<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 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 June 30, 1998
-------------------------------------------------
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.
----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0715685
----------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. employer
Incorporation or Organization) Identification No.)
One Capital Drive Lake Forest, California 92630
----------------------------------------------------------------------------
(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: 3,122,000 SHARES OF COMMON
STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF AUGUST 14, 1998.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 80,218 $ 8,137
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103,444 4,966
Accounts receivable, net of allowance for
doubtful accounts of $300,000 at December 31,
1997 and $270,000 at June 30, 1998,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,875,366 6,012,193
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . 216,956 37,033
Inventories, net of reserve . . . . . . . . . . . . . . . . . . . . 9,384,573 10,045,550
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 344,283 473,232
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . 392,979 567,979
Current portion of note receivable. . . . . . . . . . . . . . . . . 1,781,172 1,868,610
Notes receivable from founder . . . . . . . . . . . . . . . . . . . 408,718 408,718
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . 293,000 301,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 21,880,709 19,727,418
------------ ------------
PROPERTY AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . 1,030,100 1,270,084
Less - accumulated depreciation . . . . . . . . . . . . . . . . . . 337,908 432,091
------------ ------------
692,192 837,993
------------ ------------
Note receivable, net of current portion. . . . . . . . . . . . . . . . 1,272,071 316,250
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,512 254,512
------------ ------------
1,451,583 570,762
------------ ------------
$ 24,024,484 $ 21,136,173
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not yet presented for payment . . . . . . . . . . . . $ 984,031 $ 371,423
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 2,882,044 2,500,864
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 770,432 603,709
Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . 9,289,188 11,209,182
Note payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 856,087
Current portion of long-term debt . . . . . . . . . . . . . . . . . 3,133,352 3,479,684
Current portion of capital lease obligations. . . . . . . . . . . . 19,698 23,427
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . 17,078,745 19,044,376
------------ ------------
Long-term debt, net of current portion . . . . . . . . . . . . . . . . 2,582,826 330,176
------------ ------------
Capital lease obligations, net of current portion. . . . . . . . . . . 14,674 39,322
------------ ------------
Other long-term liability. . . . . . . . . . . . . . . . . . . . . . . 480,000 480,000
------------ ------------
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . 93,000 101,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.01, 3,000,000
shares authorized; none issued and outstanding . . . . . . . . . . - -
Common stock, par value of $.01, 10,000,000
shares authorized; 3,165,000 and 3,122,000 shares issued
and outstanding at December 31, 1997 and
June 30, 1998, respectively. . . . . . . . . . . . . . . . . . . . 31,650 31,650
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . 5,658,099 5,658,099
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (1,914,510) (4,475,146)
Treasury stock, 43,000 shares at cost . . . . . . . . . . . . . . . - (73,304)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 3,775,239 1,141,299
------------ ------------
$ 24,024,484 $ 21,136,173
------------ ------------
------------ ------------
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
RESTATED RESTATED
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET DISTRIBUTED SERVICES AND INVENTORY SALES . . . . . $ 9,377,901 $ 6,353,866 $ 18,566,271 $ 15,172,497
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS. . . . . . . . . . . . . . . . . 387,200 124,440 662,052 176,101
------------- ------------ ------------ -------------
TOTAL NET SALES. . . . . . . . . . . . . . . . . . . . 9,765,101 6,478,306 19,228,323 15,348,598
COST OF SALES. . . . . . . . . . . . . . . . . . . . . 7,122,084 5,064,306 14,809,006 11,955,695
------------- ------------ ------------ -------------
Gross profit. . . . . . . . . . . . . . . . . . . 2,643,017 1,414,000 4,419,317 3,392,903
SELLING AND ADMINISTRATIVE EXPENSES. . . . . . . . . . 1,880,799 1,926,730 3,064,855 3,719,102
NON RECURRING EXPENSES . . . . . . . . . . . . . . . . - 530,425 - 1,039,310
------------- ------------ ------------ -------------
Income (loss) from operations . . . . . . . . . . 762,218 (1,043,155) 1,354,462 (1,365,509)
OTHER (EXPENSES) INCOME:
Interest expense. . . . . . . . . . . . . . . . . (233,222) (714,639) (508,872) (1,357,183)
Interest income . . . . . . . . . . . . . . . . . 109,192 69,186 221,637 157,722
Other income. . . . . . . . . . . . . . . . . . . - 16,289 451 4,334
------------- ------------ ------------ -------------
Income (loss) before provision for
income taxes. . . . . . . . . . . . . . . . . . 638,188 (1,672,319) 1,067,678 (2,560,636)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . 150,000 - 253,000 -
------------- ------------ ------------ -------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $ 488,188 $ (1,672,319) $ 814,678 $ (2,560,636)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Basic and diluted net
income (loss) per share. . . . . . . . . . . . . . . $ 0.16 $ (0.53) $ 0.31 $ (0.81)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Weighted average shares outstanding. . . . . . . . . . 3,123,000 3,150,000 2,650,000 3,158,000
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
RESTATED
1997 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 814,678 $ (2,560,636)
Adjustments to reconcile net income to net cash
used in operating activities:
Principal payments on note receivable. . . . . . . . . . . . . . 788,125 868,383
Borrowings on notes payable related to inventory purchases . . . 1,610,183 2,390,018
Principal payments on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . (1,449,318) (3,530,796)
Legal settlement . . . . . . . . . . . . . . . . . . . . . . . . (80,000) -
Principal payments on note payable
related to legal settlement. . . . . . . . . . . . . . . . . . (820,000) -
Depreciation and amortization. . . . . . . . . . . . . . . . . . 84,653 187,878
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . . . . (3,379,505) 1,863,173
Other receivables . . . . . . . . . . . . . . . . . . . . . (11,673) 179,923
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (2,610,234) (660,977)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . (343,868) (128,949)
Income tax receivable . . . . . . . . . . . . . . . . . . . - (175,000)
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . (24,919) (8,000)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 167,797 (75,000)
Checks issued not yet presented for payment . . . . . . . . (91,810) (612,608)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 909,556 (381,180)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 42,283 (166,723)
Income taxes payable. . . . . . . . . . . . . . . . . . . . 103,000 -
Deferred tax liability. . . . . . . . . . . . . . . . . . . - 8,000
----------- -----------
Net cash used in operating activities. . . . . . . . (4,291,052) (2,802,494)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (135,438) (198,565)
Decrease (increase) in restricted cash. . . . . . . . . . . . . . . . (1,212,081) 1,098,478
----------- -----------
Net cash provided by (used in) investing activities . (1,347,519) 899,913
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit . . . . . . . . . . . . . . . . . . . . 20,065,229 17,517,759
Principal payments on lines of credit . . . . . . . . . . . . . . . . (19,417,059) (15,597,765)
Borrowings on long-term debt. . . . . . . . . . . . . . . . . . . . . 500,000 -
Principal payments of long-term debt. . . . . . . . . . . . . . . . . (509,694) (3,148)
Principal payments of capital lease obligations . . . . . . . . . . . (10,191) (13,042)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . - (73,304)
Net proceeds from initial public offering . . . . . . . . . . . . . . 5,282,749 -
----------- -----------
Net cash provided by financing activities . . . . . . 5,911,034 1,830,500
----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . 272,463 (72,081)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 16,985 80,218
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 289,448 $ 8,137
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 332,482 $ 1,195,053
----------- -----------
----------- -----------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 375,000 $ 175,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1998 and the results of its operations for the three and
six month periods ended June 30, 1998 and 1997 and cash flows for the six month
periods ended June 30, 1998 and 1997. The results of operations and cash flows
for the six month period ended June 30, 1998 are not necessarily indicative of
the results of operations or cash flows which may be reported for the remainder
of 1998.
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, 1997
financial statements and the notes thereto included in the Prospectus contained
in the Company's Annual Report on Form 10KSB.
NOTE 2 - RESTATEMENT OF JUNE 30, 1997 FINANCIAL STATEMENTS:
The Company has restated its previously issued consolidated financial statements
for the quarterly period ended June 30, 1997, for matters related to: previously
reported sales and accounts receivables, inventory costs and valuation reserves,
revisions to the previous policy regarding the capitalization of costs
associated with the bulk purchase of inventory, correction of prior accounting
for capitalization of bulk purchase and certain other costs, unrecorded
liabilities, additional bad debt expenses and the related income tax effects.
Retained earnings at January 1, 1997 was reduced by $2,380,245 as a result of
adjustments to 1995 and 1996 financial statements.
The effect on the Company's previously issued financial statements for the
quarterly periods ended June 30, 1997 are summarized as follows:
<PAGE>
Changes to the Statement of Operations for the three months ended June 30, 1997:
<TABLE>
<CAPTION>
PREVIOUSLY INCREASE
REPORTED (DECREASE) (RESTATED)
-------- ---------- ----------
(OOO'S OMITTED)
<S> <C> <C> <C>
Total Net Sales . . . . . . . . . . . . . . . $ 10,085 $ (320) $ 9,765
Cost of Sales . . . . . . . . . . . . . . . . 7,171 (49) 7,122
Gross Profit. . . . . . . . . . . . . . . . . 2,914 (271) 2,643
Selling and Administration Expenses . . . . . 1,794 87 1,881
Income from Operations. . . . . . . . . . . . 1,120 (358) 762
Income Before Taxes . . . . . . . . . . . . . 996 (358) 638
Provision for Taxes . . . . . . . . . . . . . 388 (238) 150
Net Income. . . . . . . . . . . . . . . . . . 608 (120) 488
Net Income Per Share . . . . . $ 0.20 $ (0.04) $ 0.16
</TABLE>
Changes to the Statement of Operations for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
PREVIOUSLY INCREASE
REPORTED (DECREASE) (RESTATED)
-------- ---------- ----------
(OOO'S OMITTED)
<S> <C> <C> <C>
Total Net Sales . . . . . . . . . . . . . . . $ 19,539 $ (311) $19,228
Cost of Sales . . . . . . . . . . . . . . . . 14,742 67 14,809
Gross Profit. . . . . . . . . . . . . . . . . 4,797 (378) 4,419
Selling and Administration Expenses . . . . . 3,019 45 3,064
Income from Operations. . . . . . . . . . . . 1,778 (423) 1,355
Income Before Taxes . . . . . . . . . . . . . 1,491 (423) 1,068
Provision for Taxes . . . . . . . . . . . . . 576 (323) 253
Net Income. . . . . . . . . . . . . . . . . . 915 (100) 815
Net Income Per Share. . . . . . . . . . . . . $ 0.35 $ (0.04) $ 0.31
</TABLE>
NOTE 3 - CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS:
In August 1997, the Company's former independent auditors withdrew their
previously issued reports on the Company's financial statements for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and resigned as the Company's auditors. These actions were the result of their
investigation of allegations regarding certain of the Company's accounting and
financing practices. The lack of required financial information resulted in the
subsequent halt in trading and delisting of the Company's common stock on the
Nasdaq SmallCap market in September 1997.
In October 1997, three separate class action lawsuits were filed against the
Company, its founder, directors and certain current and former officers and
directors, and others. In February 1998, a motion was approved to consolidate
all three class action lawsuits in Federal court.
<PAGE>
In April 1998, the Company entered into a settlement in principle which is
memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit, will contribute 130,000 shares. The Company's cost of settlement was
accrued in the fourth quarter of 1997.
The settlement is conditioned upon the execution of a definitive settlement
agreement on or before May 1, 1998 and the court's approval of that
agreement. Counsel for the plaintiffs and the Company orally agreed to extend
this date. As of August 14, 1998 the filing of the definitive agreement was
in process. For the agreement to be effected, a certain percentage (to be
specified in the agreement) of shareholders must not have elected to be
excluded from the terms and conditions of the settlement. The settling
plaintiffs, if they so elect, may withdraw from the settlement if the Company's
common shares trade at less than $5 per share for the ten-day period
beginning fifteen days prior to the settlement hearing.
Both a Federal grand jury and the Securities and Exchange Commission have
commenced investigations into the allegations referred to above. The
investigations are continuing and the Company is unable, at this time, to
evaluate the possible outcome of the investigations or their impact on the
Company.
NOTE 4 - DEBT ARRANGEMENTS
At June 30, 1998, the Company was not in compliance with certain of the
covenants of its line of credit with BNY Financial Corporation. BNY Financial
Corporation continues to support the Company and its management; however,
there is no assurance that the lender will not require repayment of all debt
and/or terminate the credit facility.
In February 1998, the Company borrowed $2,140,000 from BNY Financial Corporation
to purchase specific inventory. The balance of the note payable is $856,000 at
June 30, 1998. The note is secured by specific inventory and by the one million
shares of common stock pledged on the Credit Facility, was due on April 27,
1998, and has an interest rate of Prime plus three percent plus other fees. The
Company did not pay the required amount on the note in March 1998 and did not
pay off the note by April 27, 1998. As a result the Company incurred a $100,000
default penalty in March 1998. The bank further extended this note for a
$100,000 fee to June 30, 1998. The Company did not pay the balance of this note
by June 30, 1998. The Company was also not in compliance with certain of its
debt covenants under this note agreement at June 30, 1998. Management is
currently negotiating with the bank to resolve this matter.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of the Company for each of the
periods discussed. This discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the related notes
thereto, which are included elsewhere in this document. This discussion
contains "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that the expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Such forward looking
statements involve risks and uncertainties and actual results could differ from
those described herein and future results may be subject to numerous factors,
many of which are beyond the control of the Company.
OVERVIEW
Net sales consist primarily of gross sales, net of allowance for returns and
other adjustments. Cost of sales consists primarily of product costs, freight
charges and an inventory provision for damaged and obsolete products. Product
costs consist of the acquisition costs of the products and costs associated with
repairs, maintenance and certification.
Net sales and gross profit depend in large measure on the volume and timing of
sales orders received during the period and the mix of aircraft parts contained
in the Company's inventory. The timing of bulk inventory purchases can impact
sales and gross profit. In general, bulk inventory purchases allow the Company
to obtain large inventories of aircraft parts at a lower cost than can
ordinarily be obtained by purchasing such parts on an individual basis. Thus,
these bulk purchases allow the Company to seek larger gross margins on its sale
of aircraft parts since the cost of purchase is reduced.
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 June 30, 1997 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1997
RESTATED 1998
----------------------- ------------------------
<S> <C> <C> <C> <C>
Net distributed services and inventory
sales $ 9,378 96.0% $ 6,354 98.1%
Net sales on consignment and marketing
agreements 387 4.0 124 1.9
-------- ----- --------- -----
Net sales 9,765 100.0 6,478 100.0
Cost of sales 7,122 72.9 5,064 78.2
-------- ----- --------- -----
Gross profit 2,643 27.1 1,414 21.8
Selling and administrative expenses 1,881 19.3 1,927 29.7
Non recurring expenses - - 530 8.2
-------- ----- --------- -----
Income (loss) from operations 762 7.8 (1,043) (16.1)
Interest expense, net 124 1.3 645 9.9
Other income - - 16 .2
Provision for income taxes 150 1.5 - -
-------- ----- --------- -----
Net income (loss) $ 488 5.0% $ (1,672) (25.8)%
-------- ----- --------- -----
-------- ----- --------- -----
</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 decreased from
$9.4 million for the three months ended June 30, 1997 to $6.4 million for the
three months ended June 30, 1998, a decrease of $3.0 million or 31.9%. This
decrease was primarily the result of two large transactions during the second
quarter of 1997 that contributed approximately $1.1 million of inventory sales
and due to a shortage in cash availability during the second quarter of 1998
resulting from cash requirements related to the class action lawsuits and
government investigations.
Sales from distributed services represented approximately 79.1% and 86.5% of
total distributed services and inventory sales for the three months ended June
30, 1997 and 1998, respectively. Sales of Company-owned inventory represented
approximately 20.9% and 13.5% of total distributed services and inventory sales
for the three months ended June 30, 1997 and 1998, respectively. The decrease
in the percentage of the sales of Company-owned inventory was primarily due to
the sale of a single engine being sold for $900,000 and another part that was
sold for $250,000 from Company-owned inventory during the second quarter of
1997.
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 $387,000 for the three months ended June 30, 1997 to $124,000 for
the three months ended June 30, 1998, a decrease of $263,000 or 68.0%. This
decrease was primarily due to a decrease in the number of consignment and
marketing agreements the Company had entered into during the second quarter of
1998.
COST OF SALES. Cost of sales decreased from $7.1 million for the three months
ended June 30, 1997 to $5.1 million for the three months ended June 30, 1998, a
decrease of $2.0 million or 28.2%. This decrease was primarily attributable to
the decrease in net sales. See "Distributed services and inventory sales,"and
"Net sales on consignment and marketing agreements."
GROSS PROFIT. Gross profit decreased from $2.6 million for the three months
ended June 30, 1997 to $1.4 million for the three months ended June 30, 1998, a
decrease of $1.2 million or 46.2%. This decrease was a result of the decrease
in net sales. Gross profit margin
<PAGE>
decreased from 27.1% for the three months ended June 30, 1997 to 21.8% for the
three months ended June 30, 1998. The decrease in gross profit margin was
primarily attributable to some high margin sales received in the 1997 period,
including the large inventory sales of $1.1 million receiving margins greater
than 40 percent. See "Net distributed services and inventory sales."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of compensation, commission expense, professional fees,
consulting expense, bank fees, insurance, facility rent and travel expense.
The Company's selling and administrative expenses remained relatively
consistent at $1.9 million for both periods. As a percentage of net sales,
selling and administrative expenses increased from 19.3% for the 1997 period
to 29.7% for the 1998 period, primarily due to the decrease in sales.
NON RECURRING EXPENSES. In the second quarter of 1998, the Company incurred
$530,000 of expenses related to its investigation of allegations concerning its
previously issued financial statements, restatement of those financial
statements, class action lawsuits and investigations by a Federal grand jury and
the Securities and Exchange Commission. See "Part II, Item 1 - Legal
Proceedings." These expenses primarily consist of legal, accounting and
consulting fees.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from operations for
the 1998 period due to a decrease in sales and gross profit and the additional
non recurring expenses. See "Distributed services and inventory sales," "Net
sales on consignment and marketing agreements," "Gross profit" and "Non
recurring expenses."
INTEREST EXPENSE, NET. Net interest expense increased from $124,000 for the
three months ended June 30, 1997 to $645,000 for the three months ended June 30,
1998. The increase in interest expense was due to an increase in borrowings
under the Company's line of credit during the second quarter of 1998 and due to
approximately $330,000 interest incurred on the note payable for the purchase of
the CFM56 engine. Also the Company was able to decrease its borrowings under
its lines of credit in 1997 as a result of the proceeds received from the
initial public offering completed in March 1997.
The following table sets forth certain information relating to the Company's
operations for the six months ended June 30, 1997 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1997
RESTATED 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net distributed services and inventory
sales $ 18,566 96.6% $ 15,173 98.9%
Net sales on consignment and marketing
agreements 662 3.4 176 1.1
--------- ----- --------- -----
Net sales 19,228 100.0 15,349 100.0
Cost of sales 14,809 77.0 11,956 77.9
--------- ----- --------- -----
Gross profit 4,419 23.0 3,393 22.1
Selling and administrative expenses 3,065 16.0 3,719 24.2
Non recurring expenses - - 1,039 6.8
--------- ----- --------- -----
Income from operations 1,354 7.0 (1,365) (8.9)
Interest expense, net 286 1.5 1,200 7.8
Other income - - 4 -
Provision for income taxes 253 1.3 - -
--------- ----- --------- -----
Net income $ 815 4.2% $ (2,561) (16.7)%
--------- ----- --------- -----
--------- ----- --------- -----
</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 decreased from $18.6
million for the six months ended June 30, 1997 to $15.2 million
<PAGE>
for the six months ended June 30, 1998, a decrease of $3.4 million or 18.3%.
This decrease was primarily the result of a shortage in cash availability during
the first two quarters of 1998 resulting from cash requirements related to the
class action lawsuits and government investigations. The Company also had
several large transactions during the first two quarters of 1997 that
contributed approximately $2.7 million of distributed services and inventory
sales compared to $1.2 million of large transactions in the 1998 period.
Sales from distributed services represented approximately 86.8% and 81.2% of
total distributed services and inventory sales for the six months ended June 30,
1997 and 1998, respectively. Sales of Company-owned inventory represented
approximately 13.2% and 18.8% of total distributed services and inventory sales
for the six months ended June 30, 1997 and 1998, respectively. The increase in
the percentage of the sales of Company-owned inventory was primarily due to
additional inventory available to the Company in the first quarter of 1998 from
the purchase of the CFM56 engine.
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 $662,000 for the six months ended June 30, 1997 to $176,000 for
the six months ended June 30, 1998, a decrease of $486,000 or 73.4%. 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 1998.
COST OF SALES. Cost of sales decreased from $14.8 million for the six months
ended June 30, 1997 to $12.0 million for the six months ended June 30, 1998, a
decrease of $2.8 million or 18.9%. This decrease was primarily attributable to
the 20.2% decrease in net sales. See "Distributed services and inventory
sales,"and "Net sales on consignment and marketing agreements."
GROSS PROFIT. Gross profit decreased from $4.4 million for the six months
ended June 30, 1997 to $3.4 million for the six months ended June 30, 1998, a
decrease of $1 million or 22.7%. This decrease was a result of the decrease in
net sales. Gross profit margin remained relatively consistent from 23.0% for
the six months ended June 30, 1997 to 22.1% for the six months ended June 30,
1998. See "Net distributed services and inventory sales,"and "Net sales on
consignment and marketing agreements."
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of compensation, commission expense, professional fees,
consulting expense, bank fees, insurance, facility rent and travel expense.
The Company's selling and administrative expenses increased from $3.1 million
for the six months ended June 30, 1997 to $3.7 million for the six months
ended June 30, 1998, an increase of $600,000 or 19.4%. This increase was
principally due to higher bank charges related to the new credit facility
entered into by the Company in June 1997, increases in insurance expense and
increases in facility rent when the Company moved its headquarters in
February of 1998.
NON RECURRING EXPENSES. In the first two quarters of 1998, the Company incurred
$1.0 million of expenses related to its investigation of allegations concerning
its previously issued financial statements, restatement of those financial
statements, class action lawsuits and investigations by a Federal grand jury and
the Securities and Exchange Commission. See "Part II, Item 1 - Legal
Proceedings." These expenses primarily consist of legal, accounting and
consulting fees.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from operations for
the 1998 period due to a decrease in sales, gross profit, the increase in
selling and administrative expenses and the non recurring expenses. See "Net
distributed services and inventory sales," "Net sales on consignment and
marketing agreements," "Gross profit," "Selling and administrative expenses" and
"Non recurring expenses."
<PAGE>
INTEREST EXPENSES, NET. Net interest expense increased from $286,000 for the
six months ended June 30, 1997 to $1.2 million for the six months ended June 30,
1998. The increase in interest expense was due to an increase in borrowings
under the Company's line of credit during the first two quarters of 1998 and due
to approximately $450,000 interest incurred on the note payable for the purchase
of the CFM56 engine. Also the Company was able to decrease its borrowings under
its lines of credit in 1997 as a result of the proceeds received from the
initial public offering completed in March 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $80,000 and $8,000 as of December
31, 1997 and June 30, 1998, respectively. The Company had restricted cash of
$1.1 million as of December 31, 1997. Restricted cash was required for letters
of credit issued to certain vendors.
The Company's operating activities used $4.3 million and $2.8 million in the six
months ended June 30, 1997 and 1998, respectively. The largest cash uses in the
1997 period were $3.4 million for increases in accounts receivable, $2.6 million
for acquisition of inventories and payments of $820,000 related to a legal
settlement, offset by earnings and increases in liability accounts. For the
1998 period the largest uses of cash were the $2.5 million loss, payments of
$3.5 million related to notes payable for inventory purchases, and decreases in
liability accounts, offset by a $1.8 million reduction in accounts receivable.
Net cash used in investing activities was $1.3 million in the 1997 period as a
result from an increase in restricted cash required for a letter of credit. Net
cash provided by was $900,000 in the 1998 period principally as a result of a
decrease in restricted cash when a letter of credit was cancelled.
Cash provided by 1997 financing activities of $5.9 million was primarily a
result of the $5.3 million of net proceeds received from the Company's initial
public offering. The $1.8 million provided by 1998 financing activities
consisted primarily of a net increase in line of credit borrowings.
The Company's operations are financed under a credit facility from BNY Financial
Corporation, a subsidiary of, the Bank of New York. This facility is an asset
based line of credit and is the primary source for the Company to finance its
operations and growth. The Company's Credit Facility provides for working
capital loans of up to $15.0 million with interest at the Bank of New York
Alternate Base Rate (8.5 percent at June 30, 1998) plus one 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
terms of the credit agreement provide for a facility non-use fee of 0.75% per
annum of the difference between the facility amount and the average monthly
balance. The Credit Facility matures on June 25, 2000.
BNY Financial Corporation has a fully perfected security interest against all
assets of the Company, except restricted cash, in addition to a personal
guarantee from the Company's founder and the pledge of 1 million shares of
common stock owned by the Company's founder.
The Credit Facility provides for the repayment of all debt and/or termination of
the Credit Facility (i) in the event the Company voluntarily files under the
federal bankruptcy laws or fails to dismiss, within 31 days, any petition filed
against it in any involuntary case under such bankruptcy laws, (ii) if the
lender believes the prospect of payment or performance of the indebtedness is
impaired, or (iii) upon a change of control. The $15.0 million Credit Facility
has certain financial covenants that require the Company to: have a tangible net
worth of at least $3.25 million at June 30, 1998, and that tangible net worth
shall increase by $250,000 per quarter in 1998, commencing with the June 30,
1998 quarter; to not make capital expenditures in any fiscal year in an amount
in excess of
<PAGE>
$750,000; to maintain the ratio of EBITDA (as defined in the Credit Facility and
the amendments) of the Company at not less than two to one; and not at any time
at the end of any month permit its working capital to be less than $4.0 million.
The Company was not in compliance with certain of its debt covenants at June
30, 1998. BNY Financial Corporation continues to support the Company and its
management; however, there is no assurance that BNY Financial Corporation will
not require repayment of all debt and/or terminate the Credit Facility.
The Company's long-term debt at June 30, 1998 consists of the following: (i)
note of $2.2 million 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; (ii) note of $1.6 million payable to a
corporation, secured by specific inventory, due in varied monthly installments
of principal and interest to July 1998, with an imputed interest rate of 9.5
percent; and (iii) two notes payable for $21,000.
In February 1998, the Company borrowed $2,140,000 from BNY Financial Corporation
to purchase specific inventory. The balance of the note payable is $856,000 at
June 30, 1998. The note is secured by specific inventory and by the one million
shares of common stock pledged on the Credit Facility, was due on April 27,
1998, and has an interest rate of Prime plus three percent plus other fees. The
Company did not pay the required amount on the note in March 1998 and did not
pay off the note by April 27, 1998. As a result, the Company incurred a
$100,000 default penalty in March 1998. The bank further extended this note to
June 30, 1998 for a $100,000 fee. The Company did not pay the balance of this
note by June 30, 1998. The Company was also not in compliance with certain of
its debt covenants under this note agreement at June 30, 1998. Management is
currently negotiating with the bank to resolve this matter.
In 1997, the Company and certain of its current and former officers and
directors were named as defendants in three class action lawsuits. In April
1998, the Company entered into a Memorandum of Understanding to settle the
lawsuits. The Company's estimated cost of settlement, totaling $620,000, was
charged to Legal Settlement Expense in the fourth quarter of 1997. See "Part
II, Item 1 - Legal Proceedings."
The Company's Credit Facility is an asset based line of credit and is the
primary source for the Company to finance its operations and growth. Because of
the non-recurring costs associated with the re-auditing of the Company's
financial statements and the ongoing federal investigations, the Company has
used its asset base to meet these obligations. As a result, the Company may
need to increase its capital base in order to continue to meet its growth
objectives. There can be no assurance that such additional capital will be
available on a timely basis or at acceptable terms.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1997, the Company, its founder, its directors, certain of
its officers, a former officer and director, its former auditor and its
underwriter were named as defendants in three civil suits filed as class actions
on behalf of individuals claiming to have purchased ADI Common Stock during the
period from March 1997 to September 1997, and seeking damages for violation of
Federal securities laws. The suits were filed in the United States District
Court for the Central District of California and are captioned as follows: (i)
NGUYEN V. AVIATION DISTRIBUTORS, INC., ET AL., U.S. District Court, Central
District of California, Case No. SACV 97-795 (ANx); (ii) ALAN GREEN V. AVIATION
DISTRIBUTORS, INC., ET AL., U.S. District Court, Central District of California,
Case No. SACV 97-801 GLT (EEx); and (iii) SHARON TATE V. AVIATION DISTRIBUTORS,
INC., ET AL., U.S. District Court, Central District of California, Case No. SACV
97-838 (Eex).
In April 1998, the Company entered into a settlement in principle, which is
memorialized in a Memorandum of Understanding (the "M.O.U."), with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit, will contribute 131,000 shares. The settlement is conditioned upon
execution of a definitive settlement agreement and approval of the settlement by
the Federal Court. As of August 14, 1998 the filing of the definitive agreement
was in process. The M.O.U. provides that the settling plaintiffs may withdraw
from the settlement if the mean trading price of the Company's common stock is
less than $5.00 per share for the 10-day period beginning 15 days prior to the
settlement hearing.
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.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 Bylaws, as amended, of the Registrant. (1)
3.3 Amendment to Amended and Restated Certificate of Incorporation of
the Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
9.1 Voting Trust Agreement, dated November 17, 1997, by and among
Osamah Bakhit, Aviation Distributors, Inc., and Dirk O. Julander,
as trustee. (2)
10.2 1996 Stock Option and Incentive Plan. (1)
10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between
Alia The Royal Jordanian Airlines and Aviations Distributors, Inc..
(1)
10.4 Credit and Security Agreement, dated June 25, 1997, by and between
Aviation Distributors, Inc. and BNY Financial Corporation.(2)
10.5 Secured and Guaranteed Promissory Note, dated February 24, 1998, by
and between Aviation Distributors, Inc. and BNY Financial
Corporation.(2)
10.6 Amended and Restated Employment Agreement, dated as of July 16,
1996, by and between Osamah S. Bakhit and Aviation Distributors,
Inc. (1)
10.7 Employment Agreement, dated as of July 16, 1996, by and between
Mark W. Ashton and Aviation Distributors, Inc. (1)
10.8 Employment Agreement, dated as of July 16, 1996, by and between
Jeffrey G. Ward and Aviation Distributors, Inc. (1)
10.9 Commercial Lease, dated June 11, 1996, by and between Francis De
Leone and Aviation Distributors, Inc. (1)
10.10 Amendment to Employment Agreement, dated November 17, 1997, by and
between Osamah S. Bakhit and Aviation Distributors, Inc.(2)
10.11 Amendment to Employment Agreement, dated November 17, 1997, by and
between Mark W. Ashton and Aviation Distributors, Inc.(2)
10.12 Lease, dated as of July 9, 1997, by and between Olen Properties
Corp. and Aviation Distributors, Inc. (2)
10.13 Amended and Restated Promissory Note from Osamah S. Bakhit to
Aviation Distributors, Inc., dated as of December+31, 1995. (1)
10.14 Settlement Agreement dated as of November 1, 1996. (1)
10.15 Form of Indemnity Agreement. (1)
10.33 Promissory Note between Aviation Distributors, Inc. and Osamah S.
Bakhit, dated December 31, 1996. (1)
<PAGE>
(1) Filed with the Company's Registration Statement on Form SB-2 dated March 3,
1997.
(2) Filed with the Company's Registration Statement on Form 10-KSB dated April
20, 1998.
(b) Reports on Form 8-K.
Date of Report/Filing Date Item Reported
-------------------------- -------------
August 29, 1997/September 8, 1997 Change in Registrant's Certifying
Accountant (Withdrawal of Reports
on Financial Statements;
Resignation of Arthur Andersen
LLP). No financial statements were
filed.
August 29, 1997/September 17, 1997 Financial Statements and Exhibits
(Letter from Arthur Andersen LLP).
No financial statements were filed.
October 1, 1997/October 14, 1997 Other Events (Delisting by Nasdaq).
No financial statements were filed.
November 19, 1997/November 19, 1997 Change in Registrant's Certifying
Account (Appointment of Grant
Thornton LLP); Other Events
(Resignation of Osamah S. Bakhit as
Chairman, CEO; Transfer of Bakhit
Shares to Voting Trust). No
financial statements were filed.
<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 August 14, 1998 AVIATION DISTRIBUTORS, INC.
-------------------------------------
By: /s/ Saleem Naber
--------------------------------
Saleem Naber
Chief Executive Officer
By: /s/ Gary L. Joslin
--------------------------------
Gary Joslin
Chief Financial Officer and
Vice President of Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 6,282
<ALLOWANCES> 270
<INVENTORY> 10,046
<CURRENT-ASSETS> 19,727
<PP&E> 1,270
<DEPRECIATION> 432
<TOTAL-ASSETS> 21,136
<CURRENT-LIABILITIES> 19,044
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 1,109
<TOTAL-LIABILITY-AND-EQUITY> 21,136
<SALES> 15,349
<TOTAL-REVENUES> 15,349
<CGS> 11,956
<TOTAL-COSTS> 11,956
<OTHER-EXPENSES> 4,749
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 1,357
<INCOME-PRETAX> (2,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,561)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
