<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1999
REGISTRATION NO. 333-8061
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(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, 1999
---------------------------------------------
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
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 (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 3,202,000 SHARES
OF COMMON STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF NOVEMBER
16, 1999.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,171 7,026
Accounts receivable, net of allowance for
doubtful accounts of $620,000 at December 31,
1998 and $625,000 at September 30, 1999,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,767,470 5,541,220
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 69,238 235,804
Inventories, net of reserve . . . . . . . . . . . . . . . . . . . . . 9,356,386 8,755,323
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 529,965 314,003
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . 392,979 36,995
Current portion of note receivable . . . . . . . . . . . . . . . . . 1,276,750 -
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . 101,000 101,000
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 16,501,959 14,991,371
----------- -----------
PROPERTY AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,622 1,042,346
Less - accumulated depreciation . . . . . . . . . . . . . . . . . . . 355,715 462,156
----------- -----------
645,907 580,190
----------- -----------
Note receivable from founder . . . . . . . . . . . . . . . . . . . . . . . . 408,718 408,718
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,351 31,484
----------- -----------
438,069 440,202
----------- -----------
$ 17,585,935 $ 16,011,763
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Checks issued not yet presented for payment . . . . . . . . . . . . . $ 377,986 $ 337,986
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,120,953 3,796,773
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 838,446 848,594
Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,791,538 13,866,494
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 1,911,057 132,303
Current portion of capital lease obligations . . . . . . . . . . . . 18,797 13,071
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 19,058,777 18,995,221
----------- -----------
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . 9,672 5,605
----------- -----------
Capital lease obligations, net of current portion. . . . . . . . . . . . . . 30,323 22,229
----------- -----------
Other long-term liability . . . . . . . . . . . . . . . . . . . . . . . . . 480,000 -
----------- -----------
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,000 101,000
----------- -----------
STOCKHOLDERS' 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 and 3,245,000 shares
issued and outstanding at December 31, 1998 and
September 30, 1999, respectively . . . . . . . . . . . . . . . . . . 31,650 32,450
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 5,658,099 6,137,299
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (7,710,282) (9,208,737)
Treasury stock, 43,000 shares at cost . . . . . . . . . . . . . . . . . (73,304) (73,304)
----------- -----------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . (2,093,837) (3,112,292)
----------- -----------
$ 17,585,935 $ 16,011,763
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. . . $ 7,497,055 $ 5,396,347 $ 22,669,552 $ 16,335,080
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS . . . . . . . . . . . . . . 71,019 - 247,120 -
---------- ---------- ----------- -----------
TOTAL NET SALES . . . . . . . . . . . . . . . . . 7,568,074 5,396,347 22,916,672 16,335,080
COST OF SALES . . . . . . . . . . . . . . . . . . 6,086,123 3,873,354 18,041,818 12,524,745
---------- ---------- ----------- -----------
Gross profit . . . . . . . . . . . . . 1,481,951 1,522,993 4,874,854 3,810,335
SELLING AND ADMINISTRATIVE EXPENSES. . . . . . . . 1,542,073 1,388,356 5,261,175 4,246,607
NON RECURRING EXPENSES . . . . . . . . . . . . . . 205,781 29,735 1,245,091 118,650
---------- ---------- ----------- -----------
Income (loss) from operations. . . . . . (265,903) 104,902 (1,631,412) (554,922)
OTHER (EXPENSES) INCOME:
Interest expense . . . . . . . . . . . . (464,765) (397,188) (1,821,948) (1,334,006)
Interest income . . . . . . . . . . . . . 53,243 80,230 210,965 130,093
Other income . . . . . . . . . . . . . . 310 6,833 4,644 8,245
---------- ---------- ----------- -----------
Loss before provision for
income taxes . . . . . . . . . . . . . (677,115) (205,223) (3,237,751) (1,579,052)
PROVISION FOR (BENEFIT FROM) INCOME TAXES . . . . 202,076 (81,397) 202,076 (80,597)
---------- ---------- ----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM . . . . . . . . (879,191) (123,826) (3,439,827) (1,669,993)
EXTRAORDINARY ITEM - Gain on restructuring of
payables, net of applicable income taxes . . . . -- 171,538 -- 171,538
---------- ---------- ----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ (879,191) $ 47,712 $(3,439,827) $(1,498,455)
=========== ========== ============= ============
Basic and diluted net income (loss) per share:
Loss before extraordinary item . . . . . (0.28) (0.04) (1.09) (0.53)
Extraordinary item . . . . . . . . . . . -- 0.05 -- 0.05
---------- ---------- ----------- -----------
Net income (loss) per share. . . . . . . . . . . . $ (0.28) $ 0.01 $ (1.09) $ (0.48)
=========== ========== =========== ===========
Weighted average shares outstanding. . . . . . . . 3,122,000 3,202,000 3,146,000 3,180,000
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
----------------------- -------------------- ADDITIONAL STOCKHOLDERS'
NUMBER NUMBER PAID ACCUMULATED EQUITY
OF SHARES AMOUNT OF SHARES AMOUNT IN CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 . . . . 3,165,000 31,650 - - 5,658,099 (1,914,510) 3,775,239
Purchase of treasury stock . . - - 43,000 (73,304) - - (73,304)
Net loss . . . . . . . . . . . - - - - - (5,795,772) (5,795,772)
---------- ------ ---------- ------ ----------- ----------- ----------
Balance at December 31, 1998. . . . 3,165,000 31,650 43,000 (73,304) 5,658,099 (7,710,282) (2,093,837)
Stock issued in
legal settlement . . . . . . 80,000 800 - - 479,200 - 480,000
Net loss . . . . . . . . . . . - - - - - (1,498,455) (1,498,455)
---------- ------ ---------- ------ ----------- ----------- ----------
Balance at September 30, 1999 . . . 3,245,000 $ 32,450 43,000 $ (73,304) $ 6,137,299 $ (9,208,737) $ (3,112,292)
========= ========= ======= ========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,439,827) $ (1,498,455)
Adjustments to reconcile net loss to net cash
used in operating activities:
Principal payments on note receivable . . . . . . . . . . . . . . 1,318,237 1,276,750
Borrowings on notes payable related to inventory purchases. . . . 2,406,919 -
Principal payments on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . (4,139,770) (1,276,750)
Reduction in amount due on notes payable
related to inventory purchases in exchange for
reduction in accounts receivable . . . . . . . . . . . . . . . - (643,788)
Depreciation and amortization . . . . . . . . . . . . . . . . . . 279,489 157,997
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . 2,017,408 (773,750)
Other receivables . . . . . . . . . . . . . . . . . . . . . 158,899 (166,566)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (63,276) 601,063
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . (56,283) 215,962
Income tax receivable . . . . . . . . . . . . . . . . . . . (175,000) 355,984
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . 192,000 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . (75,000) (2,133)
Checks issued not yet presented for payment. . . . . . . . . (576,958) (40,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (1,047,573) 675,820
Accrued liabilities . . . . . . . . . . . . . . . . . . . . (104,444) 10,148
Deferred tax liability . . . . . . . . . . . . . . . . . . . 8,000 -
----------- ----------
Net cash used in operating activities . . . . . . . . (3,297,179) (1,107,718)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (203,055) (74,769)
Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . 1,095,031 1,145
----------- ----------
Net cash provided by (used in) investing activities . . 891,976 (73,624)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit . . . . . . . . . . . . . . . . . . . . 25,464,678 16,152,534
Principal payments on lines of credit . . . . . . . . . . . . . . . . (22,991,183) (15,077,578)
Borrowings on long-term debt . . . . . . . . . . . . . . . . . . . . - 125,000
Principal payments of long-term debt . . . . . . . . . . . . . . . . (5,000) (4,794)
Principal payments of capital lease obligations . . . . . . . . . . . (19,725) (13,820)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . (73,304) -
----------- ----------
Net cash provided by financing activities . . . . . . . 2,375,466 1,181,342
----------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . (29,737) -
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 80,218 -
----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 50,481 $ -
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,820,109 $ 1,402,426
============ ===========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 177,076 $ 800
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
5
<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 September 30, 1999 and the results of its
operations for the three and nine month periods ended September 30, 1999 and
1998 and cash flows for the nine month periods ended September 30, 1999 and
1998. The results of operations and cash flows for the nine month period ended
September 30, 1999 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of 1999.
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-Q. 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, 1998 financial statements and the notes thereto
included in the Company's Annual Report on Form 10KSB.
NOTE 2 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company sustained a substantial
loss from operations in 1998 and incurred losses for the first and second
quarters of 1999; has used, rather than provided, cash in its operations; and
has deficits in working capital and stockholders' equity at December 31, 1998
and September 30, 1999. In addition, the Company is in an over advance
position on its line of credit, which limits its ability to obtain additional
operating capital from its primary lender. The Company has reduced its over
advance in the third quarter, from $1.2 million at June 30, 1999 to $240,000
at September 30, 1999.
Recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheets are dependent upon continued operations of the
Company. This in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing,
and to succeed in its future operations.
6
<PAGE>
Management has taken steps to revise its operations and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence. Ongoing expenses have been reduced by salary
reductions, headcount reductions and other cost saving measures implemented.
To further reduce ongoing expenses, the Australian warehouse and European
sales office were closed, relocating the inventory and the sales function to
California. The class action lawsuits have been settled. Management expects
the nonrecurring and abnormal expenses caused by the lawsuits and other legal
issues to decline by more than $1 million compared to such expenses incurred
in fiscal year 1998. Settlement of legal issues will also allow management to
concentrate on managing, improving and expanding the business. Discussions are
in process to obtain convertible senior subordinated debt. Management
believes that new financing will allow an improvement in vendor relations and
bank loan arrangements, which in turn will improve financial flexibility.
NOTE 3 - CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS:
On March 15, 1999, the Federal Court approved the settlement of the class
action lawsuit described in prior filings. Terms of the settlement included a
total cash consideration of $740,000, and 210,000 shares of the Company's
common stock. The Company paid $140,000 in cash and issued 80,000 shares of
common stock. The Company's founder, Osamah Bakhit, contributed 130,000 shares
of Company stock he owned to the settlement.
The allegations in the class action lawsuit are being investigated by a
Federal grand jury and the Securities and Exchange Commission. The Company is
unable at this time, to anticipate the outcome of three investigations.
7
<PAGE>
NOTE 4 - DEBT ARRANGEMENTS
On February 9, 1999 the Company amended its Credit Facility with GMAC
Commercial Credit LLC, successor in interest to BNY Financial Corporation
(GMAC), to increase the maximum loan amount to $20,000,000, increase its
unused line fee to 0.5%, increase its receivables advance rate and extend the
loan expiration date to June 21, 2002. The Company incurred a $50,000 fee for
amending the Credit Facility.
At September 30, 1999, the Company was not in compliance with certain of the
covenants of its line of credit with GMAC. GMAC 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.
NOTE 5 - EXPORT SALES
For the nine months ended September 30, 1998 and 1999, approximately 48.0%
and 50.9%, respectively, of the Company's net sales were export sales. Export
sales by region were approximately as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1999
---- ----
<S> <C> <C>
Pacific Rim . . . . . . . . . . . . . . . . 18.9% 14.0%
Europe . . . . . . . . . . . . . . . . . 6.9 11.6
Latin/South America . . . . . . . . . . . . . 16.2 18.7
Africa/Middle East. . . . . . . . . . . . . . 6.0 6.6
------- ----
48.0% 50.9%
======= ====
</TABLE>
NOTE 6 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 consolidated
financial statements to conform to the 1999 presentation.
8
<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.
9
<PAGE>
The following table sets forth certain information relating to the Company's
operations for the three months ended September 30, 1998 and 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999
------------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 7,568 100.0 % $ 5,396 100.0 %
Cost of sales 6,086 80.4 3,873 71.8
------- ------- ------- ------
Gross profit 1,482 19.6 1,523 28.2
Selling and administrative expenses 1,542 20.4 1,388 25.7
Non-recurring expenses 206 2.7 30 0.6
------- ------- ------- ------
Income (loss) from operations (266) (3.5) 105 1.9
Interest expense 464 6.1 397 7.4
Interest income 53 0.7 80 1.5
Other income - - 7 0.1
Provision for (benefit from) income taxes 202 2.7 (81) (1.5)
Gain on restructuring of payables, net of taxes - - 172 3.2
------- ------- ------- ------
Net income (loss) $ (879) (11.6)% $ 48 0.8 %
======= ======= ======= ======
</TABLE>
NET SALES. Net sales decreased from $7.6 million for the three months ended
September 30, 1998 to $5.4 million for the three months ended September 30,
1999, a decrease of $2.2 million or 28.9%. This decrease was in part a result
of the restrictions on financing and the completion of fewer large sales.
Net sales consist of 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. Sales from distributed services (outside sourcing)
represented approximately 86.5% and 83.3% of total net sales for the three
months ended September 30, 1998 and 1999, respectively. Sales of
Company-owned inventory represented approximately 13.5% and 16.7% of total
net sales for the three months ended September 30, 1998 and 1999, respectively
COST OF SALES. Cost of sales decreased from $6.1 million for the three months
ended September 30, 1998 to $3.9 million for the three months ended September
30, 1999, a decrease of $2.2 million or 36.1%. This decrease was primarily
attributable to the 30.3% decrease in net sales.
GROSS PROFIT. Gross profit was $1.5 million and 19.6% of net sales for the
three months ended September 30, 1998 and $1.5 million or 28.2% of net sales
for the three months ended September 30, 1999. The 8.6% increase in the gross
profit percent was the result of increased sales of owned inventory and an
overall focus by management to improve margins. The company identified
certain owned inventory parts to be sold at a loss and recorded a valuation
reserve for those specific parts at the end of the second quarter. Those
parts were subsequently sold and that resulted in a reduction in the inventory
valuation reserve of approximately $148,000.
10
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of wages and commission expense, rent expense,
professional fees, consulting expense and travel expense. The Company's
selling and administrative expenses decreased from $1.5 million for the three
months ended September 30, 1998 to $1.4 million for the three months ended
September 30, 1999, a decrease of $100,000 or 6.7%. This decrease was
principally due to a decrease in employee compensation as a result of salary
reductions and headcount reductions, a decrease in commission expense as a
result of the decrease in net sales and a decrease in other administrative
expenses as a result of management effectively controlling administrative
expenses.
NON-RECURRING EXPENSES. In the third quarter of 1998 and 1999, the Company
incurred $206,000 and $30,000, respectively, 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. Management expects these expenses to continue to decrease, as the
shareholder lawsuit was settled on March 15, 1999. These expenses primarily
consist of legal, accounting and consulting fees. See "Part II, Item 1 -
Legal Proceedings."
INCOME (LOSS) FROM OPERATIONS. The Company had a loss from operations of
$266,000 for the three months ended September 30, 1998 compared to income
from operations of $105,000 for the three months ended September 30, 1999 a
difference of $371,000. The income from operations is due to the decrease in
selling and administrative expenses and non-recurring expenses and the
increase in gross profit. See "Gross profit", "Selling and administrative
expenses" and "Non-recurring expenses."
INTEREST EXPENSES. Interest expense decreased from $464,000 for the three
months ended September 30, 1998 to $397,000 for the three months ended
September 30, 1999. The $67,000 decrease in interest expense was due to an
early payment of a note payable related to the purchase of inventory, which
reduced interest expense, by $71,000. The Company was in an overadvance with
its primary lender which resulted in an increase in the interest rate charged
for both 1998 and 1999.
INTEREST INCOME. Interest income increased from $53,000 for the three months
ended September 30, 1998 to $80,000 for the three months ended September 30,
1999. The $27,000 increase in interest income was due to interest income of
$66,000 related to an income tax receivable from both the federal government
and the state. This increase was offset by the decrease of a note receivable.
GAIN ON RESTRUCTURING OF PAYABLES, NET OF TAXES. Gain on
restructuring of payables, net of taxes, was due to the Company negotiating,
and the reduction of, certain overhead vendor accounts payable.
11
<PAGE>
The following table sets forth certain information relating to the Company's
operations for the nine months ended September 30, 1998 and 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 22,917 100.0 % $ 16,335 100.0 %
Cost of sales 18,042 78.7 12,525 76.7
-------- ------ -------- ------
Gross profit 4,875 21.3 3,810 23.3
Selling and administrative expenses 5,261 23.0 4,247 26.0
Non-recurring expenses 1,245 5.4 118 0.7
-------- ------ -------- ------
Loss from operations (1,631) (7.1) (555) (3.4)
Interest expense 1,822 7.9 1,334 8.2
Interest income 211 0.9 130 0.8
Other income 4 - 8 -
Provision for (Benefit from) income taxes 202 0.9 (81) (0.5)
Gain on restructuring of payables, net
of taxes - - 172 1.1
-------- ------ -------- ------
Net loss $ (3,440) (15.0)% $ (1,498) (9.2)%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
NET SALES. Net sales decreased from $22.9 million for the nine months ended
September 30, 1998 to $16.3 million for the nine months ended September 30,
1999, a decrease of $6.6 million or 28.9%. This decrease was in part a result
of the restrictions on financing and the completion of fewer large sales.
Net sales consist of 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. Sales from distributed services (outside sourcing)
represented approximately 84.9% and 90.1% of total net sales for the nine
months ended September 30, 1998 and 1999, respectively. Sales of
Company-owned inventory represented approximately 15.1% and 9.9% of total
net sales for the nine months ended September 30, 1998 and 1999, respectively
COST OF SALES. Cost of sales decreased from $18.0 million for the nine months
ended September 30, 1998 to $12.5 million for the nine months ended September
30, 1999, a decrease of $5.5 million or 30.6%. This decrease was primarily
attributable to the 28.9% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $4.9 million or 21.3% of net sales
for the nine months ended September 30, 1998 to $3.8 million or 23.3% of net
sales for the nine months ended September 30, 1999, a decrease of $1.1 million
or 22.5%. This decrease was primarily a result of the 28.9% decrease in net
sales offset by an increase in margins in 1999 by 2.0% of net sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of wages and commission expense, rent expense,
professional fees, consulting expense and travel expense. The Company's
selling and
12
<PAGE>
administrative expenses decreased from $5.3 million for the nine months ended
September 30, 1998 to $4.2 million for the nine months ended September 30,
1999, a decrease of $1.1 million or 20.8%. This decrease was principally due
to a decrease in employee compensation as a result of salary reductions and
headcount reductions, a decrease in commission expense as a result of the
decrease in net sales and a decrease in other administrative expenses as a
result of management effectively controlling administrative expenses.
NON-RECURRING EXPENSES. For the nine months ended September 30, 1998 and
1999, the Company incurred $1.2 million and $118,000, respectively, 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. Management expects these expenses
to continue to decrease, as the shareholder lawsuit was settled on March 15,
1999. These expenses primarily consist of legal, accounting and consulting
fees. See "Part II, Item 1 - Legal Proceedings."
LOSS FROM OPERATIONS. The Company had a loss from operations of $1.6 million
and $555,000 for the nine months ended September 30, 1998 and 1999,
respectively. The $1.0 million decrease in loss from operations is due to the
decrease in selling and administrative expenses and non-recurring expenses
offset by a decrease in net sales and gross profit. See "Net sales", "Gross
profit", "Selling and administrative expenses" and "Non-recurring expenses."
INTEREST EXPENSES. Interest expense decreased from $1.8 million for the nine
months ended September 30, 1998 to $1.3 million for the nine months ended
September 30, 1999. The $500,000 decrease in interest expense was due to
approximately $450,000 of interest incurred on the note payabe for the
purchase of the CFM56 engine in 1998 and an early payment of a note payable
related to the purchase of inventory reduced interest expense by $71,000. The
Company was in an overadvance with its primary lender which resulted in an
increase in the interest rate charged for both 1998 and 1999.
INTEREST INCOME. Interest income decreased from $211,000 for the nine months
ended September 30, 1998 to $130,000 for the nine months ended September 30,
1999. The $81,000 decrease in interest income was due to a decrease of a note
receivable balance offset by interest income of $66,000 related to an income
tax receivable from both the federal government and the state.
GAIN ON RESTRUCTURING OF PAYABLES, NET OF TAXES. Gain on restructuring of
payables, net of taxes, was due to the Company negotiating, and the reduction
of, certain overhead vendor accounts payable.
YEAR 2000 COMPLIANCE
The Company initiated a comprehensive information technology systems review,
which resulted in the implementation of a new software system in September
1999. The new software is year 2000 compliant and provides a new integrated
database to manage the business systems of the Company. The capital outlay
associated with cost and implementation of the software was approximately
$200,000. The software was purchased in 1997 for approximately $100,000.
Management estimates the costs for future upgrades are approximately $50,000,
which includes custom programming of the new software system. The Company
13
<PAGE>
does not separately track the internal costs incurred for the Y2K project.
The Company estimated its future costs by assessing compensation and fringe
benefits of internal employees working on the Y2K issues and fees of certain
outside consultants.
The Company is confirming Y2K readiness with its major suppliers and
customers. This will allow the Company to determine the reliable sources of
aircraft parts and which companies will be ready to purchase aircraft parts
in year 2000. Although the Company has many suppliers it purchases parts
from, there is no assurance that a critical supplier may not be Y2K compliant
resulting in a material impact on the Company's operations.
As a distributor and re-seller of goods manufactured by other companies, the
Company will do all that it reasonably can to ensure that any transactions
for goods supplied to the Company and shipped to customers will not suffer
from the change of date. However, there is no assurance that the Company's
year 2000 remediation efforts will prevent all potential consequences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $3.3 million and $1.1 million in net
cash in the nine months ended September 30, 1998 and 1999, respectively. The
largest cash uses in the 1998 period were the $3.4 million loss, payments of
$4.1 million related to notes payable for inventory purchases, and decreases
in liability accounts, offset by a $2.0 million reduction in accounts
receivable and $2.4 million borrowings on notes payable related to inventory
purchases. For the 1999 period, the largest uses of cash were the $1.5
million net loss, payments of $1.3 million related to notes payable for
inventory purchases, and $600,000 reduction in amount due on notes payable
related to inventory purchases in exchange for reduction in accounts
receivable and $800,000 reductions in accounts receivable offset by $1.3
million principal payments on note receivable, $600,000 decrease in
inventories and a $700,000 increase of accounts payable.
For the 1998 period, the Company used $200,000 in investing activities from
purchases of property and equipment, less reductions of $1.2 million in
restricted cash. For the 1999 period, the Company used $75,000 for purchases
of property and equipment.
Cash provided by 1998 financing activities of $2.4 million, was primarily a
result of a $2.5 million net increase in line of credit borrowings. The 1999
financing activities provided cash of $1.2 million, primarily resulting from
the $1.1 million net increase in line of credit borrowings and the $125,000
increase in borrowings on current portion of long-term debt.
As of September 30, 1999, the Company had a working capital deficit of $4.0
million. This was primarily due to the increase in the borrowings on the line
of credit, resulting from the cash requirements for the shareholder lawsuits
14
<PAGE>
and the government investigations, decreases in accounts receivable related
to the decrease in net sales and the decrease in current notes receivable.
See "Item 1 - Legal Proceedings."
At September 30, 1999, the Company was not in compliance with certain of the
covenants of its line of credit with GMAC. GMAC 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 October 1998 the Company assigned all tax refunds from governmental
agencies to GMAC and issued 126,600 warrants to purchase common stock of the
Company at $2.50 per share. At December 31, 1998 the Company has recorded a
tax receivable representing over-paid taxes on the 1996 Federal and State tax
returns of $393,000. In July of 1999 the Company received $437,000 of the tax
refunds plus applicable interest with $37,000 remaining to be paid. In
February 1999, the Company reduced the exercise price of the warrants from
$2.50 to $1.00 per share.
On February 9, 1999 the Company amended its Credit Facility with GMAC to
increase the maximum loan amount to $20,000,000, increase its unused line fee
to 0.5% and increase its receivables advance rate for insured international
receivables from 80% to 90%. The Company incurred a $50,000 fee for amending
the Credit Facility.
The Company's long-term debt consists of the following: (i) note payable of
$125,000 at September 30, 1999 to the founder of the Company and (ii) notes
payable for $13,000.
The Company's credit facility with GMAC is an asset based line of credit
secured by account receivable and inventory 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 line of
credit to pay these costs. 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.
See note 2 to the consolidated financial statements included in this form
10-Q regarding realization of assets and steps management has taken with
respect to its operations and financing requirements.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in certain legal and administrative proceedings and
threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, management believes the
ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company. Also, see Note 3 to the
consolidated financial statements in Part I.
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
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.(3)
10.5 Secured and Guaranteed Promissory Note, dated February 24, 1998,
by and between Aviation Distributors, Inc. and BNY Financial
Corporation.(3)
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)
16
<PAGE>
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.(3)
10.11 Amendment to Employment Agreement, dated November 17, 1997,
by and between Mark W. Ashton and Aviation Distributors, Inc.(3)
10.12 Lease, dated as of July 9, 1997, by and between Olen Properties Corp.
and Aviation Distributors, Inc. (3)
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)
(1) Filed with the Company's Registration Statement on Form SB-2
dated March 3, 1997.
(2) Filed with the Company's Current Report on Form 8-K dated August
29, 1997.
(3) Filed with the Company's Registration Statement on Form 10-KSB
dated April 20, 1998.
(b) Reports on Form 8-K.
<TABLE>
<CAPTION>
DATE OF REPORT/FILING DATE ITEM REPORTED
-------------------------- -------------
<S> <C>
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.
</TABLE>
17
<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 November 16, 1999 AVIATION DISTRIBUTORS, INC.
----------------------------
By: /s/ Saleem Naber
---------------------------
Saleem Naber
Chief Executive Officer
President and Director
(Principal Executive Officer)
By: /s/ Gary L. Joslin
---------------------------
Gary L. Joslin
Chief Financial Officer
and Director (Principal
Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 6,166
<ALLOWANCES> 625
<INVENTORY> 8,755
<CURRENT-ASSETS> 14,991
<PP&E> 1,042
<DEPRECIATION> 462
<TOTAL-ASSETS> 16,012
<CURRENT-LIABILITIES> 18,995
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> (3,145)
<TOTAL-LIABILITY-AND-EQUITY> 16,012
<SALES> 16,335
<TOTAL-REVENUES> 16,335
<CGS> 12,525
<TOTAL-COSTS> 12,525
<OTHER-EXPENSES> 4,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,334
<INCOME-PRETAX> (1,751)
<INCOME-TAX> (81)
<INCOME-CONTINUING> (1,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,498)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
