AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
REGISTRATION NO. 333-8061
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(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, 1999
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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 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 (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 3,202,000 SHARES
OF COMMON STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF AUGUST 16,
1999.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1998 1999
---- ----
ASSETS (UNAUDITED)
CURRENT ASSETS:
Restricted cash ............................................. $ 8,171 554
Accounts receivable, net of allowance for
doubtful accounts of $620,000 at December 31,
1998 and $835,000 at June 30, 1999,
respectively ............................................... 4,767,470 3,995,918
Other receivables ........................................... 69,238 201,590
Inventories, net of reserve ................................. 9,356,386 9,286,120
Prepaid expenses ............................................ 529,965 338,875
Income tax receivable ....................................... 392,979 392,979
Current portion of note receivable .......................... 1,276,750 321,944
Deferred tax asset .......................................... 101,000 101,000
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Total current assets ................................... 16,501,959 14,638,980
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PROPERTY AND EQUIPMENT ............................................. 1,001,622 969,569
Less - accumulated depreciation ............................. 355,715 420,126
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645,907 549,443
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Note receivable from founder ....................................... 408,718 408,718
Other assets ....................................................... 29,351 31,322
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438,069 440,040
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$ 17,585,935 $ 15,628,463
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Checks issued not yet presented for payment ................. $ 377,986 $ 305,813
Accounts payable ............................................ 3,120,953 3,419,118
Accrued liabilities ......................................... 838,446 702,531
Lines of credit ............................................. 12,791,538 13,568,337
Current portion of long-term debt ........................... 1,911,057 646,448
Current portion of capital lease obligations ................ 18,797 15,581
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Total current liabilities .............................. 19,058,777 18,657,828
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Long-term debt, net of current portion ............................. 9,672 6,014
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Capital lease obligations, net of current portion .................. 30,323 23,625
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Other long-term liability .......................................... 480,000 --
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Deferred tax liability ............................................. 101,000 101,000
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STOCKHOLDERS' DEFICIT:
Preferred stock, par value of $.01, 3,000,000
shares authorized; none issued and outstanding ............. -- --
Common stock, par value of $.01, 10,000,000
shares authorized; 3,165,000 and 3,245,000 shares
issued and outstanding at December 31, 1998 and
June 30, 1999, respectively ................................ 31,650 32,450
Additional paid in capital .................................. 5,658,099 6,137,299
Accumulated deficit ......................................... (7,710,282) (9,256,449)
Treasury stock, 43,000 shares at cost ....................... (73,304) (73,304)
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Total stockholders' deficit............................. (2,093,837) (3,160,004)
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$ 17,585,935 $ 15,628,463
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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 JUNE 30, SIX MONTHS ENDED JUNE 30,
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(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1998 1999 1998 1999
---- ---- ---- ----
NET DISTRIBUTED SERVICES AND INVENTORY SALES... $ 6,353,866 $ 3,227,622 $ 15,172,497 $ 10,938,733
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS ......................... 124,440 -- 176,101 --
------------ ------------ ------------ ------------
TOTAL NET SALES ............................... 6,478,306 3,227,622 15,348,598 10,938,733
COST OF SALES ................................. 5,064,306 2,610,741 11,955,695 8,651,391
------------ ------------ ------------ ------------
Gross profit ........................ 1,414,000 616,881 3,392,903 2,287,342
SELLING AND ADMINISTRATIVE EXPENSES ........... 1,926,730 1,448,541 3,719,102 2,858,251
NON RECURRING EXPENSES ........................ 530,425 71,172 1,039,310 88,915
------------ ------------ ------------ ------------
Loss from operations ................ (1,043,155) (902,832) (1,365,509) (659,824)
OTHER (EXPENSES) INCOME:
Interest expense .................... (714,639) (511,702) (1,357,183) (936,818)
Interest income ..................... 69,186 17,808 157,722 49,863
Other income ........................ 16,289 325 4,334 1,412
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Loss before provision for
income taxes ...................... (1,672,319) (1,396,401) (2,560,636) (1,545,367)
PROVISION FOR INCOME TAXES .................... -- 800 -- 800
------------ ------------ ------------ ------------
NET LOSS ............................ $ (1,672,319) $ (1,397,201) $ (2,560,636) $ (1,546,167)
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Basic and diluted net
Loss per share .............................. $ (0.53) $ (0.44) $ (0.81) $ (0.49)
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Weighted average shares outstanding ........... 3,150,000 3,179,000 3,158,000 3,179,000
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The accompanying notes are an integral part of these consolidated statements.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common stock Treasury stock Total
------------------------ ------------------------ Additional stockholders'
Number Number paid Accumulated equity
of shares Amount of shares Amount in capital deficit (deficit)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at January 1, 1998 ....... 3,165,000 31,650 -- -- 5,658,099 (1,914,510) 3,775,239
Purchase of treasury stock ... -- -- 43,000 (73,304) -- -- (73,304)
Net loss ..................... -- -- -- -- -- (5,795,772) (5,795,772)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1998 ..... 3,165,000 31,650 43,000 (73,304) 5,658,099 (7,710,282) (2,093,837)
Stock issued in
legal settlement ........... 80,000 800 -- -- 479,200 -- 480,000
Net loss ..................... -- -- -- -- -- (1,546,167) (1,546,167)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at June 30, 1999 ......... 3,245,000 $ 32,450 43,000 $ (73,304) $ 6,137,299 $(9,256,449) $ (3,160,004)
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The accompanying notes are an integral part of these consolidated statements.
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
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1998 1999
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(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (2,560,636) $ (1,546,167)
Adjustments to reconcile net loss to net cash
used in operating activities:
Principal payments on note receivable ........................ 868,383 954,806
Borrowings on notes payable related to inventory purchases.... 2,390,018 --
Principal payments on notes payable
related to inventory purchases ............................. (3,530,796) (954,806)
Reduction in amount due on notes payable
related to inventory purchases in exchange for
reduction in accounts receivable ........................... -- (444,327)
Depreciation and amortization ................................ 187,878 108,371
Changes in assets and liabilities:
Accounts receivable, net ................................ 1,863,173 771,552
Other receivables ....................................... 179,923 (132,352)
Inventories ............................................. (660,977) 70,266
Prepaid expenses ........................................ (128,949) 191,090
Income tax receivable ................................... (175,000) --
Deferred tax asset ...................................... (8,000) --
Other assets ............................................ (75,000) (1,971)
Checks issued not yet presented for payment ............. (612,608) (72,173)
Accounts payable ........................................ (381,180) 298,165
Accrued liabilities ..................................... (166,723) (135,915)
Deferred tax liability .................................. 8,000 --
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Net cash used in operating activities ............ (2,802,494) (893,461)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (198,565) (1,991)
Decrease in restricted cash ....................................... 1,098,478 7,617
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Net cash provided by investing activities .......... 899,913 5,626
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit ..................................... 17,517,759 11,618,532
Principal payments on lines of credit ............................. (15,597,765) (10,841,733)
Borrowings on long-term debt ...................................... -- 125,000
Principal payments of long-term debt .............................. (3,148) (4,050)
Principal payments of capital lease obligations ................... (13,042) (9,914)
Acquisition of treasury stock ..................................... (73,304) --
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Net cash provided by financing activities ........... 1,830,500 887,835
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Net decrease in cash and cash equivalents ................................ (72,081) --
Cash and cash equivalents at beginning of period ......................... 80,218 --
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Cash and cash equivalents at end of period ............................... $ 8,137 $ --
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ..................................................... $ 1,195,053 $ 933,971
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Income taxes ................................................. $ 175,000 $ 800
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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 June 30, 1999 and the results of its operations
for the three and six month periods ended June 30, 1999 and 1998 and cash
flows for the six month periods ended June 30, 1999 and 1998. The results of
operations and cash flows for the six month period ended June 30, 1999 are
not necessarily indicative of the results of operations or cash flows which
may be reported for the remainder of 1999.
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
unaudited interim consolidated financial statements should be read in
connection with the Company's December 31, 1998 financial statements and the
notes thereto included in the Prospectus contained in the Company's Annual
Report on Form 10KSB.
NOTE 2 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company sustained a substantial
loss from operations in 1998 and continued to incur losses for the first and
second quarters of 1999; has used, rather than provided, cash in its
operations; and has deficits in working capital and stockholders' equity at
December 31, 1998 and June 30, 1999. In addition, the Company is in an over
advance position on its line of credit, which limits its ability to obtain
additional operating capital from its primary lender. Also, as discussed in
note 3, the impact on the Company of certain governmental investigations
cannot be determined at this time.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheets are dependent upon continued operations of the Company. This
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing, and to
succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management has taken steps to revise its operations and financial
requirements, which it believes are sufficient to provide the Company with
the ability to continue in existence. Ongoing expenses have been reduced by
salary reductions, headcount reductions and other cost saving measures
implemented. To further reduce ongoing expenses, the Australian warehouse and
European sales office were closed, relocating the inventory and the sales
function to California. The class action lawsuits have been settled. As a
result, management expects the nonrecurring and abnormal expenses caused by
the lawsuits and other legal issues to decline by more than $1 million
compared to such expenses incurred in fiscal year 1998. Settlement of legal
issues will also allow management to concentrate on managing, improving and
expanding the business. Discussions are in process to obtain a bridge loan,
subordinated loan and/or equity financing. Management believes that new
financing will allow an improvement in vendor relations and bank loan
arrangements, which in turn will improve financial flexibility.
NOTE 3 - 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. Included in legal
settlement expense for the year ended December 31, 1997 is a $620,000 charge,
of which $480,000 is attributable to the issuance of 80,000 shares of common
stock and $140,000 represents the Company's portion of the cash
consideration. The Federal Court approved this settlement agreement on March
15, 1999.
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 4 - DEBT ARRANGEMENTS
On February 9, 1999 the Company amended its Credit Facility with GMAC
Commercial Credit LLC, successor in interest to BNY Financial Corporation
(GMAC), to increase the maximum loan amount to $20,000,000, increase its
unused line fee to 0.5%, increase its receivables advance rate and extend the
loan expiration date to June 21, 2002. This is based on the requirement that
the Company reduce its normal monthly overhead expenses to an amount equal to
or below $425,000 per month. The Company incurred a $50,000 fee for amending
the Credit Facility.
At June 30, 1999, the Company was not in compliance with certain of the
covenants of its line of credit with GMAC. GMAC 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.
NOTE 5 - EXPORT SALES
For the six months ended June 30, 1998 and 1999, approximately 50.3% and
68.7%, respectively, of the Company's net sales were export sales.
Export sales by region were approximately as follows:
JUNE 30,
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1998 1999
Pacific Rim ................................ 19.4% 16.5%
Europe ..................................... 8.9 27.2
Latin/South America ........................ 16.1 18.1
Africa/Middle East ......................... 5.9 6.9
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50.3% 68.7%
NOTE 6 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of the Company for each of
the periods discussed. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and the
related notes thereto, which are included elsewhere in this document.
This discussion contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Such forward looking statements involve risks and uncertainties and
actual results could differ from those described herein and future results
may be subject to numerous factors, many of which are beyond the control of
the Company.
OVERVIEW
Net sales consist primarily of gross sales, net of allowance for returns and
other adjustments. Cost of sales consists primarily of product costs, freight
charges and an inventory provision for damaged and obsolete products. Product
costs consist of the acquisition costs of the products and costs associated
with repairs, maintenance and certification.
Net sales and gross profit depend in large measure on the volume and timing
of sales orders received during the period and the mix of aircraft parts
contained in the Company's inventory. The timing of bulk inventory purchases
can impact sales and gross profit. In general, bulk inventory purchases allow
the Company to obtain large inventories of aircraft parts at a lower cost
than can ordinarily be obtained by purchasing such parts on an individual
basis. Thus, these bulk purchases allow the Company to seek larger gross
margins on its sale of aircraft parts since the cost of purchase is reduced.
The following table sets forth certain information relating to the Company's
operations for the three months ended June 30, 1998 and 1999 (dollars in
thousands):
1998 1999
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Net sales $ 6,478 100.0 % $ 3,228 100.0 %
Cost of sales 5,064 78.2 2,611 80.9
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Gross profit 1,414 21.8 617 19.1
Selling and administrative expenses 1,927 29.7 1,449 44.9
Non-recurring expenses 530 8.2 71 2.2
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Loss from operations (1,043) (16.1) (903) (28.0)
Interest expense, net 645 10.0 494 15.3
Other income 16 0.2 -- --
---------- ---------- ---------- ----------
Net loss $ (1,672) (26.3)% $ (1,397) (43.3)%
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NET SALES. Net sales decreased from $6.5 million for the three months ended
June 30, 1998 to $3.2 million for the three months ended June 30, 1999, a
decrease of $3.3 million or 50.8%. This decrease was mainly a result of a
shortage in cash availability that restricted the Company's purchasing
ability to receive critical parts from its suppliers. The shortage of cash
availability primarily resulted from cash requirements relating to the class
action lawsuits and government investigations.
Net sales consist of 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. Sales from distributed services (outside sourcing)
represented approximately 86.5% and 94.6% of total net sales for the
three months ended June 30, 1998 and 1999, respectively. Sales of
Company-owned inventory represented approximately 13.5% and 5.4% of
total net sales for the three months ended June 30, 1998 and 1999,
respectively
COST OF SALES. Cost of sales decreased from $5.1 million for the three months
ended June 30, 1998 to $2.6 million for the three months ended June 30, 1999,
a decrease of $2.5 million or 49.0%. This decrease was primarily attributable
to the 50.8% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $1.4 million or 21.8% of net sales
for the three months ended June 30, 1998 to $600,000 or 19.1% of net sales
for the three months ended June 30, 1999, a decrease of $800,000 or 57.1%.
This decrease was a result of the 50.8% decrease in net sales and an
additional inventory valuation reserve of $150,000.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of wages and commission expense, rent expense,
professional fees, consulting expense and travel expense. The Company's
selling and administrative expenses decreased from $1.9 million for the three
months ended June 30, 1998 to $1.4 million for the three months ended June
30, 1999, a decrease of $500,000 or 26.3%. This decrease was principally due
to a decrease in employee compensation as a result of salary reductions and
headcount
reductions, a decrease in commission expense as a result of the decrease in
net sales and a decrease in other administrative expenses as a result of
management effectively controlling administrative expenses.
NON-RECURRING EXPENSES. In the second quarter of 1998 and 1999, the Company
incurred $530,000 and $71,000, respectively, of expenses related to its
investigation of allegations concerning its previously issued financial
statements, restatement of those financial statements, class action lawsuits
and investigations by a Federal grand jury and the Securities and Exchange
Commission. Management expects these expenses to continue to decrease, as the
shareholder lawsuit was settled on March 15, 1999. These expenses primarily
consist of legal, accounting and consulting fees. See "Part II, Item 1 -
Legal Proceedings."
LOSS FROM OPERATIONS. The Company had a loss from operations of $1.0 million
for the three months ended June 30, 1998 compared to a loss from operations
of $900,000 for the three months ended June 30, 1999. The slight decrease in
loss from operations is due to the decrease in net sales offset by the
decrease in selling and administrative expenses and non-recurring expenses.
See "Net sales", "Selling and administrative expenses" and "Non-recurring
expenses."
INTEREST EXPENSES, NET. Net interest expense decreased from $645,000 for the
three months ended June 30, 1998 to $494,000 for the three months ended June
30, 1999. The $151,000 decrease in interest expense was due to approximately
$330,000 of interest incurred on the note payable for the purchase of the
CFM56 engine in 1998, offset by increased borrowings under its line of credit
and the increased overadvance interest incurred in 1999.
The following table sets forth certain information relating to the Company's
operations for the six months ended June 30, 1998 and 1999 (dollars in
thousands):
1998 1999
----------------------- -----------------------
Net sales $ 15,349 100.0 % $ 10,938 100.0 %
Cost of sales 11,956 77.9 8,651 79.1
---------- ---------- ---------- ----------
Gross profit 3,393 22.1 2,287 20.9
Selling and administrative expenses 3,719 24.2 2,858 26.1
Non-recurring expenses 1,039 6.8 89 0.8
---------- ---------- ---------- ----------
Loss from operations (1,365) (8.9) (660) (6.0)
Interest expense, net 1,200 7.8 887 8.1
Other income 4 -- 1 --
---------- ---------- ---------- ----------
Net loss $ (2,561) (16.7)% $ (1,546) (14.1)%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET SALES. Net sales decreased from $15.3 million for the six months ended
June 30, 1998 to $10.9 million for the six months ended June 30, 1999, a
decrease of $4.4 million or 28.8%. This decrease was mainly a result of a
shortage in cash availability that restricted the Company's purchasing
ability to receive critical parts from its suppliers. The shortage of cash
availability primarily resulted from cash requirements relating to the class
action lawsuits and government investigations.
Net sales consist of 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. Sales from distributed services (outside sourcing)
represented approximately 81.2% and 94.1% of total net sales for the six
months ended June 30, 1998 and 1999, respectively. Sales of Company-owned
inventory represented approximately 18.8% and 5.9% of total net sales for the
six months ended June 30, 1998 and 1999, respectively
COST OF SALES. Cost of sales decreased from $12.0 million for the six months
ended June 30, 1998 to $8.7 million for the six months ended June 30, 1999, a
decrease of $3.3 million or 27.5%. This decrease was primarily attributable
to the 28.8% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $3.4 million or 22.1% of net sales
for the six months ended June 30, 1998 to $2.3 million or 20.9% of net sales
for the six months ended June 30, 1999, a decrease of $1.1 million or 32.4%.
This decrease was primarily a result of the 28.8% decrease in net sales and an
additional inventory valuation reserve of $150,000 in the second quarter.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of wages and commission expense, rent expense,
professional fees, consulting expense and travel expense. The Company's
selling and administrative expenses decreased from $3.7 million for the six
months ended June 30, 1998 to $2.9 million for the six months ended June 30,
1999, a decrease of $800,000 or 21.6%. This decrease was principally due to a
decrease in employee compensation as a result of salary reductions and
headcount reductions, a decrease in commission expense as a result of the
decrease in net sales and a decrease in other administrative expenses as a
result of management effectively controlling administrative expenses.
NON-RECURRING EXPENSES. For the six months ended June 30, 1998 and 1999, the
Company incurred $1.0 million and $89,000, respectively, of expenses related
to its investigation of allegations concerning its previously issued
financial statements, restatement of those financial statements, class action
lawsuits and investigations by a Federal grand jury and the Securities and
Exchange Commission. Management expects these expenses to continue to
decrease, as the shareholder lawsuit was settled on March 15, 1999. These
expenses primarily consist of legal, accounting and consulting fees. See
"Part II, Item 1 - Legal Proceedings."
LOSS FROM OPERATIONS. The Company had a loss from operations of $1.4 million
and $700,000 for the six months ended June 30, 1998 and 1999, respectively.
The $700,000 decrease in loss from operations is due to the decrease in
selling and administrative expenses and non-recurring expenses offset by a
decrease in net sales. See "Net sales", "Selling and administrative expenses"
and "Non-recurring expenses."
INTEREST EXPENSES, NET. Net interest expense decreased from $1.2 million for
the six months ended June 30, 1998 to $900,000 for the six months ended June
30, 1999. The $300,000 decrease in interest expense was due to approximately
$450,000 of interest incurred on the note payable for the purchase of the
CFM56 engine in 1998 offset by increased borrowings under its line of credit
and the increased overadvance interest incurred in 1999.
YEAR 2000 COMPLIANCE
The Company has analyzed its Year 2000 compliance issues and developed
solutions and contingency plans. Management's estimate of costs to
become year 2000 compliant is between $50,000 and $150,000, which includes
the implementation of a new software system. Management plans to implement
and be fully operational on the new software system purchased for
approximately $100,000 in 1997, during September 1999. The Company does not
separately track the internal costs incurred for the Y2K project. The Company
estimated its future costs by assessing compensation and fringe benefits of
internal employees working on the Y2K issues and fees of certain outside
consultants.
Management has developed a specific project plan that it expects to complete
during September 1999. The project team is in the process of completing the
installation of hardware and software, which will provide year 2000
compliance and provide a new integrated database to manage the business
systems of the Company. Data transfer and file structure for the purchased
software are being loaded and tested for specific application to the
Company's needs. Outside consultants with experience and expertise in the
software purchased by the Company have been engaged to assist in the
implementation. Historical data is being transferred to the new software and
tested for accuracy. Training programs have been developed and the training
has begun for the new software. All testing to-date has been satisfactory.
If the new system is not running by December 1999, the Company's first
contingency plan is to continue using the current systems. The current system
will run transactions in the year 2000, but the date will register as 1900.
If the current systems fails and the information becomes inaccurate, the
Company would have to resort to performing manual invoices and manual
purchasing and manual perpetual inventory. A manual process would slow down
the Company's operations and the Company may incur additional expenses to
meet customer delivery expectations.
The Company is confirming Y2K readiness with its major suppliers and
customers. This will allow the Company to determine the reliable sources of
aircraft parts and which companies will be ready to purchase aircraft parts
in year 2000. Although the Company has many suppliers it purchases parts
from, there is no assurance that a critical supplier may not be Y2K compliant
resulting in a material impact on the Company's operations.
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's operating activities used $2.8 million and $900,000 in net cash
in the six months ended June 30, 1998 and 1999, respectively. The largest
cash uses in the 1998 period were the $2.6 million loss, payments of $3.5
million related to notes payable for inventory purchases, and decreases in
liability accounts, offset by a $1.8 million reduction in accounts receivable
and $2.4 million borrowings on notes payable related to inventory purchases.
For the 1999 period, the largest uses of cash were the $1.5 million net loss,
payments of $1.0 million related to notes payable for inventory purchases,
and $400,000 reduction in amount due on notes payable related to inventory
purchases in exchange for reduction in accounts receivable, offset by $1.0
million principal payments on note receivable and a $700,000 reduction of
accounts receivable.
For the 1998 period, the Company used $200,000 in investing activities from
purchases of property and equipment, less reductions of $1.2 million in
restricted cash.
Cash provided by 1998 financing activities of $1.8 million, was primarily a
result of a $1.9 million net increase in line of credit borrowings. The 1999
financing activities provided cash of $900,000, primarily resulting from the
$800,000 net increase in line of credit borrowings and the $100,000 increase
in borrowings on long-term debt.
As of June 30, 1999, the Company had a working capital deficit of $4.0
million. This was primarily due to the increase in the borrowings on the line
of credit, resulting from the cash requirements for the shareholder lawsuits
and the government investigations, decreases in accounts receivable related
to the decrease in net sales and the decrease in current notes receivable.
See "Item 1 - Legal Proceedings."
At June 30, 1999, the Company was not in compliance with certain of the
covenants of its line of credit with GMAC. GMAC 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 October 1998 the Company assigned all tax refunds from governmental
agencies to GMAC and issued 126,600 warrants to purchase common stock of the
Company at $2.50 per share. At December 31, 1998 the Company has recorded a
tax receivable representing over-paid taxes on the 1996 Federal and State tax
returns of $393,000. In July of 1999 the Company received the tax refunds
plus applicable interest. In February 1999, the Company reduced the exercise
price of the warrants from $2.50 to $1.00 per share.
On February 9, 1999 the Company amended its Credit Facility with GMAC to
increase the maximum loan amount to $20,000,000, increase its unused line fee
to 0.5% and increase its receivables advance rate for insured international
receivables from 80% to
90%. The Company's permitted normal monthly overhead expense was reduced to
an amount equal to or below $425,000 per month. The Company incurred a
$50,000 fee for amending the Credit Facility.
The Company's long-term debt consists of the following: (i) note payable of
$322,000 at June 30, 1999, 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 $192,000 at June 30, 1999
to a corporation, secured by specific inventory, an imputed interest rate of
9.5 percent; (iii) note payable of $125,000 at March 31, 1999 to the founder
of the Company and (iv) notes payable for $13,000.
The Company's credit facility with GMAC is an asset based line of credit
secured by account receivable and inventory and is the primary source for the
Company to finance its operations and 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 line of
credit to pay these costs. As a result, the Company may need to increase its
capital base in order to continue to meet its growth objectives. There can be
no assurance that such additional capital will be available on a timely basis
or at acceptable terms.
See note 2 to the consolidated financial statements included in this form
10-Q regarding realization of assets and steps management has taken with
respect to its operations and financing requirements.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in certain legal and administrative proceedings and
threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, management believes the
ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company. Also, see Note 3 to the
consolidated financial statements in Part I.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 Bylaws, as amended, of the Registrant. (1)
3.3 Amendment to Amended and Restated Certificate of Incorporation of
the Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
9.1 Voting Trust Agreement, dated November 17, 1997, by and among
Osamah Bakhit, Aviation Distributors, Inc., and Dirk O. Julander,
as trustee. (2)
10.2 1996 Stock Option and Incentive Plan. (1)
10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between
Alia The Royal Jordanian Airlines and Aviations Distributors,
Inc.. (1)
10.4 Credit and Security Agreement, dated June 25, 1997, by and
between Aviation Distributors, Inc. and BNY Financial
Corporation.(3)
10.5 Secured and Guaranteed Promissory Note, dated February 24, 1998,
by and between Aviation Distributors, Inc. and BNY Financial
Corporation.(3)
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.(3)
10.11 Amendment to Employment Agreement, dated November 17, 1997, by
and between Mark W. Ashton and Aviation Distributors, Inc.(3)
10.12 Lease, dated as of July 9, 1997, by and between Olen Properties
Corp. and Aviation Distributors, Inc. (3)
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 Current Report on Form 8-K dated August 29,
1997.
(3) Filed with the Company's Registration Statement on Form 10-KSB dated
April 20, 1998.
(b) Reports on Form 8-K.
DATE OF REPORT/FILING DATE ITEM REPORTED
August 29, 1997/September 8, 1997 Change in Registrant's Certifying
Accountant (Withdrawal of Reports
on Financial Statements;
Resignation of Arthur Andersen
LLP). No financial statements were
filed.
August 29, 1997/September 17, 1997 Financial Statements and Exhibits
(Letter from Arthur Andersen LLP).
No financial statements were filed.
October 1, 1997/October 14, 1997 Other Events (Delisting by Nasdaq).
No financial statements were filed.
November 19, 1997/November 19, 1997 Change in Registrant's Certifying
Account (Appointment of Grant
Thornton LLP); Other Events
(Resignation of Osamah S. Bakhit as
Chairman, CEO; Transfer of Bakhit
Shares to Voting Trust). No
financial statements were filed.
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 August 16, 1999 AVIATION DISTRIBUTORS, INC.
-----------------------------
By: /s/ Saleem Naber
-------------------------------
Saleem Naber
Chief Executive Officer
President and Director
(Principal Executive Officer)
By: /s/ Gary L. Joslin
-------------------------------
Gary L. Joslin
Chief Financial Officer
and Director (Principal
Accounting Officer)