<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1996
REGISTRATION NO. 333-8061
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVIATION DISTRIBUTORS, INC.
(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, INC.
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
LLP 601 South Figueroa, 30th Floor
300 South Grand Avenue, 34th Floor Los Angeles, California 90017
Los Angeles, California 90071
</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. / /
------------------------
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>
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>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1996
PROSPECTUS [LOGO]
1,000,000 SHARES
AVIATION DISTRIBUTORS, INC.
COMMON STOCK
All of the 1,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being offered by Aviation
Distributors, Inc., a Delaware corporation ("ADI" or the "Company").
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 $6.50 and $8.50 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price of
the Common Stock.
The Company has applied for the quotation of the Common Stock on the Nasdaq
Stock Market's SmallCap Market (the "Nasdaq SmallCap 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>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
Per Share......................................
Total (3)......................................
</TABLE>
(1) The Company has 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. See "Underwriting."
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 150,000 additional shares of Common Stock 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 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 OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. 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, (II) GIVES EFFECT TO A 3,000 FOR 1
EXCHANGE OF THE COMMON STOCK OF THE COMPANY EFFECTED IN CONNECTION WITH THE
COMPANY'S REINCORPORATION IN THE STATE OF DELAWARE IN JULY 1996 AND (III) GIVES
EFFECT TO A 0.85 FOR 1 REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK IN
AUGUST 1996. SEE "UNDERWRITING." INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Aviation Distributors, Inc. (the "Company") is a supplier of new and
overhauled aircraft parts to major commercial airlines worldwide. The Company
locates, acquires and supplies parts for all major aircraft. Additionally, the
Company enters into consignment and marketing agreements with major commercial
airlines, distributors and original equipment manufacturers ("OEMs"), which
allows 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 Airbus, Boeing, General Electric,
Lockheed, McDonnell Douglas, Pratt & Whitney and Rolls Royce. Sales have
increased from $2.8 million in 1992 to $7.2 million in 1993, $16.4 million in
1994 and $22.7 million in 1995. The 1995 sales amount includes one significant
sale of two whole aircraft for $6.5 million. If the opportunity exists, the
Company may sell whole aircraft in the future.
The worldwide aircraft parts market is highly fragmented and parts are
supplied by many types of suppliers, including airlines, OEMs and numerous
distributors, fixed base operators, Federal Aviation Administration ("FAA")
certified facilities, traders and brokers. The Canaan Group Ltd., a management
consulting firm specializing in the aircraft and aerospace industry, estimated
that aircraft parts inventories valued at $45 billion existed in May 1995, with
a carrying cost of $10 billion annually and that 80% of such inventories were
owned by airlines. The Company believes that a portion of such inventory is
available for marketing, consignment and purchase.
The Company also believes that, based on other significant market trends,
its target market will continue to grow. According to Boeing's 1996 Market
Outlook, the worldwide fleet of commercial aircraft and air cargo aircraft is
expected to grow from 11,066 aircraft at the end of 1995 to 23,080 aircraft by
2015. In the long-term, the Company believes that a larger aircraft fleet will
necessitate a greater number of aircraft spare parts to supply such a fleet.
Furthermore, to reduce the high costs associated with excess aircraft parts
inventories, many airlines are reducing their parts inventories through bulk
sales to, and marketing and consignment agreements with, aircraft parts
suppliers. 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. Finally, as a result of safety concerns regarding
unapproved parts, regulatory agencies are increasing emphasis on the tracking of
parts 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 supplier of quality parts to airlines
worldwide. The Company's strategy is comprised of the following components:
providing excellent customer service, supplying quality parts, focusing sales
efforts on major commercial airlines, increasing access to inventory through
both consignment and purchases, and expanding its business globally. A key
component of the Company's business strategy is to implement a program to
effectively contain expenses.
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........................ 1,000,000 shares
Common Stock to be outstanding after the Offering.......... 2,785,000 shares (1)
Use of proceeds............................................ To repay approximately $3.8
million of the amount
outstanding under the Company's
lines of credit, to fund a
portion of a legal settlement
entered into by the Company and
for general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq SmallCap Market symbol..................... ADIN
</TABLE>
- ------------------------
(1) Excludes an aggregate of 150,000 shares of Common Stock that may be sold by
the Company upon exercise of the Underwriters' over-allotment option. Also
excludes 100,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants and 150,000 shares of Common Stock issuable upon
the exercise of options granted pursuant to the 1996 Stock Option Plan
(defined herein). See "Underwriting" and "Management -- Employee Benefit
Plans."
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
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 $ 18,152 $ 17,319
Cost of sales.............................................. 11,809 18,680 15,093 12,430
Gross profit............................................... 4,560 3,972 3,059 4,889
Legal settlement expense................................... -- -- -- 1,375
Selling and administrative expenses........................ 3,958 3,757 2,770 3,381
Income from operations..................................... 602 215 289 133
Interest expense, net...................................... 278 622 360 505
Net income (loss).......................................... 208 (215) 17 (107)
Net income (loss) per share................................ 0.12 (0.12) 0.01 (0.06)
Shares used in computing net income (loss) per share....... 1,785,000 1,785,000 1,785,000 1,785,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
AS ADJUSTED
(1)
--------------
ACTUAL
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 7 $ 1,407
Restricted cash..................................................................... 64 64
Working capital (deficit)........................................................... (498) 5,627
Total assets........................................................................ 16,162 17,737
Total debt.......................................................................... 12,762 8,962
Total stockholders' equity.......................................................... 46 6,171
</TABLE>
- ------------------------
(1) Adjusted for the sale of 1,000,000 shares of Common Stock by the Company (at
an assumed offering price of $7.50 per share) in the Offering and the
application of the net proceeds therefrom as if the Offering had occurred on
September 30, 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
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, the mix of available aircraft 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. Although the Company generated operating income of $133,000
for the first nine months of 1996, there can be no assurance that the Company
will continue to be profitable. 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 the policies of such manufacturers 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 (90% for the year ended December 31, 1995), 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 can be no assurance that it will not encounter such problems in the
future. The Company incurs $0.80 in insurance expense per $100 in foreign sales
to help mitigate the risks associated with such activity. Consequently, an
increase in foreign sales will result in increased insurance expense for the
Company. All of the Company's sales were transacted in U.S. dollars in fiscal
year 1995. As of September 30, 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. As a result of public concerns that have arisen regarding deregulation of
the aviation industry and inadequate aircraft maintenance procedures, there is a
possibility that new and more stringent FAA regulations could 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 manufactures nor repairs aircraft parts and requires
that all of the parts that it sells be 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 sales of faulty aircraft parts
in the future. The Company does not currently maintain product liability
insurance to protect it from such claims, but intends to obtain such insurance
in the future. There can be no assurance that such coverage will be obtained,
or, if obtained, that it 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 September 30, 1996, in
connection with a 1995 transaction involving the sale of whole aircraft, the
Company had a note receivable from one customer in the amount of approximately
$5.1 million, which is secured by an irrevocable letter of credit. See Note 5 of
Notes to Consolidated Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions." For the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996, the Company wrote off an aggregate of
approximately $161,000 as uncollected accounts receivable. See Note 13 of Notes
to Consolidated Financial Statements.
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 expands its existing
credit facilities, the Company would require additional capital. Although the
Company believes that the net proceeds from the Offering, together with
available cash from operations, 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 a key man life insurance policy in the amount of $3
million on Mr. Bakhit and has entered into a long-term employment agreement with
Mr. Bakhit, who will own approximately 64% of the Company's outstanding Common
Stock following the completion of the Offering. 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 (the "Principal
Stockholder") 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 Stockholder" and "Management."
FUTURE SALES BY PRINCIPAL STOCKHOLDER; SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the Offering, Mr. Bakhit will beneficially own
approximately 64% of the outstanding Common Stock. 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
7
<PAGE>
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
Mr. Bakhit 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, with respect to the
Company, and a period of 365 days after the date of this Prospectus, with
respect to Mr. Bakhit. After such time, 1,785,000 shares of Common Stock
beneficially held by Mr. Bakhit 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 and the Representative and
may not be indicative of the market price for the Common Stock after the
Offering. Among the factors to be considered in such negotiations are 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. 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 $5.28
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 1,000,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $7.50 per share, are estimated to be $6.1 million after
deducting the estimated underwriting discounts and commissions and the expenses
of the Offering.
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 (each, a "Credit Facility" and together, the "Credit
Facilities") held by Far East National Bank ("Far East Bank"), $750,000 will be
used to fund a portion of a legal settlement entered into by the Company, and
approximately $1.55 million will be used for general corporate purposes,
including reducing the Company's vendor payables and providing working capital.
The Credit Facilities bear an interest rate of prime plus 1.0 to 1.5 percent and
provide for maximum borrowings of $6.5 million. The $4.5 million Credit Facility
matures on March 31, 1997 and the $2.0 million Credit Facility matures on August
31, 1997. As of October 31, 1996, $5.7 million was outstanding under the Credit
Facilities. 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 September 30, 1996 and as adjusted to give effect to the Offering (at
an assumed offering price of $7.50 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>
SEPTEMBER 30, 1996
------------------------
AS ADJUSTED
-----------
ACTUAL
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Total Short-Term Debt(1)............................................................. $ 7,968 $ 4,168
----------- -----------
----------- -----------
Long-Term Debt:
Note payable, net of current portion(2)............................................ 3,472 3,472
Mortgage, net of current portion(3)................................................ 925 925
Other, net of current portion(4)................................................... 397 397
----------- -----------
Total Long-Term Debt............................................................... $ 4,794 $ 4,794
----------- -----------
----------- -----------
Stockholder's Equity:
Common stock....................................................................... $ 18 $ 28
Additional paid in capital......................................................... 389 6,504
Retained deficit................................................................... (361) (361)
----------- -----------
Total Stockholder's Equity....................................................... 46 6,171
----------- -----------
Total Capitalization............................................................. $ 4,840 $ 10,965
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Short-term debt includes the 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 and does not include a note payable executed by the
Company in connection with a legal settlement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources".
(2) This debt consists of a note payable to a financial institution used to
purchase a whole aircraft, secured by a customer note receivable.
(3) This debt consists of a mortgage for the Company's headquarters 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 September
30, 1996, was $46,000 or approximately $.03 per share. "Net tangible book value
per share" represents the amount of the Company's stockholders' equity, less
intangible assets, divided by the number of shares of Common Stock outstanding.
At September 30, 1996, the Company had no intangible assets. After giving effect
to the sale of the 1,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $7.50 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
September 30, 1996 would have been $6,171,000 or $2.22 per share. This
represents an immediate increase in pro forma net tangible book value of $2.19
per share to the existing stockholder and an immediate dilution in net tangible
book value of $5.28 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.............................. $ 7.50
Net tangible book value per share before the Offering...................... $ .03
Increase per share attributable to new investors........................... 2.19
Pro forma net tangible book value per share after the Offering............... 2.22
---------
Dilution per share to new investors.......................................... $ 5.28
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1996, the differences between the existing stockholder and the purchasers of
shares in the Offering (at an assumed initial public offering price of $7.50 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.............................. 1,785,000 64% $ 407,000 5% $ .23
New investors (1)................................. 1,000,000 36 7,500,000 95 7.50
------------- ----- ------------- --------- -----
Total......................................... 2,785,000 100% $ 7,907,000 100% $ 2.84
------------- ----- ------------- --------- -----
------------- ----- ------------- --------- -----
</TABLE>
- ------------------------
(1) The underwriters have the option to purchase 150,000 shares of Common Stock
from the Company to cover over-allotments, if any, in connection with the
Company's sale of the Common Stock.
Assuming the underwriters exercise the over-allotment option, the number of
shares held by the new investors will increase to 1,150,000 or 39%.
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 nine month periods
ended September 30, 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
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 $18,152 $17,319
Cost of sales.............................................. 11,809 18,680 15,093 12,430
Gross profit............................................... 4,560 3,972 3,059 4,889
Legal settlement expense................................... -- -- -- 1,375
Selling and administrative expenses........................ 3,958 3,757 2,770 3,381
Income (loss) from operations.............................. 602 215 289 133
Interest expense, net...................................... 278 622 360 505
Net income (loss).......................................... 208 (215) 17 (107)
Net income (loss) per share................................ 0.12 (0.12) 0.01 (0.06)
Shares used in computing net income (loss) per share....... 1,785,000 1,785,000 1,785,000 1,785,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
AS ADJUSTED
(1)
--------------
ACTUAL
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 7 $ 1,407
Restricted cash..................................................................... 64 64
Working capital (deficit)........................................................... (498) 5,627
Total assets........................................................................ 16,162 17,737
Total debt.......................................................................... 12,762 8,962
Total stockholder's equity.......................................................... 46 6,171
</TABLE>
- ------------------------
(1) Adjusted for the sale of 1,000,000 shares of Common Stock by the Company (at
an assumed offering price of $7.50 per share) in the Offering and the
application of the net proceeds therefrom as if the Offering had occurred on
September 30, 1996. See "Use of Proceeds."
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
July 1996.
The Company's sales have increased from $2.8 million in 1992, to $7.2
million in 1993, $16.4 million in 1994, $22.7 million in 1995, and $17.3 million
for the nine months ended September 30, 1996. Of 1995 sales, approximately $6.5
million resulted from the sale of two whole aircraft (with engines) to Royal
Jordanian Airlines, which is located in the Middle East. The sale agreement
provided for monthly payments of $166,250 from August 1995 to August 1999 with
an imputed interest rate of 9.5%, which created a note receivable for $6.5
million at the date of sale. Royal Jordanian Airlines provided an irrevocable
letter of credit from a recognized financial institution as collateral for the
gross payments under the note receivable. Such letter of credit mitigates
potential risks associated with the note receivable. Excluding the whole
aircraft transaction, sales in 1995 would have been $16.2 million. If the
opportunity exists, the Company may sell whole aircraft in the future.
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 costs associated with repairs, maintenance and
certification.
Net sales and gross profit depend in large measure on the volume and timing
of sales orders received during the period and the mix of aircraft parts
contained in the Company's inventory. Sales and gross profit can be impacted by
the timing of bulk inventory purchases. In general, bulk inventory purchases
allow the Company to obtain large inventories of aircraft parts at a lower cost
than can ordinarily be obtained by purchasing such parts on an individual basis.
Thus, these bulk purchases allow the Company to receive larger gross margins on
its sale of aircraft parts since the cost of purchase is reduced.
Sales can be impacted by marketing and consignment agreements because such
agreements give the Company increased access to aircraft parts. Net profits are
impacted by marketing agreements because the Company does not incur costs
associated with carrying owned inventory due to the fact that a party who has
entered into a marketing agreement with the Company is responsible for storing
and maintaining the inventory to which the Company has access pursuant to such
marketing agreement. Generally, sales from consignment and marketing agreements
are not as profitable as sales from bulk inventory purchases.
The Company's owned inventory turned approximately 0.4 times during 1995, or
every 912 days. Inventory reserves are determined by analyzing the current and
future demand for the Company owned aircraft parts. Aircraft parts have long
lives, typically 30 years or more.
13
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
The following table sets forth certain information relating to the Company's
operations for the nine month period ended September 30, 1995 and 1996 (dollars
in thousands):
<TABLE>
<CAPTION>
1995 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
Distributed services and inventory sales............... $ 17,159 94.5% $ 14,409 83.2%
Net sales on consignment and marketing agreements...... 993 5.5 2,910 16.8
--------- ----- --------- -----
Net sales.............................................. 18,152 100.0 17,319 100.0
Cost of sales.......................................... 15,093 83.1 12,430 71.8
--------- ----- --------- -----
Gross profit......................................... 3,059 16.9 4,889 28.2
Legal settlement expense............................... -- -- 1,375 7.9
Selling and administrative expenses.................... 2,770 15.3 3,381 19.5
--------- ----- --------- -----
Income from operations................................. 289 1.6 133 0.8
Interest expense, net.................................. 360 2.0 505 2.9
Net income (loss)...................................... 17 0.1 (107) (0.6)
</TABLE>
DISTRIBUTED SERVICES AND INVENTORY SALES. Distributed services and
inventory sales represent sales of inventory located through outside parties and
sales of Company owned inventory. Distributed services and inventory sales
decreased from $17.2 million for the nine months ended September 30, 1995 to
$14.4 million for the nine months ended September 30, 1996, a decrease of $2.8
million or 16.3%. This decrease is the result of the whole aircraft sale for
$6.5 million during 1995, noted above. Distributed services and inventory sales,
excluding the whole aircraft transaction discussed above, for the nine months
ended September 30, 1995, would have been $10.7 million, compared to $14.4
million for the nine months ended September 30, 1996, an increase of $3.7
million or 34.6%. This increase was primarily due to an increase in the
Company's availability of aircraft parts as a result of bulk inventory purchases
during the last quarter of 1995 and the first three quarters of 1996, the
addition of new sales personnel and emphasis on development of new domestic
customers and some larger international customers. See "General."
Sales from distributed services represented approximately 97.3% and 93.5% of
total distributed services and inventory sales for the nine months ended
September 30, 1995 and 1996, respectively. Sales of Company owned inventory
represented approximately 2.7% and 6.5% of total distributed services and
inventory sales for the nine months ended September 30, 1995 and 1996,
respectively. The increase in the percentage of the sales of Company owned
inventory is primarily due to the bulk inventory purchases as discussed above.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment
and marketing agreements represent total revenue, including commissions, related
to sales of inventory held on consignment and sales of inventory obtained
through marketing agreements. Net sales on consignment and marketing agreements
increased from $993,000 for the nine months ended September 30, 1995 to $2.9
million for the nine months ended September 30, 1996, an increase of $1.9
million or 191.3%. This increase was primarily due to an increase in the amount
of aircraft parts available for sale under these consignment and marketing
agreements, the addition of new sales personnel and emphasis on development of
new domestic customers and some larger international customers. See "Net sales."
NET SALES. Net sales decreased from $18.2 million for the nine months ended
September 30, 1995 to $17.3 million for the nine months ended September 30,
1996, a decrease of $900,000 or 4.9% This decrease in net sales is due to the
whole aircraft sale for $6.5 million in 1995 noted above, somewhat offset by the
increase in net sales primarily due to the reasons stated above. See
"Distributed services and inventory sales" and "Net sales on consignment and
marketing agreements."
14
<PAGE>
The sales by region data presented below should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto included
elsewhere in this Prospectus. The following data consists of sales by region for
the nine months ended September 30, 1995 and 1996:
<TABLE>
<CAPTION>
AREA 1995 1996
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Pacific Rim.............................................................. 19.7% 20.3%
Europe................................................................... 14.1 24.5
Latin/South America...................................................... 15.6 13.5
Africa/Middle East....................................................... 40.8 6.7
Domestic................................................................. 9.8 35.0
--------- ---------
Total.................................................................. 100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
For the nine months ended September 30, 1995, 90.2% of the Company's sales
were to international customers compared to 65.0% for the nine months ended
September 30, 1996. The decrease in the percentage of the Company's sales to
international customers was primarily due to the whole aircraft transaction
during the third quarter of 1995, discussed above, specifically in the
Africa/Middle East region. The sales to international customers as a percentage
of total sales has also decreased as a result of the Company's purchase of bulk
inventory, which is predominantly sold domestically, and an emphasis on
development of new domestic customers. The Company expects that international
sales will continue to account for a significant portion of total sales,
although the percentage may fluctuate from period to period. The majority of the
Company's international sales are insured through an export credit insurance
policy. Such insurance policy mitigates potential risks associated with
international sales.
COST OF SALES. Cost of sales decreased from $15.1 million for the nine
months ended September 30, 1995 to $12.4 million for the nine months ended
September 30, 1996, a decrease of $2.7 million or 17.9%. This decrease was
primarily the result of the whole aircraft sale, at a cost of $5.5 million,
during the third quarter of 1995, as discussed above. Cost of sales excluding
the whole aircraft transaction, discussed above, was $9.6 million for the period
ended September 30, 1995, compared to $12.4 million for the nine months ended
September 30, 1996, an increase of $2.8 million or 29.2%. This increase in cost
of sales is primarily due to the increase in net sales. As a percentage of net
sales, cost of sales decreased from 83.1% in the 1995 period to 71.8% in the
1996 period as a result of higher costs in the 1995 period due to the whole
aircraft transaction, which realized a cost of sale percentage of 85%, and due
to improved pricing on inventory parts during the 1996 period as a result of
bulk inventory purchases. See "General" and "Distributed services and inventory
sales."
GROSS PROFIT. Gross profit increased from $3.1 million, or 16.9% for the
nine months ended September 30, 1995 to $4.9 million or 28.2% for the nine
months ended September 30, 1996. The gross profit margin increased, in part, as
a result of the low profit margin of 15% realized in the nine month period ended
September 30, 1995 on the whole aircraft sale discussed above. Gross profit
margin also increased as a result of bulk inventory purchases during the last
quarter of 1995 and the first three quarters of 1996, the addition of new sales
personnel and emphasis on development of new domestic customers and some larger
international customers. See "General" and "Cost of sales."
LEGAL SETTLEMENT EXPENSE. A legal charge was recorded in the third quarter
of 1996 due to settlement negotiations relating to an action that was brought
against the Company in February 1996. The action brought against the Company
related to a contract dispute between the Company and one of its customers. In
August 1996 the Company made a partial settlement payment to such customer of
$166,000, which was accrued during December 1995 in accounts payable as it
represented aircraft parts purchased during 1995 under the contract in dispute.
Although the Company believed it had meritorious defenses to this dispute,
counsel advised the Company that final judical resolution of such matter could
take several years. Consequently, in order to pursue the Offering in a timely
manner, the Company made a strategic business decision to resolve this dispute
and in November 1996 entered
15
<PAGE>
into a settlement agreement with such customer, pursuant to which the Company
will pay $1.2 million. The Company has incurred approximately $175,000 of legal
expenses related to this contract dispute as of September 30, 1996. See
"Liquidity."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, professional fees, consulting
expense and travel expenses. The Company's selling and administrative expenses
increased from $2.8 million for the nine months ended September 30, 1995 to $3.4
million for the nine months ended September 30, 1996, an increase of $600,000 or
21.4%. This increase in expenditures for the nine months ended September 30,
1996 principally reflects higher personnel costs necessary to respond to the
Company's growth, including salaries, taxes, insurance and commission expenses.
In addition, general and administrative expenses increased as a result of an
investment in information systems, both in the form of additional personnel and
computer hardware/software. As a percentage of net sales, general and
administrative expenses increased from 15.3% for the nine months ended September
30, 1995 to 19.5% of net sales in the nine months ended September 30, 1996
primarily due to lower commission expense in the 1995 period as a result of no
sales commission paid on the whole aircraft transaction and a small percentage
of selling and administrative support required for the whole aircraft in the
1995 period. The Company currently anticipates a future annual increase in
general and administrative expenses of approximately $350,000, which increase
consists of a minimum of $225,000 due to the Company's employment agreement with
Mr. Bakhit and the remainder primarily due to estimated bonuses the Company
anticipates paying to certain members of senior management. This increase could
be material to the Company's financial condition.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations for the nine months ended September 30, 1996 decreased $156,000
compared to the nine months ended September 30, 1995. The decrease primarily
reflects the legal settlement expense discussed above. Income from operations at
September 30, 1996, excluding the legal settlement expense, would have been $1.3
million, an increase of $1 million or 346.0%. This increase was a result of the
increase in gross profit of $1.8 million. See "Gross profit" and "Legal
settlement expense."
INTEREST EXPENSES, NET. Net interest expense increased from $360,000, or
2.0% of net sales at September 30, 1995 to $505,000, or 2.9% of net sales at
September 30, 1996. The increase in interest expense is due to an increase in
borrowings under the Company's lines of credit, notes to financial institutions
and notes to corporations secured by inventory.
NET INCOME (LOSS). Net income (loss) decreased from $17,000 for the nine
months ended September 30, 1995 to $(107,000) for the nine months ended
September 30, 1996, a decrease of $124,000. This decrease is attributable to the
legal settlement expense noted above and the increase in the Company's selling
and administrative expenses, somewhat offset by increases in gross profit. See
"Gross profit," "Legal settlement expense" and "Selling and administrative
expenses."
16
<PAGE>
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 years ended December 31, 1994 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
Distributed services and inventory sales................... $ 13,530 83.0% $ 21,545 95.0%
Net sales on consignment and marketing agreements.......... 2,839 17.0 1,107 5.0
--------- --------- --------- ---------
Net sales.................................................. 16,369 100.0 22,652 100.0
Cost of sales.............................................. 11,809 72.1 18,680 82.5
--------- --------- --------- ---------
Gross profit............................................... 4,560 27.9 3,972 17.5
Selling and administrative expenses........................ 3,958 24.2 3,757 16.6
--------- --------- --------- ---------
Income from operations..................................... 602 3.7 215 0.9
Interest expense, net...................................... 278 1.7 622 2.7
Net income (loss).......................................... 208 1.3 (215) (0.9)
</TABLE>
DISTRIBUTED SERVICES AND INVENTORY SALES. Distributed services and
inventory sales increased from $13.5 million for the year ended December 31,
1994 to $21.5 million for the year ended December 31, 1995, an increase of $8.0
million or 59.3%. This increase was primarily the result of the whole aircraft
sale for $6.5 million noted above. See "General."
The sales of Company-owned inventory represented approximately 1% and 3% of
total distributed services and inventory sales for the years ended December 31,
1994 and 1995, respectively. The increase in the percentage of the sales of
Company owned inventory is primarily due to an increase in the Company's
availability of aircraft parts as a result of bulk inventory purchases during
the last quarter of 1995.
Sales of distributed services represented approximately 99% and 97% of total
distributed services and inventory sales for the years ended December 31, 1995
and 1994, respectively.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment
and marketing agreements decreased from $2.8 million for the year ended December
31, 1994 to $1.1 million for the year ended December 31, 1995, a decrease of
$1.7 million or 61%. The decrease was due to the Company's efforts being focused
on the whole aircraft transaction during 1995 and due to the availability of
aircraft parts under consignment and marketing agreements.
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 a reduction in
sales to smaller airlines in the Africa/Middle East region as a result of the
Company's emphasis on developing relationships with larger airlines. See
"General."
17
<PAGE>
The sales by region data presented below should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto included
elsewhere in this Prospectus. The following data consists of sales by region for
the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
AREA 1994 1995
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Pacific Rim.............................................................. 19.2% 22.4%
Europe................................................................... 25.0 15.7
Latin/South America...................................................... 16.6 17.4
Africa/Middle East....................................................... 11.6 34.8
Domestic................................................................. 27.6 9.7
--------- ---------
Total.................................................................. 100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
For the year ended December 31, 1994, 72.4% of the Company's sales were to
international customers; for the year ended December 31, 1995, 90.3% of the
Company's sales were to international customers. The increase in the percentage
of the Company's sales to international customers is primarily the result of the
whole aircraft transaction discussed above, specifically in the Africa/Middle
East region. The Company expects that international sales will continue to
account for a significant portion of total sales, although the percentage may
fluctuate from period to period. The majority of the Company's international
sales are insured through an export credit insurance policy. Such insurance
policy mitigates potential risks associated with international sales. See
"General."
COST OF SALES. Cost of sales increased from $11.8 million for the year
ended December 31, 1994 to $18.7 million for the year ended December 31, 1995,
an increase of $6.9 million or 58.5%. This increase was primarily the result of
the whole aircraft sale, at a cost of $5.5 million, as noted above. Cost of
sales excluding the whole aircraft transaction discussed above was $13.2 million
for the year ended December 31, 1995. This represents an increase of $1.4
million or 11.9%, 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 $4.0 million or 17.5% 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 18.4%, a
decrease of 9.5% compared to the year ended December 31, 1994. The decline was
attributable to increased discounts and reduced margins on sales to certain
customers. The Company will continue to offer discounts to obtain new customers
and accept lower margins on exceptionally large sales, e.g. whole aircraft. 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. Selling and administrative expenses decreased
slightly from $4.0 million for the year ended December 31, 1994 to $3.8 million
for the year ended December 31, 1995, a decrease of $200,000 or 5%. The decrease
is due to the Company effectively managing its expenses.
INCOME FROM OPERATIONS. As a result of the above, income from operations
decreased from $602,000 for the year ended December 31, 1994 to $215,000 for the
year ended December 31, 1995, a decrease of $387,000 or 64.3%. The decrease
reflects the lower gross profit margins realized in 1995 compared to 1994. See
"Gross profit."
INTEREST EXPENSE, NET. 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 outstanding amounts of the Company's lines of credit,
notes to financial institutions and notes to corporations secured by inventory.
18
<PAGE>
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 203.4%. This decrease was attributable to a
decrease in gross profit and an increase in interest expense discussed above.
See "Gross profit" and "Interest expense, net."
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 $7,000 as of December 31, 1994, 1995 and
September 30, 1996, respectively. The Company had restricted cash of $105,000,
$301,000 and $64,000 as of December 31, 1994, 1995 and September 30, 1996,
respectively. For the periods ended December 31, 1994 and 1995 and September 30,
1996, $1.1 million, $3.1 million and $678,000, respectively, of cash was
provided by financing activities. Restricted cash was required for one of the
Credit Facilities until May 1996 and for letters of credit issued to certain
vendors. For the nine month period ended September 30, 1996 the Company had a
working capital deficit of $(498,000), as a result of the accrual of the legal
settlement expense discussed above.
The Company's primary uses of cash, to date, have been for purchases of
inventory and the repayment of indebtedness. Cash flows provided by (used in)
investing activities were ($225,000), ($1.8 million) and $59,000 for 1994, 1995
and the nine months ended September 30, 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, currently reduced by a letter of credit for $150,000, includes
certain receivables and inventories of the Company. The $4.5 million Credit
Facility matures on March 31, 1997 and the $2.0 million Credit Facility matures
on August 31, 1997. The Company is currently in discussions with financial
institutions with respect to additional sources of financing. The Company repaid
a line of credit in the amount of $500,000 that expired during May 1996 with its
restricted cash. The Company plans to pay approximately $3.8 million of the
amount outstanding under the Credit Facilities from the proceeds received from
the Offering. The Company determined to use the majority of the proceeds
received from the Offering to pay down the amount outstanding under the Credit
Facilities as an effort to decrease insurance and interest costs. The remaining
proceeds received from the Offering, $1.5 million, are anticipated to be used
for legal settlement expenses and general corporate purposes, including reducing
the Company's vendor payables and providing working capital. See "Use of
Proceeds."
Far East Bank has a fully perfected security interest against all assets of
the Company in addition to a personal guarantee from Mr. Bakhit and his wife.
Far East Bank has indicated orally that it will consider terminating such
guarantee following consummation of the Offering.
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. The $4.5 million Credit Facility requires the Company to have a
tangible net worth of at least $750,000 beginning October 31, 1996, which was
extended by the financial institution to begin on December 31, 1996. As of
September 30, 1996, the Company's tangible net worth was $46,000 and pro forma
for the Offering the Company's tangible net worth would have been $5.4 million.
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 nine months ended September
30, 1996, the Company was in compliance with all of its requirements under the
Credit Facilities.
The Company's long-term debt consists of the following: (i) note payable of
$5.1 million at September 30, 1996 to a financial institution, due in monthly
installments of $166,250 (principal and interest) to August 1999 with an
interest rate of 9.5 percent; (ii) note payable of $940,000 at September 30,
1996 to a financial institution, secured by a building, due in adjustable
monthly installments of
19
<PAGE>
$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; (iii) note
payable of $555,000 at September 30, 1996 to a corporation, secured by specific
inventory, due in semi-annual installments of $125,000 (principal and interest)
to December 1998, with an imputed interest rate of 10 percent; (iv) note payable
of $731,000 at September 30, 1996 to a corporation, secured by specific
inventory, due in monthly installments of $100,000 (principal and interest) to
August 1997, with an imputed interest rate of 10 percent; (v) note payable of
$3,000 at September 30, 1996 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; and (vi) notes payable aggregating $10,000 as of
September 30, 1996 to a corporation, secured by equipment, due in monthly
installments ranging from $196 to $347 (principal and interest) to February
2000, with interest rates ranging from 24 percent to 46 percent.
In February 1996, an action was brought against the Company arising out of a
contract dispute between the Company and one of its customers. In August 1996,
the Company made a partial settlement payment to such customer in the amount of
$166,000, which was financed through additional borrowings under the Credit
Facilities. Although the Company believed it had meritorious defenses to this
dispute, counsel advised the Company that final judicial resolution of such
matter could take several years. Consequently, in order to pursue the Offering
in a timely manner, the Company made a strategic business decision to resolve
this dispute and in November 1996 entered into a settlement agreement with such
customer. Pursuant to such settlement agreement, the Company (i) paid such
customer $300,000, which was financed through additional borrowings under the
Credit Facilities, (ii) agreed to pay such customer an additional $450,000 on or
before December 31, 1996, subject to extension, which the Company intends to pay
from a portion of the Offering Proceeds, and (iii) executed a note in the amount
of $450,000, guaranteed by an irrevocable letter of credit, payable to such
customer in quarterly installments of principal ($112,500) and interest (10%)
commencing March 15, 1997 and maturing on December 15, 1997, which the Company
anticipates will come from operating income. In the event the Company does not
satisfy its financial obligations under the settlement agreement by March 15,
1997, a judgment will be entered against the Company for $1.2 million. In such
event, the Company will not receive credit towards such judgment amount for the
initial $300,000 payment set forth in clause (i) above as a penalty for its
failure to satisfy its financial obligations under such settlement agreement.
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 -- Business Strategy."
Financing for such acquisitions will be provided from operations and from
borrowings under the Credit Facilities. The Company may also issue additional
debt and/or equity securities in connection with one or more of these
acquisitions.
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BUSINESS
INTRODUCTION
The Company is a supplier of new and overhauled aircraft parts to major
commerical airlines worldwide. The Company locates, acquires and supplies parts
for all major aircraft. Additionally, the Company engages in consignment and
marketing agreements with major commerical airlines, distributors and OEMs which
allow the Company to offer a wide range of parts for sale without certain risks
and financing costs associated with owned inventory. Aircraft parts offered by
the Company include those manufactured by Airbus, Boeing, General Electric,
Lockheed, McDonnell Douglas, Pratt & Whitney and Rolls Royce. Sales have
increased from $2.8 million in 1992 to $7.2 million in 1993, $16.4 million in
1994 and $22.7 million in 1995. The 1995 sales amount included one significant
sale of two whole aircraft for $6.5 million. If the opportunity exists, the
Company may sell whole aircraft in the future.
INDUSTRY OVERVIEW AND TRENDS
The worldwide aircraft parts market is highly fragmented and parts are
supplied by many types of suppliers, including airlines, OEMs and numerous
distributors, fixed base operators, FAA-certified facilities, traders and
brokers. The Canaan Group Ltd., a management consulting firm specializing in the
aircraft and aerospace industry, estimated that aircraft parts inventories
valued at $45 billion existed in May 1995, with a carrying cost of $10 billion
annually and that 80% of such inventories were owned by airlines. The Company
believes that a portion of such inventory is available for marketing,
consignment and purchase. The Company also believes that, based on other
significant market trends, its target market will continue to grow.
MARKET GROWTH. According to Boeing's 1996 Market Outlook, the worldwide
fleet of commercial aircraft and cargo jet aircraft is expected to grow from
11,066 aircraft at the end of 1995 to 23,080 aircraft 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
and the majority of the Company's sales are from foreign commercial airlines and
foreign OEMs. The Company believes that these factors have resulted and will
continue to result in increased demand for aircraft parts worldwide.
REDUCTION IN AIRLINE INVENTORIES. Historically, airlines have controlled
the majority of the aircraft parts inventory. Today, airlines are beginning to
reduce the size of their parts inventories in an effort to reduce inventory
carrying 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. To reduce the high costs
associated with excess aircraft parts inventory, many airlines are selling their
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
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a few preferred suppliers. Over the last few years, airlines have begun to
reduce the number of aircraft parts suppliers with which 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 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 objectives are 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. The Company's
marketing approach includes direct marketing to airlines and manufacturers,
advertising in trade directories and attending industry trade shows and
conferences. Although the Company concentrates the majority of its marketing
efforts on commercial airlines servicing the passenger market, it also seeks to
foster business from commercial airlines servicing the cargo market, as well as
overhaul facilities and OEMs.
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 aircraft parts 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 COMMERCIAL AIRLINES. The Company plans to continue targeting
major commercial airlines worldwide, many of which are currently customers of
the Company. Such airlines generally have larger aircraft fleets that generate a
greater demand for aircraft parts than smaller airlines. Consequently,
relationships with major commercial airlines enable the Company to expend fewer
resources to generate comparable sales volume and corresponding revenue with
margins of profitability comparable to sales to several smaller airlines.
Additionally, major commercial 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 commercial airlines also provide the Company with increased access to such
airlines' aircraft parts inventories, which are generally greater than those of
smaller airlines.
INCREASE ACCESS TO INVENTORY. The Company plans to increase its accessible
inventory by (i) entering into new consignment and marketing agreements with
airlines, manufacturers and overhaul facilities, (ii) bulk purchasing from
airlines and manufacturers of aircraft parts, and (iii) purchasing large items,
such as engines and whole aircraft, on an opportunistic basis. The
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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, 90% of the Company's sales were to international customers. The
Company plans to continue to take advantage of the growing international market
through the 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 selling a broad range of
aircraft parts from its owned inventory, on behalf of airlines and manufacturers
pursuant to consignment and marketing agreements, and from inventory located
from outside parties. For the year ended December 31, 1995, sales from owned
inventory, pursuant to consignment and marketing agreements, and pursuant to
outside sourcing represented approximately 3%, 5% and 92%, respectively, of the
Company's gross revenue. The Company's owned inventory turned approximately 0.4
times during 1995, or every 912 days. Inventory reserves are determined by
analyzing the current and future demand for the Company owned 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 and contracts with two
FAA-licensed Designated Airworthiness Representatives, 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
contributed 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 aircraft parts, and therefore is generally not subject
to the risks associated with the repair business.
Each sales person employed by the Company is responsible for making an
appraisal of a particular aircraft part's value and makes such appraisal based
on industry experience and practice after considering current manufacturers'
list price, the condition of the part, the part's availability and lead
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time to manufacture the part. The Company carries its own inventory and also has
access to a much larger pool of inventory pursuant to its consignment and
marketing agreements. This gives the Company access to a broad assortment of
aircraft parts which helps the Company meet rapid delivery requirements. The
Company's return policy permits customers to return parts within 10 days of
receipt. Additionally, although the Company's payment terms are generally 30
days, extended payment terms up to 60 days are provided in certain
circumstances.
The Company's owned inventory and the inventory it holds on consignment is
stored in the Company's Irvine, California warehouse; a party who has entered
into a marketing agreement with the Company is responsible for storing the
inventory to which the Company has access pursuant to such marketing agreement.
All inventory is shipped to customers by the Company via national courier
services to a customer's U.S. office or, if a customer does not have a U.S.
office, to a representative of such customer located in the U.S. If an aircraft
part sought by a customer exists in the Company's owned inventory or in
inventory on consignment or inventory available through exclusive marketing
agreements (together, the "Accessible Inventory"), such part is generally
shipped to the customer the day the order is placed. The turn-around time is
generally up to one week from the time the order is placed if the Company has to
acquire a part from an outside party.
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 with the Company's customers, 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 the Company's customers. The Company's sales staff,
through its knowledge of the industry and its 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 its owned inventory for
availability of the part, then checks 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 to enhance the Company's 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
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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 customers to maximize the value of their inventory while at
the same time freeing up resources that can be focused on their 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 aircraft 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 aircraft 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.
In the past, the Company conducted certain of its consignment sales
activities through ADI Consignment Sales, Inc. ("ADICS"), a wholly-owned
subsidiary of the Company. Pursuant to consignment arrangements, ADICS sold
parts held on consignment to wholesalers of aircraft parts, including the
Company. The Company has discontinued consignment sales through ADICS and
intends to dissolve ADICS in the future and conduct its consignment sales
activities directly through the Company. 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
primary 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.
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
aircraft parts suppliers 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
September 30, 1996, the Company listed approximately 240,000 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.
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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
equipped 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 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 installation on an
aircraft. When necessary, the Company uses FAA and/or Joint Aviation Authority
certified repair 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 regulations applicable to its
operations.
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 November 30, 1996, the Company had 48 full-time and two part-time
employees in the United States, two full-time employees in England and one
full-time employee in New Zealand. As of such date, the Company also has a total
of five agents in Chile, India, 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.
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FACILITIES
As of November 30, 1996, the Company owned one facility at One Wrigley
Drive, Irvine, California 92618, leased 5,000 square feet of additional
warehouse space at 4 Autry, Irvine, California 92618 on a month-to-month basis
(subject to termination upon 30-days notice) for $2,400 per month and leased a
facility at 6 Market Street, Sleaford, Lincolnshire, England for L588 per month,
which lease expires on December 31, 1996. 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
Company's facility in England is used as a sales office. The Company believes
that its facilities are adequately covered by insurance.
The Company anticipates that an additional 20,000-25,000 square feet of
warehouse space will be needed by late 1996 to accommodate new consignment and
company-owned inventory. The Company has recently begun the process of locating
such additional warehouse space.
LEGAL PROCEEDINGS
The Company is involved in certain legal and administrative proceedings and
threatened legal and administrative proceedings arising in the normal course of
its business. While the outcome of such proceedings and threatened proceedings
cannot be predicted with certainty, management believes the ultimate resolution
of these matters individually or in the aggregate will not have a material
adverse effect on the Company.
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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 54 Senior Vice President, Technical Operations
Victor Buendia 38 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
Daniel C. Lewis 47 Proposed Director
William T. Walker, Jr. 65 Proposed 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 that 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) and CR & R Inc. (1991-1993) 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, together with a technological diploma in mechanical engineering and
a teaching degree with the North York Board of Education, Canada.
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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 1992,
Mr. Buendia owned and operated his own business and brings valuable marketing,
communication and sales skills to ADI.
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 other companies in aircraft sales.
LAURA M. BIRGBAUER, CHIEF ACCOUNTING OFFICER AND TREASURER. Ms. Birgbauer
has over four years of public accounting experience and is a Certified Public
Accountant. 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.
DANIEL C. LEWIS, PROPOSED DIRECTOR. Mr. Lewis currently serves as a Senior
Vice President of Booz-Allen & Hamilton, Inc. ("Booz-Allen") where he heads the
firm's worldwide engineering manufacturing businesses of aerospace, automotive
and industrials. At Booz-Allen, Mr. Lewis is a member of the Commercial
Leadership Team, Operating Council, and is a former Director of the company.
Prior to joining Booz-Allen, Mr. Lewis was a materials manager in
Warner-Lambert's consumer products group. Prior to Warner-Lambert, Mr. Lewis was
with Sundstrand working in the machine tool and aerospace business. Mr. Lewis
has a B.S. in industrial supervision and a B.A. in applied science from Purdue
University and an M.B.A. from Fairleigh Dickinson University.
WILLIAM T. WALKER, JR., PROPOSED DIRECTOR. Mr. Walker founded Walker
Associates, a corporate finance consulting firm for investment banking, in 1985
and has participated in or been instrumental in completing over $250 million in
public and private offerings since its inception. Prior to forming Walker
Associates, Mr. Walker served as executive Vice President, Manager of Investment
Banking, Member of the Board and Executive Committee and Chairman of the
Underwriting Committee for Bateman Eichler Hill Richards, a New York Stock
Exchange Member firm. Mr. Walker is also a member of the Board of Directors of
Fortune Petroleum Corporation and Go-Video, Inc., both public companies traded
on the American Stock Exchange. Mr. Walker attended Stanford University.
BOARD OF DIRECTORS
The Board of Directors of the Company (the "Board of Directors") is
currently comprised of Messrs. Bakhit, Ashton and Haglund. Prior to the
consummation of the Offering, the Company intends to appoint Messrs. Lewis and
Walker, each of whom are neither officers nor employees of the Company, as
directors. 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.
The Board of Directors has (i) an Audit Committee that is responsible for
recommending to the Board of Directors the engagement of the independent
auditors of the Company and reviewing with
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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, and (ii) a Compensation
Committee (the "Compensation Committee") that is responsible for reviewing and
approving all compensation arrangements for officers of the Company, including
compensation pursuant to the Executive Compensation Plan (as defined herein),
and for administering the 1996 Stock Option Plan. See "Employment Agreements"
and "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. 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.
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 $328,718 from
the Company for personal use. See "Certain Transactions." In 1994, Mr.
Bakhit received an annual salary of $106,000.
(2) Compensation consists of automobile lease payments and automobile insurance
paid by the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into an amended and restated employment agreement
with Mr. Bakhit (the "Bakhit Agreement") pursuant to which Mr. Bakhit shall
serve as the Chairman of the Board, Chief Executive Officer and President. The
Bakhit Agreement provides for an annual base salary of $225,000. In addition,
the Company shall provide Mr. Bakhit with an automobile allowance and all
employee benefits established for Company employees. The Bakhit Agreement also
provides Mr. Bakhit with incentive compensation under the Executive Incentive
Compensation Plan (the "Executive Compensation Plan"), which provides for the
contribution to a senior management bonus pool of 7.5% 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 is
entitled to bonus compensation declared at the discretion of the independent
members of the Board of Directors from time to time in an amount not to exceed
two times Mr. Bakhit's annual base salary per calendar year. Under the Bakhit
Agreement, Mr. Bakhit was granted an option to purchase 51,050 shares of Common
Stock pursuant to the terms of the Company's 1996 Stock Plan (defined below) at
an option price of $7 per share. This option vests six months after the closing
of the Offering.
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<PAGE>
The Bakhit Agreement contains nonsolicitation, noncompetition and
confidentiality provisions, which provisions are tied to Mr. Bakhit remaining
with the Company as a consultant upon certain events of termination. The Bakhit
Agreement provides for an initial term expiring on December 31, 2001. However,
the Bakhit Agreement will be automatically renewed for a new five-year term on
its 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 has entered into an employment agreement with Mr. Ashton (the
"Ashton Agreement") pursuant to which Mr. Ashton shall serve as the Company's
Chief Financial Officer and Vice President, Finance. The Ashton Agreement
provides for an annual base salary of $120,000. In addition, the Company shall
provide Mr. Ashton all employee benefits established for Company employees. The
Ashton Agreement also provides 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 was granted an option to
purchase 10,000 shares of Common Stock pursuant to the 1996 Stock Plan at an
option price of $7 per share. This option vests ratably over a three-year period
commencing six months after the closing of the Offering.
The Ashton Agreement contains nonsolicitation and confidentiality
provisions. The Ashton Agreement provides for an initial term expiring on
December 31, 1999. However, 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 has entered into an employment agreement with Mr. Ward (the
"Ward Agreement") pursuant to which Mr. Ward shall serve as the Company's
Executive Vice President. The Ward Agreement provides for an annual base salary
of $120,000. In addition, the Company shall provide Mr. Ward all employee
benefits established for Company employees. The Ward Agreement also provides 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 was granted an option to purchase 15,000 shares of Common Stock pursuant to
the 1996 Stock Plan at an option price of $7 per share. This option vests
ratably over a three-year period commencing six months after the closing of the
Offering. In addition, Mr. Ward is entitled to commission on sales to certain
customers identified in the Ward Agreement equal to 1.25% of such sales.
The Ward Agreement contains nonsolicitation and confidentiality provisions.
The Ward Agreement provides 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, the Board of Directors 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 264,500 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
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<PAGE>
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 of
Regulation G (12 C.F.R. Section207), 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.
PLAN ADMINISTRATION
The 1996 Stock Plan is administered by the Board of Directors, and from and
after the consumation of the Offering, will be administered by the Compensation
Committee, 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 Compensation Committee are not entitled to
receive remuneration for administering the 1996 Stock Plan. The 1996 Stock Plan
provides that no member of the Board of Directors or the Compensation 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 264,500 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 and affiliates who is determined by the Plan
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<PAGE>
Administrator to be eligible for participation in the 1996 Stock Plan,
consistent with the purposes of the Plan; provided that, ISOs may only be
granted to employees of the Company and its subsidiaries and affiliates which
have participants in the 1996 Stock 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 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 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
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<PAGE>
by the Board of Directors or the Compensation 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 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 of Directors or the Compensation 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 of Directors and the Compensation 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 of Directors or the Compensation 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 1996 Stock 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
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<PAGE>
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.
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 are 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.
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<PAGE>
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 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
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<PAGE>
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 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.
1996 STOCK PLAN BENEFITS
On July 16, 1996, the Board of Directors approved grants of Options to 34
non-employee directors, employees and independent contractors of the Company at
an exercise price of $7 per share, which was equal to the median value of the
estimated range of the initial public offering price of the Common Stock on the
date of grant. The following table provides information with respect to certain
of such Option grants. The size of any future grants to be made to individuals
named or described in the table cannot yet be determined.
<TABLE>
<CAPTION>
NAME AND POSITION OPTIONS GRANTED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Osamah S. Bakhit 51,050
Chief Executive Officer and Director
Jeffrey G. Ward 15,000
Executive Vice President
Dennis R. Lewis 0
Senior Vice President, Technical Operations
Executive Officer Group 76,050
Non-Executive Director Group 10,000
Non-Executive Officer Employee Group 63,950
</TABLE>
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
37
<PAGE>
status or service as directors of officers (other than liabilities arising from
willful misconduct of a culpable nature) and to advance their expenses incurred
as a result of any proceeding against them, as to which they could be
indemnified. 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.
38
<PAGE>
CERTAIN TRANSACTIONS
The Company loaned $328,718 to Mr. Bakhit for personal use in December 1995.
As of September 30, 1996, $328,718 principal amount was outstanding on the loan.
The loan is payable in quarterly principal installments of approximately $82,180
beginning March 1, 1997 and continuing through December 1, 1997. The loan bears
an interest rate of 6%. Interest on the unpaid principal balance through
December 30, 1996 is due and payable on December 30, 1996; thereafter, interest
is payable quarterly beginning March 1, 1997 and continuing through December 1,
1997 when all accrued and unpaid interest is due and payable. Payment of such
loan by Mr. Bakhit may be extended from time to time by the Board of Directors
of the Company.
Mr. Bakhit and his wife have personally guaranteed the Credit Facilities
with Far East Bank. Far East Bank has indicated orally that it will consider
terminating such guarantee following consummation of the Offering.
Pursuant to an Aircraft Purchase Agreement dated January 6, 1995 between the
Company and Air China Group Import and Export Trading Company ("Air China"), as
amended (the "Purchase Agreement"), the Company purchased two whole Boeing
707-320C aircraft (the "Aircraft") from Air China for an aggregate purchase
price of $5,500,000. The Company financed the purchase through a term loan with
State Street Bank.
Pursuant to an Aircraft Purchase Agreement dated August 8, 1995 (the "Sales
Agreement") between the Company and Alia-The Royal Jordanian Airline ("RJ"), the
Company sold the Aircraft and four Pratt & Whitney JT3D-7 aircraft engines to RJ
for an aggregate sale price of $7,980,000 financed by RJ through a revolving
letter of credit with the Housing Bank of Jordan payable in 48 monthly
installments of $166,250.
The Company expects that transactions between the Company and its officers,
directors and affiliated persons in the future, if any, will be on terms as
favorable to the Company as such terms would be if negotiated between the
Company and persons unaffiliated with its officers, directors or affiliated
persons.
PRINCIPAL 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 Principal 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(2) TO BE SOLD AFTER THE OFFERING
------------------------- ---------------- -------------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER NUMBER PERCENT
- -------------------------------------- ----------- ------------ ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Osamah S. Bakhit (1).................. 1,785,000 100% -- 1,785,000 64%
All directors and executive officers
as a group (4 persons)............... 1,785,000 100% -- 1,785,000 64%
</TABLE>
- ------------------------
(1) The mailing address of Mr. Bakhit is c/o Aviation Distributors Incorporated,
One Wrigley Drive, Irvine, California 92618. Mr. Bakhit is the Chief
Executive Officer, President and a director of the Company.
(2) Does not include Common Stock that may be purchased pursuant to the exercise
of Options granted to Mr. Bakhit and to other directors and executive
officers. See "Management -- Employee Benefit Plans -- 1996 Stock Plan
Benefits."
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have 2,785,000
shares of Common Stock outstanding. Of these shares, the 1,000,000 shares sold
by the Company 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 1,785,000 shares of Common Stock 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 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 1996 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 has 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."
40
<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
41
<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 Corporations
Code may 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.
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom CRI is acting as
Representative, have severally agreed to purchase from the Company and the
Company has 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 as
set forth on the cover page of this Prospectus.
The Company has 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 150,000 shares 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 135% 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 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 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.
43
<PAGE>
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 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 LLP, 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 giving said reports.
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 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.
44
<PAGE>
AVIATION DISTRIBUTORS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited).......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995
and for the nine months ended September 30, 1995 and 1996 (unaudited)................ F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1994
and 1995 and for the nine months ended September 30, 1996 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995
and for the nine months ended September 30, 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, Inc.:
We have audited the accompanying consolidated balance sheet of AVIATION
DISTRIBUTORS, INC. (a Delaware corporation) and subsidiaries 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. 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, Inc.
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
F-2
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
1995 30,
------------ 1996
-----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 867,721 $ 6,507
Restricted cash.......................................................... 301,175 63,610
Accounts receivable, net of allowance for doubtful accounts of $48,607 at
December 31, 1995 and $30,000 at September 30, 1996..................... 4,437,112 5,471,499
Other receivables........................................................ 141,287 420,827
Inventories.............................................................. 2,209,262 2,925,253
Current portion of notes receivable...................................... 1,466,224 1,577,346
Current portion of note receivable from officer.......................... 65,744 246,538
Prepaid expenses......................................................... 51,700 112,595
------------ -----------
Total current assets................................................... 9,540,225 10,824,175
------------ -----------
PROPERTY AND EQUIPMENT 1,663,378 1,766,305
Less -- Accumulated depreciation......................................... 170,140 247,129
------------ -----------
1,493,238 1,519,176
------------ -----------
Notes receivable, net of current portion................................... 4,674,491 3,471,678
Note receivable from officer, net of current portion....................... 262,974 82,180
Other assets............................................................... 43,765 264,666
------------ -----------
4,981,230 3,818,524
------------ -----------
$ 16,014,693 $16,161,875
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Checks issued not yet presented for payment.............................. $ 574,888 $ 207,830
Accounts payable......................................................... 2,185,188 1,746,130
Accrued liabilities...................................................... 370,833 1,399,780
Lines of credit.......................................................... 4,667,784 5,414,337
Current portion of long-term debt........................................ 1,815,220 2,532,748
Current portion of capital lease obligations............................. 26,178 21,393
------------ -----------
Total current liabilities.............................................. 9,640,091 11,322,218
------------ -----------
Long-term debt, net of current portion..................................... 6,168,356 4,754,749
------------ -----------
Capital lease obligations, net of current portion.......................... 53,240 38,801
------------ -----------
Commitments and Contingencies
STOCKHOLDER'S EQUITY:
Capital stock, par value of $.01, 10,000,000 shares authorized; 1,785,000
shares issued and outstanding........................................... 17,850 17,850
Additional paid in capital............................................... 389,150 389,150
Retained deficit......................................................... (253,994) (360,893)
------------ -----------
Total stockholder's equity............................................. 153,006 46,107
------------ -----------
$ 16,014,693 $16,161,875
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------ SEPTEMBER 30,
1994 1995 ------------------------------
-------------- -------------- 1995 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
DISTRIBUTED SERVICES AND INVENTORY SALES........ $ 13,530,167 $ 21,544,983 $ 17,159,334 $ 14,408,904
NET SALES ON CONSIGNMENT AND MARKETING
AGREEMENTS..................................... 2,838,800 1,107,327 992,562 2,910,370
-------------- -------------- -------------- --------------
TOTAL NET SALES................................. 16,368,967 22,652,310 18,151,896 17,319,274
COST OF SALES................................... 11,809,104 18,679,924 15,092,760 12,429,936
-------------- -------------- -------------- --------------
Gross profit................................ 4,559,863 3,972,386 3,059,136 4,889,338
LEGAL SETTLEMENT EXPENSE........................ -- -- -- 1,375,000
SELLING AND ADMINISTRATIVE EXPENSES............. 3,957,897 3,757,073 2,770,259 3,381,350
-------------- -------------- -------------- --------------
Income from operations...................... 601,966 215,313 288,877 132,988
OTHER EXPENSES (INCOME):
Interest expense.............................. 281,260 867,030 438,172 937,777
Interest income............................... (2,835) (245,332) (78,292) (433,161)
Other expense (income)........................ 12,603 (88,232) (99,975) (11,729)
-------------- -------------- -------------- --------------
Income (loss) before provision (benefit) for
income taxes............................... 310,938 (318,153) 28,972 (359,899)
PROVISION (BENEFIT) FOR INCOME TAXES............ 102,460 (103,320) 11,589 (253,000)
-------------- -------------- -------------- --------------
Net income (loss)........................... $ 208,478 $ (214,833) $ 17,383 $ (106,899)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Earnings (loss) per share....................... $ .12 $ (.12) $ .01 $ (.06)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares outstanding............. 1,785,000 1,785,000 1,785,000 1,785,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CAPITAL STOCK
---------------------- ADDITIONAL TOTAL
NUMBER PAID RETAINED STOCKHOLDER'S
OF SHARES AMOUNT IN CAPITAL DEFICIT EQUITY
----------- --------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. 1,785,000 $ 17,850 $ 279,150 $ (247,639) $ 49,361
Capital contribution.................... -- -- 110,000 -- 110,000
Net income.............................. -- -- -- 208,478 208,478
----------- --------- -------------- ------------ -------------
Balance at December 31, 1994.............. 1,785,000 17,850 389,150 (39,161) 367,839
Net loss................................ -- -- -- (214,833) (214,833)
----------- --------- -------------- ------------ -------------
Balance at December 31, 1995.............. 1,785,000 17,850 389,150 (253,994) 153,006
Net loss................................ -- -- -- (106,899) (106,899)
----------- --------- -------------- ------------ -------------
Balance at September 30, 1996
(unaudited).............................. 1,785,000 $ 17,850 $ 389,150 $ (360,893) $ 46,107
----------- --------- -------------- ------------ -------------
----------- --------- -------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------ SEPTEMBER 30,
1994 1995 ------------------------
----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 208,478 $ (214,833) $ 17,383 $ (106,899)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Sale in exchange for note receivable.................... -- (6,617,406) (6,617,406) --
Principal payments of notes receivable.................. -- 482,691 130,811 1,085,691
Borrowings on notes payable related to inventory
purchases.............................................. -- 7,463,356 6,617,406 1,161,782
Principal payments on notes payable related to inventory
purchases.............................................. -- (482,681) (130,811) (1,710,691)
Reduction in amount due on notes payable related to
inventory purchases.................................... -- -- -- (210,950)
Non-cash portion of nonrecurring loss on settlement..... 230,075 -- -- --
Loss on sale of property and equipment.................. -- -- -- 48,999
Depreciation and amortization of debt discount.......... 91,972 87,628 65,900 175,795
Changes in assets and liabilities:
Accounts receivable, net.............................. (1,650,155) (707,814) (185,761) (1,034,387)
Other receivables..................................... (250,601) 109,314 (503,086) (279,540)
Inventories........................................... (199,540) (1,833,509) (780,842 (674,918)
Other assets.......................................... (70,071) (44,919) (72,712) (275,796)
Checks issued not yet presented for payment........... 680,632 (105,744) 119,881 (367,058)
Accounts payable...................................... 29,273 908,668 543,260 (439,058)
Accrued liabilities................................... 34,769 327,167 25,619 1,028,947
Income tax payable.................................... 105,330 (105,330) (12,795) --
----------- ----------- ----------- -----------
Net cash used in operating activities............... (789,838) (733,422) (783,153) (1,598,083)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (120,086) (1,257,103) (1,236,220) (178,309)
Borrowings given on notes receivable...................... -- (6,000) (6,000) --
Borrowings given on note receivable from officer.......... -- (328,718) -- --
(Increase) decrease in restricted cash.................... (105,000) (196,175) (742,569) 237,565
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities......................................... (225,086) (1,787,996) (1,984,789) 59,256
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit............................. 1,072,250 8,988,103 13,619,640 16,445,394
Principal payments on lines of credit..................... -- (6,769,388) (12,028,732) (15,698,841)
Borrowings on long-term debt.............................. 68,233 1,848,276 974,196 --
Principal payments of long-term debt...................... (9,272) (909,076) (31,501) (49,716)
Principal payments of capital lease obligations........... (9,120) (19,965) (13,463) (19,224)
Contributed capital....................................... 10,000 -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities........... 1,132,091 3,137,950 2,520,140 677,613
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 117,167 616,532 (247,802) (861,214)
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 $ 3,387 $ 6,507
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 275,210 $ 786,725 $ 401,222 $ 920,951
Income taxes............................................ 1,600 32,632 2,400 20,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital contribution of inventory from an officer, valued
at officer's historical cost............................. 100,000 -- -- --
Capital lease obligations for purchase of new equipment... 32,000 74,779 74,779 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Aviation Distributors, Inc. ("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, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996, approximately 72.4%, 90.3%, 90.2% and 65.0%,
respectively, of the Company's net sales were export sales. These export sales
by region were approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------------
1994 1995 1995 1996
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Pacific Rim......................................................... 19.2% 22.4% 19.7% 20.3%
Europe.............................................................. 25.0 15.7 14.1 24.5
Latin/South America................................................. 16.6 17.4 15.6 13.5
Africa/Middle East.................................................. 11.6 34.8 40.8 6.7
--- --- --- ---
72.4% 90.3% 90.2% 65.0%
--- --- --- ---
--- --- --- ---
</TABLE>
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 September 30, 1996 and for the
nine month periods ended September 30, 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 in 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.
F-7
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying values of the Company's financial
instruments (cash and cash equivalents, notes receivable and notes payable)
approximated their fair values as the interest rates on such financial
instruments are comparable to market rates.
The Company had an outstanding irrevocable letter of credit in the amount of
$1,700,000 as of September 30, 1996. This letter of credit has a term of 17
months and collateralizes the Company's obligation to a third party for the
purchase of inventory. The fair value of this letter of credit is estimated to
be the same as the contract value based on the nature of the fee arrangements
with the issuing banks.
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.
Distributed services and inventory sales represent sales of inventory
located through outside parties and sales of company owned inventory. Net sales
on consignment and marketing agreements represent revenue related to sales of
inventory held on consignment and sales of inventory obtained through marketing
agreements.
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
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.
F-8
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 annually on the aggregate principal
balance outstanding. This officer who is also the Company's sole stockholder did
not draw a salary during 1995. See "Note 14" for subsequent changes to this note
receivable.
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 credit risks consist of accounts
receivable denominated in U.S. dollars from customers in the aircraft industry.
The Company performs periodic credit evaluations of its customers' financial
conditions and provides an allowance for doubtful accounts as required.
NOTE 5 -- NOTES RECEIVABLE:
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
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 $ 5,049,024
Note receivable from an individual........................................ 6,000 --
------------- -------------
6,140,715 5,049,024
Less -- Current portion................................................... 1,466,224 1,577,346
------------- -------------
$ 4,674,491 $ 3,471,678
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Buildings................................................................. $ 1,087,834 $ 1,129,240
Computer equipment and software........................................... 236,417 282,443
Machinery and equipment................................................... 172,072 250,022
Furniture and fixtures.................................................... 81,822 94,750
Auto...................................................................... 85,233 9,850
------------- -------------
$ 1,663,378 $ 1,766,305
------------- -------------
------------- -------------
</TABLE>
NOTE 7 -- LINES OF CREDIT:
The Company has revolving lines of credit with a financial institution,
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revolving line of credit, interest at prime rate (8.50 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
$3,500,000. See "Note 14" for subsequent changes to this line of credit............ $ 3,181,671 $ 3,565,185
Revolving line of credit, interest at prime rate (8.50 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
$1,500,000. See "Note 14" for subsequent changes to this line of credit............ 1,284,200 1,849,152
Revolving line of credit, interest at 7.5 percent due monthly, principal due May 7,
1996, secured by restricted cash at December 31 of $201,913, maximum borrowings
were $500,000...................................................................... 201,913 --
------------- -------------
$ 4,667,784 $ 5,414,337
------------- -------------
------------- -------------
</TABLE>
These lines of credit are personally guaranteed by the stockholder who is
also an officer of the Company.
The weighted average borrowings outstanding under the Company's lines 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 12.0% and 10.7%,
respectively. The weighted average interest rates at December 31, 1994 and 1995
were approximately 12.5% and 9.8%, respectively.
F-10
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------- SEPTEMBER 30,
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 $ 5,049,024
Note payable to a financial institution, secured by a building, due in adjustable
monthly installments of $7,729 as of December 31, 1995 (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............................................. 950,585 940,195
Note payable to a corporation, secured by specific inventory, due in semi-annual
installments of $125,000 (principal and interest) to December 1998, with an
imputed interest rate of 10 percent, net of discount of $154,050 on original
sales value of inventory of $1,000,000 and $70,261 on renegotiated sales value of
inventory of $750,000 at December 31, 1995 and September 30, 1996,
respectively..................................................................... 845,950 554,739
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
discount of $19,968. (see Note 10)............................................... -- 730,540
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 --
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 3,216
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 9,783
------------- -------------
7,983,576 7,287,497
Less -- Current portion............................................................. 1,815,220 2,532,748
------------- -------------
$ 6,168,356 $ 4,754,749
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LONG-TERM DEBT: (CONTINUED)
Future annual principal payments on long-term debt at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1996..................... $ 1,815,220
1997..................... 1,932,038
1998..................... 2,051,398
1999..................... 1,295,826
2000..................... 19,736
Thereafter............... 869,358
-------------
$ 7,983,576
-------------
-------------
</TABLE>
NOTE 9 -- INCOME TAXES:
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
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>
At December 31, 1995 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) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
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)
Net operating losses............................................... -- --
Other, net......................................................... (22,344) 23,751
----------- ------------
$ 102,460 $ (103,320)
----------- ------------
----------- ------------
</TABLE>
F-12
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES: (CONTINUED)
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>
<CAPTION>
Depreciation..................................................... $ (28,192)
<S> <C>
---------
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. As of
December 31, 1995 the Company has net operating loss carryforwards of
approximately $212,000 and $106,000 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
(see Note 8).
F-13
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
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.
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 that manufactured aircraft hardware, to this officer. ADI
Manufacturing Inc.'s results of operations were not material to the Company's
financial statements. The common stock was valued at the book value of net
assets transferred. 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 relating to this settlement was $376,075, which is
included in selling and administrative expenses.
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. During 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..................................................... 19,707 86,400
Amounts written off.................................................... (7,500) (50,000)
--------- ---------
Ending balance......................................................... $ 12,207 $ 48,607
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. -- SUBSEQUENT EVENTS-UNAUDITED
STOCK OPTION PLAN
On July 10, 1996, the Company adopted the Aviation Distributors Incorporated
1996 Stock Option and Incentive Plan (the "Plan") which provides for the
issuance of up to a maximum of 264,500 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.
On July 16, 1996, the Company's board of directors granted 150,000 options
under the Plan at an exercise price of $7.00 per share.
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.
STOCK SPLIT
On August 16, 1996 the Company approved a .85 for one stock split. All share
and per share data have been retroactively restated in the accompanying
financial statements to give effect to this stock split.
LINES OF CREDIT
In August 1996 the Company's $3.5 million and $1.5 million lines of credit
were increased to $4.5 million and $2.0 million, respectively, and extended to
March 31, 1997 and August 31, 1997, respectively.
The $4.5 million line has a financial covenant that requires the Company's
tangible net worth to be not less than $750,000 beginning December 31, 1996.
As of September 30, 1996, the Company's tangible net worth was approximately
$46,000. The ability of the Company to be in compliance with this covenant as of
December 31, 1996, is dependent upon, among other things, the success of fourth
quarter operations. In the opinion of management, the Company will meet this
covenant as of December 31, 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with the Chief
Executive Officer (CEO) providing for a base salary of $225,000, an automobile
allowance, incentive compensation under the Executive Incentive Compensation
Plan, and bonus compensation from time to time on an amount determined by the
independent members of the Board of Directors not to exceed two times his base
salary per calendar year. The CEO was also granted 51,050 shares of common stock
at an option price of $7 per share. The agreement expires on December 31, 2001
and will be automatically renewed for a new five-year term on the expiration
date unless cancelled upon 90 days written notice.
F-15
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. -- SUBSEQUENT EVENTS-UNAUDITED (CONTINUED)
The Company has also entered into an employment agreement with an officer
providing for an annual base salary of $120,000, all normal employee benefits,
incentive compensation under the Executive Incentive Compensation Plan and
options to purchase 10,000 shares of common stock at an option price of $7 per
share. The agreement expires on December 31, 1999 and will be automatically
renewed for a new three-year term on the expiration date unless cancelled upon
90 days written notice.
The Company has also entered into an employment agreement with an officer
providing for an annual base salary of $120,000, all normal employee benefits,
incentive compensation under the Executive Incentive Compensation Plan and
options to purchase 15,000 shares of common stock at an option price of $7 per
share. In addition, this officer is entitled to commission on sales to certain
customers identified in the agreement equal to 1.25% of such sales. The
agreement expires on December 31, 1999 and will be automatically renewed for a
new three year term on the expiration date unless cancelled upon 90 days written
notice.
LEGAL SETTLEMENT
In February 1996, an action was brought against the Company arising out of a
dispute relating to an agreement between the Company and a customer. The
plaintiff claimed, among other things, damages of $3,518,000, interest, attorney
fees and punitive damages. At December 31, 1995, the Company believed they had
adequately accrued in the amount of $166,000 their potential liability, based
upon discussions with legal counsel indicating substantial defenses to the
remaining claims from this customer. The Company also filed a counterclaim
against this customer for breach of contract, fraud and negligent
misrepresentation. Although the Company believed it had meritorious defenses to
this dispute, in August 1996, counsel advised the Company that final judicial
resolution of such matter could take several years. Consequently, in order to
pursue an initial public offering in a timely manner, during the third quarter
of 1996 the Company made a strategic business decision to resolve this dispute.
On November 1, 1996 this case was settled for $1.2 million, which was accrued in
the accompanying balance sheet at September 30, 1996. Included in the legal
settlement expense as of September 30, 1996 is the $1.2 million settlement
charge plus $175,000 of legal costs.
Pursuant to such settlement agreement, the Company (i) paid such customer
$300,000 upon execution of settlement agreement, (ii) agreed to pay such
customer an additional $450,000 on or before December 31, 1996, subject to
extension, and (iii) executed a note guaranteed by an irrevocable letter of
credit in the amount of $450,000 payable to such customer in quarterly
installments including 10% interest commencing March 15, 1997. In the event the
Company does not satisfy its obligations under the settlement agreement by March
15, 1997, a judgment will be entered against the Company for $1.2 million. In
such event, the Company will not receive credit towards such judgment amount for
the initial $300,000 payment set forth in clause (i) above.
CORPORATE NAME CHANGE
On September 16, 1996 the Company changed its name to Aviation Distributors,
Inc.
NOTE RECEIVABLE FROM OFFICER
In November 1996 the terms of the note receivable from officer were amended.
The new terms amend the principal payments to be due and payable in four equal
quarterly installments of approximately $82,180, commencing on March 1, 1997 and
continuing through December 1, 1997. Interest payments were amended to require
the interest on the unpaid principal balance through December 30, 1996 shall be
due and payable on December 30, 1996; thereafter, interest on the unpaid
principal balance shall be due and payable quarterly commencing March 1, 1997
and continuing through December 1, 1997.
F-16
<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 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.................................................................. 21
Management................................................................ 28
Certain Transactions...................................................... 39
Principal Stockholder..................................................... 39
Shares Eligible for Future Sale........................................... 40
Description of Capital Stock.............................................. 41
Underwriting.............................................................. 43
Legal Matters............................................................. 44
Experts................................................................... 44
Additional Information.................................................... 44
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, INC.
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 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.
II-1
<PAGE>
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 SmallCap Market Listing Fee......................................... 6,150
Blue Sky fees and expenses................................................. 60,000
Printing and engraving expenses............................................ *
Legal fees and expenses.................................................... 300,000
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.
4.2 Form of Warrant Agreement.
**5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.2 1996 Stock Option and Incentive Plan.
10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The
Royal Jordanian Airlines and Aviation Distributors Incorporated.
10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air
China Group Import & Export Trading Co. and Aviation Distributors
Incorporated.
10.5 Revolving Credit Facility, dated August 22, 1996, by and between Aviation
Distributors Incorporated and Far East National Bank.
10.6 Employment Agreement, dated as of July 16, 1996, by and between Osamah S.
Bakhit and Aviation Distributors Incorporated.
10.7 Employment Agreement, dated as of July 16, 1996, by and between Mark W.
Ashton and Aviation Distributors Incorporated.
10.8 Employment Agreement, dated as of July 16, 1996, by and between Jeffrey G.
Ward and Aviation Distributors Incorporated.
10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone and
Aviation Distributors, Inc.
10.10 Lease Agreement, dated January 1, 1996, by and between Ian and Robert
Burton Limited and Aviation Distributors (Europe) Limited.
10.11 Revolving Credit Facility, dated August 31, 1996, by and between Aviation
Distributors Incorporated and Far East National Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.12 Non-Revolving Credit Facility, dated August 22, 1996, by and between
Aviation Distributors, Incorporated and Far East National Bank.
10.13 Amended and Restated Employment Agreement, dated as of July 16, 1996, by
and between Osamah S. Bakhit and Aviation Distributors Incorporated.
*10.14 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation
Distributors, Inc., dated as of December 31, 1995.
*10.15 Settlement Agreement dated as of November 1, 1996.
*10.16 Form of Indemnity Agreement.
23.1 Consent of Arthur Andersen LLP.
**23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-4 of the Registration Statement on
Form SB-2 filed on July 12, 1996 (File No. 333-8061)).
99.1 Lock-up Agreement, dated August 16, 1996, by and between Osamah S. Bakhit
and Cruttenden Roth Incorporated.
99.2 Consent of Daniel C. Lewis.
99.3 Consent of William T. Walker, Jr.
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
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 Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irvine, State of California, on the 2nd day of
December, 1996.
AVIATION DISTRIBUTORS, INC.
By: /s/ OSAMAH S. BAKHIT
-----------------------------------
Osamah S. Bakhit
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement was signed by the following persons in
the capacities stated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------------------- -----------------------
*
------------------------------------ Chief Executive Officer, President and December 2, 1996
Osamah S. Bakhit Director (Principal Executive Officer)
* Chief Financial Officer, Vice President,
------------------------------------ Finance and Director (Principal December 2, 1996
Mark W. Ashton Financial Officer)
*
------------------------------------ Treasurer (Principal Accounting Officer) December 2, 1996
Laura M. Birgbauer
*
------------------------------------ Secretary and Director December 2, 1996
Bruce H. Haglund
By /s/ OSAMAH S. BAKHIT
-----------------------------------
Osamah S. Bakhit
ATTORNEY-IN-FACT
</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...........................
3.2 Bylaws, as amended, of the Registrant.........................................................
4.1 Specimen Common Stock Certificate.............................................................
4.2 Form of Warrant Agreement.....................................................................
**5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP...........................................
10.2 1996 Stock Option and Incentive Plan..........................................................
10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian
Airlines and Aviation Distributors Incorporated..............................................
10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air China Group Import &
Export Trading Co. and Aviation Distributors Incorporated....................................
10.5 Revolving Credit Facility, dated August 22, 1996, by and between Aviation Distributors
Incorporated and Far East National Bank......................................................
10.6 Employment Agreement, dated as of July 16, 1996, by and between Osamah S. Bakhit and Aviation
Distributors Incorporated....................................................................
10.7 Employment Agreement, dated as of July 16, 1996, by and between Mark W. Ashton and Aviation
Distributors Incorporated....................................................................
10.8 Employment Agreement, dated as of July 16, 1996, by and between Jeffrey G. Ward and Aviation
Distributors Incorporated....................................................................
10.9 Commercial Lease, dated June 11, 1996, by and between Francis De Leone and Aviation
Distributors, Inc............................................................................
10.10 Lease Agreement, dated January 1, 1996, by and between Ian and Robert Burton Limited and
Aviation Distributors (Europe) Limited.......................................................
10.11 Revolving Credit Facility, dated August 31, 1996, by and between Aviation Distributors
Incorporated and Far East National Bank......................................................
10.12 Non-Revolving Credit Facility, dated August 22, 1996, by and between Aviation Distributors,
Incorporated and Far East National Bank......................................................
10.13 Amended and Restated Employment Agreement, dated as of July 16, 1996, by and between Osamah S.
Bakhit and Aviation Distributors Incorporated................................................
*10.14 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation Distributors, Inc.,
dated as of December 31, 1995................................................................
*10.15 Settlement Agreement dated as of November 1, 1996.............................................
*10.16 Form of Indemnity Agreement...................................................................
23.1 Consent of Arthur Andersen LLP................................................................
**23.2 Consent of Counsel (included on page II-4 of the Registration Statement on Form SB-2 filed on
July 12, 1996 (File No 333-8061))............................................................
24.1 Power of Attorney (See page II-4).............................................................
99.1 Lock-up Agreement, dated August 16, 1996, by and between Osamah S. Bakhit and Cruttenden Roth
Incorporated.................................................................................
99.2 Consent of Daniel C. Lewis....................................................................
99.3 Consent of William T. Walker, Jr..............................................................
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
<PAGE>
Exhibit 10.14
AMENDED AND RESTATED PROMISSORY NOTE
$328,718.00 Dated as of December 31, 1995
Irvine, California
FOR VALUE RECEIVED, the undersigned, OSAMAH S. BAKHIT ("Payor")
promises to pay to AVIATION DISTRIBUTORS, INC., a Delaware corporation and
successor corporation to Aviation Distributors, Inc., a California corporation
("Payee"), the principal sum of Three Hundred Twenty-Eight Thousand Seven
Hundred Eighteen Dollars and No Cents ($328,718.00), together with simple
interest at the rate of six percent (6%) per annum on the aggregate principal
balance outstanding from time to time.
Principal on the Note shall be due and payable in four (4) equal
quarterly installments of Eighty-Two Thousand One Hundred Seventy-Nine Dollars
and Fifty Cents ($82,179.50), commencing March 1, 1997 and continuing through
December 1, 1997.
Interest on the unpaid principal balance through December 30, 1996
shall be due and payable on December 30, 1996; thereafter, interest on the
unpaid principal balance shall be due and payable quarterly commencing March 1,
1997 and continuing through December 1, 1997 when all accrued but unpaid
interest shall be due and payable.
In the event of default under this Note which is not cured within
sixty (60) days after a notice of default has been sent in writing to Payor, the
principal balance and accrued but unpaid interest shall immediately become due
and payable.
Payee shall be entitled to collect a reasonable attorneys' fee from
the Payor, as well as other costs, charges, and expenses reasonably incurred, in
curing any default or attempting collection of the payment due on this Note,
whether or not litigation or any proceeding to enforce this Note is commenced.
This Note may be prepaid in whole or in part at any time without
penalty.
If any term or provision of this Note, or any portion of any such term
or provision, shall be held invalid or against public policy, or if the
application of the same to any person or circumstance is held invalid or against
public policy, then, the
<PAGE>
remainder of this Note (or the remainder of such term or provision) and the
application thereof to other persons or circumstances shall not be affected
thereby and shall remain valid and in full force and effect to the fullest
extent permitted by law.
This Note shall be governed by and construed solely in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, Payor has executed this Amended and Restated
Promissory Note as of the day first hereinabove written at Irvine, California.
___________________________________
Osamah S. Bakhit
2
<PAGE>
Exhibit 10.15
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Agreement") is made and entered into as of
November 1, 1996, by and between COMPANIA MEXICANA DE AVIACION, S.A., DE C.V., a
Mexican corporation ("Mexicana"), and its subsidiaries and divisions, and
TURBORREACTORES, S.A., DE C.V., a Mexican corporation, and its subsidiaries and
divisions, on the one hand, and ADI CONSIGNMENT SALES, INC., a California
corporation ("ADICS"), AVIATION DISTRIBUTORS, INC., a Delaware corporation (and
successor corporation to AVIATION DISTRIBUTORS, INC., a California corporation)
and its subsidiaries and divisions ("ADI"), and OSAMAH S. BAKHIT, an individual
("Mr. Bakhit"), on the other hand (collectively referred to as the "ADI
Parties"). Mexicana, Turborreactores, and the ADI Parties are sometimes
hereinafter referred to collectively as "the parties" and individually as a
"party."
RECITALS:
A. On or about February 14, 1996, Mexicana filed a complaint in the
United States District Court, Central District of California, Case No. SA CV
96-140 GLT (EEX), against the ADI Parties, which Complaint was later amended
(hereinafter all versions of the Complaint filed by Mexicana are referred to
collectively as the "Complaint").
B. On or about July 25, 1996, ADI and Mr. Bakhit filed their answer
to the Complaint. On or about July 25, 1996, ADICS filed its answer to the
Complaint and filed a counterclaim against Mexicana and certain others (the
"Counterclaim"), which Counterclaim
1
<PAGE>
was subsequently amended (hereinafter all versions of the Counterclaim filed by
ADICS are referred to as the "Counterclaim"). The Counterclaim has not been
answered due to the intervening settlement discussions that have culminated in
the agreement set forth in more detail below.
C. After consideration of various factors, including the high cost
of protracted litigation and other economic issues, the parties now consider it
to be in their best interests to settle their disputes on the terms and
conditions set forth in this Agreement.
D. Each party hereto is entering into this Agreement voluntarily and
after conferring with counsel of its choice, without duress and without any
promise or assurance other than as expressly contained in this Agreement.
SPECIFIC AGREEMENTS:
NOW, THEREFORE, IN CONSIDERATION OF AND RELIANCE ON THE MUTUAL
PROMISES, COVENANTS, AND UNDERTAKINGS HEREIN CONTAINED AND FOR OTHER GOOD AND
VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY
ACKNOWLEDGED, WITH THE INTENT TO BE OBLIGATED LEGALLY AND EQUITABLY, THE PARTIES
AGREE AS FOLLOWS:
1. The ADI Parties shall pay to Mexicana the sum of $1,200,000 USD,
payable as follows:
a. Concurrently with the execution of this Agreement, the ADI
Parties shall pay to Mexicana, through counsel Troop Meisinger Steuber & Pasich,
LLP (hereinafter "Mexicana's counsel"), a cashier's check in the amount of
$300,000 USD made
2
<PAGE>
payable to COMPANIA MEXICANA DE AVIACION, S.A., DE C.V., which check may be
deposited by Mexicana concurrently with its execution of this Agreement.
b. On December 15, 1996, and in no event later than December
31, 1996, the ADI Parties will pay to Mexicana, through Mexicana's counsel, a
cashier's check in the amount of $450,000 USD payable to COMPANIA MEXICANA DE
AVIACION, S.A., DE C.V., which check may be deposited by Mexicana upon receipt.
If payment is made after December 15, 1996 but before December 31, 1996, the ADI
Parties shall advise Mexicana, in writing on or before December 15, 1996, of the
circumstances causing the delay.
c. On or before December 15, 1997, the ADI Parties will pay to
Mexicana, through Mexicana's counsel, the additional sum of $450,000 USD,
payable in quarterly installments, each installment bearing interest at the rate
of ten percent (10%) per annum from November 1, 1996. Each quarterly payment
shall be made in a cashier's check payable to COMPANIA MEXICANA DE AVIACION,
S.A., DE C.V., delivered to Mexicana's counsel and which may be deposited by
Mexicana upon receipt, according to the following installment schedule:
i. $112,500 plus interest payable on or before March 15,
1997;
ii. $112,500 plus interest payable on or before
June 15, 1997;
iii. $112,500 plus interest payable on or before
September 15, 1997; and
iv. $112,500 plus interest payable on or before
December 15, 1997.
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<PAGE>
d. As security for the performance of their obligations set
forth in this Agreement, on or before December 31, 1996, the ADI Parties shall
deliver to Mexicana, through Mexicana's counsel, a promissory note in the form
attached hereto as Exhibit A (the "Note"), fully executed by Mr. Bakhit on
behalf of ADI in the sum of $450,000 USD with ten percent (10%) interest per
annum from November 1, 1996, reflecting payment in the quarterly installments
set forth in paragraph 1(c) above.
e. As further security for the performance of their
obligations, on or before December 31, 1996, ADI will also provide to Mexicana
an irrevocable standby letter of credit in the sum of $483,503.40 USD from Wells
Fargo Bank, or other financial institution with capital in excess of
$100,000,000 USD, in substantially the form attached hereto as Exhibit B to
secure the payment of the Note (the "Letter of Credit"). Mexicana may present
and draw upon the Letter of Credit, without prior notice to the ADI Parties,
upon default by the ADI Parties on any of the payments set forth in paragraph
1(c) of this Agreement, or any portion thereof. If the parties subsequently
discover a defect in the irrevocable standby Letter of Credit, or if Wells Fargo
Bank or such other financial institution refuses to honor the irrevocable
standby Letter of Credit for any reason whatsoever, within seven (7) calendar
days the ADI Parties agree to replace the apparently defective Letter of Credit
with a non-defective irrevocable standby Letter of Credit, or with other
valuable consideration agreeable to Mexicana to replace the sums provided by the
Letter of Credit. The ADI Parties agree to take no action that will interfere
with Mexicana's ability to draw upon the Letter of Credit.
2. If, despite the best efforts and due to no fault of the ADI
Parties, the Initial Public Offering of ADI's common stock (the "Offering")
contemplated by ADI is not consummated on or before December 31, 1996, and in
that event only, in lieu of performance
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<PAGE>
under paragraph 1(b) and 1(c) of this Agreement only, the ADI Parties will pay
to Mexicana the sum of $900,000 USD plus ten percent (10%) interest per annum
from November 1, 1996, as follows:
a. On or before January 1, 1997, the ADI Parties shall deliver
to Mexicana, through Mexicana's counsel, a promissory note in the form attached
hereto as Exhibit A (the "Note"), executed by Mr. Bakhit on behalf of ADI in the
sum of $450,000 USD with ten percent (10%) interest per annum from November 1,
1996.
b. On or before March 15, 1997, the ADI Parties will pay to
Mexicana, through Mexicana's counsel, a cashier's check payable to COMPANIA
MEXICANA DE AVIACION, S.A., DE C.V. in the amount of $450,000 USD, plus ten
percent (10%) interest per annum from November 1, 1996, which check may be
deposited by Mexicana upon receipt;
c. On or before March 15, 1997, the ADI Parties will pay to
Mexicana the sum of $450,000 USD, payable in quarterly installments, each
installment bearing interest at the rate of ten percent (10%) per annum from
November 1, 1996, in accordance with the installment schedule in this paragraph
below. ADI will also deliver to Mexicana on or before March 15, 1997, as
further security for the performance of the ADI Parties' obligations, an
irrevocable standby letter of credit in the sum of $450,000 USD plus interest
thereon for a total of $483,503.40 USD from Wells Fargo Bank, or other financial
institution with capital in excess of $100,000,000 USD, in substantially the
form attached hereto as Exhibit B to provide payment of the Note (the "Letter of
Credit"), according to the following installment schedule:
i. $112,500 plus interest payable on or before
March 15, 1997;
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<PAGE>
ii. $112,500 plus interest payable on or before
June 15, 1997;
iii. $112,500 plus interest payable on or before
September 15, 1997; and
iv. $112,500 plus interest payable on or before
December 15, 1997.
Mexicana may present and draw upon the Letter of Credit, without prior notice to
the ADI Parties, upon default by the ADI Parties on any of the payments set
forth in this paragraph, or any portion thereof. If the parties subsequently
discover a defect in the irrevocable Letter of Credit, or if Wells Fargo Bank or
such other financial institution refuses to honor the irrevocable Letter of
Credit for any reason whatsoever, within seven (7) calendar days the ADI Parties
agree to replace the apparently defective Letter of Credit with a non-defective
irrevocable Letter of Credit, or with other valuable consideration agreeable to
Mexicana to replace the $483,503.40 USD payment provided by the Letter of
Credit. The ADI Parties agree to take no action that will interfere with
Mexicana's ability to draw upon the Letter of Credit.
3. Concurrently with the execution of this Agreement, the ADI
Parties will execute a Judgment Pursuant To Stipulation ("Consent Judgment") in
the amount of $1,200,000 USD, plus interest in the amount of ten percent (10%)
per annum from November 1, 1996, in the form attached hereto as Exhibit C, that
may be filed as follows:
a. Subject only to paragraph 3(c) below, in the event that ADI
fails to meet its payment obligations set forth in paragraphs 1 and 2 of this
Agreement, or in the
6
<PAGE>
event ADI fails to deliver the Note or Letter of Credit as set forth in the
paragraphs above, Mexicana shall have the right, by and through this Agreement
alone, to file the stipulated Consent Judgment accompanied by a declaration
under penalty of perjury that the ADI Parties have failed to abide by the terms
of this Agreement as set forth below, and to have judgment entered in favor of
Mexicana and against the ADI Parties, and each of them, jointly and severally.
b. The parties agree that if the ADI Parties have failed to
make the first payment of $450,000 USD, plus interest thereon, or deliver the
Notes or Letter of Credit, as specified in Paragraph 1 of this Agreement, or in
the event that the Offering is not consummated on or before December 31, 1996,
then as specified in Paragraph 2 of this Agreement, Mexicana will prepare a
complaint alleging the entry into and breach of this Agreement, and file it as a
new action in the United States District Court for the Central District of
California, concurrently with the stipulated Consent Judgment and supporting
declaration, provided that Mexicana's counsel has given two (2) hours'
telephonic notice to the ADI Parties' counsel listed in Paragraph 19 of this
Agreement, followed by written confirmation of Mexicana's intention to file and
execute upon the stipulated Consent Judgment, and further provided that upon
filing, a copy of the declaration and Consent Judgment are served on the ADI
Parties by certified mail, return receipt requested, in conformity with
paragraph 19 below. The ADI Parties agree that Mexicana may execute on the
stipulated Consent Judgment immediately and without further notice,
c. In the event that Mexicana is required to file the
stipulated Consent Judgment and to seek enforcement of or execute on the
judgment, the ADI Parties shall be entitled to a credit against the $1,200,000
USD judgment, plus the interest as specified
7
<PAGE>
herein, only for those installment payments actually made and sums actually
received by Mexicana as set forth in paragraphs 1(b) and 1(c) or 2(b) and 2(c)
(but not paragraph 1(a)) above, and the ADI Parties shall not be entitled to any
other credit or offset for any other sums paid in connection with this Agreement
or otherwise.
d. The ADI Parties waive any right to respond to or object in
any way to the filing of an action to seek enforcement of this Agreement, to
claim that the action or any cause of action therein is time-barred by any
statute of limitations, waiver, estoppel, laches, statute of repose, or any
other theory, to object to the entry of the stipulated Consent Judgment, and to
answer any action filed or proceeding brought to bring effect to the stipulated
Consent Judgment. The ADI Parties further waive any right to challenge the
stipulated Consent Judgment in the trial court or by appeal on any grounds other
than compliance. The ADI Parties agree not to seek a stay of execution on the
stipulated Consent Judgment, or to stay or interfere with any process to collect
under the stipulated Consent Judgment, except to the extent to show their
compliance with paragraphs 1(b) and 1(c) or paragraphs 2(b) and 2(c) of this
Agreement.
e. In the event that the ADI Parties timely perform each and
all of the obligations set forth in paragraphs 1 and 2 of this Agreement, the
stipulated Consent Judgment shall not be filed with the Court and instead, the
original shall be returned to counsel for ADICS at the address set forth in
paragraph 19 below within ten (10) days of Mexicana's actual receipt of all sums
provided by Paragraphs 1 or 2 of this Agreement, whether by payment of the sums
specified in this Agreement or by drawing upon the Letters of Credit identified
in this Agreement, or some combination thereof.
8
<PAGE>
4. The ADI Parties agree that their obligation to pay Mexicana the
total sum of $1,200,000 USD, plus interest thereon as set forth above in this
Agreement, or in the event of partial payment, any portion thereof, is not
dischargeable in bankruptcy in the event that any of the ADI Parties, jointly or
individually, should seek protection under any of the Bankruptcy laws of the
United States.
5. Concurrently with the execution of this Agreement and all
appurtenant documents attached to this Agreement, pursuant to Rule 41(a)(ii) of
the Federal Rules of Civil Procedure, Mexicana and the ADI Parties will execute
a dismissal with prejudice of Case No. SA CV 96-140 GLT (EEX) in its entirety,
including the Complaint and the Counterclaim, in the form attached hereto as
Exhibit D, which Mexicana shall cause to be filed only after execution of this
Agreement and all appurtenant documents and Mexicana's receipt of the $300,000
USD payment set forth in paragraph 1(a) herein.
6. The parties expressly acknowledge that time is of the essence in
the performance of each of the obligations under this Agreement. Each party
also agrees that it will not take any action that would interfere with the
performance of this Agreement by the other party or that would adversely affect
any of the rights provided for herein.
7. Except for Mexicana's and Turborreactores' rights to enforce the
terms and provisions of this Agreement, Mexicana and Turborreactores, and each
of them, on behalf of themselves and their present and former shareholders,
officers, directors, employees, representatives, attorneys, agents, successors,
assigns, subsidiaries, and divisions, and each
9
<PAGE>
and all of them, hereby fully, irrevocably and forever waive, release, and
discharge the ADI Parties and the ADI Parties' present and former shareholders,
officers, directors, employees, representatives, attorneys, agents, successors,
assigns, subsidiaries, and divisions, and each and all of them, of, from, and
against any and all claims, demands, debts, liabilities, obligations, expenses,
damages, actions, causes of action, rights of indemnity, liens, and remedies, of
every kind and nature, whether known or unknown, heretofore arising out of, in
connection with, or incidental to any act, omission, transaction, agreement,
dealings, association, matter, or thing, including the claims that either
Mexicana or Turborreactores has or may have against any of the ADI Parties,
including claims that are or could have been included in the Complaint,
excepting therefrom any liability that may be imposed on Mexicana or
Turborreactores by third parties arising from the alleged sale of Mexicana's or
Turborreactores' parts by the ADI Parties, or any of them.
8. Except for the ADI Parties' right to enforce the terms and
provisions of this Agreement, the ADI Parties, and each of them, on behalf of
themselves and their present and former shareholders, officers, directors,
employees, representatives, attorneys, agents, successors, assigns,
subsidiaries, and divisions, and each and all of them, hereby fully, irrevocably
and forever waive, release, and discharge Mexicana and Turborreactores, and
their present and former shareholders, officers, directors, employees,
representatives, attorneys, agents, successors, assigns, subsidiaries, and
divisions, and each and all of them, of, from, and against any and all claims,
demands, debts, liabilities, obligations, expenses, damages, actions, causes of
action, rights of indemnity, liens and remedies, of every kind and nature,
whether known or unknown, heretofore arising out of, in connection with, or
incidental to any act, omission, transaction, agreement, dealings, association,
matter, or thing, including the claims that the ADI Parties have or may have
against Mexicana or Turborreactores, including claims that are or could have
been included in the Counterclaim, excepting therefrom any liability that
10
<PAGE>
may be imposed on the ADI Parties by third parties arising from the alleged sale
of Mexicana's or Turborreactores' parts by the ADI Parties, or any of them.
9. The parties hereby acknowledge that they have had the opportunity
to review this Agreement with legal counsel and that they are familiar with the
provisions of section 1542 of the California Civil Code ("section 1542"), which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THIS RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED THE SETTLE-MENT WITH THE
DEBTOR.
Each of the parties, being aware of section 1542, hereby expressly waives and
relinquishes any right or benefit that such party has or may have under section
1542 pertaining to the matters released herein, and any law or principle of
similar effect of any state of territory of the United States, to the full
extent that such party may lawfully waive such rights or benefits pertaining to
the subject matter of this Agreement. In connection with such waiver and
relinquishment, each party acknowledges that it is aware that it may hereafter
discover claims presently unknown or unsuspected, or facts in addition to or
different from those which it or he now knows or believes to be true, with
respect to the matters released herein. Nevertheless, it is the intention of
each party hereto, through this Agreement, fully, finally, and forever to settle
and release all such matters, and all claims relative thereto, which do now
exist, may exist, or heretofore have existed between and among the parties
hereto. In furtherance of such intention, the release herein given shall be,
and remain in effect as, a full and complete release
11
<PAGE>
of such matters notwithstanding the discovery of the existence of any additional
claims or facts relating thereto.
10. Each party represents, warrants, and covenants that such party
has made no assignment and will make no assignment of any claims, choses in
action, rights of action or any rights of any kind whatsoever, embodied in any
of the claims released under the terms and provisions of this Agreement until
Mexicana has received in full the $450,000 and the Letters of Credit referenced
in paragraphs 1 and 2 of this Agreement. The ADI Parties further agree that no
assets of ADI or ADICS may be transferred except in the normal course of
business without Mexicana's prior written consent until Mexicana has received in
full the $450,000 and the Letters of Credit referenced in paragraphs 1 and 2 of
this Agreement, and that a violation of this limitation on transfer of assets is
a breach of this Agreement and is grounds for avoidance of any such transfer.
11. This Agreement shall bind and inure to the benefit of the
parties, the parties' respective agents, servants, employees, shareholders,
successors, assigns, heirs, executors, administrators, and estates of each of
them.
12. If any party receives an inquiry from any customer or supplier of
the ADI Parties inquiring as to the relationship between Mexicana and the ADI
Parties, the parties agree not to communicate to third parties the existence of
this Agreement, nor the terms and conditions thereof, except under compulsion of
legal process. In the event an inquiry is made of any of the parties regarding
the status or outcome of this matter, the parties agree to use their best
efforts to reply only that "the matter has been settled and concluded to the
mutual satisfaction of all parties," and nothing further.
12
<PAGE>
13. The parties agree that this Agreement is a settlement of disputed
claims, and neither this Agreement nor the furnishing of the consideration for
this Agreement shall constitute or be construed as an admission of liability or
wrongdoing on the part of any party, or be admissible as evidence in any
proceeding other than for enforcement of this Agreement or based on the
inaccuracy of the representations of any party provided for by this Agreement.
14. Each of the undersigned represents and warrants that he or she
has the authority to bind the entity or persons on behalf of whom he or she is
signing to the terms and obligations of this Agreement, and that to the extent
necessary, the execution and performance of this Agreement has been duly
authorized and approved by its respective Board of Directors.
15. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument. The parties may also execute this
Agreement, transmitting the same by facsimile, in which event a facsimile
signature of any one of the parties shall be treated as an original signature
until such time as the original signature is received by the opposing parties'
counsel at the addresses set forth in paragraph 19 below.
16. This Agreement and the attachments hereto constitute the entire
understanding of the parties with respect to the subject matter herein, and
there are no representations, warranties, or promises other than those contained
herein. This Agreement may not be changed, modified, or amended except by
written agreement executed by all parties.
17. In the event any part or provision of this Agreement, for any
reason, shall be declared invalid, such decision shall not effect the validity
of any remaining portion of this Agreement, which remaining portion shall remain
in complete force and effect as if
13
<PAGE>
this Agreement had been executed with the invalid portion thereof eliminated.
18. Each party to this Agreement shall take any and all action
necessary, appropriate or advisable to execute and discharge that party's
responsibilities and obligations created by the provisions of this Agreement and
further to effectuate and carry out the intent and purposes of this Agreement
and the transactions contemplated by the provisions of this Agreement.
19. Should any party hereto institute any action or proceeding in
court to enforce any provision hereof or for damages by reason of any alleged
breach of any provision of this Agreement, the prevailing party shall be
entitled to recover from the losing party or parties all costs and expenses
incurred plus reasonable attorneys' fees for services rendered to the prevailing
party. In the event that the non-prevailing party contests the reasonableness
of the prevailing party's attorneys' fees and more than fifty percent (50%) of
the disputed fees are upheld by the court or other arbitrator appointed to hear
the matter, the prevailing party shall also be entitled to recover from the
contesting party the attorneys' fees and costs incurred to confirm its
entitlement to those sums.
20. If any notice or other document must be delivered or served in
connection with this Agreement, such delivery or service must be made to the
parties at the addresses indicated below unless written notification is given
changing the place or person to whom the notice or other document is to be
given:
FOR THE ADI PARTIES:
Dirk O. Julander, Esq.
Law Office of Dirk O. Julander
611 Anton Blvd., Suite 120
Costa Mesa, California 92626
14
<PAGE>
FOR MEXICANA AND TURBORREACTORES:
Mary Craig Calkins, Esq.
Troop, Meisinger, Steuber & Pasich, LLP
10940 Wilshire Blvd., Suite 800
Los Angeles, California 90024-7000
21. Failure of any party to require the performance of any term in
this Agreement, or the waiver by any party of any breach thereof, shall not
prevent subsequent enforcement of such term nor be deemed a waiver of any
subsequent breach.
22. This Agreement shall be interpreted and construed in accordance
with the laws of the State of California without regard to any conflict of laws.
The parties further agree that the provisions of this Agreement shall be
interpreted in accordance with the fair meaning thereof, and not strictly for or
against any of the parties hereto. Both parties have participated in the
drafting of this Agreement which, accordingly, shall not be interpreted against
either party.
IN WITNESS WHEREOF, the parties voluntarily and freely execute this
Agreement in quadruplicate all as of the date and year first set forth above.
AVIATION DISTRIBUTORS, INC.
Dated:_________________ By:________________________________
OSAMAH S. BAKHIT, President
ADI CONSIGNMENT SALES, INC.
Dated:_________________ By:________________________________
15
<PAGE>
OSAMAH S. BAKHIT, President
Dated:________________ _________________________________
OSAMAH S. BAKHIT
COMPANIA MEXICANA DE AVIACION,
S.A., DE C.V.
Dated:________________ By:_________________________________
_________________________________
Its:_____________________________
TURBORREACTORES, S.A. de C.V.
Dated:________________ By:_________________________________
_________________________________
Its:________________________________
16
<PAGE>
SECURED PROMISSORY NOTE
$450,000.00 November 1, 1996
FOR VALUE RECEIVED, the undersigned, AVIATION DISTRIBUTORS, INC., a
Delaware corporation, with offices at 1 Wrigley Drive, Irvine, California 92718
("Maker"), promises to pay to COMPANIA MEXICANA DE AVIACION, S.A., DE C.V., a
Mexican corporation, with offices at Av. Xola No. 535, Piso 29, Col. del Valle,
03100 Mexico, D.F., or holder ("Payee"), the sum of Four Hundred Fifty Thousand
Dollars ($450,000), plus interest at the rate of ten percent (10%) per annum
simple interest from the date hereof on the unpaid principal amount of this Note
from time to time outstanding; interest on the outstanding balance and one-forth
(1/4th) principle payable quarterly on the 15th day of the months of March,
June, September, and December, 1997. Principal and interest shall be payable in
the form of a cashier's check payable to Payee and delivered to Payee in care of
its counsel Mary Craig Calkins of Troop Meisinger Steuber & Pasich, LLP, at
10949 Wilshire Boulevard, Eighth Floor, Los Angeles, California 90024, or such
other address as Payee may direct in writing. All payments on this Note shall
be made in lawful tender of the United States of America.
As security for this Note, Maker agrees to provide Payee with an
irrevocable standby letter of credit ("Letter of Credit") in the sum of Four
Hundred Fifty Thousand Dollars ($450,000) plus sufficient additional credit to
satisfy the interest thereon as specified in this Note from Wells Fargo Bank or
other financial institution with capital in excess of $100,000,000, in
substantially the form attached hereto as Exhibit B to secure the payment of the
Note. Upon demand by Payee, on the dates set forth above for payment, and
without prior notice to Maker, Payee shall receive from the holder of the Letter
of Credit each payment of principle and interest required by this Note.
The Maker shall have the right to prepay all or any portion of this
Note at any time without prepayment penalty or premium. No partial prepayment
of principal shall affect the obligation of Maker to continue to pay in full the
amount of the payments hereunder until the entire obligation evidenced by this
Note is paid and discharged. Partial prepayments will not delay the due dates
of payments.
A default ("Event of Default") shall occur on this Note upon any of
the following: (i) Maker's failure to make the payments required on this Note;
(ii) the filing of a petition in bankruptcy by Maker which is not dismissed
within sixty (60) days; (iii) the appointment of a receiver for Maker; (iv)
an assignment for the benefit of creditors of Maker; or (v) the failure of
Maker to maintain continuous business operations.
1
<PAGE>
In the case of an Event of Default and the Payee is unable to obtain
payment of the defaulted amount from the Maker's Irrevocable Letter of Credit,
the Payee shall have the right to declare the entire principal and accrued but
unpaid interest on this Note immediately due and payable. In addition, in the
case of an Event of Default which has required Maker to pay immediately the full
amount of unpaid principal, interest shall continue to accrue at the same rate
from the time of default until such time as Maker has paid all sums due under
this Note in full or the default is cured to Payee's satisfaction. Failure by
Payee to exercise this option shall not constitute a waiver of the right to
exercise it in the event of any subsequent Event of Default.
Payee shall be entitled to collect reasonable attorneys' fees from the
Maker, as well as other costs and expenses incurred in connection with the
enforcement of this Note or the attempt to recover upon nonpayment of this Note
when due.
Maker warrants that the execution, delivery, and performance of this
Note has been duly authorized by all requisite corporation authorizations and is
enforceable against Maker in accordance with the terms thereof.
This Note shall be payable in lawful money of the United States and
shall be governed by and construed solely in accordance with the laws of the
State of California with regard to any conflict of laws. Any action brought
hereunder shall be brought in the United States District Court for the Central
District of California
IN WITNESS WHEREOF, Maker has caused this Promissory Note to be
executed by its Chief Executive Officer and Secretary and has caused the
corporate seal to be affixed as of this date first hereinabove written at
__________________, California.
"MAKER" AVIATION DISTRIBUTORS, INC.
By:_______________________________
Its Chief Executive Officer
By:_______________________________
Its Secretary
2
<PAGE>
[FORM OF WELLS FARGO BANK LETTER OF CREDIT]
WELLS FARGO BANK
IRREVOCABLE LETTER OF CREDIT NO.___________________
US$483,503.40
Compania Mexicana De Aviacion, S.A., De C.V.
Avenida Xola No. 535
Piso 29
Col. del Valle
03100 Mexico, D.F.
Gentlemen:
We hereby issue our irrevocable letter of credit ("Letter of Credit"),
Letter of Credit No. __________________, for the account of Aviation
Distributors, Inc., One Wrigley Drive, Irvine, California 92718 ("ADI"), in
favor of Compania Mexicana De Aviacion, S.A., De C.V., Avenida Xola No. 535,
Piso 29, Col. del Valle, 03100 Mexico, D.F. ("Mexicana"), in the total amount of
US$483,503.40 (Four Hundred Eighty Three Thousand, Five Hundred Three and Forty
Hundredths United States Dollars), expiring at our [Wells Fargo Los Angeles Main
Office] on December 31, 1998, available according to the terms of this Letter of
Credit as set forth below.
We will pay you each installment drawn under this Letter of Credit in
immediately available funds within twenty-four hours after receipt by us of a
Draft for such installment in the form of Exhibit 1 attached hereto, executed by
an officer of Mexicana, and a Certificate of an officer of Mexicana or of
Mexicana's counsel Guillermo Rojas, Abogado Senior, in the form of Exhibit 2
attached hereto.
SPECIAL CONDITIONS
I. This Letter of Credit allows for drawings in four installments, each of
which installments may be drawn after the respective date set forth below, in an
amount not to exceed the maximum amount for such installment set forth after
such date:
INSTALLMENT DATE AMOUNT
First Installment March 15, 1997 US$125,106.16
Second Installment June 15, 1997 US$122,301.36
Third Installment September 15, 1997 US$119,465.75
Fourth Installment December 15, 1997 US$116,630.13
<PAGE>
1. This Letter of Credit automatically decreases by the maximum
amount of each installment for which any payment is made hereunder upon such
payment and for any installment as to which no draft has been presented
hereunder within thirty (30) days of the date set forth for such installment in
Special Condition 1 above.
2. The credit established hereby shall expire on December 31, 1998.
3. The credit established hereby is not transferable.
4. This Letter of Credit is irrevocable.
5. All our fees and charges are for the account of ADI.
We hereby engage with you and any endorsers and bona fide holders that
we will duly honor at sight each draft drawn under, and in conformity with the
terms and conditions of, this Letter of Credit, if accompanied by the above-
specified Certificate and presented at our [address of Wells Fargo Bank Los
Angeles Main Office] on or before the expiry date of this Letter of Credit.
This credit is subject to the Uniform Customs and Practice for
Documentary Credits, 1993 Revision, International Chamber of Commerce
Publication No. 500.
Dated: _______________________ WELLS FARGO BANK
By:__________________________
[Name]
[Title]
2
<PAGE>
Exhibit 1 to Letter of Credit
[FORM OF DRAFT]
WELLS FARGO BANK
IRREVOCABLE LETTER OF
CREDIT NO.__________________
__________________, 199__
Pay to the order of ___________________________ the amount of
US$_________________ (_____________________________________________________
______________________________________ United States Dollars), drawn on WELLS
FARGO BANK as issuer of its Irrevocable Letter of Credit No. ________________,
dated [date of Letter of Credit].
COMPANIA MEXICANA De AVIACION, S.A., De C.V.
By ______________________________
[Name]
[Title]
3
<PAGE>
Exhibit 2 to Letter of Credit
[Form of Certificate to be Filed by Mexicana]
The undersigned certifies that he is an officer of Compania Mexicana
De Aviacion, S.A., De C.V. ("Mexicana") or counsel of Mexicana, and that he is
authorized to make the following certification on behalf of Mexicana:
1. Mexicana is a party to a Settlement Agreement between Mexicana,
ADI, and others dated as of November 1, 1996 (the "Agreement"), among Mexicana,
Turborreactores S.A., De C.V., ADI, ADI Consignment Sales, Inc., and Osamah S.
Bakhit.
2. Under the terms of the Agreement, ADI is to pay to Mexicana the
sum of US$450,000 (Four Hundred Fifty Thousand United States Dollars) plus
interest, payable in quarterly installments, each installment bearing interest
at the rate of ten percent (10%) per annum, from November 1, 1996, according to
the following installment schedule:
a. $112,500 plus interest payable on or before March 15, 1997;
b. $112,500 plus interest payable on or before June 15, 1997;
c. $112,500 plus interest payable on or before September 15,
1997; and
d. $112,500 plus interest payable on or before December 15,
1997.
3. ADI has failed to make payment due in respect of the installment
payments pursuant to the terms of the Agreement for the payment due on or before
[date to be inserted]. [CHOOSE ONE OF THE FOLLOWING TWO TEXTS:] [ADI has not
paid any amount of such payment. The Draft that accompanies this Certificate is
in the full amount due for such payment.] [ADI has paid US$_________________ of
such payment, but has failed to pay the balance of such payment in the amount of
US$___________________. The Draft that accompanies this Certificate is in the
amount of such unpaid balance of such payment.]
4. Pursuant to the terms of the Agreement, at the date hereof,
Mexicana is entitled to payment of the installment in the amount of $112,500,
plus ten percent (10%) interest from November 1, 1996, which sum (or the portion
of which sum identified in paragraph 3 above) has not previously been paid to
Mexicana by ADI.
5. Pursuant to the terms of the Agreement, the Letter of Credit a
draft on which accompanies this Certificate may be drawn upon by Mexicana
without ADI's consent and without notice to ADI.
The undersigned certifies to the truth, accuracy, and completeness of
each of the foregoing statements.
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Dated: ____________________ COMPANIA MEXICANA DE AVIACION,
S.A., DE C.V.
By:___________________________
Its:__________________________
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Exhibit 10.16
FORM OF INDEMNITY AGREEMENT
This Indemnity Agreement, dated ______, 1996, is made and entered into by
and between Aviation Distributors, Inc., a Delaware corporation (the "Company"),
and ________ ("Indemnitee").
WHEREAS, Indemnitee is currently serving as a director, officer, employee
or agent of the Company or, at the Company's request, as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise;
WHEREAS, the Amended and Restated Bylaws (the "Bylaws") of the Company
provide that the Company will indemnify, in the manner and to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL"), certain persons
against specified expenses arising out of certain threatened, pending or
completed actions, suits or proceedings; and
WHEREAS, in order to induce Indemnitee to continue to serve the Company in
his or her present capacity, and to provide Indemnitee with specific contractual
assurance that the protection authorized by the Bylaws will be available to
Indemnitee, the Company wishes to enter into this Agreement.
NOW THEREFORE, the Company and Indemnitee hereby agree as follows:
Section 1. DEFINITIONS. The following terms, as used herein, shall
have the following meanings:
(a) "Covered Claim" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
PROVIDED, that (1) such claim is not for an accounting of profits made from the
purchase or sale by Indemnitee of securities of the Company within the meaning
of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar
provisions of any state law and (2) Indemnitee shall not be indemnified by the
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Company if, with respect to such action, suit or proceeding, a Determination (as
defined below) is made that:
(i) Indemnitee did not act in good faith in a manner
Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company;
(ii) in the case of any criminal action or
proceeding, Indemnitee had reasonable cause to believe his or her
conduct was unlawful; or
(iii) Indemnitee intentionally breached his or her
duty to the Company or its stockholders.
(b) "Determination" shall mean a determination, based upon the
facts known at the time, made by:
(i) the Board of Directors of the Company, by the
vote of a majority of the directors who are not parties to the action,
suit or proceeding in question, even though less than a quorum;
(ii) if there are no such disinterested directors, or
if such disinterested directors so direct, by independent legal
counsel in a written opinion;
(iii) the stockholders of the Company; or
(iv) a court of competent jurisdiction in a final,
nonappealable adjudication.
(c) "Payment" shall mean all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with a Covered Claim.
Section 2. INDEMNIFICATION. The Company shall indemnify and hold
harmless Indemnitee against and from any and all Payments to the extent that:
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(a) the Company shall not have advanced expenses to Indemnitee
pursuant to Article VIII, Section 6 of the Bylaws or otherwise and no
Determination shall have been made pursuant to such bylaw or the DGCL that
Indemnitee is not entitled to indemnification;
(b) Indemnitee shall not already have received payment on
account of such Payments from any third party, including, without limitation,
pursuant to one or more valid and collectible insurance policies; and
(c) such indemnification by the Company is not unlawful.
Notwithstanding anything contained in this Agreement to the contrary, except for
proceedings to enforce rights to indemnification or advancement of expenses
pursuant to Section 4 hereof, the Company shall have no obligation to indemnify
Indemnitee in connection with a proceeding (or part thereof) initiated by
Indemnitee unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors of the Company. Further, the Company shall have no
obligation to indemnify Indemnitee under this Agreement for any amounts paid in
a settlement of any action, suit or proceeding effected without the Company's
prior written consent, which consent shall not be unreasonably withheld. The
Company shall not settle any claim in any manner that would impose any
obligation on Indemnitee without Indemnitee's prior written consent, which
consent shall not be unreasonably withheld.
Section 3. INDEMNIFICATION PROCEDURE; ADVANCEMENTS OF EXPENSES.
(a) If at the time of receipt of any notice pursuant to Section
9 hereof the Company has directors' and officers' liability insurance in effect,
the Company shall give prompt notice of the commencement of such action, suit or
proceeding to the insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnitee. The Company shall thereafter take
all necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all Payments payable as a result of such action, suit or proceeding
in accordance with the terms of such policies.
(b) All expenses, including attorneys' fees, incurred by
Indemnitee in defending any Covered Claim shall be paid by the Company in
advance of the final disposition of such Covered Claim upon an undertaking by or
on behalf of Indemnitee to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the Company as
authorized
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herein. Indemnitee hereby undertakes to and agrees that he or she will repay
the Company for any expenses advanced by or on behalf of the Company pursuant to
this Section 3(c) if it shall ultimately be determined by a court of competent
jurisdiction in a final, nonappealable adjudication that Indemnitee is not
entitled to indemnification under this Agreement.
(c) If the Company shall advance the expenses of any such
action, suit or proceeding pursuant to Section 3(c) hereof, it shall be entitled
to assume the defense of such action, suit or proceeding, if appropriate, with
counsel reasonably satisfactory to Indemnitee, upon delivery to Indemnitee of
written notice of its election so to do. After delivery of such notice, the
Company shall not be liable to Indemnitee under this Agreement for any expenses
subsequently incurred by Indemnitee in connection with such defense other than
reasonable expenses of investigation; PROVIDED, HOWEVER, that:
(i) Indemnitee shall have the right to employ
separate counsel in any such action, suit or proceeding provided that
the fees and expenses of such counsel incurred after delivery of
notice by the Company of its assumption of such defense shall be at
Indemnitee's own expense; and
(ii) the fees and expenses of counsel employed by
Indemnitee shall be at the expense of the Company if (x) the
employment of counsel by Indemnitee has previously been authorized by
the Company, (y) Indemnitee shall have reasonably concluded that there
may be a conflict of interest between the Company and Indemnitee in
the conduct of any such defense (PROVIDED, that the Company shall not
be required to pay for more than one counsel to represent two or more
Indemnitees where such Indemnitees have reasonably concluded that
there is no conflict of interest among them in the conduct of such
defense) or (z) the Company shall not, in fact, have employed counsel
reasonably satisfactory to Indemnitee to assume the defense of such
action, suit or proceeding.
(d) All payments on account of the Company's advancement
obligations under Section 3(c) hereof shall be made within 20 days of
Indemnitee's written request therefor. All other payments on account of the
Company's obligations under this Agreement shall be made within 60 days of
Indemnitee's written request therefor, unless a Determination is made that the
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claims giving rise to Indemnitee's request are not payable under this Agreement.
Each request for payment hereunder shall be accompanied by evidence reasonably
satisfactory to the Company of Indemnitee's incurrence of the expenses for which
such payment is sought.
Section 4. ENFORCEMENT OF INDEMNIFICATION; BURDEN OF PROOF. If a
claim for indemnification or advancement of expenses under this Agreement is not
paid in full by or on behalf of the Company within the time period specified in
Section 3(e) hereof, Indemnitee may at any time thereafter bring suit against
the Company to recover the unpaid amount of such claim. In any such action, the
Company shall have the burden of proving that indemnification is not required
under this Agreement.
Section 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Company for some
portion of any Payments, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion of any such
Payments to which Indemnitee is entitled.
Section 6. INTERPRETATION. All references in this Agreement to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on the Indemnitee with respect to any
employee benefit plan; and references to "serving at the request of the Company"
shall include any service by Indemnitee as a director, officer, employee or
agent of the Company that imposes duties on, or involves services by, Indemnitee
with respect to an employee benefit plan, its participants or beneficiaries. If
Indemnitee acts in good faith and in a manner he or she reasonably believes to
be in the interests of the participants and beneficiaries of any employee
benefit plan, then, for purposes of Section 3(c)(i) hereof, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company."
Section 7. RIGHTS NOT EXCLUSIVE. The rights to indemnification and
advancement of expenses provided hereunder shall not be deemed exclusive of any
other rights to which Indemnitee may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office.
Section 8. SUBROGATION. In the event of payment under this Agreement
by or on behalf of the Company, the Company shall be subrogated to
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the extent of such payment to all of the rights of recovery of Indemnitee, who
shall execute all papers that may be required and shall do all things that may
be necessary to secure such rights, including, without limitation, the execution
of such documents as may be necessary to enable the Company effectively to bring
suit to enforce such rights.
Section 9. NOTICE OF CLAIM. Promptly after receipt by Indemnitee of
notice of the commencement or threat of commencement of any civil, criminal,
administrative or investigative action, suit or proceeding, Indemnitee shall, if
indemnification with respect thereto may be sought from the Company under this
Agreement, notify the Company thereof in writing at its principal office and
directed to the Corporate Secretary (or such other address as the Company shall
designate in writing to Indemnitee); notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
Section 10. CHOICE OF LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without giving effect to the principals of conduct of laws thereunder.
Section 11. JURISDICTION. The Company and Indemnitee hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action, suit or proceeding that arises
out of or relates to this Agreement, and agree that any action instituted under
this Agreement shall be brought only in the state courts of the State of
Delaware.
Section 12. COVERAGE. The provisions of this Agreement shall apply
to Indemnitee's service as a director, officer, employee or agent of the Company
or at the Company's request, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise with respect to all periods of such service prior to and after
the date of this Agreement, even though Indemnitee may have ceased such service
at the time of indemnification hereunder.
Section 13. ATTORNEYS' FEES. If any action, suit, or proceeding is
commenced in connection with or related to this Agreement, the prevailing party
shall be entitled to have its costs and expenses, including, without limitation,
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reasonable attorneys' fees and reasonable expenses of investigation, paid by the
losing party.
Section 14. SEVERABILITY. In the event that any provision of this
Agreement is determined by a court to require the Company to do or to fail to do
an act that is in violation of any applicable law, such provision shall be
limited or modified in its application to the minimum extent necessary to avoid
a violation of law, and, as so limited or modified, such provision and the
balance of this Agreement shall be enforceable in accordance with their terms.
Section 15. SUCCESSORS AND ASSIGNS. The Agreement shall be binding
upon all successors and assigns of the Company, including any transferee of all
or substantially all of its assets and any successor by merger or otherwise by
operation of law, and shall be binding upon and inure to the benefit of the
heirs, executors and administrators of Indemnitee.
Section 16. DESCRIPTIVE HEADINGS. The descriptive headings in this
Agreement are included for the convenience of the parties only and shall not
affect the construction of this Agreement.
Section 17. COUNTERPARTS. This Agreement may be executed in two
counterparts, both of which taken together shall constitute one document.
Section 18. AMENDMENT. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in writing and
signed by each of the parties hereto.
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IN WITNESS WHEREOF, the Company and Indemnitee have executed this Agreement
as of the date first written above.
AVIATION DISTRIBUTORS, INC.,
a Delaware corporation
By:__________________________________________
Name:
Title:
INDEMNITEE
_____________________________________________
Name:
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