10-Q/A 1 a2065596z10-qa.txt 10-Q/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON_______ __, 2001 REGISTRATION NO. 333-8061 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q/A (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 ---------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the transition period from to ------------------- ------------------- Commission file number 0-29028 AVIATION DISTRIBUTORS, INC. --------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 33-0715685 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. employer Incorporation or Organization) Identification No.) ONE CAPITAL DRIVE LAKE FOREST, CALIFORNIA 92630 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (949) 586-7558 ------------------ Indicate by check (X) whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,389,487 SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, WERE OUTSTANDING AS OF September 30, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes the operations of the Company for each of the periods discussed. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, which are included elsewhere in this document. This discussion contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such forward looking statements involve risks and uncertainties and actual results could differ from those described herein and future results may be subject to numerous factors, many of which are beyond the control of the Company. The "forward looking statements" reflect the Company's current view about future events and are subject to risks, uncertainties and assumptions. These risks, uncertainties and assumptions include: - The continued cooperation of the Company's lender, GMAC Commercial Credit LLC in waiving covenant violations, supporting its overadvance and not foreclosing on the Company's assets. - Adverse consequences related to the Company's substantial debt. - Continued losses through the aviation industry downturn. - Further write-downs of the Company's inventories and accounts receivable. - The Company's ability to acquire adequate inventory and to obtain favorable pricing for its inventory. - Customer concentrations The Company believes that its lender, GMAC, will continue to fund the Company's overadvance and waive its covenant violations. Were the Company's lender to foreclose on the Company's assets secured in its credit facility, the Company would be liquidated. In order to stem the continued losses the Company has incurred, Management has reduced budgeted selling, general and administrative expenses. Budget cuts include reduced business travel, professional fees, the elimination of 5 sales and administrative positions and 15% to 25% salary cuts for the Company's management. 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 lower of cost or market estimates, damaged, excess 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 fluctuate based 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. CONTINUING DEVELOPMENTS IN THE COMPANY'S MARKET ENVIRONMENT Economic and other factors that are affecting the airline industry have negatively impacted, and may continue to negatively impact, the Company's business. Pricing of the inventory the Company needs for its business is affected to a degree by the overall economic condition of the airline industry, which has historically been volatile. The demand for after-market aircraft engines and parts is driven primarily by flying hours or cycles. 8 These parts must be serviced or replaced at scheduled intervals. As a result, the demand for after-market parts is a function of the volume of worldwide air traffic. Additionally, factors such as the price of fuel affect the aircraft parts market, since older aircraft (into which repaired or overhauled aircraft parts are most often placed) become less economically viable as the price of fuel increases. During a downturn in the aviation industry, there may be reduced overall demand for the products the Company provides, lower selling prices for its products and increased credit risk associated with doing business with industry participants. The aircraft parts aftermarket experienced a downturn during 2000, which has continued and worsened in 2001. As a result, a number of companies in the industry have encountered financial difficulties. Consequently, many companies within the industry have been forced to sell inventory at reduced prices in order to generate cash. The Company's gross margin and fair value of inventory have been negatively affected by these deteriorating conditions. Additionally, according to recent reports by a few large airlines, during 2001, the airline industry has begun to experience a significant slowdown in overall traffic, which the Company's management believes has reduced demand for aftermarket parts. The Company has experienced the affects of this downturn in the second quarter of 2001. As a result, the Company has recorded an increase to its inventory reserve of $1,285,000 for excess quantities and lower of cost or market writedowns. The following table sets forth certain information relating to the Company's operations for the three months ended September 30, 2001 and 2000 (dollars in thousands):

NET SALES. Net sales decreased from $10.1 million for the three months ended September 30, 2000 to $6.2 million for the three months ended September 30, 2001, a decrease of $3.9 million or 38.4%. This decrease was mainly the result of an overall slowdown in the aviation industry as a whole causing decreased demand for the Company's inventory sales. COST OF SALES. Cost of sales decreased from $7.4 million for the three months ended September 30, 2000 to $6.3 million for the three months ended September 30, 2001, a decrease of $1.2 million or 15.8%. This decrease was primarily attributable to the 38.4% decrease in net sales, increases in the Company's reserves for excess and obsolete inventory and the overall decrease in gross margins due to the decline in the aviation market as a whole. 9 GROSS PROFIT. Gross profit decreased from $2.7 million or 26.5% of net sales for the three months ended September 30, 2000 to $0 gross margin or 0.0% of net sales for the three months September 30, 2001, a decrease of $2.7 million or 100.0%. The decrease in gross profit dollars and percentage of net sales is due to the substantial increase in inventory reserves of $1.3 million and pricing pressures due to the overall industry slowdown. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses consisted primarily of wages and commission expense, bad debt expense, rent expense, professional fees, consulting expenses and travel expenses. The Company's selling and administrative expense increased from $1.5 million for the three months ended September 30, 2000 to $2.5 million for three months ended September 30, 2001, an increase of $.9 million or 60.3%. This increase is due primarily to a significant increase in the Company's allowance for bad debt caused by customers' financial condition deteriorating as a result of the slow-down in the aviation industry. The Company's bad debt reserve was increased by $866,000 in the three month period ended September 30, 2001. This increase is primarily attributable to three customers. One of these customers has filed for bankruptcy protection. The Company has reserved for 47% of this customer's total amount outstanding. The remainder of the balance was insured and the Company has filed an insurance claim to receive payment. The Company has increased its reserve for the other two customers' accounts to approximately 10% of the outstanding balance. The remainder of the increase reflects the increased risk the Company faces due to the deteriorating economic conditions within the aviation industry. INCOME FROM OPERATIONS. The Company had income from operations of $.3 million for the three months ended September 30, 2000 compared to a loss from operations of $2.5 million for the three months ended September 30, 2001, a decrease of $2.8 million or 982.0%. The decrease in operating income is due to the decrease in gross margins and increases in selling and administrative expenses. INTEREST EXPENSES. Net interest expense decreased from $853,000 for the three months ended September 30, 2000 to $746,000 for the three months ended September 30, 2001. This decrease was due to decreases in the Company's lending rate experienced in the third quarter. NET LOSS. The Company had a net loss of $570,000 for the three months ended September 30, 2000 compared to a loss of $3.2 million for the three months ended September 30, 2001, due to the foregoing factors. 10 The following table sets forth certain information relating to the Company's operations for the nine months ended September 30, 2001 and 2000 (dollars in thousands):

NET SALES. Net sales were $28.4 million for the nine months ended September 30, 2000 and $24.6 million for the nine months ended September 30, 2001. The decrease in sales are due primarily to the industry slowdown the aviation industry has experienced in the second and third quarter of 2001. There have been substantial changes in the Company's customer base due to the overall decline in the aviation industry. The Company has increased its market share in South America and has incurred slowdowns in its European sales. COST OF SALES. Cost of sales increased from $21.1 million for the nine months ended September 30, 2000 to $21.7 million for the nine months ended September 30, 2001, an increase of $594,000 or 2.8%. This increase was primarily attributable to pricing pressures due to the industry slow-down realized in the second and third quarter of 2001 and substantial increases in the Company's reserves for inventories of approximately $1.3 million. GROSS PROFIT. Gross profit decreased from $7.3 million or 25.6% of net sales for the nine months ended September 30, 2000 to $2.9 million or 11.9% of net sales for the nine months September 30, 2001, a decrease of $4.3 million or 64.4%. The decrease in gross profit dollars and percentage of net sales is due to the substantial increase in inventory reserves and pricing pressures due to the overall industry slowdown. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses consisted primarily of wages and commission expense, bad debt expense, rent expense, professional fees, consulting expenses and travel expenses. The Company's selling and administrative expense increased from $4.6 million for the nine months ended September 30, 2000 to $7.0 million for nine months ended September 30, 2001, an increase of $2.4 million or 53.5%. This increase is due primarily to a significant increase to the Company's bad debt reserve of 11 $1,047,000 caused by customers financial status deteriorating through the aviation industry slow-down, professional fees and travel expenses as the Company has tried to increase sales through new distribution channels. The Company's bad debt reserve was increased by $1,047,000 in the nine month period ended September 30, 2001. This increase is primarily attributable to the third quarter charge of $866,000. This increase is primarily attributable to three customers. One of these customers has filed for bankruptcy protection. The Company has reserved for 47% of this customer's total amount outstanding. The remainder of the balance was insured and the Company has filed an insurance claim to receive payment. The Company has increased its reserve for the other two customers' accounts to approximately 10% of the outstanding balance. The remainder of the increase reflects the increased risk the Company faces due to the deteriorating economic conditions within the aviation industry. INCOME FROM OPERATIONS. The Company had income from operations of $1.8 million for the nine months ended September 30, 2000 compared to a loss from operations of $4.1 million for the nine months ended September 30, 2001. The loss from operations is due to the decrease in gross margins and increases in selling and administrative expenses. INTEREST EXPENSES. Interest expense was $2.3 million for the nine months ended September 30, 2000 and $2.3 million for the nine months ended September 30, 2001. The Company experienced greater use of its line of credit which was offset by decreases in the Company's lendor's lending rate. NET LOSS. The Company had a net loss of $426,000 for the nine months ended September 30, 2000 compared to a loss of $6.4 million for the nine months ended September 30, 2001, due to the foregoing factors. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows from operating activities used $7.6 million and provided $375,000 in the nine months ended September 30, 2000 and 2001, respectively. The largest cash uses in the 2000 period were an increase in accounts receivable of $5.5 million, an increase in inventory of $3.3 million which includes a bulk purchase of $3.6 million, offset by an increase in accounts payable and checks issued not yet presented for payment totalling $1.3 million. For the 2001 period, cash was provided by operating activities primarily from increases in accounts payable of $1.1 million and a decrease in inventory (predominantly due to increased excess, obsolete and lower of cost or market reserves) and accounts receivable of $3.2 million and $2.7 million, respectively. The 2000 financing activities provided cash of $7.7 million, primarily resulting from an increase in line of credit borrowings. The 2001 financing activities used $305,000 of cash due to principal payments on long-term debt and capital leases of $486,000 and $9,000, respectively, offset by a $190,000 increase on the Company's line of credit borrowings. The Company had a working capital deficit of $20.2 million and $17.3 million as of September 30, 2001 and December 31, 2000, respectively. This was primarily due to increases in borrowings on the Company's line of credit and accounts payable resulting from the cash requirements for increases in the Company's operating losses and increases in the Company's reserves for excess and obsolete inventory and bad debts. On February 23, 2000, the Company amended its Credit Facility with GMAC to extend the loan maturity date to June 24, 2010. In conjunction with this amendment, GMAC was issued 208,762 warrants. These warrants and 126,600 warrants issued to GMAC in 1998 gave GMAC warrants equal to 9.9% of the outstanding stock of the Company or 335,362 warrants. The exercise price of the warrants is $.25 and the warrants expire on February 28, 2010. The fair value of the total warrants issued to GMAC was determined to be $818,283 and such warrants are being amortized to interest expense over a ten year period 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 events, none of which have occurred. The $2,000,000 has been reflected as debt issue costs in the accompanying Consolidated balance sheet and is being amortized to interest expense over the term of the promissory note. The note bears interest at GMAC's Alternate Base Rate and interest is payable semi-annually. On September 12, 2000 the Company received approval from GMAC for a $10 12 million working capital line to finance the purchase of inventory related to the servicing of the Company's contracts with major foreign airlines. The Company implemented the use of this line in October, 2000 which is guaranteed by the export-import Bank of the United States the official export credit agency of the U.S. government and which carries an interest rate of Prime plus 1%. The working capital line is used in conjunction with the Company's $26.8 million Credit Facility. The Company's long-term debt consists of the following at September 30, 2001: (i) term loan of $500,000 to GMAC, due in quarterly principal installments of $125,000 with an interest rate of 2.0 percent above the lenders alternate base rate; (ii) note payable of $100,000 to the founder of the Company (iii) capital lease obligations of $12,670, (v) settlement fee debt of $496,230, (vi) note payable of $300,000 to corporations' and (vii) note payable of $2,000,000 to GMAC, due in February 2010. The Company's credit facility with GMAC is an asset-based line of credit secured by accounts receivable and inventory and is the primary source for the Company to finance its operations and growth. At September 30, 2001 the balance on the credit facility was $23,882,245. The Company may need to increase its capital base in order to continue to meet its growth objectives. There can be no assurance that such additional capital will be available on a timely basis or at acceptable terms. See note 2 to the consolidated financial statements included in this form 10-Q regarding realization of assets and steps management has taken with respect to its operations and financing requirements. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in certain legal and administrative proceedings and threatened legal and administrative proceedings arising in the normal course of its business. While the outcome of such proceedings and threatened proceedings cannot be predicted with certainty, management believes the ultimate resolution of these matters individually or in the aggregate will not have a material adverse effect on the Company. Also, see Note 3 to the consolidated financial statements in Part I. Item 2. CHANGES IN SECURITIES Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None Item 5. OTHER INFORMATION None 13 Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(1) Filed with the Company's Registration Statement on Form SB-2 dated March 3, 1997. (2) Filed with the Company's Current Report on Form 8-K dated August 29, 1997. (3) Filed with the Company's Registration Statement on Form 10-KSB dated April 20, 1998. (4) Filed with the Company's Form 10-KSB dated April 11, 2000 (b) Reports on Form 8-K. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date September 30, 2001 AVIATION DISTRIBUTORS, INC. ---------------------------- By: /s/ Gary L. Joslin ------------------------------- Gary L. Joslin Chief Financial Officer and Director (Principal Accounting Officer) 15

AVIATION DISTRIBUTORS INC 10-Q/A