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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 29, 1997
AVIATION DISTRIBUTORS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-29028 33-0715685
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WRIGLEY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 586-7558
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
7.2 Letter from Arthur Andersen LLC to the Securities and Exchange
Commission dated September 15, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AVIATION DISTRIBUTORS, INC.
September 17, 1997 By: /s/ Osamah S. Bakhit
-----------------------------
Osamah S. Bakhit, President
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EXHIBIT 7.2
[LETTERHEAD]
September 15, 1997
Securities and Exchange Commission
Office of the Chief Accountant
450 Fifth Street, NW
Washington, DC 20549
Gentlemen:
We have read the statements made by Aviation Distributors, Inc., (the
Company) included in Item 4 of Form 8-K filed with the Commission on
September 8, 1997. For ease of reference, we attach a copy of the Form 8-K
with the paragraphs numbered to facilitate cross-referencing. We agree with
the statements concerning our Firm in such Form 8-K, except as follows:
1. We believe that paragraphs 3, 4 and 11 are outside the scope of Form 8-K
and we exclude them from the scope of our comments.
2. In paragraphs 8, 9, 13 and 16, the phrase "limited review procedures" or
"limited procedural review" is used. As clarification, our Firm performed
certain inquiry and analytical procedures in connection with the first
and second quarters of 1997 and did not perform reviews of the Company's
interim financial information in accordance with SAS No. 71.
3. With respect to paragraph 8, our Firm's position, based on the limited
information obtained through the inquiry and analytical procedures
performed at the time, was that, assuming the original transaction was a
bona fide sale for which the company expected to receive cash and that
the "value" of the subsequently received inventory was the same as the
relevant outstanding receivable, the gross profit on the original sale
should be reversed as of the date the exchange took place, not that the
original sale and gross profit should never have been recorded.
4. With respect to paragraph 9, we not that the adjustments raised by our
Firm were brought to the attention of management and they disagreed with
each of them. The Company took the position that any such items could be
offset by reversing some portion of the bonus accrual and it initially
reversed $50,000 of that accrual. We indicated to management that we had
still not received supporting documentation for some of the items we had
raised and that we were concerned regarding the accuracy of the
quarterly numbers. Management proceeded to publicly release earnings for
the quarter. This led us to inform the Company that we would not consent
to the use of our latest auditor's report in any filings in connection
with a proposed secondary offering scheduled for early August
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[LETTERHEAD]
Securities and Exchange Commission
Page 2
September 15, 1997
unless we could resolve our concerns in such areas as accounts receivable,
inventory exchanges and revenue (sales) cutoff issues. After its public
announcement but prior to filing its Form 10-Q the Company reversed the
remaining balance of the bonus accrual and made certain other adjustments.
The Company's net income was not changed from the amount stated in its
earlier press release. [See also Paragraph 7.]
5. With respect to the next to last sentence of paragraph 13, we note that,
as indicated in paragraph 4 above, our Firm had previously informed the
Company that we would not consent to the inclusion of our reports in any
filing in connection with a proposed secondary offering until we could
resolve our concerns in such areas as accounts receivable, inventory
exchanges and revenue (sales) cutoff issues.
6. With respect to the last sentence of Paragraph 16, the recommendation
made by our Firm relating to the Chief Executive Officer at that time was
that it would be preferable if he were not physically present at the
Company during the investigation.
7. With respect to paragraph 17, we note that shortly after the Company
engaged the independent consultant, we recommended to him that the
Company not file the Form 10-Q until it had better information about how
the June 30, 1997 financial statements might be impacted by the ongoing
investigation. We were informed by the consultant that the Company had
consulted with legal counsel and that the Company would file the Form
10-Q on timer. [See also paragraph 4 above.]
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Copy to:
Bruce H. Haglund, Chairman of the Audit Committee, Aviation Distributors, Inc.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 29, 1997
AVIATION DISTRIBUTORS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-29028 33-0715685
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WRIGLEY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 586-7558
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ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
1) WITHDRAWAL OF REPORTS; RESIGNATION OF AUDITOR. On Friday, August 29,
1997, Arthur Andersen LLP (the "Former Auditor") requested a meeting with
the Chairman of the Audit Committee of Aviation Distributors, Inc. (the
"Company") and Kenneth A. Lipinski, an independent consultant to the Audit
Committee, at which the Former Auditor disclosed its decision to withdraw
its previously issued reports on the Company's financial statements dated
December 31, 1994, 1995, and 1996 and June 30, 1996 (collectively, the
"Withdrawn Reports"). Afterwards, the Former Auditor expressed the need to
meet internally to discuss the possibility of resigning as the Company's
independent auditors. Later that afternoon, the Former Auditor delivered
its letter of resignation to the Chairman of the Audit Committee. A copy
of the Letter is filed as an exhibit (see Exhibit 7.1 to Item 7 below) to
this Current Report on Form 8-K and incorporated herein in its entirety by
this reference (the "Letter").
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2) In the Letter, the Former Auditor advised the Company that the Former
Auditor believes that the Company (i) prepared false sales invoices and
provided them to the Company's former bank to obtain financing; (ii) that
the Company prepared false documents and provided them to the Former
Auditor to support the collectibility of accounts receivable balances; and
(iii) that the Company prepared false documents which resulted in
inappropriate recording of sales at December 31, 1996 on orders that had
not been shipped as of that date. The Former Auditor also advised the
Company that it believes that the foregoing matters have had a material
impact on the Company's December 31, 1996 financial statements and that
they occurred with the knowledge and involvement of management of the
Company. Based on its beliefs, the Former Auditor was unwilling to
continue to rely on management's representations in connection with its
audits of the Company's financial statements and unwilling to serve as the
Company's independent public accountant.
3) The Company understands that one of the allegations of the Former Auditor
relates to certain transactions with the Company's former bank. The former
bank was paid in full in June 1997. See Item 5, Other Events, for
additional information relating to the status of the Company's
relationship with BNY Financial Corporation, its current bank.
4) With respect to the allegations
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in the Letter, the Company is in the process of engaging a replacement
auditor to evaluate the Former Auditor's concerns and commence an audit of
the Company's financial statements at December 31, 1995 and 1996 and at
September 30, 1997.
5) None of the Withdrawn Reports contained an adverse opinion or disclaimer
of opinion, nor were the Withdrawn Reports qualified or modified as to
uncertainty, audit scope, or accounting principles.
6) OTHER DISAGREEMENTS. In May 1996, the Former Auditor informed the Company
of significant deficiencies in the design and operation of its internal
controls that it had observed in connection with its audit of the
Company's December 31, 1995 financial statements. The Company addressed
these deficiencies by hiring a new Chief Financial Officer and a new Chief
Accounting Officer in June 1996, as well as implementing changes in its
internal controls.
7) In connection with the December 31, 1996 audit, the Former Auditor
proposed an adjustment to the bad debt reserve for $100,000. The matter
was discussed with management and an adjustment was made which satisfied
the Former Auditor, who then issued an unqualified report for that period.
8) In connection with limited review procedures performed on the quarter
ended March 31, 1997, the Former Auditor became aware of the fact that
certain receivables were collected by accepting inventory from some
customers. These inventory exchanges are non-monetary transactions which
the Former Auditor believed should not have resulted in the recognition of
revenue
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and profit on the related orginal sales. Management of the Company
believed that its recognition policy was in accordance with industry
standards. The Former Auditor proposed an adjustment to reverse the
original profit relating to these exchanges. No amount was recorded in
the first quarter as management believed that it had excess reserves in
inventory and had overaccrued on certain liabilities, which would negate
any impact on the quarterly results.
9) In connection with limited review procedures performed on the quarter
ended June 30, 1997, the Former Auditor raised issues with respect to (i)
a sale for $240,000 recorded in June 1997 which may not have been shipped
until July 3, 1997, (ii) the level of bad debt and credit memo reserves,
which on the basis of limited testing by the Former Auditor, was believed
by it to be in the range of $125,000 to $250,000 low, and (iii) additional
inventory exchanges recorded in the second quarter. In response to
discussions with the Former Auditor concerning these items, the Company
adopted the recommendation to increase the reserves for bad debts and
credit memos to $346,000 and reversed several excess accrued liabilities
and part of its inventory reserves. The Company also made the adjustment
necessary to reverse the $240,000 sale transaction in question. The
Former Auditor continues to express concern that further adjustments may
be required upon completion of the review of the matters addressed in the
Letter.
10) Subsequent to the issuance of the press release by the Company of its
second quarter 1997 results and prior to the Company's filing of its
second quarter 1997 Form 10-Q, which did include known adjustments
recommended by the Former Auditor, the Former Auditor requested and the
Company agreed to delay the filing of a registration statement for a
secondary offering until certain allegations brought to the attention of
the Former Auditor were completely reviewed and evaluated as to the
potential impact on the Company's previously released financial reports.
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11) The Company expressed a concern to the Former Auditor regarding numerous
changes of experienced personnel, including the audit partners, and as to
whether these changes were the cause of increasing audit costs.
12) The Company will authorize the Former Auditor to respond fully to the
inquiries of a successor auditor, when selected, concerning the subject
matter of each of the foregoing disagreements.
13) COMMUNICATIONS BETWEEN THE FORMER AUDITOR AND THE AUDIT COMMITTEE. On
July 24, 1997, the Former Auditor notified an outside director that it had
become aware of information from an informant(s) regarding the Company's
practices, including allegations of falsification of documents given to
the Former Auditor and allegations of improper financial reporting and,
based upon a limited procedural review, the Former Auditor reiterated its
concern about the filing for a secondary offering. The Company had
previously agreed to delay the secondary offering based upon the Former
Auditor's disclosure to management that the Former Auditor needed more
time to perform additional tests of the Company's internal controls and
reporting procedures. The Former Auditor requested a meeting with all of
the outside Directors.
14) On July 25, 1997, two of the outside Directors, the Company's securities
counsel, and representatives of the Former Auditor participated in a
conference call wherein the Former Auditor informed the Directors that the
allegations included (i) the existence of previously undisclosed related
party transactions, (ii) falsified documents, such as shipping documents,
receiving reports, and purchase orders, (iii) fictitious sales and
exchanges of inventory, and (iv) improper recording of sales and
receivable agings to misrepresent the characterization of accounts
receivable.
15) On July 25, 1997, the Board of Directors of the Company appointed the
three non-employee Directors to serve on the Company's Audit Committee.
On July 28, 1997, the Audit Committee engaged the Former Auditor to
conduct an investigation into the allegations.
16) On August 9, 1997, the Former Auditor participated in a conference call
with two of the members of the Audit Committee and special counsel to the
Company to update the status of the investigation work. The Former
Auditor reported that they believed that some of the allegations had
proven correct, most significantly, that false invoices had been created
and sent to the Company's former bank in order to
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obtain financing on the accounts receivable and working capital lines. In
addition, the Former Auditor reported that there had been an admission by
a Company employee that a falsified document was prepared purporting to
document an inventory exchange and that the false document had been
provided to the Former Auditor in connection with its limited review
procedures in the first quarter of 1997. The Former Auditor also
recommended that the Board replace or suspend the Chief Executive Officer,
bring in a senior management person to direct the Company's investigation,
and discuss requirements for disclosure of the investigation with its
legal counsel.
17) On August 12, 1997, the Audit Committee engaged the services of Kenneth
A. Lipinski, an independent consultant reporting directly to the Audit
Committee, to work with the Former Auditor in connection with the
investigation, to monitor the performance of the Company's accounting
personnel, and to make recommendations to the Audit Committee with respect
to the subject matter of the allegations.
18) On August 29, 1997, the consultant and two members of the Audit Committee
met with the Former Auditor to discuss the status of the Former Auditor's
investigation. At the meeting, the Former
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Auditor indicated that on August 28, 1997 it internally came to the
conclusion that the December 31, 1996 financial statements were materially
misstated and the Former Auditor delivered the Letter to the Company.
ITEM 5. OTHER EVENTS.
The Company reported the following additional events:
1. The Company met with BNY on September 3, 1997 to advise BNY of
the actions taken by the Former Auditor. BNY agreed that it would waive the
violations of loan covenants requiring audited financial statements for a
90-day period to enable the Company to complete an audit of its financial
statements. In consideration of the waiver, the Company and BNY agreed to
amend their Credit and Security Agreement dated June 25, 1997 to provide for,
among other things, the personal guarantee of the Company's Chief Executive
Officer. BNY has indicated its intention to continue to monitor the
situation. Pursuant to compliance with the terms of the amended Credit and
Security Agreement, the Company believes it will be able to maintain the
$15.0 million credit facility in place.
2. On September 8, 1997, the Company announced the election of
Kenneth A. Lipinski as Chief Operating Officer. Mr. Lipinski will report
directly to the Audit Committee of the Board of Directors and will have
managerial control over all accounting and administrative functions of the
Company.
3. On September 8, 1997, the Company announced the formation of an
Executive Committee to monitor the day-to-day activities of the Company and to
approve transactions out of the ordinary course of business. The members of the
Executive Committee will be the Company's Chief Executive Officer, the Company's
Chief Operating Officer, and the Chairman of the Company's Audit Committee.
4. The Company is also evaluating other corporate governance and
structural changes which have not been finalized as of the date of the filing of
this Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
7.1 Letter from Arthur Andersen LLP to the Board of Directors of the
Company dated August 29, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AVIATION DISTRIBUTORS, INC.
September 8, 1997 By: /s/OSAMAH S. BAKHIT
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Osamah S. Bakhit, President
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[LETTERHEAD]
August 29, 1997
The Board of Directors
Aviation Distributors Incorporated
1 Wrigley Drive
Irvine, California 92618
Dear Sirs:
As you are aware, in the course of performing limited inquiry and analytical
procedures with respect to the 1997 unaudited interim financial information of
Aviation Distributors Incorporated (the Company), we were made aware of certain
matters requiring further investigation. Accordingly since July 28, 1997, we
have been conducting an investigation into alleged financial reporting
irregularities at the Company with respect to the Company's financial statements
for its 1996 calendar year and for subsequent unaudited interim periods.
As a result of this investigation we now believe:
1. that the Company prepared false sales invoices and provided them to Far
East National Bank in order to obtain financing.
2. that the Company prepared false documents and provided those documents to
us to support the collectibility of accounts receivable balances.
3. that the Company prepared false documents which resulted in the
inappropriate recording of sales at December 31, 1996 on orders that had
not been shipped as of that date.
Our investigation has caused us to believe that the foregoing matters have a
material impact on the December 31, 1996 financial statements of the Company.
In addition, we believe that the foregoing matters have occurred with the
knowledge and involvement of the highest levels of management in the Company.
Accordingly, we are unwilling to continue to rely on management's
representation in connection with our audits of the Company's financial
statements. Further, the limited extent of the investigation that we have
performed, the apparent management override of the system of internal
controls and the apparent collusion among Company management and personnel
that impaired the system of internal controls, results in a risk that there
may be other matters which could materially affect the Company's financial
statements in addition to those identified in this letter.
This letter is to inform you that, as a consequence of these matters, Arthur
Andersen LLP - withdraws its reports dated May 30, 1995, April 17, 1996 and
February 12, 1997 on the Company's December 31, 1994, 1995 and 1996 financial
statements, respectively, and its report dated August 9, 1996 on the
Company's June 30, 1996 financial statements, effective
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The Board of Directors
Aviation Distributors Incorporated
Page 2
August 29, 1997
immediately. Reliance should not be placed on our reports referred to above
or on any of the related financial statements. The Company should look to
its responsibilities to others who may place reliance on its annual and
interim financial statements.
This letter will also serve to inform you that Arthur Andersen LLP hereby
resigns, effective as of the date of this letter, as the independent public
accountant for the Company. Accordingly, you should consult with your
counsel as to your obligation to disclose our decision to resign to the SEC
through a prompt Form 8-K filing.
By receipt of this letter, we further advise you that we believe that the
foregoing circumstances trigger a possible reporting obligation for Arthur
Andersen LLP under Section 10(A)(b)(2) of the Securities Exchange Act of 1934
as amended by Title III of the U.S. Private Securities Litigation Reform Act
of 1995. Accordingly, we ask that the Board inform us by no later than
September 4, 1997 concerning what timely remedial actions which the Board is
taking concerning these matters.
Very truly yours,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
