trial is pending. Any judgment against Mr. Bakhit may have a material adverse effect on the Company’s business.
The Company is involved in certain legal and administrative proceedings and threatened legal and administrative proceedings arising in the normal course of its business. While the outcome of such proceedings and threatened proceedings cannot be predicted with certainty, management believes the ultimate resolution of these matters individually or in the aggregate will not have a material adverse effect on the Company.
NOTE 4 – DEBT ARRANGEMENTS
On February 23, 2000, the Company amended its Credit Facility with GMAC to extend the loan maturity date to June 24, 2010. In conjunction with this amendment, GMAC was issued 208,762 warrants. These warrants and 126,600 warrants issued to GMAC in 1998 gave GMAC warrants equal to 9.9% of the outstanding stock of the Company or 335,362 warrants. The exercise price of the warrants are $0.25 and the warrants expire on February 28, 2010. The fair value of the total warrants issued to GMAC was determined to be $818,000 and such warrants are being amortized to interest expense over a ten-year period beginning in 2000.
As a condition for the extension of the credit facility, the Company entered into a $2,000,000 promissory note, due in a balloon payment on the earlier of February 1, 2010, or if the Company’s stock reaches a $6.00 per share value over 10 consecutive days, or the occurrence of one of several events, none of which have occurred. The $2,000,000 has been reflected as debt issue costs in the accompanying consolidated balance sheet and is being amortized to interest expense over the ten-year term of the promissory note. The note bears interest at GMAC’s Alternate Base Rate and interest is payable semi-annually.
On September 12, 2000 the Company received approval from GMAC for a $10 million working capital line to finance the purchase of inventory related to the servicing of the Company’s contracts with major foreign airlines. The Company implemented the use of this line in October, 2000 which is guaranteed by the export-import Bank of the United States the official export credit agency of the U.S. government and which carries an interest rate of Prime plus 1.0%. The working capital line is used in conjunction with the Company’s $26.8 million Credit Facility.
NOTE 5 – EXPORT SALES
For the three months ended March 31, 2001 and 2000, approximately 55.5% and 70.8%, respectively, of the Company’s net sales were export sales. Export sales by region were approximately as follows:
| | March 31,
|
| | 2001
| 2000
|
| Pacific Rim | 3.3% | 3.5% |
| Europe | 19.8 | 38.4 |
| Latin/South America | 28.7 | 21.9 |
| Africa/Middle East | 3.7
| 7.0
|
| | 55.5%
| 70.8%
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes the operations of the Company for each of the periods discussed. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, which are included elsewhere in this document.
This discussion contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such forward looking statements involve risks and uncertainties and actual results could differ from those described herein and future results may be subject to numerous factors, many of which are beyond the control of the Company.
Overview
Net sales consist primarily of gross sales, net of allowance for returns and other adjustments. Cost of sales consists primarily of product costs, freight charges and an inventory provision for damaged and obsolete products. Product costs consist of the acquisition costs of the products and costs associated with repairs, maintenance and certification.
Net sales and gross profit depend in large measure on the volume and timing of sales orders received during the period and the mix of aircraft parts contained in the Company's inventory. The timing of bulk inventory purchases can impact sales and gross profit. In general, bulk inventory purchases allow the Company to obtain large inventories of aircraft parts at a lower cost than can ordinarily be obtained by purchasing such parts on an individual basis. Thus, these bulk purchases allow the Company to seek larger gross margins on its sale of aircraft parts since the cost of purchase is reduced.
The following table sets forth certain information relating to the Company's unaudited operations for the three months ended March 31, 2001 and 2000 (dollars in thousands):
| | Three Months Ended March 31,
|
| | 2001
| 2000
|
| Net sales | $11,711 | 100.0 % | $8,274 | 100.0% |
| Cost of sales | 9,121
| 77.8
| 6,217
| 75.1
|
| | | | | |
| Gross profit | 2,590 | 22.2 | 2,057 | 24.9 |
| | | | | |
| Selling and administrative expenses | 1,685 | 14.4 | 1,428 | 17.3 |
| Non-recurring expenses | 11
| 0.1
| 6
| 0.1
|
| | | | | |
| Income from operations | 894 | 7.7 | 623 | 7.5 |
| Interest expense, net | 818
| 7.0
| 560
| 6.7
|
| | | | | |
| Income before provision for income taxes | 76 | 0.7 | 63 | 0.8 |
| | | | | |
| Provision for income taxes | 1
| 0.1
| -
| -
|
| Net income | $75
| 0.6 %
| $63
| 0.8%
|
Net sales. Net sales increased from $8.3 million for the three months ended March 31, 2000 to $11.7 million for the three months ended March 31, 2001, an increase of $3.4 million or 41.5%. This increase was mainly a result of the increase in financing availability that allowed the Company to focus on the business, which resulted in increased sales and the ability of the Company to purchase material for its customers. The improved financing availability allowed the Company to obtain sales previously passed over due to a lack of financing.
Cost of sales. Cost of sales increased from $6.2 million for the three months ended March 31, 2000 to $9.1 million for the three months ended March 31, 2001, an increase of $2.9 million or 46.7%. This increase was primarily attributable to the 41.5% increase in net sales.
Gross profit. Gross profit increased from $2.1 million or 24.9% of net sales for the three months ended March 31, 2000 to $2.6 million or 22.2% of net sales for the three months ended March 31, 2001, an increase of $.5 million or 25.9%. The increase in gross profit dollars was a result of the 41.5% increase in net sales from the prior period. The decrease in gross profit as a percentage of net sales was due to increased sales of brokered orders.
Selling and administrative expenses. Selling and administrative expenses consisted primarily of wages and commission expense, rent expense, professional fees, consulting expense and travel expense. The Company's selling and administrative expenses increased from $1.4 million for the three months ended March 31, 2000 to $1.7 million for the three months ended March 31, 2001, an increase of $257,000 or 18%. This increase was principally due to an increase in employee compensation as a result of the increased commission from increased sales.
Income from operations. The Company had income from operations of $.6 million for the three months ended March 31, 2000 compared to income from operations of $.9 million for the three months ended March 31, 2001. The increase in income from operations is due to the increase in net sales and gross profit dollars.
Interest expenses. Interest expense increased from $560,000 for the three months ended March 31, 2000 to $826,000 for the three months ended March 31, 2001. The $266,000 increase in interest expense was due to increased financing to support the increase in sales.
Net income. Net income increased from $63,000 for the three months ended March 31, 2000 to $75,000 for the three months ended March 31, 2001, due to the foregoing factors.
Liquidity and Capital Resources
The Company’s operating activities used $.6 million and provided $5,000 in the three months ended March 31, 2000 and 2001, respectively. The largest cash uses in the 2000 period were; an increase in accounts receivable of $1.1 million, a decrease in accounts payable of $.3 million and a reduction in accrued liabilities of $.2 million offset by a decrease in inventory of $.6 million and an increase in checks not presented for payment of $.2 million. For the 2001 period, the largest use of cash was a $1.3 million increase in accounts receivable, offset by a decrease in inventory of $.7 million and an increase in checks not yet presented for payment of $.5 million.
The 2000 financing activities provided cash of $.7 million, primarily resulting from the $1.2 million net increase in line of credit borrowings offset by principal payments on long term debt. The 2001 financing activities provided $34,000 of cash due to a net increase in borrowings of $295,000 offset by $258,000 principal payments on long-term debt.
As of March 31, 2001, the Company had a working capital deficit of $5.8 million. This was primarily due to the increase in the borrowings on the line of credit resulting from the cash requirements for increases in accounts receivable and inventory purchases in 2000.
On February 23, 2000, the Company amended its Credit Facility with GMAC to extend the loan maturity date to June 24, 2010. In conjunction with this amendment, GMAC was issued 208,762 warrants. These warrants and 126,600 warrants issued to GMAC in 1998 gave GMAC warrants equal to 9.9% of the outstanding stock of the Company or 335,362 warrants. The exercise price of the warrants is $.25 and the warrants expire on February 28, 2010. The fair value of the total warrants issued to GMAC was determined to be $818,283 and such warrants are being amortized to interest expense over a ten year period beginning in 2000.
As a condition for the extension of the credit facility, the Company entered into a $2,000,000 promissory note, due in a balloon payment on the earlier of February 1, 2010, or if the Company’s stock reaches a $6 per share value over 10 consecutive days, or the occurrence of one of several events, none of which have occurred. The $2,000,000 has been reflected as debt issue costs in the accompanying Consolidated balance sheet and is being amortized to interest expense over the term of the promissory note. The note bears interest at GMAC’s Alternate Base Rate and interest is payable semi-annually.
On September 12, 2000 the Company received approval from GMAC for a $10 million working capital line to finance the purchase of inventory related to the servicing of the Company’s contracts with major foreign airlines. The Company implemented the use of this line in October, 2000 which is guaranteed by the export-import Bank of the United States the official export credit agency of the U.S. government and which carries an interest rate of Prime plus 1%. The working capital line is used in conjunction with the Company’s $26.8 million Credit Facility.
The Company's debt primarily consists of the following at March 31, 2001: (i) term loan of $750,000 at to GMAC, due in quarterly principal installments of $125,000 with an interest rate of 2.0 percent above the lenders alternate base rate; (ii) note payable of $300,000 to corporations’, secured by specific inventory; (iii) note payable of $100,000 to the founder of the Company (iv) settlement fee debt of $449,750, and (v) note payable of $2,000,000 to GMAC, due in February 2010.
The Company’s credit facility with GMAC is an asset based line of credit secured by accounts receivable and inventory and is the primary source for the Company to finance its operations and growth. At March 31, 2001 the balance on the credit facility was $23,986,550. Because of the non-recurring costs associated with the re-auditing of the Company’s financial statements and the ongoing federal investigations, the Company has used its line of credit to pay these costs. As a result, the Company may need to increase its capital base in order to continue to meet its growth objectives. There can be no assurance that such additional capital will be available on a timely basis or at acceptable terms.
See note 2 to the consolidated financial statements included in this form 10-Q regarding realization of assets and steps management has taken with respect to its operations and financing requirements.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in certain legal and administrative proceedings and threatened legal and administrative proceedings arising in the normal course of its business. While the outcome of such proceedings and threatened proceedings cannot be predicted with certainty, management believes the ultimate resolution of these matters individually or in the aggregate will not have a material adverse effect on the Company. Also, see Note 3 to the consolidated financial statements in Part I.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| 3.1 | | Amended and Restated Certificate of Incorporation of the Registrant. (1) |
| 3.2 | | Bylaws, as amended, of the Registrant. (1) |
| 3.3 | | Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (1) |
| 4.1 | | Specimen Common Stock Certificate. (1) |
| 9.1 | | Voting Trust Agreement, dated November 17, 1997, by and among Osamah Bakhit, Aviation Distributors, Inc., and Dirk O. Julander, as trustee. (2) |
| 10.2 | | 1996 Stock Option and Incentive Plan. (1) |
| 10.3 | | Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian Airlines and Aviation Distributors, Inc.. (1) |
| 10.4 | | Credit and Security Agreement, dated June 25, 1997, by and between Aviation Distributors, Inc. and BNY Financial Corporation.(3) |
| 10.5 | | Amendment dated December 15, 1999 between the Company and GMAC Commercial Credit LLC to the June 25, 1997 Credit and Security Agreement between the company and BNY Financial Corporation, including related Common Stock Purchase Warrant for 335,362 shares dated February 28, 2000 issued to GMAC Commercial Credit LLC.(4) |
| 10.6 | | Amended and Restated Employment Agreement, dated as of July 16, 1996, by and between Osamah S. Bakhit and Aviation Distributors, Inc. (1) |
| 10.7 | | Employment Agreement, dated as of January 5, 2000 by and between William D. King and Aviation Distributors, Inc.. (4) |
| 10.8 | | Employment Agreement, dated as of July 16, 1996, by and between Jeffrey G. Ward and Aviation Distributors, Inc. (1) |
| 10.9 | | Amendment to Employment Agreement, dated November 17, 1997, by and between Osamah S. Bakhit and Aviation Distributors, Inc.(3) |
| 10.10 | | Lease, dated as of July 9, 1997, by and between Olen Properties Corp. and Aviation Distributors, Inc. (3) |
| 10.11 | | Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation Distributors, Inc., dated as of December 31, 1995. (1) |
| 10.12 | | Form of Indemnity Agreement. (1) |
| 10.13 | | Promissory Note between Aviation Distributors, Inc. and Osamah S. Bakhit, dated December 31, 1996. (1) |
| 10.16 | | Employment Agreement dated as of June 1, 1998 by and between Gary L. Joslin and Aviation Distributors, Inc. (4) |
(1) Filed with the Company’s Registration Statement on Form SB-2 dated March 3, 1997.
(2) Filed with the Company’s Current Report on Form 8-K dated August 29, 1997.
(3) Filed with the Company’s Registration Statement on Form 10-KSB dated April 20, 1998.
(4) Filed with the Company’s Form 10-KSB dated April 11, 2000
(b) Reports on Form 8-K.
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.
Date May 21, 2001
| | AVIATION DISTRIBUTORS, INC. |
| | | By: | /s/ William D. King
|
| | | | William D. King |
| | | | Chief Executive Officer |
| | | | Chairman and Director |
| | | | (Principal Executive Officer) |
| | | By: | /s/ Gary L. Joslin
|
| | | | Gary Joslin |
| | | | Gary L. Joslin |
| | | | Chief Financial Officer |
| | | | and Director (Principal |
| | | | Accounting Officer) |
