AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1998
REGISTRATION NO. 333-8061
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 30, 1998
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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
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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 Capital Drive Lake Forest, California 92630
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (949) 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 ( ) NO (X)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 3,122,000 SHARES OF COMMON
STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF NOVEMBER 16, 1998.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 80,218 $ 50,481
Restricted cash . . . . . . . . . . . . . . . . . . . . . 1,103,444 8,413
Accounts receivable, net of allowance for
doubtful accounts of $300,000 at December 31,
1997 and $285,000 at September 30, 1998,
respectively . . . . . . . . . . . . . . . . . . . . . . . 7,875,366 5,857,958
Other receivables . . . . . . . . . . . . . . . . . . . . . 216,956 58,057
Inventories, net of reserve . . . . . . . . . . . . . . . . 9,384,573 9,447,849
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 344,283 400,566
Income tax receivable . . . . . . . . . . . . . . . . . . . 392,979 567,979
Current portion of note receivable . . . . . . . . . . . . . 1,781,172 1,735,006
Notes receivable from founder .. . . . . . . . . . . . . . . 408,718 408,718
Deferred tax asset .. . . . . . . . . . . . . . . . . . . . 293,000 101,000
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Total current assets . . . . . . . . . . . . . . . . . . 21,880,709 18,636,027
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PROPERTY AND EQUIPMENT .. . . . . . . . . . . . . . . . . . . . 1,030,100 1,274,574
Less - accumulated depreciation .. . . . . . . . . . . . . . 337,908 486,330
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692,192 788,244
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Note receivable, net of current portion . . . . . . . . . . . 1,272,071 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 179,512 254,512
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1,451,583 254,512
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$ 24,024,484 $ 19,678,783
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not yet presented for payment . . . . . . . . $ 984,031 $ 407,073
Accounts payable . . . . . . . . . . . . . . . . . . . . . 2,882,044 1,834,471
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 770,432 665,988
Lines of credit . . . . . . . . . . . . . . . . . . . . . . 9,289,188 11,762,683
Note payable . . . . . . . . . . . . . . . . . . . . . . . . - 842,063
Current portion of long-term debt . . . . . . . . . . . . . . 3,133,352 3,255,823
Current portion of capital lease obligations . . . . . . . . 19,698 21,636
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Total current liabilities .. . . . . . . . . . . . . . 17,078,745 18,789,737
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Long-term debt, net of current portion . . . . . . . . . . . . . 2,582,826 11,508
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Capital lease obligations, net of current portion. . . . . . . . 14,674 34,430
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Other long-term liability . . . . . . . . . . . . . . . . . . 480,000 480,000
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Deferred tax liability . . . . . . . . . . . . . . . . . . . . 93,000 101,000
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STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.01, 3,000,000
shares authorized; none issued and outstanding . . . . . . . - -
Common stock, par value of $.01, 10,000,000
shares authorized; 3,165,000 and 3,122,000 shares issued
and outstanding at December 31, 1997 and
September 30, 1998, respectively . . . . . . . . . . . . . 31,650 31,650
Additional paid in capital . . . . . . . . . . . . . . . . . 5,658,099 5,658,099
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (1,914,510) (5,354,337)
Treasury stock, 43,000 shares at cost . . . . . . . . . . . . - (73,304)
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Total stockholders' equity . . . . . . . . . . . . . . . 3,775,239 262,108
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$ 24,024,484 $ 19,678,783
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The accompanying notes are an integral part of these consolidated balance
sheets.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
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(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1997 1998 1997 1998
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NET DISTRIBUTED SERVICES AND INVENTORY . . . . . . $ 11,588,102 $ 7,497,055 $ 30,154,373 $ 22,669,552
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS. . . . . . . . . . . . . . . 259,760 71,019 921,812 247,120
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TOTAL NET SALES. . . . . . . . . . . . . . . . . . 11,847,862 7,568,074 31,076,185 22,916,672
COST OF SALES. . . . . . . . . . . . . . . . . . . 9,418,897 6,086,123 24,227,903 18,041,818
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Gross profit . . . . . . . . . . . . . . . . 2,428,965 1,481,951 6,848,282 4,874,854
SELLING AND ADMINISTRATIVE EXPENSES. . . . . . . . 1,871,718 1,542,073 4,936,573 5,261,175
NON RECURRING EXPENSES . . . . . . . . . . . . . . 339,804 205,781 339,804 1,245,091
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Income (loss) from operations . . . . . . . . 217,443 (265,903) 1,571,905 (1,631,412)
OTHER (EXPENSES) INCOME:
Interest expense . . . . . . . . . . . . . . (354,809) (464,765) (863,681) (1,821,948)
Interest income . . . . . . . . . . . . . . . 111,992 53,243 333,629 210,965
Other income . . . . . . . . . . . . . . . . 1,781 310 2,232 4,644
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Income (loss) before provision for
income taxes . . . . . . . . . . . . . . . (23,593) (677,115) 1,044,085 (3,237,751)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . - 202,076 253,000 202,076
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NET INCOME (LOSS) . . . . . . . . . . . . . . $ (23,593) $ (879,191) $ 791,085 $ (3,439,827)
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Basic and diluted net
income (loss) per share . . . . . . . . . . . . $ (0.01) $ (0.28) $ 0.28 $ (1.09)
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Weighted average shares outstanding. . . . . . . . 3,165,000 3,122,000 2,824,000 3,146,000
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The accompanying notes are an integral part of these consolidated statements.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
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1997 1998
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(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 791,085 $ (3,439,827)
Adjustments to reconcile net income to net cash
used in operating activities:
Principal payments on note receivable. . . . . . . . . . . . . . . . 1,199,024 1,318,237
Borrowings on notes payable related to inventory purchases . . . . . 4,104,753 2,406,919
Principal payments on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . . . (2,116,616) (4,139,770)
Reduction in amount due on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . . . (374,577)
Legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . (80,000) -
Principal payments on note payable
related to legal settlement. . . . . . . . . . . . . . . . . . . . (820,000) -
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 166,837 279,489
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . (2,771,286) 2,017,408
Other receivables . . . . . . . . . . . . . . . . . . . . . . . (77,032) 158,899
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (5,502,090) (63,276)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . (388,888) (56,283)
Income tax receivable . . . . . . . . . . . . . . . . . . . . . - (175,000)
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . (24,919) 192,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 138,284 (75,000)
Checks issued not yet presented for payment . . . . . . . . . . 336,712 (576,958)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 680,733 (1,047,573)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 297,422 (104,444)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . 103,000 -
Deferred tax liability. . . . . . . . . . . . . . . . . . . . . - 8,000
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Net cash used in operating activities . . . . . . . . . . . (4,337,558) (3,297,179)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (178,337) (203,055)
Decrease (increase) in restricted cash . . . . . . . . . . . . . . . . (1,046,803) 1,095,031
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Net cash provided by (used in) investing activities . . . . (1,225,140) 891,976
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit . . . . . . . . . . . . . . . . . . . . 32,904,057 25,464,678
Principal payments on lines of credit . . . . . . . . . . . . . . . . (32,416,784) (22,991,183)
Borrowings on long-term debt. . . . . . . . . . . . . . . . . . . . . . 519,800 -
Principal payments of long-term debt . . . . . . . . . . . . . . . . (516,031) (5,000)
Principal payments of capital lease obligations . . . . . . . . . . . (14,438) (19,725)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . - (73,304)
Net proceeds from initial public offering . . . . . . . . . . . . . . 5,282,749 -
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Net cash provided by financing activities . . . . . . . . . 5,759,353 2,375,466
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Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 196,655 (29,737)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 16,985 80,218
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Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 213,640 $ 50,481
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 926,747 $ 1,820,109
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Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 375,000 $ 177,076
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The accompanying notes are an integral part of these consolidated statements.
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 September 30, 1998 and the results of its operations for the three
and nine month periods ended September 30, 1998 and 1997 and cash flows for the
nine month periods ended September 30, 1998 and 1997. The results of operations
and cash flows for the nine month period ended September 30, 1998 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the remainder of 1998.
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, 1997
financial statements and the notes thereto included in the Prospectus contained
in the Company's Annual Report on Form 10KSB.
NOTE 2 - CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS:
In August 1997, the Company's former independent auditors withdrew their
previously issued reports on the Company's financial statements for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and resigned as the Company's auditors. These actions were the result of their
investigation of allegations regarding certain of the Company's accounting and
financing practices. The lack of required financial information resulted in the
subsequent halt in trading and delisting of the Company's common stock on the
Nasdaq SmallCap market in September 1997.
In October 1997, three separate class action lawsuits were filed against the
Company, its founder, directors and certain current and former officers and
directors, and others. In February 1998, a motion was approved to consolidate
all three class action lawsuits in Federal court.
In April 1998, the Company entered into a settlement in principle which is
memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit, will contribute 130,000 shares. The Company's cost of settlement was
accrued in the fourth quarter of 1997.
The settlement is conditioned upon the execution of a definitive settlement
agreement on or before May 1, 1998 and the court's approval of that
agreement. Counsel for the plaintiffs and the Company orally agreed to extend
this date. As of November 16, 1998 a definitive settlement agreement had been
achieved, subject only to approval of the Federal Court. There is a hearing
scheduled on January 11, 1999 to determine if the court will approve the
agreement. For the agreement to be effected, a certain percentage (to be
specified in the agreement) of shareholders must not have elected to be
excluded from the terms and conditions of the settlement.
Both a Federal grand jury and the Securities and Exchange Commission have
commenced investigations into the allegations referred to above. The
investigations are continuing and the Company is unable, at this time, to
evaluate the possible outcome of the investigations or their impact on the
Company.
NOTE 3 - DEBT ARRANGEMENTS
At September 30, 1998, the Company was not in compliance with certain of the
covenants of its line of credit with BNY Financial Corporation. BNY Financial
Corporation continues to support the Company and its management; however, there
is no assurance that the lender will not require repayment of all debt and/or
terminate the credit facility.
In February 1998, the Company borrowed $2,140,000 from BNY Financial Corporation
to purchase specific inventory. The balance of the note payable is $842,000 at
September 30, 1998. The note is secured by specific inventory and by the one
million shares of common stock pledged on the Credit Facility, was due on April
27, 1998, and has an interest rate of Prime plus three percent plus other fees.
The Company did not pay the required amount on the note in March 1998 and did
not pay off the note by April 27, 1998. As a result the Company incurred a
$100,000 default penalty in March 1998. The bank further extended this note for
a $100,000 fee to June 30, 1998. The Company did not pay the balance of this
note by June 30, 1998. The Company was also not in compliance with certain of
its debt covenants under this note agreement at September 30, 1998. Management
is currently negotiating with the bank to resolve this matter.
In appreciation of the financial institution's continued support the Company has
issued a warrant to BNY Financial Corporation to purchase 126,600 shares of the
Company's stock.
NOTE 4 - YEAR 2000 COMPLIANCE
The Company is in a process of analyzing its Year 2000 compliance issues and
developing solutions and contingency plans. Management's initial estimate of
costs to become year 2000 compliant is between $30,000 and $100,000. As a
distributor and re-seller of goods manufactured by other companies, the
Company will do all that it reasonably can to ensure that any transactions
for goods supplied to the Company and shipped to customers will not suffer
from the change of date. However, there is no assurance that the Company's
year 2000 remediation efforts will prevent all potential consequences.
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.
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 September 30, 1997 and 1998 (dollars in
thousands):
1997 1998
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Distributed services and $ 11,588 97.8% $ 7,497 99.1%
inventory sales
Net sales on consignment and
marketing agreements 260 2.2 71 0.9
-------- -------- -------- --------
Net sales 11,848 100.0 7,568 100.0
Cost of sales 9,419 79.5 6,086 80.4
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Gross profit 2,429 20.5 1,482 19.6
Selling and administrative expenses 1,872 15.8 1,542 20.4
Nonrecurring expenses 340 2.9 206 2.7
-------- -------- -------- --------
Income(loss) from operations 217 1.8 (266) (3.5)
Interest expense, net 243 2.0 411 5.4
Other income 2 - - -
Provision for income taxes - - 202 2.7
-------- -------- -------- --------
Net loss $ (24) (0.2)% $ (879) (11.6)%
-------- -------- -------- --------
-------- -------- -------- --------
NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services
represents sales of aircraft parts purchased at the point of sale through
outside parties. Inventory sales represent sales of the Company's owned
inventory. Net distributed services and inventory sales decreased from
$11.6 million for the three months ended September 30, 1997 to $7.5 million for
the three months ended September 30, 1998, a decrease of $4.1 million or 35.3%.
This decrease was primarily the result of several large transactions during the
third quarter of 1997 that contributed approximately $3.9 million and due to a
shortage in cash availability during the third quarter of 1998 resulting from
cash requirements related to the class action lawsuits and government
investigations.
Sales from distributed services represented approximately 72.9% and 92.3% of
total distributed services and inventory sales for the three months ended
September 30, 1997 and 1998, respectively. Sales of Company-owned inventory
represented approximately 27.1% and 7.7% of total distributed services and
inventory sales for the three months ended September 30, 1997 and 1998,
respectively. The decrease in the percentage of the sales of Company-owned
inventory was primarily due to several large transactions in the third quarter
of 1997 from Company-owned inventory (the sale of a single engine being sold for
$930,000 and two other parts that were sold for approximately $800,000).
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 due to a decrease in the number of consignment and marketing
agreements the Company had entered into during the third quarter of 1998.
COST OF SALES. Cost of sales decreased from $9.4 million for the three months
ended September 30, 1997 to $6.1 million for the three months ended September
30, 1998, a decrease of $3.3 million or 35.1%. This decrease was primarily
attributable to the 36.1% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $2.4 million for the three months
ended September 30, 1997 to $1.5 million for the three months ended September
30, 1998, a decrease of $900,000 or 37.5%. This decrease was a result of the
36.1% decrease in net sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of compensation, commission expense, professional fees,
consulting expense, bank fees, insurance, facility rent and travel expense. The
Company's selling and administrative expenses decreased from $1.9 million for
the three months ended September 30, 1997 to $1.5 million for the three months
ended September 30, 1998, a decrease of $400,000 or 21.1%. This decrease was
principally due to a decrease in commission expense and other sales-related
expenses due to the decrease in net sales and a decrease in travel expense,
offset by an increase in bank charges and facility rent.
NON RECURRING EXPENSES. The Company has incurred these expenses relating to its
investigation of allegations concerning its previously issued financial
statements, restatement of those financial statements and investigations by a
Federal grand jury and the Securities and Exchange Commission. See "Part II,
Item 1 - Legal Proceedings." These expenses primarily consist of legal,
accounting and consulting fees.
INCOME (LOSS) FROM OPERATIONS. The Company's income from operations for the
three months ended September 30, 1997, excluding the nonrecurring expenses,
would have been $557,000. The loss from operations for the three months ended
September 30, 1998, excluding the nonrecurring expenses, would have been
$(60,000). The Company incurred a loss from operations for the 1998 period
of $(266,000) due to a decrease in net sales and gross profit and the
additional nonrecurring expenses. See "Net distributed services and inventory
sales," "Net sales on consignment and marketing agreements," "Gross profit" and
"Non recurring expenses."
INTEREST EXPENSE, NET. Net interest expense increased from $243,000 for the
three months ended September 30, 1997 to $411,000 for the three months ended
September 30, 1998. The increase in interest expense was due to an increase in
borrowings under the Company's line of credit. The Company increased its
borrowings in order to meet the cash requirements related to the class action
lawsuits and government investigations.
PROVISION FOR INCOME TAXES. The Company had a provision for income taxes in the
third quarter of 1998 due to the Company increasing the reserve for the deferred
tax asset.
The following table sets forth certain information relating to the Company's
operations for the nine months ended September 30, 1997 and 1998 (dollars in
thousands):
1997 1998
------------------- --------------------
Distributed services and $ 30,154 97.0% $ 22,670 98.9%
inventory sales
Net sales on consignment and
marketing agreements 922 3.0 247 1.1
-------- -------- -------- --------
Net sales 31,076 100.0 22,917 100.0
Cost of sales 24,228 78.0 18,042 78.7
-------- -------- -------- --------
Gross profit 6,848 22.0 4,875 21.3
Selling and administrative expenses 4,936 15.9 5,261 23.0
Nonrecurring expenses 340 1.1 1,245 5.4
-------- -------- -------- --------
Income(loss) from operations 1,572 5.0 (1,631) (7.1)
Interest expense, net 530 1.7 1,611 7.0
Other income 2 - 4 -
Provision for income taxes 253 0.8 202 0.9
-------- -------- -------- --------
Net income (loss) $ 791 2.5% $(3,440) (15.0)%
-------- -------- -------- --------
-------- -------- -------- --------
NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services
represents sales of aircraft parts purchased at the point of sale through
outside parties. Inventory sales represent sales of the Company's owned
inventory. Net distributed services and inventory sales decreased from $30.2
million for the nine months ended September 30, 1997 to $22.7 million for the
nine months ended September 30, 1998, a decrease of $7.5 million or 24.8%. This
decrease was primarily the result of a shortage in cash availability during the
first three quarters of 1998 resulting from cash requirements related to the
class action lawsuits and government investigations. The Company also had
several large transactions during the first three quarters of 1997 that
contributed approximately $6.9 million of distributed services and inventory
sales compared to $2.4 million of large transactions in the 1998 period.
Sales from distributed services represented approximately 81.5% and 84.9% of
total distributed services and inventory sales for the nine months ended
September 30, 1997 and 1998, respectively. Sales of Company-owned inventory
represented approximately 18.5% and 15.1% of total distributed services and
inventory sales for the nine months ended September 30, 1997 and 1998,
respectively. The decrease was primarily due to some large sales in the 1997
period from Company-owned inventory for approximately $2.8 million compared to
$1.2 million of large sales in the 1998 period from Company-owned inventory.
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 $922,000 for the nine months ended September 30, 1997 to $247,000
for the nine months ended September 30, 1998, a decrease of $675,000 or 73.2%.
This decrease was primarily due to a decrease in the number of consignment and
marketing agreements the Company had entered into during the 1998 period.
COST OF SALES. Cost of sales decreased from $24.2 million for the nine months
ended September 30, 1997 to $18.0 million for the nine months ended September
30, 1998, a decrease of $6.2 million or 25.6%. This decrease was primarily
attributable to the 26.3% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $6.8 million for the nine months
ended September 30, 1997 to $4.9 million for the nine months ended September 30,
1998, a decrease of $1.9 million or 27.9%. The decrease was a result of the
decrease in net sales and a slight decrease in the gross profit margins of
22.0% in the 1997 period to 21.3% in the 1998 period.
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 $4.9 million for the nine months ended
September 30, 1997 to $5.3 million for the nine months ended September 30, 1998,
an increase of $400,000 or 8.2%. This increase was principally due to higher
bank charges related to the new credit facility entered into by the Company in
June 1997, increases in insurance expense and increases in facility rent when
the Company moved its headquarters in February of 1998.
NON RECURRING EXPENSES. In the third quarter of 1997 and the first three
quarters of 1998 the Company incurred $340,000 and $1.2 million, respectively,
of expenses related to its investigation of allegations concerning its
previously issued financial statements, restatement of those financial
statements and investigations by a Federal grand jury and the Securities and
Exchange Commission. See "Part II, Item 1 - Legal Proceedings." These expenses
primarily consist of legal, accounting and consulting fees.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss of $1.6 million
from operations for the nine months ended September 30, 1998. Income from
operations for the nine months ended September 30, 1997, excluding the non
recurring expenses, would have been $1.9 million. The loss from operations
for the nine months ended September 30, 1998, excluding the non recurring
expenses, would have been $(386,000), a decrease of $2.3 million. The
decrease in operating income is due to a decrease in net sales, gross profit
and the increase in selling and administrative. See "Net distributed
services and inventory sales," "Net sales on consignment and marketing
agreements," "Gross profit" and "Selling and administrative expenses."
INTEREST EXPENSES, NET. Net interest expense increased from $530,000 for the
nine months ended September 30, 1997 to $1.6 million for the nine months ended
September 30, 1998. The increase in interest expense was due to an increase in
borrowings under the Company's line of credit during the 1998 period and due to
approximately $470,000 interest incurred on the note payable for the purchase of
the CFM56 engine.
PROVISION FOR INCOME TAXES. The Company had a provision for income taxes in the
third quarter of 1998 due to the Company increasing the reserve for the deferred
tax asset.
YEAR 2000 COMPLIANCE
The Company is in a process of analyzing its Year 2000 compliance issues and
developing solutions and contingency plans. Management's initial estimate of
costs to become year 2000 compliant is between $30,000 and $100,000. As a
distributor and re-seller of goods manufactured by other companies, the
Company will do all that it reasonably can to ensure that any transactions
for goods supplied to the Company and shipped to customers will not suffer
from the change of date. However, there is no assurance that the Company's
year 2000 remediation efforts will prevent all potential consequences.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $80,000 and $50,000 as of December
31, 1997 and September 30, 1998, respectively. The Company had restricted cash
of $1.1 million as of December 31, 1997. Restricted cash was required for
letters of credit issued to certain vendors.
The Company's operating activities used $4.3 million and $3.3 million in the
nine months ended September 30, 1997 and 1998, respectively. The largest cash
uses in the 1997 period were $2.8 million for increases in accounts receivable,
$5.5 million for acquisition of inventories, payments of $2.1 million related to
notes payable for inventory purchases and payments of $820,000 related to a
legal settlement, offset by earnings, borrowings on notes payable related to
inventory purchases and increases in liability accounts. For the 1998 period
the largest uses of cash were the $3.4 million loss, payments of $4.1 million
related to notes payable for inventory purchases, and decreases in liability
accounts, offset by a $2.0 million reduction in accounts receivable and $2.4
million of borrowings on notes payable related to inventory purchases.
Net cash used in investing activities was $1.2 million in the 1997 period
resulting from an increase in restricted cash required for a letter of credit.
Net cash provided by investing activities was $900,000 in the 1998 period
principally as a result of a decrease in restricted cash when a letter of credit
was cancelled.
Cash provided by 1997 financing activities of $5.8 million was primarily a
result of the $5.3 million of net proceeds received from the Company's
initial public offering. The $2.4 million provided by 1998 financing
activities consisted primarily of a net increase in line of credit borrowings.
The Company's operations are financed under a credit facility from BNY
Financial Corporation, a subsidiary of the Bank of New York. This facility
is an asset based line of credit and is the primary source for the Company to
finance its operations and future growth. The Company's Credit Facility
provides for working capital loans of up to $15.0 million with interest at
the Bank of New York Alternate Base Rate (8.0 percent at September 30, 1998)
plus one 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 terms of the credit agreement provide for a
facility non-use fee of 0.75% per annum of the difference between the
facility amount and the average monthly balance. The Credit Facility matures
on September 25, 2000.
BNY Financial Corporation has a fully perfected security interest against all
assets of the Company, except restricted cash, in addition to a personal
guarantee from the Company's founder and the pledge of one million shares of
common stock owned by the Company's founder.
The Credit Facility provides for the repayment of all debt and/or termination of
the Credit Facility (i) in the event the Company voluntarily files under the
federal bankruptcy laws or fails to dismiss, within 31 days, any petition filed
against it in any involuntary case under such bankruptcy laws, (ii) if the
lender believes the prospect of payment or performance of the indebtedness is
impaired, or (iii) upon a change of control. The $15.0 million Credit Facility
has certain financial covenants that require the Company to: have a tangible net
worth of at least $3.25 million at June 30, 1998, and that tangible net worth
shall increase by $250,000 per quarter in 1998, commencing with the June 30,
1998 quarter; to not make capital expenditures in any fiscal year in an amount
in excess of $750,000; to maintain the ratio of EBITDA (as defined in the Credit
Facility and the amendments) of the Company at not less than two to one; and not
at any time at the end of any month permit its working capital to be less than
$4.0 million.
The Company was not in compliance with certain of its debt covenants at
September 30, 1998. The Company's interest rate on its line of credit has
increased to 11.5% (3.5% above prime) at September 30, 1998 due to the Company's
noncompliance with its debt covenants. BNY Financial Corporation continues to
support the Company and its management; however, there is no assurance that BNY
Financial Corporation will not require repayment of all debt and/or terminate
the Credit Facility.
The Company's long-term debt at September 30, 1998 consists of the following:
(i) note of $1.7 million payable 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 of $1.5 million payable to a
corporation, secured by specific inventory, with an imputed interest rate of 9.5
percent; and (iii) a note payable for $20,000.
The balance of the $1.5 million note payable to a corporation was reduced to
approximately $800,000 as of November 16, 1998 resulting from offsetting
transactions with the corporation against the amount due Aviation
Distributors, Inc. from sales to the corporation.
In February 1998, the Company borrowed $2,140,000 from BNY Financial Corporation
to purchase specific inventory. The balance of the note payable is $842,000 at
September 30, 1998. The note is secured by specific inventory and by the one
million shares of common stock pledged on the Credit Facility, was due on April
27, 1998, and has an interest rate of Prime plus three percent plus other fees.
The Company did not pay the required amount on the note in March 1998 and did
not pay off the note by April 27, 1998. As a result, the Company incurred a
$100,000 default penalty in March 1998. The bank further extended this note to
June 30, 1998 for a $100,000 fee. The Company did not pay the balance of this
note by June 30, 1998. The Company was also not in compliance with certain of
its debt covenants under this note agreement at September 30, 1998. Management
is currently negotiating with the bank to resolve this matter.
In 1997, the Company and certain of its current and former officers and
directors were named as defendants in three class action lawsuits. In April
1998, the Company entered into a Memorandum of Understanding to settle the
lawsuits. The Company's estimated cost of settlement, totaling $620,000, was
charged to Legal Settlement Expense in the fourth quarter of 1997. See "Part
II, Item 1 - Legal Proceedings."
The Company's Credit Facility is an asset based line of credit and is the
primary source for the Company to finance its operations and future growth.
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 asset base to meet these obligations. 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 as defendants in three civil suits filed as class actions
on behalf of individuals claiming to have purchased ADI Common Stock during the
period from March 1997 to September 1997, and seeking damages for violation of
Federal securities laws. The suits were filed in the United States District
Court for the Central District of California and are captioned as follows: (i)
NGUYEN V. AVIATION DISTRIBUTORS, INC., ET AL., U.S. District Court, Central
District of California, Case No. SACV 97-795 (ANx); (ii) ALAN GREEN V. AVIATION
DISTRIBUTORS, INC., ET AL., U.S. District Court, Central District of California,
Case No. SACV 97-801 GLT (EEx); and (iii) SHARON TATE V. AVIATION DISTRIBUTORS,
INC., ET AL., U.S. District Court, Central District of California, Case No. SACV
97-838 (Eex).
In April 1998, the Company entered into a settlement in principle, which is
memorialized in a Memorandum of Understanding (the "M.O.U."), with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit, will contribute 131,000 shares. As of November 16, 1998 a definitive
settlement agreement had been filed with the Federal Court and there is a
hearing scheduled on January 11, 1999 to determine if the court will approve the
agreement.
Both a Federal grand jury and the Securities and Exchange Commission have
commenced investigations into the allegations referred to above. The
investigations are continuing and the Company is unable, at this time, to
evaluate the possible outcome of the investigations or their impact on the
Company.
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.
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 Aviations Distributors, Inc.. (1)
10.4 Credit and Security Agreement, dated June 25, 1997, by and between
Aviation Distributors, Inc. and BNY Financial Corporation.(2)
10.5 Secured and Guaranteed Promissory Note, dated February 24, 1998, by
and between Aviation Distributors, Inc. and BNY Financial
Corporation.(2)
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 July 16, 1996, by and between Mark
W. Ashton and Aviation Distributors, Inc. (1)
10.8 Employment Agreement, dated as of July 16, 1996, by and between
Jeffrey G. Ward and Aviation Distributors, Inc. (1)
10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone
and Aviation Distributors, Inc. (1)
10.10 Amendment to Employment Agreement, dated November 17, 1997, by and
between Osamah S. Bakhit and Aviation Distributors, Inc.(2)
10.11 Amendment to Employment Agreement, dated November 17, 1997, by and
between Mark W. Ashton and Aviation Distributors, Inc.(2)
10.12 Lease, dated as of July 9, 1997, by and between Olen Properties Corp.
and Aviation Distributors, Inc. (2)
10.13 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation
Distributors, Inc., dated as of December+31, 1995. (1)
10.14 Settlement Agreement dated as of November 1, 1996. (1)
10.15 Form of Indemnity Agreement. (1)
10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated December 31, 1996. (1)
(1) Filed with the Company's Registration Statement on Form SB-2 dated
March 3, 1997.
(2) Filed with the Company's Registration Statement on Form 10-KSB
dated April 20, 1998.
(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 November 16, 1998 AVIATION DISTRIBUTORS, INC.
-------------------------------
By: /SS/ Saleem Naber
-------------------------------------
Saleem Naber
Chief Executive Officer
By: /SS/ Gary L. Joslin
-------------------------------------
Gary Joslin
Chief Financial Officer and
Vice President of Finance