<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 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 March 31, 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 Identification No.)
Incorporation or Organization)
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 MAY 17, 1999.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Restricted cash . . . . . . . . . . . . . . . . . . . . . $ 8,171 $ 7,462
Accounts receivable, net of allowance
for doubtful accounts of $620,000. . . . . . . . . . . . . 4,767,470 7,077,038
Other receivables . . . . . . . . . . . . . . . . . . . . . 69,238 197,889
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 9,356,386 9,223,332
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 529,965 344,912
Income tax receivable . . . . . . . . . . . . . . . . . . . 392,979 392,979
Current portion of notes receivable . . . . . . . . . . . . 1,276,750 805,499
Deferred tax asset . . . . . . . . . . . . . . . . . . . . 101,000 101,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . 16,501,959 18,150,111
------------ ------------
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . 1,001,622 1,003,613
Less - accumulated depreciation . . . . . . . . . . . . . . 355,715 400,707
------------ ------------
645,907 602,906
------------ ------------
Notes receivable from founder . . . . . . . . . . . . . . . . . . 408,718 408,718
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 29,351 30,567
------------ ------------
438,069 439,285
------------ ------------
$ 17,585,935 $ 19,192,302
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Checks issued not yet presented for payment . . . . . . . . $ 377,986 $ 706,267
Accounts payable . . . . . . . . . . . . . . . . . . . . . 3,120,953 2,756,970
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 838,446 602,083
Line of credit . . . . . . . . . . . . . . . . . . . . . . 12,791,538 15,631,955
Current portion of long-term debt . . . . . . . . . . . . . 1,911,057 1,105,033
Current portion of capital lease obligations . . . . . . . 18,797 18,836
------------ ------------
Total current liabilities . . . . . . . . . . . . . . 19,058,777 20,821,144
------------ ------------
Long-term debt, net of current portion. . . . . . . . . . . . . . 9,672 7,327
------------ ------------
Capital lease obligations, net of current portion . . . . . . . . 30,323 25,634
------------ ------------
Other long-term liability . . . . . . . . . . . . . . . . . . . . 480,000 -
------------ ------------
Deferred tax liability. . . . . . . . . . . . . . . . . . . . . . 101,000 101,000
------------ ------------
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 and 3,245,000 shares issued
and 3,122,000 and 3,202,000 shares outstanding at
December 31, 1998 and March 31, 1999, respectively . . . . 31,650 32,450
Additional paid in capital . . . . . . . . . . . . . . . . 5,658,099 6,137,299
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (7,710,282) (7,859,248)
Treasury stock, 43,000 shares at cost . . . . . . . . . . . (73,304) (73,304)
------------ ------------
Total stockholders' equity (deficit) . . . . . . . . . (2,093,837) (1,762,803)
------------ ------------
$ 17,585,935 $ 19,192,302
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
NET DISTRIBUTED SERVICES AND INVENTORY SALES. . . . . . $ 8,818,631 $ 7,711,111
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS . . . . . . . . . . . . . . . . . 51,661 -
----------- -----------
TOTAL NET SALES . . . . . . . . . . . . . . . . . . . . 8,870,292 7,711,111
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 6,891,389 6,040,650
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . 1,978,903 1,670,461
SELLING AND ADMINISTRATIVE EXPENSES . . . . . . . . . . 1,792,372 1,409,710
NON-RECURRING EXPENSES . . . . . . . . . . . . . . . . 508,885 17,743
----------- -----------
Income (loss) from operations . . . . . . . . . (322,354) 243,008
OTHER (EXPENSE) INCOME:
Interest expense . . . . . . . . . . . . . . . (642,544) (425,116)
Interest income . . . . . . . . . . . . . . . . 88,536 32,055
Other income . . . . . . . . . . . . . . . . . (11,955) 1,087
----------- -----------
Loss before provision
for income taxes . . . . . . . . . . . . . . . (888,317) (148,966)
PROVISION FOR INCOME TAXES. . . . . . . . . . . . . . . - -
----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . $ (888,317) $ (148,966)
----------- -----------
----------- -----------
Basic and diluted net loss per share . . . . . $ (0.28) $ (0.05)
----------- -----------
----------- -----------
Basic and diluted weighted
average shares outstanding . . . . . . . . . . 3,165,000 3,179,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<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 . . . . . . . . . . . . - - - - - (148,966) (148,966)
----------- --------- -------- ---------- ----------- ------------ ------------
Balance at March 31, 1999 . . . . . . 3,245,000 $ 32,450 43,000 $ (73,304) $ 6,137,299 $ (7,859,248) $ (1,762,803)
----------- --------- -------- ---------- ----------- ------------ ------------
----------- --------- -------- ---------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (888,317) $ (148,966)
Adjustments to reconcile net loss to net cash
used in operating activities:
Principal payments on note receivable. . . . . . . . . . . . . . . . 429,475 471,251
Borrowings on notes payable related to inventory purchases . . . . . 2,361,228 -
Principal payments on notes payable
related to inventory purchases . . . . . . . . . . . . . . . . . . (1,398,194) (471,970)
Reduction in amount due on notes payable
related to inventory purchases in exchange for
reduction in accounts receivable . . . . . . . . . . . . . . . . . - (444,327)
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 63,677 54,908
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 72,027 (2,309,568)
Other receivables . . . . . . . . . . . . . . . . . . . . . . . 145,695 (128,651)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (1,172,031) 133,054
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . (233,915) 185,053
Income tax receivable . . . . . . . . . . . . . . . . . . . . . (175,000) -
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . (8,000) -
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . - (1,216)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . (341,840) (363,983)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . (202,978) (236,363)
Deferred tax liability. . . . . . . . . . . . . . . . . . . . . 8,000 -
----------- -----------
Net cash used in operating activities . . . . . . . . . . . . (1,340,173) (3,260,778)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . (139,185) (1,991)
Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . . 25,039 709
----------- -----------
Net cash used in investing activities. . . . . . . . . . . . . (114,146) (1,282)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit . . . . . . . . . . . . . . . . . . . . . 9,398,209 6,424,512
Principal payments on lines of credit . . . . . . . . . . . . . . . . . (7,591,504) (3,584,095)
Borrowings on long-term debt. . . . . . . . . . . . . . . . . . . . . . - 100,000
Principal payments of long-term debt . . . . . . . . . . . . . . . . . (430,982) (1,988)
Borrowings on capital lease obligations . . . . . . . . . . . . . . . . 30,000 -
Principal payments of capital lease obligations . . . . . . . . . . . . (6,421) (4,650)
(Decrease) increase in checks issued not yet presented for payment. . . (17,982) 328,281
----------- -----------
Net cash provided by financing activities. . . . . . . . . . . 1,381,320 3,262,060
----------- -----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . (72,999) -
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 80,218 -
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 7,219 $ -
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 687,857 $ 424,967
----------- -----------
----------- -----------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 175,000 $ -
----------- -----------
----------- -----------
Noncash financing activity:
Issuance of 80,000 shares of common stock
in settlement of long-term liability . . . . . . . . . . . . . . . . $ - $ 480,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<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 March 31, 1999 and the results of its operations for the three
month periods ended March 31, 1999 and 1998 and cash flows for the three month
periods ended March 31, 1999 and 1998. The results of operations and cash flows
for the three month period ended March 31, 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 10-KSB.
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 continued to have a loss for the first quarter 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 March 31,
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. Also, as discussed in note 3, the impact on the Company of
certain governmental investigations cannot be determined at this time.
In view of the matters described in the preceding paragraph, 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. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
<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. As a result, 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. The financial structure of
the bank loan has been modified to include a purchase order advance line.
Parallel discussions are in process to obtain a bridge loan, subordinated loan
and/or equity financing. Management believes that new financing will allow an
improvement in vendor relations, which in turn will improve financial
flexibility.
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.
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. Included in legal settlement expense for
the year ended December 31, 1997 is a $620,000 charge, of which $480,000 is
attributable to the issuance of 80,000 shares of common stock and $140,000
represents the Company's portion of the cash consideration. The Federal Court
approved this settlement agreement on March 15, 1999.
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.
<PAGE>
NOTE 4 - DEBT ARRANGEMENTS
On February 9, 1999 the Company amended its Credit Facility with BNY 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. This is based on the requirement that the Company reduce its
monthly overhead expenses to an amount equal to or below $425,000 per month. The
Company incurred a $50,000 fee for amending the Credit Facility.
At March 31, 1999, the Company was not in compliance with certain of the
covenants of its line of credit with BNY Financial Corporation. On April 30,
1999, the financial institution issued the Company a waiver of the covenants
that were in default and modified certain covenants for 1999.
NOTE 5 - EXPORT SALES
For the quarters ended March 31, 1998 and 1999, approximately 48.3% and 68.9%,
respectively, of the Company's net sales were export sales. Export sales by
region were approximately as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1998 1999
---- ----
<S> <C> <C>
Pacific Rim . . . . . . . . . . . . . . . . 19.1% 18.2%
Europe. . . . . . . . . . . . . . . . . . 6.5 31.8
Latin/South America . . . . . . . . . . . . . 18.6 11.9
Africa/Middle East. . . . . . . . . . . . . . 4.1 7.0
----- -----
48.3% 68.9%
---- ----
---- ----
</TABLE>
NOTE 6 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
<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.
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.
The following table sets forth certain information relating to the Company's
operations for the three months ended March 31, 1998 and 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1999
--------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $ 8,870 100.0 % $ 7,711 100.0 %
Cost of sales 6,891 77.7 6,041 78.3
----------- --------- ---------- ---------
Gross profit 1,979 22.3 1,670 21.7
Selling and administrative expenses 1,792 20.2 1,409 18.4
Non-recurring expenses 509 5.7 18 0.1
----------- --------- ---------- ---------
Income (loss) from operations (322) (3.6) 243 3.2
Interest expense, net 554 6.2 393 5.1
Other (income) expense 12 0.1 1 -
----------- --------- ---------- ---------
Net loss $ (888) (10.0)% $ (149) (1.9)%
----------- --------- ---------- ---------
----------- --------- ---------- ---------
</TABLE>
NET SALES. Net sales decreased from $8.8 million for the three months ended
March 31, 1998 to $7.7 million for the three months ended March 31, 1999, a
decrease of $1.1 million or 13.1%. This decrease was mainly a result of a
shortage in cash availability that restricted the Company's purchasing ability
to receive critical parts from its suppliers. The shortage of cash availability
primarily resulted from cash requirements relating to the class action lawsuits
and government investigations.
<PAGE>
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 77.5% and 93.8% of total net sales for the three
months ended March 31, 1998 and 1999, respectively. Sales of Company-owned
inventory represented approximately 22.5% and 6.2% of total net sales for the
three months ended March 31, 1998 and 1999, respectively. The decrease in the
percentage of the sales of Company-owned inventory was primarily due to a $1.2
million sale in the first quarter of 1998 of certain parts from the CFM56 engine
bulk purchase completed in the first quarter of 1998.
COST OF SALES. Cost of sales decreased from $6.9 million for the three months
ended March 31, 1998 to $6.0 million for the three months ended March 31, 1999,
a decrease of $900,000 or 12.5%. This decrease was primarily attributable to the
13.1% decrease in net sales.
GROSS PROFIT. Gross profit decreased from $2.0 million or 22.3% of net sales for
the three months ended March 31, 1998 to $1.7 million or 21.7% of net sales for
the three months ended March 31, 1999, a decrease of $300,000 or 15.0%. This
decrease was a result of the 13.1% decrease in net sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of management compensation, commission expense, rent
expense, professional fees, consulting expense and travel expense. The Company's
selling and administrative expenses decreased from $1.8 million for the three
months ended March 31, 1998 to $1.4 million for the three months ended March 31,
1999, a decrease of $400,000 or 22.2%. 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 first quarter of 1998 and 1999, the Company
incurred $509,000 and $18,000, 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
$322,000 for the three months ended March 31, 1998 compared to income from
operations of $243,000 for the three months ended March 31, 1999. Income from
operations for the quarter ended March 31, 1998, excluding the non-recurring
expenses, was $187,000. The slight increase in income from operations, excluding
the non-recurring expenses, is due to the decrease in selling and administrative
expenses. See "Selling and administrative expenses."
<PAGE>
INTEREST EXPENSES, NET. Net interest expense decreased from $554,000 for the
three months ended March 31, 1998 to $393,000 for the three months ended March
31, 1999. The $161,000 decrease in interest expense was due to a note for $2.2
million that was outstanding during the first quarter of 1998 which the Company
incurred a $100,000 related loan fee and a $100,000 related penalty fee for late
payments, offset by the cost of increased borrowings during the 1999 quarter.
YEAR 2000 COMPLIANCE
The Company has analyzed its Year 2000 compliance issues and developed solutions
and contingency plans. Management's future estimate of costs to become year 2000
compliant is between $100,000 and $200,000, which includes the implementation of
a new software system or an upgrade of the current systems. Management plans to
implement the new software system purchased for approximately $100,000 in 1997.
The Company 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.
Management has developed a specific project plan that it expects to complete by
August 1, 1999. The project team is in the process of completing the
installation of hardware and software, which will provide year 2000 compliance
and provide a new integrated database to manage the business systems of the
Company. Data transfer and file structure for the purchased software are being
loaded and tested for specific application to the Company's needs. Outside
consultants with experience and expertise in the software purchased by the
Company have been engaged to assist in the implementation. Historical data is
being transferred to the new software and tested for accuracy. Training programs
have been developed and the training has begun for the new software. All testing
to-date has been satisfactory.
If the new system is not running by August 1999, the Company's first contingency
plan is to upgrade the current systems to be Y2K compliant. If neither the new
system nor the upgraded systems are running at December 31, 1999, the current
systems will begin to fail and the information will not be accurate. The Company
will have to resort to performing manual invoices and a manual purchasing and
perpetual inventory systems. A manual process could slow down the Company's
operations and the Company may not meet customer delivery expectations.
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.
<PAGE>
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 $1.3 million and $3.3 million in the
quarters ended March 31, 1998 and 1999, respectively. The largest cash uses in
the 1998 period were the $888,000 loss, along with the net effect of normal
fluctuations in operating asset and liability accounts. For the 1999 period, the
largest uses of cash were the $2.3 million increase in accounts receivable, the
decreases on notes payable related to inventory purchases and decreases in
accounts payable and accrued liabilities.
For the 1998 period, the Company used $114,000 in investing activities from
purchases of property and equipment, less reductions in restricted cash.
Cash provided by 1998 financing activities of $1.4 million was a result of a
$1.8 million net increase in line of credit borrowings less $400,000 of payments
on long-term debt. The 1999 financing activities provided cash of $3.3 million,
primarily resulting from the $2.8 million net increase in line of credit
borrowings and the $300,000 increase in checks issued not yet presented for
payment.
As of March 31, 1999, the Company had a working capital deficit of $2.7 million.
This was primarily due to the increase in the borrowings on the line of credit
resulting from the cash requirements for increases in accounts receivable and
the shareholder lawsuits and the government investigations. See "Item 1 - Legal
Proceedings."
As of March 31, 1999, the Company was in default on certain covenants of its
credit facility with BNY Financial Corporation (BNY). On April 30, 1999, the
financial institution issued the Company a waiver of the covenants that were in
default and modified certain covenants for 1999.
In October 1998 the Company assigned all tax refunds from governmental agencies
to BNY 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 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 BNY to increase
the maximum loan amount to $20,000,000, add a $500,000 purchase order advance
line, increase its unused line fee to 0.5% and increase its receivables advance
rate for insured international receivables from 80% to 90%. The Company's
permitted monthly overhead expense was reduced to an amount equal to or below
$425,000 per month. The Company incurred a $50,000 fee for amending the Credit
Facility.
<PAGE>
The Company's long-term debt consists of the following: (i) note payable of
$805,000 at March 31, 1999 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 $192,000 at March 31, 1999 to
a corporation, secured by specific inventory, an imputed interest rate of 9.5
percent; (iii) note payable of $100,000 at March 31, 1999 to the founder of the
Company and (iv) notes payable for $8,000.
The Company's credit facility with BNY 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.
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 stateaments in Part I.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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
<TABLE>
<S> <C>
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, 1998, 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 Aviation Distributors, Inc. (1)
10.4 Credit and Security Agreement, dated June 25, 1998, by and between
Aviation Distributors, Inc. and BNY Financial Corporation. (3)
10.5 Secured and Guaranteed Promissory Note, dated February 24, 1999, 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)
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, 1998, by and
between Osamah S. Bakhit and Aviation Distributors, Inc. (3)
10.11 Amendment to Employment Agreement, dated November 17, 1998, by and
between Mark W. Ashton and Aviation Distributors, Inc. (3)
10.12 Lease, dated as of July 9, 1998, 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)
</TABLE>
(1) Filed with the Company's Registration Statement on Form SB-2 dated
March 3, 1998.
(2) Filed with the Company's Registration Statement on Form 10-KSB dated
April 20, 1999.
(3) Filed with the Company's Form 10-KSB dated April 20, 1998.
<PAGE>
(b) Reports on Form 8-K.
<TABLE>
<CAPTION>
Date of Report/Filing Date Item Reported
-------------------------- -------------
<S> <C>
August 29, 1998/September 8, 1998 Change in Registrant's
Certifying Accountant
(Withdrawal of Reports on
Financial Statements;
Resignation of Arthur Andersen
LLP). No financial statements
were filed.
August 29, 1998/September 17, 1998 Financial Statements and
Exhibits (Letter from Arthur
Andersen LLP). No financial
statements were filed.
October 1, 1998/October 14, 1998 Other Events (Delisting by
Nasdaq). No financial
statements were filed.
November 19, 1998/November 19, 1998 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>
<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 May 17, 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)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,697
<ALLOWANCES> 620
<INVENTORY> 9,223
<CURRENT-ASSETS> 18,150
<PP&E> 1,004
<DEPRECIATION> 401
<TOTAL-ASSETS> 19,192
<CURRENT-LIABILITIES> 20,821
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> (1,795)
<TOTAL-LIABILITY-AND-EQUITY> 19,192
<SALES> 7,711
<TOTAL-REVENUES> 7,711
<CGS> 6,041
<TOTAL-COSTS> 7,468
<OTHER-EXPENSES> (33)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 425
<INCOME-PRETAX> (149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
