AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997
REGISTRATION NO. 333-8061
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
For the transition period from to
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Commission file number 0-29028
Aviation Distributors, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0715685
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(State or Other Jurisdiction of (I.R.S. employer
Incorporation or Organization) Identification No.)
One Wrigley Drive Irvine, California 92618
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (714) 586-7558
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Indicate by check (X) whether the issuer (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 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: 3,165,000 SHARES OF COMMON
STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF AUGUST 14, 1997.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 16,985 $ 468,362
Restricted cash 63,458 1,275,539
Accounts receivable, net of allowance for doubtful 5,815,681 8,840,505
accounts of $150,000 at December 1996 and $346,316
at June 1997
Other receivables 66,251 77,925
Inventories 3,704,911 7,077,858
Current portion of notes receivable 1,615,528 1,654,201
Current portion of notes receivable from officer 408,718 408,718
Deferred tax asset 537,000 171,025
Prepaid expenses 69,724 210,792
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Total current assets 12,298,256 20,184,925
PROPERTY AND EQUIPMENT 1,784,853 1,920,291
Less - Accumulated depreciation 278,686 351,752
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1,506,167 1,568,539
Notes receivable, net of current portion 3,056,855 2,230,058
Other assets 246,596 -
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3,303,451 2,230,058
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$17,107,874 $23,983,522
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not yet presented for payment $ 935,440 $ 617,544
Accounts payable 2,590,222 3,616,604
Accrued liabilities 226,510 171,327
Income tax payable 553,000 385,400
Lines of credit 5,583,475 6,231,645
Current portion of long term debt 2,661,540 3,165,262
Current portion of capital lease obligations 18,867 16,654
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Total current liabilities 12,569,054 14,204,436
Long term debt, net of current portion 3,985,205 3,149,241
Capital lease obligations, net of current portion 34,372 27,177
Deferred tax liability 51,000 51,000
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.01, 3,000,000 shares - -
authorized; none issued and outstanding
Common stock, par value of $.01, 10,000,000 shares 17,850 31,650
authorized; 1,785,000 and 3,165,000 shares issued
and outstanding at December 31, 1996 and June 30,
1997, respectively
Additional paid in capital 389,150 5,543,630
Retained earnings 61,243 976,388
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Total stockholders' equity 468,243 6,551,668
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$17,107,874 $23,983,522
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The accompanying notes are an integral part of these consolidated balance
sheets.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
----------------- ---------------- ----------------- ----------------
DISTRIBUTED SERVICES AND INVENTORY SALES $5,808,398 $ 9,697,640 $ 9,897,785 $18,877,109
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS 1,277,135 387,200 1,823,507 662,052
----------------- ---------------- ----------------- ----------------
TOTAL NET SALES 7,085,533 10,084,840 11,721,292 19,539,161
COST OF SALES 4,858,507 7,171,368 8,625,477 14,742,161
----------------- ---------------- ----------------- ----------------
Gross profit 2,227,026 2,913,472 3,095,815 4,797,000
SELLING AND ADMINISTRATIVE EXPENSES 1,107,157 1,793,749 2,216,645 3,019,263
----------------- ---------------- ----------------- ----------------
Income from operations 1,119,869 1,119,723 879,170 1,777,737
OTHER EXPENSES (INCOME):
Interest expense 466,483 232,935 608,748 508,585
Interest income (284,268) (109,173) (284,268) (221,638)
Other income - - (11,730) (450)
----------------- ---------------- ----------------- ----------------
Income before provision for income taxes 937,654 995,961 566,420 1,491,240
PROVISION FOR INCOME TAXES 169,634 388,200 169,634 576,094
----------------- ---------------- ----------------- ----------------
Net income $ 768,020 $ 607,761 $ 396,786 $ 915,146
----------------- ---------------- ----------------- ----------------
Net income per share $ 0.43 $ 0.20 $ 0.22 $ 0.35
----------------- ---------------- ----------------- ----------------
Weighted average shares outstanding 1,785,000 3,123,000 1,785,000 2,650,000
----------------- ---------------- ----------------- ----------------
The accompanying notes are an integral part of these consolidated statements.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1997
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 396,786 $ 915,146
Adjustments to reconcile net income to net cash
used in operating activities:
Principal payments of notes receivable 715,484 788,125
Borrowings on notes payable related to inventory purchases 1,088,906 1,610,183
Principal payments on notes payable related to inventory (200,000) (1,044,318)
purchases
Reduction in amount due on notes payable related to inventory (210,950) -
purchases
Reduction in amount due on legal settlement - (80,000)
Principal payments on note payable related to legal settlement - (820,000)
Depreciation and amortization of debt discounts 107,780 84,653
Changes in assets and liabilities:
Accounts receivable, net (1,464,266) (3,024,824)
Other receivables (76,133) (11,674)
Inventories (582,518) (3,372,947)
Deferred tax asset - 365,975
Other assets (266,036) 105,527
Checks issued not yet presented for payment 76,968 (317,896)
Accounts payable (465,830) 1,026,382
Accrued liabilities (96,069) (55,183)
Income tax payable 195,000 (167,600)
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Net cash used in operating activities (780,878) (3,998,451)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (115,997) (135,438)
(Increase) decrease in restricted cash 184,291 (1,212,081)
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Net cash provided by (used in)investing activities 68,294 (1,347,519)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 12,304,964 20,065,229
Principal payments on lines of credit (11,684,217) (19,417,059)
Borrowings on long term debt - 500,000
Principal payments of long term debt (761,296) (509,694)
Principal payments of capital lease obligations (11,551) (9,409)
Contributed capital from initial public offering - 4,407,829
Contributed capital from underwriter's over-allotment option - 760,451
---------------- ----------------
Net cash provided by (used in)financing activities (152,100) 5,797,347
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (864,684) 451,377
Cash and cash equivalents at beginning of period 867,721 16,985
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Cash and cash equivalents at end of period $ 3,037 $ 468,362
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 597,287 $ 566,902
Income taxes 20,000 377,800
The accompanying notes are an integral part of these consolidated statements.
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 _ GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND OPERATIONS
Aviation Distributors, Inc. and its subsidiaries (collectively, the
"Company") established operations in 1988, incorporated in the state of
California in 1992 and reincorporated in the state of Delaware in 1996. The
Company is a supplier, distributor and broker of commercial aircraft parts and
supplies worldwide.
On March 3, 1997 the Company's Registration Statement on Form SB-2
relating to the Company's initial public offering of 1,200,000 shares of its
common stock was declared effective. On March 7, 1997 the Company closed its
public offering of 1,200,000 shares of its common stock at $5 per share. In
connection with the initial public offering, the Company granted the
underwriters a 45-day option to purchase up to 180,000 additional shares of its
common stock to cover over-allotments. The underwriters exercised such over-
allotment option and on April 22, 1997, the Company sold an additional 180,000
shares of its common stock at $5 per share.
The net proceeds from the offering after all expenses were approximately
$4.5 million, of such proceeds, $3,800,000 was used to repay a portion of the
amount outstanding under two revolving lines of credit, $400,000 was used to
repay loans made to the Company by certain of its employees, and the remaining
proceeds were used to fund a portion of a legal settlement entered into by the
Company. (See Note 4)
On April 22, 1997 the Company received net proceeds of approximately
$760,000 from the exercise of the underwriter's over-allotment option. The
proceeds were used for working capital and to reduce vendor payables.
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 June 30, 1997 and the results of its operations
for the three and six month periods ended June 30, 1997 and 1996 and cash flows
for the six month periods ended June 30, 1997 and 1996. The results of
operations and cash flows for the six month period ended June 30, 1997 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the remainder of 1997.
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-QSB. 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, 1996 financial statements and the notes thereto included in the Prospectus
contained in the Company's Form SB-2 Registration Statement.
ACCOUNTING ESTIMATES
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 periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, ADI Consignment Sales Inc. and
Aviation Distributors (Europe) Ltd. All significant intercompany transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity
of less than 90 days to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of short term certificates of deposits held as
security for letters of credit issued on behalf of the Company by financial
institutions.
INVENTORIES
Inventories, which consist primarily of aircraft parts, are stated at the
lower of cost or market with cost determined on a first-in, first-out basis.
Expenditures required for the rectification of parts are capitalized as
inventory cost as incurred and are expensed as the parts associated with the
rectification are sold.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is provided
using the straight line method over the estimated useful lives of the assets,
ranging from five to thirty years. Expenditures for repairs and maintenance are
expensed as incurred. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized. The carrying
amounts of assets which are sold or retired and the related accumulated
depreciation are removed from the accounts in the year of disposal, and any
resulting gain or loss is reflected in operations.
REVENUE RECOGNITION
Sales of aircraft parts are recognized as revenues when the product is
shipped and title has passed to the customer. The Company provides an allowance
for estimated product returns.
Distributed services and inventory sales represent sales of inventory
located through outside parties and sales of company-owned inventory. Net sales
on consignment and marketing agreements represent revenue related to sales of
inventory held on consignment and sales of inventory obtained through marketing
agreements.
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
# 128 "Earnings Per Share." Effective April 1, 1997 the Company adopted this
statement. The statement requires, at a minimum, new calculations of earnings
per share and disclosures. The Company has reviewed the provisions of SFAS No.
128 and has determined that adoption of this pronouncement had no material
effect on the Company's reporting of its results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
# 130 "Reporting Comprehensive Income." The statement requires a separate
reporting of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. The statement is effective for fiscal years
beginning after December 15, 1997. Management does not expect the adoption of
this statement to have a material effect on the Company's reporting of its
results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
# 131 "Disclosures About Segments of an Enterprise and Related Information."
The statement requires a disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and a finer partitioning of geographic disclosures. It also
requires geographic data by country, as opposed to broader geographic regions
permitted under current standards. The statement is effective for fiscal years
beginning after December 15, 1997. Management does not expect the adoption of
this statement to have a material effect on the Company's reporting of its
results of operations.
NOTE 2 _ ACCOUNTS RECEIVABLE:
The Company distributes products in the United States and abroad to
commercial airlines, air cargo carriers, distributors, maintenance facilities
and other aerospace companies. The Company's credit risks consist of accounts
receivable denominated in U.S. dollars from customers in the aircraft industry.
The Company performs periodic credit evaluations of its customers' financial
conditions and provides an allowance for doubtful accounts as required. The
Company, at times, offers extended payment terms of up to one year on its
receivables.
The Company insures the majority of its international customers through an
export credit insurance policy. The policy has an aggregate limit of
$5 million, a one-time annual deductible of $35,000 for any claim(s) for the
period, a premium rate of $.75 per $100 of insured receivables and the policy
expires on November 1, 1997. This policy covers 90% of the insured balance.
NOTE 3 _ COMMITMENTS AND CONTINGENCIES:
In 1996, the Company entered into an agreement to purchase approximately
$7.0 million of inventory from a vendor. In 1997 the purchase price was reduced
to approximately $4.6 million. Under the terms of the agreement, the Company
will remit 36 equal monthly installments of $128,194 after receipt of 30% of
the inventory. As of June 30, 1997, the Company had received approximately 37%
of the inventory under this agreement and had made its first monthly payment.
NOTE 4 _ LEGAL SETTLEMENT:
In February 1996, an action was brought against the Company arising out of
a dispute relating to an agreement between the Company and a customer. The
plaintiff claimed, among other things, damages of $3,518,000, interest,
attorney fees and punitive damages. In August 1996, the Company made a partial
payment to such customer of $166,000. Although the Company believed it had
meritorious defenses to this dispute, in August 1996, counsel advised the
Company that final judicial resolution of such matter could take several
years. Consequently, in order to prevent future strain on the Company's
financial and human resources necessary to defend the dispute, to avoid the
uncertainties associated with litigation generally and to pursue an initial
public offering in a timely manner, the Company made a strategic business
decision to resolve this dispute, and on November 1, 1996, entered into a
settlement agreement with such customer.
Pursuant to such settlement agreement, the Company was to pay such
customer $1.2 million, of which $300,000 was paid upon execution of the
settlement agreement. On March 14, 1997 the Company modified the settlement
agreement by paying the customer $850,000 in exchange for full satisfaction of
all remaining monetary obligations owed to the customer under the settlement
agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
information set forth under: Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 13 through 20 of the Company's
Form SB-2 dated March 3, 1997. 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 have been 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
The Company's business as a supplier, distributor and seller of commercial
aircraft parts and supplies was established in October 1988. The Company was
incorporated in California in February 1992 and reincorporated in Delaware in
July 1996.
GENERAL
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. Sales and gross profit can be impacted by
the timing of bulk inventory purchases. 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 receive larger gross
margins on its sale of aircraft parts since the cost of purchase is reduced.
Sales can be impacted by marketing and consignment agreements because such
agreements give the Company increased access to aircraft parts. Net profits are
impacted by marketing agreements because the Company does not incur costs
associated with carrying owned inventory due to the fact that a party who has
entered into a marketing agreement with the Company is responsible for storing
and maintaining the inventory to which the Company has access pursuant to such
marketing agreement. Generally, sales from consignment and marketing agreements
are not as profitable as sales from bulk inventory purchases.
The following table sets forth certain information relating to the Company's
operations for the three months ended June 30, 1996 and 1997 (dollars in
thousands):
1996 1997
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Distributed services and inventory sales $ 5,808 82.0% $ 9,698 96.2%
Net sales on consignment and marketing
agreements 1,277 18.0 387 3.8
------- ------- ------- -------
Net sales 7,085 100.0 10,085 100.0
Cost of sales 4,858 68.6 7,171 71.1
------- ------- ------- -------
Gross profit 2,227 31.4 2,914 28.9
Selling and administrative expenses 1,107 15.6 1,794 17.8
------- ------- ------- -------
Income from operations 1,120 15.8 1,120 11.1
Interest expense, net 182 2.6 124 1.2
Net income 768 10.8 608 6.0
DISTRIBUTED SERVICES AND INVENTORY SALES. Distributed services and
inventory sales represent sales of inventory located through outside parties
and sales of Company-owned inventory. Distributed services and inventory sales
increased from $5.8 million for the three months ended June 30, 1996 to
$9.7 million for the three months ended June 30, 1997, an increase of
$3.9 million or 67.2%. This increase was primarily due to an increase in the
Company's availability of aircraft parts as a result of the bulk inventory
purchases received during 1996 and during the first two quarters of 1997, the
addition of new sales personnel and emphasis on development of new domestic
customers and some larger international customers. The Company also had
several large transactions during the second quarter of 1997 that contributed
approximately $1.46 million of distributed services and inventory sales.
Sales from distributed services represented approximately 91.9% and 82.4%
of total distributed services and inventory sales for the three months ended
June 30, 1996 and 1997, respectively. Sales of Company-owned inventory
represented approximately 8.1% and 17.6% of total distributed services and
inventory sales for the three months ended June 30, 1996 and 1997,
respectively. The increase in the percentage of the sales of Company-owned
inventory was primarily due to the bulk inventory purchases received during
1996 and during the first two quarters of 1997 and due to the sale of a single
engine being sold for $900,000 from Company-owned inventory during the second
quarter of 1997.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on
consignment and marketing agreements represent total revenue, including
commissions, related to sales of inventory held on consignment and sales of
inventory obtained through marketing agreements. Net sales on consignment and
marketing agreements decreased from $1.3 million for the three months ended
June 30, 1996 to $387,000 for the three months ended June 30, 1997, a decrease
of $913,000 or 70.2%. This decrease was primarily due to a decrease in the
number of consignment and marketing agreements the Company had entered into
during the second quarter of 1997.
NET SALES. Net sales increased from $7.1 million for the three months
ended June 30, 1996 to $10.1 million for the three months ended June 30, 1997,
an increase of $3.0 million or 42.3%. This increase was primarily due to
additional sales personnel hired in the third and fourth quarters of 1996,
continued efforts to strengthen relationships with customers and the
availability of additional parts as a result of bulk inventory purchases
received during 1996 and the first two quarters of 1997. See "Distributed
services and inventory sales."
COST OF SALES. Cost of sales increased from $4.9 million for the three
months ended June 30, 1996 to $7.2 million for the three months ended June 30,
1997, an increase of $2.3 million or 46.9%. This increase was primarily
attributable to the increase in net sales.
GROSS PROFIT. Gross profit increased from $2.2 million for the three
months ended June 30, 1996 to $2.9 million for the three months ended June 30,
1997, an increase of $700,000 or 31.8%. This increase was a result of the
increase in net sales. Gross profit margin slightly decreased from 31.4% for
the three months ended June 30, 1996 to 28.9% for the three months ended June
30, 1997. The decrease in gross profit margin was primarily attributable to
lower margins from some of the larger transactions, offset by a 100.0% gross
profit sale for approximately $300,000 from a commission earned by the Company.
See "Distributed services and inventory sales."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, commission expense,
professional fees, consulting expense and travel expense. The Company's selling
and administrative expenses increased from $1.1 million for the three months
ended June 30, 1996 to $1.8 million for the three months ended June 30, 1997,
an increase of $700,000 or 63.6%. This increase was principally due to higher
personnel costs necessary to respond to the Company's growth, including
salaries, taxes, insurance and commission expenses.
INCOME FROM OPERATIONS. Income from operations for the three months
ended June 30, 1996 and 1997 were consistent. The increase in net sales in the
current quarter was offset by the increase in the selling and administrative
expenses. See "Net sales" and "Selling and administrative expenses."
INTEREST EXPENSES, NET. Net interest expense decreased from $182,000 for
the three months ended June 30, 1996 to $124,000 for the three months ended
June 30, 1997. The decrease in interest expense was due to a decrease in
borrowings under the Company's lines of credit during the second quarter of
1997. The Company was able to decrease its borrowings under its lines of
credit in 1997 as a result of the proceeds received from the initial public
offering completed in March 1997.
NET INCOME. Net income decreased from $768,000 for the three months
ended June 30, 1996 to $608,000 for the three months ended June 30, 1997, a
decrease of $160,000 or 20.8%. This decrease was attributable to a net
operating loss tax benefit recognized in the prior three month period.
The following table sets forth certain information relating to the
Company's operations for the six months ended June 30, 1996 and 1997 (dollars
in thousands):
1996 1997
---------------- ----------------
Distributed services and inventory sales $ 9,898 84.4% $18,877 96.6%
Net sales on consignment and marketing
agreements 1,823 15.6 662 3.4
------- ------- ------- -------
Net sales 11,721 100.0 19,539 100.0
Cost of sales 8,625 73.6 14,742 75.4
------- ------- ------- -------
Gross profit 3,096 26.4 4,797 24.6
Selling and administrative expenses 2,217 18.9 3,019 15.5
------- ------- ------- -------
Income from operations 879 7.5 1,778 9.1
Interest expense, net 325 2.8 287 1.5
Net income 397 3.4 915 4.7
DISTRIBUTED SERVICES AND INVENTORY SALES. Distributed services and
inventory sales represent sales of inventory located through outside parties
and sales of Company-owned inventory. Distributed services and inventory sales
increased from $9.9 million for the six months ended June 30, 1996 to
$18.9 million for the six months ended June 30, 1997, an increase of
$9.0 million or 90.9%. This increase was primarily due to an increase in the
Company's availability of aircraft parts as a result of bulk inventory
purchases received during 1996 and during the first two quarters of 1997, the
addition of new sales personnel and emphasis on development of new domestic
customers and some larger international customers. The Company also had several
large transactions during the first two quarters of 1997 that contributed
approximately $3.1 million of distributed services and inventory
sales.
Sales from distributed services represented approximately 94.5% and 88.2%
of total distributed services and inventory sales for the six months ended June
30, 1996 and 1997, respectively. Sales of Company-owned inventory represented
approximately 5.5% and 11.8% of total distributed services and inventory sales
for the six months ended June 30, 1996 and 1997, respectively. The increase in
the percentage of the sales of Company-owned inventory was primarily due to the
bulk inventory purchases received during 1996 and during the first two quarters
of 1997 and due to the sale of a single engine being sold for $900,000 from
Company-owned inventory during the second quarter of 1997.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on
consignment and marketing agreements represent total revenue, including
commissions, related to sales of inventory held on consignment and sales of
inventory obtained through marketing agreements. Net sales on consignment and
marketing agreements decreased from $1.8 million for the six months ended June
30, 1996 to $662,000 for the six months ended June 30, 1997, a decrease of $1.1
million or 61.1%. This decrease was primarily due to a decrease in the number
of consignment and marketing agreements the Company had entered into during the
first two quarters of 1997.
NET SALES. Net sales increased from $11.7 million for the six months
ended June 30, 1996 to $19.5 million for the six months ended June 30, 1997, an
increase of $7.8 million or 66.7%. This increase was primarily due to
additional sales personnel hired in the third and fourth quarters of 1996,
continued efforts to strengthen relationships with customers and the
availability of additional parts as a result of bulk inventory purchases
received during 1996 and the first two quarters of 1997. See "Distributed
services and inventory sales."
COST OF SALES. Cost of sales increased from $8.6 million for the six
months ended June 30, 1996 to $14.7 million for the six months ended June 30,
1997, an increase of $6.1 million or 70.9%. This increase was primarily
attributable to the increase in net sales.
GROSS PROFIT. Gross profit increased from $3.1 million for the six
months ended June 30, 1996 to $4.8 million for the six months ended June 30,
1997, an increase of $1.7 million or 54.8%. This increase was a result of the
increase in net sales. Gross profit margin slightly decreased from 26.4% for
the six months ended June 30, 1996 to 24.6% for the six months ended June 30,
1997. The decrease in gross profit margin was primarily attributable to lower
margins from some of the larger transactions, offset by a 100.0% gross profit
sale for approximately $300,000 from a commission earned by the Company. See
"Distributed services and inventory sales."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, commission expense,
professional fees, consulting expense and travel expense. The Company's selling
and administrative expenses increased from $2.2 million for the six months
ended June 30, 1996 to $3.0 million for the six months ended June 30, 1997, an
increase of $800,000 or 36.4%. This increase was principally due to higher
personnel costs necessary to respond to the Company's growth, including
salaries, taxes, insurance and commission expenses. As a percentage of net
sales, selling and administrative expenses decreased from 18.9% for the six
months ended June 30, 1996 to 15.5% for the six months ended June 30, 1997.
The decrease as a percentage of net sales was primarily due to management
effectively controlling administrative expenses.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations for the six months ended June 30, 1997 increased $899,000 compared
to the six months ended June 30, 1996. The increase primarily reflects higher
net sales and gross profit realized during the first two quarters of 1997. See
"Net Sales" and "Gross profit."
INTEREST EXPENSES, NET. Net interest expense decreased from $325,000 for
the six months ended June 30, 1996 to $287,000 for the six months ended June
30, 1997. The decrease in interest expense was due to a decrease in borrowings
under the Company's lines
of credit during the first two quarters of 1997. The Company was able to
decrease its borrowings under its lines of credit in 1997 as a result of the
proceeds received from the initial public offering completed in March 1997.
NET INCOME. Net income increased from $397,000 for the six months ended
June 30, 1996 to $915,000 for the six months ended June 30, 1997, an increase
of $518,000 or 130.5%. This increase was attributable to the increase in net
sales and gross profit, somewhat offset by higher selling and administrative
expenses. See "Net sales," "Gross profit," and "Selling and administrative
expenses."
LIQUIDITY AND CAPITAL RESOURCES
On March 3, 1997 the Company's Registration Statement on Form SB-2
relating to the Company's initial public offering of 1,200,000 shares of its
common stock was declared effective. On March 7, 1997 the Company closed its
initial public offering of 1,200,000 shares of its common stock at $5 per
share. In connection with the initial public offering, the Company granted the
underwriters a 45-day option to purchase up to 180,000 additional shares of its
common stock to cover over-allotments. The underwriters exercised such over-
allotment option and on April 22, 1997, the Company sold an additional 180,000
shares of its common stock at $5 per share.
The net proceeds from the offering after all expenses were approximately
$4.5 million; of such proceeds, $3,800,000 was used to repay a portion of the
amount outstanding under two revolving lines of credit, $400,000 was used to
repay loans made to the Company by certain of its employees, and the remaining
proceeds were used to fund a portion of a legal settlement entered into by the
Company.
On April 22, 1997 the Company received net proceeds of approximately
$760,000 from the exercise of the underwriter's over-allotment option. The
proceeds were used for working capital and to reduce vendor payables.
The Company's line of credit provides working capital of up to $15.0
million with interest at the greater of prime plus 1.0 percent or the weighted
average of the rates on overnight Federal funds plus 1.5 percent subject to an
availability calculation based on the eligible borrowing base. The eligible
borrowing base includes certain receivables and inventories of the Company.
The $15.0 million line of credit matures on June 24, 2000. Events of default
under the line of credit include various events of default customary for such
type of agreement, such as failure to pay scheduled payments when due, failure
to pay taxes when due (unless contested in good faith), cross defaults on other
indebtedness or material contracts, the breach of any representation or
warranty by the Company, any change in the Company's condition that the Lender
believes impairs the collateral for the Credit Facility or the ability of the
Company to perform its obligations, certain events of bankruptcy, insolvency or
reorganization, engaging in certain sales of assets and if the lender deems
itself in good faith insecure or unsafe or fears diminution in value, removal
or waste of the collateral for the line of credit. In addition, the line of
credit includes events of default for the Company any merger, consolidation or
sale of substantially all of the property or assets of the Company and any
change in the management of the Company whereby Mr. Osamah Bakhit is no longer
the Chief Executive Officer of the Company.
The line of credit requires certain financial covenants to be met;
including, but not limited to, a tangible net worth of at least $4.5 million
at the outset and increasing by $500,000 each calendar quarter thereafter, a
minimum working capital of $4.0 million at all times and not to make capital
expenditures in any fiscal year in an amount in excess of $750,000. In
addition, the line of credit requires mandatory repayments in the event the
availability calculation based on the eligible borrowing base has been
reduced. Substantially all of the Company's assets are pledged as collateral
for amounts borrowed. At June 30, 1997 the Company was in compliance with all
of its requirements under the line of credit.
The Company's long-term debt consists of the following: (i) note payable of
$3.9 million at June 30, 1997 to a financial institution, due in monthly
installments of $166,250 (principal and interest) to August 1999 with an
interest rate of 9.5 percent; (ii) note payable of $929,000 at June 30, 1997 to
a financial institution, secured by a building, due in adjustable monthly
installments of $8,382 (principal and interest) to May 1999, with a balloon
payment due May 1999 and interest at Moody's A Bond Index (8.0% at December 31,
1996) plus .125 percent; (iii) note payable of $1.5 million at June 30, 1997 to
a corporation, secured by specific inventory, due in monthly installments of
$128,194 (principal and interest) to May 2000, with an imputed interest rate of
9.5 percent; (iv) other long-term debt of approximately $9,700.
In February 1996, an action was brought against the Company arising out of
a contract dispute between the Company and one of its customers. In August
1996, the Company made a partial settlement payment to such customer in the
amount of $166,000, which was financed through additional borrowings under the
Company's lines of credit. Although the Company believed it had meritorious
defenses to this dispute, counsel advised the Company that final judicial
resolution of such matter could take several years. Consequently, in order to
prevent future strain on the Company's financial and human resources necessary
to defend the dispute, to avoid the uncertainties associated with litigation
generally and to pursue an initial public offering in a timely manner, the
Company made a strategic business decision to resolve this dispute, and on
November 1, 1996, entered into a settlement agreement with such customer.
Pursuant to such settlement agreement, the Company was to pay such customer
$1.2 million, of which $300,000 was paid upon execution of the settlement
agreement, which was financed through additional borrowings under the Company's
lines of credit. On March 14, 1997 the Company modified the settlement
agreement by paying the customer $850,000 in exchange for full satisfaction of
all remaining monetary obligations owed to the customer under the settlement
agreement. This amount was financed through the proceeds from the offering and
through additional borrowings under the Company's lines of credit.
On April 16, 1997, the Company entered into an agreement to lease
approximately 33,000 square feet of office and warehouse space located in Lake
Forest, California. Additionally, the Company has entered into an agreement to
sell the building presently owned. The sale is expected to close in November
1997. Net proceeds resulting from the sale are expected to offset the costs
associated with relocation and improvements to the new leased facility.
The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to purchase
inventory on a bulk basis.
The Company believes that the net proceeds from its initial public
offering will be sufficient to meet its cash requirements for at least the next
twelve months. There can be no assurance that the Company will not require
additional financing during such period or that financing will be available on
a timely basis and at acceptable terms, if at all.
As part of its growth strategy, the Company intends to pursue acquisitions
of bulk inventories of aircraft parts. Financing for such acquisitions will be
provided from operations and from borrowings under the Company's lines of
credit. The Company may also issue additional debt and/or equity securities in
connection with one or more of these acquisitions.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
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
In February 1996, an action was brought against the Company arising
out of a dispute relating to an agreement between the Company and a customer.
The plaintiff claimed, among other things, damages of $3,518,000, interest,
attorney fees and punitive damages. In August 1996, the Company made a partial
payment to such customer of $166,000. Although the Company believed it had
meritorious defenses to this dispute, in August 1996, counsel advised the
Company that final judicial resolution of such matter could take several years.
Consequently, in order to prevent future strain on the Company's financial and
human resources necessary to defend the dispute, to avoid the uncertainties
associated with litigation generally and to pursue an initial public offering
in a timely manner, the Company made a strategic business decision to resolve
this dispute, and on November 1, 1996, entered into a settlement agreement with
such customer.
Pursuant to such settlement agreement, the Company was to pay such
customer $1.2 million, of which $300,000 was paid upon execution of the
settlement agreement. On March 14, 1997 the Company modified the settlement
agreement by paying the customer $850,000 in exchange for full satisfaction of
all remaining monetary obligations owed to the customer under the settlement
agreement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
**3.1 Amended and Restated Certificate of Incorporation of the Registrant
**3.2 Bylaws, as amended, of the Registrant
**3.3 Amendment to Amended and Restated Certificate of Incorporation of the
Registrant
**4.1 Specimen Common Stock Certificate
**4.2 Form of Warrant Agreement
**10.2 1996 Stock Option and Incentive Plan
**10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia
The Royal Jordanian Airlines and Aviation Distributors Incorporated
**10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air
China Group Import & Export Trading Co. and Aviation Distributors
Incorporated
**10.5 Revolving Credit Facility, dated August 22, 1996, by and between
Aviation Distributors Incorporated and Far East National Bank
**10.6 Employment Agreement, dated as of July 16, 1996, by and between Osamah
S. Bakhit and Aviation Distributors Incorporated
**10.7 Employment Agreement, dated as of July 16, 1996, by and between Mark
W. Ashton and Aviation Distributors Incorporated
**10.8 Employment Agreement, dated as of July 16, 1996, by and between
Jeffrey G. Ward and Aviation Distributors Incorporated
**10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone
and Aviation Distributors, Inc.
**10.10 Lease Agreement, dated January 1, 1996, by and between Ian and Robert
Burton Limited and Aviation Distributors (Europe) Limited
**10.11 Revolving Credit Facility, dated August 31, 1996, by and between
Aviation Distributors Incorporated and Far East National Bank
**10.12 Non-Revolving Credit Facility dated August 22, 1996, by and between
Aviation Distributors, Incorporated and Far East National Bank
**10.13 Amended and Restated Employment Agreement, dated as of July 16, 1996,
by and between Osamah S. Bakhit and Aviation Distributors Incorporated
**10.14 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation
Distributors, Inc., dated as of December 31, 1995
**10.15 Settlement Agreement dated as of November 1, 1996
**10.16 Form of Indemnity Agreement
**10.17 Promissory Note between Aviation Distributors, Inc. and Mark W.
Ashton, dated January 28, 1997
**10.18 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated January 28, 1997
**10.19 Promissory Note between Aviation Distributors, Inc. and Jim Goulet,
dated January 28, 1997
**10.20 Promissory Note between Aviation Distributors, Inc. and Steve Hayer,
dated January 28, 1997
**10.21 Promissory Note between Aviation Distributors, Inc. and Elizabeth
Morgan, dated January 28, 1997
**10.22 Promissory Note between Aviation Distributors, Inc. and Magda
Reichenberg, dated January 28, 1997
**10.23 Promissory Note between Aviation Distributors, Inc. and Leza Ann
Waner, dated January 28, 1997
**10.24 Promissory Note between Aviation Distributors, Inc. and Jeffrey G.
Ward, dated January 28, 1997
**10.25 Amendment to Promissory Note between Aviation Distributors, Inc. and
Mark W. Ashton, dated February 3, 1997
**10.26 Amendment to Promissory Note between Aviation Distributors, Inc. and
Osamah S. Bakhit, dated February 3, 1997
**10.27 Amendment to Promissory Note between Aviation Distributors, Inc. and
Jim Goulet, dated February 3, 1997
**10.28 Amendment to Promissory Note between Aviation Distributors, Inc. and
Steve Hayer, dated February 3, 1997
**10.29 Amendment to Promissory Note between Aviation Distributors, Inc. and
Elizabeth Morgan, dated February 3, 1997
**10.30 Amendment to Promissory Note between Aviation Distributors, Inc. and
Magda Reichenberg, dated February 3, 1997
**10.31 Amendment to Promissory Note between Aviation Distributors, Inc. and
Leza Ann Waner, dated February 3, 1997
**10.32 Amendment to Promissory Note between Aviation Distributors, Inc. and
Jeffrey G. Ward, dated February 3, 1997
**10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated December 31, 1996
***10.34 Acknowledgment of Receipt of Settlement Funds by and among Compania
Mexicana de Aviacion, S.A. de C.V., ADI Consignment Sales, Inc.,
Aviation Distributors, Inc. and Osamah S. Bakhit
- ---------------------
* Filed herewith.
** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the Registration Statement on Form SB-2 previously
filed by the Registrant (File No. 333-8061).
*** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the Registration Statement on Form 10-QSB
previously filed by the Registrant on May 6, 1997 (File
No. 333-8061)
(b) Reports on Form 8-K
None.
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 AVIATION DISTRIBUTORS, INC.
-------------------------
By:
-----------------------
Osamah S. Bakhit
President and
Chief Executive Officer
By:
-----------------------
Mark W. Ashton
Chief Financial Officer and
Vice President of Finance
EXHIBIT INDEX
Exhibit
Number Title
- ------- -----
**3.1 Amended and Restated Certificate of Incorporation of the Registrant
**3.2 Bylaws, as amended, of the Registrant
**3.3 Amendment to Amended and Restated Certificate of Incorporation of the
Registrant
**4.1 Specimen Common Stock Certificate
**4.2 Form of Warrant Agreement
**10.2 1996 Stock Option and Incentive Plan
**10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia
The Royal Jordanian Airlines and Aviation Distributors Incorporated
**10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air
China Group Import & Export Trading Co. and Aviation Distributors
Incorporated
**10.5 Revolving Credit Facility, dated August 22, 1996, by and between
Aviation Distributors Incorporated and Far East National Bank
**10.6 Employment Agreement, dated as of July 16, 1996, by and between Osamah
S. Bakhit and Aviation Distributors Incorporated
**10.7 Employment Agreement, dated as of July 16, 1996, by and between Mark
W. Ashton and Aviation Distributors Incorporated
**10.8 Employment Agreement, dated as of July 16, 1996, by and between
Jeffrey G. Ward and Aviation Distributors Incorporated
**10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone
and Aviation Distributors, Inc.
**10.10 Lease Agreement, dated January 1, 1996, by and between Ian and Robert
Burton Limited and Aviation Distributors (Europe) Limited
**10.11 Revolving Credit Facility, dated August 31, 1996, by and between
Aviation Distributors Incorporated and Far East National Bank
**10.12 Non-Revolving Credit Facility dated August 22, 1996, by and between
Aviation Distributors, Incorporated and Far East National Bank
**10.13 Amended and Restated Employment Agreement, dated as of July 16, 1996,
by and between Osamah S. Bakhit and Aviation Distributors Incorporated
**10.14 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation
Distributors, Inc., dated as of December 31, 1995
**10.15 Settlement Agreement dated as of November 1, 1996
**10.16 Form of Indemnity Agreement
**10.17 Promissory Note between Aviation Distributors, Inc. and Mark W.
Ashton, dated January 28, 1997
**10.18 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated January 28, 1997
**10.19 Promissory Note between Aviation Distributors, Inc. and Jim Goulet,
dated January 28, 1997
**10.20 Promissory Note between Aviation Distributors, Inc. and Steve Hayer,
dated January 28, 1997
**10.21 Promissory Note between Aviation Distributors, Inc. and Elizabeth
Morgan, dated January 28, 1997
**10.22 Promissory Note between Aviation Distributors, Inc. and Magda
Reichenberg, dated January 28, 1997
**10.23 Promissory Note between Aviation Distributors, Inc. and Leza Ann
Waner, dated January 28, 1997
**10.24 Promissory Note between Aviation Distributors, Inc. and Jeffrey G.
Ward, dated January 28, 1997
**10.25 Amendment to Promissory Note between Aviation Distributors, Inc. and
Mark W. Ashton, dated February 3, 1997
**10.26 Amendment to Promissory Note between Aviation Distributors, Inc. and
Osamah S. Bakhit, dated February 3, 1997
**10.27 Amendment to Promissory Note between Aviation Distributors, Inc. and
Jim Goulet, dated February 3, 1997
**10.28 Amendment to Promissory Note between Aviation Distributors, Inc. and
Steve Hayer, dated February 3, 1997
**10.29 Amendment to Promissory Note between Aviation Distributors, Inc. and
Elizabeth Morgan, dated February 3, 1997
**10.30 Amendment to Promissory Note between Aviation Distributors, Inc. and
Magda Reichenberg, dated February 3, 1997
**10.31 Amendment to Promissory Note between Aviation Distributors, Inc. and
Leza Ann Waner, dated February 3, 1997
**10.32 Amendment to Promissory Note between Aviation Distributors, Inc. and
Jeffrey G. Ward, dated February 3, 1997
**10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated December 31, 1996
***10.34 Acknowledgment of Receipt of Settlement Funds by and among Compania
Mexicana de Aviacion, S.A. de C.V., ADI Consignment Sales, Inc.,
Aviation Distributors, Inc. and Osamah S. Bakhit
- ---------------------
* Filed herewith.
** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the Registration Statement on Form SB-2 previously
filed by the Registrant (File No. 333-8061).
*** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the Registration Statement on Form 10-QSB
previously filed by the Registrant on May 6, 1997 (File
No. 333-8061)