<PAGE>
As filed with the Securities and Exchange Commission on June 19, 1998
Registration No. 333-8061
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 1934
For the transition period from to
--------------------- ---------------------
Commission file number 0-29028
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Aviation Distributors, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0715685
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(State or Other Jurisdiction of (I.R.S. employer Identification No.)
Incorporation or Organization)
One Capital Drive Lake Forest, California 92630
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (949) 586-7558
------------------
Indicate by check (X) whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES ( ) NO (X)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 3,165,000 SHARES OF COMMON
STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF JUNE 19, 1998.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
RESTATED
1996 1997
---- ----
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . $ 16,985 $ 213,640
Restricted cash . . . . . . . . . . . . . . . . . . . 63,458 1,110,261
Accounts receivable, net of allowance for
doubtful accounts of $410,500 at December 31,
1996 and $346,316 at September 30, 1997,
respectively . . . . . . . . . . . . . . . . . . . . . 4,390,479 7,161,765
Other receivables . . . . . . . . . . . . . . . . . . . 66,272 143,304
Inventories, net of reserve . . . . . . . . . . . . . . 2,866,756 8,368,846
Prepaid expenses . . . . . . . . . . . . . . . . . . . 69,724 458,612
Current portion of notes receivable . . . . . . . . . . 1,615,528 1,654,201
Notes receivable from founder . . . . . . . . . . . . . 408,718 408,718
Deferred tax asset . . . . . . . . . . . . . . . . . . 386,000 410,919
------------- -------------
Total current assets . . . . . . . . . . . . . . . 9,883,920 19,930,266
------------- -------------
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . 1,784,853 1,963,190
Less - accumulated depreciation . . . . . . . . . . . . 278,686 393,247
------------- -------------
1,506,167 1,569,943
------------- -------------
Notes receivable, net of current portion. . . . . . . . . 3,056,855 1,819,158
Other assets . . . . . . . . . . . . . . . . . . . . . . 167,797 29,513
------------- -------------
3,224,652 1,848,671
------------- -------------
$ 14,614,739 $ 23,348,880
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Checks issued not yet presented for payment . . . . . . $ 530,440 $ 867,152
Accounts payable . . . . . . . . . . . . . . . . . . . 2,844,798 3,525,531
Accrued liabilities . . . . . . . . . . . . . . . . . . 377,044 674,466
Lines of credit . . . . . . . . . . . . . . . . . . . . 5,583,475 6,070,748
Income taxes payable . . . . . . . . . . . . . . . . . - 103,000
Current portion of long-term debt . . . . . . . . . . . 3,066,540 3,516,599
Current portion of capital lease obligations . . . . . 18,867 18,890
------------- -------------
Total current liabilities . . . . . . . . . . . . 12,421,164 14,776,386
------------- -------------
Long-term debt, net of current portion . . . . . . . . . 3,985,205 4,304,751
------------- -------------
Capital lease obligations, net of current portion . . . . 34,372 19,911
------------- -------------
Deferred tax liability . . . . . . . . . . . . . . . . . . 86,000 86,000
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value of $.01, 3,000,000
shares authorized; none issued and outstanding . . . . - -
Common stock, par value of $.01, 10,000,000
shares authorized; 3,165,000 shares issued
and outstanding at December 31, 1996 and
September 30, 1997 . . . . . . . . . . . . . . . . . . 17,850 31,650
Additional paid in capital . . . . . . . . . . . . . . 389,150 5,658,099
Accumulated deficit . . . . . . . . . . . . . . . . . . (2,319,002) (1,527,917)
------------- -------------
Total stockholders' equity (deficit) . . . . . . . (1,912,002) 4,161,832
------------- -------------
$ 14,614,739 $ 23,348,880
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. . . $ 5,063,772 $ 11,588,102 $ 15,713,994 $ 30,154,373
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS . . . . . . . . . . . . . . 264,316 259,760 1,237,371 921,812
-------------- -------------- -------------- --------------
TOTAL NET SALES . . . . . . . . . . . . . . . . . 5,328,088 11,847,862 16,951,365 31,076,185
COST OF SALES . . . . . . . . . . . . . . . . . . 3,838,488 9,418,897 12,602,320 24,227,903
-------------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . 1,489,600 2,428,965 4,349,045 6,848,282
SELLING AND ADMINISTRATIVE EXPENSES . . . . . . . 1,302,455 1,871,718 3,834,149 4,936,573
NONRECURRING EXPENSES . . . . . . . . . . . . . . - 339,804 - 339,804
LEGAL SETTLEMENT EXPENSES . . . . . . . . . . . . 1,275,000 - 1,275,000 -
-------------- -------------- -------------- --------------
Income (loss) from operations . . . . . . . . (1,087,855) 217,443 (760,104) 1,571,905
OTHER (EXPENSES) INCOME:
Interest expense . . . . . . . . . . . . . . (313,955) (354,809) (937,777) (863,681)
Interest income . . . . . . . . . . . . . . . 133,819 111,992 433,161 333,629
Other income . . . . . . . . . . . . . . . . . - 1,781 11,730 2,232
-------------- -------------- -------------- --------------
Income (loss) before provision for
(benefit from) income taxes . . . . . . . . . (1,267,991) (23,593) (1,252,990) 1,044,085
PROVISION (BENEFIT) FOR INCOME TAXES . . . . . . (188,000) - (188,000) 253,000
-------------- -------------- -------------- --------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . $ (1,079,991) $ (23,593) $ (1,064,990) $ 791,085
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Primary and fully diluted net
income (loss) per share . . . . . . . . . . . . $ (0.61) $ (0.01) $ (0.60) $ 0.28
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares outstanding . . . . . . . 1,785,000 3,165,000 1,785,000 2,824,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
RESTATED
1996 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,064,990) $ 791,085
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary item - gain on early extinguishment of debt . . . . . . - -
Principal payments on note receivable . . . . . . . . . . . . . . . . 1,091,691 1,199,024
Borrowings on notes payable related to inventory purchases. . . . . . 1,250,508 4,104,753
Principal payments on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . . . (1,710,691) (2,116,616)
Reduction in amount due on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . . . (258,602) (374,577)
Legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . - (80,000)
Principal payments on note payable
related to legal settlement . . . . . . . . . . . . . . . . . . . . - (820,000)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 149,412 166,837
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . (479,147) (2,771,286)
Other receivables . . . . . . . . . . . . . . . . . . . . . . . (279,540) (77,032)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (550,479) (5,502,090)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . (60,895) (388,888)
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . (17,174) (24,919)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (110,487) 138,284
Checks issued not yet presented for payment. . . . . . . . . . . (367,058) 336,712
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (331,768) 680,733
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 1,028,947 297,422
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 65,000 103,000
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . (28,192) -
------------- -------------
Net cash used in operating activities . . . . . . . . . . (1,673,465) (4,337,558)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (102,927) (178,337)
Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . 237,565 (1,046,803)
------------- -------------
Net cash provided by (used in) investing activities . . 134,638 (1,225,140)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit . . . . . . . . . . . . . . . . . . . . 16,445,394 32,904,057
Principal payments on lines of credit . . . . . . . . . . . . . . . . (15,698,840) (32,416,784)
Borrowings on long-term debt . . . . . . . . . . . . . . . . . . . . - 519,800
Principal payments of long-term debt . . . . . . . . . . . . . . . . (49,717) (516,031)
Principal payments of capital lease obligations . . . . . . . . . . . (19,224) (14,438)
Net proceeds from initial public offering . . . . . . . . . . . . . . - 5,282,749
------------- -------------
Net cash provided by financing activities . . . . . . . 677,613 5,759,353
------------- -------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . (861,214) 196,655
Cash and cash equivalents at beginning of period . . . . . . . . . . . 867,721 16,985
------------- -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 6,507 $ 213,640
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 906,852 $ 926,747
------------- -------------
------------- -------------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000 $ 375,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 _ GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND OPERATIONS
Aviation Distributors, Inc. and its subsidiaries (collectively, the "Company")
established operations in 1988, incorporated in the state of California in 1992
and reincorporated in the state of Delaware in 1996. The Company is a supplier,
distributor and broker of commercial aircraft parts and supplies worldwide.
On March 3, 1997 the Company's Registration Statement on Form SB-2 relating to
the Company's initial public offering of 1,200,000 shares of its common stock
was declared effective. On March 7, 1997 the Company closed its public offering
of 1,200,000 shares of its common stock at $5 per share. In connection with the
initial public offering, the Company granted the underwriters a 45-day option to
purchase up to 180,000 additional shares of its common stock to cover
over-allotments. The underwriters exercised such over-allotment option and on
April 22, 1997, the Company sold an additional 180,000 shares of its common
stock at $5 per share.
The net proceeds from the offering after all expenses were approximately $4.5
million, of such proceeds, $3,800,000 was used to repay a portion of the amount
outstanding under two revolving lines of credit, $400,000 was used to repay
loans made to the Company by certain of its employees, and the remaining
proceeds were used to fund a portion of a legal settlement entered into by the
Company. (See Note 3)
On April 22, 1997 the Company received net proceeds of approximately $792,000
from the exercise of the underwriter's over-allotment option. The proceeds were
used for working capital and to reduce vendor payables.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1997 and the results of its operations for the three
and nine month periods ended September 30, 1997 and 1996 and cash flows for the
nine month periods ended September 30, 1997 and 1996. The results of operations
and cash flows for the nine month period ended September 30, 1997 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the remainder of 1997.
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-QSB. Pursuant to such rules and regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The accompanying unaudited interim consolidated financial
statements should be read in connection with the Company's December 31, 1996
restated financial statements and the notes thereto included in the Company's
Form 10-KSB Registration
<PAGE>
Statement for the fiscal year ended December 31, 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS #
128 "Earnings Per Share. " The statement requires, at a minimum, new
calculations of earnings per share and disclosures. The Company has reviewed
the provisions of SFAS No. 128 and has determined that adoption of this
pronouncement will have no material effect on the Company's reporting of its
results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS # 130
"Reporting Comprehensive Income. " The statement requires a separate reporting
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity. The statement is effective for fiscal years beginning after December
15, 1997. Management does not expect the adoption of this statement to have a
material effect on the Company's reporting of its results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS # 131
"Disclosures About Segments of an Enterprise and Related Information. " The
statement requires a disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and a finer partitioning of geographic disclosures. It also
requires geographic data by country, as opposed to broader geographic regions
permitted under current standards. The statement is effective for fiscal years
beginning after December 15, 1997. Management does not expect the adoption of
this statement to have a material effect on the Company's reporting of its
results of operations.
NOTE 2 - CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS:
In August 1997, the Company's former independent auditors withdrew their
previously issued reports on the Company's financial statements for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and resigned as the Company's auditors. These actions were the result of their
investigation of allegations regarding certain of the Company's accounting and
financing practices. The lack of required financial information resulted in the
subsequent halt in trading and delisting of the Company's common stock on the
Nasdaq SmallCap market in September 1997.
In October 1997, three separate class action lawsuits were filed against the
Company, its founder, directors and certain current and former officers and
directors, and others.
<PAGE>
NOTE 3 - 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. In August 1996, the Company made a partial payment
to such customer of $166,000. 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 prevent future strain on the Company's financial and human resources
necessary to defend the dispute, to avoid the uncertainties associated with
litigation generally and to pursue an initial public offering in a timely
manner, the Company made a strategic business decision to resolve this dispute,
and on November 1, 1996, entered into a settlement agreement with such customer.
Pursuant to such settlement agreement, the Company was to pay such customer $1.2
million, of which $300,000 was paid upon execution of the settlement agreement.
On March 14, 1997 the Company modified the settlement agreement by paying the
customer $850,000 in exchange for full satisfaction of all remaining monetary
obligations owed to the customer under the settlement agreement.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
information set forth under: Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 10 through 15 of the
Company's Annual Report on Form 10KSB for the year ended December 31, 1997.
This discussion contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. Such forward looking statements involve risks and
uncertainties and actual results could differ from those described herein and
future results may be subject to numerous factors, many of which are beyond
the control of the Company.
OVERVIEW
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.
GENERAL
Net sales consist primarily of gross sales, net of allowance for returns and
other adjustments. Cost of sales consists primarily of product costs, freight
charges and an inventory provision for damaged and obsolete products. Product
costs consist of the acquisition costs of the products and costs associated with
repairs, maintenance and certification.
Net sales and gross profit depend in large measure on the volume and timing of
sales orders received during the period and the mix of aircraft parts contained
in the Company's inventory. 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.
<PAGE>
The following table sets forth certain information relating to the Company's
operations for the three months ended September 30, 1996 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net distributed services and inventory sales $5,064 95.0% $11,588 97.8%
Net sales on consignment and marketing
agreements 264 5.0 260 2.2
------ ------ ------- ------
Net sales 5,328 100.0 11,848 100.0
Cost of sales 3,838 72.0 9,419 79.5
------ ------ ------- ------
Gross profit 1,490 28.0 2,429 20.5
Selling and administrative expenses 1,303 24.5 1,872 15.8
Nonrecurring expenses - - 340 2.9
Legal settlement expense 1,275 23.9 - -
------ ------ ------- ------
Income (loss) from operations (1,088) (20.4) 217 1.8
Interest expense, net 180 3.4 243 2.0
Other income - - 2 -
Provision (benefit)for income taxes (188) (3.5) - -
------ ------ ------- ------
Net loss $(1,080) (20.3)% $(24) (0.2)%
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services
represents sales of aircraft parts purchased at the point of sale through
outside parties. Inventory sales represent sales of the Company's owned
inventory. Net distributed services and inventory sales increased from
$5.1 million for the three months ended September 30, 1996 to $11.6 million for
the three months ended September 30, 1997, an increase of $6.5 million or
127.5%. This increase was primarily the result of the additional capital
availability in March 1997 from the initial public offering of 1,380,000 shares.
This new capital allowed the Company to react more quickly to order requests and
the ability to locate and purchase the parts needed to fulfill these orders. In
addition, the increase in net distributed sales and inventory sales resulted
from the Company's increase in their availability of aircraft parts as a result
of the bulk inventory purchases received during 1996 and during the first three
quarters of 1997, the general growth in the industry, the emphasis on broadening
relationships with existing domestic customers, and the development of both new
domestic and international customers. The Company also had several large
transactions during the third quarter of 1997 that contributed approximately
$3.9 million of inventory sales.
Sales from distributed services represented approximately 91.5% and 72.9% of
total distributed services and inventory sales for the three months ended
September 30, 1996 and 1997, respectively. Sales of Company-owned inventory
represented approximately 8.5% and 27.1% of total distributed services and
inventory sales for the three months ended September 30, 1996 and 1997,
respectively. The increase in the percentage of the sales of Company-owned
inventory was primarily due to the bulk inventory purchases received during 1996
and during the first three quarters of 1997 and due to the sale of a single
engine being sold for $930,000 and two other parts that were sold for
approximately $800,00 from Company-owned inventory during the third quarter of
1997.
<PAGE>
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
remained relatively flat.
NET SALES. Net sales increased from $5.3 million for the three months ended
September 30, 1996 to $11.8 million for the three months ended September 30,
1997, an increase of $6.5 million or 122.6%. This increase has been discussed
above in the net distributed services and inventory sales. See "Net distributed
services and inventory sales. "
COST OF SALES. Cost of sales increased from $3.8 million for the three months
ended September 30, 1996 to $9.4 million for the three months ended September
30, 1997, an increase of $5.6 million or 147.4%. This increase was primarily
attributable to the increase in net sales.
GROSS PROFIT. Gross profit increased from $1.5 million for the three months
ended September 30, 1996 to $2.4 million for the three months ended September
30, 1997, an increase of $900,000 or 60.0%. This increase was a result of the
increase in net sales. Gross profit margin decreased from 28.0% for the three
months ended September 30, 1996 to 20.5% for the three months ended September
30, 1997. The decrease in gross profit margin was primarily attributable to a
sale of an engine for approximately $2.5 million with a 7.0% margin in the 1997
period.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, commission expense, professional
fees, consulting expense and travel expense. The Company's selling and
administrative expenses increased from $1.3 million for the three months ended
September 30, 1996 to $1.9 million for the three months ended September 30,
1997, an increase of $600,000 or 46.2%. This increase was principally due to
higher personnel costs necessary to respond to the Company's growth, including
salaries, taxes, insurance and commission expenses. As a percentage of net
sales, selling and administrative expenses decreased from 24.5% for the 1996
period to 15.8% for the 1997 period, primarily due to economies of scale
achieved because of higher sales.
NON RECURRING EXPENSES. In third quarter of 1997 the Company incurred $340,000
of expenses related to its investigation of allegations concerning its
previously issued financial statements, restatement of those financial
statements and investigations by a Federal grand jury and the Securities and
Exchange Commission. See "Item 5 - Withdrawal of Reports on Financial
Statements; Resignation of Auditor". These expenses primarily consist of legal,
accounting and consulting fees.
<PAGE>
LEGAL SETTLEMENT EXPENSE. A legal settlement expense was recorded in the third
quarter of 1996 due to settlement negotiations relating to an action that was
brought against the Company, its wholly owned subsidiary, ADI Consignment Sales,
Inc. ("ADICSI"), and Mr. Bakhit in February 1996. The action arose out of a
consignment agreement between ADICSI and the customer whereby ADICSI agreed to
hold certain aircraft parts inventory of such customer on consignment for sale.
The complaint generally alleged causes of action arising out of breach of
contract and fraud. All of the claims asserted in the lawsuit by the customer
were dismissed pursuant to a settlement agreement executed in November 1996 by
all of the parties to the litigation. In August 1996, the Company made a partial
settlement payment to the customer of $166,000, which was accrued during
December 1995 in accounts payable for aircraft parts purchased during 1995 under
the contract. 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 prevent future strain
on the Company's financial and human resources necessary to defend this dispute,
to avoid the uncertainties associated with litigation generally and to pursue
the Company's initial public 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 which the Company
paid $1.2 million. The Company incurred approximately $75,000 of legal expenses
related to this contract dispute as of September 30, 1996.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from operations of
$1.1 million for the three months ended September 30, 1996 due to the legal
settlement discussed above. Income from operations for the three months ended
September 30, 1996, excluding the legal settlement expense, would have been
$187,000. Income from operations for the three months ended September 30, 1997,
excluding the nonrecurring expenses, would have been $557,000, an increase of
$370,000. The increase was due to the increase in gross profit, offset by the
increase in selling and administrative expenses. See "Gross profit, " "Selling
and administrative expenses," "Non recurring expenses" and "Legal settlement
expense."
INTEREST EXPENSE, NET. Net interest expense increased from $180,000 for the
three months ended September 30, 1996 to $243,000 for the three months ended
September 30, 1997. The increase in interest expense was due to an increase in
borrowings under the Company's lines of credit and notes to corporations during
the third quarter of 1997. The Company increased its borrowings in order to
meet the demands from the growth of the Company's net sales.
NET LOSS. Net loss decreased from $1.1 million for the three months ended
September 30, 1996 to $24,000 for the three months ended September 30, 1997, a
decrease of $1.0 million. This decrease was attributable to the increase in net
sales and gross profit, offset by the increase in the selling and administrative
expenses and changes in non recurring expenses and legal settlement expense.
See "Net sales," "Gross profit", "Selling and administrative expenses.",
"Nonrecurring expenses" and "Legal settlement expense."
<PAGE>
The following table sets forth certain information relating to the Company's
operations for the nine months ended September 30, 1996 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Distributed services and
inventory sales $15,714 92.7% $30,154 97.0%
Net sales on consignment and
marketing agreements 1,237 7.3 922 3.0
-------- -------- -------- --------
Net sales 16,951 100.0 31,076 100.0
Cost of sales 12,602 74.4 24,228 78.0
-------- -------- -------- --------
Gross profit 4,349 25.6 6,848 22.0
Selling and administrative expenses 3,834 22.6 4,936 15.9
Nonrecurring expenses - - 340 1.1
Legal settlement expense 1,275 7.5 - -
-------- -------- -------- --------
Income (loss) from operations (760) (4.5) 1,572 5.0
Interest expense, net 505 3.0 530 1.7
Other income 12 0.1 2 -
Provision (benefit) for income taxes (188) (1.1) 253 0.8
-------- -------- -------- --------
Net income (loss) $(1,065) (6.3)% $ 791 2.5%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services
represents sales of aircraft parts purchased at the point of sale through
outside parties. Inventory sales represent sales of the Company's owned
inventory. Net distributed services and inventory sales increased from $15.7
million for the nine months ended September 30, 1996 to $30.2 million for the
nine months ended September 30, 1997, an increase of $14.5 million or 92.4%.
This increase was primarily the result of the additional capital availability in
March 1997 from the initial public offering of 1,380,000 shares. This new
capital allowed the Company to react more quickly to order requests and the
ability to locate and purchase the parts needed to fulfill these orders. In
addition, the increase in net distributed sales and inventory sales resulted
from the Company's increase in their availability of aircraft parts as a result
of the bulk inventory purchases received during 1996 and during the first three
quarters of 1997, the general growth in the industry, the emphasis on broadening
relationships with existing domestic customers, and the development of both new
domestic and international customers. The Company also had several large
transactions during the first three quarters of 1997 that contributed
approximately $6.6 million of distributed services and inventory sales.
Sales from distributed services represented approximately 93.8% and 81.5% of
total distributed services and inventory sales for the nine months ended
September 30, 1996 and 1997, respectively. Sales of Company-owned inventory
represented approximately 6.2% and 18.5% of total distributed services and
inventory sales for the nine months ended September 30, 1996 and 1997,
respectively. The increase in the percentage of the sales of Company-owned
inventory was primarily due to the bulk inventory purchases received during 1996
and during the first three quarters of 1997. The increase was also due to large
sales including two engines for approximately $900,000 each and another three
sales for a total of approximately $1.0 million from Company-owned inventory
during the first three quarters of 1997.
<PAGE>
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment and
marketing agreements represent total revenue, including commissions, related to
sales of inventory held on consignment and sales of inventory obtained through
marketing agreements. Net sales on consignment and marketing agreements
decreased from $1.2 million for the nine months ended September 30, 1996 to
$922,000 for the nine months ended September 30, 1997, a decrease of $278,000 or
23.2%. This decrease was primarily due to a decrease in the number of
consignment and marketing agreements the Company had entered into during the
first two quarters of 1997.
NET SALES. Net sales increased from $17.0 million for the nine months ended
September 30, 1996 to $31.1 million for the nine months ended September 30,
1997, an increase of $14.1 million or 82.9%. This increase has been discussed
above in the net distributed services and inventory sales, offset by the
decrease in net sales on consignment and marketing agreements. See "Net
distributed services and inventory sales" and "Net sales on consignment and
marketing agreements. "
COST OF SALES. Cost of sales increased from $12.6 million for the nine months
ended September 30, 1996 to $24.2 million for the nine months ended September
30, 1997, an increase of $11.6 million or 92.1%. This increase was primarily
attributable to the increase in net sales.
GROSS PROFIT. Gross profit increased from $4.3 million for the nine months
ended September 30, 1996 to $6.8 million for the nine months ended September 30,
1997, an increase of $2.5 million or 58.1%. This increase was a result of the
increase in net sales. Gross profit margin decreased from 25.6% for the nine
months ended September 30, 1996 to 22.0% for the nine months ended September 30,
1997. The decrease in gross profit margin was primarily attributable to some
high margin sales received in the 1996 period and a sale of an engine for
approximately $2.5 million with a 7.0% margin in the 1997 period.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, commission expense, professional
fees, consulting expense and travel expense. The Company's selling and
administrative expenses increased from $3.8 million for the nine months ended
September 30, 1996 to $4.9 million for the nine months ended September 30, 1997,
an increase of $1.1 million or 28.9%. This increase was principally due to
higher personnel costs necessary to respond to the Company's growth, including
salaries, taxes, insurance and commission expenses. As a percentage of net
sales, selling and administrative expenses decreased from 22.6% for the nine
months ended September 30, 1996 to 15.9% for the nine months ended September 30,
1997. The decrease as a percentage of net sales was primarily due to economies
of scale achieved because of higher sales.
NON RECURRING EXPENSES. In the third quarter of 1997 the Company incurred
$340,000 of expenses related to its investigation of allegations concerning its
previously issued financial statements, restatement of those financial
statements and investigations by a Federal grand jury and the Securities and
Exchange Commission. See "Item 5 - Withdrawal of Reports on Financial
Statements; Resignation of Auditor". These expenses primarily consist of legal,
accounting and consulting fees.
<PAGE>
LEGAL SETTLEMENT EXPENSE. A legal settlement expense was recorded in the third
quarter of 1996 due to settlement negotiations relating to an action that was
brought against the Company, its wholly owned subsidiary, ADI Consignment Sales,
Inc. ("ADICSI"), and Mr. Bakhit in February 1996. The action arose out of a
consignment agreement between ADICSI and the customer whereby ADICSI agreed to
hold certain aircraft parts inventory of such customer on consignment for sale.
The complaint generally alleged causes of action arising out of breach of
contract and fraud. All of the claims asserted in the lawsuit by the customer
were dismissed pursuant to a settlement agreement executed in November 1996 by
all of the parties to the litigation. In August 1996, the Company made a partial
settlement payment to the customer of $166,000, which was accrued during
December 1995 in accounts payable for aircraft parts purchased during 1995 under
the contract. 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 prevent future strain
on the Company's financial and human resources necessary to defend this dispute,
to avoid the uncertainties associated with litigation generally and to pursue
the Company's initial public 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 which the Company
paid $1.2 million. The Company incurred approximately $75,000 of legal expenses
related to this contract dispute as of September 30, 1996.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from operations of
$760,000 for the nine months ended September 30, 1996 due to the legal
settlement discussed above. Income from operations for the nine months ended
September 30, 1996, excluding the legal settlement expense, would have been
$515,000. Income from operations for the nine months ended September 30, 1997,
excluding the non recurring expenses, would have been $1.9 million, an increase
of $1.3 million. The increase was due to the increase in gross profit, offset by
the increase in selling and administrative expenses. See "Gross profit, "
"Selling and administrative expenses, "Non recurring expenses" and "Legal
settlement expense. "
INTEREST EXPENSES, NET. Net interest expense remained constant for the nine
months ended September 30, 1996 and 1997. The Company had a decrease in
borrowings under the lines of credit during the first two quarters of 1997 as a
result of the proceeds received from the initial public offering completed in
March 1997. In the third quarter the Company increased its borrowings in order
to meet the demands from the growth of the Company's net sales.
NET INCOME (LOSS). Net income (loss) increased from a loss of $1.1 million for
the nine months ended September 30, 1996 to $791,000 of income for the nine
months ended September 30, 1997, an increase of $1.9 million. This increase was
attributable to the increase in net sales and gross profit, somewhat offset by
higher selling and administrative expenses. See "Net sales," "Gross profit,"
and "Selling and administrative expenses."
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 3, 1997 the Company's Registration Statement on Form SB-2 relating to
the Company's initial public offering of 1,200,000 shares of its common stock
was declared effective. On March 7, 1997 the Company closed its initial public
offering of 1,200,000 shares of its common stock at $5 per share. In connection
with the initial public offering, the Company granted the underwriters a 45-day
option to purchase up to 180,000 additional shares of its common stock to cover
over-allotments. The underwriters exercised such over-allotment option and on
April 22, 1997, the Company sold an additional 180,000 shares of its common
stock at $5 per share.
The net proceeds from the offering after all expenses were approximately $4.5
million; of such proceeds, $3,800,000 was used to repay a portion of the amount
outstanding under two revolving lines of credit, $400,000 was used to repay
loans made to the Company by certain of its employees, and the remaining
proceeds were used to fund a portion of a legal settlement entered into by the
Company.
On April 22, 1997 the Company received net proceeds of approximately $760,000
from the exercise of the underwriter's over-allotment option. The proceeds were
used for working capital and to reduce vendor payables.
The Company's line of credit provides working capital of up to $15.0 million
with interest at the greater of prime plus 1.0 percent or the weighted average
of the rates on overnight Federal funds plus 1.5 percent subject to an
availability calculation based on the eligible borrowing base. The eligible
borrowing base includes certain receivables and inventories of the Company. The
$15.0 million line of credit matures on June 24, 2000. Events of default under
the line of credit include various events of default customary for such type of
agreement, such as failure to pay scheduled payments when due, failure to pay
taxes when due (unless contested in good faith), cross defaults on other
indebtedness or material contracts, the breach of any representation or warranty
by the Company, any change in the Company's condition that the Lender believes
impairs the collateral for the Credit Facility or the ability of the Company to
perform its obligations, certain events of bankruptcy, insolvency or
reorganization, engaging in certain sales of assets and if the lender deems
itself in good faith insecure or unsafe or fears diminution in value, removal or
waste of the collateral for the line of credit. In addition, the line of credit
includes events of default for the Company any merger, consolidation or sale of
substantially all of the property or assets of the Company and any change in the
management of the Company whereby Mr. Osamah Bakhit is no longer the Chief
Executive Officer of the Company.
The line of credit requires certain financial covenants to be met; including,
but not limited to, a tangible net worth of at least $4.5 million at the outset
and increasing by $500,000 each calendar quarter thereafter, a minimum working
capital of $4.0 million at all times and not to make capital expenditures in any
fiscal year in an amount in excess of $750,000. In addition, the line of credit
requires mandatory repayments in the event the availability calculation based on
the eligible borrowing base has been reduced. Substantially all of the Company's
assets are pledged as collateral for amounts borrowed.
The Company was not in compliance with certain of its debt covenants at
September 30, 1997. There is no assurance that the financial institution will
not require repayment of all debt and/or terminate the line of credit.
<PAGE>
The Company's long-term debt consists of the following: (i) note payable of
$3.5 million at September 30, 1997 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 $925,000 at September 30,
1997 to a financial institution, secured by a building, due in adjustable
monthly installments of $8,382 (principal and interest) to May 1999, with a
balloon payment due May 1999 and interest at Moody's A Bond Index (8.0% at
December 30, 1996) plus .125 percent; (iii) note payable of $1.5 million at
September 30, 1997 to a corporation, secured by specific inventory, due in
monthly installments of $128,194 (principal and interest) to May 2000, with an
imputed interest rate of 9.5 percent; (iv) other long-term debt of approximately
$27,000.
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 Company's
lines of credit. 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 prevent future
strain on the Company's financial and human resources necessary to defend the
dispute, to avoid the uncertainties associated with litigation generally and to
pursue an initial public offering in a timely manner, the Company made a
strategic business decision to resolve this dispute, and on November 1, 1996,
entered into a settlement agreement with such customer. Pursuant to such
settlement agreement, the Company was to pay such customer $1.2 million, of
which $300,000 was paid upon execution of the settlement agreement, which was
financed through additional borrowings under the Company's lines of credit. On
March 14, 1997 the Company modified the settlement agreement by paying the
customer $850,000 in exchange for full satisfaction of all remaining monetary
obligations owed to the customer under the settlement agreement. This amount
was financed through the proceeds from the offering and through additional
borrowings under the Company's lines of credit.
On April 16, 1997, the Company entered into an agreement to lease approximately
33,000 square feet of office and warehouse space located in Lake Forest,
California. Additionally, the Company entered into an agreement to sell the
building presently owned. The sale closed in December 1997. Net proceeds
resulting from the sale were used to offset the costs associated with relocation
and improvements to the new leased facility.
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.
The Company believes that the net proceeds from its initial public offering 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 a timely basis and at
acceptable terms, if at all.
As part of its growth strategy, the Company intends to pursue acquisitions of
bulk inventories of aircraft parts. Financing for such acquisitions will be
provided from operations and from borrowings under the Company's lines of
credit. The Company may also issue additional debt and/or equity securities in
connection with one or more of these acquisitions.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
WITHDRAWAL OF REPORTS ON FINANCIAL STATEMENTS; RESIGNATION OF AUDITOR. On
August 29, 1997, Arthur Andersen LLP, the Company's former independent auditor
(the "Former Auditor") withdrew 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"). The Former Auditor also resigned on
that same date.
In a letter to the Company's Audit Committee, the Former Auditor advised the
Company that it believed 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 believed that the foregoing matters 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.
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.
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.
<PAGE>
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.
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 and profit on
the related original 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.
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 expressed concern that further adjustments may be required
upon completion of the review of the matters addressed in the Letter.
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.
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.
The Company authorized the Former Auditor to respond fully to the inquiries of
the successor auditor concerning the subject matter of each of the foregoing
disagreements.
COMMUNICATIONS BETWEEN THE FORMER AUDITOR AND THE COMPANY'S 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
<PAGE>
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 then requested a
meeting with all of the outside directors of the Company.
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.
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.
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 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.
On August 12, 1997, the Audit Committee engaged the services of Kenneth
A. Lipinski, an independent consultant reporting directly to the Audit Committee
who was subsequently hired as the Company's interim Chief Operating Officer, 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.
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 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.
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. In August 1996, the Company made
a partial payment to such customer of $166,000. 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.
<PAGE>
Consequently, in order to prevent future strain on the Company's financial and
human resources necessary to defend the dispute, to avoid the uncertainties
associated with litigation generally and to pursue an initial public offering in
a timely manner, the Company made a strategic business decision to resolve this
dispute, and on November 1, 1996, entered into a settlement agreement with such
customer.
Pursuant to such settlement agreement, the Company was to pay such customer $1.2
million, of which $300,000 was paid upon execution of the settlement agreement.
On March 14, 1997 the Company modified the settlement agreement by paying the
customer $850,000 in exchange for full satisfaction of all remaining monetary
obligations owed to the customer under the settlement agreement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<C> <S>
**3.1 Amended and Restated Certificate of Incorporation of the
Registrant
**3.2 Bylaws, as amended, of the Registrant
**3.3 Amendment to Amended and Restated Certificate of Incorporation of
the Registrant
**4.1 Specimen Common Stock Certificate
**4.2 Form of Warrant Agreement
**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 30, 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 Osmah S. Bakhit to
Aviation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
Distributors, Inc., dated as of December 30, 1995
**10.15 Settlement Agreement dated as of November 1, 1996
**10.16 Form of Indemnity Agreement
**10.17 Promissory Note between Aviation Distributors, Inc. and Mark W.
Ashton, dated January 28, 1997
**10.18 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated January 28, 1997
**10.19 Promissory Note between Aviation Distributors, Inc. and Jim
Goulet, dated January 28, 1997
**10.20 Promissory Note between Aviation Distributors, Inc. and Steve
Hayer, dated January 28, 1997
**10.21 Promissory Note betwen Aviation Distributors, Inc. and Elizabeth
Morgan, dated January 28, 1997
**10.22 Promissory Note between Aviation Distributors, Inc., and Magda
Reichenberg, dated January 28, 1997
**10.23 Promissory Note between Aviation Distributors, Inc. and Leza Ann
Waner, dated January 28, 1997
**10.24 Promissory Note between Aviation Distributors, Inc. and Jeffrey G.
Ward, dated January 28, 1997
**10.25 Amendment to Promissory Note between Aviation Distributors, Inc.
and Mark W. Ashton, dated February 3, 1997
**10.26 Amendment to Promissory Note between Aviation Distributors, Inc.
and Osamah S. Bakhit, dated February 3, 1997
**10.27 Amendment to Promissory Note between Aviation Distributors, Inc.
and Jim Goulet, dated February 3, 1997
**10.28 Amendment to Promissory Note between Aviation Distributors, Inc.
and Steve Hayer, dated February 3, 1997
**10.29 Amendment to Promissory Note between Aviation Distributors, Inc.
and Elizabeth Morgan, dated February 3, 1997
**10.30 Amendment to Promissory Note between Aviation Distributors, Inc.
and Magda Reichenberg, dated February 3, 1997
**10.30 Amendment to Promissory Note between Aviation Distributors, Inc.
and Leza Ann Waner, dated February 3, 1997
**10.32 Amendment to Promissory Note between Aviation Distributors, Inc.
and Jeffrey G. Ward, dated February 3, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated December 30, 1996.
***10.34 Acknowledgement of Receipts of Settlement Funds by and among
Compania Mexicana de Aviacion, S.A. de C.V. , ADI Consignment
Sales, Inc., Aviation Distributors, Inc. and Osamah S. Bakhit
</TABLE>
* Filed herewith
** Incorporated by reference to the exhibits with the
corresponding exhibit numbers in the Registration
Statements on Form SB-2 previously filed by the Registrant
(File No. 333-8061).
*** Incorporated by reference to the exhibits with the
corresponding exhibit numbers in the Registration Statement
on Form 10-QSB previously filed by the Registrant on May 6,
1997 (File No. 333-8061)
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date June 19, 1998 AVIATION DISTRIBUTORS, INC.
---------------------------
By: /SS/ Kenneth A. Lipinski
--------------------------------
Ken Lipinski
Chief Operating Officer
By: /SS/ Gary L. Joslin
-------------------------------
Gary Joslin
Chief Financial Officer and
Vice President of Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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0
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