<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVIATION DISTRIBUTORS INCORPORATED
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5008 33-0715685
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1 WRIGLEY DRIVE
IRVINE, CALIFORNIA 92618
(714) 586-7558
(Address and telephone number of principal executive offices)
------------------------
OSAMAH S. BAKHIT
CHIEF EXECUTIVE OFFICER
AVIATION DISTRIBUTORS INCORPORATED
1 WRIGLEY DRIVE
IRVINE, CALIFORNIA 92618
(714) 586-7558
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRIAN J. MCCARTHY, ESQ. KENNETH J. BARONSKY, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM MILBANK, TWEED, HADLEY & MCCLOY
300 South Grand Avenue, 34th Floor 601 South Figueroa, 30th Floor
Los Angeles, California 90071 Los Angeles, California 90017
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after this Registration Statement becomes effective.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED SHARE (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value (2)...... 1,150,000 $8.00 $9,200,000 $3,173
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) Includes 150,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any, in connection with the
Registrant's sale of the Common Stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
FORM SB-2 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Outside Front Cover Page; Front of Registration
Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Principal and Selling Stockholder
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal and Selling Stockholder
12. Description of Securities............................ Outside Front Cover Page; Prospectus Summary;
Dividend Policy; Capitalization; Description of
Capital Stock
13. Interests of Named Experts and Counsel............... Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Management; Underwriting
15. Organization Within Last Five Years.................. Certain Transactions
16. Description of Business.............................. Risk Factors; Prospectus Summary; Management's
Discussion and Analysis of Results of Operations and
Financial Condition; Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Results of
Operations and Financial Condition
18. Description of Property.............................. Business
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. Outside Front Cover Page; Risk Factors; Dividend
Policy; Description of Capital Stock; Shares
Eligible for Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS [LOGO]
SUBJECT TO COMPLETION, DATED JULY 12, 1996
1,000,000 SHARES
AVIATION DISTRIBUTORS INCORPORATED
COMMON STOCK
Of the 1,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 900,000 are being offered by
Aviation Distributors Incorporated, a Delaware corporation ("ADI" or the
"Company"), and 100,000 are being offered by the Selling Stockholder (as defined
herein). The Company will not receive any of the proceeds from the sale of the
shares by the Selling Stockholder. See "Principal and Selling Stockholder."
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $6 and $8 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price of the
Common Stock.
The Company intends to apply for the quotation of the Common Stock on the
Nasdaq Stock Market's National Market under the symbol "ADIN."
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDER
Per Share..................
Total (3)..................
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. Excludes the value of warrants to
purchase up to 100,000 shares of Common Stock (the "Representative's
Warrants") granted to the representative of the several Underwriters (the
"Representative"). See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $ , including the Representative's non-accountable expense
allowance and including the Selling Stockholder's expenses of $ to
be paid by the Company. See "Underwriting."
(3) The Company and the Selling Stockholder have granted to the Underwriters a
45-day option to purchase up to 100,000 and 50,000 additional shares of
Common Stock, respectively, to cover over-allotments, if any. To the extent
that the option is exercised, the Underwriters will offer the additional
shares at the Price to Public shown above. If the option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company and Proceeds to Selling Stockholder will be
$ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, subject to certain
conditions. Delivery of the shares is expected against payment therefor on or
about , 1996, at the offices of Cruttenden Roth Incorporated,
Irvine, California or through the facilities of the Depository Trust Company.
------------------------
CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES EFFECT TO A 3,000 FOR 1
EXCHANGE OF THE COMMON STOCK OF THE COMPANY IN CONNECTION WITH ITS
REINCORPORATION IN THE STATE OF DELAWARE. SEE "UNDERWRITING." INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Aviation Distributors Incorporated ("ADI" or the "Company") is a supplier of
new and used aircraft parts to major airlines worldwide. The Company locates,
acquires and supplies parts for all major aircraft. Additionally, the Company
enters into consignment and marketing agreements with major airlines,
distributors and original equipment manufacturers ("OEMs"), which allow the
Company to offer a wide range of parts for sale without certain risks and
financing costs associated with owned inventory. The aircraft parts offered by
the Company include those manufactured by Boeing, McDonnell Douglas, Airbus,
Pratt & Whitney, General Electric, Rolls Royce and Lockheed. Sales have
increased from $2.6 million in 1992 to $7.2 million in 1993 to $16.4 million in
1994 to $22.7 million in 1995.
The worldwide aircraft parts market is highly fragmented and parts are
supplied by many types of suppliers, including airlines themselves, OEMs and
numerous distributors, fixed base operators, Federal Aviation Administration
("FAA") certified facilities, traders and brokers. In May 1995, The Canaan Group
Ltd., a management consulting firm specializing in the aircraft and aerospace
industry, estimated parts inventories at $45 billion. The Company believes that
growth trends outlined below could increase the size of the aircraft parts
market while decreasing the number of aircraft parts suppliers.
According to Boeing's 1996 Market Outlook, the worldwide fleet of commercial
aircraft and air cargo aircraft is expected to grow from 11,066 airplanes at the
end of 1995 to 23,080 airplanes by 2015. Additionally, airlines are decreasing
the number of suppliers from which parts are purchased, in an effort to reduce
purchasing costs and increase quality and service. To reduce inventory costs,
airlines are also reducing parts inventories through bulk sales to and marketing
and consignment agreements with aircraft parts suppliers. Finally, because of
safety concerns regarding unapproved parts, regulatory agencies are increasing
emphasis on part trackability by requiring increased documentation for aircraft
parts.
The Company's objectives are to take advantage of trends in the aircraft
parts market and to become a leading comprehensive supplier of quality parts to
airlines worldwide. The Company's strategy is comprised of the following
components: excellent customer service and emphasis on quality, focus on major
airlines, increase access to inventory through both consignment and purchases
and global expansion.
The Company was established in October 1988, incorporated in February 1992
as a California corporation and reincorporated in July, 1996 as a Delaware
corporation. The Company's executive offices are located at 1 Wrigley Drive,
Irvine, California 92618 and its telephone number at that address is (714)
586-7558.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company........................................... 900,000 shares
By the Selling Stockholder............................... 100,000 shares
Common Stock to be outstanding after the Offering.......... 3,000,000 shares (1)
Use of proceeds............................................ To repay approximately $3.8
million of the amount
outstanding under the Company's
lines of credit and for general
corporate purposes, including
working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..................... ADIN
</TABLE>
- ------------------------
(1) Excludes an aggregate of 150,000 shares of Common Stock that may be sold by
the Company and the Selling Stockholder upon exercise of the Underwriters'
over-allotment option. Also excludes 100,000 shares of Common Stock issuable
upon exercise of the Representative's Warrants. See "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
The Summary Financial Data presented below are derived from the Consolidated
Financial Statements of the Company and are qualified in their entirety by, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $ 16,369 $ 22,652 $ 4,621 $ 4,636
Cost of sales.............................................. 11,809 18,476 3,892 3,767
Gross profit............................................... 4,560 4,176 729 869
Selling and administrative expenses........................ 3,582 3,961 842 1,110
Income (loss) from operations.............................. 978 215 (113) (241)
Interest expense, net...................................... 278 622 125 142
Net income (loss).......................................... 208 (215) (168) (371)
Net income (loss) per share................................ 0.10 (0.10) (0.08) (0.18)
Shares used in computing net income (loss) per share....... 2,100,000 2,100,000 2,100,000 2,100,000
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, ---------------------------
-------------------- AS ADJUSTED
1994 1995 ACTUAL (1)
--------- --------- ----------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 251 $ 868 $ 14 $ 914
Restricted cash............................................... 105 301 778 778
Working capital (deficit)..................................... 124 (152) (462) 4,238
Total assets.................................................. 5,011 16,015 16,006 16,906
Total debt.................................................... 2,537 12,731 13,187 9,387
Total stockholders' equity (deficit).......................... 368 153 (218) 4,482
</TABLE>
- ------------------------
(1) Adjusted for the sale of 900,000 shares of Common Stock by the Company (at
an assumed offering price of $7.00 per share) in the Offering and the
application of the net proceeds therefrom as if the Offering had occurred on
March 31, 1996. See "Use of Proceeds."
------------------------
5
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, TOGETHER WITH OTHER INFORMATION SET FORTH
IN THIS PROSPECTUS.
FLUCTUATIONS IN OPERATING RESULTS; HISTORICAL OPERATING LOSSES
The Company's operating results are affected by many factors, including the
timing of orders from large customers, the timing of expenditures to purchase
inventory in anticipation of future sales, the timing of bulk inventory
purchases, and the mix of available aircraft spare parts contained, at any time,
in the Company's inventory and many other factors largely outside the Company's
control. Given that a large portion of the Company's operating expenses are
relatively fixed, there can be no assurance that external factors such as those
described above will not have a material adverse impact on the Company's
operating results. The Company experienced an operating loss of $240,699 for the
first quarter of 1996 and has experienced operating losses in the past, and as
of March 31, 1996, had a stockholder's deficit of $218,319. These losses are
primarily attributable to high levels of selling and administrative expenses,
primarily travel and entertainment, associated with establishing and maintaining
customer relationships. A key component of the Company's business strategy is to
implement a program to effectively contain such expenses. There can be no
assurance that the Company will be able to effectively reduce selling and
administrative expenses or achieve profitability in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The aircraft parts supply industry is highly competitive. Competition is
generally based on availability of product, reputation, customer service, price
and lead time. Some of the Company's competitors have access to greater
financial and other resources than the Company. There can be no assurance that
the Company will be able to effectively compete with such companies in the
future. See "Business -- Competition."
DEPENDENCE ON KEY PARTS SUPPLIERS
The Company is dependent on certain domestic and international OEMs for many
key parts and components. Many of these OEMs maintain their own parts
inventories and distribution services and compete with the Company. The Company
believes that these manufacturers will continue to adhere to their current
policy of supporting qualified independently-owned aircraft parts suppliers.
However, if their policy should change or if certain OEMs require scarce parts
for their own distribution operations, the Company may incur shortages in the
supply of required parts and components. An inability of the Company to maintain
access to parts and components on commercially reasonable terms would have a
material adverse effect on the Company's business.
FOREIGN OPERATIONS
The Company's foreign activities, which account for a significant percentage
of the Company's total sales, are subject to the risks customarily associated
with such activities. These include controls, expropriation, nationalization and
other economic, political and regulatory policies of local governments as well
as the laws and policies of the United States affecting foreign trade and
investment. To date, the Company has not encountered any significant problems in
its foreign activities, however there is no assurance that this will continue in
the future. All of the Company's sales were transacted in U.S. dollars in fiscal
1995. As of March 31, 1996 the Company had a minimal amount of owned assets
outside the United States.
REGULATION
Parts that are installed in aircraft are required to be certified by FAA
approved manufacturing and repair facilities prior to installation. The Company
does not operate repair stations and is not otherwise directly regulated by the
FAA. Because of public concerns that have been raised regarding deregulation of
the aviation industry and inadequate maintenance procedures, there is the
possibility that new and more stringent FAA regulations will be adopted. There
can be no assurance that the Company will not become subject to direct
regulation by the FAA, or that any new regulations adopted by the FAA will not
have a material adverse effect on the Company's business.
6
<PAGE>
PRODUCT LIABILITY
The Company neither manufacturers nor repairs aircraft parts and requires
that all of the parts that it sells are properly documented and traceable to
their original source. Although the Company has never been subject to product
liability claims, there is no guarantee that the Company could not be subject to
liability from its potential exposure relating to faulty aircraft parts in the
future. The Company maintains liability insurance in the amount of $2 million to
protect it from such claims, but there can be no assurance that such coverage
will be adequate to fully protect the Company from any liabilities it might
incur. An uninsured loss could have a material adverse effect upon the Company's
financial condition.
CONCENTRATION OF CREDIT RISK
As part of its business strategy, the Company may, from time to time,
purchase high price items such as engines and whole aircraft on an opportunistic
basis. This activity can lead to a high proportion of net sales and trade
accounts receivables from a few customers. As of March 31, 1996 the Company had
a note receivable from one customer in the amount of approximately $5.8 million,
which is secured by an irrevocable letter of credit. See Note 5 of Notes to
Consolidated Financial Statements. For the years ended 1994 and 1995 and the
three months ended March 31, 1996 the Company has written off an aggregate of
approximately $8,000 as uncollected accounts receivable.
CERTAIN LITIGATION
The Company is a defendant in a pending action brought by a customer of the
Company arising out of a consignment agreement that was terminated in August
1995. The lawsuit alleges, among other things, breach of contract and fraud, and
seeks combined damages of $3,518,000, interest, attorneys fees, punitive damages
and treble damages under R.I.C.O. Although the Company intends
to vigorously defend the lawsuit, the ultimate outcome is uncertain, and an
adverse outcome would likely have a material adverse effect on the Company. See
"Business -- Litigation."
FUTURE CAPITAL REQUIREMENTS
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. In addition, to the extent the Company decides to expand its
existing facilities, the Company would require additional capital. Although the
Company believes that the net proceeds from the Offering, together with
available cash, 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 acceptable terms, if at all.
DEPENDENCE UPON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the management and other skills of Osamah Bakhit, the Chief Executive
Officer of the Company, as well as its ability to retain other key employees and
to attract skilled personnel in the future to manage the growth of the Company.
The Company maintains key man life insurance policy in the amount of $3 million
on Mr. Bakhit and intends to enter into a long-term employment agreement with
Mr. Bakhit, who will own approximately 67% of the Company's outstanding Common
Stock following the completion of the Offering (approximately 63% if the
over-allotment option is exercised). The loss or unavailability of the services
of Mr. Bakhit could have a material adverse effect on the Company.
CONTROL BY PRINCIPAL STOCKHOLDER
Following the consummation of the Offering, Mr. Bakhit will have majority
control of the Company and the ability to control the election of directors and
the results of other matters submitted to a vote of stockholders. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. The Board of Directors of the Company is
expected to be initially comprised entirely of designees of Mr. Bakhit. See
"Principal and Selling Stockholder" and "Management."
7
<PAGE>
FUTURE SALES BY PRINCIPAL STOCKHOLDER; SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the Offering, Mr. Bakhit (the "Principal Stockholder" or
"Selling Stockholder") will beneficially own approximately 67% of the
outstanding Common Stock (approximately 63% if the over-allotment option is
exercised). Subject to the restrictions set forth below, Mr. Bakhit will be free
to sell such shares and may determine to sell them from time to time to take
advantage of favorable market conditions or for any other reason. Future sales
of shares of Common Stock by the Company and its stockholders could adversely
affect the prevailing market price of the Common Stock. The Company and Mr.
Bakhit have entered into a lock-up agreement with Cruttenden Roth Incorporated
("CRI"), as representative (the "Representative") of the Underwriters, pursuant
to which the Company and the Selling Stockholder have agreed, subject to certain
exceptions, not to, directly or indirectly, (i) sell, grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock or file a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the foregoing or (ii) enter into any swap or
other agreement or transaction that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock, without the prior written consent
of the Representative, for a period of 180 days after the date of this
Prospectus. After such time, 2 million shares of Common Stock (1.95 million
shares of Common Stock if the over-allotment option is exercised) will be
eligible for sale pursuant to Rule 144 promulgated under the Securities Act. See
"Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price of the Common Stock offered hereby
will be determined by negotiations among the Company, the Selling Stockholder
and the Representative and may not be indicative of the market price for the
Common Stock after the Offering. The market price for shares of the Common Stock
may be volatile and may fluctuate based upon a number of factors, including,
without limitation, business performance, news announcements or changes in
general economic and market conditions. See "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution of $5.51
per share in the net tangible book value of the Common Stock from the initial
public offering price. See "Dilution."
ABSENCE OF PAYMENT OF DIVIDENDS
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings for
use in the operation and growth of its business and does not anticipate paying
any cash dividends in the foreseeable future. See "Dividend Policy."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 900,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $7 per share, are estimated to be $4.7 million after deducting
the estimated underwriting discounts and commissions and the expenses of the
Offering. The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered by the Selling Stockholder hereby.
The net proceeds of the Offering will be used by the Company to repay a
portion of existing indebtedness and for general corporate purposes, including
working capital.
Of the net proceeds to the Company from the Offering, approximately $3.8
million will be used to repay a portion of the amount outstanding under two
revolving lines of credit (the "Credit Facilities") held by Far East National
Bank ("Far East Bank") and approximately $900,000 will be used for general
corporate purposes, including working capital. The Credit Facilities bear an
interest rate of prime plus 1.0 to 1.5 percent, mature on October 31, 1996 and
provide for a maximum of $6.5 million, of which $5.3 million was outstanding as
of June 30, 1996. The proceeds from the Credit Facilities were used for
inventory purchases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Pending the foregoing uses, the Company intends to invest the net proceeds
of the Offering in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
Since inception, the Company has not declared or paid any cash dividends on
its capital stock. The Company currently intends to retain any future earnings
for funding growth and, therefore, does not anticipate paying any cash dividends
in the foreseeable future. Additionally, the Company's Credit Facilities contain
covenants restricting the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
9
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at March 31, 1996 and as adjusted to give effect to the Offering (at an
assumed offering price of $7.00 per share) and the application of the net
proceeds thereof. See "Use of Proceeds." This table should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS ADJUSTED
-----------
ACTUAL
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Total Short-Term Debt(1)............................................................. $ 7,309 $ 3,509
----------- -----------
----------- -----------
Long-Term Debt:
Note payable, net of current portion(2)............................................ 4,293 4,293
Mortgage, net of current portion(3)................................................ 933 933
Other, net of current portion(4)................................................... 652 652
----------- -----------
Total Long-Term Debt............................................................... $ 5,878 $ 5,878
----------- -----------
----------- -----------
Stockholder's Equity (Deficit):
Common stock....................................................................... $ 21 $ 30
Additional paid in capital......................................................... 386 5,077
Retained deficit................................................................... (625) (625)
----------- -----------
Total Stockholder's Equity (Deficit)............................................. (218) 4,482
----------- -----------
Total Capitalization............................................................. $ 5,660 $ 10,360
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Short-term debt includes Credit Facilities that bear an interest rate of
prime plus 1.0 to 1.5 percent and current portions of long-term debt and
capitalized leases.
(2) This debt consists of a note payable to a financial institution used to
purchase aircraft, secured by a customer note receivable.
(3) This debt consists of a mortgage for the Company's headquarters and
warehouse in Irvine, California.
(4) Other debt consists of notes payable for equipment, inventory and
automobiles and capitalized amounts outstanding under various capitalized
leases associated with the Company's facilities.
10
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1996, was $(218,000) or approximately $(0.10) per share. "Net tangible book
value per share" represents the amount of the Company's stockholders' equity
(deficit), less intangible assets, divided by the number of shares of Common
Stock outstanding. At March 31, 1996, the Company had no intangible assets.
After giving effect to the sale of the 900,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $7.00 per
share, and after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company, the Company's pro forma net tangible
book value at March 31, 1996 would have been $4,482,000 or $1.49 per share. This
represents an immediate increase in pro forma net tangible book value of $1.59
per share to the existing stockholder and an immediate dilution in net tangible
book value of $5.51 per share to new investors purchasing Common Stock in the
Offering. The following table illustrates the foregoing information with respect
to dilution to new shareholders on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 7.00
Net tangible book value per share before the Offering..................... $ (0.10)
Increase per share attributable to new investors.......................... 1.59
Pro forma net tangible book value per share after the Offering.............. 1.49
--------- ---------
Dilution per share to new investors......................................... $ 5.51
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the differences between the existing stockholder and the purchasers of shares in
the Offering (at an assumed initial public offering price of $7.00 per share)
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder (1).......................... 2,100,000 70% $ 407,000 6.1% $ 0.19
New investors (1)................................. 900,000 30 6,300,000 93.9 7.00
------------- ----- ------------- --------- -----
Total......................................... 3,000,000 100% $ 6,707,000 100% $ 2.24
------------- ----- ------------- --------- -----
------------- ----- ------------- --------- -----
</TABLE>
- ------------------------
(1) The 100,000 shares sold by the existing stockholder will reduce the number
of shares held by the existing stockholder to 2 million or 67% and increase
the number of shares held by new investors to 1 million or 33%.
The underwriters have the option to purchase 150,000 shares (100,000 shares
from the Company and 50,000 shares from the existing stockholder) of Common
Stock to cover over-allotments, if any, in connection with the Registrant's
sale of the Common Stock.
Assuming the underwriters exercise the over-allotment option, the number of
shares held by the existing stockholder will be reduced to 1.95 million or
63% and the number of shares held by new investors will increase to 1.15
million or 37%.
11
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended
December 31, 1994 and 1995 have been derived from the Consolidated Financial
Statements as audited by Arthur Andersen LLP, independent public accountants.
The selected financial data presented below as of and for the three month
periods ended March 31, 1995 and 1996 have been derived from the unaudited
consolidated financial statements of the Company, which in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the results of operations for such periods.
The selected financial data presented below should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $16,369 $22,652 $4,621 $4,636
Cost of sales.............................................. 11,809 18,476 3,892 3,767
Gross profit............................................... 4,560 4,176 729 869
Selling and administrative expenses........................ 3,582 3,961 842 1,110
Income (loss) from operations.............................. 978 215 (113) (241)
Interest expense, net...................................... 278 622 125 142
Net income (loss).......................................... 208 (215) (168) (371)
Net income (loss) per share................................ 0.10 (0.10) (0.08) (0.18)
Shares used in computing net income (loss) per share....... 2,100,000 2,100,000 2,100,000 2,100,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
MARCH 31,
-----------
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 251 $ 868 $ 14
Restricted cash................................................................ 105 301 778
Working capital (deficit)...................................................... 124 (152) (462)
Total assets................................................................... 5,011 16,015 16,006
Total debt..................................................................... 2,537 12,731 13,187
Total stockholder's equity (deficit)........................................... 368 153 (218)
</TABLE>
12
<PAGE>
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 "Selected Financial Data" and the Company's Consolidated
Financial Statements and the related notes thereto which are included elsewhere
in this Prospectus.
GENERAL
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
June 1996.
The Company's sales have increased from $2.6 million in 1992, to $7.2
million in 1993, $16.4 million in 1994, $22.7 million in 1995, and $4.6 million
for the first quarter of 1996. Of 1995 sales, approximately $6.5 million
resulted from the sale of two whole aircraft (with engines) to one customer.
Excluding the whole aircraft transaction, sales in 1995 would have been $16.2
million.
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, commissions to outside sales representatives and an inventory provision
for damaged and obsolete products. Product costs consist of the acquisition
costs of the products and any costs associated with repairs, maintenance and
certification.
Net sales and gross profit depend in large measure on the volume and mix of
aircraft parts delivered from the Company to its customers. Sales and gross
profit can be impacted by 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 and consignment agreements because the Company does not
incur costs associated with carrying owned inventory. However, sales from
consignment and marketing agreements are not as profitable as sales from bulk
inventory purchases.
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
The following table sets forth certain information relating to the Company's
operations for the three months ended March 31 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales......................................... $ 4,621 100.0% $ 4,636 100.0%
Cost of sales..................................... 3,892 84.2 3,767 81.3
--------- ------------- --------- -------------
Gross profit.................................... 729 15.8 869 18.7
Selling and administrative expenses............... 842 18.2 1,110 23.9
--------- ------------- --------- -------------
Income from operations............................ (113) (2.4) (241) (5.2)
Interest expense, net............................. 125 2.7 142 3.1
Net loss.......................................... (168) (3.6) (371) (8.0)
</TABLE>
NET SALES. Net sales for the three months ended March 31, 1995 and for the
three months ended March 31, 1996 remained relatively stable at $4.6 million.
13
<PAGE>
COST OF SALES. Cost of sales decreased from $3.9 million for the three
months ended March 31, 1995 to $3.8 million for the three months ended March 31,
1996, a decrease of $100,000 or 2.6%. The decrease was attributable to improved
pricing on inventory parts as a result of bulk inventory purchases during the
last quarter of 1995 and general cost reduction efforts.
GROSS PROFIT. Gross profit increased from $729,000 for the three months
ended March 31, 1995 to $869,000 for the three months ended March 31, 1996, an
increase of $140,000, or 19.2%. Gross profit margin increased from 15.8% for the
three months ended March 31, 1995 to 18.7% for the three months ended March 31,
1996. The increase in gross profit margin was attributable to lower product
acquisition costs and a favorable shift in product mix to higher margin
inventory.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased from $842,000 for the three months ended March 31, 1995 to $1.1
million for the three months ended March 31, 1996, an increase of $258,000 or
30.6%. The increase was attributable to increases in the number of marketing and
support personnel and in travel and insurance expenses.
LOSS FROM OPERATIONS. Loss from operations increased from $113,000 for the
three months ended March 31, 1995 to $241,000 for the three months ended March
31, 1996, an increase of $128,000 or 113%. This increase was attributable to
increases in the Company's selling and administrative expenses as discussed
above.
INTEREST EXPENSE, NET. Interest expense increased from $125,000 for the
three months ended March 31, 1995 to $142,000 for the three months ended March
31, 1996, an increase of $17,000 or 13.6%. The increase was attributable to an
increase in the average borrowings outstanding on the Credit Facilities during
1996.
NET LOSS. Net loss increased from $(168,000) for the three months ended
March 31, 1995 to $(371,000) for the three months ended March 31, 1996, an
increase of 121%. This increase was attributable to increases in the Company's
selling and administrative expenses and interest expenses as discussed above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information relating to the Company's
operations for the year ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales............................................................ $ 16,369 100.0% $ 22,652 100.0%
Cost of sales........................................................ 11,809 72.1 18,476 81.6
--------- --------- --------- ---------
Gross profit......................................................... 4,560 27.9 4,176 18.4
Selling and administrative expenses.................................. 3,582 21.9 3,961 17.5
--------- --------- --------- ---------
Income from operations............................................... 978 6.0 215 0.9
Interest expense, net................................................ 278 1.7 622 2.7
Net income (loss).................................................... 208 1.3 (215) (0.9)
</TABLE>
NET SALES. Net sales increased from $16.4 million for the year ended
December 31, 1994 to $22.7 million for the year ended December 31, 1995, an
increase of $6.3 million, or 38.4%. This increase was primarily the result of
the whole aircraft sale for $6.5 million noted above. Net sales, excluding the
whole aircraft transaction discussed above, for the year ended December 31,
1995, would have been $16.2 million, a decrease of $200,000 or 1.2% compared to
the year ended December 31, 1994. This decrease was attributable to lower sales
volume with smaller airlines in the Mideast/Africa region as a result of the
Company's emphasis on developing relationships with larger airlines. See
"General."
COST OF SALES. Cost of sales increased from $11.8 million for the year
ended December 31, 1994 to $18.5 million for the year ended December 31, 1995,
an increase of $6.7 million or 56.8%. This increase was primarily the result of
the aircraft sale, at a cost of $5.5 million, as noted above. Cost of sales
14
<PAGE>
excluding the whole aircraft transaction discussed above were $13 million for
the year ended December 31, 1995. This represents an increase of $1.2 million,
or 10.2%, compared to the year ended December 31, 1994. The increase was
attributable to increased sales to certain of the Company's customers. See
"General."
GROSS PROFIT. Gross profit decreased from $4.6 million, or 27.9% for the
year ended December 31, 1994, to $4.2 million, or 18.4% for the year ended
December 31, 1995. The gross profit margin decreased, in part, as a result of
the whole aircraft sale noted above, on which the Company realized a 15% gross
profit margin. Gross profit margin excluding the whole aircraft transaction
discussed above, for the year ended December 31, 1995, would have been 19.6%, a
decrease of 8.3% compared to the year ended December 31, 1994. The decline was
attributable to increased discounts and reduced margins on sales to certain
customers. See "General" and "Cost of Sales."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consist primarily of management compensation, professional fees, consulting
expense and travel expenses. The Company's selling and administrative expenses
increased from $3.6 million for the year ended December 31, 1994 to $4 million
for the year ended December 31, 1995, an increase of $400,000, or 11.1%. The
increase was attributable to selling costs, primarily travel and entertainment
costs, incurred in completing the whole aircraft transaction described above.
Without these costs, selling and administrative costs would have been consistent
between 1994 and 1995. See "General."
INCOME FROM OPERATIONS. As a result of the above, income from operations
decreased from $978,000 for the year ended December 31, 1994 to $215,000 for the
year ended December 31, 1995, a decrease of $763,000 or 78%. The decrease
reflects the lower gross profit margins realized in 1995 compared to 1994 and an
increase in selling and administrative expenses.
INTEREST EXPENSE, NET. Interest expense increased from $278,000, or 1.7% of
net sales for the year ended December 31, 1994 to $622,000, or 2.7% of net sales
for the year ended December 31, 1995. The increase in interest expense was due
to an increase in the lines of credit, notes to financial institutions and notes
to corporations secured by inventory.
NET INCOME (LOSS). Net income decreased from $208,000 for the year ended
December 31, 1994 to a net loss of $215,000 for the year ended December 31,
1995, a decrease of $423,000 or 203%. This decrease was attributable to an
increase in selling and administrative expenses and interest expense discussed
above. See "Gross profit," "Selling and administrative expenses," and "Interest
expense."
LIQUIDITY AND CAPITAL RESOURCES
From inception to 1995, the Company was financed primarily with its cash
flow from operations and financing activities. The Company had cash and cash
equivalents of $251,000, $868,000 and $14,000 as of December 31, 1994, 1995 and
March 31, 1996, respectively. The Company had restricted cash of $105,000,
$301,000 and $778,000 as of December 31, 1994, 1995 and March 31, 1996,
respectively. As of December 31, 1994 and 1995 and March 31, 1996, $1.1 million,
$10.1 million and $400,000, respectively, of cash was provided by financing
activities. Restricted cash is required for one of the Credit Facilities and for
letters of credit issued to certain vendors.
The Company's primary uses of cash, to date, have been for purchases of
inventory and the repayment of indebtedness. Cash flows used in investing
activities was ($225,000), ($1.3 million) and ($189,000) for 1994, 1995 and the
three months ended March 31, 1996, respectively.
The Company's Credit Facilities provide working capital of up to $6.5
million with interest at prime plus 1.0 to 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
Credit Facilities expire on October 31, 1996. The Company is currently
negotiating with the financial institution to extend its revolving Credit
Facilities.
15
<PAGE>
Far East Bank has a fully perfected security interest against all assets of
ADI in addition to a personal guarantee from Mr. Bakhit, the Company's Chief
Executive Officer, and his wife. Following consummation of the Offering, the
Bank has indicated that it will consider terminating such guarantee.
The Credit Facilities provide for the suspension of the Credit Facilities
and repayment of all debt (i) in the event of a material adverse change in the
Company's financial condition, (ii) if the lender believes the prospect of
payment or performance of the indebtedness is impaired, or (iii) upon a change
of control. In addition, the Credit Facilities require mandatory repayments from
excess cash flow. Substantially all of the Company's assets are pledged as
collateral for amounts borrowed. At December 31, 1995 and for the three months
ended March 31, 1996, the Company was in compliance with all of its requirements
under the Credit Facilities.
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. In addition, to the extent the Company decides to expand its
existing facilities, the Company would require additional capital. Although the
Company believes that the net proceeds from the Offering, together with
available cash, 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 acceptable terms, if at all.
The contemplated repayment of indebtedness with the net proceeds of the
Offering is expected to significantly improve the Company's liquidity by
reducing the Company's interest expense, principal amount of the indebtedness
required to be repaid in the future and insurance costs associated with
international sales.
As part of its growth strategy, the Company intends to pursue acquisitions
of bulk inventories of aircraft parts. See "Business Strategy." Financing for
such acquisitions will be provided from operations and from the proceeds of the
amended Credit Facilities. The Company may also issue additional debt and/or
equity securities in connection with one or more of these acquisitions.
16
<PAGE>
BUSINESS
INTRODUCTION
The Company is a supplier of new and used aircraft parts to major airlines
worldwide. The Company locates, acquires and supplies parts for all major
aircraft. Additionally, the Company engages in consignment and marketing
agreements with major airlines, distributors and OEMs. The ability to sell parts
on a consignment basis allows the Company to offer a wide range of parts for
sale without the associated inventory risk and other financing costs associated
with owned inventory. Such parts include those manufactured by Boeing, McDonnell
Douglas, Airbus, Pratt & Whitney, General Electric, Rolls Royce and Lockheed.
Sales have increased from $2.6 million in 1992 to $7.2 million in 1993 to $16.4
million in 1994 to $22.7 million in 1995.
INDUSTRY OVERVIEW AND TRENDS
The worldwide aircraft parts market is highly fragmented and parts are
supplied by many types of suppliers, including airlines themselves, OEMs and
numerous distributors, fixed base operators, FAA-certified facilities, traders
and brokers. In May 1995, The Canaan Group Ltd., a management consulting firm
specializing in the aircraft and aerospace industry, estimated such aircraft
parts inventories at $45 billion. The Company believes that growth trends
outlined below could increase the size of the aircraft parts market while
decreasing the number of aircraft parts suppliers.
MARKET GROWTH. According to Boeing's 1996 Market Outlook, the worldwide
fleet of commercial airplanes and cargo jet airplanes is expected to grow from
11,066 airplanes at the end of 1995 to 23,080 airplanes by 2015, representing a
compound annual growth rate of 3.8%. Boeing estimates that revenue passenger
miles will exceed 4 trillion by 2015, an increase from less than 2 trillion in
1995. The Company believes such increase in revenue passenger miles is an
indication that aircraft will be flown more often and will need standard service
checks more frequently. Additionally, the growth rate of revenue passenger miles
for the international market will exceed the growth rate for the domestic
market. The Company believes that these factors have resulted and will continue
to result in increased demand for aircraft parts worldwide.
REDUCTION IN AIRLINE INVENTORIES. In the past, airlines controlled the
majority of the aircraft parts inventory. Today, airlines are reducing the size
of their parts inventories in an effort to reduce costs. These inventory
reductions have increased reliance by airlines on aftermarket suppliers to
provide parts that are difficult to obtain from manufacturers on a timely basis,
if at all. Manufacturers' lead time for delivery of aircraft parts averages 30
to 60 days. As airlines continue to demand time responsive inventory procurement
processes, responsibility for inventory storage and handling has shifted to
suppliers such as the Company. The Company believes that its access to a large
inventory of aircraft parts and its ability to deliver such parts to its
customers quickly and at a preferred price enable it to provide the services
sought by airlines in an effective manner.
INCREASE IN CONSIGNMENT AND MARKETING BUSINESS. In May 1995, the Canaan
Group Ltd. estimated the cost to suppliers of carrying the $45 billion of
aircraft parts inventory is $10 billion annually, and that airlines carry 80% of
such inventory. One method used by airlines to reduce costs associated with
excess inventory is to sell parts inventories through consignment and marketing
agreements with suppliers such as the Company. Such agreements enable an airline
to distribute its inventory to a large number of prospective inventory buyers
while enabling suppliers such as the Company to offer an extensive aircraft
parts inventory to its customers with a relatively low capital cost.
REDUCTION IN NUMBER OF SUPPLIERS. In an attempt to increase quality and
service, reduce purchasing costs and streamline purchasing decisions, airlines
have begun to form relationships with a few preferred suppliers. Over the last
few years, airlines have begun to reduce the number of aircraft parts suppliers
with whom they do business. In each case to date where the Company had an
established relationship with an airline, the Company was one of the parts
suppliers selected. The
17
<PAGE>
Company believes that due to its focus on cultivating relationships with its
customers and its reputation for service, quality and reliability, airlines will
continue to select the Company as one of their preferred aircraft parts
suppliers.
INCREASED EMPHASIS ON TRACEABILITY. Regulatory agencies have increased
documentation requirements for aircraft parts because of concern regarding
unapproved parts. In order for suppliers to trace all aircraft parts back to
their original source, suppliers have invested in sophisticated information
systems technology. The Company has developed and intends to maintain and
upgrade its information systems technology to ensure that all aircraft parts
bought and sold by the Company comply with applicable regulatory requirements.
BUSINESS STRATEGY
The Company's primary objective is to be a leading quality supplier of
aircraft parts to airlines worldwide and to increase income from its business
through the application of a comprehensive business strategy combining various
customer service, marketing, operating and growth objectives.
CUSTOMER SERVICE. The Company intends to continue to market and develop its
(i) access to an extensive aircraft parts inventory, (ii) ability to deliver
parts quickly to customers at a preferred price, and (iii) emphasis on
engineering and implementing creative solutions to locate and deliver hard-to-
find aircraft parts. Additionally, the Company plans to continue to cultivate
relationships with its customers to assure that it retains its position on its
customers' preferred list of suppliers. The Company has historically incurred
high levels of selling and administrative expenses, primarily travel and
entertainment, associated with establishing and maintaining customer
relationships. A key component of the Company's business strategy is to
implement a program to effectively contain such expenses.
EMPHASIS ON QUALITY. The Company will continue to emphasize its reputation
for quality, including its track record of consistently meeting FAA regulations
by maintaining and, if necessary, introducing safeguards to ensure the quality
of its aircraft parts. Such safeguards include employing two FAA-licensed
Airframe and Powerplant Inspectors and contracting with two FAA-licensed
Designated Airworthiness Representatives and an outside quality assurance
consultant. Each of these specialists verifies the airworthiness of aircraft
parts bought and sold by the Company.
FOCUS ON MAJOR AIRLINES. The Company plans to continue targeting major
airlines, many of which are currently customers of the Company. Major airlines
generally have larger aircraft fleets that generate a greater demand for
aircraft parts than smaller airlines. Consequently, relationships with major
airlines requires the expenditure of fewer resources to generate comparable
sales volume and corresponding revenue with margins of profitability comparable
to sales to several smaller airlines. Additionally, major airlines typically
have greater financial resources than smaller airlines, resulting in reduced
credit risk to the Company and a greater likelihood of timely payment. The
Company's relationships with major airlines also provide the Company with
increased access to such airlines' aircraft parts inventories, which are
generally larger than those of smaller airlines.
INCREASE ACCESS TO INVENTORY. The Company plans to increase its accessible
inventory by (i) bulk purchasing from airlines and manufacturers of aircraft
parts, (ii) entering into new consignment and marketing agreements with
airlines, manufacturers and overhaul facilities, and (iii) purchasing large
items, such as engines and whole aircraft, on an opportunistic basis. The
Company will seek to secure aircraft parts where it believes demand is greater
than supply. Presently, the Company believes that demand exceeds supply in the
aircraft parts market for aircraft models ranging from five to thirty years old.
GLOBAL EXPANSION. The Company's goal is to service customers domestically
and worldwide, and to become a major aircraft parts supplier for the
fastest-growing markets, particularly the Far East. For the year ended December
31, 1995, 80% of the Company's sales were to international customers. The
Company plans to continue to take advantage of the growing international market
through the
18
<PAGE>
use of its multilingual sales staff and by maintaining existing relationships
and establishing new relationships in the following regions: Pacific Rim/Far
East/South Pacific, Europe, Latin/South America, Middle East/Africa and North
America.
PRODUCTS AND SERVICES
GENERAL. The Company is in the business of buying and selling a broad range
of aircraft parts. The Company's access to an extensive inventory is a result of
its worldwide relationships with airlines, manufacturers and suppliers of
aircraft parts, numerous consignment and marketing agreements with airlines and
manufacturers, and owned inventory of new and overhauled aircraft parts. The
general categories of aircraft parts are as follows: (i) rotable; (ii)
repairable; and (iii) expendable.
A rotable is a part which is removed periodically as dictated by an
operator's maintenance procedures or on an as-needed basis and is typically
repaired or overhauled and re-used an indefinite number of times. A subset of
rotables is life-limited parts. A life-limited rotable has a designated number
of allowable flight hours and/or cycles (one take-off and landing generally
constitutes one cycle) after which it is rendered unusable.
A repairable is similar to a rotable except that it can only be repaired a
limited number of times before it must be discarded. Typically, rotables and
repairables must be removed from an airplane and rebuilt or checked based upon
the number of hours in flight. Rotables and repairables must be repaired at
FAA-approved repair facilities.
An expendable is generally a part which is used and not thereafter repaired
for further use. Consequently, all expendable inventory is new. Expendable
inventory cannot be used for less than its useful life and then transferred to a
new airplane; once an expendable part is removed from an airplane, it must be
discarded.
Currently, the Company supplies aircraft parts for Boeing 737, 747, and 767
series, Airbus 300 series, McDonnell Douglas 80, DC and MD series aircraft.
These aircraft parts represent a significant portion of the aircraft parts used
by major airlines, which represent the majority of the Company's current
customers. Although not required by the FAA to do so, the Company maintains on
staff two FAA-licensed Airframe and Powerplant Inspectors, contracts with two
FAA-licensed Designated Airworthiness Representatives and retains an outside
quality assurance consultant to perform annual audits, all of whom verify the
airworthiness of aircraft parts bought and sold by the Company. The Company
believes that its strict adherence to FAA and manufacturer guidelines has been a
contributing factor to the Company's growth in customer base and revenues. In
fact, the rejection rate for aircraft parts shipped by the Company is less than
1%. The Company does not repair parts, and therefore is generally not subject to
the risks associated with the repair business.
The Company also from time to time, on an opportunistic basis, purchases for
resale high price items, such as engines and whole aircraft.
CLIENT SERVICES. Client services are conducted through the Company's
Irvine-based multilingual direct sales force, as well as through its sales force
in the Company's overseas offices whose primary responsibility is to sell
aircraft parts and manage customers. Sales personnel travel extensively to
develop strong personal relationships, improve communications and remain current
on regional market data. Salespeople are assigned to specific airlines and are
supported by a group of regional agents who assist in countries such as
Argentina, India, Indonesia, Israel, Malaysia, New Zealand, Philippines,
Singapore and Turkey where local representation is critical to purchase order
processing and timely payment. The Company also maintains a two-person office in
London to coordinate European sales and support.
Each sales representative is supported by additional personnel who research
and locate parts ordered by customers. The Company's sales staff, through its
knowledge of the industry and its
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relationships throughout the world, is able to engineer and implement creative
solutions to locate and deliver hard-to-find aircraft parts, a quality that the
Company believes sets it apart from its competitors.
Upon the Company's receipt from a customer of a telephone or fax inquiry for
a specific aircraft part, the Company first checks for availability of the part
within its owned inventory, then against inventory on consignment and inventory
covered by an exclusive marketing agreement (together the "Accessible
Inventory"). If the part is not owned or part of the Accessible Inventory, the
Company will attempt to source the part through cultivated industry contacts or
the Inventory Locator Service-TM- ("ILS"), a domestic, industry-wide database of
aircraft parts. Even if the aircraft part is within the Company's owned or
Accessible Inventory, the Company will assure that it is achieving full market
value for each part sold by researching alternate sources for availability and
competing prices for the part prior to quoting the end user.
Management plans to continue to grow the core business of sourcing aircraft
parts to end users, and develop better relationships with existing customers.
This should allow new relationships to grow and increase the exposure of its
sales staff to the needs and desires of the customers. Coincident with the
growth of the core business, additional marketing and consignment opportunities
should continue to expand the Company's consignment and marketing business.
CONSIGNMENT AND MARKETING BUSINESS. In addition to supplying parts from
owned inventory, the Company also supplies parts through (i) consignment
agreements, pursuant to which the Company takes actual possession of a vendor's
inventory, and (ii) exclusive marketing agreements, pursuant to which the
Company markets vendors' inventory which remains in the vendors' possession.
Through consignment agreements or marketing agreements with an aircraft parts
supplier such as the Company, customers, such as airlines and manufacturers, are
able to distribute their aircraft parts to a larger number of prospective
inventory buyers. This allows the customer to maximize the value of its
inventory while at the same time freeing up resources that can be focused on its
core business. Consignment and marketing arrangements also enable the Company to
offer for sale aircraft parts from a much larger inventory at minimal capital
cost to the Company.
When an inquiry is made with respect to a particular aircraft part, the
Company will query its inventory databases for availability before researching
market value. A party who has entered into consignment or marketing agreements
with the Company (the "Contract Party") typically establishes an asking price
for each part subject to the agreement, but may allow the Company to lower such
price to assure a sale. If the Company feels it must offer a part for below the
price established by the Contract Party, it will first seek the Contract Party's
permission. In most instances, the Contract Party has entered into the
relationship with the Company because it believes the Company has the expertise
necessary to attract the best price for each part. Further, the Company is paid
a percentage of the sales price as compensation for its consignment and
marketing services. Consequently, the Contract Party, understanding that the
Company's own best interest is in achieving the highest price possible for the
sale of the part, will usually give consideration to a recommendation by the
Company to sell a particular aircraft part at a price below the Contract Party's
established price.
The Company has several consignment and marketing agreements with airlines
and OEMs. No single consignment or marketing agreement is material to the
Company as a whole.
INVENTORY PURCHASES. The Company acquires aircraft parts by bidding on the
inventory of (i) airlines that are eliminating certain portions of their parts
inventory due to retirement of an aircraft type from their fleet, downsizing of
operations or the dissolution of their businesses and (ii) OEMs and overhaul
facilities who seek to sell excess inventory. Management believes that its main
source of aircraft parts for acquisition during the next few years will be from
such purchases. The Company also purchases specific items from time to time,
such as engines and whole aircraft, on an opportunistic basis.
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<PAGE>
SYSTEMS
Due to concerns regarding unapproved aircraft parts, regulatory authorities
have increased the level of documentation required for aircraft parts. This
requirement has, in turn, been extended by end users to the suppliers of the
parts. The sophistication required to track the history of an inventory
consisting of thousands of aircraft parts is considerable and has required
companies to invest significantly in information systems technology. The high
cost of increased technology has made entry into and survival in the aircraft
parts supply market increasingly difficult and expensive. However, the Company
has previously invested in systems technology and intends to continue to
maintain its information systems to allow it to effectively compete in the
aircraft parts supply market.
The most commonly used database available in the aircraft part supply
industry is ILS. ILS is a service that assists in searching for and locating
aircraft parts. Once a potential purchaser locates a part owned by the Company
or available through the Company's Accessible Inventory, the purchaser contacts
the Company to confirm price, condition and availability information. As of June
30, 1996, the Company listed 204,000 items on ILS of which the Company owned
approximately 80,000 with the remaining 124,000 constituting the Accessible
Inventory. Additionally, ILS is one of the tools used by the Company to locate
aircraft parts to which it does not have direct access.
The Company also uses a software packages called Quick Quote-TM-. This
computer database creates requests for quote sheets, quotations, sales orders,
purchase orders, repair order and invoices. Quick Quote also provides extensive
part number databases and inventory control. The system, specifically designed
for the aircraft parts industry, is comprehensive and can originate and complete
a transaction without additional software. The Company also uses advanced
methods of electronic data exchange including Spec 2000, AIRS, BComm-TM-, and
the Internet. The Company is currently in the initial development stage of
creating a customized inventory identification and search system for the
Internet. Further, the Company offers customers a remote link directly into the
Company's databases to improve communications with each Contract Party.
COMPETITION
The aircraft parts supply industry is highly competitive. The Company
encounters substantial competition from (i) direct competitors such as The Ages
Group, The Memphis Group, AAR Corp. and Aviation Sales Company and (ii) indirect
competitors such as OEMs, which include aircraft manufacturers such as Boeing,
Airbus and McDonnell Douglas, as well as component manufacturers such as Bendix,
Menasco and Goodrich. Competition is generally based on availability of product,
reputation, customer service, price and lead time. Although some of the
Company's competitors have access to greater financial and other resources than
the Company, the Company believes that by focusing on service, product integrity
and the cultivation of relationships with customers worldwide, it is well suited
to compete effectively in its industry.
GOVERNMENT REGULATION
Both domestic and foreign entities regulate products sold by the Company.
The following discussion summarizes the required regulatory approvals and
clearances relating to the Company's products and highlights the Company's
specific efforts to conform to such requirements.
The FAA is charged with regulating the manufacture, repair and operation of
all aircraft and aircraft equipment operated within the United States. The FAA
monitors safety by promulgating regulations regarding proper maintenance of
aircraft and aircraft equipment. Similar regulations exist in foreign countries.
All aircraft and aircraft equipment must be monitored on a continual basis and
periodically inspected in order to ensure the product's proper condition and
maintenance. Regulatory agencies specify maintenance, repair and inspection
procedures for aircraft and aircraft equipment. These procedures must be
performed by certified technicians in approved repair facilities on set
schedules. All parts must conform to prescribed regulations and be certified
prior to being installed on an aircraft. When necessary, the Company uses FAA
and/or Joint Aviation Authority certified repair
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<PAGE>
shops to repair or certify parts for distribution. Because regulations are
subject to modification, the Company carefully monitors the FAA and industry
trade organizations in order to assess any potentially adverse impact on the
Company caused by changes in the regulations.
Documentation of spare parts is of paramount importance in the aircraft
parts industry. To ensure that all parts are properly documented and thus
traceable to their original source, the Company requires that its suppliers
comply with all documentation requirements set forth by regulatory agencies.
Documentation may include: (i) an invoice or purchase order from an approved
supplier, (ii) a "teardown" report noting actions taken during the last repair,
(iii) a signed maintenance release from a certified airline or repair facility
that repaired the aircraft spare part and a statement from an inspector
verifying that the part was repaired in accordance with proper workmanship, and
using proper materials and methods.
EMPLOYEES
As of June 30, 1996, the Company employed 50 persons located in the United
States, one employee in Chile, two employees in England, two employees in Jordan
and one employee in New Zealand. The Company also has a total of six agents
located in Argentina, India, Israel, Italy, Malaysia and Turkey. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
FACILITIES
As of June 30, 1996, the Company owned one facility in Irvine, California,
leased 5,000 square feet of additional warehouse space in Irvine, California and
leased a facility in England. The Company's owned facility in Irvine, California
houses the Company's corporate headquarters and consists of 16,000 square feet,
9,200 of which are used for warehouse space, with the remaining space used for
sales administration and accounting offices. The England facility is used as a
sales office.
Additional warehouse space will be needed in the future to accommodate new
consignment and company-owned inventory. The Company is currently in the process
of securing such additional warehouse space.
LEGAL PROCEEDINGS
On February 14, 1996, an action was brought in the United States District
Court for the Central District of California by a customer of the Company
against the Company, its wholly owned subsidiary, ADI Consignment Sales, Inc.
("ADICS"), and Mr. Bakhit. The action arises out of a dispute relating to a
consignment agreement between ADICS and the customer whereby ADICS agreed to
hold certain aircraft parts inventory of such customer on consignment for sale.
The complaint generally alleges causes of action arising out of breach of
contract. For its damages, the plaintiff is claiming $3,518,000, interest,
attorneys fees, punitive damages and treble damages under R.I.C.O.
The Company has filed a motion challenging the legal viability of the
R.I.C.O. cause of action. Discovery has only recently commenced and the Company
has not yet had the opportunity to obtain discovery regarding the substance of
the claims. The Company, ADICS and Mr. Bakhit deny liability for the remaining
claims brought by the customer and intend to vigorously defend such claims.
There can be no assurance as to the ultimate outcome of this litigation, and an
adverse outcome would likely have a material adverse effect on the Company.
In addition, the Company is involved in certain other 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.
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<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
EXECUTIVE AGE TITLE
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Osamah S. Bakhit 46 Chief Executive Officer, President and Director
Mark W. Ashton 45 Chief Financial Officer, Vice President, Finance
and Director
Jeffrey G. Ward 37 Executive Vice President
Dennis R. Lewis 55 Senior Vice President, Technical Operations
Victor Buendia 37 Vice President, Latin and South American Sales
Elizabeth Morgan 33 Vice President, Consignment and Domestic Sales
Laura M. Birgbauer 28 Chief Accounting Officer and Treasurer
Bruce H. Haglund 45 Secretary and Director
</TABLE>
OSAMAH S. BAKHIT, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr.
Bakhit has over 15 years of aircraft experience. Currently, Mr. Bakhit oversees
the sales and operations of the Company. Prior to forming the Company in 1988,
Mr. Bakhit was CEO of Bakhit Enterprises, a company where he purchased heavy
construction vehicles and material for General Enterprise Company. Mr. Bakhit
worked for General Enterprise Company in Amman, Jordan, where he managed overall
construction operations. His duties included supervising the construction of
Queen Alia International Airport in Jordan. Mr. Bakhit has a B.S. in chemistry
from the University of California, Irvine.
MARK W. ASHTON, CHIEF FINANCIAL OFFICER, VICE PRESIDENT, FINANCE AND
DIRECTOR. Mr. Ashton has over 4 years of aircraft experience and over 18 years
of general accounting and finance experience. Currently, Mr. Ashton oversees the
Company's finance and accounting departments. Prior to joining the Company in
1996, Mr. Ashton was Controller/Chief Accounting Officer for Optical Science
Company (1993-1996), CR & R Inc. (1991-1993) and Tracor Flight Systems, Inc.
(1987-1991) where he oversaw accounting and finance reporting and developed and
implemented state-of-the art software systems. Mr. Ashton has a B.S. in
accounting/finance from the University of Southern California/California State
University, Fullerton and an M.B.A. from Pepperdine University.
JEFFREY G. WARD, EXECUTIVE VICE PRESIDENT. Mr. Ward has over 15 years of
aircraft experience and currently oversees and lends leadership to the extensive
sales team at ADI. Prior to joining the Company in 1993, Mr. Ward was a sales
representative for Systems Industries. He was a sales consultant to the
aerospace industry with key accounts including the U.S. military and major
aerospace manufacturers. Prior to Systems Industries, Mr. Ward was a sales
representative for Eastman Kodak Company. Mr. Ward also served in the United
States Marine Corps for seven years as a naval aviator. Mr. Ward has a B.A. in
economics from University of Virginia.
DENNIS R. LEWIS, SENIOR VICE PRESIDENT, TECHNICAL OPERATIONS. Mr. Lewis
joined ADI in 1994, and currently oversees the technical operations and quality
control of the Company. His 25 years of aviation experience includes serving as
Vice President of Marketing and Business Planning for Royal Aerospace and Vice
President of Operations and a pilot at Worldways Canada Ltd., where his duties
included managing the maintenance facility. Mr. Lewis holds several aviation
credentials, along with a technological diploma in mechanical engineering and a
teaching degree with the North York Board of Education, Canada.
VICTOR BUENDIA, VICE PRESIDENT, LATIN AND SOUTH AMERICAN SALES. Mr. Buendia
has 4 years of aircraft experience. Mr. Buendia is responsible for all of the
Company's major Latin America accounts. Prior to joining the Company in 1993,
Mr. Buendia owned and operated his own business and brings valuable marketing,
communication and sales skills to ADI.
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<PAGE>
ELIZABETH MORGAN, VICE PRESIDENT, CONSIGNMENT AND DOMESTIC SALES. Ms.
Morgan has 12 years of experience in aircraft parts sales. Ms. Morgan is
responsible for the operations and sales of the Company's consignment sales.
Prior to joining the Company in 1994, Ms. Morgan was the Director of Marketing
for Pacific Airmotive, a division of UNC. In addition, Ms. Morgan has worked for
several companies in aircraft sales.
LAURA M. BIRGBAUER, CHIEF ACCOUNTING OFFICER AND TREASURER. Ms. Birgbauer
has over four years of public accounting experience. Currently, Ms. Birgbauer
manages the Company's finance and accounting departments and is responsible for
financial reporting and the Company's treasury. From 1991 to 1996, Ms. Birgbauer
was an Experienced Senior Auditor for Arthur Andersen LLP, where she supervised
audit engagements and prepared and reviewed financial reports. Ms. Birgbauer has
a B.S. in accounting from the University of Southern California.
BRUCE H. HAGLUND, SECRETARY AND DIRECTOR. Mr. Haglund has served as General
Counsel of the Company since 1992 and has served as Secretary and a director of
the Company from June 1996 to present. Since 1994, Mr. Haglund has been a
partner in the law firm Gibson, Haglund & Johnson. Prior to 1994, Mr. Haglund
was a principal in the law firm of Phillips, Haglund, Hadden & Jeffers. From
1984 to 1991, he was a partner at the law firm of Gibson & Haglund. Mr. Haglund
is also the Secretary and a member of the Board of Directors of GB Foods
Corporation and the Secretary of Metalclad Corporation, both public companies
traded on the Nasdaq SmallCap Market. Mr. Haglund has a J.D. from the University
of Utah College of Law.
BOARD OF DIRECTORS
The Company's Board of Directors is currently comprised of Messrs. Bakhit,
Ashton and Haglund. Shortly following the consummation of the Offering, the
Company intends to appoint not less than two directors who are neither officers
nor employees of the Company. The Company has three classes of directors which
are elected for staggered terms of three years. The initial terms of each class
expire at the annual meetings of stockholders in 1997 (Class I), 1998 (Class II)
and 1999 (Class III). Mr. Haglund is a Class I director, Mr. Ashton is a Class
II director and Mr. Bakhit is a Class III director.
Upon the appointment of the additional directors, the Board of Directors
will establish an Audit Committee and a Compensation Committee. The Audit
Committee will be responsible for recommending to the Board of Directors the
engagement of the independent auditors of the Company and reviewing with the
independent auditors the scope and results of the audits, the internal
accounting controls of the Company, audit practices and the professional
services furnished by the independent auditors. The Compensation Committee will
be responsible for reviewing and approving all compensation arrangements for
officers of the Company, and will also be responsible for administering the 1996
Stock Option Plan. See "Employee Benefit Plans -- 1996 Stock Option Plan."
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. It is expected that directors who are not
employees of the Company will receive a fee of $1,000 for each board or
committee meeting attended in person and a fee of $500 for each board or
committee meeting attended via conference call. All directors are reimbursed for
expenses incurred in connection with attendance at board or committee meetings.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation received in the year ended
December 31, 1995 by (i) the Company's Chief Executive Officer and (ii) the
Company's two other most highly compensated executive officers whose salary plus
bonus exceeded $100,000 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)
- --------------------------------------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Osamah S. Bakhit 1995 --(1) -- 21,000(2)
Chief Executive Officer and Director
Jeffrey G. Ward 1995 116,473 21,000 --
Executive Vice President
Dennis R. Lewis 1995 103,200 25,000 --
Senior Vice President, Technical Operations
</TABLE>
- ------------------------
(1) Mr. Bakhit did not receive a salary for 1995, but did borrow approximately
$328,700 from the Company for personal use. See "Certain Transactions."
(2) Compensation consists of automobile lease payments and automobile insurance
paid by the Company.
EMPLOYMENT AGREEMENTS
The Company intends to enter into an employment agreement with Mr. Bakhit
(the "Bakhit Agreement") pursuant to which Mr. Bakhit will serve as the Chairman
of the Board, Chief Executive Officer and President. The Bakhit Agreement will
provide for an annual base salary of $400,000. In addition, the Company will
provide Mr. Bakhit with an automobile of his choice at the expense of the
Company, and all employee benefits established for Company employees. The Bakhit
Agreement will also provide Mr. Bakhit with incentive compensation under an
Executive Compensation Plan that the Company intends to adopt (the "Executive
Compensation Plan"), which will provide for the contribution to a senior
management bonus pool of a certain percentage of the Company's earnings before
taxes (not to exceed $250,000 annually), to be allocated in accordance with the
determination of the Board of Directors. In addition, Mr. Bakhit will be
entitled to bonus compensation declared at the discretion of the Board of
Directors from time to time in an amount not to exceed $150,000 per calendar
year. Under the Bakhit Agreement, Mr. Bakhit will be granted certain options to
purchase shares of Common Stock.
The Bakhit Agreement will contain nonsolicitation, noncompetition and
confidentiality provisions. The Bakhit Agreement will provide for an initial
term expiring on December 31, 2001. However, the Bakhit Agreement will be
automatically renewed for a new five-year term on the expiration date unless
canceled upon 90 days written notice by the Company or by Mr. Bakhit or unless
sooner terminated pursuant to the terms of the Bakhit Agreement.
The Company intends to enter into an employment agreement with Mr. Ashton
(the "Ashton Agreement") pursuant to which Mr. Ashton will serve as the
Company's Vice President-Finance and Chief Financial Officer. The Ashton
Agreement will provide for an annual base salary of $120,000. In addition, the
Company will agree to provide Mr. Ashton all employee benefits established for
Company employees. The Ashton Agreement will also provide Mr. Ashton with
incentive compensation under the Executive Compensation Plan in an amount to be
determined by the Board of Directors. Under the Ashton Agreement, Mr. Ashton
will be granted certain options to purchase shares of Common Stock.
The Ashton Agreement will contain nonsolicitation, noncompetition and
confidentiality provisions. The Ashton Agreement will provide for an initial
term expiring on December 31, 1999. However,
25
<PAGE>
the Ashton Agreement will be automatically renewed for a new three year term on
the expiration date unless canceled upon 90 days written notice by the Company
or by Mr. Ashton or unless sooner terminated pursuant to the terms of the Ashton
Agreement.
The Company intends to enter into an employment agreement with Mr. Ward (the
"Ward Agreement") pursuant to which Mr. Ward will serve as the Company's
Executive Vice President. The Ward Agreement will provide for an annual base
salary of $120,000. In addition, the Company will provide Mr. Ward all employee
benefits established for Company employees. The Ward Agreement will also provide
Mr. Ward with incentive compensation under the Executive Compensation Plan in an
amount to be determined by the Board of Directors. Under the Ward Agreement, Mr.
Ward will be granted certain options to purchase shares of Common Stock. In
addition, Mr. Ward will be entitled to commission on sales to certain customers
identified in the Ward Agreement equal to 1.25% of such sales.
The Ward Agreement will contain nonsolicitation, noncompetition and
confidentiality provisions. The Ward Agreement will provide for an initial term
expiring on December 31, 1999. However, the Agreement will be automatically
renewed for a new three year term on the expiration date unless canceled upon 90
days written notice by the Company or by Mr. Ward or unless sooner terminated
pursuant to the terms of the Ward Agreement.
EMPLOYEE BENEFIT PLANS
THE 1996 STOCK PLAN
On July 10, 1996, prior to the consumation of the Offering the board of
directors of the Company (the "Board") adopted, and the then stockholder
approved, the Aviation Distributors Incorporated 1996 Stock Option and Incentive
Plan (the "1996 Stock Plan"), which provides for the grant of various types of
stock-based compensation to non-employee directors, selected employees and
independent contractors of the Company and its subsidiaries. The 1996 Stock Plan
provides for the issuance of a maximum of 2,856,000 shares of Common Stock
pursuant to awards under the 1996 Stock Plan.
The purposes of the 1996 Stock Plan are to promote the success of the
Company's business by providing incentives to those non-employee directors,
employees and independent contractors who are or will be responsible for such
success; to facilitate the ownership of Common Stock by such individuals,
thereby increasing their proprietary interests in the Company's business and to
assist the Company in attracting and retaining non-employee directors, employees
and independent contractors with experience and ability.
The 1996 Stock Plan is designed to comply with the requirements for
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code of 1986, as amended and the conditions for exemption from the short-swing
profit recovery rules under Rule 16b-3 of the Exchange Act. The summary that
follows is subject to the actual terms of the 1996 Stock Plan.
The 1996 Stock Plan provides for the granting of stock options ("Options"),
including incentive stock options ("ISOs") and non-qualified stock options
("NSOs"). Options granted under the 1996 Stock Plan may be accompanied by stock
appreciation rights ("SARs") or limited stock appreciation rights ("LSARs"), or
both ("Rights"). Rights may also be granted independently of Options. The Plan
also provides for the granting of restricted stock and restricted stock units
("Restricted Awards"), dividend equivalents and other stock- and cash-based
awards. The 1996 Stock Plan also permits the plan's administrator to make loans
to participants in connection with the grant of awards, on terms and conditions
determined solely by the plan administrator. All awards will be evidenced by an
agreement (an "Award Agreement") setting forth the terms and conditions
applicable thereto.
26
<PAGE>
PLAN ADMINISTRATION
The 1996 Stock Plan is administered by the Board, and from and after the
consumation of the Offering will be administered by a committee of the Board,
the composition of which will at all times satisfy the provisions of Rule 16b-3
(such Board or committee sometimes referred to herein as the "Plan
Administrator"). Members of the Board or committee are not entitled to receive
remuneration for administering the 1996 Stock Plan. The 1996 Stock Plan provides
that no member of the Board or committee will be liable for any action or
determination taken or made in good faith with respect to the 1996 Stock Plan or
any Option, Right, Restricted Award or other award granted thereunder.
Subject to the terms of the 1996 Stock Plan, the Plan Administrator has the
right to grant awards to eligible recipients and to determine the terms and
conditions of Award Agreements, including the vesting schedule and exercise
price of such awards, and the effect, if any, of a change in control of the
Company on such awards.
SHARES SUBJECT TO THE 1996 STOCK PLAN
The 2,856,000 shares reserved for issuance under the 1996 Stock Plan may be
authorized but unissued shares of Common Stock or shares which have or may be
reacquired by the Company in the open market, in private transactions or
otherwise. Generally speaking, shares subject to an award which is forfeited,
cancelled, exchanged, surrendered or terminated, without distribution of the
shares subject thereto, will again be available for issuance under the 1996
Stock Plan.
The 1996 Stock Plan provides that, in the event of changes in the Common
Stock by reason of a merger, reorganization, recapitalization, common stock
dividend, stock split or similar change, the Plan Administrator will make
appropriate adjustments in the aggregate number of shares available for issuance
under the 1996 Stock Plan, the purchase price to be paid or the number of shares
issuable upon the exercise thereafter of any Option previously granted and in
the purchase price to be paid or the number of shares issuable pursuant to other
awards. The Plan Administrator will have the discretion to make other
appropriate adjustments to awards to prevent dilution of shares or other
devaluations of such awards.
ELIGIBILITY
Discretionary grants of Options, Rights, Restricted Awards and dividend
equivalents, and loans in connection therewith may be made to any non-employee
director, employee or any independent contractor of the Company or its direct
and indirect subsidiaries who is determined by the Plan Administrator to be
eligible for participation in the 1996 Stock Plan, consistent with the purposes
of the Plan.
EXERCISE OF OPTIONS
Options will vest and become exercisable over the exercise period, at such
times and upon such conditions as the Plan Administrator determines and sets
forth in the Award Agreement. The Plan Administrator may accelerate the
exercisability of any outstanding Option at such time and under such
circumstances as it deems appropriate. Options that are not exercised within ten
years from the date of grant, however, will expire without value. Options are
exercisable during the optionee's lifetime only by the optionee. The Award
Agreements will contain provisions regarding the exercise of Options following
termination of employment with or service to the Company, including terminations
due to the death, disability or retirement of an award recipient, or upon a
change in control of the Company. In addition to the terms and conditions
governing NSOs, ISOs awarded under the 1996 Stock Plan must comply with the
requirements set forth in Section 422 of the Code.
The purchase price of Common Stock subject to the exercise of an Option will
be as determined by the Plan Administrator and may be adjusted in accordance
with the antidilution provisions described in "Shares Subject to the 1996 Stock
Plan," above. Upon the exercise of any Option, the purchase price may be fully
paid in cash, by delivery of Common Stock previously owned by the optionee equal
in value to the exercise price, by means of a loan from the Company, or by
having shares of Common
27
<PAGE>
Stock with a fair market value (on the date of exercise), equal to the exercise
price withheld by the Company or sold by a broker-dealer under qualifying
circumstances (or in any combination of the foregoing).
STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS
Unless the Plan Administrator determines otherwise, a SAR or LSAR (1)
granted in tandem with an NSO may be granted at the time of grant of the related
NSO or at any time thereafter or (2) granted in tandem with an ISO may only be
granted at the time of grant of the related ISO. A SAR will be exercisable only
to the extent the underlying Option is exercisable.
Upon exercise of a SAR the grantee will receive, with respect to each share
subject thereto, an amount equal in value to the excess of (1) the fair market
value of one share of Common Stock on the date of exercise over (2) the grant
price of the SAR (which in the case of a SAR granted in tandem with an Option
will be the exercise price of the underlying Option, and which in the case of
any other SAR will be the price determined by the Plan Administrator).
Upon exercise of a LSAR, the grantee will receive, with respect to each
share subject thereto, automatically upon the occurrence of a change in control
of the Company, an amount equal in value to the excess of (1) the change in
control price (which in the case of a LSAR granted in tandem with an ISO will be
the fair market value) of one share of Common Stock on the date of such change
in control over (2) the grant price of the LSAR (which in the case of a LSAR
granted in tandem with an Option will be the exercise price of the underlying
Option, and which in the case of any other LSAR will be the price determined by
the Plan Administrator). In the case of a LSAR granted to a participant,
however, who is subject to the reporting requirements of Section 16(a) of the
Exchange Act (a "Section 16 Individual"), such Section 16 Individual will only
be entitled to receive such amount if the LSAR has been outstanding for at least
six (6) months as of the date of the change in control.
With respect to SARs and LSARs that are granted in tandem with Options, each
such SAR and LSAR will terminate upon the termination or exercise of the
pertinent portion of the related Option, and the pertinent portion of the
related Option will terminate upon the exercise of any such SAR or LSAR.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
A Restricted Stock award is an award of Common Stock subject to such
restrictions on transferability and other restrictions as the Plan Administrator
may impose at the date of grant or thereafter. Restrictions on shares may lapse
at such times, under such circumstances or otherwise, as determined by the Board
or the committee. Unless an Award Agreement provides otherwise, a Restricted
Stock recipient will have all of the rights of a shareholder during the
restriction period including the right to vote Restricted Stock and the right to
receive dividends.
If the recipient of an award of Restricted Stock terminates employment with
or service to the Company during the applicable restriction period, Restricted
Stock and any accrued but unpaid dividends or dividend equivalents that are at
that time still subject to restrictions will be forfeited (unless the Plan
Administrator has provided otherwise in an Award Agreement).
Recipients of Restricted Stock Units will receive cash or shares of Common
Stock, as determined by the Plan Administrator, upon expiration of the deferral
period specified for such Restricted Stock Units in the related Award Agreement.
Restricted Stock Units may also be subject to such restrictions as the Plan
Administrator imposes at the time of grant or thereafter, which restrictions may
lapse at the expiration of the deferral period (or at an earlier or later time
in the Plan Administrator's discretion).
Upon termination of employment with or service to the Company during any
applicable deferral period to which forfeiture conditions apply, or upon failure
to satisfy any other conditions precedent to
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<PAGE>
the delivery of cash or Common Stock pursuant to a Restricted Stock Unit award,
all such units that are subject to deferral or restriction will be forfeited
(unless the applicable Award Agreement or the Plan Administrator provides
otherwise).
DIVIDEND EQUIVALENTS
Dividend equivalents may be granted which relate to Options, Rights or other
awards under the 1996 Stock Plan, or may be granted as freestanding awards. The
Board or the committee may provide, at the grant date or thereafter, that
dividend equivalents will be paid or distributed to an awardee when accrued with
respect to Options, Rights or other awards under the 1996 Stock Plan, or will be
deemed to have been reinvested in additional shares of Common Stock (or such
other investment vehicles as the Plan Administrator may specify). Dividend
equivalents which are not freestanding will be subject to all conditions and
restrictions applicable to the underlying awards to which they relate.
OTHER STOCK- OR CASH-BASED AWARDS
The Plan Administrator may grant Common Stock as a bonus, or in lieu of
Company commitments to pay cash under other plans or compensatory arrangements
of the Company. The Board and the committee may also grant other stock- or
cash-based awards as an element of or supplement to any other award under the
1996 Stock Plan. Such awards may be granted with value and payment contingent
upon the attainment of specified individual or Company (or subsidiary) financial
goals, or upon any other factors designated by the Plan Administrator. The Plan
Administrator may determine the terms and conditions of such awards at the date
of grant or thereafter.
AMENDMENT; TERMINATION
The Board or the committee may terminate or amend the 1996 Stock Plan at any
time, except that stockholder approval is required for any amendment which (i)
increases the maximum number of shares of Common Stock which may be issued under
the 1996 Stock Plan (except for adjustments made to prevent share dilutions and
award devaluations), (ii) changes the class of individuals eligible to
participate in the 1996 Stock Plan, or (iii) extends the term of the 1996 Stock
Plan or the period during which any Option, Right, Restricted Award or other
award may be granted or any Option or Right may be exercised; but such approval
is needed only to the extent required by Rule 16b-3 with respect to the material
amendment of any employee benefit plan maintained by the Company. Termination or
amendment of the 1996 Stock Plan will not affect previously granted Options,
Rights, Restricted Awards or other grants, which will continue in effect in
accordance with their terms.
PAYMENT OF TAXES
The Company is authorized to withhold from any award granted, any payment
relating to an award under the Plan (including from a distribution of Common
Stock), or any other payment to a grantee, amounts of withholding and other
taxes due in connection with the award, and to take such other action as the
Plan Administrator may deem advisable to enable the Company and grantees to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to the award. This authority includes the right to withhold
or receive Common Stock or other property and to make cash payments in respect
thereof in satisfaction of a grantee's tax obligations.
CERTAIN FEDERAL INCOME TAX EFFECTS
The following discussion of certain relevant federal income tax effects
applicable to Options, Rights, Restricted Awards and dividend equivalents
granted under the 1996 Stock Plan is a summary only, and reference is made to
the Code for a complete statement of all relevant federal tax provisions.
Holders of NSOs, ISOs, Rights and dividend equivalents should consult their tax
advisors before realization of any such awards, and holders of Common Stock
pursuant to awards hereunder should consult their tax advisors before disposing
of any shares of Common Stock acquired pursuant to such awards. Section 16
Individuals should note that somewhat different rules than those described below
may apply to them.
29
<PAGE>
NON-QUALIFIED STOCK OPTIONS
A participant will generally not be taxed upon the grant of an NSO. Rather,
at the time of exercise of such NSO, the participant will recognize ordinary
income for federal income tax purposes in an amount equal to the excess of the
fair market value of the shares purchased over the Option price. The Company
will generally be entitled to a tax deduction at such time and in the same
amount that the participant recognizes ordinary income.
If shares acquired upon exercise of a NSO (or upon untimely exercise of an
ISO) are later sold or exchanged, then the difference between the sales price
and the fair market value of such Common Stock on the date that ordinary income
was recognized with respect thereto will generally be taxable as long-term or
short-term capital gain or loss (if the Common Stock is a capital asset of the
participant) depending upon whether the Common Stock has been held for more than
one year after such date.
INCENTIVE STOCK OPTIONS
A participant will not be taxed upon the grant of an ISO or upon its timely
exercise. Exercise of an ISO will be timely if made during its term and if the
participant remains an employee of the Company or a subsidiary at all times
during the period beginning on the date of grant of the ISO and ending on the
date three months before the date of exercise (or one year before the date of
exercise in the case of a disabled employee). Exercise of an ISO will also be
timely if made by the legal representative of a participant who dies (i) while
in the employ of the Company or a subsidiary or (ii) within three months after
termination of employment (or one year in the case of a disabled employee). The
tax consequences of an untimely exercise of an ISO will be determined in
accordance with the rules applicable to NSOs. (See "Certain Federal Income Tax
Effects -- Non-qualified Stock Options," above.)
If shares acquired pursuant to a timely exercised ISO is later disposed of,
the participant will, except as noted below with respect to a "disqualifying
disposition," recognize long-term capital gain or loss (if the Common Stock is a
capital asset of the employee) equal to the difference between the amount
realized upon such sale and the Option price. The Company, under these
circumstances, will not be entitled to any federal income tax deduction in
connection with either the exercise of the ISO or the sale of such Common Stock
by the participant.
If, however, a participant disposes of shares acquired pursuant to the
exercise of an ISO prior to the expiration of two years from the date of grant
of the ISO or within one year from the date such stock is transferred to him
upon exercise (a "disqualifying disposition"), generally (i) the participant
will realize ordinary income at the time of the disposition in an amount equal
to the excess, if any, of the fair market value of the shares at the time of
exercise (or, if less, the amount realized on such disqualifying disposition)
over the Option exercise price, and (ii) if the Common Stock is a capital asset
of the participant, any additional gain recognized by the participant will be
taxed as short-term or long-term capital gain. In such case, the Company may
claim a federal income tax deduction at the time of such disqualifying
disposition for the amount taxable to the participant as ordinary income. Any
capital gain recognized by the participant will be long-term capital gain if the
participant's holding period for the shares at the time of disposition is more
than one year; otherwise it will be short-term.
The amount by which the fair market value of the Common Stock on the
exercise date of an ISO exceeds the Option price will be an item of adjustment
for purposes of the "alternative minimum tax" imposed by Section 55 of the Code.
EXERCISE WITH SHARES
According to a published ruling of the Internal Revenue Service, a
participant who pays the Option price upon exercise of a NSO, in whole or in
part, by delivering shares of Common Stock already owned by him will recognize
no gain or loss for federal income tax purposes on the shares surrendered, but
otherwise will be taxed according to the rules described above for NSOs. (See
"Certain Federal Income Tax Effects -- Non-qualified Stock Options," above.)
With respect to shares
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<PAGE>
acquired upon exercise which are equal in number to the shares surrendered, the
basis of such shares will be equal to the basis of the shares surrendered, and
the holding period of the shares acquired will include the holding period of the
shares surrendered. The basis of additional shares received upon exercise will
be equal to the fair market value of such shares on the date which governs the
determination of the participant's ordinary income, and the holding period for
such additional shares will commence on such date.
The Treasury Department has issued proposed regulations that, if adopted in
their current form, would appear to provide for the following rules with respect
to the exercise of an ISO by surrender of previously owned shares of corporation
stock. If the shares surrendered in payment of the exercise price of an ISO are
"statutory option stock" (including stock acquired pursuant to the exercise of
an ISO) and if the surrender constitutes a "disqualifying disposition" (as would
be the case, for example, if, in satisfaction of the Option exercise price, the
Company withholds shares which would otherwise be delivered to the participant),
any gain realized on such transfer will be taxable to the optionee, as discussed
above. Otherwise, when shares of the Company's stock are surrendered upon
exercise of an ISO, in general, (i) no gain or loss will be recognized as a
result of the exchange, (ii) the number of shares received that is equal in
number to the shares surrendered will have a basis equal to the shares
surrendered and (except for purposes of determining whether a disposition will
be a disqualifying disposition) will have a holding period that includes the
holding period of the shares exchanged, and (iii) any additional shares received
will have a zero basis and will have a holding period that begins on the date of
the exchange. If any of the shares received are disposed of within two years of
the date of grant of the ISO or within one year after exercise, the shares with
the lowest basis will be deemed to be disposed of first, and such disposition
will be a disqualifying disposition giving rise to ordinary income as discussed
above.
RIGHTS
A grant of SARs or LSARs has no federal income tax consequences at the time
of such grant. Upon the exercise of SARs or LSARs (other than a Free Standing
LSAR), the amount of any cash and the fair market value as of the date of
exercise of any shares of Common Stock received is taxable to the participant as
ordinary income. With respect to a Free Standing LSAR, however, a recipient
should be required to include as taxable ordinary income on the change in
control date an amount equal to the amount of cash that could be received upon
the exercise of the LSAR, even if the LSAR is not exercised until a date
subsequent to the change in control date. The Company will generally be entitled
to a deduction at the same time and equal to the amount included in the
participant's income. Upon the sale of the shares acquired by the exercise of
SARs or LSARs, participants will recognize capital gain or loss (assuming such
Common Stock was held as a capital asset) in an amount equal to the difference
between the amount realized upon such sale and the fair market value of the
Common Stock on the date that governs the determination of the participant's
ordinary income.
RESTRICTED AWARDS
In the case of a Restricted Award, a participant generally will not be taxed
upon the grant of such an award, but, rather, the participant will recognize
ordinary income in an amount equal to (i) the fair market value of Common Stock
at the time the shares become transferable or are otherwise no longer subject to
a substantial risk of forfeiture (as defined in the Code), minus (ii) the price,
if any, paid by the participant to purchase such Common Stock. The Company will
be entitled to a deduction at the time when, and in the amount that, the
participant recognizes ordinary income. However, a participant may elect (not
later than 30 days after acquiring such shares) to recognize ordinary income at
the time the restricted shares are awarded in an amount equal to their fair
market value at that time, notwithstanding the fact that such shares are subject
to restrictions and a substantial risk of forfeiture. If such an election is
made, no additional taxable income will be recognized by the participant at the
time the restrictions lapse. The Company will be entitled to a tax deduction at
the time when, and to the extent that, income is recognized by the participant.
However, if shares in respect of which such
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<PAGE>
election was made are later forfeited, no tax deduction is allowable to the
participant for the forfeited shares, and the Company will be deemed to
recognize ordinary income equal to the amount of the deduction allowed to the
Company at the time of the election in respect of such forfeited shares.
DIVIDEND EQUIVALENTS
A participant will not be taxed upon the grant of a dividend equivalent, but
will instead recognize ordinary income in an amount equal to the value of the
dividend equivalent at the time the dividend equivalent becomes payable to the
participant. The Company will be entitled to a deduction at such time and in
such amount as the participant recognizes ordinary income with respect to the
dividend equivalent.
No Options have been granted by the Company pursuant to the 1996 Stock Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law ("GCL") provides that a company may
indemnify its directors and officers as to certain liabilities. The Company's
Certificate of Incorporation and Bylaws provide for the indemnification of its
directors and officers to the fullest extent permitted by law, and the Company
intends to enter into separate indemnification agreements with each of its
directors and officers to effectuate these provisions and to purchase directors
and officers liability insurance. The effect of such provisions is to indemnify,
to the fullest extent permitted by law, the directors and officers of the
Company against all costs, expenses and liabilities incurred by them in
connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company.
The Company's indemnification agreements with each of its officers,
directors and key employees contain provisions which are in some respects
broader than the specific indemnification provisions contained in the GCL. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors of officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them, as to which
they could be indemnified, and to obtain director's and officer's insurance, if
available on reasonable terms. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
At present, the Company is not aware of any pending litigation involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
The Company loaned approximately $328,700 to Mr. Bakhit for personal use in
December 1995. The loan is payable in annual principal installments of $65,744
through December 31, 2000. The loan bears an interest rate of 6%, payable from
time to time on the outstanding balance. As of June 30, 1996, approximately
$328,700 principal amount was outstanding on the loan.
Mr. Bakhit, the Chief Executive Officer, and his wife have personally
guaranteed the Credit Facilities with Far East Bank. Following consummation of
the Offering, Far East Bank has indicated that it will consider terminating such
guarantee.
PRINCIPAL AND SELLING STOCKHOLDER
The following table and the notes thereto set forth information, as of the
date of this Prospectus, relating to beneficial ownership (as defined in Rule
13d-3 of the Securities Exchange Act of 1934) of the Company's equity securities
by the Selling Stockholder, the Company's directors and executive officers and
the Company's directors and executive officers as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP
OF COMMON STOCK OF COMMON STOCK OF COMMON STOCK
PRIOR TO THE OFFERING TO BE SOLD AFTER THE OFFERING(2)
------------------------- ----------------- -------------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------------------------- ----------- ------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Osamah S. Bakhit (1)................. 2,100,000 100% 100,000 2,000,000 67%
All directors and executive officers
as a group (4 persons).............. 2,100,000 100% 100,000 2,000,000 67%
</TABLE>
- ------------------------
(1) The mailing address of Mr. Bakhit is c/o Aviation Distributors Incorporated,
1 Wrigley Drive, Irvine, California 92618. Mr. Bakhit is the Chief Executive
Officer, President and a director of the Company.
(2) Assumes that the over-allotment option is not exercised.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have 3,000,000
shares of Common Stock outstanding. Of these shares, the 900,000 shares sold by
the Company and the 100,000 shares sold by the Selling Stockholder in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, unless held by an "affiliate" of the Company (as that
term is defined below). Any such affiliate will be subject to the resale
limitations of Rule 144 adopted under the Securities Act. The remaining
2,000,000 shares of Common Stock (1,950,000 shares of Common Stock if the
over-allotment is exercised) outstanding are "restricted securities" for
purposes of Rule 144 and are held by Mr. Bakhit, who is considered an
"affiliate" of the Company within the meaning of Rule 144. Restricted securities
may not be resold in a public distribution except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption
therefrom, including the exemptions provided by Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell within any three-month period a number of shares beneficially
owned for at least two years that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume of the outstanding shares of Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company during the 90 days
preceding a proposed sale by such person and who has beneficially owned
"restricted securities" for at least three years is entitled to sell such
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<PAGE>
shares under Rule 144 without regard to the volume, manner of sale or notice
requirements. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly or indirectly controls, or is controlled by, or is under common
control with such issuer.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors before the date the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons, including the Stock Plan.
Securities issued in reliance on Rule 701 are restricted securities and,
beginning 90 days after the date of this Prospectus, may be sold by persons
other than affiliates subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements. Such securities will be subject, however, to any
lockup agreements related to such securities.
The Company and the Selling Stockholder have agreed, subject to certain
exceptions, not to, directly or indirectly, (i) sell, grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock or file a
registration statement under the Securities Act with respect to the foregoing or
(ii) enter into any swap or other agreement or transaction that transfers, in
whole or in part, the economic consequence of ownership of the Common Stock,
without the prior written consent of CRI, for a period of 180 days after the
date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock.
No predictions can be made as to the effect, if any, that future sales of shares
of Common Stock, and options to acquire shares of Common Stock, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales may occur, could have a material
adverse effect on the market price of the Common Stock. See "Risk Factors --
Future Sales by Principal Stockholder; Shares Eligible for Future Sale."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Certificate") and Bylaws ("Bylaws") is a summary and is qualified in its
entirety by the provisions of the Certificate and Bylaws, copies of which have
been filed as exhibits to the Registration Statement.
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $.01 par value, and 3,000,000 shares of Preferred Stock, $.01 par
value.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore. See "Dividend Policy."
Holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of the Company's liabilities and the
liquidation preference, if any, of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
Common Stock into any other securities and there are no redemption provisions
with respect to such shares. All of the outstanding shares of Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. The transfer agent for the Common Stock is
American Stock Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors, without further action by the stockholders, may
issue shares of the Preferred Stock in one or more series and may fix or alter
the relative, participating, optional or other rights, preferences, privileges
and restrictions, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
preferences and conversion rights, and the description of and number of shares
constituting any wholly unissued series of Preferred Stock. The Board of
Directors, without further stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. No shares of Preferred Stock presently are
outstanding and the Company currently has no plans to issue shares of Preferred
Stock. The issuance of Preferred Stock in certain circumstances may have the
effect of delaying or preventing a change of control of the Company without
further action by the stockholders, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price and the voting and other rights of the holders of Common
Stock.
CERTAIN CORPORATE PROVISIONS
Upon the consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the GCL. In general, this statute prohibits a
publicly held Delaware corporation from engaging under certain circumstances in
a "business combination" with an "interested stockholder," for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless (i) prior to the date at which the stockholder became an
interested stockholder the Board of Directors approved either the business
combination or the transaction which resulted in the person becoming an
interested stockholder, (ii) the stockholder owned more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent) held on or subsequent to the date of
the business combination. An "interested stockholder" is a person who, (i) owns
15% or more of the corporation's voting stock or (ii) is an affiliate or
associate of the
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<PAGE>
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the prior three years. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
Although the Company is a Delaware corporation, under Section 2115 of the
California Corporations Code, certain provisions of the California's
Corporations Code apply to the Company because of the residence of the Company's
stockholders and the extent of its business operations and assets in California.
These provisions include, among others, those pertaining to cumulative voting,
enforcement of certain rights by the California Attorney General, the directors'
standard of care, certain requirements for annual election and removal of
directors, limitations on sales of assets and mergers and stockholders' right to
inspect and copy the Company's stockholder's list. Certain of such provisions
may delay or prevent a change of control of the Company.
The Company's Certificate and Bylaws contain a number of provisions relating
to corporate governance and to the rights of stockholders. Certain of these
provisions may be deemed to have a potential "anti-takeover" effect in that such
provisions may delay or prevent a change of control of the Company. These
provisions include (a) the classification of the Board of Directors into three
classes, each class serving for staggered three years terms; (b) a provision
that stockholder action may be taken only at stockholder meetings; (c) the
authority of the Board of Directors to issue series of Preferred Stock with such
voting rights and other powers as the Board of Directors may determine; (d) a
provision that a vote of not less than two-thirds of the outstanding shares
entitled to vote thereon is required for an amendment to the Bylaws and to amend
provisions of the Certificate relating to (i) the classification of the Board of
Directors, (ii) the calling of special stockholder meetings and (iii) the
amendment of the Bylaws; and (e) notice requirements in the Bylaws relating to
nominations to the Board of Directors and to the raising of business matters at
stockholder meetings. See also "Risk Factors -- Control by Principal
Stockholder."
The Certificate provides that the Company is subject to the provision of
Section 302 of the GCL. In general, this statute allows any court of equitable
jurisdiction in the State of Delaware, upon proper application by the Company or
any of its creditors or stockholders, to order a meeting of creditors or
stockholders whenever a compromise or arrangement is proposed between the
Company and its creditors or the Company and its stockholders. Any compromise,
arrangement or reorganization of the Company that is approved by a majority in
number representing three-fourths in value of the creditors or stockholders, as
the case may be, and sanctioned by the court to which the application was made
shall be binding on all of the creditors or stockholders, as the case may be,
and the Company.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated is acting as Representative, have severally agreed to purchase from
the Company and the Selling Stockholder, and the Company and the Selling
Stockholder have agreed to sell to the Underwriters, the respective number of
shares of Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cruttenden Roth Incorporated...............................................
-----------------
Total.................................................................. 1,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions, and letters from the Company and its
respective counsel and the Company's independent certified public accountants.
The nature of the Underwriters' obligation is such that they are committed to
purchase and pay for all the shares of Common Stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a discount not in excess of $ per share to certain brokers and
dealers. After the initial public offering of the shares, the public offering
price and other selling terms may be changed by the Representative. No change in
such terms shall change the amount of proceeds to be received by the Company and
the Selling Stockholder as set forth on the cover page of this Prospectus.
The Company and the Selling Stockholder have granted an option to the
Underwriters, exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to an additional 100,000 shares and 50,000 shares,
respectively, of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
The Underwriters may exercise this option only to cover over-allotments, if any.
To the extent that the Underwriters exercise this option, each of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares of Common Stock in approximately the same proportion as set
forth in the above table.
The Company has agreed to issue to the Representative, for a total of $100,
warrants (the "Representative's Warrants") to purchase up to 100,000 shares of
Common Stock at an exercise price per share equal to 120% of the initial public
offering price. The Representative's Warrants are exercisable for a period of
four years beginning one year from the date of this Prospectus. The holders of
the Representative's Warrants will have no voting, dividend, or other
stockholder rights until the Representative's Warrants are exercised. In
addition, the Company has granted certain rights to the holders of the
Representative's Warrants to register the Representative's Warrants and the
Common Stock underlying the Representative's Warrants under the Securities Act.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the aggregate Price to Public (including with respect
to shares of Common Stock underlying the over-allotment option, if and to the
extent it is exercised) set forth on the front cover of this Prospectus for
expenses in connection with this offering, of which the sum of $30,000 has been
paid. The
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<PAGE>
Representative's expenses in excess of such allowance will be borne by the
Representative. To the extent that the expenses of the Representative are less
than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representative.
The Company has granted to the Representative a right of first refusal to
manage or co-manage certain public offerings or private placements of the
Company's debt or equity securities by the Company and certain stockholders. The
right of first refusal terminates upon the first to occur of (i) the date the
Company has completed an offering that the Representative has declined, or (ii)
the third anniversary of the closing date of the sale of Common Stock offered by
this Prospectus.
The Representative has advised the Company that it does not expect any sales
of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
Prior to this offering, there has been no established trading market for the
Common Stock. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined by negotiation among the Company and
the Representative. Among the factors considered in such negotiations were the
preliminary demand for the Common Stock, the prevailing market and economic
conditions, the Company's results of operations, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, an assessment of the Company's management, the
consideration of these factors in relation to the market valuation of comparable
companies in related businesses, the current condition of the markets in which
the Company operates, and other factors deemed relevant. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to this
offering at or above the initial public offering price.
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock have been passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom, Los Angeles,
California. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles,
California.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 1995 and
the related consolidated statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1994 and 1995 included in this Prospectus
and elsewhere in the registration statement of which this Prospectus is a part
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in such registration statement and the exhibits and
schedules thereto. For further information with respect to the Company or such
Common Stock, reference is made to such registration statement and the schedules
and exhibits filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or any other document are not necessarily
complete and, in each instance, reference is hereby made to the copy of such
contract or other document filed as an exhibit to such registration statement.
Such registration
38
<PAGE>
statement, including exhibits thereto, may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
at the following regional offices of the Commission: Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of all or any
part thereof may be obtained from the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the prescribed fees. The Commission also maintains a site on the
World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
39
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-3
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995
and for the three months ended March 31, 1995 and 1996 (unaudited)................... F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1994
and 1995 and for the three months ended March 31, 1996 (unaudited)................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995
and for the three months ended March 31, 1995 and 1996 (unaudited)................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Aviation Distributors Incorporated:
We have audited the accompanying consolidated balance sheet of AVIATION
DISTRIBUTORS INCORPORATED (a Delaware corporation) and subsidiaries as of
December 31, 1995, and the related consolidated statements of operations,
stockholder's equity (deficit) and cash flows for the years ended December 31,
1994 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviation Distributors
Incorporated and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the years ended December 31, 1994 and 1995
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
April 17, 1996 (except with
respect to the matters
discussed in Note 14,
as to which the date
is July 12, 1996)
F-2
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 867,721 $ 13,630
Restricted cash.......................................................... 301,175 778,393
Accounts receivable, net of allowance for doubtful accounts of $48,607 at
December 1995 and $40,907 at March 1996................................. 4,437,112 4,627,208
Other receivables........................................................ 141,287 116,588
Inventories.............................................................. 2,209,262 2,626,894
Current portion of notes receivable...................................... 1,466,224 1,511,543
Current portion of note receivable from officer.......................... 65,744 65,744
Prepaid expenses......................................................... -- 144,178
------------ -----------
Total current assets................................................... 9,488,525 9,884,178
------------ -----------
PROPERTY AND EQUIPMENT 1,663,378 1,711,406
Less -- Accumulated depreciation......................................... 170,140 183,650
------------ -----------
1,493,238 1,527,756
------------ -----------
Notes receivable, net of current portion................................... 4,674,491 4,292,744
Note receivable from officer, net of current portion....................... 262,974 262,974
Other assets............................................................... 95,465 38,364
------------ -----------
$ 16,014,693 $16,006,016
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Checks issued not yet presented for payment.............................. $ 574,888 $ 502,007
Accounts payable......................................................... 2,185,188 2,177,235
Accrued liabilities...................................................... 370,833 357,798
Lines of credit.......................................................... 4,667,784 5,414,431
Current portion of long-term debt........................................ 1,815,220 1,867,624
Current portion of capital lease obligations............................. 26,178 26,628
------------ -----------
Total current liabilities.............................................. 9,640,091 10,345,723
------------ -----------
Long-term debt, net of current portion..................................... 6,168,356 5,831,492
------------ -----------
Capital lease obligations, net of current portion.......................... 53,240 47,120
------------ -----------
Commitments and Contingencies
STOCKHOLDER'S EQUITY (DEFICIT):
Capital stock, par value of $.01, 10,000,000 shares authorized; 2,100,000
shares issued and outstanding........................................... 21,000 21,000
Additional paid in capital............................................... 386,000 386,000
Retained deficit......................................................... (253,994) (625,319)
------------ -----------
Total stockholder's equity (deficit)................................... 153,006 (218,319)
------------ -----------
$ 16,014,693 $16,006,016
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------ MARCH 31,
1994 1995 ----------------------------
-------------- -------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES.......................................... $ 16,368,967 $ 22,652,310 $ 4,620,978 $ 4,635,759
COST OF SALES...................................... 11,809,104 18,475,548 3,891,875 3,766,970
-------------- -------------- ------------- -------------
Gross profit................................... 4,559,863 4,176,762 729,103 868,789
SELLING AND ADMINISTRATIVE EXPENSES................ 3,581,822 3,961,449 842,518 1,109,488
-------------- -------------- ------------- -------------
Income (loss) from operations.................. 978,041 215,313 (113,415) (240,699)
OTHER EXPENSES (INCOME):
Interest expense, net............................ 278,425 621,699 124,645 142,265
Other expense (income)........................... 12,603 (88,233) -- (11,639)
Nonrecurring loss on settlement.................. 376,075 -- -- --
-------------- -------------- ------------- -------------
Income (loss) before provision (benefit) for
income taxes.................................. 310,938 (318,153) (238,060) (371,325)
PROVISION (BENEFIT) FOR INCOME TAXES............... 102,460 (103,320) (70,000) --
-------------- -------------- ------------- -------------
Net income (loss).............................. $ 208,478 $ (214,833) $ (168,060) $ (371,325)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Earnings (loss) per share.......................... $ .10 $ (.10) $ (.08) $ (.18)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Weighted average shares outstanding................ 2,100,000 2,100,000 2,100,000 2,100,000
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CAPITAL STOCK TOTAL
---------------------- ADDITIONAL STOCKHOLDER'S
NUMBER PAID RETAINED EQUITY
OF SHARES AMOUNT IN CAPITAL DEFICIT (DEFICIT)
----------- --------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............. 2,100,000 $ 21,000 $ 276,000 $ (247,639) $ 49,361
Capital contribution................... -- -- 110,000 -- 110,000
Net income............................. -- -- -- 208,478 208,478
----------- --------- -------------- ------------- -------------
Balance at December 31, 1994............. 2,100,000 21,000 386,000 (39,161) 367,839
Net loss............................... -- -- -- (214,833) (214,833)
----------- --------- -------------- ------------- -------------
Balance at December 31, 1995............. 2,100,000 21,000 386,000 (253,994) 153,006
Net loss............................... -- -- -- (371,325) (371,325)
----------- --------- -------------- ------------- -------------
Balance at March 31, 1996 (unaudited).... 2,100,000 $ 21,000 $ 386,000 $ (625,319) $ (218,319)
----------- --------- -------------- ------------- -------------
----------- --------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------ MARCH 31,
1994 1995 ------------------------
----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 208,478 $ (214,833) $ (168,060) $ (371,325)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Sale in exchange for note receivable.................... -- (6,617,406) -- --
Non-cash portion of nonrecurring loss on settlement..... 230,075 -- -- --
Depreciation and amortization........................... 91,972 87,628 11,258 13,510
Changes in assets and liabilities:
Accounts receivable, net.............................. (1,650,155) (707,814) 8,608 (190,096)
Other receivables..................................... (250,601) 109,314 (989,831) 24,700
Inventories........................................... (199,540) (1,833,509) (27,052) (350,689)
Other assets.......................................... (70,071) (44,919) (226,727) (87,076)
Checks issued not yet presented for payment........... 680,632 (105,744) 15,134 (72,881)
Accounts payable...................................... 29,273 908,668 843,176 (7,953)
Accrued liabilities................................... 34,769 327,167 (1,000) (13,035)
Income tax payable.................................... 105,330 (105,330) (70,000) --
----------- ----------- ----------- -----------
Net cash used in operating activities............... (789,838) (8,196,778) (604,494) (1,054,845)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (120,086) (1,257,103) (1,148,174) (48,028)
Principal payments of notes receivable.................... -- 482,691 -- 336,428
Borrowings given on notes receivable...................... -- (6,000) -- --
Borrowings given on note receivable from officer.......... -- (328,718) -- --
(Increase) decrease in restricted cash.................... (105,000) (196,175) 105,000 (477,218)
----------- ----------- ----------- -----------
Net cash used in investing activities............... (225,086) (1,305,305) (1,043,174) (188,818)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in lines of credit........................... 1,072,250 2,218,715 480,347 746,647
Borrowings on long-term debt.............................. 68,233 9,311,632 963,247 --
Principal payments of long-term debt...................... (9,272) (1,391,767) (10,308) (351,406)
Principal payments of capital lease obligations........... (9,120) (19,965) (3,504) (5,669)
Contributed capital....................................... 10,000 -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities........... 1,132,091 10,118,615 1,429,782 389,572
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 117,167 616,532 (217,886) (854,091)
Cash and cash equivalents at beginning of period............ 134,022 251,189 251,189 867,721
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 251,189 $ 867,721 $ 33,303 $ 13,630
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 275,210 $ 786,725 $ 101,180 $ 166,868
Income taxes............................................ 1,600 32,632 -- 20,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital contribution of inventory from an officer......... 100,000 -- -- --
Capital lease obligations for purchase of new equipment... 32,000 74,779 -- --
Inventory in exchange for a note payable.................. -- -- -- 66,944
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Aviation Distributors Incorporated ("ADI") and its subsidiaries (the
"Company") established operations in 1988, incorporated in the state of
California in 1992 and reincorporated in the state of Delaware in 1996 (see Note
14). The Company is a supplier, distributor and broker of commercial aircraft
parts and supplies. The Company distributes aircraft components for commercial
airlines worldwide.
For the years ended December 31, 1995 and 1994, approximately 80% and 77%,
respectively, of the Company's net sales were export sales. These sales were
primarily to France, Australia, Chile, Argentina, Switzerland, Turkey and
Jordan.
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, ADICSI and Aviation Distributors
(Europe) Ltd. All significant intercompany transactions have been eliminated in
consolidation.
INTERIM FINANCIAL DATA
The interim consolidated financial data as of March 31, 1996 and for the
three month periods ended March 31, 1995 and 1996 is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments, that,
in the opinion of management, are necessary to present fairly the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for a full fiscal year.
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 and one of the Company's lines of credit.
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 various methods 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
F-7
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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. Such gains or losses were not significant during the
years ended December 31, 1994 and 1995.
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 a reserve for
estimated product returns.
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."
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable based on
the estimated future cash flows (undiscounted and without interest charges).
SFAS No. 121 also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less costs to sell. The Company adopted SFAS No. 121 as of January 1,
1996, and the effect of adoption was not material to the financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies
have the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro forma disclosures of
net income or loss and earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company has not yet determined whether it will implement the fair value-based
accounting method or continue accounting for stock options under APB Opinion No.
25.
NOTE 2 -- NOTE RECEIVABLE FROM OFFICER:
Note receivable from officer of $328,718 is due in annual installments of
$65,744 (principal only) commencing on December 30, 1996 to December 2000 and
bears interest at six percent payable from time to time on the outstanding
balance.
NOTE 3 -- AIRCRAFT TRANSACTIONS:
During 1995, the Company purchased commercial aircraft and engines which
were subsequently sold in exchange for a note receivable (see Note 5) secured by
an irrevocable letter of credit provided by the customer. The Company purchased
the aircraft through proceeds from a note payable (see Note 8) to a financial
institution which is secured by the customer note receivable. This transaction
represents approximately 28 percent of the Company's 1995 sales (see Note 12).
NOTE 4 -- 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
F-8
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACCOUNTS RECEIVABLE: (CONTINUED)
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 allowance for
doubtful accounts as required.
NOTE 5 -- NOTES RECEIVABLE:
Notes receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Note receivable from a corporation, secured by a $7,980,000 Irrevocable Letter of
Credit, due in monthly installments of $166,250 (principal and interest) to August
1999 with an interest rate of 9.5 percent (see Note 3)............................. $ 6,134,715 $ 5,801,189
Note receivable from an individual.................................................. 6,000 3,098
------------- -------------
6,140,715 5,804,287
Less -- Current portion............................................................. 1,466,224 1,511,543
------------- -------------
$ 4,674,491 $ 4,292,744
------------- -------------
------------- -------------
</TABLE>
NOTE 6 -- PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Buildings....................................................... $ 1,087,834 $ 1,128,862
Computer equipment and software................................. 236,417 243,417
Machinery and equipment......................................... 172,072 172,072
Furniture and fixtures.......................................... 81,822 81,822
Auto............................................................ 85,233 85,233
------------- -------------
$ 1,663,378 $ 1,711,406
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LINES OF CREDIT:
The Company has revolving lines of credit with a financial institution,
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revolving line of credit, interest at prime rate (8.5 percent at December 31, 1995)
plus 1.5 percent due monthly, principal due October 31, 1996, secured by
substantially all of the Company's assets, except cash, maximum borrowings are
$4,000,000......................................................................... $ 3,181,671 $ 3,074,038
Revolving line of credit, interest at prime rate (8.5 percent at December 31, 1995)
plus one percent due monthly, principal due October 31, 1996, secured by
substantially all of the Company's assets, except cash, maximum borrowings are
$2,000,000......................................................................... 1,284,200 1,914,312
Revolving line of credit, interest at 7.5 percent due monthly, principal due May 7,
1996, secured by restricted cash at December 31 is $201,913, maximum borrowings are
$500,000........................................................................... 201,913 426,081
------------- -------------
$ 4,667,784 $ 5,414,431
------------- -------------
------------- -------------
</TABLE>
These lines of credit are personally guaranteed by the stockholder and an
officer of the Company.
The weighted average borrowings outstanding under the Company's line of
credit arrangements during 1994 and 1995 were approximately $1,904,000 and
$3,555,000, respectively. Maximum amounts outstanding at the end of the months
during 1994 and 1995 were $2,449,069 and $4,667,784, respectively. The weighted
average interest rates during 1994 and 1995 were approximately 12% and 10.7%,
respectively. The weighted average interest rates at December 31, 1994 and 1995
were approximately 12.5% and 9.75%, respectively.
F-10
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Long-term debt consists of the following:
Note 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.
(see Note 3)..................................................................... $ 6,134,715 $ 5,801,189
Note payable to a financial institution, secured by a building, due in monthly
installments of $7,729 (principal and interest) to May 1999, with a balloon
payment, interest at Moody's A Bond Index 8.25% at December 31, 1995) plus .125
percent.......................................................................... 950,585 946,278
Note payable to a corporation, secured by specific inventory, due in monthly
installments of $167,000 (principal and interest) to December 1998, with an
imputed interest rate of 10 percent, net of original issue discount of
$154,050......................................................................... 845,950 845,950
Note payable to a corporation, secured by specific inventory, due in monthly
installments to August 1997, with an imputed interest rate of 10 percent, net of
original issue discount of $4,842. (see Note 10)................................. -- 66,944
Note payable to a corporation, secured by an automobile, due in monthly
installments of $1,892 (principal and interest) to August 1997, with an interest
rate of 8 percent................................................................ 35,319 26,210
Note payable to a corporation, secured by an automobile, due in monthly
installments of $192 (principal and interest) to March 1998, with an interest
rate of 7.9 percent.............................................................. 4,703 3,505
Notes payable to a corporation, secured by equipment, due in monthly installments
of $196 to $347 (principal and interest) to February 2000, with interest rates of
24 percent to 46 percent......................................................... 12,304 9,040
------------- -------------
7,983,576 7,699,116
Less -- Current portion............................................................. 1,815,220 1,867,624
------------- -------------
$ 6,168,356 $ 5,831,492
------------- -------------
------------- -------------
</TABLE>
Future annual principal payments on long-term debt at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
1996..................... $1,815,220
1997..................... 1,932,038
1998..................... 2,051,398
1999..................... 1,295,826
2000..................... 19,736
2001..................... 869,358
----------
$7,983,576
----------
----------
</TABLE>
F-11
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES:
The components of the provision (benefit) for income taxes consist of the
following at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Current:
Federal.......................................................... $ 77,721 $ (77,100)
State............................................................ 29,209 (6,056)
----------- ------------
106,930 (83,156)
----------- ------------
Deferred:
Federal.......................................................... (3,334) (14,164)
State............................................................ (1,136) (6,000)
----------- ------------
(4,470) (20,164)
----------- ------------
Total:......................................................... $ 102,460 $ (103,320)
----------- ------------
----------- ------------
</TABLE>
Current income tax benefit consists primarily of an estimated income tax
receivable and the difference between the Company's estimated and actual 1994
income tax liability.
The reconciliation of income tax expense computed at U.S. Federal statutory
rates to income tax expense (benefit) at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Tax at U.S. Federal statutory rates................................ $ 105,719 $ (108,173)
State income taxes, net of federal effect.......................... 19,085 (18,898)
Other, net......................................................... (22,344) 23,751
----------- ------------
$ 102,460 $ (103,320)
----------- ------------
----------- ------------
</TABLE>
Deferred income taxes arise as a result of differences in the methods used
to determine income for financial reporting versus income for tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Depreciation..................................................... $ (28,192)
---------
Gross deferred tax liabilities................................. (28,192)
---------
Inventory reserve................................................ 29,840
Allowance for doubtful accounts.................................. 19,442
Operating accruals............................................... 3,544
Net operating loss carryforwards................................. 82,528
---------
Gross deferred tax assets...................................... 135,354
---------
Deferred tax assets valuation allowance........................ (82,528)
---------
$ 24,634
---------
---------
</TABLE>
The net deferred tax asset at December 31, 1995 is included in other assets
in the accompanying balance sheet.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance for net operating loss carryforwards. The
Company has net operating loss carryforwards of approximately
F-12
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES: (CONTINUED)
$223,000 and $111,000 for federal and state purposes, respectively, which expire
in 2010 and 2000, respectively. Realization of future tax benefits from
utilization of the net operating loss carryforwards may be subject to certain
limitations if ownership changes occur in the future.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
The Company leases equipment and facilities under noncancelable operating
and capital leases. As of December 31, 1995, the annual minimum lease
commitments are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 CAPITAL OPERATING
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1996.......................................................................... $ 37,656 $ 43,808
1997.......................................................................... 26,366 28,639
1998.......................................................................... 24,108 25,599
1999.......................................................................... 13,418 11,967
2000.......................................................................... 2,280 2,820
----------- -----------
103,828 $ 112,833
-----------
-----------
Less -- Amount representing interest.......................................... 24,410
-----------
79,418
Less -- Current portion....................................................... 26,178
-----------
$ 53,240
-----------
-----------
</TABLE>
Rent expense for the years ended December 31, 1994, and 1995 was $181,572
and $135,568, respectively.
In 1996, the Company entered into an agreement to purchase approximately
$1.6 million of inventory from a vendor. Under the terms of the agreement, the
Company will remit 17 monthly installments of $100,000 beginning in April 1996.
As of March 31, 1996, the Company had received $71,786 of inventory under this
agreement (see Note 8).
The Company supplies certain parts to its customers through various
consignment agreements, under which the Company takes possession of a vendors
inventory and exclusive marketing agreements, under which the Company markets
the vendors inventory which remains in the vendors possession. These agreements
are generally entered into on a long-term basis.
In February 1996, an action was brought against the Company arising out of a
dispute relating to a consignment agreement between the Company and a customer.
The plaintiff is claiming damages of $3,518,000, interest, attorney fees,
punitive damages and treble damages under R.I.C.O. Management believes they have
adequately accrued for the Company's potential liability and denies liability
for the remaining claims. This estimate could change in the near term and that
change could be material.
NOTE 11 -- NONRECURRING LOSS ON SETTLEMENT:
On April 8, 1994, the Company entered into an agreement to settle various
asserted claims made by one of its key officers to avoid the cost and the
uncertainties of litigation. Under the terms of the settlement, the Company paid
$112,000 in cash and transferred the common stock of ADI Manufacturing, Inc., a
former subsidiary, to this officer. In return, the key officer agreed to drop
all claims against the Company and to resign as an officer of the Company.
Management believes this separation is in the best interest of the Company. The
amount charged to operations during 1994 was $376,075.
NOTE 12 -- CONCENTRATION OF CREDIT RISK:
Concentrations of credit risk with respect to trade accounts receivable are
generally diversified due to the large number of customers and their dispersion
worldwide. As discussed in Note 4, during
F-13
<PAGE>
AVIATION DISTRIBUTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CONCENTRATION OF CREDIT RISK: (CONTINUED)
1995, as a result of the aircraft transaction (see Note 3), the Company had one
large customer that accounted for 28 percent of net sales for the year. The note
receivable related to this large customer represented 38 percent of total assets
at December 31, 1995.
The Company had two large customers in 1994 which accounted for
approximately 22 percent of net sales, and approximately 30.5 percent of trade
accounts receivable at December 31, 1994.
The Company performs ongoing credit evaluations and insures a large portion
of its accounts receivable through an export credit insurance policy for the
majority of the international customers.
NOTE 13. -- VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1994 and 1995, activity with respect to the
Company's allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Beginning balance................................................................ $ -- $ 12,207
Charged to expense............................................................... 12,207 36,400
Amounts written off.............................................................. -- --
--------- ---------
Ending balance................................................................... $ 12,207 $ 48,607
--------- ---------
--------- ---------
</TABLE>
NOTE 14. -- SUBSEQUENT EVENTS
STOCK OPTION PLAN
On July 10, 1996, the Company adopted the Aviation Distributors, Inc 1996
Stock Option and Incentive Plan (the Plan) which provides for the issuance of up
to a maximum of 2,856,000 shares of the Company's common stock to employees,
non-employee directors and independent contractors at the sole discretion of the
board of directors. The Plan provides for the issuance of incentive stock
options and non-qualified stock options. Options issued under the Plan may be
accompanied by stock appreciation rights, as defined. Additionally, the Plan
provides for the issuance of restricted stock, dividend equivalents and other
stock and cash based awards and loans to participants in connection with the
options or other plan provisions at the discretion of the board of directors.
REINCORPORATION
On July 12, 1996, the Company reincorporated in the State of Delaware,
increasing its authorized number of Common Shares to 10,000,000, $.01 par value,
and increasing the number of Common Shares outstanding to 2,100,000. All share
and per share data have been retroactively restated in the accompanying
financial statements to give effect to the above items.
Effective July 12, 1996, the Company also authorized the issuance of up to
3,000,000 shares of preferred stock, $.01 par value.
F-14
<PAGE>
- -----------------------------------------------------
-----------------------------------------------------
- -----------------------------------------------------
-----------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 9
Dividend Policy........................................................... 9
Capitalization............................................................ 10
Dilution.................................................................. 11
Selected Financial Data................................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 17
Management................................................................ 23
Certain Transactions...................................................... 33
Principal and Selling Stockholder......................................... 33
Shares Eligible for Future Sale........................................... 33
Description of Capital Stock.............................................. 35
Underwriting.............................................................. 37
Legal Matters............................................................. 38
Experts................................................................... 38
Additional Information.................................................... 38
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,000,000 SHARES
[LOGO]
AVIATION DISTRIBUTORS INCORPORATED
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CRUTTENDEN ROTH
INCORPORATED
, 1996
- -----------------------------------------------------
-----------------------------------------------------
- -----------------------------------------------------
-----------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the GCL empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer, director,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include judgments, fines, amounts
paid in settlement and expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, with respect to criminal proceedings, had no reasonable cause to
believe his conduct was illegal. A Delaware corporation may indemnify its
officers and directors against expenses actually and reasonably incurred by them
in connection with an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation
in the performance of his duty. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred in connection therewith.
Section 102(b)(7) of the GCL further provides that a corporation in its
certificate of incorporation may eliminate or limit the personal liability of
its directors to the corporation or its stockholders for breach of their
fiduciary duties in certain circumstances.
In accordance with Section 145 of the GCL, the Company's Certificate
provides that the Company shall indemnify its officers and directors against,
among other things, any and all judgments, fines, penalties, amounts paid in
settlements and expenses paid or incurred by virtue of the fact that such
officer or director was acting in such capacity to the extent not prohibited by
law.
In addition, as permitted by Section 102(b)(7) of the GCL, the Company's
Certificate contains a provision limiting the personal liability of the
Company's directors for violations of their fiduciary duties to the fullest
extent permitted by the Delaware Law. This provision eliminates each director's
liability to the Company or its stockholders for monetary damages except (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or
(iv) for any transaction from which a director derived an improper personal
benefit. The general effect of this provision is to eliminate a director's
personal liability for monetary damages for actions involving a breach of his or
her fiduciary duty of care, including any such actions involving gross
negligence.
Also, in accordance with the GCL and pursuant to the Company's Certificate,
the Company is authorized to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company, is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Company would have the power to indemnify such person
against liability under the GCL.
[The Company has entered into agreements (the "Indemnification Agreements")
with certain directors and officers of the Company (the "Indemnified Parties")
which require the Company to indemnify each Indemnified Party against, and to
advance expenses incurred by each Indemnified Party in the defense of, any claim
arising out of his or her employment to the fullest extent permitted under law.
The Indemnification Agreements also provide, among other things, for (i)
advancement by
II-1
<PAGE>
the Company of expenses incurred by the director or officer in defending certain
litigation, (ii) the appointment of an independent legal counsel to determine
whether the director or officer is entitled to indemnity and (iii) the continued
maintenance by the Company of directors' and officers' liability insurance, if
available on reasonable terms.]
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee....................................................... $ 3,173
NASD filing fee............................................................ 1,420
Nasdaq National Market Listing Fee......................................... *
Blue Sky fees and expenses................................................. *
Printing and engraving expenses............................................ *
Legal fees and expenses.................................................... *
Accounting fees and expenses............................................... *
Transfer Agent and Registrar fees.......................................... *
Miscellaneous expenses..................................................... *
-----------------
Total.................................................................. $ *
-----------------
-----------------
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Bylaws, as amended, of the Registrant.
*4.1 Specimen Common Stock Certificate.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.
*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 Facilities, dated October 20, 1995, by and between Aviation
Distributors Incorporated and Far East National Bank.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (See page II-4).
</TABLE>
- ------------------------
* To be filed by amendment.
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies it has reasonable grounds to believe that it meets all of
the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in the City of Irvine,
State of California, on the 12th day of July, 1996.
AVIATION DISTRIBUTORS INCORPORATED
By: /s/ OSAMAH S. BAKHIT
-----------------------------------
Osamah S. Bakhit
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Osamah S. Bakhit as such person's true and lawful
attorney-in-fact and agent, with the full power of substitution and
resubstitution, for such person in any and all capacities (including such
person's capacity as a director and/or officer of Aviation Distributors
Incorporated), to sign any and all amendments to this Registration Statement
(including post-effective amendments pursuant to Rule 462(b) or otherwise), and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
stated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------------------ ----------------
/s/ OSAMAH S. BAKHIT
------------------------------------ Chief Executive Officer, President and Director July 12, 1996
Osamah S. Bakhit (Principal Executive Officer)
/s/ JEFFREY G. WARD
------------------------------------ Executive Vice President July 12, 1996
Jeffrey G. Ward
/s/ MARK W. ASHTON
------------------------------------ Chief Financial Officer, Vice President, Finance July 12, 1996
Mark W. Ashton and Director (Principal Financial Officer)
/s/ LAURA M. BIRGBAUER
------------------------------------ Treasurer (Principal Accounting Officer) July 12, 1996
Laura M. Birgbauer
/s/ BRUCE H. HAGLUND
------------------------------------ Secretary and Director July 12, 1996
Bruce H. Haglund
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..................................................................
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.............................
*3.3 Bylaws, as amended, of the Registrant...........................................................
*4.1 Specimen Common Stock Certificate...............................................................
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.................................................
*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 Facilities, dated October 20, 1995, by and between Aviation Distributors
Incorporated and Far East National Bank........................................................
23.1 Consent of Arthur Andersen LLP..................................................................
*23.2 Consent of Counsel (included in Exhibit 5.1)....................................................
24.1 Power of Attorney (See page II-4)...............................................................
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references made to our Firm) included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
July 12, 1996