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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-29028
AVIATION DISTRIBUTORS, INC.
(Name of small business issuer 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 Office) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 586-7558
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK -- $.01 PAR VALUE
(TITLE OF CLASS)
Check whether the registrant (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 for such 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
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. X
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Revenues of the registrant for the fiscal year ended December 31, 1999 were
$23,361,000.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 31, 2000 was approximately $2,325,000, based upon the
average of the bid and asked prices of the Common Stock, as reported by the
Bloomberg Financial Markets.
The number of shares of the Common Stock of the registrant outstanding as of
March 31, 1999 was 3,344,500.
Transitional Small Business Disclosure Format (check one):
Yes No X
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Documents incorporated by reference:
Items 10, 11, 12 and 13 of Part III are incorporated by reference from a portion
of the Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 2000 Annual Meeting of Stockholders
and are incorporated by reference into Part III hereof.
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PART I
All statements, other than statements of historical fact, included in this Form
10-KSB, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Aviation Distributors, Inc. (the
"Company" or "ADI") to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements contained in this Form 10-KSB. Such potential risks and uncertainties
include, without limitation, competitive pricing and other pressures from other
aviation parts suppliers, aviation industry and economic conditions generally
and in the Company's primary markets, availability of capital, and other risk
factors detailed herein and in other of the Company's filings with the
Securities and Exchange Commission. The forward-looking statements are made as
of the date of this Form 10-KSB and the Company assumes no obligation to update
the forward-looking statements or to update the reasons that actual results
could differ from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a supplier of new and overhauled aircraft parts to major
commercial airlines worldwide. The Company locates, acquires and supplies parts
for all major aircraft. Additionally, the Company engages in consignment and
marketing agreements with major commercial airlines, distributors and OEMs,
which allows the Company to offer a wide range of parts for sale without certain
risks and financing costs associated with owned inventory. Aircraft parts
offered by the Company include those manufactured by Airbus, Boeing, General
Electric, Lockheed, McDonnell Douglas, Pratt & Whitney and Rolls Royce.
The Company's sales decreased from $28.4 million in 1998 to $23.4 million in
1999 as a result of the restrictions on financing and the completion of fewer
large sales. The Company's sales increased from $21.3 million in 1995, to $23.9
million in 1996 and $39.0 million in 1997. Due to financing restrictions, 1998
sales decreased to $28.4 million.
INDUSTRY OVERVIEW AND TRENDS
The worldwide aircraft parts market is highly fragmented and parts are supplied
by many types of suppliers, including airlines, OEMs and numerous distributors,
fixed base operators, FAA-certified facilities, traders and brokers. The Canaan
Group Ltd., a management consulting firm specializing in the aircraft and
aerospace industry, estimated that aircraft parts inventories valued at $45
billion existed in May 1995, with a carrying cost of $10 billion annually, and
that 80% of such inventories were owned by airlines. The Company believes that a
portion of such inventory is available for marketing, consignment and purchase.
The Company also believes that, based on other significant market trends, its
target market will continue to grow.
MARKET GROWTH. According to Boeing's 1999 Market Outlook, the worldwide fleet of
commercial aircraft and cargo jet aircraft is expected to grow from 12,600
airplanes at the end of 1998 to 19,100 airplanes by 2008 and to 28,425 airplanes
by 2018. For the industry as a whole, profitability was attained in 1998.
Airlines will increase airplane size only moderately in the next decade, with
almost three-fourths of future deliveries comprised of single aisle airplanes.
The number of seats in passenger service will increase from 1.8 to nearly 4.2
million. The freighter fleet capacity is expected to grow by more than 280% by
2018. The Company believes such increase in the number of airplanes and the
increase in the number of flights is an indication that aircraft will be flown
more often and will need standard service checks more frequently. The Company
believes that these factors have resulted and will continue to result in
increased demand for aircraft parts worldwide.
REDUCTION IN AIRLINE INVENTORIES. Historically, airlines have controlled the
majority of the aircraft parts inventory. Today, many airlines are beginning to
reduce the size of their parts inventories in an effort to reduce
inventory-carrying costs. These inventory reductions have increased reliance by
many airlines on after-market suppliers to provide parts that are difficult to
obtain from manufacturers on a timely basis, if at all. Manufacturers' lead-time
for delivery of aircraft parts averages 30 to 60 days. As airlines continue to
demand time-responsive inventory procurement processes, responsibility for
inventory storage and handling has shifted to suppliers such as the Company. The
Company believes that its access to a large inventory of aircraft parts and its
ability to deliver such parts to its customers quickly and at a competitive
price enable it to provide the services sought by airlines in an effective
manner.
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INCREASE IN CONSIGNMENT AND MARKETING BUSINESS. To reduce the high costs
associated with excess aircraft parts inventory, many airlines are selling their
parts inventories through consignment and marketing agreements with suppliers
such as the Company. Such agreements enable an airline to distribute its
inventory to a large number of prospective inventory buyers while enabling
suppliers such as the Company to offer an extensive aircraft parts inventory to
its customers with a relatively low capital cost.
REDUCTION IN NUMBER OF SUPPLIERS. In an attempt to increase quality and service,
reduce purchasing costs and streamline purchasing decisions, some airlines have
begun to form relationships with a few preferred suppliers. Over the last few
years, airlines have begun to reduce the number of aircraft parts suppliers with
which they do business. In the majority of cases to date, where the Company had
an established relationship with an airline, the Company was one of the parts
suppliers selected. The Company believes that due to its focus on cultivating
relationships with its customers and its reputation for service, quality and
reliability, airlines will continue to select the Company as one of their
preferred aircraft parts suppliers.
INCREASED EMPHASIS ON TRACEABILITY. Regulatory agencies have increased
documentation requirements for aircraft parts because of concern regarding
unapproved parts. In order for suppliers to trace all aircraft parts back to
their original source, suppliers have invested in sophisticated information
systems technology. The Company has developed and continues to maintain and
upgrade its information systems technology to ensure that all aircraft parts
bought and sold by the Company comply with applicable regulatory requirements.
BUSINESS STRATEGY
The Company's primary objectives are to be a leading quality supplier of
aircraft parts to airlines worldwide and to increase revenue from its business
through the application of a comprehensive business strategy combining various
customer service, marketing, operating and growth objectives. The Company's
marketing approach includes direct marketing to airlines and manufacturers,
advertising in trade directories and attending industry trade shows. Although
the Company concentrates the majority of its marketing efforts on commercial
airlines servicing the passenger market, it also seeks to foster business from
commercial airlines servicing the cargo market, as well as overhaul facilities
and OEMs.
CUSTOMER SERVICE. The Company intends to continue to market and develop its
ability to deliver parts quickly to customers at a preferred price and its
emphasis on implementing creative solutions to locate and deliver hard-to-find
aircraft parts. Additionally, the Company plans to continue to cultivate
relationships with its customers to assure that it retains its position on its
customers' preferred list of aircraft parts suppliers. The Company has
historically incurred high levels of selling and administrative expenses,
primarily travel and entertainment associated with establishing and maintaining
customer relationships. A key component of the Company's business strategy is to
implement a program to effectively contain such expenses.
EMPHASIS ON QUALITY. The Company will continue to emphasize its reputation for
quality, including its track record of consistently meeting FAA regulations by
maintaining and, if necessary, introducing safeguards to ensure the quality of
its aircraft parts. In addition, in October 1996 the Company became a full
distributor under the National Aerospace and Defense Contractors Accreditation
Program of the Performance Review Institute. Such safeguards include employing
three FAA-licensed Airframe and Powerplant Inspectors and contracting with three
FAA-licensed Designated Airworthiness Representatives and an outside quality
assurance consultant. Each of these specialists verifies the airworthiness of
aircraft parts bought and sold by the Company.
In March 1998, the Company attained its ISO 9002 Certification. The Company has
since undergone four surveillance audits, which resulted in the retention of the
certification. The Company is among a select group in its industry to have
achieved this status, which is a well-recognized symbol of quality operating
standards.
FOCUS ON MAJOR COMMERCIAL AIRLINES. The Company plans to continue targeting
major commercial airlines worldwide, many of which are currently customers of
the Company. Such airlines generally have larger aircraft fleets, which generate
a greater demand for aircraft parts than smaller airlines. Consequently,
relationships with major commercial airlines enable the Company to expend fewer
resources to generate comparable sales volume with margins of profitability
comparable to similar sales to several smaller airlines. Additionally, major
commercial airlines typically have greater financial resources than smaller
airlines, resulting in reduced credit risk to the Company and a greater
likelihood of timely payment. The Company's relationships with major commercial
airlines also provide the Company with increased access to such airlines'
aircraft parts inventories.
INCREASE ACCESS TO INVENTORY. The Company plans to increase its accessible
inventory by pursuing new consignment and marketing agreements with airlines,
manufacturers and overhaul facilities and purchasing large items, such as
engines, that can be broken down and sold as smaller parts for significantly
more than the "as - is" value. The Company will seek to secure aircraft parts
where it believes demand is greater than supply. Presently, the Company believes
that demand exceeds supply in the aircraft parts market for aircraft models over
five years old.
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GLOBAL EXPANSION. The Company's goal is to service customers domestically and
worldwide and to become a major aircraft parts supplier for the fastest-growing
markets, particularly Europe. For the year ended December 31, 1999, 48.9% of the
Company's sales were to international customers. The Company plans to continue
to take advantage of the growing international market through the use of its
multilingual sales staff and by maintaining existing relationships and
establishing new relationships in the following regions: Pacific Rim/Far
East/South Pacific, Europe, Latin/South America, Middle East/Africa and North
America.
PRODUCTS AND SERVICES
GENERAL. The Company is in the business of selling a broad range of aircraft
parts from its owned inventory, on behalf of airlines and manufacturers pursuant
to consignment and marketing agreements, and from inventory owned by outside
parties and located by the Company at the time of receiving a customer order
(outside sourcing). For the year ended December 31, 1999, sales from
Company-owned inventory and outside sourcing represented approximately 8% and
92%, respectively, of the Company's net sales.
The Company's access to an extensive inventory is a result of its worldwide
relationships with airlines, manufacturers and suppliers of aircraft parts,
numerous consignment and marketing agreements with airlines and manufacturers,
and owned inventory of new and overhauled aircraft parts.
The general categories of aircraft parts are as follows: (i) rotable; (ii)
repairable; and (iii) expendable.
A rotable is a part that is removed periodically as dictated by an operator's
maintenance procedures or on an as-needed basis and is typically repaired or
overhauled and re-used an indefinite number of times. A subset of rotables is
life-limited parts. A life-limited rotable has a designated number of allowable
flight hours and/or cycles (one take-off and landing generally constitutes one
cycle) after which it is rendered unusable.
A repairable is similar to a rotable except that it can only be repaired a
limited number of times before it must be discarded. Typically, rotable and
repairable parts must be removed from an airplane and rebuilt or checked based
upon the number of hours in flight. Rotable and repairable parts must be
repaired at FAA-approved repair facilities.
An expendable is generally a part that is used and not thereafter repaired for
further use. Consequently, all expendable inventory is new. Expendable inventory
cannot be used for less than its useful life and then transferred to a new
airplane; once an expendable part is removed from an airplane, it must be
discarded.
Currently, the Company supplies aircraft parts for Boeing 737, 747, 757 and 767
series, Airbus 300 series, McDonnell Douglas 80, DC and MD series aircraft.
These aircraft parts represent a significant portion of the aircraft parts used
by major airlines, which represent the majority of the Company's current
customers. Although not required by the FAA to do so, the Company maintains on
staff three FAA-licensed Airframe and Powerplant Inspectors and contracts with
three FAA-licensed Designated Airworthiness Representatives, whose
responsibilities are to verify the airworthiness of aircraft parts bought and
sold by the Company. The Company believes that its strict adherence to FAA and
manufacturer guidelines has contributed to the Company's reputation in the
industry. The Company does not repair aircraft parts, and therefore is generally
not subject to the risks associated with the repair business.
Each sales person employed by the Company is responsible for making an appraisal
of a particular aircraft part's value and makes such appraisal based on industry
experience and practice after considering current manufacturers' list prices,
the condition of the part, the part's availability and lead time to manufacture
the part. The Company's return policy permits customers to return parts within
10 days of receipt, although, in certain instances the Company may accept
returned parts beyond the 10 day period. Additionally, the Company's terms to
customers are generally 30 days; the Company may extend payment terms in certain
circumstances.
The Company's owned inventory at December 31, 1999 is stored in the Company's
California warehouse. Any party who has entered into a marketing agreement with
the Company owns and is responsible for storing the inventory to which the
Company has access pursuant to such marketing agreement. The Company ships all
inventory to customers via national or international courier services. If an
aircraft part sought by a customer exists in the Company's owned inventory,
inventory on consignment, or inventory available through exclusive marketing
agreements (together, the "Accessible Inventory"), such part is generally
shipped to the customer the day the order is placed. The turn-around time is
generally up to one week from the time the order is placed if the Company has to
acquire a part from an outside party.
CLIENT SERVICES. Client services are conducted through the Company's
California-based multilingual direct sales force, whose primary responsibility
is to sell aircraft parts and manage customers. Sales personnel travel
extensively to develop strong personal relationships with the Company's
customers, improve communications and remain current on regional market data.
Salespeople are assigned to specific airlines and are supported by a group
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of regional agents, who assist in countries such as Brazil, Chile, India,
Israel, Korea, Pakistan, and Turkey where local representation is critical to
purchase order processing and timely payment.
Each sales representative is supported by additional personnel who research and
locate parts ordered by the Company's customers. The Company's sales staff,
through its knowledge of the industry and its relationships throughout the
world, is able to develop and implement creative solutions to locate and deliver
hard-to-find aircraft parts, a quality that the Company believes sets it apart
from its competitors.
Upon the Company's receipt of an inquiry for a specific aircraft part from a
customer via telephone, e-mail or fax, the Company first checks its owned
inventory for availability of the part, then checks the Accessible Inventory. If
the part is not owned or part of the Accessible Inventory, the Company will
attempt to source the part through cultivated industry contacts or the Inventory
Locator Service ("ILS"), a domestic, industry-wide database of aircraft parts.
Even if the aircraft part is within the Company's owned or Accessible Inventory,
the Company attempts to achieve full market value for each part sold by
researching alternate sources for availability and competing prices for the part
prior to quoting the end user.
CONSIGNMENT AND MARKETING BUSINESS. In addition to supplying parts from owned
inventory, the Company has supplied parts through (i) consignment agreements,
pursuant to which the Company takes actual possession of a vendor's inventory,
and (ii) exclusive marketing agreements, pursuant to which the Company markets
vendors' inventory which remains in the vendors' possession. Through consignment
or marketing agreements with an aircraft parts supplier, the Company is able to
distribute its aircraft parts to a larger number of prospective inventory
buyers. This allows the Company's vendors to maximize the value of their
inventory while at the same time freeing up resources that can be focused on
their core business. Consignment and marketing arrangements also enable the
Company to offer for sale aircraft parts from a much larger inventory at minimal
capital cost to the Company.
When an inquiry is made with respect to a particular aircraft part, the Company
will query its inventory databases for availability before researching market
value. A party who has entered into a consignment or marketing agreement with
the Company (the "Contract Party") typically establishes an asking price for
each aircraft part subject to the agreement, but may allow the Company to lower
such price to assure a sale. If the Company feels it must offer a part for below
the price established by the Contract Party, it will first seek the Contract
Party's permission. In most instances, the Contract Party has entered into the
relationship with the Company because it believes the Company has the expertise
necessary to attract the best price for each aircraft part. Further, the Company
is paid a percentage of the sales price as compensation for its consignment and
marketing services. Consequently, the Contract Party, understanding that the
Company's own best interest is in achieving the highest price possible for the
sale of the part, will usually give consideration to a recommendation by the
Company to sell a particular aircraft part at a price below the Contract Party's
established price.
The Company has had consignment and marketing agreements with airlines and OEMs.
No single consignment or marketing agreement has been material to the Company's
business in the aggregate. Although the Company had no marketing or consignment
agreements at December 31, 1999, the Company is considering potential future
consignment and marketing agreements.
INVENTORY PURCHASES. The Company acquires aircraft parts by bidding on the
inventory of, (i) airlines that are eliminating certain portions of their parts
inventory due to retirement of an aircraft type from their fleet, downsizing of
operations, or the dissolution of their businesses and, (ii) OEMs and overhaul
facilities who seek to sell excess inventory. Management believes that its
primary source of aircraft parts for acquisition during the next few years will
be from such purchases.
SYSTEMS
Due to concerns regarding unapproved aircraft parts, regulatory authorities have
increased the level of documentation required for aircraft parts. End users have
in turn, extended this requirement to the suppliers of the parts. The
sophistication required to track the history of an inventory consisting of
thousands of aircraft parts is considerable and has required aircraft parts
suppliers to invest significantly in information systems technology. The high
cost of increased technology has made entry into and survival in the aircraft
parts supply market increasingly difficult and expensive. However, the Company
has previously invested in systems technology and intends to continue to
maintain and improve its information systems to allow it to effectively compete
in the aircraft parts supply market.
The most commonly used database available in the aircraft part supply industry
is ILS. ILS is an inventory locating service that assists in searching for and
locating aircraft parts. Once a potential purchaser locates a part owned by the
Company or available through the Company's Accessible Inventory, the purchaser
contacts the Company to confirm price, condition and availability information.
As of December 31, 1999, the Company listed approximately 400,000 items on ILS.
Additionally, ILS is one of the tools used by the Company to locate aircraft
parts that are not in the Company's Accessible Inventory.
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The Company implemented a new software package during 1999. This new system is
an integrated accounting and business management software package. It will
create requests for quote sheets, quotations, sales orders, purchase orders,
repair orders and invoices. This database has provided improved part number
databases, inventory controls and additional linkage between accounting and
sales.
COMPETITION
The aircraft parts supply industry is highly competitive. The Company encounters
substantial competition from (i) direct competitors, such as The Ages Group, The
Memphis Group, AAR Corp. and Aviation Sales Company, and (ii) indirect
competitors, such as OEMs, which include aircraft manufacturers such as Boeing,
Airbus and McDonnell Douglas, as well as component manufacturers such as Bendix,
Menasco and Goodrich. Generally, competition is based on availability of
product, reputation, customer service, price and lead-time. Although many of the
Company's competitors have access to substantially greater financial and other
resources than the Company, the Company believes that by focusing on service,
product integrity and the cultivation of relationships with customers worldwide,
it is well equipped to compete effectively in its industry.
GOVERNMENT REGULATION
Both domestic and foreign entities regulate products sold by the Company. The
following discussion summarizes the required regulatory approvals and clearances
relating to the Company's products and highlights the Company's specific efforts
to conform to such requirements.
The FAA is charged with regulating the manufacture, repair and operation of all
aircraft and aircraft equipment operated within the United States. The FAA
monitors safety by promulgating regulations regarding proper maintenance of
aircraft and aircraft equipment. Similar regulations exist in foreign countries.
All aircraft and aircraft equipment must be monitored on a continual basis and
periodically inspected in order to ensure proper condition and maintenance.
Regulatory agencies specify maintenance, repair and inspection procedures for
aircraft and aircraft equipment. These procedures must be performed by certified
technicians in approved repair facilities on set schedules. All parts must
conform to prescribed regulations and be certified prior to installation on an
aircraft. When necessary, the Company uses FAA and/or Joint Aviation Authority
certified repair shops to repair or certify parts for distribution. Because
regulations are subject to modification, the Company carefully monitors the FAA
and industry trade organizations in order to assess any potentially adverse
impact on the Company caused by changes in regulations applicable to its
operations.
Documentation of spare parts is of paramount importance in the aircraft parts
industry. To ensure that all parts are properly documented and thus traceable to
their original source, the Company requires that its suppliers comply with all
documentation requirements set forth by regulatory agencies. Documentation may
include: (i) an invoice or purchase order from an approved supplier, (ii) a
"teardown" report noting actions taken during the last repair, (iii) a signed
maintenance release from a certified airline or repair facility that repaired
the aircraft spare part and a statement from an inspector verifying that the
part was repaired in accordance with proper workmanship, and using proper
materials and methods.
EMPLOYEES
As of March 15, 2000, the Company had 44 full-time and one part-time employee in
the United States. As of such date, the Company also has agents in Brazil,
Chile, India, Israel, Pakistan, Indonesia, South Africa and Turkey. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
In February 1998, the Company leased a 36,079 square foot facility at One
Capital Drive, Lake Forest, California 92630 as its principal executive offices
and primary warehouse for $29,500 per month. The facility has approximately
14,293 square feet allocated to office space and 21,786 square feet of
warehouse. The lease expires January 31, 2005, with an option to extend the term
of the lease for one five-year period at the then market rate for the equivalent
space. The Company believes that its facility is adequately covered by
insurance.
ITEM 3. 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
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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 was
memorialized in a Memorandum of Understanding (the M.O.U.), with counsel for the
plaintiffs to settle the suits. The Federal Court approved this settlement
agreement on March 15, 1999. Terms of the settlement included 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,
contributed 130,000 shares. The Company recorded a legal settlement expense for
the year ended December 31, 1997 of $620,000, of which $480,000 was attributable
to the expected issuance of 80,000 shares of common stock and $140,000 of which
represented the Company's portion of the cash consideration. The 80,000 shares
were issued to the plaintiffs in 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. The Company has incurred legal, accounting and consulting expense
relating to these investigations of $1.3 million and $156,000 for the years
ended December 31, 1998 and 1999, respectively.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From March 3, 1997 to September 2, 1997, the Company's Common Stock was quoted
on the Nasdaq SmallCap Market under the symbol "ADIN." Effective September 2,
1997, trading in the Company's Common Stock was halted by Nasdaq, and on October
1, 1997 the Company's Common Stock was delisted from the Nasdaq SmallCap Market
based on a failure to comply with the requirements for audited financial
statements.
The following table sets forth, for the period from January 20, 1998 through
March 31, 2000, the high and low sales prices for the common stock, as reported
on the Nasdaq Over-The-Counter Bulletin Board. The prices represent quotations
between dealers, without adjustment for retail markup, mark down or commission,
and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
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High Low
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<S> <C> <C>
1998
1st Quarter 7 3
2nd Quarter 6 1/4 .95
3rd Quarter 2 1/8 5/16
4th Quarter 1 7/16 3/16
1999
1st Quarter 1 1/4 9/32
2nd Quarter 1 3/16 11/32
3rd Quarter 9/16 1/4
4th Quarter 2 1/16 3/16
2000
1st Quarter 2 11/16 31/32
</TABLE>
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The Company has not paid any cash dividends on its Common Stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will be retained for use in its business. As of March 31, 1999, the
approximate number of record holders of the Company's Common Stock was 32,
however, the Company believes the number of beneficial owners is approximately
250 persons.
ITEM 6. 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.
GENERAL
The Company is a supplier of new and overhauled aircraft parts to major
commercial airlines worldwide. The Company locates, acquires and supplies parts
for all major aircraft. Additionally, the Company engages in consignment and
marketing agreements with major commercial airlines, distributors and OEMs,
which allow the Company to offer a wide range of parts for sale without certain
risks and financing costs associated with owned inventory. The Company was
established in October 1988, incorporated in California in February 1992 and
reincorporated in Delaware in July 1996.
The Company's sales have decreased from $28.4 million in 1998 to $23.4 million
in 1999 as a result of the restrictions on financing and the completion of fewer
large sales. Management believes the Company's revenues will increase in 2000
due to improved financing capabilities. In years prior to 1998, the Company's
sales had increased from $21.3 million in 1995, to $23.9 million in 1996 and
$39.0 million in 1997. Sales in 1998 decreased to $28.4 million due to financing
restrictions. Of 1995 sales, approximately $6.5 million resulted from the sale
of two whole aircraft (with engines) to Royal Jordanian Airlines. Excluding the
whole aircraft transaction, sales in 1995 would have been $14.8 million. If the
opportunity exists, the Company may sell whole aircraft in the future.
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.
RESULTS OF OPERATIONS
The following table sets forth certain information relating to the Company's
operations for the years ended December 31, 1998 and 1999 (dollars in
thousands):
7
<PAGE>
<TABLE>
<CAPTION>
1998 1999
======================== ========================
<S> <C> <C> <C> <C>
Net inventory sales $ 28,186 99.1 % $ 23,361 100.0 %
Net sales on consignment and marketing agreements 247 0.9 - -
----------- ------------ ----------- ------------
Net sales 28,433 100.0 23,361 100.0
Cost of sales 22,597 79.5 17,607 75.4
----------- ------------ ----------- ------------
Gross profit 5,836 20.5 5,754 24.6
Selling and administrative expenses 7,593 26.7 6,003 25.7
Non recurring expenses 1,311 4.6 156 0.7
----------- ------------ ----------- ------------
Loss from operations (3,068) (10.8) (405) (1.7)
Interest expense, net 2,297 8.1 1,716 7.3
Other (income) expense 144 0.5 (6) (0.0)
Provision (benefit) for income taxes 287 1.0 (83) (0.4)
Extraordinary gain - payable restructuring 0 - 242 1.0
----------- ------------ ----------- ------------
Net loss $(5,796) (20.4)% $(1,790) (7.7)%
=========== ============ =========== ============
</TABLE>
NET INVENTORY SALES. Net inventory sales represents sales of aircraft parts
purchased at the time of sale through outside parties (outside sourcing) and
sales of the Company's owned inventory. Net inventory sales decreased from $28.2
million for the year ended December 31, 1998 to $23.4 million for the year ended
December 31, 1999, a decrease of $4.8 million or 17.0%. This decrease was a
result of financing limitations and fewer large transactions.
NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment and
marketing agreements represent revenue, including commission, from sales of
inventory held on consignment and sales of inventory obtained through marketing
agreements with larger airlines. These types of sales decreased from $247,000
for the year ended December 31, 1998 to $0 for the year ended December 31, 1999.
The decrease was a result of management's decision to terminate a marketing
agreement during 1998. Currently, the Company does not have any active marketing
or consignment agreements, but continues to explore possible opportunities.
NET SALES. Net sales decreased by $5.1 million, or 17.8%, as a result of
restrictions on financing and fewer large transactions.
The sales by region data presented below should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto included
elsewhere in this document. The following data consists of sales by region for
the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Pacific Rim 17.9 % 10.9 %
Europe 17.5 11.4
Latin/South America 16.1 18.2
Africa/Middle East 6.3 7.8
--------- ---------
57.8 % 48.3 %
========= =========
</TABLE>
The Company's sales to international customers for the years ended December 31,
1998, 57.8%, and December 31, 1999, 48.3%, decreased as a result of large
transactions closed with domestic customers.
COST OF SALES. Cost of sales decreased from $22.6 million for the year ended
December 31, 1998 to $17.6 million for the year ended December 31, 1999, a
decrease of $5.0 million or 22.1%. This decrease was primarily the result of the
17.9% decrease in net sales. As a percentage of net sales, cost of sales
decreased from 79.5% in 1998 to 75.4% in 1999 due to improved pricing on
inventory parts during 1999 and from high margin sales of bulk purchased
inventory.
GROSS PROFIT. Gross profit of $5.8 million, or 20.5% of net sales for the
year ended December 31, 1998 compares to $5.8 million or 24.6% of net sales
for the year ended December 31, 1999. The increase in gross margin percent
maintained a comparable gross profit from 1998 to 1999 despite the decrease
in sales.
8
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of compensation, commission expense, professional fees,
consulting expense and travel expense. The Company's selling and administrative
expenses decreased from $7.6 million for the year ended December 31, 1998 to
$6.0 million for the year ended December 31, 1999, a decrease of $1.6 million or
21%. This decrease was principally due to cost reduction efforts and closing of
the Australia facility in February 1999.
NONRECURRING EXPENSES. The Company incurred $1.3 million and $156,000 during
1998 and 1999, 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. See "Item 3 -
Legal Proceedings". These expenses primarily consist of legal, accounting and
consulting fees.
LOSS FROM OPERATIONS. The Company incurred a loss of $405,000 from operations
for the year ended December 31, 1999, compared to a loss from operations of
$3.1 million in 1998. Loss from operations for the 1999 period, excluding the
non-recurring expenses, was $249,000. The loss from operations for the 1998
period, excluding the non-recurring expenses and the legal settlement
expense, was $1.7 million. The increase in operating income is due to a
decrease in net sales, offset by improved margins, and the decrease in
selling and administrative expenses. See "Net distributed services and
inventory sales," "Gross profit" and "Selling and administrative expenses."
INTEREST EXPENSES, NET. Net interest expense decreased from $2.3 million, or
8.1% of net sales for the year ended December 31, 1998 to $1.7 million, or 7.3%
of net sales for the year ended December 31, 1999. The decrease in interest
expense was partly due to a decrease in borrowings under the Company's line of
credit during the 1999 period. The decrease was also due to approximately
$470,000 interest incurred on the note payable for the purchase of the CFM56
engine during 1998.
PROVISION FOR INCOME TAXES. The Company had a benefit from income taxes in 1999
due to income tax refunds received in excess of the benefit recorded in 1998.
The 1998 income tax benefit was a result of the Company providing for an
estimated refund.
YEAR 2000 COMPLIANCE
To become fully Year 2000 compliant, the Company successfully implemented a new
software system at a cost of approximately $120,000. The Company did not
separately track the internal costs incurred for the Y2K project. The company
did not incur any systems problems as a result of the successful implementation
of the new systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $3.0 million in 1998, with the principal
uses being the $5.8 million loss and net reductions of $3.2 million in inventory
purchase notes payable, offset by a $4.9 million reductions in accounts and
notes receivable. In 1999, operating activities used $3.7 million, comprised
primarily of the $1.8 million loss, net reductions of $1.1 million in inventory
purchase notes payable and by a $1.5 million net increase in accounts and notes
receivable.
In 1998, investing activities provided net cash of $880,000 principally
relating to a decrease in restricted cash due to a certificate of deposit
that was used as collateral on a letter of credit issued to a vendor that was
utilized in the second quarter of 1998. In 1999, investing activities used
net cash of $109,000, comprised primarily of a new system implementation.
Financing activities provided cash of $2.0 million in 1998 and $3.8 million in
1999. Net increases in line of credit borrowings were $2.7 million and $2.9
million in 1998 and 1999, respectively.
At December 31, 1999, the Company's Credit Facility provided for working capital
loans of up to the lesser of $21,000,000 (facility amount) or the advance rate
against qualified accounts receivable and inventory, with interest at the GMAC
Commercial Credit LLC, successor in interest to BNY Financial Corporation
(GMAC), Alternate Base Rate (8.5 percent at December 31, 1999) plus one percent.
The borrowing rate is subject to a premium of 0.5% per annum when the facility
is over advanced and a premium of 2.0% per annum when the Company is out of
covenant compliance. The terms of the credit agreement provide for a facility
non-use fee of 0.5% per annum of the difference between the facility amount and
the average monthly balance. GMAC 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 secured by 1,000,000 shares of
common stock pledged by the Company's founder. The Credit Facility matures on
December 1, 2002 (see Note 6 for subsequent amendment). The credit facility has
9
<PAGE>
general financial covenants related to the Company's financial condition. At
December 31, 1999, the Company was not in compliance with certain covenants. The
Company has received a waiver for the non-compliance that sets forth revised
tangible net worth, operating ratios, capital expenditure and working capital
requirements for 2000.
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 30 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 $21.0 million Credit
Facility has certain financial covenants that require the Company to have: a
tangible net deficit of no more than $5.5 million at June 30, 2000, $4.5
million at September 30, 2000 and $ 3.4 million at December 31, 2000, an
EBITDA to cash interest ratio of 1.5 to 1 at June 30, 2000, 1.6 to 1 at
September 30, 2000 and 1.7 to 1 at December 31, 2000, capital expenditures
$192,000 and a working capital deficit of no more than $2.4 million at June
30, 2000, 1.3 million at September 30, 2000 and $0.4 million at December 31,
2000.
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. In February 1999 the Company reduced the exercise price of the
warrants from $2.50 to $1.00 per share.
The Company's long-term debt at December 31, 1999 consists of the following: (i)
note payable of $1.0 million to GMAC, interest due monthly beginning January
2000, principal due in quarterly installments of $125,000 beginning December
2000, with an interest rate equal to the GMAC Alternate Base Rate plus 2.0%;
(ii) note payable of $833,333 to a corporation, secured by specific inventory,
(iii) note payable to a related party of $100,000 at an interest rate of 6.0%;
and (iv) notes payable for $10,359.
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.
10
<PAGE>
AVIATION DISTRIBUTORS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Years ended December 31, 1998 and 1999 . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998 and 1999. . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1999 . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Aviation Distributors, Inc.
We have audited the accompanying consolidated balance sheets of Aviation
Distributors, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aviation
Distributors, Inc. as of December 31, 1998 and 1999, and the consolidated
results of its operations and its consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,789,628 for the year ended December 31,
1999, and, as of that date, the Company's current liabilities exceeded its
current assets by $3,316,228 and its total liabilities exceeded its total assets
by $3,325,590. These factors, among others, as discussed in Note 2 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Irvine, California
April 6, 2000
F-2
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
ASSETS 1998 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash .................................................................... $ - $ -
Restricted cash ......................................................... 8,171 -
Accounts receivable, net of allowance for
doubtful accounts of $620,000 and $250,000
at December 31, 1998 and 1999, respectively ............................ 4,767,470 7,548,474
Other receivables ....................................................... 69,238 44,739
Inventories ............................................................. 9,356,386 9,008,560
Prepaid expenses ........................................................ 529,965 85,554
Income tax receivable ................................................... 392,979 -
Current portion of notes receivable ..................................... 1,276,750 -
Deferred tax asset ...................................................... 101,000 101,000
------------ -----------
Total current assets ............................................... 16,501,959 16,788,327
------------ -----------
PROPERTY AND EQUIPMENT ........................................................ 1,001,622 1,016,165
Less - accumulated depreciation ......................................... 355,715 466,998
------------ -----------
645,907 549,167
------------ -----------
Notes receivable from founder ................................................. 408,718 408,718
Other assets .................................................................. 29,351 131,484
------------ -----------
438,069 540,202
------------ -----------
$ 17,585,935 $17,877,696
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Checks issued not yet presented for payment ............................. $ 377,986 $ 256,957
Accounts payable ........................................................ 3,120,953 2,587,403
Accrued liabilities ..................................................... 838,446 606,997
Line of credit .......................................................... 12,791,538 15,677,982
Current portion of long-term debt ....................................... 1,911,057 965,388
Current portion of capital lease obligations ............................ 18,797 9,828
------------ -----------
Total current liabilities .......................................... 19,058,777 20,104,555
------------ -----------
Long-term debt, net of current portion ........................................ 9,672 978,304
------------ -----------
Capital lease obligations, net of current portion ............................. 30,323 19,427
------------ -----------
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 3,387,500 shares
issued; 3,122,000 and 3,344,500 shares outstanding
at December 31, 1998 and 1999, respectively ............................ 31,650 33,875
Additional paid in capital .............................................. 5,658,099 6,213,749
Accumulated deficit ..................................................... (7,710,282) (9,499,910)
Treasury stock, 43,000 shares at cost ................................... (73,304) (73,304)
------------ -----------
Total stockholders' deficit ........................................ (2,093,837) (3,325,590)
------------ -----------
$ 17,585,935 $17,877,696
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1999
---- ----
<S> <C> <C>
NET DISTRIBUTED SERVICES AND INVENTORY SALES ............................ $ 28,185,451 $ 23,361,146
NET SALES ON CONSIGNMENT AND
MARKETING AGREEMENTS ................................................... 247,120 -
------------ ------------
TOTAL NET SALES ......................................................... 28,432,571 23,361,146
COST OF SALES ........................................................... 22,596,436 17,606,921
------------ ------------
Gross profit ..................................................... 5,836,135 5,754,225
SELLING AND ADMINISTRATIVE EXPENSES ..................................... 7,593,018 6,002,925
NON-RECURRING EXPENSES .................................................. 1,311,153 155,996
------------ ------------
Loss from operations ............................................. (3,068,036) (404,696)
OTHER (EXPENSE) INCOME:
Interest expense ................................................. (2,560,930) (1,850,661)
Interest income .................................................. 263,796 133,866
Loss on disposal of assets ....................................... (148,666) (1,720)
Other income ..................................................... 5,064 8,246
------------ ------------
Loss before provision
for income taxes ................................................ (5,508,772) (2,114,965)
PROVISION (BENEFIT) FOR INCOME TAXES .................................... 287,000 (82,877)
------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM ...................................... (5,795,772) (2,032,088)
EXTRAORDINARY ITEM - Gain on debt forgiveness ........................... - 242,460
------------ ------------
NET LOSS ......................................................... $ (5,795,772) $ (1,789,628)
============ ============
Basic and diluted loss per share:
Loss before extraordinary item ................................... $ (1.85) $ (0.64)
Extraordinary item ............................................... - 0.08
------------ ------------
Net loss ......................................................... $ (1.85) $ (0.56)
============ ============
Weighted average number of shares outstanding,
basic and diluted ................................................ 3,140,000 3,221,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common stock Treasury stock
------------------------ ---------------------------
Number Number
of shares Amount of shares Amount
---------- ------- --------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 ....................................... 3,165,000 $31,650 - $ -
Purchase of treasury stock ................................... - - 43,000 (73,304)
Net loss ..................................................... - - -
---------- ------- --------- ------
Balance at December 31, 1998 .................................... 3,165,000 31,650 43,000 (73,304)
Stock issued in
legal settlement ........................................... 80,000 800 - -
Fair value of stock
options issued for debt forgiveness ........................ - - - -
Stock options exercised ...................................... 142,500 1,425 - -
Net loss ..................................................... - - - -
---------- ------- --------- -----------
Balance at December 31, 1999 .................................... 3,387,500 $33,875 43,000 $ (73,304)
========== ======= ========= ===========
<CAPTION>
Total
Additional stockholders'
paid Accumulated equity
in capital deficit (deficit)
---------- ------- ---------
<S> <C> <C> <C>
Balance at January 1, 1998 ....................................... $ 5,658,099 $(1,914,510) $ 3,775,239
Purchase of treasury stock ................................... - - (73,304)
Net loss ..................................................... - (5,795,772) (5,795,772)
----------- ----------- -----------
Balance at December 31, 1998 .................................... 5,658,099 (7,710,282) (2,093,837)
Stock issued in
legal settlement............................................ 479,200 - 480,000
Fair value of stock
options issued for debt forgiveness ........................ 42,250 - 42,250
Stock options exercised ...................................... 34,200 - 35,625
Net loss ..................................................... - (1,789,628) (1,789,628)
----------- ----------- -----------
Balance at December 31, 1999 .................................... $ 6,213,749 $(9,499,910) $(3,325,590)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
AVIATION DISTRIBUTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss .............................................................................. $ (5,795,772) $ (1,789,628)
Adjustments to reconcile net loss to net cash
used in operating activities:
Principal payments on note receivable .............................................. 1,776,493 1,276,750
Borrowings on notes payable related to inventory purchases ......................... 2,423,586 1,000,000
Principal payments on notes payable
related to inventory purchases.................................................... (4,552,354) (1,443,417)
Reduction in amount due on notes payable
related to inventory purchases in exchange for
reduction in accounts receivable.................................................. (1,057,573) (643,788)
Loss on disposition of property and equipment ...................................... 148,666 1,720
Depreciation and amortization ...................................................... 327,606 196,722
Gain on debt forgiveness............................................................ - (242,460)
Changes in assets and liabilities:
Accounts receivable, net ...................................................... 3,107,896 (2,781,004)
Other receivables ............................................................. 147,718 24,499
Inventories ................................................................... 28,187 347,826
Prepaid expenses .............................................................. (185,682) 444,411
Income tax receivable ......................................................... - 392,979
Deferred tax asset ............................................................ 192,000 -
Other assets .................................................................. 150,161 (102,133)
Accounts payable .............................................................. 238,909 (213,216)
Accrued liabilities ........................................................... 68,014 (198,492)
Deferred tax liability ........................................................ 8,000 -
------------- -------------
Net cash used in operating activities ....................................... (2,974,145) (3,729,231)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................................... (214,841) (117,146)
Decrease in restricted cash ........................................................... 1,095,273 8,171
------------- -------------
Net cash provided by (used in) investing activities .......................... 880,432 (108,975)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit ......................................................... 31,249,446 22,144,770
Principal payments on lines of credit ................................................. (28,523,015) (19,258,327)
Borrowings on long-term debt .......................................................... - 1,125,000
Principal payments of long-term debt .................................................. (6,916) (32,343)
Principal payments of capital lease obligations ....................................... (26,671) (19,865)
Checks issued not yet presented for payment ........................................... (606,045) (121,029)
Acquisition of treasury stock ......................................................... (73,304) -
------------- -------------
Net cash provided by financing activities .................................... 2,013,495 3,838,206
------------- -------------
Net increase (decrease) in cash .......................................................... (80,218) -
Cash at beginning of period .............................................................. 80,218 -
------------- -------------
Cash at end of period .................................................................... $ - $ -
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................................... $ 2,572,895 $ 1,847,897
============ =============
Income taxes ....................................................................... $ 84,615 $ 800
============ =============
</TABLE>
Non-cash investing and financing activities:
During 1999, the Company issued 80,000 shares of its common stock in
connection with a legal settlement agreed to in 1998 (see Note 8). As a
result, the Company reduced Other Long Term Liabilities by $480,000,
increased Common Stock by $800 and Paid in Capital by $479,200.
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Aviation Distributors, Inc. ("ADI") and its subsidiary (the "Company")
established operations in 1988, incorporated in the state of California in 1992
and reincorporated in the state of Delaware in 1996. The Company is a supplier,
distributor and broker of commercial aircraft parts and supplies. The Company's
customers are located worldwide.
For the years ended December 31, 1998 and 1999, approximately 57.8% and 48.3%
respectively, of the Company's net sales were export sales. These export sales
by region were approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
---- ----
<S> <C> <C>
Pacific Rim .................................................. 17.9% 10.9%
Europe........................................................ 17.5 11.4
Latin/South America........................................... 16.1 18.2
Africa/Middle East............................................ 6.3 7.8
---- ----
57.8% 48.3%
==== ====
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary ADI Consignment and Sales, Inc. The
Company's subsidiary is a non-operating entity; therefore, there were no
significant intercompany transactions.
RESTRICTED CASH
Restricted cash at December 31, 1998 consists of short-term certificates of
deposits held as security for letters of credit issued on behalf of the Company
by financial institutions.
INVENTORIES
Inventories, which consist primarily of aircraft parts, are stated at the lower
of cost or market with cost determined on a specific identification or first-in,
first-out basis. Expenditures required for the rectification of parts are
capitalized as inventory cost as incurred and are expensed with cost of sales as
the parts are sold. Inventory received from a vendor in exchange for Company
owned inventory is recorded at the historical cost of the items surrendered,
after any necessary reduction for impairment. Inventory received in settlement
of receivables is recorded at the lower of the receivable balance or the fair
value of the items received.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is provided using
the straight-line method over the useful lives of the assets, ranging from five
to thirty years. Expenditures for repairs and maintenance are expensed as
incurred. Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. The carrying amounts of assets
sold or retired are removed from their accounts in the year of disposal, and any
resulting gain or loss is reflected in operations.
FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the carrying value of the Company's financial
instruments (cash, accounts receivable, notes receivable, lines of credit, other
liabilities due in less than one year and notes payable) approximated their fair
values due to the relatively short maturity of the instruments or because the
interest rates on the instruments are comparable to market rates.
F-7
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Sales of aircraft parts are recognized as revenues when the product is shipped
and title has passed to the customer. The Company provides an allowance for
estimated product returns. Distributed services sales represent sales of
aviation parts obtained from outside sources at the point of sale, whereas
inventory sales represent sales from Company owned inventory. Net sales on
consignment and marketing agreements represent revenue related to inventories
owned by others in which the Company has entered into exclusive marketing and/or
consignment agreement to sell the third party parts.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
BASIC AND DILUTED NET LOSS PER SHARES
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption that
all convertible shares and stock options were converted or exercised, unless
such assumption would be antidilutive. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation as prescribed by APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and has adopted the
disclosure provisions of Statement of Financial Accounting Standards 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). SFAS 123 requires pro
forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied. Under the
fair value based method, compensation cost is recorded based on the value of the
award at the grant date and is recognized over the service period. See Note 11.
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 substantial losses in
1998 and 1999; has used, rather than provided, cash in its operations; and has
deficits in working capital and stockholders' equity at December 31, 1998 and
December 31, 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.
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. The class
action lawsuits have been settled. Settlement of legal issues will also allow
management to concentrate on managing, improving and expanding the business.
In addition, as described in Note 6 the Company has increased its
availability under its line of credit and extended the loan maturity date.
F-8
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - NOTES RECEIVABLE:
At December 31, 1998 the Company had a note receivable from a corporation of
$1,276,750, secured by an irrevocable letter of credit, due in monthly
installments of $166,250 (principal and interest) to August 1999 with an
interest rate of 9.5% (see Note 7). The note receivable and related payable were
collected and paid, respectively, during 1999.
NOTE 4 - NOTES RECEIVABLE FROM FOUNDER:
Mr. Osamah S. Bakhit is the founder of the Company and is currently a consultant
for the Company. The Company loaned $328,718 to Mr. Bakhit in December 1995 and
$80,000 in December 1996. The loans are in the form of notes, bearing interest
at 6 percent, payable in quarterly installments aggregating $102,180. Interest
on the notes has been satisfied through December 1999 through a reduction in a
vacation liability due to Mr. Bakhit; the Board of Directors of the Company has
approved the deferral of principal and additional interest payments to December
31, 2000.
NOTE 5 - PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment, at cost, consists of the following: DECEMBER 31,
-----------------------------
1998 1999
---- ----
<S> <C> <C>
Computer equipment and software............................................. $ 321,495 $ 402,624
Furniture and fixtures...................................................... 369,318 369,752
Leasehold improvements...................................................... 164,910 107,740
Machinery and equipment..................................................... 100,448 100,448
Autos....................................................................... 45,451 35,601
----------- -----------
$ 1,001,622 $ 1,016,165
=========== ===========
</TABLE>
NOTE 6 - LINE OF CREDIT:
At December 31, 1999, the Company's Credit Facility provided for working capital
loans of up to the lesser of $21,000,000 (facility amount) or the advance rate
against qualified accounts receivable and inventory, with interest at the GMAC
Commercial Credit LLC, successor in interest to BNY Financial Corporation
(GMAC), Alternate Base Rate (8.5 percent at December 31, 1999) plus one percent.
The borrowing rate is subject to a premium of 0.5% per annum when the facility
is over advanced and a premium of 2.0% per annum when the Company is out of
covenant compliance. The terms of the credit agreement provide for a facility
non-use fee of 0.5% per annum of the difference between the facility amount and
the average monthly balance. GMAC has a fully perfected security interest
against all assets of the Company, except restricted cash, in addition to a
personal guarantee from and pledge of 1,000,000 shares of common stock owned by
the Company's founder. The Credit Facility matures on December 15, 2002. The
credit facility has general financial covenants related to the Company's
financial condition. At December 31, 1999, the Company was not in compliance
with certain covenants. The Company has received a waiver for the non-compliance
that sets forth revised tangible net worth, operating ratios, capital
expenditure and working capital requirements for each quarter of the year ending
December 31, 2000.
In October 1998, the Company assigned all tax refunds from governmental agencies
to GMAC as a pledge of additional collateral and issued 126,600 warrants to BNY
to purchase common stock of the Company at $2.50 per share, expiring on October
31, 2003. In February 1999, the Company reduced the exercise price of the
warrants from $2.50 to $1.00 per share.
On February 23, 2000 the Company amended its Credit Facility with GMAC to extend
the loan maturity date to December 1, 2010. Additionally, the 126,600 warrants
previously issued to GMAC were increased to provide GMAC with warrants equal to
9.9% of the outstanding stock of the Company or approximately 335,362 warrants.
The exercise price of the previously issued warrants was reduced from $1.00 to
$0.25 per share. The additional 208,762 warrants were issued at an exercise
price of $0.25 per share. The total warrants issued to GMAC expire on February
28, 2010.
F-9
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the new warrants and the repriced warrants issued to GMAC,
estimated at approximately $510,000, will be amortized to interest expense
beginning in 2000.
As a condition for the extension of the credit facility, the Company entered
into a $2,000,000 promissory note, due in a balloon payment on the earlier of
February 1, 2010 or if the Company's stock reaches a $6 per share value over
10 consecutive days or the occurrence of one of several other events, none of
which have occurred. The $2,000,000 will be amortized to interest expense
beginning in 2000. The note bears interest at GMAC's Alternate Base Rate and
interest is payable semi-annually.
Subsequent to December 31, 1999, the Company obtained an additional
$3,800,000 increase in its credit facility to finance the purchase of
inventory.
NOTE 7 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
---- ----
<S> <C> <C>
Note payable to a financial institution, principal due in quarterly installments
of $125,000 beginning December 2000, interest due monthly beginning January
2000, secured by the assets of the Company, with an interest rate equal to the
GMAC Alternate Base Rate plus two percent............................................ $ - $ 1,000,000
Non-interest bearing note payable to a corporation, secured by specific
inventory, due in monthly installments of $166,667 beginning December 1999,
with the final $333,333 due March 31, 2000. The final payment on the note was
not paid on March 31, 2000. The Company and the vendor are currently
negotiating the payment terms, which have not yet been finalized..................... - 833,333
Note payable to a related party, unsecured, originally due February 2000, with
an interest rate of 6%; the maturity date was extended to February 2001
after December 31, 1999.............................................................. - 100,000
Note payable to a financial institution, due in monthly installments of $166,250
(principal and interest) to August 1999, secured by a note receivable (see Note 3),
with an interest rate of 9.5 percent.................................................. 1,276,750 -
Non-interest bearing note payable to a corporation, secured by specific
inventory, with an imputed interest rate of 9.5 percent, net of discount of
$79,343 at December 31, 1998. Amounts owed under this note are payable in
November 1999. The Company settled these amounts in 1999 by offsetting amounts
due against certain accounts receivable owed to the Company by the corporation........ 626,277 -
Note payable to a corporation, secured by an automobile, due in monthly installments
of $485, (principal and interest) to July 2001, with an interest rate of 8.15
percent............................................................................... 13,511 9,038
Note payable to a corporation, secured by equipment, due in monthly installments
of $347 (principal and interest) to February 2000, with an interest rate of 24
percent............................................................................... 4,191 1,321
------------- -----------
1,920,729 1,943,692
Less - Current portion.................................................................. 1,911,057 965,388
------------- -----------
$ 9,672 $ 978,304
============= ===========
</TABLE>
F-10
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future annual principal payments on long-term debt at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000......................................... $ 965,388
2001......................................... 603,304
2002......................................... 375,000
-------------
$ 1,943,692
============
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company leases equipment and facilities under noncancelable operating and
capital leases. As of December 31, 1999, the annual minimum lease commitments
are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL OPERATING
------------ ------- ---------
<S> <C> <C>
2000.................................. $13,718 $ 419,652
2001.................................. 10,893 435,674
2002.................................. 9,804 424,509
2003.................................. 716 433,295
2004.................................. - 451,873
Thereafter............................ - 75,566
-------- ----------
35,131 $2,240,569
==========
Less - Amount representing interest.. 5,876
-------
29,255
Less - Current portion............... 9,828
-----
$19,427
=======
</TABLE>
Rent expense for the years ended December 31, 1998 and 1999 was $449,697 and
$376,423, respectively.
The Company neither manufacturers nor repairs aircraft parts and requires that
all of the parts that it sells are properly documented and traceable to their
original source. Although the Company has never been subject to product
liability claims, there is no guarantee that the Company would not be subject to
liability from its potential exposure relating to faulty aircraft parts in the
future. The Company maintains liability insurance to protect from such claims,
but there can be no assurance that such coverage will be adequate to fully
protect the Company from any liabilities it might incur. A loss above the
Company's policy limit could have a material adverse effect upon the Company's
financial condition.
EMPLOYMENT CONTRACTS
The Company has contracts with certain key employees and the Company's founder.
The contracts provide for all normal employee benefits, incentive compensation
under the Executive Incentive Compensation Plan and options to purchase shares
of common stock at an option price ranging from $0.25 to $5 per share. The
agreements expire from December 31, 2001 to December 31, 2002. All but one
contract will automatically renew for additional terms ranging from three to
five years unless cancelled upon 90 days written notice.
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.
F-11
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 included 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, contributed 130,000 shares. The Company recorded a legal settlement
expense for the year ended December 31, 1997 of $620,000, of which $480,000 was
attributable to the expected issuance of 80,000 shares of common stock and
$140,000 of which represented the Company's portion of the cash consideration.
The Federal Court approved this settlement agreement on March 15, 1999 and the
80,000 shares of common stock were issued to the plaintiffs in 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.
NOTE 9 - CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Substantially all of the Company's sales are to airlines, other aircraft
operators and other aircraft parts suppliers. Credit risk with respect to trade
accounts receivable is generally diversified due to the large number of
customers and their dispersion worldwide. The Company also performs credit
evaluations on its customers throughout the year.
The Company distributes products in the United States and abroad to commercial
airlines, air cargo carriers, distributors, maintenance facilities and other
aerospace companies. The Company's credit risk consists of accounts receivable
denominated in U.S. dollars from customers in the aircraft industry. The Company
performs periodic credit evaluations of its customers' financial condition and
provides an allowance for doubtful accounts as required. The Company has
purchased insurance to reduce the risk of collection of a portion of amounts
receivable from qualifying foreign customers. The Company, at times, offers
extended payments terms.
For the years ended December 31, 1998 and 1999, activity with respect to the
Company's allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1998 1999
------------------------ ---- ----
<S> <C> <C>
Beginning balance............................ $ 300,000 $ 620,000
Charged to expense........................... 828,504 214,976
Amounts written off.......................... (508,504) (584,976)
--------- -----------
Ending balance............................... $ 620,000 $ 250,000
========= ==========
</TABLE>
F-12
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - INCOME TAXES:
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Current:
Federal......................................... $ 50,000 $(44,402)
State........................................... 37,000 (38,475)
--------- --------
87,000 (82,877)
--------- --------
Deferred:
Federal......................................... 159,000 -
State........................................... 41,000 -
--------- --------
200,000 -
--------- --------
$ 287,000 $(82,877)
========= ========
</TABLE>
The reconciliation of income tax expense computed at the U.S. Federal statutory
rate to income tax expense is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Tax at U.S. Federal statutory rates................ $ (1,873,000) $ (636,653)
State income taxes, net of federal effect.......... (331,000) (114,223)
Change in valuation allowance...................... 2,310,000 694,397
Permanent differences.............................. 20,000 47,926
Other, net......................................... 161,000 (74,324)
------------ ---------
$ 287,000 $ (82,877)
========= =========
</TABLE>
Deferred income taxes arise as a result of differences in the methods used to
determine income for financial reporting versus income for tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Depreciation....................................... $ (101,000) $ (101,000)
---------- ----------
Gross deferred tax liabilities................... (101,000) (101,000)
---------- ----------
Inventory reserve.................................. 59,000 87,000
Allowance for doubtful accounts.................... 249,000 107,000
Operating accruals and capitalized inventory costs. 252,000 342,000
Legal settlement................................... 256,000 -
Net operating loss carryforwards................... 2,218,000 3,175,000
---------- ----------
Gross deferred tax assets........................ 3,034,000 3,711,000
---------- ----------
Deferred tax assets valuation allowance.......... (2,933,000) 3,610,000
---------- ----------
$ - $ -
=========== =========
</TABLE>
The Company has federal and state net operating loss carryforwards of
approximately $2,835,000 and $340,000, respectively, which expire between years
2001 and 2014.
F-13
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCK BASED COMPENSATION PLANS
In July 1996 the Company adopted the Aviation Distributors, Inc. 1996 Stock
Option and Incentive Plan (the "Plan"). This plan provides for the granting
of incentive or non-qualified stock options to employees, non-employee
directors and independent contractors at the sole discretion of the board of
directors. Stock appreciation rights, as defined, may accompany options
issued under the Plan. Additionally, the Plan provides for the issuance of
restricted stock, dividend equivalents and other stock and cash based awards
and loans to participants in connection with the options or other plan
provisions at the discretion of the board of directors. Options currently
outstanding become exercisable in zero to four years from the grant date and
expire 10 years after the grant date. The options are exercisable at not less
than the market value of the Company's stock on the date of the grant. The
initial number of shares available under the Plan for issuance was 264,500. A
total of 932,500 non-qualified options have been granted outside the Plan
since the Plan's inception. The board of directors has approved an amendment
to the Plan to increase the allowable shares under the Plan to 1,000,000
shares, subject to shareholder approval at the annual shareholders meeting
during 2000.
Stock option activity for years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1997............................ 163,400 $ 5.00
Granted..................................................... 80,000 5.00
Forfeited................................................... (12,700) 5.00
---------- ------
Outstanding at December 31, 1998............................ 230,700 5.00
Granted..................................................... 1,619,000 0.85
Exercised................................................... (142,500) 0.25
Forfeited................................................... (33,650) 5.00
---------- ------
Outstanding at December 31, 1999............................ 1,673,550 $ 1.39
========== ======
</TABLE>
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Number of options exercisable at year end.................. 97,542 475,964
Weighted average exercise price of options
exercisable at year end............................... $ 5.00 $ 1.51
Weighted average fair value of options granted
during the year....................................... $ 2.13 $ 0.60
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: dividend yield of 0
percent for all years; expected volatility of 133 and 52 percent; risk-free
interest rates of 6.0 and 5.5 percent; and expected lives of one to nine years.
During 1999, the Company issued 142,500 options to non-employees at an exercise
price of $0.25. All of these options were exercised in 1999. The options issued
to non-employees are included in the above stock option table, but excluded from
the calculation of pro forma compensation expense below.
F-14
<PAGE>
AVIATION DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information regarding options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Life Exercise Price Exercisable Exercise Price
----------- --------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.25 350,000 10.0 $ 0.25 350,000 $ 0.25
$ 1.00 - $ 1.22 1,126,500 9.7 1.12 - -
$ 5.00 197,050 7.4 5.00 125,964 5.00
----------- ------------ -------------- ------------ -----------
1,673,550 9.5 $ 1.39 475,964 $ 1.51
=========== ============ ============== ============ ===========
</TABLE>
Had compensation cost been determined based on the basis of fair value pursuant
to Statement of Financial Accounting Standards 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123), the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Net loss
As reported $ 1,789,628 $ 5,795,722
Pro forma $ 2,095,011 $ 5,891,850
Diluted loss per share
As reported $ 0.56 $ 1.85
Pro forma $ 0.65 $ 1.88
</TABLE>
NOTE 12 - EXTRAORDINARY ITEM
During 1999, the Company negotiated a reduction in payables to certain vendors.
Three of the vendors either were granted stock options or warrants (total of
182,500) in connection with the forgiveness of the payables. The Company
recorded an extraordinary gain in connection with this debt forgiveness of
$242,460 which is net of the value of the options/warrants issued to the vendors
($42,250), as determined by the Black Scholes Option - Pricing Model.
F-15
<PAGE>
AVIATION DISTRIBUTORS, INC.
PART III
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
<TABLE>
<CAPTION>
EXECUTIVE AGE TITLE
- --------- --- -----
<S> <C> <C>
William D. King 58 Chief Executive Officer, Chairman and Director
Gary L. Joslin 62 Chief Financial Officer and Director
Osamah S. Bakhit 50 Founder, Marketing and Sales Advisor
Jeffrey G. Ward 40 Executive Vice President
Bruce H. Haglund 48 Secretary, Director, Chairman of the Audit Committee
John B. Jacobs 35 Senior Vice President
William T. Walker, Jr. 68 Director and Member of the Audit Committee
Saleem S. Naber 70 Director
</TABLE>
WILLIAM D. KING, CHIEF EXECUTIVE OFFICER, CHAIRMAN AND DIRECTOR. Mr. King
became Chief Executive Officer, Chairman and a Director of the Company in
January 2000. Prior to his involvement with the Company, Mr. King held
various executive positions from 1969 to 1994, when he retired as President
of Electrical and Mechanical groups of JWP, Inc. Mr. King holds an MBA from
Harvard University's Graduate School of Business Administration and a
Bachelor of Science degree from the University of North Carolina. Mr. King is
also a member of the Executive Committee of the Company.
GARY L. JOSLIN, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr. Joslin, who became
Chief Financial Officer and Director in April 1998, served as a management and
financial consultant prior to joining ADI. Previously, he served as a senior
financial executive in the wholesale and retail segments of the building
materials and equipment industry for companies ranging in size from $70 million
to $450 million, including Prime Source, Inc. He also served in numerous
financial positions with Wickes Companies, a multi-billion-dollar conglomerate
involved in retailing, wholesaling, and manufacturing. Mr. Joslin holds a
Bachelor of Science degree in Accounting from California State University - Long
Beach and is a licensed CPA. Mr. Joslin is also a member of the Executive
Committee of the Company.
OSAMAH S. BAKHIT, MARKETING AND SALES ADVISOR. Mr. Bakhit, the founder of the
Company, was Chief Executive Officer, President, Chairman and a Director of the
Company from its inception until his resignation as an officer and Director of
the Company in November 1997. He is no longer an executive officer of the
Company, but consults with the Company on a full-time basis as a marketing and
sales advisor. Mr. Bakhit has over 16 years of aircraft experience. Prior to
forming the Company in 1988, Mr. Bakhit was CEO of Bakhit Enterprises, a company
that purchased heavy construction vehicles and material for General Enterprise
Company. Mr. Bakhit worked for General Enterprise Company in Amman, Jordan,
where he managed overall construction operations. His duties included
supervising the construction of Queen Alia International Airport in Jordan. Mr.
Bakhit attended the University of California, Irvine.
JEFFREY G. WARD, EXECUTIVE VICE PRESIDENT. Mr. Ward has over 16 years of
aircraft experience and currently oversees and lends leadership to the extensive
sales team at ADI. Prior to joining the Company in 1993, Mr. Ward was a sales
representative for System Industries. He was a sales consultant to the aerospace
industry with key accounts including the U.S. military and major aerospace
manufacturers. Prior to System Industries, Mr. Ward was a sales representative
for Eastman Kodak Company. Mr. Ward also served in the United States Marine
Corps for seven years as a naval aviator. Mr. Ward has a B.A. in Economics and
German from the University of Virginia.
BRUCE H. HAGLUND, SECRETARY AND DIRECTOR. Mr. Haglund has served as General
Counsel of the Company since 1992 and has served as Secretary and a director of
the Company from June 1996 to present. He has served as a Director of the
Company since 1989. Mr. Haglund is a principal in the law firm of Gibson,
Haglund & Paulsen in Orange County, California where he has been engaged in the
private practice of law since 1980. He is also a member of the Boards of
Directors of Metalclad Corporation, HydroMaid International, Inc., Renaissance
Golf Products, Inc. and VitriSeal, Inc. Mr. Haglund has a J.D. from the
University of Utah College of Law. Mr. Haglund is also the Chairman of the Audit
Committee of the Board and a member of the Executive Committee of the Company.
11
<PAGE>
JOHN B. JACOBS, SENIOR VICE PRESIDENT. Mr. Jacobs has over 11 years of
management experience in aircraft material sales and leasing. Prior to joining
the Company in July 1999, he was vice president of Airmotive, Inc., an
international aircraft parts redistributor, where he held various sales
positions for over nine years. He has been active in the aircraft industry since
1988. Mr. Jacobs oversees sales, marketing and operations for the company. Mr.
Jacobs holds a Bachelor of Arts degree in International Marketing and Management
from California State University, Fullerton.
WILLIAM T. WALKER, JR., DIRECTOR. Mr. Walker became a director of the Company in
March 1997. Mr. Walker founded Walker Associates, a corporate finance consulting
firm for investment banking, in 1985 and has participated in or been
instrumental in completing over $250 million in public and private offerings
since its inception. Prior to forming Walker Associates, Mr. Walker served as
executive Vice President, Manager of Investment Banking, Member of the Board and
Executive Committee and Chairman of the Underwriting Committee for Bateman
Eichler Hill Richards, a New York Stock Exchange Member firm. Mr. Walker is also
a member of the Board of Directors of Fortune Petroleum Corporation and
Go-Video, Inc., both public companies traded on the American Stock Exchange. Mr.
Walker attended Stanford University. Mr. Walker is also a member of the Audit
Committee of the Board.
SALEEM S. NABER, DIRECTOR. Mr. Naber, who became Chief Executive Officer,
President and a Director of the Company in April 1998. Mr. Naber resigned as an
officer of the Company in January 2000 and is now exclusively a Director of the
Company. Mr. Naber has over 40 years of experience in the aerospace industry,
primarily with Lucas Aerospace and Western Gear Corporation, acquired by Lucas
in 1988. His responsibilities with Lucas ranged from Design Engineer of
Precision Products to President of Lucas Western, Inc., the $400 million U.S.
division of Lucas. Mr. Naber's most recent post before joining the Company was
Managing Director of Lucas Aerospace, Aircraft Systems Division, the position he
held when he resigned in 1996. Mr. Naber received a Bachelor of Science degree
in Electrical Engineering from the University of California - Berkeley and
pursued post-graduate courses at the University of Southern California and the
University of California, Los Angeles. Mr. Naber is also a member of the Audit
Committee.
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act requires the Company's officers,
Directors, and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the SEC and NASDA. Officers, Directors, and greater than 10%
beneficial owners are required by SEC regulation to furnish the Company with
copies of all Section 16 (a) forms they file. The Company believes that all
filing requirements were complied with applicable to its Officers, Directors,
and greater than 10% beneficial owners.
ITEM 9. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1999 Proxy Statement.
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 1999
Proxy Statement.
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 1999 Proxy Statement.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-KSB:
1. Financial Statements for the periods ended December 31, 1998 and
1999:
Independent Auditors' Reports
12
<PAGE>
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
2. Exhibits
The following exhibits are being filed with this Annual Report on Form 10-KSB
and/or are incorporated by reference therein in accordance with the designated
footnote references:
<TABLE>
<CAPTION>
<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, 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
Aviation 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 Amendment dated December 15, 1999 between the Company and GMAC Commercial Credit LLC to June 25, 1997 Credit and
Security Agreement between the Company and BNY Financial Corporation, including related Common Stock Purchase
Warrant for 335,362 shares dated February 28, 2000 issued to GMAC Commercial Credit LLC.
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 January 5, 2000, by and between William D. King and Aviation
Distributors, Inc.
10.8 Employment Agreement, dated as of July 16, 1996, by and between Jeffrey G. Ward and Aviation
Distributors, Inc. (1)
10.9 Amendment to Employment Agreement, dated November 17, 1997, by and between Osamah S. Bakhit and Aviation
Distributors, Inc. (3)
10.10 Amendment to Employment Agreement, dated November 17, 1997, by and between Mark W. Ashton and Aviation
Distributors, Inc. (3)
10.11 Lease, dated as of July 9, 1997, by and between Olen Properties Corp. and Aviation Distributors, Inc. (3)
10.12 Amended and Restated Promissory Note from Osamah S. Bakhit to Aviation Distributors, Inc., dated as of
December 31, 1995. (1)
10.13 Settlement Agreement dated as of November 1, 1996. (1)
10.14 Form of Indemnity Agreement. (1)
10.15 Promissory Note between Aviation Distributors, Inc. and Osamah S. Bakhit, dated December 31, 1996. (1)
10.16 Employment Agreement dated as of June 1, 1998 by and between Gary L. Joslin and Aviation Distributors, Inc.
</TABLE>
(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 Form 10-KSB dated April 20, 1998.
(b) Reports on Form 8-K.
None
13
<PAGE>
SUPPLEMENTAL INFORMATION
An annual report and an information statement shall be furnished to the security
holders of the Company subsequent to the filing of this Form 10-KSB. The Company
shall furnish copies of the annual report to security holders and the proxy
statement to the Securities and Exchange Commission when it is sent to the
security holder.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AVIATION DISTRIBUTORS, INC.
By: /s/ William D. King
----------------------------------
William D. King
Chief Executive Officer
Date: April 11, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ William D. King Chief Executive Officer April 11, 2000
- --------------------------------- Chairman and Director
William D. King (Principal Executive Officer)
/s/ Gary L. Joslin Chief Financial Officer April 11, 2000
- --------------------------------- and Director (Principal
Gary L. Joslin Accounting Officer)
/s/ Bruce H. Haglund Director April 11, 2000
- ---------------------------------
Bruce H. Haglund
</TABLE>
15
<PAGE>
GMAC
Commercial Credit LLC
1290 Avenue of the Americas, New York, NY 10104
212-408-7000
December 15, 1999
VIA FIRST CLASS MAIL
Aviation Distributors, Inc.
One Capital Drive
Lake Forest, California 92630-2203
Ladies and Gentlemen:
Reference is hereby made to a certain Credit and Security Agreement dated
as of June 25, 1997, as supplemented and/or amended (the "Agreement"), by and
between GMAC Commercial Credit, LLC (successor in interest to BNY Financial
Corporation) and you.
You have requested and we are willing to amend certain terms and conditions
of the Agreement. Accordingly, the Agreement is hereby amended as follows:
1. The text of the definition of "Loans" is deleted from Section 1(A) of
the Agreement in its entirety and the following text is inserted in
its place and stead:
"'Loans' means the Revolving Credit Advances, Term Loan and all other
extensions of credit hereunder."
2. The text of the definition of "Maximum Loan Amount" is deleted from
Section 1(A) of the Agreement in its entirety and the following text
is inserted in its place and stead:
"'Maximum Loan Amount' means Twenty-one Million Dollars ($21,000,000)."
3. The following definitions are hereby added to Section 1(A) in their
appropriate alphabetical order.
"'TERM LOAN' shall have the meaning set forth in Section 2(k)."
"TERM LOAN MATURITY DATE' means December 1, 2002."
<PAGE>
"'TERM LOAN NOTE' shall have the meaning set forth in Section 2(k)."
"'TERM LOAN RATE' means an interest rate per annum equal to the (i)
Alternative Base Rate plus (ii) two percent (2.0%)."
4. Section 2 of the Agreement is hereby amended by adding a new
subsection (k) as follows:
"(k) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Lender, in its discretion, will make a term loan to
Borrower in the sum of One Million ($1,000,000) Dollars ("Term Loan") which
shall be evidenced by and subject to the terms and conditions set forth in a
secured promissory note in evidencing such Term Loan ("Term Loan Note")."
5. Section 5 of the Agreement is hereby amended by adding a new
subsection (a)(iv):
"Amounts due under the Term Loan shall be payable as follows:
(1) Beginning on December 1, 2000, and on the first day of each three
month quarterly period thereafter, until the Term Loan Maturity
Date, Borrower shall make quarterly payments of principal each in
the amount of One Hundred and Twenty-Five Thousand ($125,000.00)
Dollars; and
(2) Beginning on January 1, 2000 and continuing on the same day of
each month thereafter until the Term Loan is paid in full,
Borrower shall make monthly payments of interest from time to
time on the outstanding principal balance of the Term Loan.
Subject to acceleration upon the occurrence of an Event of Default
hereunder or termination of this Agreement."
6. Section 12 of the Agreement is hereby amended by adding a new
subsection (bb):
"(bb) Borrower shall only use the proceeds of the Term Loan first, to
pay any amounts due under the Revolving Credit Facility in excess of the formula
amount and second, for general working capital purposes."
For purposes of clarification by letter amendment to the Agreement
dated September 8, 1997 a section "2(d)" was added to the Agreement. This
confirms that said section did not, and was not intended to replace the section
2(d) which existed and continues to exist in the Agreement
<PAGE>
and the original section 2(d) of the Agreement shall nunc pro tunc appear and be
referred to as section "2(j)" in the Agreement.
All other provisions of the Agreement remain in full force and effect
in accordance with the original terms except as amended hereby. You hereby
confirm the Agreement as amended hereby as being your valid and binding
Agreement enforceable in accordance with its terms, as amended hereby and that
you have no defenses to the enforceability thereof.
If the foregoing accurately reflects your agreement with us, please so
indicate by signing a copy of this letter and returning it to our offices.
Sincerely,
GMAC Commercial Credit LLC
By:____________________________________
Its:______________________________
READ AND AGREED TO
Aviation Distributors, Inc.
By:________________________________
Its:
GMAC
Commercial Credit LLC
1280 Avenue of the Americas, New York, NY 10104
212-408-7000
February 23, 2000
Aviation Distributors, Inc.
1 Capital Drive
Lake Forest, CA 92630
Ladies/Gentlemen:
Reference is made to the Credit and Security Agreement between us dated
June 25, 1997 as supplemented and amended (the "Agreement"). Capitalized terms
not otherwise defined herein shall have such meanings as are ascribed to them
under the Agreement.
You have requested that we cancel the Shadow Warrant which you recently
granted in our favor for the cash equivalent of thirty-five percent (35%) of the
issued and outstanding stock of your company, because you have determined that
such Shadow Warrant would, among other things, tend to depress the market value
of your securities. This letter shall serve to confirm our willingness to cancel
said Shadow Warrant on the condition that:
1. you execute a Two Million Dollar ($2,000,000) Promissory Note in our
favor of even date herewith on the terms set forth in said Promissory
Note;
2. the Warrant heretofore issued by you in our favor for the equivalent
of five percent (5%) of the issued and outstanding stock of your
company be exchanged for a new warrant equal to 9.9% of the issued and
outstanding stock of your company with an exercise price of $.25 per
share on terms which are otherwise similar to the former warrant,
which warrant shall be of even date herewith;
3. the definition of the word "Term" set forth in Section 1(A) shall be
amended and restated to read in its entirety as follows:
""Term" means the closing date through and including the date
preceding the 13th anniversary of the Closing Date in the year
2010, subject to acceleration upon the occurrence of an Event of
Default hereunder or other termination hereunder."
4. by amending the fourth sentence of Section 17 of the Agreement which
shall be amended and restated in its entirety to read as follows:
<PAGE>
"For purposes hereof, Required Percentage shall mean (a) three
percent (3%) of this Agreement is terminated prior to the fourth
anniversary of the Closing Date: (b) two percent (2%) if this
Agreement is terminated on or after the fourth anniversary of the
Closing Date but prior to the fifth anniversary of the Closing
Date; (c) one percent (1%) if this Agreement is terminated on or
after the fifth anniversary of the Closing Date, but prior to the
thirteenth (13th) anniversary of the Closing Date."
By your execution of this letter in the space provided below, you agree to
execute the promissory note and the new warrant described above, and you further
agree to the effectiveness of the amendments to the Loan Agreement as are stated
in condition 3 and 4 above.
If the foregoing correctly sets forth the Agreement between us, please
execute a copy of this letter in the space provided below and return an executed
copy to our offices.
Except as hereby or heretofore modified or amended, all of the terms and
provisions of the Agreement shall continue to remain in full force and effect in
accordance with its original terms.
Very truly yours,
GMAC COMMERICAL CREDIT LLC
By:_________________________________
Title:
READ AND AGREED TO:
AVIATION DISTRIBUTORS, INC.
By:_____________________________
Title:
- 2 -
<PAGE>
PROMISSORY NOTE
$2,000,000 New York, New York, February 23, 2000
FOR VALUE RECEIVED, the undersigned, AVIATION DISTRIBUTORS, INC. (the
"Maker") hereby promises to pay to the order of GMAC COMMERCIAL CREDIT LLC (the
"Payee"), at 1290 Avenue of the Americas, New York, New York 10104 or at such
other place as may be designated in writing by the holder hereof, the principal
sum of Two Million Dollars ($2,000,000), in lawful money of the United States of
America, in one (1) installment of two Million Dollars ($2,000,000) which shall
be due on the earlier of (a) February 1, 2010 or (b) the occurrence of one of
the following: (i) termination for any reason of the Credit and Security
Agreement (the "Credit Agreement") dated June 25, 1997 between Maker and Payee
as awarded and supplemented, or (ii) a secondary capital stock offering by the
Maker, or (iii) the Maker's stock price reaching a market price of $6.00 per
share for any ten (10) consecutive day period, (iv) any change of control of the
Maker, or (v) termination of the employment of Sam Bakhit with Maker, upon the
occurrence of any of the foregoing the entire unpaid principal balance hereof,
together with all interest accrued thereon, shall be due and payable.
The Maker agrees to pay interest on the first day of each six (6) month
semi-annual period (each September 1 and March 1) hereafter occurring commencing
with September 1, 2000, at the same place, on the principal amount of this Note
from time to time outstanding. Interest shall be calculated for each month at
the Alternate Base Rate in effect during the previous month, as such term is
defined in the Credit Agreement. All payments received hereunder shall be
applied first to interest due and the remainder to principal. Notwithstanding
anything to the contrary contained herein, in no event shall the Maker be
required to pay interest hereunder at a rate in excess of the maximum rate
permitted by applicable law.
The Maker shall have the right to prepay this Note, at any time, in whole
or in part, without premium or penalty. Each partial prepayment shall be applied
first to accrued interest and thereafter to installments of principal in the
inverse order of their maturity.
The entire unpaid principal balance hereof together with all interest
accrued thereon shall immediately become due and payable in full, without notice
or demand, in the event of: (i) default in the payment of any installment of
principal or of interest hereunder, or any renewal or extension hereof; or (ii)
default by the Maker under the Agreement, or under any other agreement between
the Maker and the Payee or executed by the Maker in favor of the Payee; or (iii)
default by the Maker or any other signatory under any additional instruments or
documents evidencing or granting collateral security for, or guaranteeing any of
the Obligations (as defined in the Agreement) of the Maker to the Payee (all
such additional instruments and documents being hereinafter collectively
referred to as the "Collateral Documents"); or (iv) termination of the Agreement
for any reason or
<PAGE>
termination of any of the Collateral Documents without the consent of the Payee;
or (v) default by any endorser hereof under any agreement between the Payee and
such endorser; or (vi) any action being taken by or against any endorser hereof
or any guarantor of the Obligations, which, if taken by or against the Maker,
would constitute a default under the Agreement. The failure to assert this right
shall not be deemed a waiver thereof.
After maturity (by acceleration or otherwise), this Note shall continue to
bear interest at the rate provided for herein until it is paid in full. If this
Note is placed with an attorney for collection, the Maker agrees to pay all
costs and expenses of collection, including reasonable attorneys' fees, which
shall be added to the principal amount due hereunder.
The Maker and each endorser of this Note, if any, hereby waive presentment
for payment, demand, protest, notice of protest and notice of dishonor hereof
and each endorser agrees to all of the terms and conditions hereof and
guarantees the payment of this Note at maturity.
The holder may extend the time of payment of this Note, postpone the
enforcement hereof, grant any other indulgences and/or add or release and
collateral for the Obligations of any party primarily or secondarily liable
hereon without affecting or diminishing the holder's right or recourse against
the Maker and endorsers of this Note, which right is hereby expressly reserved.
This Note evidences an Obligation and is secured by, among other things,
the security interests and liens granted to the payee under the Agreement and
the Collateral Documents.
The Note evidences a borrowing under the Agreement and under the Collateral
Documents and, subject to the specific terms hereof, is entitled to the benefits
of the Agreement and the Collateral Documents and is subject to all of the terms
and conditions thereof provided, however, that no payments on, or other proceeds
of, accounts receivable of the Maker shall be applied to reduction of the
indebtedness evidenced by this Note until all other Obligations have been paid
in full.
This Note shall be governed by, and interpreted in accordance with, the
laws of the State of New York and the Maker and endorsers hereof consent to the
jurisdiction of the Federal and State courts of such state for all purposes in
connection with this Note.
- 2 -
<PAGE>
TO THE EXTENT LEGALLY PERMISSIBLE, BOTH MAKER AND PAYEE WAIVE ALL RIGHT TO
TRAIL BY JURY IN ANY LITIGATION RELATING TO TRANSACTIONS UNDER THIS NOTE,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
AVIATION DISTRIBUTORS, INC.
By:________________________________
Title:
- 3 -
<PAGE>
AVIATION DISTRIBUTORS, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
<PAGE>
THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i)
PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE
AND IS CURRENT WITH RESPECT TO THE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON THE HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER COUNSEL
ACCEPTABLE TO THE COMANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL
APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR
LAW.
February 23, 2000
AVIATION DISTRIBUTORS, INC.
THIS WARRANT REPLACES AND SUPPLANTS IN ITS ENTIRETY ANY WARRANTS OR SHADOW
WARRANTS HERETOFORE ISSUED BY THE COMPANY IN FAVOR OF GMAC.
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged by Aviation Distributors, Inc., a Delaware corporation,
with its principal office at 1 Capital Drive, Lake Forest, California 92630 (the
"Company"), GMAC Commercial Credit LLC (the "Holder" or "GMAC"), of 1290 Avenue
of the Americas, New York, New York 10104, subject to the terms and conditions
of this Warrant, is hereby granted the right to purchase, at the initial
exercise price per share equal to $0.25 at any one or more times from the date
hereof until 5:00 p.m. on February 28, 2010, in the aggregate, Three Hundred
Thirty Five Thousand Three Hundred Sixty-Two (335,362) shares of Common Stock of
the Company, $.01 par value (the "Shares"), subject to adjustment as provided in
Section 5 hereof.
This Warrant initially is exercisable at a price of $0.25 payable in cash,
by certified or official bank check in New York Clearing House funds or other
form of payment reasonably satisfactory to the Company, subject to adjustment as
provided in Section 5 hereof.
1. Exercise of Warrant. The purchase rights represented by this Warrant are
exercisable at the option of the Holder hereof, in whole or in part, at one or
more times during any period in which this Warrant may be exercised as set forth
above. The Holder shall not be deemed to have exercised its purchase rights
hereunder until the Company receives written notice of the Holder's intent to
exercise its purchase rights hereunder along with payment for the purchased
Shares. The written notice shall be in the form of a duly executed Subscription
Form attached hereto and made a part hereof. Less than all of the Shares may be
purchased under this Warrant in which case a new Warrant representing the
unexercised portion of the Warrant will be executed and returned to Holder (or
its assigns).
- 2 -
<PAGE>
2. Issuance of Certificates. Upon the exercise of this Warrant, the
issuance of certificates for Shares underlying this Warrant which are purchased
shall be made forthwith (and in any event within ten (10) business days after
the Company's receipt of (i) written notice and payment for the purchased Shares
hereunder as specified in Section 1 above) and (ii) good funds in respect of the
Purchase Price pursuant to Section 4 hereof for the shares so exercised and such
certificates shall be issued in the name of the Holder hereof. Upon issuance,
such shares shall be deemed fully paid non-assessable shares of common stock of
the Company.
3. Restriction on Transfer and Registration Rights. Neither this Warrant
nor any Shares issuable upon exercise hereof have been registered under the
Securities Act of 1933, as amended (the "Act"), and neither may be sold or
transferred in whole or in part unless the Holder shall have first given prior
written notice to the Company describing such sale or transfer and furnished to
the Company an opinion, satisfactory to counsel for the Company as determined by
such counsel in its discretion, to the effect that the proposed sale or transfer
may be made without registration under the Act; provided, however, that the
foregoing shall not apply if there is in effect a registration statement with
respect to this Warrant or the Shares issuable upon exercise hereof, as the case
may be, at the time of the proposed sale or transfer. Upon exercise, in part or
in whole, of this Warrant, each certificate issued representing the Shares
underlying this Warrant shall bear a legend to the foregoing effect. The Holder
shall have such rights to request the Company to register all or any of the
Shares issuable upon exercise of this Warrant as set forth in Annex B hereto
(the "Registration Rights") subject to the terms of Annex B.
4. Price.
4.1 Initial and Adjusted Purchase Price. The initial Purchase Price per
share shall be equal to $0.25. The adjusted Purchase Price shall be the price
which shall result from time to time from any and all adjustments of the initial
purchase price in accordance with the provisions of Section 5. hereof.
4.2 Purchase Price. The term "Purchase Price" herein shall mean the initial
purchase price of the adjusted purchase price, as the case may be.
5. Adjustments of Purchase Price and Number of Shares. The Shares subject
to this Warrant and the Purchase Price thereof shall be appropriately adjusted
by the Company in accordance with the Statement of Rights to Warrants included
in Annex A hereto.
6. Replacement of Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and, in case of such loss, theft, destruction or mutilation, of
indemnity or security reasonably satisfactory to it in its sole discretion, and
reimbursement to the Company of all expenses incidental or relating thereto, and
upon surrender and cancellation of this Warrant (unless lost, stolen or
destroyed), the Company will make and deliver a new Warrant of like tenor, in
lieu of this Warrant.
- 3 -
<PAGE>
7. Notice to Warrant Holder. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof prior to exercise of this Warrant
the right to vote or to consent as a shareholder in respect of any meetings of
shareholders for the election of directors or any other matter, or as having any
rights whatsoever as a shareholder of the Company. The Company shall, however,
during the term of this warrant supply GMAC with copies of all filings made with
the SEC under the Securities Exchange Act of 1934, as amended and of all
documents delivered to stockholders of the Company.
8. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of this Warrant, to the address of
such Holder as shown on the books of the Company.
(b) If to the Company, to the address set forth on the first page of
this Warrant or to such other address as the Company may designate by
notice to the Holder.
9. Successors. All the agreements contained in this Warrant shall bind the
parties hereto and their respective heirs, executors, administrators,
distributees, permitted successors and assigns. The Holder may assign this
Warrant without the Company's prior written consent provided that the Holder
complies with the provisions of this agreement and applicable securities laws.
Any attempted assignment in violation of the preceding sentence shall be void
and of no effect.
10. Headings. The headings in this Warrant are inserted for purposes of
convenience only and shall have no substantive effect.
11. Law Governing. This Warrant is delivered in the State of New York and
shall be construed and enforced in accordance with, and governed by, the laws of
the State of Delaware, without giving effect to conflicts of law principles.
12. The Company hereby represents and warrants to the Holder hereof, that
it has the requisite power and authority to execute this Warrant and that this
Warrant has been executed by the Company and such execution has been fully
authorized by its Board of Directors.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
corporate name by, and such signature to be attested to by, a duly authorized
officer as of the date first above written.
AVIATION DISTRIBUTORS, INC.
By:_____________________________
Its:
- 4 -
<PAGE>
ANNEX A
STATEMENT OF RIGHTS TO WARRANTS
AND
FORMS OF SUBSCRIPTION AND ASSIGNMENT
(a) Adjustment to Purchase Price and Number of Shares. In case, prior to
the expiration of this Warrant by exercise or by its terms, the Company shall
issue any shares of its Common Stock as a stock dividend or subdivide the number
of outstanding shares of its Common Stock into a greater number of shares, then
in either of such cases, the then applicable Purchase Price per share of the
shares of Common Stock purchasable pursuant to this Warrant in effect at the
time of such action shall be proportionately reduced and the number of shares at
that time purchasable pursuant to this Warrant shall be proportionately
increased; and conversely, in the event the Company shall contract the number of
outstanding shares of Common Stock by combining such shares into a smaller
number of shares, then, in such case, the then applicable Purchase Price per
share of the shares of Common Stock purchasable pursuant to this Warrant in
effect at the time of such action shall be proportionately increased and the
number of shares of Common Stock purchasable pursuant to this Warrant shall be
proportionately decreased. If the Company shall, at any time during the term of
this Warrant, declare a dividend payable in cash on its Common Stock and shall,
at substantially the same time, offer to its stockholders a right to purchase
new Common Stock from the proceeds of such dividend or for an amount
substantially equal to the dividend, all Common Stock so issued shall, for the
purpose of this Warrant, be deemed to have been issued as a stock dividend. Any
dividend paid or distributed upon the Common Stock shall be treated as a
dividend paid in Common Stock to the extent that shares of Common Stock are
issuable upon conversion thereof.
(b) Purchase Price Reset Provision. In the event that prior to the
expiration of this Warrant the Company sells publicly or privately (i) shares of
its Common Stock, (ii) securities convertible into shares of its Common Stock,
or (iii) options or warrants to purchase shares of its Common Stock or
securities convertible into shares of its Common Stock at a sale, conversion or
exercise price per share (the "Issue Price"), as the case may be, less than the
Purchase Price then in effect, the Purchase Price shall be reset to the Issue
Price and the number of shares purchasable pursuant to this Warrant shall be
increased pro rata to the percentage reduction in the Purchase Price, provided,
however, that the number of shares purchasable shall not exceed nine and
nine-tenths percent (9.9%) of the then outstanding shares of Common Stock of the
Company after giving effect to the exercise or conversion of any outstanding
options warrants or convertible securities and provided further that the reset
provision shall not apply to
(i) any shares issued upon exercise or conversion of any currently
outstanding options, warrants or convertible securities,
(ii) any Common Stock options or warrant issuable pursuant to an employee
stock option plan or other compensation arrangement or any underlying Common
Stock issued on the exercise thereof, or
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<PAGE>
(iii) one or more sales of any such securities which in the aggregate do
not equal 5% or more than the currently outstanding shares of Common Stock after
giving effect to the conversion or the exercise of all such securities.
The Issue Price shall be calculated taking into account the amount paid for
the issuance of such Common Stock, option or warrant or convertible security and
the amount, if any, payable upon the exercise of conversion thereof.
(c) Recapitalization. In case, prior to the expiration of this Warrant by
exercise or by its terms, the Company shall be recapitalized by reclassifying
its outstanding Common Stock, (other than a change in par value to no par
value), or the Company or a successor corporation shall consolidate or merge
with or convey all or substantially all of its or of any successor corporation's
property and assets to any other corporation or corporations (any such other
corporations being included within the means of the term "successor corporation"
hereinbefore used in the event of any consolidation or merger of any such other
corporation with, or the sale of all or substantially all of the property of any
such other corporation to, another corporation or corporations), the Holder of
this Warrant shall receive thirty (30) days' prior written notice of any such
action and then, as a condition of such recapitalization, consolidation, merger
or conveyance, lawful and adequate provision shall be made whereby the Holder of
this Warrant shall thereafter have the right to purchase, upon the basis and on
the terms and conditions specified in this Warrant, in lieu of the Shares of
Common Stock of the Company theretofore purchasable upon the exercise of this
Warrant, such shares of stock, securities, property or assets of the other
corporation (including, without limitation, cash) as to which the Holder of this
Warrant would have been entitled had this Warrant been exercised immediately
prior to such recapitalization, consolidation, merger or conveyance; and in any
such event, the rights of the Warrant Holder to any adjustment in the number of
Shares of Common Stock purchasable upon the exercise of this Warrant, as
hereinbefore provided, shall continue and be preserved in respect of any stock
which the Warrant Holder becomes entitled to purchase.
(d) Dissolution. In case the Company at any time while this Warrant shall
remain unexpired and unexercised shall sell all or substantially all of its
property or dissolve, liquidate or wind up its affairs, lawful provision shall
be made as part of the terms of any such sale, dissolution, liquidation or
winding up, so that the Holder of this Warrant may thereafter receive upon
exercise hereof in lieu of each Share of Common Stock of the Company which it
would have been entitled to receive, the same kind and amount of any securities
or assets as may be issuable, distributable or payable upon any such sale,
dissolution, liquidation or winding up with respect to each share of Common
Stock of the Company; provided, however, that in any case of any such sale or of
dissolution, liquidation or winding up, the right to exercise this Warrant shall
terminate on a date fixed by the Company. Such date so fixed shall be no earlier
than 3 P.M. New York City Time, on the forty-fifth (45th) day next succeeding
the date on which notice of such termination of the right to exercise this
Warrant has been given by mail to the registered Holder of this Warrant at its
address as it appears on the books of the Company.
(e) No fractional Shares. Upon any exercise of this Warrant by the Warrant
Holder, the Company shall not be required to deliver fractions of one share, but
adjustment in the Purchase
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Price payable by the Warrant Holder shall be made in respect of any such
fraction of one Share on the basis of the Purchase Price per share then
applicable upon exercise of this Warrant.
(f) Notices. In the event that, prior to the expiration of this Warrant by
exercise or by its terms, the Company shall determine to take a record of its
stockholders for the purpose of determining stockholders entitled to receive any
dividend, stock dividend, distribution or other right that whether or not it may
cause any change or adjustment in the number, amount, price or nature of the
securities or assets deliverable upon the exercise of this Warrant pursuant to
the foregoing provisions, the Company shall give at least ten (10) days' prior
written notice to the effect that it intends to take such record to the
registered Holder of this Warrant at its address as it appears on the books of
the Company, said notice to specify the date as of which such record is to be
taken, the purpose for which such record is to be taken, and the effect which
the action which may be taken will have upon this Warrant.
(g) Registered Owner. The Company may deem and treat the registered Holder
of the Warrant at any time as the absolute owner hereof for all purposes, and
shall not be affected by any notice to the contrary.
(h) Status. This Warrant shall not entitle any Holder hereof to any of the
rights of a stockholder, and shall not entitle any Holder hereof to any
dividend declared upon the Common Stock unless the Holder shall have exercised
the within Warrant and purchased the Shares of Common Stock prior to the record
date fixed by the Board of Directors for the determination of Holders of Common
Stock entitled to exercise any such rights to receive said dividend.
(i) No Adjustment for Small Amounts. Anything in the Statement of Rights to
Warrants to the contrary notwithstanding, the Company shall not be required to
give effect to any adjustment in the Purchase Price unless and until the net
effect of one or more adjustments, determined as above provided, shall have
required a change of the Purchase Price by at least ten cents, but when the
cumulative net effect of more than one adjustment so determined shall be to
change the actual Purchase Price by at least ten cents, such change in the
Purchase Price shall thereupon be given effect.
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ASSIGNMENT
(To Be Executed By the Registered Holder to Effect a Transfer to the Within
Warrant)
FOR VALUE RECEIVED ____________________________________ hereby sells, assigns
and transfers unto (Name) ____________________________________________ (Address)
______________________________ the right to purchase Common Stock evidenced by
the within Warrant, to the extent of shares of Common Stock, and does hereby
irrevocably constitute and appoint ___________________________________________
to transfer the said right on the books of the Company, with full power of
substitution.
Date: _________________, 2000.
___________________________
(Signature)
NOTICE: The signature to this assignment must correspond with the name as
written upon
the case of the within Warrant in every particular, without alteration
or enlargement, or any change whatsoever and must be guaranteed by a
bank, other than a savings bank or trust company, having an office or
correspondent in New York, or by a firm having membership on a
registered national securities exchange and an office in New York, New
York.
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Aviation Distributors, Inc.
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, shares of Common Stock of Aviation Distributors, Inc. and
herewith makes payment of $ therefor, and requests that the certificate or
certificates for such shares be issued in the name of and delivered to the
undersigned.
Dated: _________________
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrants)
(Address)
Insert here the maximum number of shares or, in the case of a partial exercise,
the portions hereof as to which the Warrant is being exercised.
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ANNEX B
REGISTRATION RIGHTS
(a) If, at any time prior to February 28, 2010, the Company proposes to
register any of its securities under the Securities Act of 1933 (the "Securities
Act") (other than securities to be issued pursuant to a stock option or other
employee benefit or similar plan or in connection with a transaction
contemplated by Rule 145 under the Securities Act, the Company shall, promptly
give written notice (the "Registration Notice") to Holder of the Company's
intention to effect such registration. The Company also agrees that on two
occasions it will deliver such a Registration Notice to Holder within 30 days of
its receipt of a written demand from Holder for a Registration Notice. If,
within 15 days after receipt of such Registration Notice, Holder submits a
written request to the Company specifying the number of shares of Common Stock
which it will receive upon exercise of the Warrant and which it proposes to sell
or otherwise dispose of (the "Subject Stock") the Company shall include the
Subject Stock in such registration statement. Notwithstanding anything herein to
the contrary GMAC shall not be entitled to require the Company to include the
Subject Stock in a registration statement more frequently than twice during the
term hereof. GMAC when requesting inclusion of the Subject Stock in any such
registration statement, may in its discretion delay exercise of the Warrant and
notify the Company it that will exercise its Warrant as to the Subject Stock
immediately upon the registration statement becoming effective or for delivery
upon closing of a related offering. The Company will use its reasonable best
efforts in good faith to effect promptly (but in no event later than one hundred
and twenty (120) days-after the receipt from GMAC of the request to register the
Subject Stock provided, however, that such period shall be extended for up to
sixty (60) additional days in the event-of a material development that shall
hinder the Company from effecting such registration) the registration of the
Subject Stock. The Company shall keep each registration statement covering any
Subject Stock in effect until the earlier of (i) 90 days following the
effectiveness of such registration statement (except for an underwritten
offering which is closed sooner) and maintain compliance with each applicable
federal and state law and regulation and (ii) the sale of the Subject Shares.
Notwithstanding the foregoing, if the offering of the Company's securities
pursuant to such registration statement is to be made by or through
underwriters, the Company shall not be required to include Subject Stock therein
if and to the extent that the underwriter managing the offering advises the
Company in writing that such inclusion would materially adversely affect such
offering and, in such event, the Company an delay the effectiveness of the
registration of or cause Holder to delay the sale of the Subject Stock for a
period of not more than 30 days after completion of the distribution of
securities being underwritten on behalf of the Company (but in no event for more
than 180 days after the registration statement first becomes effective) and the
Company shall thereupon promptly file such supplements and post-effective
amendments and take such other steps as may be necessary to permit Holder to
make its proposed offering following the end of such period of delay.
(b) In connection with any offering of shares of Subject Stock registered
pursuant to this Annex B the Company (i) shall furnish to Holder such number of
copies of each registration statement, each prospectus and each preliminary
prospectus, and of each amendment, and supplement to any thereof as Holder may
reasonably request in order to effect the offering and sale
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of the Subject Stock to be offered and sold, but only while the Company shall be
required under the provisions hereof to cause the registration statement to
remain current and (ii) take such action as shall be necessary to qualify the
shares covered by such registration statement under such blue sky or other state
securities law as for offer and sale as Holder shall request; provided, however,
that the Company shall not be obligated to qualify as a foreign corporation to
do business under the laws of any jurisdiction in which it shall not then be
qualified or to file any general consent to service of process in any
jurisdiction in which such a consent has not been previously filed or subject
itself to taxation in any jurisdiction in which the company is not already
subject to taxation. To the extent the Company shall enter into an underwriting
agreement (the "Agreement") with a managing underwriter or underwriters selected
by it containing representations, warranties, indemnities and agreements then
customarily included by an issuer in underwriting agreements with respect to
secondary distributions, Holder agrees as a condition to participation in such
offering to make such representations and warranties with respect to information
as to it as selling stockholder, and as to its holdings, which is furnished in
writing to the underwriter for use in the registration statement as are
customary and appropriate. In connection with any offering of Subject Stock
registered pursuant to this Annex B, the Company shall furnish to the
underwriter, at the Company's expense, unlegended certificates representing
ownership of the Subject Stock being sold in such denominations as requested and
instruct any transfer agent and registrar of the Subject Stock to release any
stop transfer orders with respect to such Subject Stock.
(c) Upon the receipt of notice from the Company to suspend sales to permit
the Company to correct or update a registration statement or prospectus, GMAC
will not (until a receipt of a notice to the contrary) effect sales of Subject
Stock included in any registration statement. The obligations of the Company
with respect to maintaining any registration statements current and effective
shall be extended by a period of days equal to the period that such suspension
is in effect.
(d) In connection with any registration pursuant to this Annex B all
expenses of registration shall be borne by the Company (unless contrary to the
federal securities laws or the laws of any state where the Subject Stock is to
be offered), provided, however, in connection with any such registration, Holder
shall be obligated to pay any and all underwriter's and/or brokers commissions,
to the extent that such commissions would not have been so incurred in the
absence of the registration of such Subject Stock. Under no circumstances shall
the Company have any liability for any fees and expenses of underwriters,
counsel, accountants or other agents of Holder relating to the subject stock
with respect to any registration statement filed pursuant hereto, including but
not limited to any out-of-pocket expenses, securities liability insurance
policies, the costs of any investigations by or on behalf of Holder of the
accuracy and completeness of such registration statement or related to the
furnishing of information by Holder in connection with such registration
statement.
(e) For a period until the earlier of (i) ninety (90) days from and after
the effective date of any registration statement filed pursuant hereto in which
any of the Subject Stock is included and (ii) the sale of the Subject Shares,
the Company shall from time to time amend or supplement the registration
statement and the prospectus used in connection therewith as may be necessary to
permit such sale and disposition and to the extent necessary in order to keep
such registration statement effective and such prospectus current under the Act
so that neither the registration
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statement nor the prospectus contains any untrue statement as to any material
fact, omits any statement necessary to make the statements contained therein not
misleading.
(f) In the case of any offering registered pursuant to this Annex B, the
Company agrees to indemnify and hold harmless Holder and each controlling person
of Holder within the meaning of Section 15 of the Securities Act, and the
directors and officers of Holder, against any and all losses, claims, damages or
liabilities to which they or any of them may become subject under the Securities
Act or any other statute or common law or otherwise, and to reimburse them from
time to time upon request, for any legal or other expenses reasonably incurred
by them in connection with investigating any claims and defending any actions,
insofar as any such losses, claims, damages, liabilities or actions shall arise
out of or shall be based upon any untrue statement or alleged untrue statement
contained in the registration statement relating to the sale of such Subject
Stock in any preliminary prospectus or in any prospectus or in any supplement or
amendment to any of the foregoing of a material fact, or the omission or alleged
omission to state therein a material fact required to be stated or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, provided, however, that the indemnification agreement
contained in this paragraph (f) shall not apply to such losses, claims, damages,
liabilities or actions which shall, arise from (i) the sale of Subject Stock if
such losses, claims, damages, liabilities or actions shall arise out of or shall
be based upon any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, if such statement or omission shall have been made
in reliance upon and in conformity with information furnished in writing to the
Company by Holder specifically for use in connection with the preparation of the
registration statement or any preliminary prospectus or prospectus contained in
the registration statement or any amendment thereof or supplement thereto; or
(ii) any actual or alleged untrue statement of a material fact or any actual or
alleged omission of a material fact required to be stated in any preliminary
prospectus if Holder sells Securities to a Person to whom there was not sent or
given, at or prior to the written confirmation of such sale, a copy of the final
prospectus or of the final prospectus as then amended or supplemented, whichever
is most recent, if the Company had previously furnished copies thereof to Holder
or its representatives and such final prospectus, as then amended or
supplemented, corrected any such misstatement or omission; or (iii) the use of
any preliminary, final or summary prospectus by or on behalf of Holder after the
Company has notified Holder that such Prospectus contains an untrue statement of
a material fact or omits to state a material fact required to be stated therein,
in the light of the circumstances under which they were made, not misleading; or
(iv) the use of any final prospectus, as amended or supplemented, by or on
behalf of Holder after such time as the obligation of the Company under this
Annex B to keep the related registration statement effective has expired; or (v)
any violation of any federal or state securities laws, rules or regulations
committed by Holder (other than any violation that arises out of or is based
upon the circumstances described above and as to which Holder would otherwise be
entitled to indemnification hereunder).
(g) In connection with any registration statement in which Holder is
participating, Holder will indemnify, to the extent permitted by law, the
Company, controlling persons of the Company under Section 15 of the Securities
Act and its directors and officers against any and all losses, claims, damages,
liabilities and expenses resulting, and to reimburse them, from time to time
upon request, for any legal or other expenses reasonably incurred by them in
connection with
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<PAGE>
investigating any claims and defending any actions, solely by reason of (I) any
untrue statement of a material fact or any omission of a material fact necessary
to make the statements therein not misleading, in the registration statement or
any prospectus or preliminary prospectus or any amendment or supplement thereto,
but only to the extent that such untrue statement is contained in, or such
omission is omitted from, information so furnished to the Company by Holder in
writing; (ii) the use of any prospectus by or on behalf of Holder (x) after the
Company has notified Holder that such prospectus contains an untrue statement of
a material fact or omits to state a material fact required to be stated therein,
in light of the circumstances under which they were made, not misleading or (y)
after such time as the obligation of the Company to keep the related
registration statement effective and current has expired; (iii) the failure to
send or deliver to a party to whom Holder sells the Securities, at or prior to
the written confirmation of sale, a copy of the final prospectus or of the final
prospectus as then amended or supplemented, whichever is most recent, if the
Company had previously furnished copies thereof to Holder or its
representatives; or (iv) any violations by Holder of any federal or state
securities law or rule or regulation thereunder (other than any violation that
arises out of or is based upon the circumstances described above and as to which
Holder is entitled to indemnification hereunder); provided, however, that Holder
shall not be liable in the aggregate for any amounts exceeding the product of
the sale price minus the exercise price per share of Subject Stock of Holder
sold in such registered offering and the number of shares of Subject Stock sold
pursuant to such registration statement or prospectus by Holder.
(h) Each party indemnified under paragraph (f) or (g) of this Annex B
shall, promptly after receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be sought
hereunder, notify the indemnifying party in writing of the commencement thereof.
The omission of any indemnified party to so notify an indemnifying party of any
such action shall not relieve the indemnifying party from any liability in
respect of such action which it may have to such indemnifies party on account of
the indemnity agreement contained in paragraph (f) or (g) of this Annex B,
unless the indemnifying party was prejudiced by such omission, and in no event
shall relieve the indemnifying party from any other liability which it may have
to such indemnified party. In case any such action shall be brought against any
indemnified party and it shall notify an indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it may desire to assume the defense thereof through counsel
satisfactory to the indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under paragraph (f) or (g) of this Annex B for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, other than reasonable costs of investigation (unless such indemnified
party reasonably objects to such assumption on the grounds that there may be
defenses available to it which are different from or in addition to such
indemnifying party in which event the indemnified party shall be reimbursed by
the indemnifying party for the expenses incurred in connection with retaining
one separate legal counsel).
(i) Nothing in paragraph (f) (g) of this Annex B shall prevent the
indemnified party from retaining counsel of its own choosing, at its own
expense, to defend or cooperate in the defense or investigation of any claim in
respect of which indemnification is available hereunder. No
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indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
(j) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as specified therein, the parties entitled
to indemnification by the terms thereof shall be entitled to contribution for
any and all losses, claims, damages, or liabilities, joint or several, and
expenses to which they may become subject, in such proportion as is appropriate
to reflect the relative fault of the parties entitled to indemnification, on the
one he and, and the indemnifying parties, on the other, in connection with the
matter out of which such losses, claims, damages, liabilities or expenses arise
or result from. In determining the amount of contribution to which the
respective parties are entitled, there shall be considered the parties' relative
knowledge and access to information concerning the matter with respect to which
the action was asserted, the opportunity to correct and prevent any statement or
omission, and any other equitable considerations appropriate under the
circumstances. The Company and each Holder agrees that it would not be equitable
if the amount of such contribution were determined by pro rata or per capita
allocations. Notwithstanding the provisions of this Section (I) the Holder shall
not be required to contribute any amount in excess of the amount by which the
net proceeds received by such Holder from the sale of its Warrants or underlying
shares of Common Stock exceeds the amount of the exercise price of the Warrants
plus any damages that such Holder has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission.
(k) Notwithstanding the foregoing, Holder shall furnish to the Company such
information regarding Holder, its intended method of distribution of the
Securities and such other information as the Company may from time to time
reasonably request for purposes of preparation of any registration statement
pursuant to this Annex B and to maintain the effectiveness of such registration
statement.
(i) At least five business days prior to any disposition of Securities
(other than pursuant to an underwritten offering) by Holder, Holder will orally
advise the Company (and promptly confirm such advise in writing) of the dates on
which such disposition is expected to commence and terminate, the number of
Securities expected to be sold, the method of disposition and such other
information as the Company may reasonably request in order to supplement the
prospectus contained in the registration statement in accordance with the rules
and regulations of the Commission. Promptly after receiving such advise, the
Company will, if necessary, (x) prepare a supplement to the prospectus based
upon such advice and file the same with the Commission pursuant to Rule 424(b)
under the Securities Act and (y), if necessary, qualify the Securities to be
sold under the Securities or blue sky laws of such jurisdiction in the United
States as Holder shall reasonably request (subject to the provision of Section
(b) of this Annex B).
(ii) Holder agrees that, upon receipt of any notice from the Company of any
event of the kind described in Section (d) of this Annex B, Holder will
forthwith discontinue disposition of the Securities pursuant to such
registration statement until receipt of copies of the supplemented or amended
prospectus contemplated by Section (d), and, if so directed by the Company, will
deliver
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to the Company all copies of the prospectus covering the Securities in its
possession at the time of receipt of such notice.
(iii) Holder shall, at any time it is engaged in a distribution of
Securities, comply with all applicable requirements of Rule M (or any successor
provisions then in force) promulgated under the Exchange Act and (x) will not
engage in any stabilization activity in connection with the securities of the
Company in contravention of such rules, (y) will distribute the Securities
solely in the manner described in the registration statement and (z) will not
bid for or purchase any securities of the Company or attempt to induce any
person to purchase any securities of the Company other than as permitted under
the Exchange Act.
(iv) Holder shall provide such information and materials, execute all such
documents and take all such other actions as the Company shall reasonably
request in order to permit the Company to comply with all applicable
requirements of law and to effect the registration of Holder's Securities.
(v) If Securities are registered for sale pursuant to Rule 415 under the
Securities Act, Holder shall cease any distribution of such shares under the
registration statement twice a year, for up to 90 days each, upon the request of
the Company if: (x) such distribution would require the public disclosure of
material non-public information concerning any transaction or negotiations
involving the Company or any of its affiliates that, in the good faith judgment
of the Company's Board of Directors (or the executive committee thereof), would
materially interfere with such transaction or negotiations, (y) such
distribution would otherwise require premature disclosure of information that,
in the good faith judgment of the Company's Board of Directors, would adversely
affect or otherwise be detrimental to the Company or (z) the Company proposes to
file a registration statement under the Securities Act for the offering and sale
of securities for its own account in an underwritten offering and the managing
underwriter therefor shall advise the Company in writing that in its opinion the
continued distribution of the Securities would adversely affect the success of
the offering of the securities proposed to be registered for the account of the
Company. The Company shall promptly notify Holder at such time as (I) such
transactions or negotiations have been otherwise publicly disclosed or
terminated, (ii) such non-public information has been publicly disclosed or
counsel to the Company has determined that such disclosure is not required due
to subsequent events or (iii) the completion of such underwritten offering.
(vi) The Company shall be entitled to postpone once a year, for a
reasonable period of time not to exceed 90 days, the filing of a registration
statement otherwise required to be prepared and filed by it pursuant to Section
(a) of this Annex B if, at the time it receives the written demand, (y) such
registration would require the public disclosure of material non-public
information concerning any transaction or negotiations involving the Company or
any affiliate that, in the opinion of counsel to the Company, is not yet
required to be publicly disclosed and the Company's Board of Directors, in good
faith, determines that such disclosure would materially interfere with such
transaction or negotiations on (z) such registration would, in good faith
judgment of the Company, otherwise required premature disclosure of information
which would adversely affect or otherwise be detrimental to the Company.
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of this 7th day of January, 2000 by and between
WILLIAM D. KING, residing at #9 Wideloop Road, Rolling Hills, California
90274-5234 ("Executive"), and AVIATION DISTRIBUTORS, INC., a California
corporation, with offices at One Capital Drive, Lake Forest, California
92630-2203 (the "Company"), for the purpose of setting forth the terms and
conditions of Executive's employment by the Company and to protect the Company's
knowledge, expertise, customer relationships and the confidential information
the Company has developed regarding clients, customers, shareholders, option
holders, employees, products, business operations and services. As of the
Effective Date (defined in Section 2 below), this Agreement supersedes any prior
understandings or agreements between Executive and the Company or any of the
Company's subsidiaries or affiliates.
The Board of Directors of the Company (the "Board") acknowledges that
Executive has been engaged by the Company since July 1, 1999 as a consultant.
The Board of Directors expects that Executive's contribution to the growth and
success of the Company as a full-time employee will be substantial. Therefore,
the Board desires to provide for the continued employment of Executive and to
make provisions in Executive's employment arrangements with the Company that the
Board has determined will encourage the continued attention and dedication to
the Company of Executive as a member of the Company's management, in the best
interest of the Company and its shareholders. Executive is willing to commit
himself to serve the Company on the terms and conditions herein provided.
In order to effect the foregoing, the Company and Executive wish to enter
into an employment agreement on the terms and conditions set forth below. In
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. TIME AND EFFORTS
1.1 Executive shall be employed as the Company's Chairman of the Board and
Chief Executive Officer and shall devote his full-time attention to the duties
and responsibilities of those offices in furtherance of the Company's business.
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1.2 In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its officers and employees generally and its Chairman of the Board
and Chief Executive Officer specifically. Executive shall report to the Board of
Directors.
1.3 Executive shall be a member of the Board of Directors during the term
of this Agreement.
1.4 Without the prior express authorization of the Board, Executive shall
not, directly or indirectly, during the term of this Agreement engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner or independent contractor, or as an officer, director, or employee
of any other corporation. This Agreement shall not be interpreted to prohibit
Executive from making passive personal investments, conducting private business
affairs, or engaging in educational or charitable activities, if those
activities do not materially interfere with the services required hereunder.
1.5 In order to induce the Company to enter into this Agreement, Executive
represents and warrants to the Company that (i) Executive is not a party or
subject to any employment agreement or arrangement with any other person, firm,
company, corporation or other business entity; and (ii) Executive is subject to
no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair Executive's right or ability to enter the employ of the Company or to
perform fully his duties and obligations pursuant to this Agreement.
1.6 Without first obtaining the written permission of the Board in each
instance, Executive will not authorize or permit the Company to engage the
services, of, or engage in any business activity with, or provide any financial
or other benefit to, any affiliate of Executive. The phrase "affiliate of
Executive" as used in this Agreement shall mean and include Executive's family
by blood or marriage (including, without limitation, parents, spouse, siblings,
children and in-laws), and any business or business entity which is directly or
indirectly owned or controlled by Executive or any member of Executive's family
or in which Executive or any member of Executive's family has any direct or
indirect financial interest whatsoever.
2. TERM
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The term of this Agreement is from December 1, 1999 (the "Effective Date")
until December 31, 2001.
3. TERMINATION
This Agreement shall be terminated upon the happening of any of the
following events:
3.1 Upon the death of Executive.
3.2 Upon the dissolution of the Company.
3.3 Whenever the Company and Executive shall mutually agree to termination.
3.4 At the option of the Company, upon written notice by the Company to
Executive, for Cause. "Cause" shall exist for such termination if Executive (i)
pleads or is found guilty of a felony involving an act of dishonesty or moral
turpitude by a court of competent jurisdiction; (ii) has engaged in serious
misconduct; (iii) has made any material misrepresentation or omission to the
Company under Section 1.5 hereof; (iv) has committed a willful, unexcused breach
of his duty in the course of Executive's employment; (v) has been guilty of
habitual neglect of Executive's duties; (vi) has usurped a corporate
opportunity, is guilty of fraudulent embezzlement of property or funds of the
Company, or committed any act of fraud or intentional misrepresentation moral
turpitude, dishonesty or other misconduct that would constitute a felony; or
(vii) has committed a material, unexcused breach of this Agreement.
3.5 At the option of Executive, upon 90 days written notice by Executive to
the Company.
3.6 If as a result of Executive's incapacity due to physical or mental
illness, Executive shall have been absent from his duties hereunder on a
full-time basis for the entire period of six consecutive months, and within 30
days after written notice of termination is given (which may occur before or
after the
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end of such six-month period) shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate Executive's employment hereunder.
3.7 Upon the expiration of the term of this Agreement, or any extension or
renewal thereof.
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4. COMPANY'S AUTHORITY
Executive agrees to observe and comply with the reasonable rules and
regulations of Company as adopted by the Board of Directors of the Company or
committee of the Board of Directors respecting performance of Executive's duties
and to carry out and perform orders, directions, and policies of Company as they
may be, from time-to-time, stated to Executive either verbally or in writing.
5. VACATION
During each calendar year of the term of this Agreement, Executive shall be
entitled four weeks of paid vacation. Executive shall be entitled to receive
payment for accrued vacation not taken during each calendar year during the term
of this Agreement or may accrue such vacation for use in a subsequent calendar
year; however Executive shall not be entitled to more than four weeks of accrued
vacation from a prior year during any calendar year.
6. CURRENT COMPENSATION
6.1 ANNUAL SALARY. For all services rendered by Executive under this
Agreement, the Company shall pay or cause to be paid to Executive, and Executive
shall accept the annual Salary and Incentive Compensation, if any, all in
accordance with the subject to the terms of this Agreement. For purposes of this
Agreement, the term "Compensation" shall mean the Annual Salary and Incentive
Compensation, if any. Executive shall be entitled to receive as current
compensation an annual salary in the amount of $120,000 per annum (hereinafter
referred to as the "Annual Salary"). References in this Agreement to "annual" or
"per annum" or "Annual" and similar phrases shall mean the twelve-month period
commencing on January 1st of each year during the term of this Agreement unless
otherwise indicated.
6.2 INCENTIVE COMPENSATION. In addition, Executive shall be entitled to
annual Incentive Compensation in accordance with the Company's Executive
Incentive Compensation Plan. The Company acknowledges the current Executive
Incentive Compensation Plan provides for the contribution of 7.5% of the
Company's earnings before taxes to a senior management bonus pool to be
allocated in accordance
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with the determination of the Board of Directors, not to exceed the contribution
of $250,000 annually. In addition, Executive shall be entitled to bonus
compensation declared at the discretion of the outside members of the Board of
Directors from time to time.
6.3 401(k) PLAN. Executive shall be entitled to participate in the
Company's 401(k) or other similar retirement benefit plan.
6.4 PAYMENTS OF CURRENT COMPENSATION. The payment of Executive's Annual
Salary shall be made in semi-monthly installments on the then prevailing paydays
of the Company. Any payment for Incentive Compensation will be made in
accordance with the Executive Incentive Compensation Plan, and payment will be
made in one lump sum concurrently with payments made to others in senior
management. All payments are subject to the customary withholding tax and other
employment taxes as required with respect to compensation paid to an employee.
6.5 PAYMENT OF COMPENSATION ON TERMINATION OTHER THAN FOR DISABILITY OR
WITHOUT CAUSE. Upon termination of Executive's employment prior to the
expiration of this Agreement, if such termination is pursuant to Section 3.1,
3.2, 3.3, 3.4, 3.5 or 3.7 hereof, Executive shall be entitled to any Annual
Salary and vacation accrued but unpaid through the date of termination of
employment. All such compensation pursuant to this Section 6.5 shall be paid
upon termination.
6.6 PAYMENT OF COMPENSATION ON TERMINATION WITHOUT CAUSE. Upon termination
of Executive's employment prior to the expiration of this Agreement without
cause, Executive shall be entitled to Annual Salary through the end of the term
of this Agreement, payable in semi-monthly installments in accordance with the
provisions of Section 6.4 above.
7. COMPENSATION ON DISABILITY
7.1 DISABILITY BENEFITS. If Executive shall become disabled, as defined in
Section 3.6, during each of the first three months after such determination of
disability during the term of this Agreement, the Company shall continue to pay
to or for the benefit of Executive the benefits provided for in Section 8.1
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and his Annual Salary hereunder, less the amount of any disability benefits
received by Executive from any source paid for or reimbursed by the Company.
Thereafter, Executive's compensation shall be reduced to reflect the reduced
performance of Executive's services. However, so long as Executive is providing
services to the Company at a reduced level pursuant to an agreement with the
Company, Executive shall be entitled to receive the benefits provided for in
Section 8.1.
7.2 In the event Executive's disability is in question, and after written
request by the Company, Executive refuses to be examined by his regularly
attending physician or if the regularly attending physician fails to submit a
report within 30 days after the examination has been requested by the Company,
the determination of disability shall be made by the Company.
8. MISCELLANEOUS BENEFITS
8.1 MEDICAL INSURANCE. Executive and his family shall be entitled to
participate in any medical, dental, vision, life, long-term disability, other
insurance or employee benefit program instituted or maintained by the Company
for the benefit of its executive employees.
8.2 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT WITHOUT CAUSE. If
Executive's employment with the Company is terminated without cause, the Company
agrees that Executive shall be entitled to continued compensation as if
Executive were still actively employed by the Company, for the remainder of the
term of this Agreement. If applicable law or the terms and conditions of such
plans do not permit Executive to be covered with respect to any benefit under
this Agreement as if Executive were still actively employed by the Company, the
Company agrees to pay Executive an amount equal to what the Company would have
paid to maintain such benefits if Executive were still employed by the Company
for the remainder of the term of this Agreement.
8.3 BUSINESS EXPENSES. Executive shall be reimbursed for all reasonable
expenses incurred by Executive in connection with Executive's attendance of
business meetings and promotion of Company business upon presentation by
Executive to the Company of an expense report and adequate records or other
documentation substantiating the expenditures, not less frequently than monthly.
Any such amounts
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disallowed as a business expense for federal or state income tax purposes shall
be deemed additional salary to Executive. The fact that the Company may not
reimburse Executive for an expense is not an indication that the Company
determined that the expense was not incurred on its behalf or in connection with
the Company's business.
8.4 AUTOMOBILE ALLOWANCE, Executive shall be entitled to an automobile
allowance of $1,500 per month to be used at his discretion for expenses relating
to lease payments for the automobile of Executive's choice, taxes, licensing
fees, insurance, and maintenance costs.
8.5 SERVICES FURNISHED, The Company shall furnish Executive with office
space, stenographic assistance and such other facilities and services as shall
be suitable to Executive's position and adequate for the performance of his
duties.
8.6 PLACE OF PERFORMANCE. In connection with Executive's employment by the
Company, Executive shall be based at the principal executive offices of the
Company, except for required travel on the Company's business to an extent
substantially consistent with present business travel obligations.
9. RESTRICTIVE COVENANTS
9.1 Executive acknowledges that (i) he has a major responsibility for the
operation, administration development and growth of the Company's business; (ii)
the Company's business is or may become national or international in scope;
(iii) his work for the Company will bring him into close contact with
confidential information of the Company and its clients; and (iv) the agreements
and covenants contained in this Section 9 are essential to protect the business
interests of the Company and that the Company would not enter this Agreement but
for such agreements and covenants. Accordingly, Executive covenants and agrees
as follows:
9.1.1 Except as otherwise provided for in this Agreement, during the
term of this Agreement and, if this Agreement is terminated for any reason other
than pursuant to Section 3.7 hereof, for two years following such date of
termination (the "Termination Period"), Executive shall not, directly or
indirectly, within any county in any state, province or other political
subdivision of the United States, or any
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other country in which the Company is conducting business as of the effective
date hereof, or as of the date of termination, compete with respect to any
services or products of the Company which are either offered or are being
developed by the Company as of either such date (the "Company's Business"); or,
without limiting the generality of the foregoing, be or become, or agree to be
or become, interested in or associated with, in any capacity (whether as a
partner, shareholder, owner, officer, director, employee, principal, agent,
creditor, trustee, consultant, co-venturer or otherwise), any individual,
corporation, Company, association, partnership, joint venture or other business
entity, which competes with Company's Business, provided, however, that
Executive may own, solely as an investment, not more than 1% of any class of
securities of any publicly held corporation traded on any national securities
exchange in the United States.
9.1.2 During the term of this Agreement and, if applicable, during the
Termination Period, Executive shall not, directly or indirectly, (i) solicit for
employment or provide services, or employ or engage the services of, any
employee of the Company who was employed by the Company at the time of
termination or any neutrals associated with the Company as of such time; (ii)
aid or agree to aid any competitor, client, or supplier of the Company in any
attempt to hire any person who shall have been employed by the Company within
the period preceding such requested aid; or (iii) induce or attempt to influence
any person or business entity who was a client or supplier of the Company during
any portion of said period to transact business with a competitor of the
Company.
9.2 Executive hereby expressly acknowledges, understands and agrees that
all documents, records, computer discs and programs, marketing and business
plans and studies, and business and financial information (collectively referred
to in this paragraph as "confidential information") relating to the Company's
business including, without limitation, the names and addresses of the Company's
clients and referral sources, all client records, files, and other client
information, all methods of marketing services, setting cases, training
programs, fee policies, and management and operating methods, whether they are
prepared in whole or in part by Executive or by any other person, are and shall
remain the exclusive property of the Company, and that all such trade secrets
are confidential, material and important to the business and financial success
of the Company, and that their disclosure or unauthorized use would seriously
and adversely affect the Company's business.
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9.3 Executive hereby expressly covenants and agrees that he will not either
directly or indirectly, do any of the following either during the term of his
employment by the Company, or at any time thereafter (or such shorter period
following termination a may be described below), except as is necessary to
perform his obligations in the course of his employment by the Company:
9.3.1 divulge, disclose or communicate to any person, Company, or
entity any of the Company's confidential information; or
9.3.2 for two years following termination of Executive's employment,
directly solicit or cooperate with others to directly solicit, any of the
clients, customers or referral sources of the Company, or neutrals associated
with the Company, for the purpose of, or in connection with, any business which
is the same or substantially similar to the Company's business; or
9.3.3 use himself, duplicate or copy any of such confidential
information; or
9.3.4 otherwise engage in unfair competition with the Company.
9.4 If Executive breaches, or threatens to commit a breach of the
Restrictive Covenants, the Company shall have the following rights and remedies,
each of which shall be enforceable, and each of which is in addition to, and not
in lieu of, any other rights and remedies available to the Company at law or in
equity:
9.4.1 Executive shall account for and pay over to the Company all
compensation, profits, and other benefits, after taxes, which inure to
Executive's benefit which are derived or received by Executive or any person or
business entity controlled by Executive resulting from any action or
transactions constituting a breach of any of the Restrictive Covenants.
9.4.2 Notwithstanding the provisions of subsection 9.4.1 above,
Executive acknowledges and agrees that in the event of a violation or
threatened violation of any of the provisions of Section 9, the Company, shall
have no adequate remedy at law and shall therefore be entitled to enforce
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each such provision by temporary or permanent injunctive or mandatory relief
obtained in any court of competent jurisdiction without the necessity of proving
damages, posting any bond or other security, and without prejudice to any other
rights and remedies which may be available at law or in equity.
9.5 If any of the Restrictive Covenants, or any part thereof, is held to be
invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such determination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
9.6 The parties hereto intend to and hereby confer jurisdiction to enforce
the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar, or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants in such other respective jurisdictions, the
above covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
10. PARTICIPATION IN STOCK AND OPTION EXECUTIVE COMPENSATION PLAN
The Company and Executive acknowledge that the Company previously agreed to
grant Executive incentive stock options to purchase 350,000 shares of Common
Stock of the Company at an exercise price of $.25 per share, all of which
options are fully vested. In addition, in connection with this Agreement,
Executive shall be granted incentive stock options to purchase 10,000 shares and
a non-statutory stock option to purchase 590,000 shares of Common Stock of the
Company at an exercise price of $1.21875 per share, 300,000 of which options
shall vest on December 31, 2000 (including 10,000 incentive stock options and
290,000 non-statutory stock options) and 300,000 of which shall vest on December
31, 2001, such
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vesting to be conditioned upon Executive being employed with the Company on such
vesting dates. In addition, if the closing price of the Company's Common Stock,
as quoted on the Nasdaq Bulletin Board (or other Nasdaq stock market market or
national stock exchange), is $7.00 or higher for 10 consecutive trading days,
all of Executive's stock options shall be immediately vested. All of Executive's
stock options referred to herein shall expire on December 31, 2009. The Company
agrees to file a registration statement covering all of the stock options
referred to herein on Form S-8 on or before April 30, 2000.
11. DISPUTE RESOLUTION
Any dispute or claim arising out of, in connection with, or in relation to
the interpretation, performance or breach of this Agreement shall be resolved by
a general reference conducted by a retired judge appointed pursuant to the
provisions of California Code of Civil Procedure Section 638(1), or any
amendment, addition or successor statute thereto. The parties intend this
general reference agreement to be specifically enforceable in accordance with
said section. If the parties cannot agree upon a specific retired judge, one
shall be appointed by the presiding judge in the county in which the matter is
to be heard, provided that the retired judge so appointed shall not be a current
or former employee or panelist of, or otherwise be associated with the Company.
12. ASSIGNMENT
This Agreement is a personal contract, and the rights, interests and
obligations of Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. Executive shall not under any circumstances have
any option or right to require payment hereunder otherwise than in accordance
with the terms hereof. Except as otherwise expressly provided herein, Executive
shall not have any power of anticipation, alienation or assignment of payments
contemplated hereunder, and all rights and benefits of Executive shall be for
the sole personal benefit of Executive, and no other person shall acquire any
right, title or interest hereunder by reason of any sale, assignment, transfer,
claim or judgment or bankruptcy proceedings against Executive; provided,
however, that in the event of Executive's death, Executive's estate, legal
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representatives or beneficiaries (as the case may be) shall have the right to
receive all of the benefits that accrued to Executive pursuant to, and in
accordance with, the terms of this Agreement.
13. SUCCESSOR
This Agreement may be assigned by the Company to any successor interest to
its business. This Agreement shall bind and inure to the benefit of the
Company's successors and assigns as well.
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14. NOTICES
All notices, requests and demands hereunder shall be in writing and
delivered by hand, by mail, or by telegram, and shall be deemed given if by hand
delivery, upon such delivery, and if by mail, 48 hours after deposit in the
United States mail, first class, registered or certified mail, postage prepaid
and properly addressed to the party at the address set forth at the beginning of
this Agreement. Any party may change its address for purposes of this paragraph
by giving the other party written notice of the new address in the manner set
forth above.
15. INVALID PROVISIONS
Invalidity or unenforceability of any particular provision of this
Agreement shall not affect the other provisions hereof, and this Agreement shall
be construed in all respects as if such invalid or unenforceable provision were
omitted.
16. AMENDMENT MODIFICATION OR REVOCATION
This Agreement may be amended, modified or revoked in whole or in part, but
only by a written instrument which specifically refers to this Agreement and
expressly states that it constitutes an amendment, modification or revocation
hereof, as the case may be, and only if such written instrument has been signed
by each of the parties to this Agreement.
17. HEADINGS
The headings in this Agreement are inserted for convenience only and are
not to be considered in construction of the provisions hereof.
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18. ENTIRE AGREEMENT
This Agreement contains the entire understanding among the parties and
supersedes any prior written or verbal agreements between them respecting the
subject matter hereof, including, without limitation, any prior verbal or
written employment agreement between Executive and the Company. Upon the
effectiveness hereof, any such prior verbal or written agreements shall
terminate.
No representations or warranties of any kind or nature relating to the
Company or its affiliates or their respective businesses, assets, liabilities,
operations, future plans or prospects have been made by or on behalf of the
Company to Executive; nor have any representations or warranties of any kind or
nature been made by Executive to the Company, except as expressly set forth in
this Agreement.
19. ATTORNEYS' FEES
If any legal action is necessary to enforce the terms and conditions of
this Agreement, the prevailing party in such action shall be entitled to recover
all costs of suit and reasonable attorneys' fees as determined by the
arbitrator.
20. FURTHER ASSURANCES
The parties shall execute such documents and take such other action as is
necessary or appropriate to effectuate the provisions of this Agreement.
21. CONTROLLING LAW
This Agreement shall be governed by the laws of the State of California.
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22. WAIVER
A waiver by either party of any of the terms and conditions hereof shall
not be construed as a general waiver by such party, and such party shall be free
to reinstate such part or clause, with or without notice to the other party.
IN WITNESS WHEREOF, the parties have executed this Agreement on January 7,
2000 at Lake Forest, California.
THE COMPANY: EXECUTIVE:
AVIATION DISTRIBUTORS, INC.
By:
--------------------------------- -------------------------------------
Its Duly Authorized Officer WILLIAM D. KING
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EXHIBIT 10.16
AVIATION DISTRIBUTORS, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of this 1st day of June, 1998 by and between GARY
L. JOSLIN, residing at 28906 Greystone, Mission Viejo, California 92692
("Executive"), and AVIATION DISTRIBUTORS, INC., a Delaware corporation, with
offices at One Capital Drive, Lake Forest, California 92630 (the "Company"), for
the purpose of setting forth the terms and conditions of Executive's employment
by the Company and to protect the Company's knowledge, expertise, customer
relationships and the confidential information the Company has developed
regarding clients, customers, shareholders, option holders, employees, products,
business operations and services. As of the Effective Date, this Agreement
supersedes any prior understandings or agreements between Executive and the
Company or any of the Company's subsidiaries or affiliates.
The Board desires to provide for the continued employment of Executive and
to make certain changes in Executive's employment arrangements with the Company
which the Board has determined will reinforce and encourage the continued
attention and dedication to the Company of Executive as a member of the
Company's management, in the best interest of the Company and its shareholders.
Executive is willing to commit himself to continue to serve the Company, on the
terms and conditions herein provided, although this Agreement may be amended at
any time by written agreement among the parties.
In order to effect the foregoing, the Company and Executive wish to enter
into an employment agreement on the terms and conditions set forth below. In
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. TIME AND EFFORTS
1.1 Executive shall be employed as the Company's Vice President - Finance
and Chief Financial Officer and shall devote his full-time attention to the
duties and responsibilities of Vice President - Finance and Chief Financial
Officer in furtherance of the Company's business. Subject to consultation with,
and the directions of, the Audit Committee or the Chief Executive Officer, as
the case may be, Executive shall have full responsibility for, and authority
over, all financial, internal control, accounting, budgeting and financial
planning matters of the Company. Executive shall have custody of the books,
records and assets of the Company and shall be responsible for the systems,
procedures and record keeping with respect to such item. The Company controller
or person performing such function, internal auditors or persons performing such
function and all financial and accounting personnel shall report directly or
indirectly to Executive, Subject to the right of the Company's independent
auditors to consult directly with the Audit Committee, Executive shall have
primary responsibility for the Company's interactions with its independent
auditors.
1.2 In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its officers and employees generally and its Vice President -
Finance and Chief
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Financial Officer specifically. Executive shall report to the Audit Committee of
the Board of Directors; however, Executive agrees to report directly to the
Chief Executive Officer of the Company if so determined by resolution of the
Board of Directors.
1.3 Executive shall be a member of the Company's Executive Committee during
the Term of this Agreement (as defined in Section 2 below).
1.4 Without the prior express authorization of the Board, Executive shall
not, directly or indirectly, during the Term of this Agreement engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner or independent contractor, or as an officer, director, or employee
of any other corporation. This Agreement shall not be interpreted to prohibit
Executive from making passive personal investments, conducting private business
affairs, or engaging in educational or charitable activities, if those
activities do not materially interfere with the services required hereunder.
Subject to the reasonable prior approval of the Board, Executive may act as a
director of any profit or non-profit corporation or other business entity, if
such activity is not inconsistent with the business of the Company.
1.5 In order to induce the Company to enter into this Agreement, Executive
represents and warrants to the Company that (i) Executive is not a party or
subject to any employment agreement or arrangement with any other person, firm,
company, corporation or other business entity; and (ii) Executive is subject to
no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair Executive's right or ability to enter the employ of the Company or to
perform fully his duties and obligations pursuant to this Agreement.
1.6 Without first obtaining the written permission of the Board in each
instance, Executive will not authorize or permit the Company to engage the
services, of, or engage in any business activity with, or provide any financial
or other benefit to, any affiliate of Executive. The phrase "affiliate of
Executive" as used in this Agreement shall mean and include Executive's family
by blood or marriage (including, without limitation, parents, spouse, siblings,
children and in-laws), and any business or business entity which is directly or
indirectly owned or controlled by Executive or any member of Executive's family
or in which Executive or any member of Executive's family has any direct or
indirect financial interest whatsoever.
2. TERM
The initial Term of this Agreement is from June 1, 1998 (the "Effective
Date") until May 31, 2001; however on each anniversary of the Effective Date,
this Agreement shall be automatically renewed for a new three-year Term from
such anniversary date unless the Company notifies Executive in writing 90 days
prior to the anniversary of the Effective Date that the Company will not be
renewing this Agreement on the next anniversary of the Effective Date, or unless
sooner terminated pursuant to Section 3. References hereinafter to the "Term" of
this Agreement shall refer to both the initial term and any extended term of
Executive's employment hereunder.
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3. TERMINATION
This Agreement shall be terminated upon the happening of any of the
following events:
3.1 Upon the death of Executive.
3.2 Whenever the Company and Executive shall mutually agree to
termination.
3.3 At the option of the Company, upon written notice by the Company to
Executive, for Cause. "Cause" shall exist for such termination if Executive (i)
pleads or is found guilty of a felony involving an act of dishonesty or moral
turpitude by a court of competent jurisdiction; (ii) has engaged in serious
misconduct; (iii) has made any material misrepresentation or omission to the
Company under Section 1.5 hereof; (iv) has committed an unexcused material
breach of his duty in the course of Executive's employment; (v) has been guilty
of habitual neglect of his duties; (vi) has usurped a corporate opportunity, is
guilty of fraudulent embezzlement of property or funds of the Company, or
committed any act of fraud or intentional misrepresentation moral turpitude,
dishonesty or other misconduct that would constitute a felony; or (vii) has
committed a material, unexcused breach of this Agreement.
3.4 The Company may terminate Executive's employment under this Agreement
at any time without Cause, subject to provisions for payment of compensation as
specified under Section 6.5 of this Agreement.
3.5 At the option of Executive, upon 90 days written notice by Executive
to the Company.
3.6 If as a result of Executive's incapacity due to physical or mental
illness, Executive shall have been absent from his duties hereunder on a
full-time basis for the entire period of three consecutive months, and within 30
days after written notice of termination is given (which may occur before or
after the end of such three-month period) shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate Executive's employment hereunder.
3.7 Upon the expiration of the Term of this Agreement, or any extension or
renewal thereof.
4. COMPANY'S AUTHORITY
Executive agrees to observe and comply with the reasonable rules and
regulations of Company as adopted by the Board of Directors of the Company or
committee of the Board of Directors respecting performance of Executive's duties
and to carry out and perform orders, directions, and policies of Company as they
may be, from time-to-time, stated to Executive either verbally or in writing.
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5. VACATION
During each calendar year of the Term of this Agreement, Executive shall be
entitled three weeks of paid vacation, earned ratably over the Term of each
calendar year during the Term of this Agreement. Executive shall be entitled to
receive payment for accrued vacation not taken during each calendar year during
the Term of this Agreement or may accrue such vacation for use in a subsequent
calendar year; however Executive shall be subject to a maximum of six weeks of
accrued vacation.
6. CURRENT COMPENSATION
6.1 ANNUAL SALARY. For all services rendered by Executive under this
Agreement, the Company shall pay or cause to be paid to Executive, and Executive
shall accept the annual Salary and Incentive Compensation, if any, all in
accordance with the subject to the terms of this Agreement. For purposes of this
Agreement, the term "Compensation" shall mean the Annual Salary and Incentive
Compensation, if any. Executive shall be entitled to receive as current
compensation an annual salary in an amount of not less than $170,000 per annum
(hereinafter referred to as the "Annual Salary"). References in this Agreement
to "annual" or "per annum" or "Annual" and similar phrases shall mean the
twelve-month period commencing on May 1st of each year during the Term of this
Agreement unless otherwise indicated.
6.2 INCENTIVE COMPENSATION. In addition, Executive shall be entitled to
annual Incentive Compensation in accordance with the Company's Executive
Incentive Compensation Plan. The Company acknowledges the current Executive
Incentive Compensation Plan provides for the contribution of 7.5% of the
Company's earnings before taxes to a senior management bonus pool to be
allocated among the senior management in accordance with the determination of
the Board of Directors, not to exceed an aggregate contribution to such bonus
pool of $250,000 annually.
6.3 401(K) PLAN. Executive shall be entitled to participate in the
Company's 401(k) or other similar retirement benefit plan.
6.4 PAYMENTS OF CURRENT COMPENSATION. The payment of Executive's Annual
Salary shall be made in semi-monthly installments on the then prevailing paydays
of the Company. Any payment for Incentive Compensation will be made in
accordance with the Executive Incentive Compensation Plan, and payment will be
made in one lump sum concurrently with payments made to others in senior
management. All payments are subject to the customary withholding tax and other
employment taxes as required with respect to compensation paid to an employee.
6.5 PAYMENT OF COMPENSATION ON TERMINATION.
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6.5.1 Upon termination of Executive's employment prior to the expiration of
this Agreement, if such termination is pursuant to Section 3.1, 3.2, 3.5, 3.6,
or 3.7 hereof, Executive shall be entitled to any Annual Salary and vacation
accrued but unpaid through the date of termination of employment, payable on the
date of termination.
6.5.2 Upon termination of Executive's employment prior to the expiration of
this Agreement, if such termination is pursuant to Section 3.4 hereof, Executive
shall be entitled to any Annual Salary and vacation accrued but unpaid through
the date of termination of employment, payable on the date of termination, and
payments of Annual Salary for the number of months remaining in the Term of this
Agreement prior to such termination, payable in semi-monthly installments on the
then prevailing pay days of the Company to the estate of Executive for such
number of months. Executive shall have no obligation to mitigate his damages.
7. DETERMINATION OF DISABILITY; PAYMENT OF DISABILITY INSURANCE PREMIUMS
7.1 In the event Executive's disability, as defined in Section 3.7, is in
question, and after written request by the Company, Executive refuses to be
examined by his regularly attending physician or if the regularly attending
physician fails to submit a report within 30 days after the examination has been
requested by the Company, the determination of disability shall be made by the
Company.
7.2 In addition to the disability benefits available to all executive
employees of the Company, the Company agrees to pay the monthly premiums on
Executive's existing long-term disability policy with UNUM during the Term of
this Agreement. In the event of Executive's disability, as defined in Section
3.7, Executive shall be entitled to receive all of the benefits of such existing
long-term disability policy with UNUM in addition to any other disability
benefits payable to him under any policy maintained by the Company.
8. MISCELLANEOUS BENEFITS
8.1 MEDICAL INSURANCE. Executive and his family shall be entitled to
participate in any medical, dental, vision, life, long-term disability, other
insurance or employee benefit program instituted or maintained by the Company
for the benefit of its executive employees.
8.2 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT WITHOUT CAUSE. If
Executive's employment with the Company is terminated without cause, the Company
agrees that Executive shall be entitled to continued compensation as if
Executive were still actively employed by the Company, for the remainder of the
Term of this Agreement. If applicable law or the terms and conditions of such
plans do not permit Executive to be covered with respect to any benefit under
this Agreement as if Executive were still actively employed by the Company, the
Company agrees to pay Executive an amount equal to what the
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Company would have paid to maintain such benefits if Executive were still
employed by the Company for the remainder of the Term of this Agreement.
8.3 BUSINESS EXPENSES. Executive shall be reimbursed for all reasonable
expenses incurred by Executive in connection with Executive's attendance of
business meetings and promotion of Company business upon presentation by
Executive to the Company of an expense report and adequate records or other
documentation substantiating the expenditures, not less frequently than monthly.
Any such amounts disallowed as a business expense for federal or state income
tax purposes shall be deemed additional salary to Executive. The fact that the
Company may not reimburse Executive for an expense is not an indication that the
Company determined that the expense was not incurred on its behalf or in
connection with the Company's business.
8.4 LIFE INSURANCE. During the Term of this Agreement, the Company shall
pay for and maintain on a continuous basis, life insurance in the amount of
$500,000 on the life of Executive naming Executive's estate as beneficiary.
8.5 ADDITIONAL BENEFITS. Executive shall be entitled to participate in all
programs, rights and benefits for which executive is otherwise entitled to any
bonus plan, incentive plan, participation plan or extra compensation plan,
pension plan, profit sharing plan, life, medical, dental, disability or other
insurance plan or policy or other plan or benefit the Company may provide for
senior executives or for employees of the Company generally from time to time in
effect during the term of this Agreement. For the avoidance of doubt, the rights
granted or afforded to Executive under any such plans shall be not less than the
most favorable rights and highest amounts granted to employees of similar or
lower position with the Company and on terms at least as favorable.
9. RESTRICTIVE COVENANTS
9.1 CONFIDENTIAL INFORMATION. Executive acknowledges that in his employment
hereunder he occupies a position of trust and confidence. During the Term, and
thereafter in accordance with the provisions of this Agreement, Executive shall
not, except as may be required to perform his duties hereunder as required by
applicable law, and except for information which is or becomes publicly
available other than as a result of a breach by Executive of the provisions
hereof, disclose to others or use, whether directly or indirectly, any
Confidential Information. "Confidential Information" shall mean information
about the Company, its subsidiaries and affiliates, and their respective
suppliers, clients and customers that is not disclosed by the Company for
financial reporting purposes and that was learned by Executive in the course of
his employment hereunder, including (without limitation) proprietary knowledge,
trade secrets, market research, data, formulae, information and supplier, client
and customer lists and all papers, resumes, and records (including computer
records) of the documents containing such Confidential Information. Executive
agrees to deliver or return to the Company, at the Company's request at any time
or upon termination or expiration of his employment, or as soon thereafter as
possible, all documents, computer tapes and disks, records, lists, data,
drawings, prints, notes and written information (and all copies thereof)
furnished by the Company or any of its subsidiaries
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affiliates or prepared by Executive during the Term of his employment by the
Company. The obligations hereof shall not apply to any information which is or
becomes public or in the public domain by action of the Company or through no
fault of Executive.
9.2 BUSINESS DIVERSION. During the term and for 30 months thereafter,
Executive shall not, directly or indirectly, influence or attempt to influence
customers or suppliers of the Company or any of its subsidiaries or affiliates
to divert their business to any competitor of the Company.
9.3 NON-SOLICITATION. Executive recognizes that he will possess
confidential information about other employees of the Company and its
subsidiaries and affiliates relating to, among other things, their education,
experience, skills, abilities, compensation and benefits, and interpersonal
relationships with suppliers and customers of the Company. Executive recognizes
that the information he will possess about these other employees is not
generally known, is of substantial value to the Company, and will be acquired by
him because of his business position with the Company. Executive agrees that,
during the Term and for 12 months thereafter, he will not, directly or
indirectly, solicit or recruit any employee of the Company, its subsidiaries or
affiliates for the purpose of being employed by him or by any other person on
whose behalf he is acting as an agent, representative or employee and that he
will not convey any such confidential information or trade secrets about other
employees of the Company, its subsidiaries or affiliates to any other person.
9.4 If Executive breaches, or threatens to commit a breach of, any of the
provisions of Section 9 (the "Restrictive Covenants"), the Company and its
subsidiaries shall have the right to the following:
9.4.1 SPECIFIC PERFORMANCE. The right and remedy to have the
Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company or its
subsidiaries and that money damages would not provide an adequate remedy to the
Company or its subsidiaries.
9.4.2 ACCOUNTING. The right and remedy to require Executive to account
for and pay over to the Company or its subsidiaries, as the case may be, all
compensation, profits, monies, accruals, increments or other benefits derived or
received by Executive as a result of any transaction constituting a breach of
the Restrictive Covenants.
9.4.3 SEVERABILITY OF RESTRICTIVE COVENANTS. Executive acknowledges
and agrees that the Restrictive Covenants are reasonable and valid in geographic
and temporal scope and in all other respects. If any court determines at any of
the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the
remainder of the Restrictive Covenants shall not thereby be affected and shall
be given full effect without regard to the invalid provisions.
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9.4.4 BLUE PENCILING. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope or such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall not be enforceable.
9.4.5 ENFORCEABILITY OF JURISDICTIONS. The obligations in this Section
9 shall survive the termination of Executive's employment or expiration of this
Agreement and shall be fully enforceable thereafter. Executive intends to and
hereby confers jurisdiction to enforce the Restrictive Covenants upon the courts
of any jurisdiction within the geographic scope of such Restrictive Covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants unenforceable by reason of the breadth of such scope or otherwise, it
is the intention of Executive that such determination not bar or in any way
affect the right of the Company or its subsidiaries to the relief provided above
in the courts of any other jurisdiction within the geographic scope of such
Restrictive Covenants, as to breaches of such Restrictive Covenants in such
other respective jurisdictions, such Restrictive Covenants as they relate to
each jurisdiction being, for this purpose, severable into diverse and
independent Restrictive Covenants.
10. PARTICIPATION IN STOCK AND OPTION EXECUTIVE COMPENSATION PLAN
10.1 Executive shall be granted an option (the "1998 Options") to purchase
50,000 shares of Common Stock of the Company (the "Option Shares") pursuant to
the terms and conditions contained in the Company's 1996 Stock and Option and
Incentive Award Plan, (the "Plan"). The exercise price for the Option Shares
will be equal to $5.00 per share, and the options will vest ratably over three
years on each anniversary of the Effective Date commencing on June 1, 1999.
10.2 Executive shall be considered for additional grants of options, stock
appreciation rights, phantom stock rights, and any similar option or securities
or equity compensation when and as such grants are considered for other
executives or employees of the Company.
10.3 In the event of termination of Executive's employment as set forth in
Section 3.4, the 1998 Options, any other option or equity-based incentives
subsequently granted, or any deferred or incentive compensation programs shall
immediately vest.
11. DISPUTE RESOLUTION
The parties agree that any dispute that may arise in connection with,
arising out of or relating to this Agreement, or any dispute that relates in any
way, in whole or in part, to Executive's employment with the Company, the
termination of that employment, or any other dispute by and among the parties or
their successors, assigns or affiliates, shall be submitted to binding
arbitration in Orange County, California according to the Employment Dispute
Resolution Rules and Procedures of the American Arbitration Association. This
arbitration obligation extends to any and all claims that may arise by and
between the
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parties or their successors, assigns or affiliates, and expressly extends to,
without limitation, claims or cause of action for wrongful termination,
impairment of ability to compete in the open labor market, breach or an express
or implied contract, breach of the covenant of good faith and fair dealing,
breach of fiduciary duty, fraud, misrepresentation, defamation, slander,
infliction of emotional distress, disability, loss of future earnings, and
claims under the applicable state constitution, the United States Constitution,
and applicable state fair employment laws, federal equal employment opportunity
laws, and federal and state labor statutes and regulations, including, but not
limited to, the Civil Rights Act of 1964, as amended, the Labor-Management
Relations Act, as amended, the Worker Retraining and Notification Act of 1988,
the Americans With Disabilities Act of 1990, the Rehabilitation Act of 1973, as
amended, the Employee Retirement Income Security Act of 1974, as amended, the
Age Discrimination in Employment Act of 1967, as amended, and the California
Fair Employment and Housing Act, as amended.
12. ASSIGNMENT
This Agreement is a personal contract, and the rights, interests and
obligations of Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. Executive shall not under any circumstances have
any option or right to require payment hereunder otherwise than in accordance
with the terms hereof. Except as otherwise expressly provided herein, Executive
shall not have any power of anticipation, alienation or assignment of payments
contemplated hereunder, and all rights and benefits of Executive shall be for
the sole personal benefit of Executive, and no other person shall acquire any
right, title or interest hereunder by reason of any sale, assignment, transfer,
claim or judgment or bankruptcy proceedings against Executive; provided,
however, that in the event of Executive's death, Executive's estate, legal
representatives or beneficiaries (as the case may be) shall have the right to
receive all of the benefits that accrued to Executive pursuant to, and in
accordance with, the terms of this Agreement.
13. SUCCESSOR
This Agreement may be assigned by the Company to any successor interest to
its business. This Agreement shall bind and inure to the benefit of the
Company's successors and assigns as well.
14. NOTICES
All notices, requests and demands hereunder shall be in writing and
delivered by hand, by mail, or by telegram, and shall be deemed given if by hand
delivery, upon such delivery, and if by mail, 48 hours after deposit in the
United States mail, first class, registered or certified mail, postage prepaid
and properly addressed to the party at the address set forth at the beginning of
this Agreement. Any party may change its address for purposes of this paragraph
by giving the other party written notice of the new address in the manner set
forth above.
15. INVALID PROVISIONS
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Invalidity or unenforceability of any particular provision of this
Agreement shall not affect the other provisions hereof, and this Agreement shall
be construed in all respects as if such invalid or unenforceable provision were
omitted.
16. AMENDMENT, MODIFICATION OR REVOCATION
This Agreement may be amended, modified or revoked in whole or in part, but
only by a written instrument which specifically refers to this Agreement and
expressly states that it constitutes an amendment, modification or revocation
hereof, as the case may be, and only if such written instrument has been signed
by each of the parties to this Agreement.
17. HEADINGS
The headings in this Agreement are inserted for convenience only and are
not to be considered in construction of the provisions hereof.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding among the parties and
supersedes any prior written or verbal agreements between them respecting the
subject matter hereof, including, without limitation, any prior verbal or
written employment agreement between Executive and the Company. Upon the
effectiveness hereof, any such prior verbal or written agreements shall
terminate.
No representations or warranties of any kind or nature relating to the
Company or its affiliates or their respective businesses, assets, liabilities,
operations, future plans or prospects have been made by or on behalf of the
Company to Executive; nor have any representations or warranties of any kind or
nature been made by Executive to the Company, except as expressly set forth in
this Agreement.
19. ATTORNEYS' FEES
If any legal action is necessary to enforce the terms and conditions of
this Agreement, the prevailing party in such action shall be entitled to recover
all costs of suit and reasonable attorneys' fees as determined by the
arbitrator.
20. FURTHER ASSURANCES
The parties shall execute such documents and take such other action as is
necessary or appropriate to effectuate the provisions of this Agreement.
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21. CONTROLLING LAW
This Agreement shall be governed by the laws of the State of Delaware.
22. WAIVER
A waiver by either party of any of the terms and conditions hereof shall
not be construed as a general waiver by such party, and such party shall be free
to reinstate such part or clause, with or without notice to the other party.
23. INDEMNIFICATION
To the fullest extent permitted by law and the Company's Certificate of
Incorporation and Bylaws, the Company shall indemnify Executive for all amounts
(including, without limitation, judgments, fines, settlement payments, losses,
damages, costs and expenses, including reasonable attorneys fees, incurred or
paid by Executive in connection with any action, proceeding, suit or
investigation arising out of or relating to the performance by Executive of
services for, or acting as, an officer or employee of the Company or any
subsidiary thereof. The Company agrees to use its best efforts to maintain
directors' and officers' liability insurance.
24. PERIODIC REVIEWS
During January of each year during the term hereof, the Board of Directors
of the Company shall review Executive's Annual Salary, bonus, stock options, and
additional benefits then being provided to Executive. Following each such
review, the Company may in its discretion increase the Annual Salary, bonus,
stock options, and benefits; however, the Company shall not decrease such items
during the period Executive serves as an employee of the Company. Prior to
February 28th of each year during the term hereof, the Board of Directors of the
Company shall communicate in writing the results of such review to Executive.
THE COMPANY: EXECUTIVE:
AVIATION DISTRIBUTORS, INC.
By:
---------------------------------- -----------------------------------
Bruce H. Haglund, Secretary GARY L. JOSLIN
Page 11
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
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</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
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<RECEIVABLES> 7,789,474
<ALLOWANCES> (250,000)
<INVENTORY> 9,008,560
<CURRENT-ASSETS> 16,788,327
<PP&E> 1,016,165
<DEPRECIATION> (466,998)
<TOTAL-ASSETS> 17,877,696
<CURRENT-LIABILITIES> 20,104,555
<BONDS> 0
0
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<COMMON> 33,875
<OTHER-SE> (3,359,465)
<TOTAL-LIABILITY-AND-EQUITY> 17,877,696
<SALES> 23,361,146
<TOTAL-REVENUES> 23,361,146
<CGS> 17,606,921
<TOTAL-COSTS> 17,606,921
<OTHER-EXPENSES> 6,158,921
<LOSS-PROVISION> 214,976
<INTEREST-EXPENSE> 1,850,661
<INCOME-PRETAX> (2,114,965)
<INCOME-TAX> (82,877)
<INCOME-CONTINUING> (2,032,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 242,460
<CHANGES> 0
<NET-INCOME> (1,789,628)
<EPS-BASIC> (0.56)
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