-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdpM3ZpLB8LHlljFQd60NdS8/w3AuTdvdDi6/BnigKFb55R5JykiNJzqpEcqYW8o 4hkp4sp+obS+D7TRvPOtRg== 0000912057-96-014502.txt : 19960715 0000912057-96-014502.hdr.sgml : 19960715 ACCESSION NUMBER: 0000912057-96-014502 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960712 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIATION DISTRIBUTORS INC CENTRAL INDEX KEY: 0001018645 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08061 FILM NUMBER: 96594229 BUSINESS ADDRESS: STREET 1: 1 WRIGLEY DR CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7145867558 MAIL ADDRESS: STREET 1: 1 WRIGLEY DR CITY: IRVINE STATE: CA ZIP: 92718 SB-2 1 SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AVIATION DISTRIBUTORS INCORPORATED (Name of small business issuer in its charter) DELAWARE 5008 33-0715685 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
1 WRIGLEY DRIVE IRVINE, CALIFORNIA 92618 (714) 586-7558 (Address and telephone number of principal executive offices) ------------------------ OSAMAH S. BAKHIT CHIEF EXECUTIVE OFFICER AVIATION DISTRIBUTORS INCORPORATED 1 WRIGLEY DRIVE IRVINE, CALIFORNIA 92618 (714) 586-7558 (Name, address and telephone number of agent for service) ------------------------ COPIES TO: BRIAN J. MCCARTHY, ESQ. KENNETH J. BARONSKY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM MILBANK, TWEED, HADLEY & MCCLOY 300 South Grand Avenue, 34th Floor 601 South Figueroa, 30th Floor Los Angeles, California 90071 Los Angeles, California 90017
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly as practicable after this Registration Statement becomes effective. ------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO PRICE PER OFFERING REGISTRATION SECURITIES TO BE REGISTERED BE REGISTERED SHARE (1) PRICE (1) FEE Common Stock, $.01 par value (2)...... 1,150,000 $8.00 $9,200,000 $3,173
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457. (2) Includes 150,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments, if any, in connection with the Registrant's sale of the Common Stock. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AVIATION DISTRIBUTORS INCORPORATED CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
FORM SB-2 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Front of Registration Statement and Outside Front Cover of Prospectus................................. Outside Front Cover Page; Front of Registration Statement 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages 3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors 4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting 6. Dilution............................................. Risk Factors; Dilution 7. Selling Security Holders............................. Principal and Selling Stockholder 8. Plan of Distribution................................. Outside Front Cover Page; Underwriting 9. Legal Proceedings.................................... Business 10. Directors, Executive Officers, Promoters and Control Persons............................................. Management 11. Security Ownership of Certain Beneficial Owners and Management.......................................... Principal and Selling Stockholder 12. Description of Securities............................ Outside Front Cover Page; Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock 13. Interests of Named Experts and Counsel............... Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Management; Underwriting 15. Organization Within Last Five Years.................. Certain Transactions 16. Description of Business.............................. Risk Factors; Prospectus Summary; Management's Discussion and Analysis of Results of Operations and Financial Condition; Business 17. Management's Discussion and Analysis or Plan of Operation........................................... Management's Discussion and Analysis of Results of Operations and Financial Condition 18. Description of Property.............................. Business 19. Certain Relationships and Related Transactions....... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters............................................. Outside Front Cover Page; Risk Factors; Dividend Policy; Description of Capital Stock; Shares Eligible for Future Sale 21. Executive Compensation............................... Management 22. Financial Statements................................. Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS [LOGO] SUBJECT TO COMPLETION, DATED JULY 12, 1996 1,000,000 SHARES AVIATION DISTRIBUTORS INCORPORATED COMMON STOCK Of the 1,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby (the "Offering"), 900,000 are being offered by Aviation Distributors Incorporated, a Delaware corporation ("ADI" or the "Company"), and 100,000 are being offered by the Selling Stockholder (as defined herein). The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholder. See "Principal and Selling Stockholder." Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $6 and $8 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price of the Common Stock. The Company intends to apply for the quotation of the Common Stock on the Nasdaq Stock Market's National Market under the symbol "ADIN." ------------------------ SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDER Per Share.................. Total (3)..................
(1) The Company and the Selling Stockholder have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Excludes the value of warrants to purchase up to 100,000 shares of Common Stock (the "Representative's Warrants") granted to the representative of the several Underwriters (the "Representative"). See "Underwriting." (2) Before deducting expenses of the offering payable by the Company estimated at $ , including the Representative's non-accountable expense allowance and including the Selling Stockholder's expenses of $ to be paid by the Company. See "Underwriting." (3) The Company and the Selling Stockholder have granted to the Underwriters a 45-day option to purchase up to 100,000 and 50,000 additional shares of Common Stock, respectively, to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company and Proceeds to Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters subject to prior sale, when, as and if delivered to and accepted by them, subject to certain conditions. Delivery of the shares is expected against payment therefor on or about , 1996, at the offices of Cruttenden Roth Incorporated, Irvine, California or through the facilities of the Depository Trust Company. ------------------------ CRUTTENDEN ROTH INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1996 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES EFFECT TO A 3,000 FOR 1 EXCHANGE OF THE COMMON STOCK OF THE COMPANY IN CONNECTION WITH ITS REINCORPORATION IN THE STATE OF DELAWARE. SEE "UNDERWRITING." INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Aviation Distributors Incorporated ("ADI" or the "Company") is a supplier of new and used aircraft parts to major airlines worldwide. The Company locates, acquires and supplies parts for all major aircraft. Additionally, the Company enters into consignment and marketing agreements with major airlines, distributors and original equipment manufacturers ("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 aircraft parts offered by the Company include those manufactured by Boeing, McDonnell Douglas, Airbus, Pratt & Whitney, General Electric, Rolls Royce and Lockheed. Sales have increased from $2.6 million in 1992 to $7.2 million in 1993 to $16.4 million in 1994 to $22.7 million in 1995. The worldwide aircraft parts market is highly fragmented and parts are supplied by many types of suppliers, including airlines themselves, OEMs and numerous distributors, fixed base operators, Federal Aviation Administration ("FAA") certified facilities, traders and brokers. In May 1995, The Canaan Group Ltd., a management consulting firm specializing in the aircraft and aerospace industry, estimated parts inventories at $45 billion. The Company believes that growth trends outlined below could increase the size of the aircraft parts market while decreasing the number of aircraft parts suppliers. According to Boeing's 1996 Market Outlook, the worldwide fleet of commercial aircraft and air cargo aircraft is expected to grow from 11,066 airplanes at the end of 1995 to 23,080 airplanes by 2015. Additionally, airlines are decreasing the number of suppliers from which parts are purchased, in an effort to reduce purchasing costs and increase quality and service. To reduce inventory costs, airlines are also reducing parts inventories through bulk sales to and marketing and consignment agreements with aircraft parts suppliers. Finally, because of safety concerns regarding unapproved parts, regulatory agencies are increasing emphasis on part trackability by requiring increased documentation for aircraft parts. The Company's objectives are to take advantage of trends in the aircraft parts market and to become a leading comprehensive supplier of quality parts to airlines worldwide. The Company's strategy is comprised of the following components: excellent customer service and emphasis on quality, focus on major airlines, increase access to inventory through both consignment and purchases and global expansion. The Company was established in October 1988, incorporated in February 1992 as a California corporation and reincorporated in July, 1996 as a Delaware corporation. The Company's executive offices are located at 1 Wrigley Drive, Irvine, California 92618 and its telephone number at that address is (714) 586-7558. 3 THE OFFERING Common Stock offered: By the Company........................................... 900,000 shares By the Selling Stockholder............................... 100,000 shares Common Stock to be outstanding after the Offering.......... 3,000,000 shares (1) Use of proceeds............................................ To repay approximately $3.8 million of the amount outstanding under the Company's lines of credit and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... ADIN
- ------------------------ (1) Excludes an aggregate of 150,000 shares of Common Stock that may be sold by the Company and the Selling Stockholder upon exercise of the Underwriters' over-allotment option. Also excludes 100,000 shares of Common Stock issuable upon exercise of the Representative's Warrants. See "Underwriting." 4 SUMMARY FINANCIAL DATA The Summary Financial Data presented below are derived from the Consolidated Financial Statements of the Company and are qualified in their entirety by, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ------------------------ ------------------------ 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net sales.................................................. $ 16,369 $ 22,652 $ 4,621 $ 4,636 Cost of sales.............................................. 11,809 18,476 3,892 3,767 Gross profit............................................... 4,560 4,176 729 869 Selling and administrative expenses........................ 3,582 3,961 842 1,110 Income (loss) from operations.............................. 978 215 (113) (241) Interest expense, net...................................... 278 622 125 142 Net income (loss).......................................... 208 (215) (168) (371) Net income (loss) per share................................ 0.10 (0.10) (0.08) (0.18) Shares used in computing net income (loss) per share....... 2,100,000 2,100,000 2,100,000 2,100,000
MARCH 31, 1996 DECEMBER 31, --------------------------- -------------------- AS ADJUSTED 1994 1995 ACTUAL (1) --------- --------- ----------- -------------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents..................................... $ 251 $ 868 $ 14 $ 914 Restricted cash............................................... 105 301 778 778 Working capital (deficit)..................................... 124 (152) (462) 4,238 Total assets.................................................. 5,011 16,015 16,006 16,906 Total debt.................................................... 2,537 12,731 13,187 9,387 Total stockholders' equity (deficit).......................... 368 153 (218) 4,482
- ------------------------ (1) Adjusted for the sale of 900,000 shares of Common Stock by the Company (at an assumed offering price of $7.00 per share) in the Offering and the application of the net proceeds therefrom as if the Offering had occurred on March 31, 1996. See "Use of Proceeds." ------------------------ 5 RISK FACTORS PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, TOGETHER WITH OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. FLUCTUATIONS IN OPERATING RESULTS; HISTORICAL OPERATING LOSSES The Company's operating results are affected by many factors, including the timing of orders from large customers, the timing of expenditures to purchase inventory in anticipation of future sales, the timing of bulk inventory purchases, and the mix of available aircraft spare parts contained, at any time, in the Company's inventory and many other factors largely outside the Company's control. Given that a large portion of the Company's operating expenses are relatively fixed, there can be no assurance that external factors such as those described above will not have a material adverse impact on the Company's operating results. The Company experienced an operating loss of $240,699 for the first quarter of 1996 and has experienced operating losses in the past, and as of March 31, 1996, had a stockholder's deficit of $218,319. These losses are primarily attributable to 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. There can be no assurance that the Company will be able to effectively reduce selling and administrative expenses or achieve profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The aircraft parts supply industry is highly competitive. Competition is generally based on availability of product, reputation, customer service, price and lead time. Some of the Company's competitors have access to greater financial and other resources than the Company. There can be no assurance that the Company will be able to effectively compete with such companies in the future. See "Business -- Competition." DEPENDENCE ON KEY PARTS SUPPLIERS The Company is dependent on certain domestic and international OEMs for many key parts and components. Many of these OEMs maintain their own parts inventories and distribution services and compete with the Company. The Company believes that these manufacturers will continue to adhere to their current policy of supporting qualified independently-owned aircraft parts suppliers. However, if their policy should change or if certain OEMs require scarce parts for their own distribution operations, the Company may incur shortages in the supply of required parts and components. An inability of the Company to maintain access to parts and components on commercially reasonable terms would have a material adverse effect on the Company's business. FOREIGN OPERATIONS The Company's foreign activities, which account for a significant percentage of the Company's total sales, are subject to the risks customarily associated with such activities. These include controls, expropriation, nationalization and other economic, political and regulatory policies of local governments as well as the laws and policies of the United States affecting foreign trade and investment. To date, the Company has not encountered any significant problems in its foreign activities, however there is no assurance that this will continue in the future. All of the Company's sales were transacted in U.S. dollars in fiscal 1995. As of March 31, 1996 the Company had a minimal amount of owned assets outside the United States. REGULATION Parts that are installed in aircraft are required to be certified by FAA approved manufacturing and repair facilities prior to installation. The Company does not operate repair stations and is not otherwise directly regulated by the FAA. Because of public concerns that have been raised regarding deregulation of the aviation industry and inadequate maintenance procedures, there is the possibility that new and more stringent FAA regulations will be adopted. There can be no assurance that the Company will not become subject to direct regulation by the FAA, or that any new regulations adopted by the FAA will not have a material adverse effect on the Company's business. 6 PRODUCT LIABILITY 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 could not be subject to liability from its potential exposure relating to faulty aircraft parts in the future. The Company maintains liability insurance in the amount of $2 million to protect it 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. An uninsured loss could have a material adverse effect upon the Company's financial condition. CONCENTRATION OF CREDIT RISK As part of its business strategy, the Company may, from time to time, purchase high price items such as engines and whole aircraft on an opportunistic basis. This activity can lead to a high proportion of net sales and trade accounts receivables from a few customers. As of March 31, 1996 the Company had a note receivable from one customer in the amount of approximately $5.8 million, which is secured by an irrevocable letter of credit. See Note 5 of Notes to Consolidated Financial Statements. For the years ended 1994 and 1995 and the three months ended March 31, 1996 the Company has written off an aggregate of approximately $8,000 as uncollected accounts receivable. CERTAIN LITIGATION The Company is a defendant in a pending action brought by a customer of the Company arising out of a consignment agreement that was terminated in August 1995. The lawsuit alleges, among other things, breach of contract and fraud, and seeks combined damages of $3,518,000, interest, attorneys fees, punitive damages and treble damages under R.I.C.O. Although the Company intends to vigorously defend the lawsuit, the ultimate outcome is uncertain, and an adverse outcome would likely have a material adverse effect on the Company. See "Business -- Litigation." FUTURE CAPITAL REQUIREMENTS The Company expects its cash requirements to increase significantly in future periods. The Company will require substantial funds to purchase inventory on a bulk basis. In addition, to the extent the Company decides to expand its existing facilities, the Company would require additional capital. Although the Company believes that the net proceeds from the Offering, together with available cash, will be sufficient to meet its cash requirements for at least the next twelve months, there can be no assurance that the Company will not require additional financing during such period or that financing will be available on acceptable terms, if at all. DEPENDENCE UPON KEY PERSONNEL The Company believes that its continued success depends to a significant extent on the management and other skills of Osamah Bakhit, the Chief Executive Officer of the Company, as well as its ability to retain other key employees and to attract skilled personnel in the future to manage the growth of the Company. The Company maintains key man life insurance policy in the amount of $3 million on Mr. Bakhit and intends to enter into a long-term employment agreement with Mr. Bakhit, who will own approximately 67% of the Company's outstanding Common Stock following the completion of the Offering (approximately 63% if the over-allotment option is exercised). The loss or unavailability of the services of Mr. Bakhit could have a material adverse effect on the Company. CONTROL BY PRINCIPAL STOCKHOLDER Following the consummation of the Offering, Mr. Bakhit will have majority control of the Company and the ability to control the election of directors and the results of other matters submitted to a vote of stockholders. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. The Board of Directors of the Company is expected to be initially comprised entirely of designees of Mr. Bakhit. See "Principal and Selling Stockholder" and "Management." 7 FUTURE SALES BY PRINCIPAL STOCKHOLDER; SHARES ELIGIBLE FOR FUTURE SALE Immediately after the Offering, Mr. Bakhit (the "Principal Stockholder" or "Selling Stockholder") will beneficially own approximately 67% of the outstanding Common Stock (approximately 63% if the over-allotment option is exercised). Subject to the restrictions set forth below, Mr. Bakhit will be free to sell such shares and may determine to sell them from time to time to take advantage of favorable market conditions or for any other reason. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. The Company and Mr. Bakhit have entered into a lock-up agreement with Cruttenden Roth Incorporated ("CRI"), as representative (the "Representative") of the Underwriters, pursuant to which the Company and the Selling Stockholder have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, without the prior written consent of the Representative, for a period of 180 days after the date of this Prospectus. After such time, 2 million shares of Common Stock (1.95 million shares of Common Stock if the over-allotment option is exercised) will be eligible for sale pursuant to Rule 144 promulgated under the Securities Act. See "Shares Eligible for Future Sale" and "Underwriting." ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price of the Common Stock offered hereby will be determined by negotiations among the Company, the Selling Stockholder and the Representative and may not be indicative of the market price for the Common Stock after the Offering. The market price for shares of the Common Stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general economic and market conditions. See "Underwriting." DILUTION The initial public offering price is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in the Offering will therefore incur immediate and substantial dilution of $5.51 per share in the net tangible book value of the Common Stock from the initial public offering price. See "Dilution." ABSENCE OF PAYMENT OF DIVIDENDS The Company has never declared or paid cash dividends on the Common Stock. The Company currently anticipates that it will retain all future earnings for use in the operation and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy." 8 USE OF PROCEEDS The net proceeds to the Company from the sale of the 900,000 shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $7 per share, are estimated to be $4.7 million after deducting the estimated underwriting discounts and commissions and the expenses of the Offering. The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered by the Selling Stockholder hereby. The net proceeds of the Offering will be used by the Company to repay a portion of existing indebtedness and for general corporate purposes, including working capital. Of the net proceeds to the Company from the Offering, approximately $3.8 million will be used to repay a portion of the amount outstanding under two revolving lines of credit (the "Credit Facilities") held by Far East National Bank ("Far East Bank") and approximately $900,000 will be used for general corporate purposes, including working capital. The Credit Facilities bear an interest rate of prime plus 1.0 to 1.5 percent, mature on October 31, 1996 and provide for a maximum of $6.5 million, of which $5.3 million was outstanding as of June 30, 1996. The proceeds from the Credit Facilities were used for inventory purchases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Pending the foregoing uses, the Company intends to invest the net proceeds of the Offering in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY Since inception, the Company has not declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings for funding growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Additionally, the Company's Credit Facilities contain covenants restricting the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 9 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at March 31, 1996 and as adjusted to give effect to the Offering (at an assumed offering price of $7.00 per share) and the application of the net proceeds thereof. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1996 ------------------------ AS ADJUSTED ----------- ACTUAL ----------- (UNAUDITED) (IN THOUSANDS) Total Short-Term Debt(1)............................................................. $ 7,309 $ 3,509 ----------- ----------- ----------- ----------- Long-Term Debt: Note payable, net of current portion(2)............................................ 4,293 4,293 Mortgage, net of current portion(3)................................................ 933 933 Other, net of current portion(4)................................................... 652 652 ----------- ----------- Total Long-Term Debt............................................................... $ 5,878 $ 5,878 ----------- ----------- ----------- ----------- Stockholder's Equity (Deficit): Common stock....................................................................... $ 21 $ 30 Additional paid in capital......................................................... 386 5,077 Retained deficit................................................................... (625) (625) ----------- ----------- Total Stockholder's Equity (Deficit)............................................. (218) 4,482 ----------- ----------- Total Capitalization............................................................. $ 5,660 $ 10,360 ----------- ----------- ----------- -----------
- ------------------------ (1) Short-term debt includes Credit Facilities that bear an interest rate of prime plus 1.0 to 1.5 percent and current portions of long-term debt and capitalized leases. (2) This debt consists of a note payable to a financial institution used to purchase aircraft, secured by a customer note receivable. (3) This debt consists of a mortgage for the Company's headquarters and warehouse in Irvine, California. (4) Other debt consists of notes payable for equipment, inventory and automobiles and capitalized amounts outstanding under various capitalized leases associated with the Company's facilities. 10 DILUTION The net tangible book value of the Company's Common Stock as of March 31, 1996, was $(218,000) or approximately $(0.10) per share. "Net tangible book value per share" represents the amount of the Company's stockholders' equity (deficit), less intangible assets, divided by the number of shares of Common Stock outstanding. At March 31, 1996, the Company had no intangible assets. After giving effect to the sale of the 900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $7.00 per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, the Company's pro forma net tangible book value at March 31, 1996 would have been $4,482,000 or $1.49 per share. This represents an immediate increase in pro forma net tangible book value of $1.59 per share to the existing stockholder and an immediate dilution in net tangible book value of $5.51 per share to new investors purchasing Common Stock in the Offering. The following table illustrates the foregoing information with respect to dilution to new shareholders on a per share basis: Assumed initial public offering price per share............................. $ 7.00 Net tangible book value per share before the Offering..................... $ (0.10) Increase per share attributable to new investors.......................... 1.59 Pro forma net tangible book value per share after the Offering.............. 1.49 --------- --------- Dilution per share to new investors......................................... $ 5.51 --------- ---------
The following table sets forth, on a pro forma basis as of March 31, 1996, the differences between the existing stockholder and the purchasers of shares in the Offering (at an assumed initial public offering price of $7.00 per share) with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION -------------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------- ----------- ------------- --------- ------------- Existing stockholder (1).......................... 2,100,000 70% $ 407,000 6.1% $ 0.19 New investors (1)................................. 900,000 30 6,300,000 93.9 7.00 ------------- ----- ------------- --------- ----- Total......................................... 3,000,000 100% $ 6,707,000 100% $ 2.24 ------------- ----- ------------- --------- ----- ------------- ----- ------------- --------- -----
- ------------------------ (1) The 100,000 shares sold by the existing stockholder will reduce the number of shares held by the existing stockholder to 2 million or 67% and increase the number of shares held by new investors to 1 million or 33%. The underwriters have the option to purchase 150,000 shares (100,000 shares from the Company and 50,000 shares from the existing stockholder) of Common Stock to cover over-allotments, if any, in connection with the Registrant's sale of the Common Stock. Assuming the underwriters exercise the over-allotment option, the number of shares held by the existing stockholder will be reduced to 1.95 million or 63% and the number of shares held by new investors will increase to 1.15 million or 37%. 11 SELECTED FINANCIAL DATA The selected financial data presented below as of and for the years ended December 31, 1994 and 1995 have been derived from the Consolidated Financial Statements as audited by Arthur Andersen LLP, independent public accountants. The selected financial data presented below as of and for the three month periods ended March 31, 1995 and 1996 have been derived from the unaudited consolidated financial statements of the Company, which in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. The selected financial data presented below should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------ ------------------------ 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA: Net sales.................................................. $16,369 $22,652 $4,621 $4,636 Cost of sales.............................................. 11,809 18,476 3,892 3,767 Gross profit............................................... 4,560 4,176 729 869 Selling and administrative expenses........................ 3,582 3,961 842 1,110 Income (loss) from operations.............................. 978 215 (113) (241) Interest expense, net...................................... 278 622 125 142 Net income (loss).......................................... 208 (215) (168) (371) Net income (loss) per share................................ 0.10 (0.10) (0.08) (0.18) Shares used in computing net income (loss) per share....... 2,100,000 2,100,000 2,100,000 2,100,000
DECEMBER 31, -------------------- 1994 1995 --------- --------- MARCH 31, ----------- 1996 ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 251 $ 868 $ 14 Restricted cash................................................................ 105 301 778 Working capital (deficit)...................................................... 124 (152) (462) Total assets................................................................... 5,011 16,015 16,006 Total debt..................................................................... 2,537 12,731 13,187 Total stockholder's equity (deficit)........................................... 368 153 (218)
12 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 "Selected Financial Data" and the Company's Consolidated Financial Statements and the related notes thereto which are included elsewhere in this Prospectus. GENERAL The Company's business as a supplier, distributor and seller of commercial aircraft parts and supplies was established in October 1988. The Company was incorporated in California in February 1992 and reincorporated in Delaware in June 1996. The Company's sales have increased from $2.6 million in 1992, to $7.2 million in 1993, $16.4 million in 1994, $22.7 million in 1995, and $4.6 million for the first quarter of 1996. Of 1995 sales, approximately $6.5 million resulted from the sale of two whole aircraft (with engines) to one customer. Excluding the whole aircraft transaction, sales in 1995 would have been $16.2 million. 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, commissions to outside sales representatives and an inventory provision for damaged and obsolete products. Product costs consist of the acquisition costs of the products and any costs associated with repairs, maintenance and certification. Net sales and gross profit depend in large measure on the volume and mix of aircraft parts delivered from the Company to its customers. Sales and gross profit can be impacted by bulk inventory purchases. 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 receive larger gross margins on its sale of aircraft parts since the cost of purchase is reduced. Sales can be impacted by marketing and consignment agreements because such agreements give the Company increased access to aircraft parts. Net profits are impacted by marketing and consignment agreements because the Company does not incur costs associated with carrying owned inventory. However, sales from consignment and marketing agreements are not as profitable as sales from bulk inventory purchases. THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 The following table sets forth certain information relating to the Company's operations for the three months ended March 31 (dollars in thousands):
1995 1996 ------------------------ ------------------------ Net sales......................................... $ 4,621 100.0% $ 4,636 100.0% Cost of sales..................................... 3,892 84.2 3,767 81.3 --------- ------------- --------- ------------- Gross profit.................................... 729 15.8 869 18.7 Selling and administrative expenses............... 842 18.2 1,110 23.9 --------- ------------- --------- ------------- Income from operations............................ (113) (2.4) (241) (5.2) Interest expense, net............................. 125 2.7 142 3.1 Net loss.......................................... (168) (3.6) (371) (8.0)
NET SALES. Net sales for the three months ended March 31, 1995 and for the three months ended March 31, 1996 remained relatively stable at $4.6 million. 13 COST OF SALES. Cost of sales decreased from $3.9 million for the three months ended March 31, 1995 to $3.8 million for the three months ended March 31, 1996, a decrease of $100,000 or 2.6%. The decrease was attributable to improved pricing on inventory parts as a result of bulk inventory purchases during the last quarter of 1995 and general cost reduction efforts. GROSS PROFIT. Gross profit increased from $729,000 for the three months ended March 31, 1995 to $869,000 for the three months ended March 31, 1996, an increase of $140,000, or 19.2%. Gross profit margin increased from 15.8% for the three months ended March 31, 1995 to 18.7% for the three months ended March 31, 1996. The increase in gross profit margin was attributable to lower product acquisition costs and a favorable shift in product mix to higher margin inventory. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses increased from $842,000 for the three months ended March 31, 1995 to $1.1 million for the three months ended March 31, 1996, an increase of $258,000 or 30.6%. The increase was attributable to increases in the number of marketing and support personnel and in travel and insurance expenses. LOSS FROM OPERATIONS. Loss from operations increased from $113,000 for the three months ended March 31, 1995 to $241,000 for the three months ended March 31, 1996, an increase of $128,000 or 113%. This increase was attributable to increases in the Company's selling and administrative expenses as discussed above. INTEREST EXPENSE, NET. Interest expense increased from $125,000 for the three months ended March 31, 1995 to $142,000 for the three months ended March 31, 1996, an increase of $17,000 or 13.6%. The increase was attributable to an increase in the average borrowings outstanding on the Credit Facilities during 1996. NET LOSS. Net loss increased from $(168,000) for the three months ended March 31, 1995 to $(371,000) for the three months ended March 31, 1996, an increase of 121%. This increase was attributable to increases in the Company's selling and administrative expenses and interest expenses as discussed above. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The following table sets forth certain information relating to the Company's operations for the year ended December 31 (dollars in thousands):
1994 1995 -------------------- -------------------- Net sales............................................................ $ 16,369 100.0% $ 22,652 100.0% Cost of sales........................................................ 11,809 72.1 18,476 81.6 --------- --------- --------- --------- Gross profit......................................................... 4,560 27.9 4,176 18.4 Selling and administrative expenses.................................. 3,582 21.9 3,961 17.5 --------- --------- --------- --------- Income from operations............................................... 978 6.0 215 0.9 Interest expense, net................................................ 278 1.7 622 2.7 Net income (loss).................................................... 208 1.3 (215) (0.9)
NET SALES. Net sales increased from $16.4 million for the year ended December 31, 1994 to $22.7 million for the year ended December 31, 1995, an increase of $6.3 million, or 38.4%. This increase was primarily the result of the whole aircraft sale for $6.5 million noted above. Net sales, excluding the whole aircraft transaction discussed above, for the year ended December 31, 1995, would have been $16.2 million, a decrease of $200,000 or 1.2% compared to the year ended December 31, 1994. This decrease was attributable to lower sales volume with smaller airlines in the Mideast/Africa region as a result of the Company's emphasis on developing relationships with larger airlines. See "General." COST OF SALES. Cost of sales increased from $11.8 million for the year ended December 31, 1994 to $18.5 million for the year ended December 31, 1995, an increase of $6.7 million or 56.8%. This increase was primarily the result of the aircraft sale, at a cost of $5.5 million, as noted above. Cost of sales 14 excluding the whole aircraft transaction discussed above were $13 million for the year ended December 31, 1995. This represents an increase of $1.2 million, or 10.2%, compared to the year ended December 31, 1994. The increase was attributable to increased sales to certain of the Company's customers. See "General." GROSS PROFIT. Gross profit decreased from $4.6 million, or 27.9% for the year ended December 31, 1994, to $4.2 million, or 18.4% for the year ended December 31, 1995. The gross profit margin decreased, in part, as a result of the whole aircraft sale noted above, on which the Company realized a 15% gross profit margin. Gross profit margin excluding the whole aircraft transaction discussed above, for the year ended December 31, 1995, would have been 19.6%, a decrease of 8.3% compared to the year ended December 31, 1994. The decline was attributable to increased discounts and reduced margins on sales to certain customers. See "General" and "Cost of Sales." SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses consist primarily of management compensation, professional fees, consulting expense and travel expenses. The Company's selling and administrative expenses increased from $3.6 million for the year ended December 31, 1994 to $4 million for the year ended December 31, 1995, an increase of $400,000, or 11.1%. The increase was attributable to selling costs, primarily travel and entertainment costs, incurred in completing the whole aircraft transaction described above. Without these costs, selling and administrative costs would have been consistent between 1994 and 1995. See "General." INCOME FROM OPERATIONS. As a result of the above, income from operations decreased from $978,000 for the year ended December 31, 1994 to $215,000 for the year ended December 31, 1995, a decrease of $763,000 or 78%. The decrease reflects the lower gross profit margins realized in 1995 compared to 1994 and an increase in selling and administrative expenses. INTEREST EXPENSE, NET. Interest expense increased from $278,000, or 1.7% of net sales for the year ended December 31, 1994 to $622,000, or 2.7% of net sales for the year ended December 31, 1995. The increase in interest expense was due to an increase in the lines of credit, notes to financial institutions and notes to corporations secured by inventory. NET INCOME (LOSS). Net income decreased from $208,000 for the year ended December 31, 1994 to a net loss of $215,000 for the year ended December 31, 1995, a decrease of $423,000 or 203%. This decrease was attributable to an increase in selling and administrative expenses and interest expense discussed above. See "Gross profit," "Selling and administrative expenses," and "Interest expense." LIQUIDITY AND CAPITAL RESOURCES From inception to 1995, the Company was financed primarily with its cash flow from operations and financing activities. The Company had cash and cash equivalents of $251,000, $868,000 and $14,000 as of December 31, 1994, 1995 and March 31, 1996, respectively. The Company had restricted cash of $105,000, $301,000 and $778,000 as of December 31, 1994, 1995 and March 31, 1996, respectively. As of December 31, 1994 and 1995 and March 31, 1996, $1.1 million, $10.1 million and $400,000, respectively, of cash was provided by financing activities. Restricted cash is required for one of the Credit Facilities and for letters of credit issued to certain vendors. The Company's primary uses of cash, to date, have been for purchases of inventory and the repayment of indebtedness. Cash flows used in investing activities was ($225,000), ($1.3 million) and ($189,000) for 1994, 1995 and the three months ended March 31, 1996, respectively. The Company's Credit Facilities provide working capital of up to $6.5 million with interest at prime plus 1.0 to 1.5 percent subject to an availability calculation based on the eligible borrowing base. The eligible borrowing base includes certain receivables and inventories of the Company. The Credit Facilities expire on October 31, 1996. The Company is currently negotiating with the financial institution to extend its revolving Credit Facilities. 15 Far East Bank has a fully perfected security interest against all assets of ADI in addition to a personal guarantee from Mr. Bakhit, the Company's Chief Executive Officer, and his wife. Following consummation of the Offering, the Bank has indicated that it will consider terminating such guarantee. The Credit Facilities provide for the suspension of the Credit Facilities and repayment of all debt (i) in the event of a material adverse change in the Company's financial condition, (ii) if the lender believes the prospect of payment or performance of the indebtedness is impaired, or (iii) upon a change of control. In addition, the Credit Facilities require mandatory repayments from excess cash flow. Substantially all of the Company's assets are pledged as collateral for amounts borrowed. At December 31, 1995 and for the three months ended March 31, 1996, the Company was in compliance with all of its requirements under the Credit Facilities. The Company expects its cash requirements to increase significantly in future periods. The Company will require substantial funds to purchase inventory on a bulk basis. In addition, to the extent the Company decides to expand its existing facilities, the Company would require additional capital. Although the Company believes that the net proceeds from the Offering, together with available cash, will be sufficient to meet its cash requirements for at least the next twelve months, there can be no assurance that the Company will not require additional financing during such period or that financing will be available on acceptable terms, if at all. The contemplated repayment of indebtedness with the net proceeds of the Offering is expected to significantly improve the Company's liquidity by reducing the Company's interest expense, principal amount of the indebtedness required to be repaid in the future and insurance costs associated with international sales. As part of its growth strategy, the Company intends to pursue acquisitions of bulk inventories of aircraft parts. See "Business Strategy." Financing for such acquisitions will be provided from operations and from the proceeds of the amended Credit Facilities. The Company may also issue additional debt and/or equity securities in connection with one or more of these acquisitions. 16 BUSINESS INTRODUCTION The Company is a supplier of new and used aircraft parts to major airlines worldwide. The Company locates, acquires and supplies parts for all major aircraft. Additionally, the Company engages in consignment and marketing agreements with major airlines, distributors and OEMs. The ability to sell parts on a consignment basis allows the Company to offer a wide range of parts for sale without the associated inventory risk and other financing costs associated with owned inventory. Such parts include those manufactured by Boeing, McDonnell Douglas, Airbus, Pratt & Whitney, General Electric, Rolls Royce and Lockheed. Sales have increased from $2.6 million in 1992 to $7.2 million in 1993 to $16.4 million in 1994 to $22.7 million in 1995. INDUSTRY OVERVIEW AND TRENDS The worldwide aircraft parts market is highly fragmented and parts are supplied by many types of suppliers, including airlines themselves, OEMs and numerous distributors, fixed base operators, FAA-certified facilities, traders and brokers. In May 1995, The Canaan Group Ltd., a management consulting firm specializing in the aircraft and aerospace industry, estimated such aircraft parts inventories at $45 billion. The Company believes that growth trends outlined below could increase the size of the aircraft parts market while decreasing the number of aircraft parts suppliers. MARKET GROWTH. According to Boeing's 1996 Market Outlook, the worldwide fleet of commercial airplanes and cargo jet airplanes is expected to grow from 11,066 airplanes at the end of 1995 to 23,080 airplanes by 2015, representing a compound annual growth rate of 3.8%. Boeing estimates that revenue passenger miles will exceed 4 trillion by 2015, an increase from less than 2 trillion in 1995. The Company believes such increase in revenue passenger miles is an indication that aircraft will be flown more often and will need standard service checks more frequently. Additionally, the growth rate of revenue passenger miles for the international market will exceed the growth rate for the domestic market. The Company believes that these factors have resulted and will continue to result in increased demand for aircraft parts worldwide. REDUCTION IN AIRLINE INVENTORIES. In the past, airlines controlled the majority of the aircraft parts inventory. Today, airlines are reducing the size of their parts inventories in an effort to reduce costs. These inventory reductions have increased reliance by airlines on aftermarket 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 preferred price enable it to provide the services sought by airlines in an effective manner. INCREASE IN CONSIGNMENT AND MARKETING BUSINESS. In May 1995, the Canaan Group Ltd. estimated the cost to suppliers of carrying the $45 billion of aircraft parts inventory is $10 billion annually, and that airlines carry 80% of such inventory. One method used by airlines to reduce costs associated with excess inventory is to sell 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, 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 whom they do business. In each case to date where the Company had an established relationship with an airline, the Company was one of the parts suppliers selected. The 17 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 intends 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 objective is to be a leading quality supplier of aircraft parts to airlines worldwide and to increase income from its business through the application of a comprehensive business strategy combining various customer service, marketing, operating and growth objectives. CUSTOMER SERVICE. The Company intends to continue to market and develop its (i) access to an extensive aircraft parts inventory, (ii) ability to deliver parts quickly to customers at a preferred price, and (iii) emphasis on engineering and 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 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. Such safeguards include employing two FAA-licensed Airframe and Powerplant Inspectors and contracting with two 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. FOCUS ON MAJOR AIRLINES. The Company plans to continue targeting major airlines, many of which are currently customers of the Company. Major airlines generally have larger aircraft fleets that generate a greater demand for aircraft parts than smaller airlines. Consequently, relationships with major airlines requires the expenditure of fewer resources to generate comparable sales volume and corresponding revenue with margins of profitability comparable to sales to several smaller airlines. Additionally, major 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 airlines also provide the Company with increased access to such airlines' aircraft parts inventories, which are generally larger than those of smaller airlines. INCREASE ACCESS TO INVENTORY. The Company plans to increase its accessible inventory by (i) bulk purchasing from airlines and manufacturers of aircraft parts, (ii) entering into new consignment and marketing agreements with airlines, manufacturers and overhaul facilities, and (iii) purchasing large items, such as engines and whole aircraft, on an opportunistic basis. 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 ranging from five to thirty years old. 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 the Far East. For the year ended December 31, 1995, 80% of the Company's sales were to international customers. The Company plans to continue to take advantage of the growing international market through the 18 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 buying and selling a broad range of aircraft parts. 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 which 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, rotables and repairables must be removed from an airplane and rebuilt or checked based upon the number of hours in flight. Rotables and repairables must be repaired at FAA-approved repair facilities. An expendable is generally a part which 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, 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 two FAA-licensed Airframe and Powerplant Inspectors, contracts with two FAA-licensed Designated Airworthiness Representatives and retains an outside quality assurance consultant to perform annual audits, all of whom 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 been a contributing factor to the Company's growth in customer base and revenues. In fact, the rejection rate for aircraft parts shipped by the Company is less than 1%. The Company does not repair parts, and therefore is generally not subject to the risks associated with the repair business. The Company also from time to time, on an opportunistic basis, purchases for resale high price items, such as engines and whole aircraft. CLIENT SERVICES. Client services are conducted through the Company's Irvine-based multilingual direct sales force, as well as through its sales force in the Company's overseas offices whose primary responsibility is to sell aircraft parts and manage customers. Sales personnel travel extensively to develop strong personal relationships, improve communications and remain current on regional market data. Salespeople are assigned to specific airlines and are supported by a group of regional agents who assist in countries such as Argentina, India, Indonesia, Israel, Malaysia, New Zealand, Philippines, Singapore and Turkey where local representation is critical to purchase order processing and timely payment. The Company also maintains a two-person office in London to coordinate European sales and support. Each sales representative is supported by additional personnel who research and locate parts ordered by customers. The Company's sales staff, through its knowledge of the industry and its 19 relationships throughout the world, is able to engineer 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 from a customer of a telephone or fax inquiry for a specific aircraft part, the Company first checks for availability of the part within its owned inventory, then against inventory on consignment and inventory covered by an exclusive marketing agreement (together 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-TM- ("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 will assure that it is achieving 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. Management plans to continue to grow the core business of sourcing aircraft parts to end users, and develop better relationships with existing customers. This should allow new relationships to grow and increase the exposure of its sales staff to the needs and desires of the customers. Coincident with the growth of the core business, additional marketing and consignment opportunities should continue to expand the Company's consignment and marketing business. CONSIGNMENT AND MARKETING BUSINESS. In addition to supplying parts from owned inventory, the Company also supplies 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 agreements or marketing agreements with an aircraft parts supplier such as the Company, customers, such as airlines and manufacturers, are able to distribute their aircraft parts to a larger number of prospective inventory buyers. This allows the customer to maximize the value of its inventory while at the same time freeing up resources that can be focused on its 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 consignment or marketing agreements with the Company (the "Contract Party") typically establishes an asking price for each 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 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 several consignment and marketing agreements with airlines and OEMs. No single consignment or marketing agreement is material to the Company as a whole. 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 main source of aircraft parts for acquisition during the next few years will be from such purchases. The Company also purchases specific items from time to time, such as engines and whole aircraft, on an opportunistic basis. 20 SYSTEMS Due to concerns regarding unapproved aircraft parts, regulatory authorities have increased the level of documentation required for aircraft parts. This requirement has, in turn, been extended by end users 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 companies 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 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 a 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 June 30, 1996, the Company listed 204,000 items on ILS of which the Company owned approximately 80,000 with the remaining 124,000 constituting the Accessible Inventory. Additionally, ILS is one of the tools used by the Company to locate aircraft parts to which it does not have direct access. The Company also uses a software packages called Quick Quote-TM-. This computer database creates requests for quote sheets, quotations, sales orders, purchase orders, repair order and invoices. Quick Quote also provides extensive part number databases and inventory control. The system, specifically designed for the aircraft parts industry, is comprehensive and can originate and complete a transaction without additional software. The Company also uses advanced methods of electronic data exchange including Spec 2000, AIRS, BComm-TM-, and the Internet. The Company is currently in the initial development stage of creating a customized inventory identification and search system for the Internet. Further, the Company offers customers a remote link directly into the Company's databases to improve communications with each Contract Party. 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. Competition is generally based on availability of product, reputation, customer service, price and lead time. Although some of the Company's competitors have access to 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 suited 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 the product's 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 being installed on an aircraft. When necessary, the Company uses FAA and/or Joint Aviation Authority certified repair 21 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 the regulations. 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 June 30, 1996, the Company employed 50 persons located in the United States, one employee in Chile, two employees in England, two employees in Jordan and one employee in New Zealand. The Company also has a total of six agents located in Argentina, India, Israel, Italy, Malaysia 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. FACILITIES As of June 30, 1996, the Company owned one facility in Irvine, California, leased 5,000 square feet of additional warehouse space in Irvine, California and leased a facility in England. The Company's owned facility in Irvine, California houses the Company's corporate headquarters and consists of 16,000 square feet, 9,200 of which are used for warehouse space, with the remaining space used for sales administration and accounting offices. The England facility is used as a sales office. Additional warehouse space will be needed in the future to accommodate new consignment and company-owned inventory. The Company is currently in the process of securing such additional warehouse space. LEGAL PROCEEDINGS On February 14, 1996, an action was brought in the United States District Court for the Central District of California by a customer of the Company against the Company, its wholly owned subsidiary, ADI Consignment Sales, Inc. ("ADICS"), and Mr. Bakhit. The action arises out of a dispute relating to a consignment agreement between ADICS and the customer whereby ADICS agreed to hold certain aircraft parts inventory of such customer on consignment for sale. The complaint generally alleges causes of action arising out of breach of contract. For its damages, the plaintiff is claiming $3,518,000, interest, attorneys fees, punitive damages and treble damages under R.I.C.O. The Company has filed a motion challenging the legal viability of the R.I.C.O. cause of action. Discovery has only recently commenced and the Company has not yet had the opportunity to obtain discovery regarding the substance of the claims. The Company, ADICS and Mr. Bakhit deny liability for the remaining claims brought by the customer and intend to vigorously defend such claims. There can be no assurance as to the ultimate outcome of this litigation, and an adverse outcome would likely have a material adverse effect on the Company. In addition, the Company is involved in certain other 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. 22 MANAGEMENT
EXECUTIVE AGE TITLE - ------------------------------------------------ --- ------------------------------------------------ Osamah S. Bakhit 46 Chief Executive Officer, President and Director Mark W. Ashton 45 Chief Financial Officer, Vice President, Finance and Director Jeffrey G. Ward 37 Executive Vice President Dennis R. Lewis 55 Senior Vice President, Technical Operations Victor Buendia 37 Vice President, Latin and South American Sales Elizabeth Morgan 33 Vice President, Consignment and Domestic Sales Laura M. Birgbauer 28 Chief Accounting Officer and Treasurer Bruce H. Haglund 45 Secretary and Director
OSAMAH S. BAKHIT, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. Bakhit has over 15 years of aircraft experience. Currently, Mr. Bakhit oversees the sales and operations of the Company. Prior to forming the Company in 1988, Mr. Bakhit was CEO of Bakhit Enterprises, a company where he 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 has a B.S. in chemistry from the University of California, Irvine. MARK W. ASHTON, CHIEF FINANCIAL OFFICER, VICE PRESIDENT, FINANCE AND DIRECTOR. Mr. Ashton has over 4 years of aircraft experience and over 18 years of general accounting and finance experience. Currently, Mr. Ashton oversees the Company's finance and accounting departments. Prior to joining the Company in 1996, Mr. Ashton was Controller/Chief Accounting Officer for Optical Science Company (1993-1996), CR & R Inc. (1991-1993) and Tracor Flight Systems, Inc. (1987-1991) where he oversaw accounting and finance reporting and developed and implemented state-of-the art software systems. Mr. Ashton has a B.S. in accounting/finance from the University of Southern California/California State University, Fullerton and an M.B.A. from Pepperdine University. JEFFREY G. WARD, EXECUTIVE VICE PRESIDENT. Mr. Ward has over 15 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 Systems Industries. He was a sales consultant to the aerospace industry with key accounts including the U.S. military and major aerospace manufacturers. Prior to Systems 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 from University of Virginia. DENNIS R. LEWIS, SENIOR VICE PRESIDENT, TECHNICAL OPERATIONS. Mr. Lewis joined ADI in 1994, and currently oversees the technical operations and quality control of the Company. His 25 years of aviation experience includes serving as Vice President of Marketing and Business Planning for Royal Aerospace and Vice President of Operations and a pilot at Worldways Canada Ltd., where his duties included managing the maintenance facility. Mr. Lewis holds several aviation credentials, along with a technological diploma in mechanical engineering and a teaching degree with the North York Board of Education, Canada. VICTOR BUENDIA, VICE PRESIDENT, LATIN AND SOUTH AMERICAN SALES. Mr. Buendia has 4 years of aircraft experience. Mr. Buendia is responsible for all of the Company's major Latin America accounts. Prior to joining the Company in 1993, Mr. Buendia owned and operated his own business and brings valuable marketing, communication and sales skills to ADI. 23 ELIZABETH MORGAN, VICE PRESIDENT, CONSIGNMENT AND DOMESTIC SALES. Ms. Morgan has 12 years of experience in aircraft parts sales. Ms. Morgan is responsible for the operations and sales of the Company's consignment sales. Prior to joining the Company in 1994, Ms. Morgan was the Director of Marketing for Pacific Airmotive, a division of UNC. In addition, Ms. Morgan has worked for several companies in aircraft sales. LAURA M. BIRGBAUER, CHIEF ACCOUNTING OFFICER AND TREASURER. Ms. Birgbauer has over four years of public accounting experience. Currently, Ms. Birgbauer manages the Company's finance and accounting departments and is responsible for financial reporting and the Company's treasury. From 1991 to 1996, Ms. Birgbauer was an Experienced Senior Auditor for Arthur Andersen LLP, where she supervised audit engagements and prepared and reviewed financial reports. Ms. Birgbauer has a B.S. in accounting from the University of Southern California. 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. Since 1994, Mr. Haglund has been a partner in the law firm Gibson, Haglund & Johnson. Prior to 1994, Mr. Haglund was a principal in the law firm of Phillips, Haglund, Hadden & Jeffers. From 1984 to 1991, he was a partner at the law firm of Gibson & Haglund. Mr. Haglund is also the Secretary and a member of the Board of Directors of GB Foods Corporation and the Secretary of Metalclad Corporation, both public companies traded on the Nasdaq SmallCap Market. Mr. Haglund has a J.D. from the University of Utah College of Law. BOARD OF DIRECTORS The Company's Board of Directors is currently comprised of Messrs. Bakhit, Ashton and Haglund. Shortly following the consummation of the Offering, the Company intends to appoint not less than two directors who are neither officers nor employees of the Company. The Company has three classes of directors which are elected for staggered terms of three years. The initial terms of each class expire at the annual meetings of stockholders in 1997 (Class I), 1998 (Class II) and 1999 (Class III). Mr. Haglund is a Class I director, Mr. Ashton is a Class II director and Mr. Bakhit is a Class III director. Upon the appointment of the additional directors, the Board of Directors will establish an Audit Committee and a Compensation Committee. The Audit Committee will be responsible for recommending to the Board of Directors the engagement of the independent auditors of the Company and reviewing with the independent auditors the scope and results of the audits, the internal accounting controls of the Company, audit practices and the professional services furnished by the independent auditors. The Compensation Committee will be responsible for reviewing and approving all compensation arrangements for officers of the Company, and will also be responsible for administering the 1996 Stock Option Plan. See "Employee Benefit Plans -- 1996 Stock Option Plan." DIRECTOR COMPENSATION Directors who are employees of the Company receive no compensation for serving on the Board of Directors. It is expected that directors who are not employees of the Company will receive a fee of $1,000 for each board or committee meeting attended in person and a fee of $500 for each board or committee meeting attended via conference call. All directors are reimbursed for expenses incurred in connection with attendance at board or committee meetings. 24 EXECUTIVE COMPENSATION The following table sets forth compensation received in the year ended December 31, 1995 by (i) the Company's Chief Executive Officer and (ii) the Company's two other most highly compensated executive officers whose salary plus bonus exceeded $100,000 (collectively, the "Named Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) - --------------------------------------------------- --------- ------------- --------- ------------- Osamah S. Bakhit 1995 --(1) -- 21,000(2) Chief Executive Officer and Director Jeffrey G. Ward 1995 116,473 21,000 -- Executive Vice President Dennis R. Lewis 1995 103,200 25,000 -- Senior Vice President, Technical Operations
- ------------------------ (1) Mr. Bakhit did not receive a salary for 1995, but did borrow approximately $328,700 from the Company for personal use. See "Certain Transactions." (2) Compensation consists of automobile lease payments and automobile insurance paid by the Company. EMPLOYMENT AGREEMENTS The Company intends to enter into an employment agreement with Mr. Bakhit (the "Bakhit Agreement") pursuant to which Mr. Bakhit will serve as the Chairman of the Board, Chief Executive Officer and President. The Bakhit Agreement will provide for an annual base salary of $400,000. In addition, the Company will provide Mr. Bakhit with an automobile of his choice at the expense of the Company, and all employee benefits established for Company employees. The Bakhit Agreement will also provide Mr. Bakhit with incentive compensation under an Executive Compensation Plan that the Company intends to adopt (the "Executive Compensation Plan"), which will provide for the contribution to a senior management bonus pool of a certain percentage of the Company's earnings before taxes (not to exceed $250,000 annually), to be allocated in accordance with the determination of the Board of Directors. In addition, Mr. Bakhit will be entitled to bonus compensation declared at the discretion of the Board of Directors from time to time in an amount not to exceed $150,000 per calendar year. Under the Bakhit Agreement, Mr. Bakhit will be granted certain options to purchase shares of Common Stock. The Bakhit Agreement will contain nonsolicitation, noncompetition and confidentiality provisions. The Bakhit Agreement will provide for an initial term expiring on December 31, 2001. However, the Bakhit Agreement will be automatically renewed for a new five-year term on the expiration date unless canceled upon 90 days written notice by the Company or by Mr. Bakhit or unless sooner terminated pursuant to the terms of the Bakhit Agreement. The Company intends to enter into an employment agreement with Mr. Ashton (the "Ashton Agreement") pursuant to which Mr. Ashton will serve as the Company's Vice President-Finance and Chief Financial Officer. The Ashton Agreement will provide for an annual base salary of $120,000. In addition, the Company will agree to provide Mr. Ashton all employee benefits established for Company employees. The Ashton Agreement will also provide Mr. Ashton with incentive compensation under the Executive Compensation Plan in an amount to be determined by the Board of Directors. Under the Ashton Agreement, Mr. Ashton will be granted certain options to purchase shares of Common Stock. The Ashton Agreement will contain nonsolicitation, noncompetition and confidentiality provisions. The Ashton Agreement will provide for an initial term expiring on December 31, 1999. However, 25 the Ashton Agreement will be automatically renewed for a new three year term on the expiration date unless canceled upon 90 days written notice by the Company or by Mr. Ashton or unless sooner terminated pursuant to the terms of the Ashton Agreement. The Company intends to enter into an employment agreement with Mr. Ward (the "Ward Agreement") pursuant to which Mr. Ward will serve as the Company's Executive Vice President. The Ward Agreement will provide for an annual base salary of $120,000. In addition, the Company will provide Mr. Ward all employee benefits established for Company employees. The Ward Agreement will also provide Mr. Ward with incentive compensation under the Executive Compensation Plan in an amount to be determined by the Board of Directors. Under the Ward Agreement, Mr. Ward will be granted certain options to purchase shares of Common Stock. In addition, Mr. Ward will be entitled to commission on sales to certain customers identified in the Ward Agreement equal to 1.25% of such sales. The Ward Agreement will contain nonsolicitation, noncompetition and confidentiality provisions. The Ward Agreement will provide for an initial term expiring on December 31, 1999. However, the Agreement will be automatically renewed for a new three year term on the expiration date unless canceled upon 90 days written notice by the Company or by Mr. Ward or unless sooner terminated pursuant to the terms of the Ward Agreement. EMPLOYEE BENEFIT PLANS THE 1996 STOCK PLAN On July 10, 1996, prior to the consumation of the Offering the board of directors of the Company (the "Board") adopted, and the then stockholder approved, the Aviation Distributors Incorporated 1996 Stock Option and Incentive Plan (the "1996 Stock Plan"), which provides for the grant of various types of stock-based compensation to non-employee directors, selected employees and independent contractors of the Company and its subsidiaries. The 1996 Stock Plan provides for the issuance of a maximum of 2,856,000 shares of Common Stock pursuant to awards under the 1996 Stock Plan. The purposes of the 1996 Stock Plan are to promote the success of the Company's business by providing incentives to those non-employee directors, employees and independent contractors who are or will be responsible for such success; to facilitate the ownership of Common Stock by such individuals, thereby increasing their proprietary interests in the Company's business and to assist the Company in attracting and retaining non-employee directors, employees and independent contractors with experience and ability. The 1996 Stock Plan is designed to comply with the requirements for "performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended and the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 of the Exchange Act. The summary that follows is subject to the actual terms of the 1996 Stock Plan. The 1996 Stock Plan provides for the granting of stock options ("Options"), including incentive stock options ("ISOs") and non-qualified stock options ("NSOs"). Options granted under the 1996 Stock Plan may be accompanied by stock appreciation rights ("SARs") or limited stock appreciation rights ("LSARs"), or both ("Rights"). Rights may also be granted independently of Options. The Plan also provides for the granting of restricted stock and restricted stock units ("Restricted Awards"), dividend equivalents and other stock- and cash-based awards. The 1996 Stock Plan also permits the plan's administrator to make loans to participants in connection with the grant of awards, on terms and conditions determined solely by the plan administrator. All awards will be evidenced by an agreement (an "Award Agreement") setting forth the terms and conditions applicable thereto. 26 PLAN ADMINISTRATION The 1996 Stock Plan is administered by the Board, and from and after the consumation of the Offering will be administered by a committee of the Board, the composition of which will at all times satisfy the provisions of Rule 16b-3 (such Board or committee sometimes referred to herein as the "Plan Administrator"). Members of the Board or committee are not entitled to receive remuneration for administering the 1996 Stock Plan. The 1996 Stock Plan provides that no member of the Board or committee will be liable for any action or determination taken or made in good faith with respect to the 1996 Stock Plan or any Option, Right, Restricted Award or other award granted thereunder. Subject to the terms of the 1996 Stock Plan, the Plan Administrator has the right to grant awards to eligible recipients and to determine the terms and conditions of Award Agreements, including the vesting schedule and exercise price of such awards, and the effect, if any, of a change in control of the Company on such awards. SHARES SUBJECT TO THE 1996 STOCK PLAN The 2,856,000 shares reserved for issuance under the 1996 Stock Plan may be authorized but unissued shares of Common Stock or shares which have or may be reacquired by the Company in the open market, in private transactions or otherwise. Generally speaking, shares subject to an award which is forfeited, cancelled, exchanged, surrendered or terminated, without distribution of the shares subject thereto, will again be available for issuance under the 1996 Stock Plan. The 1996 Stock Plan provides that, in the event of changes in the Common Stock by reason of a merger, reorganization, recapitalization, common stock dividend, stock split or similar change, the Plan Administrator will make appropriate adjustments in the aggregate number of shares available for issuance under the 1996 Stock Plan, the purchase price to be paid or the number of shares issuable upon the exercise thereafter of any Option previously granted and in the purchase price to be paid or the number of shares issuable pursuant to other awards. The Plan Administrator will have the discretion to make other appropriate adjustments to awards to prevent dilution of shares or other devaluations of such awards. ELIGIBILITY Discretionary grants of Options, Rights, Restricted Awards and dividend equivalents, and loans in connection therewith may be made to any non-employee director, employee or any independent contractor of the Company or its direct and indirect subsidiaries who is determined by the Plan Administrator to be eligible for participation in the 1996 Stock Plan, consistent with the purposes of the Plan. EXERCISE OF OPTIONS Options will vest and become exercisable over the exercise period, at such times and upon such conditions as the Plan Administrator determines and sets forth in the Award Agreement. The Plan Administrator may accelerate the exercisability of any outstanding Option at such time and under such circumstances as it deems appropriate. Options that are not exercised within ten years from the date of grant, however, will expire without value. Options are exercisable during the optionee's lifetime only by the optionee. The Award Agreements will contain provisions regarding the exercise of Options following termination of employment with or service to the Company, including terminations due to the death, disability or retirement of an award recipient, or upon a change in control of the Company. In addition to the terms and conditions governing NSOs, ISOs awarded under the 1996 Stock Plan must comply with the requirements set forth in Section 422 of the Code. The purchase price of Common Stock subject to the exercise of an Option will be as determined by the Plan Administrator and may be adjusted in accordance with the antidilution provisions described in "Shares Subject to the 1996 Stock Plan," above. Upon the exercise of any Option, the purchase price may be fully paid in cash, by delivery of Common Stock previously owned by the optionee equal in value to the exercise price, by means of a loan from the Company, or by having shares of Common 27 Stock with a fair market value (on the date of exercise), equal to the exercise price withheld by the Company or sold by a broker-dealer under qualifying circumstances (or in any combination of the foregoing). STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS Unless the Plan Administrator determines otherwise, a SAR or LSAR (1) granted in tandem with an NSO may be granted at the time of grant of the related NSO or at any time thereafter or (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. A SAR will be exercisable only to the extent the underlying Option is exercisable. Upon exercise of a SAR the grantee will receive, with respect to each share subject thereto, an amount equal in value to the excess of (1) the fair market value of one share of Common Stock on the date of exercise over (2) the grant price of the SAR (which in the case of a SAR granted in tandem with an Option will be the exercise price of the underlying Option, and which in the case of any other SAR will be the price determined by the Plan Administrator). Upon exercise of a LSAR, the grantee will receive, with respect to each share subject thereto, automatically upon the occurrence of a change in control of the Company, an amount equal in value to the excess of (1) the change in control price (which in the case of a LSAR granted in tandem with an ISO will be the fair market value) of one share of Common Stock on the date of such change in control over (2) the grant price of the LSAR (which in the case of a LSAR granted in tandem with an Option will be the exercise price of the underlying Option, and which in the case of any other LSAR will be the price determined by the Plan Administrator). In the case of a LSAR granted to a participant, however, who is subject to the reporting requirements of Section 16(a) of the Exchange Act (a "Section 16 Individual"), such Section 16 Individual will only be entitled to receive such amount if the LSAR has been outstanding for at least six (6) months as of the date of the change in control. With respect to SARs and LSARs that are granted in tandem with Options, each such SAR and LSAR will terminate upon the termination or exercise of the pertinent portion of the related Option, and the pertinent portion of the related Option will terminate upon the exercise of any such SAR or LSAR. RESTRICTED STOCK AND RESTRICTED STOCK UNITS A Restricted Stock award is an award of Common Stock subject to such restrictions on transferability and other restrictions as the Plan Administrator may impose at the date of grant or thereafter. Restrictions on shares may lapse at such times, under such circumstances or otherwise, as determined by the Board or the committee. Unless an Award Agreement provides otherwise, a Restricted Stock recipient will have all of the rights of a shareholder during the restriction period including the right to vote Restricted Stock and the right to receive dividends. If the recipient of an award of Restricted Stock terminates employment with or service to the Company during the applicable restriction period, Restricted Stock and any accrued but unpaid dividends or dividend equivalents that are at that time still subject to restrictions will be forfeited (unless the Plan Administrator has provided otherwise in an Award Agreement). Recipients of Restricted Stock Units will receive cash or shares of Common Stock, as determined by the Plan Administrator, upon expiration of the deferral period specified for such Restricted Stock Units in the related Award Agreement. Restricted Stock Units may also be subject to such restrictions as the Plan Administrator imposes at the time of grant or thereafter, which restrictions may lapse at the expiration of the deferral period (or at an earlier or later time in the Plan Administrator's discretion). Upon termination of employment with or service to the Company during any applicable deferral period to which forfeiture conditions apply, or upon failure to satisfy any other conditions precedent to 28 the delivery of cash or Common Stock pursuant to a Restricted Stock Unit award, all such units that are subject to deferral or restriction will be forfeited (unless the applicable Award Agreement or the Plan Administrator provides otherwise). DIVIDEND EQUIVALENTS Dividend equivalents may be granted which relate to Options, Rights or other awards under the 1996 Stock Plan, or may be granted as freestanding awards. The Board or the committee may provide, at the grant date or thereafter, that dividend equivalents will be paid or distributed to an awardee when accrued with respect to Options, Rights or other awards under the 1996 Stock Plan, or will be deemed to have been reinvested in additional shares of Common Stock (or such other investment vehicles as the Plan Administrator may specify). Dividend equivalents which are not freestanding will be subject to all conditions and restrictions applicable to the underlying awards to which they relate. OTHER STOCK- OR CASH-BASED AWARDS The Plan Administrator may grant Common Stock as a bonus, or in lieu of Company commitments to pay cash under other plans or compensatory arrangements of the Company. The Board and the committee may also grant other stock- or cash-based awards as an element of or supplement to any other award under the 1996 Stock Plan. Such awards may be granted with value and payment contingent upon the attainment of specified individual or Company (or subsidiary) financial goals, or upon any other factors designated by the Plan Administrator. The Plan Administrator may determine the terms and conditions of such awards at the date of grant or thereafter. AMENDMENT; TERMINATION The Board or the committee may terminate or amend the 1996 Stock Plan at any time, except that stockholder approval is required for any amendment which (i) increases the maximum number of shares of Common Stock which may be issued under the 1996 Stock Plan (except for adjustments made to prevent share dilutions and award devaluations), (ii) changes the class of individuals eligible to participate in the 1996 Stock Plan, or (iii) extends the term of the 1996 Stock Plan or the period during which any Option, Right, Restricted Award or other award may be granted or any Option or Right may be exercised; but such approval is needed only to the extent required by Rule 16b-3 with respect to the material amendment of any employee benefit plan maintained by the Company. Termination or amendment of the 1996 Stock Plan will not affect previously granted Options, Rights, Restricted Awards or other grants, which will continue in effect in accordance with their terms. PAYMENT OF TAXES The Company is authorized to withhold from any award granted, any payment relating to an award under the Plan (including from a distribution of Common Stock), or any other payment to a grantee, amounts of withholding and other taxes due in connection with the award, and to take such other action as the Plan Administrator may deem advisable to enable the Company and grantees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the award. This authority includes the right to withhold or receive Common Stock or other property and to make cash payments in respect thereof in satisfaction of a grantee's tax obligations. CERTAIN FEDERAL INCOME TAX EFFECTS The following discussion of certain relevant federal income tax effects applicable to Options, Rights, Restricted Awards and dividend equivalents granted under the 1996 Stock Plan is a summary only, and reference is made to the Code for a complete statement of all relevant federal tax provisions. Holders of NSOs, ISOs, Rights and dividend equivalents should consult their tax advisors before realization of any such awards, and holders of Common Stock pursuant to awards hereunder should consult their tax advisors before disposing of any shares of Common Stock acquired pursuant to such awards. Section 16 Individuals should note that somewhat different rules than those described below may apply to them. 29 NON-QUALIFIED STOCK OPTIONS A participant will generally not be taxed upon the grant of an NSO. Rather, at the time of exercise of such NSO, the participant will recognize ordinary income for federal income tax purposes in an amount equal to the excess of the fair market value of the shares purchased over the Option price. The Company will generally be entitled to a tax deduction at such time and in the same amount that the participant recognizes ordinary income. If shares acquired upon exercise of a NSO (or upon untimely exercise of an ISO) are later sold or exchanged, then the difference between the sales price and the fair market value of such Common Stock on the date that ordinary income was recognized with respect thereto will generally be taxable as long-term or short-term capital gain or loss (if the Common Stock is a capital asset of the participant) depending upon whether the Common Stock has been held for more than one year after such date. INCENTIVE STOCK OPTIONS A participant will not be taxed upon the grant of an ISO or upon its timely exercise. Exercise of an ISO will be timely if made during its term and if the participant remains an employee of the Company or a subsidiary at all times during the period beginning on the date of grant of the ISO and ending on the date three months before the date of exercise (or one year before the date of exercise in the case of a disabled employee). Exercise of an ISO will also be timely if made by the legal representative of a participant who dies (i) while in the employ of the Company or a subsidiary or (ii) within three months after termination of employment (or one year in the case of a disabled employee). The tax consequences of an untimely exercise of an ISO will be determined in accordance with the rules applicable to NSOs. (See "Certain Federal Income Tax Effects -- Non-qualified Stock Options," above.) If shares acquired pursuant to a timely exercised ISO is later disposed of, the participant will, except as noted below with respect to a "disqualifying disposition," recognize long-term capital gain or loss (if the Common Stock is a capital asset of the employee) equal to the difference between the amount realized upon such sale and the Option price. The Company, under these circumstances, will not be entitled to any federal income tax deduction in connection with either the exercise of the ISO or the sale of such Common Stock by the participant. If, however, a participant disposes of shares acquired pursuant to the exercise of an ISO prior to the expiration of two years from the date of grant of the ISO or within one year from the date such stock is transferred to him upon exercise (a "disqualifying disposition"), generally (i) the participant will realize ordinary income at the time of the disposition in an amount equal to the excess, if any, of the fair market value of the shares at the time of exercise (or, if less, the amount realized on such disqualifying disposition) over the Option exercise price, and (ii) if the Common Stock is a capital asset of the participant, any additional gain recognized by the participant will be taxed as short-term or long-term capital gain. In such case, the Company may claim a federal income tax deduction at the time of such disqualifying disposition for the amount taxable to the participant as ordinary income. Any capital gain recognized by the participant will be long-term capital gain if the participant's holding period for the shares at the time of disposition is more than one year; otherwise it will be short-term. The amount by which the fair market value of the Common Stock on the exercise date of an ISO exceeds the Option price will be an item of adjustment for purposes of the "alternative minimum tax" imposed by Section 55 of the Code. EXERCISE WITH SHARES According to a published ruling of the Internal Revenue Service, a participant who pays the Option price upon exercise of a NSO, in whole or in part, by delivering shares of Common Stock already owned by him will recognize no gain or loss for federal income tax purposes on the shares surrendered, but otherwise will be taxed according to the rules described above for NSOs. (See "Certain Federal Income Tax Effects -- Non-qualified Stock Options," above.) With respect to shares 30 acquired upon exercise which are equal in number to the shares surrendered, the basis of such shares will be equal to the basis of the shares surrendered, and the holding period of the shares acquired will include the holding period of the shares surrendered. The basis of additional shares received upon exercise will be equal to the fair market value of such shares on the date which governs the determination of the participant's ordinary income, and the holding period for such additional shares will commence on such date. The Treasury Department has issued proposed regulations that, if adopted in their current form, would appear to provide for the following rules with respect to the exercise of an ISO by surrender of previously owned shares of corporation stock. If the shares surrendered in payment of the exercise price of an ISO are "statutory option stock" (including stock acquired pursuant to the exercise of an ISO) and if the surrender constitutes a "disqualifying disposition" (as would be the case, for example, if, in satisfaction of the Option exercise price, the Company withholds shares which would otherwise be delivered to the participant), any gain realized on such transfer will be taxable to the optionee, as discussed above. Otherwise, when shares of the Company's stock are surrendered upon exercise of an ISO, in general, (i) no gain or loss will be recognized as a result of the exchange, (ii) the number of shares received that is equal in number to the shares surrendered will have a basis equal to the shares surrendered and (except for purposes of determining whether a disposition will be a disqualifying disposition) will have a holding period that includes the holding period of the shares exchanged, and (iii) any additional shares received will have a zero basis and will have a holding period that begins on the date of the exchange. If any of the shares received are disposed of within two years of the date of grant of the ISO or within one year after exercise, the shares with the lowest basis will be deemed to be disposed of first, and such disposition will be a disqualifying disposition giving rise to ordinary income as discussed above. RIGHTS A grant of SARs or LSARs has no federal income tax consequences at the time of such grant. Upon the exercise of SARs or LSARs (other than a Free Standing LSAR), the amount of any cash and the fair market value as of the date of exercise of any shares of Common Stock received is taxable to the participant as ordinary income. With respect to a Free Standing LSAR, however, a recipient should be required to include as taxable ordinary income on the change in control date an amount equal to the amount of cash that could be received upon the exercise of the LSAR, even if the LSAR is not exercised until a date subsequent to the change in control date. The Company will generally be entitled to a deduction at the same time and equal to the amount included in the participant's income. Upon the sale of the shares acquired by the exercise of SARs or LSARs, participants will recognize capital gain or loss (assuming such Common Stock was held as a capital asset) in an amount equal to the difference between the amount realized upon such sale and the fair market value of the Common Stock on the date that governs the determination of the participant's ordinary income. RESTRICTED AWARDS In the case of a Restricted Award, a participant generally will not be taxed upon the grant of such an award, but, rather, the participant will recognize ordinary income in an amount equal to (i) the fair market value of Common Stock at the time the shares become transferable or are otherwise no longer subject to a substantial risk of forfeiture (as defined in the Code), minus (ii) the price, if any, paid by the participant to purchase such Common Stock. The Company will be entitled to a deduction at the time when, and in the amount that, the participant recognizes ordinary income. However, a participant may elect (not later than 30 days after acquiring such shares) to recognize ordinary income at the time the restricted shares are awarded in an amount equal to their fair market value at that time, notwithstanding the fact that such shares are subject to restrictions and a substantial risk of forfeiture. If such an election is made, no additional taxable income will be recognized by the participant at the time the restrictions lapse. The Company will be entitled to a tax deduction at the time when, and to the extent that, income is recognized by the participant. However, if shares in respect of which such 31 election was made are later forfeited, no tax deduction is allowable to the participant for the forfeited shares, and the Company will be deemed to recognize ordinary income equal to the amount of the deduction allowed to the Company at the time of the election in respect of such forfeited shares. DIVIDEND EQUIVALENTS A participant will not be taxed upon the grant of a dividend equivalent, but will instead recognize ordinary income in an amount equal to the value of the dividend equivalent at the time the dividend equivalent becomes payable to the participant. The Company will be entitled to a deduction at such time and in such amount as the participant recognizes ordinary income with respect to the dividend equivalent. No Options have been granted by the Company pursuant to the 1996 Stock Plan. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Delaware General Corporation Law ("GCL") provides that a company may indemnify its directors and officers as to certain liabilities. The Company's Certificate of Incorporation and Bylaws provide for the indemnification of its directors and officers to the fullest extent permitted by law, and the Company intends to enter into separate indemnification agreements with each of its directors and officers to effectuate these provisions and to purchase directors and officers liability insurance. The effect of such provisions is to indemnify, to the fullest extent permitted by law, the directors and officers of the Company against all costs, expenses and liabilities incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their affiliation with the Company. The Company's indemnification agreements with each of its officers, directors and key employees contain provisions which are in some respects broader than the specific indemnification provisions contained in the GCL. The indemnification agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors of officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them, as to which they could be indemnified, and to obtain director's and officer's insurance, if available on reasonable terms. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At present, the Company is not aware of any pending litigation involving a director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 32 CERTAIN TRANSACTIONS The Company loaned approximately $328,700 to Mr. Bakhit for personal use in December 1995. The loan is payable in annual principal installments of $65,744 through December 31, 2000. The loan bears an interest rate of 6%, payable from time to time on the outstanding balance. As of June 30, 1996, approximately $328,700 principal amount was outstanding on the loan. Mr. Bakhit, the Chief Executive Officer, and his wife have personally guaranteed the Credit Facilities with Far East Bank. Following consummation of the Offering, Far East Bank has indicated that it will consider terminating such guarantee. PRINCIPAL AND SELLING STOCKHOLDER The following table and the notes thereto set forth information, as of the date of this Prospectus, relating to beneficial ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934) of the Company's equity securities by the Selling Stockholder, the Company's directors and executive officers and the Company's directors and executive officers as a group:
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP OF COMMON STOCK OF COMMON STOCK OF COMMON STOCK PRIOR TO THE OFFERING TO BE SOLD AFTER THE OFFERING(2) ------------------------- ----------------- ------------------------- NAME OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER NUMBER PERCENT - ------------------------------------- ----------- ------------ ----------------- ----------- ------------ Osamah S. Bakhit (1)................. 2,100,000 100% 100,000 2,000,000 67% All directors and executive officers as a group (4 persons).............. 2,100,000 100% 100,000 2,000,000 67%
- ------------------------ (1) The mailing address of Mr. Bakhit is c/o Aviation Distributors Incorporated, 1 Wrigley Drive, Irvine, California 92618. Mr. Bakhit is the Chief Executive Officer, President and a director of the Company. (2) Assumes that the over-allotment option is not exercised. SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of the Offering, the Company will have 3,000,000 shares of Common Stock outstanding. Of these shares, the 900,000 shares sold by the Company and the 100,000 shares sold by the Selling Stockholder in the Offering will be freely tradeable without restriction or further registration under the Securities Act, unless held by an "affiliate" of the Company (as that term is defined below). Any such affiliate will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The remaining 2,000,000 shares of Common Stock (1,950,000 shares of Common Stock if the over-allotment is exercised) outstanding are "restricted securities" for purposes of Rule 144 and are held by Mr. Bakhit, who is considered an "affiliate" of the Company within the meaning of Rule 144. Restricted securities may not be resold in a public distribution except in compliance with the registration requirements of the Securities Act or pursuant to an exemption therefrom, including the exemptions provided by Rule 144 or Rule 701. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, is entitled to sell within any three-month period a number of shares beneficially owned for at least two years that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the outstanding shares of Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not an "affiliate" of the Company during the 90 days preceding a proposed sale by such person and who has beneficially owned "restricted securities" for at least three years is entitled to sell such 33 shares under Rule 144 without regard to the volume, manner of sale or notice requirements. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly controls, or is controlled by, or is under common control with such issuer. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisors before the date the Company becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons, including the Stock Plan. Securities issued in reliance on Rule 701 are restricted securities and, beginning 90 days after the date of this Prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its two-year minimum holding period requirements. Such securities will be subject, however, to any lockup agreements related to such securities. The Company and the Selling Stockholder have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, without the prior written consent of CRI, for a period of 180 days after the date of this Prospectus. Prior to the Offering, there has been no public market for the Common Stock. No predictions can be made as to the effect, if any, that future sales of shares of Common Stock, and options to acquire shares of Common Stock, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales may occur, could have a material adverse effect on the market price of the Common Stock. See "Risk Factors -- Future Sales by Principal Stockholder; Shares Eligible for Future Sale." 34 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Certificate") and Bylaws ("Bylaws") is a summary and is qualified in its entirety by the provisions of the Certificate and Bylaws, copies of which have been filed as exhibits to the Registration Statement. The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, $.01 par value, and 3,000,000 shares of Preferred Stock, $.01 par value. COMMON STOCK Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefore. See "Dividend Policy." Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preference, if any, of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. The transfer agent for the Common Stock is American Stock Transfer & Trust Company. PREFERRED STOCK The Board of Directors, without further action by the stockholders, may issue shares of the Preferred Stock in one or more series and may fix or alter the relative, participating, optional or other rights, preferences, privileges and restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences and conversion rights, and the description of and number of shares constituting any wholly unissued series of Preferred Stock. The Board of Directors, without further stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. No shares of Preferred Stock presently are outstanding and the Company currently has no plans to issue shares of Preferred Stock. The issuance of Preferred Stock in certain circumstances may have the effect of delaying or preventing a change of control of the Company without further action by the stockholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price and the voting and other rights of the holders of Common Stock. CERTAIN CORPORATE PROVISIONS Upon the consummation of this Offering, the Company will be subject to the provisions of Section 203 of the GCL. In general, this statute prohibits a publicly held Delaware corporation from engaging under certain circumstances in a "business combination" with an "interested stockholder," for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date at which the stockholder became an interested stockholder the Board of Directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder, (ii) the stockholder owned more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, or (iii) the business combination is approved by the Board of Directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, (i) owns 15% or more of the corporation's voting stock or (ii) is an affiliate or associate of the 35 corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the prior three years. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. Although the Company is a Delaware corporation, under Section 2115 of the California Corporations Code, certain provisions of the California's Corporations Code apply to the Company because of the residence of the Company's stockholders and the extent of its business operations and assets in California. These provisions include, among others, those pertaining to cumulative voting, enforcement of certain rights by the California Attorney General, the directors' standard of care, certain requirements for annual election and removal of directors, limitations on sales of assets and mergers and stockholders' right to inspect and copy the Company's stockholder's list. Certain of such provisions may delay or prevent a change of control of the Company. The Company's Certificate and Bylaws contain a number of provisions relating to corporate governance and to the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay or prevent a change of control of the Company. These provisions include (a) the classification of the Board of Directors into three classes, each class serving for staggered three years terms; (b) a provision that stockholder action may be taken only at stockholder meetings; (c) the authority of the Board of Directors to issue series of Preferred Stock with such voting rights and other powers as the Board of Directors may determine; (d) a provision that a vote of not less than two-thirds of the outstanding shares entitled to vote thereon is required for an amendment to the Bylaws and to amend provisions of the Certificate relating to (i) the classification of the Board of Directors, (ii) the calling of special stockholder meetings and (iii) the amendment of the Bylaws; and (e) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at stockholder meetings. See also "Risk Factors -- Control by Principal Stockholder." The Certificate provides that the Company is subject to the provision of Section 302 of the GCL. In general, this statute allows any court of equitable jurisdiction in the State of Delaware, upon proper application by the Company or any of its creditors or stockholders, to order a meeting of creditors or stockholders whenever a compromise or arrangement is proposed between the Company and its creditors or the Company and its stockholders. Any compromise, arrangement or reorganization of the Company that is approved by a majority in number representing three-fourths in value of the creditors or stockholders, as the case may be, and sanctioned by the court to which the application was made shall be binding on all of the creditors or stockholders, as the case may be, and the Company. 36 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom Cruttenden Roth Incorporated is acting as Representative, have severally agreed to purchase from the Company and the Selling Stockholder, and the Company and the Selling Stockholder have agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite each Underwriter's name below:
UNDERWRITERS NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Cruttenden Roth Incorporated............................................... ----------------- Total.................................................................. 1,000,000 ----------------- -----------------
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions, and letters from the Company and its respective counsel and the Company's independent certified public accountants. The nature of the Underwriters' obligation is such that they are committed to purchase and pay for all the shares of Common Stock if any are purchased. The Company has been advised by the Representative that the Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such selected dealers may reallow, a discount not in excess of $ per share to certain brokers and dealers. After the initial public offering of the shares, the public offering price and other selling terms may be changed by the Representative. No change in such terms shall change the amount of proceeds to be received by the Company and the Selling Stockholder as set forth on the cover page of this Prospectus. The Company and the Selling Stockholder have granted an option to the Underwriters, exercisable for a period of 45 days after the date of this Prospectus, to purchase up to an additional 100,000 shares and 50,000 shares, respectively, of Common Stock at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriters may exercise this option only to cover over-allotments, if any. To the extent that the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares of Common Stock in approximately the same proportion as set forth in the above table. The Company has agreed to issue to the Representative, for a total of $100, warrants (the "Representative's Warrants") to purchase up to 100,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price. The Representative's Warrants are exercisable for a period of four years beginning one year from the date of this Prospectus. The holders of the Representative's Warrants will have no voting, dividend, or other stockholder rights until the Representative's Warrants are exercised. In addition, the Company has granted certain rights to the holders of the Representative's Warrants to register the Representative's Warrants and the Common Stock underlying the Representative's Warrants under the Securities Act. The Company has agreed to pay the Representative a non-accountable expense allowance equal to 3% of the aggregate Price to Public (including with respect to shares of Common Stock underlying the over-allotment option, if and to the extent it is exercised) set forth on the front cover of this Prospectus for expenses in connection with this offering, of which the sum of $30,000 has been paid. The 37 Representative's expenses in excess of such allowance will be borne by the Representative. To the extent that the expenses of the Representative are less than the non-accountable expense allowance, the excess may be deemed to be compensation to the Representative. The Company has granted to the Representative a right of first refusal to manage or co-manage certain public offerings or private placements of the Company's debt or equity securities by the Company and certain stockholders. The right of first refusal terminates upon the first to occur of (i) the date the Company has completed an offering that the Representative has declined, or (ii) the third anniversary of the closing date of the sale of Common Stock offered by this Prospectus. The Representative has advised the Company that it does not expect any sales of the shares of Common Stock offered hereby to be made to discretionary accounts controlled by the Underwriters. Prior to this offering, there has been no established trading market for the Common Stock. Consequently, the initial public offering price for the Common Stock offered hereby has been determined by negotiation among the Company and the Representative. Among the factors considered in such negotiations were the preliminary demand for the Common Stock, the prevailing market and economic conditions, the Company's results of operations, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, an assessment of the Company's management, the consideration of these factors in relation to the market valuation of comparable companies in related businesses, the current condition of the markets in which the Company operates, and other factors deemed relevant. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this offering at or above the initial public offering price. The Underwriting Agreement provides that the Company and the Selling Stockholder will indemnify the Underwriters and their controlling persons against certain liabilities under the Securities Act or will contribute to payments the Underwriters and their controlling persons may be required to make in respect thereof. LEGAL MATTERS Certain legal matters with respect to the Common Stock have been passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles, California. EXPERTS The consolidated balance sheet of the Company as of December 31, 1995 and the related consolidated statements of operations, stockholder's equity and cash flows for the years ended December 31, 1994 and 1995 included in this Prospectus and elsewhere in the registration statement of which this Prospectus is a part have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in such registration statement and the exhibits and schedules thereto. For further information with respect to the Company or such Common Stock, reference is made to such registration statement and the schedules and exhibits filed as a part thereof. Statements contained in this Prospectus regarding the contents of any contract or any other document are not necessarily complete and, in each instance, reference is hereby made to the copy of such contract or other document filed as an exhibit to such registration statement. Such registration 38 statement, including exhibits thereto, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., and at the following regional offices of the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of all or any part thereof may be obtained from the Public Reference Section, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees. The Commission also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent certified public accountants and with quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. 39 AVIATION DISTRIBUTORS INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-3 Consolidated Statements of Operations for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)................... F-4 Consolidated Statements of Stockholder's Equity for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1996 (unaudited)................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)................... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder of Aviation Distributors Incorporated: We have audited the accompanying consolidated balance sheet of AVIATION DISTRIBUTORS INCORPORATED (a Delaware corporation) and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for the years ended December 31, 1994 and 1995. 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 generally accepted auditing standards. 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 financial position of Aviation Distributors Incorporated and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California April 17, 1996 (except with respect to the matters discussed in Note 14, as to which the date is July 12, 1996) F-2 AVIATION DISTRIBUTORS INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................................ $ 867,721 $ 13,630 Restricted cash.......................................................... 301,175 778,393 Accounts receivable, net of allowance for doubtful accounts of $48,607 at December 1995 and $40,907 at March 1996................................. 4,437,112 4,627,208 Other receivables........................................................ 141,287 116,588 Inventories.............................................................. 2,209,262 2,626,894 Current portion of notes receivable...................................... 1,466,224 1,511,543 Current portion of note receivable from officer.......................... 65,744 65,744 Prepaid expenses......................................................... -- 144,178 ------------ ----------- Total current assets................................................... 9,488,525 9,884,178 ------------ ----------- PROPERTY AND EQUIPMENT 1,663,378 1,711,406 Less -- Accumulated depreciation......................................... 170,140 183,650 ------------ ----------- 1,493,238 1,527,756 ------------ ----------- Notes receivable, net of current portion................................... 4,674,491 4,292,744 Note receivable from officer, net of current portion....................... 262,974 262,974 Other assets............................................................... 95,465 38,364 ------------ ----------- $ 16,014,693 $16,006,016 ------------ ----------- ------------ ----------- LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) CURRENT LIABILITIES: Checks issued not yet presented for payment.............................. $ 574,888 $ 502,007 Accounts payable......................................................... 2,185,188 2,177,235 Accrued liabilities...................................................... 370,833 357,798 Lines of credit.......................................................... 4,667,784 5,414,431 Current portion of long-term debt........................................ 1,815,220 1,867,624 Current portion of capital lease obligations............................. 26,178 26,628 ------------ ----------- Total current liabilities.............................................. 9,640,091 10,345,723 ------------ ----------- Long-term debt, net of current portion..................................... 6,168,356 5,831,492 ------------ ----------- Capital lease obligations, net of current portion.......................... 53,240 47,120 ------------ ----------- Commitments and Contingencies STOCKHOLDER'S EQUITY (DEFICIT): Capital stock, par value of $.01, 10,000,000 shares authorized; 2,100,000 shares issued and outstanding........................................... 21,000 21,000 Additional paid in capital............................................... 386,000 386,000 Retained deficit......................................................... (253,994) (625,319) ------------ ----------- Total stockholder's equity (deficit)................................... 153,006 (218,319) ------------ ----------- $ 16,014,693 $16,006,016 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 AVIATION DISTRIBUTORS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ------------------------------ MARCH 31, 1994 1995 ---------------------------- -------------- -------------- 1995 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) NET SALES.......................................... $ 16,368,967 $ 22,652,310 $ 4,620,978 $ 4,635,759 COST OF SALES...................................... 11,809,104 18,475,548 3,891,875 3,766,970 -------------- -------------- ------------- ------------- Gross profit................................... 4,559,863 4,176,762 729,103 868,789 SELLING AND ADMINISTRATIVE EXPENSES................ 3,581,822 3,961,449 842,518 1,109,488 -------------- -------------- ------------- ------------- Income (loss) from operations.................. 978,041 215,313 (113,415) (240,699) OTHER EXPENSES (INCOME): Interest expense, net............................ 278,425 621,699 124,645 142,265 Other expense (income)........................... 12,603 (88,233) -- (11,639) Nonrecurring loss on settlement.................. 376,075 -- -- -- -------------- -------------- ------------- ------------- Income (loss) before provision (benefit) for income taxes.................................. 310,938 (318,153) (238,060) (371,325) PROVISION (BENEFIT) FOR INCOME TAXES............... 102,460 (103,320) (70,000) -- -------------- -------------- ------------- ------------- Net income (loss).............................. $ 208,478 $ (214,833) $ (168,060) $ (371,325) -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Earnings (loss) per share.......................... $ .10 $ (.10) $ (.08) $ (.18) -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Weighted average shares outstanding................ 2,100,000 2,100,000 2,100,000 2,100,000 -------------- -------------- ------------- ------------- -------------- -------------- ------------- -------------
The accompanying notes are an integral part of these consolidated statements. F-4 AVIATION DISTRIBUTORS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
CAPITAL STOCK TOTAL ---------------------- ADDITIONAL STOCKHOLDER'S NUMBER PAID RETAINED EQUITY OF SHARES AMOUNT IN CAPITAL DEFICIT (DEFICIT) ----------- --------- -------------- ------------- ------------- Balance at December 31, 1993............. 2,100,000 $ 21,000 $ 276,000 $ (247,639) $ 49,361 Capital contribution................... -- -- 110,000 -- 110,000 Net income............................. -- -- -- 208,478 208,478 ----------- --------- -------------- ------------- ------------- Balance at December 31, 1994............. 2,100,000 21,000 386,000 (39,161) 367,839 Net loss............................... -- -- -- (214,833) (214,833) ----------- --------- -------------- ------------- ------------- Balance at December 31, 1995............. 2,100,000 21,000 386,000 (253,994) 153,006 Net loss............................... -- -- -- (371,325) (371,325) ----------- --------- -------------- ------------- ------------- Balance at March 31, 1996 (unaudited).... 2,100,000 $ 21,000 $ 386,000 $ (625,319) $ (218,319) ----------- --------- -------------- ------------- ------------- ----------- --------- -------------- ------------- -------------
The accompanying notes are an integral part of these consolidated statements. F-5 AVIATION DISTRIBUTORS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ------------------------ MARCH 31, 1994 1995 ------------------------ ----------- ----------- 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 208,478 $ (214,833) $ (168,060) $ (371,325) Adjustments to reconcile net income (loss) to net cash used in operating activities: Sale in exchange for note receivable.................... -- (6,617,406) -- -- Non-cash portion of nonrecurring loss on settlement..... 230,075 -- -- -- Depreciation and amortization........................... 91,972 87,628 11,258 13,510 Changes in assets and liabilities: Accounts receivable, net.............................. (1,650,155) (707,814) 8,608 (190,096) Other receivables..................................... (250,601) 109,314 (989,831) 24,700 Inventories........................................... (199,540) (1,833,509) (27,052) (350,689) Other assets.......................................... (70,071) (44,919) (226,727) (87,076) Checks issued not yet presented for payment........... 680,632 (105,744) 15,134 (72,881) Accounts payable...................................... 29,273 908,668 843,176 (7,953) Accrued liabilities................................... 34,769 327,167 (1,000) (13,035) Income tax payable.................................... 105,330 (105,330) (70,000) -- ----------- ----------- ----------- ----------- Net cash used in operating activities............... (789,838) (8,196,778) (604,494) (1,054,845) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (120,086) (1,257,103) (1,148,174) (48,028) Principal payments of notes receivable.................... -- 482,691 -- 336,428 Borrowings given on notes receivable...................... -- (6,000) -- -- Borrowings given on note receivable from officer.......... -- (328,718) -- -- (Increase) decrease in restricted cash.................... (105,000) (196,175) 105,000 (477,218) ----------- ----------- ----------- ----------- Net cash used in investing activities............... (225,086) (1,305,305) (1,043,174) (188,818) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in lines of credit........................... 1,072,250 2,218,715 480,347 746,647 Borrowings on long-term debt.............................. 68,233 9,311,632 963,247 -- Principal payments of long-term debt...................... (9,272) (1,391,767) (10,308) (351,406) Principal payments of capital lease obligations........... (9,120) (19,965) (3,504) (5,669) Contributed capital....................................... 10,000 -- -- -- ----------- ----------- ----------- ----------- Net cash provided by financing activities........... 1,132,091 10,118,615 1,429,782 389,572 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........ 117,167 616,532 (217,886) (854,091) Cash and cash equivalents at beginning of period............ 134,022 251,189 251,189 867,721 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period.................. $ 251,189 $ 867,721 $ 33,303 $ 13,630 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 275,210 $ 786,725 $ 101,180 $ 166,868 Income taxes............................................ 1,600 32,632 -- 20,000 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital contribution of inventory from an officer......... 100,000 -- -- -- Capital lease obligations for purchase of new equipment... 32,000 74,779 -- -- Inventory in exchange for a note payable.................. -- -- -- 66,944
The accompanying notes are an integral part of these consolidated statements. F-6 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS Aviation Distributors Incorporated ("ADI") and its subsidiaries (the "Company") established operations in 1988, incorporated in the state of California in 1992 and reincorporated in the state of Delaware in 1996 (see Note 14). The Company is a supplier, distributor and broker of commercial aircraft parts and supplies. The Company distributes aircraft components for commercial airlines worldwide. For the years ended December 31, 1995 and 1994, approximately 80% and 77%, respectively, of the Company's net sales were export sales. These sales were primarily to France, Australia, Chile, Argentina, Switzerland, Turkey and Jordan. 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 subsidiaries, ADICSI and Aviation Distributors (Europe) Ltd. All significant intercompany transactions have been eliminated in consolidation. INTERIM FINANCIAL DATA The interim consolidated financial data as of March 31, 1996 and for the three month periods ended March 31, 1995 and 1996 is unaudited. The information reflects all adjustments, consisting only of normal recurring adjustments, that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods indicated. Results of operations for the interim periods are not necessarily indicative of the results of operations for a full fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity of less than 90 days to be cash equivalents. RESTRICTED CASH Restricted cash consists of short term certificates of deposits held as security for letters of credit issued on behalf of the Company by financial institutions and one of the Company's lines of credit. INVENTORIES Inventories, which consist primarily of aircraft parts, are stated at the lower of cost or market with cost determined on a first-in, first-out basis. Expenditures required for the rectification of parts are capitalized as inventory cost as incurred and are expensed as the parts associated with the rectification are sold. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation expense is provided using various methods over the estimated 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 F-7 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) which are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in operations. Such gains or losses were not significant during the years ended December 31, 1994 and 1995. 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 a reserve for estimated product returns. INCOME TAXES The Company accounts for income taxes using the liability method as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on the estimated future cash flows (undiscounted and without interest charges). SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company adopted SFAS No. 121 as of January 1, 1996, and the effect of adoption was not material to the financial statements. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies have the option to implement a fair value-based accounting method or continue to account for employee stock options and stock purchase plans using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities electing to remain under APB Opinion No. 25 must make pro forma disclosures of net income or loss and earnings per share as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has not yet determined whether it will implement the fair value-based accounting method or continue accounting for stock options under APB Opinion No. 25. NOTE 2 -- NOTE RECEIVABLE FROM OFFICER: Note receivable from officer of $328,718 is due in annual installments of $65,744 (principal only) commencing on December 30, 1996 to December 2000 and bears interest at six percent payable from time to time on the outstanding balance. NOTE 3 -- AIRCRAFT TRANSACTIONS: During 1995, the Company purchased commercial aircraft and engines which were subsequently sold in exchange for a note receivable (see Note 5) secured by an irrevocable letter of credit provided by the customer. The Company purchased the aircraft through proceeds from a note payable (see Note 8) to a financial institution which is secured by the customer note receivable. This transaction represents approximately 28 percent of the Company's 1995 sales (see Note 12). NOTE 4 -- ACCOUNTS RECEIVABLE: 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 F-8 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- ACCOUNTS RECEIVABLE: (CONTINUED) credit risks consist of accounts receivable denominated in U.S. dollars from customers in the aircraft industry. The Company performs periodic credit evaluations of its customers' financial conditions and provides allowance for doubtful accounts as required. NOTE 5 -- NOTES RECEIVABLE: Notes receivable consists of the following:
DECEMBER 31, MARCH 31, 1995 1996 ------------- ------------- (UNAUDITED) Note receivable from a corporation, secured by a $7,980,000 Irrevocable Letter of Credit, due in monthly installments of $166,250 (principal and interest) to August 1999 with an interest rate of 9.5 percent (see Note 3)............................. $ 6,134,715 $ 5,801,189 Note receivable from an individual.................................................. 6,000 3,098 ------------- ------------- 6,140,715 5,804,287 Less -- Current portion............................................................. 1,466,224 1,511,543 ------------- ------------- $ 4,674,491 $ 4,292,744 ------------- ------------- ------------- -------------
NOTE 6 -- PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following:
DECEMBER 31, MARCH 31, 1995 1996 ------------- ------------- (UNAUDITED) Buildings....................................................... $ 1,087,834 $ 1,128,862 Computer equipment and software................................. 236,417 243,417 Machinery and equipment......................................... 172,072 172,072 Furniture and fixtures.......................................... 81,822 81,822 Auto............................................................ 85,233 85,233 ------------- ------------- $ 1,663,378 $ 1,711,406 ------------- ------------- ------------- -------------
F-9 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- LINES OF CREDIT: The Company has revolving lines of credit with a financial institution, summarized as follows:
DECEMBER 31, MARCH 31, 1995 1996 ------------- ------------- (UNAUDITED) Revolving line of credit, interest at prime rate (8.5 percent at December 31, 1995) plus 1.5 percent due monthly, principal due October 31, 1996, secured by substantially all of the Company's assets, except cash, maximum borrowings are $4,000,000......................................................................... $ 3,181,671 $ 3,074,038 Revolving line of credit, interest at prime rate (8.5 percent at December 31, 1995) plus one percent due monthly, principal due October 31, 1996, secured by substantially all of the Company's assets, except cash, maximum borrowings are $2,000,000......................................................................... 1,284,200 1,914,312 Revolving line of credit, interest at 7.5 percent due monthly, principal due May 7, 1996, secured by restricted cash at December 31 is $201,913, maximum borrowings are $500,000........................................................................... 201,913 426,081 ------------- ------------- $ 4,667,784 $ 5,414,431 ------------- ------------- ------------- -------------
These lines of credit are personally guaranteed by the stockholder and an officer of the Company. The weighted average borrowings outstanding under the Company's line of credit arrangements during 1994 and 1995 were approximately $1,904,000 and $3,555,000, respectively. Maximum amounts outstanding at the end of the months during 1994 and 1995 were $2,449,069 and $4,667,784, respectively. The weighted average interest rates during 1994 and 1995 were approximately 12% and 10.7%, respectively. The weighted average interest rates at December 31, 1994 and 1995 were approximately 12.5% and 9.75%, respectively. F-10 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- LONG-TERM DEBT:
DECEMBER 31, MARCH 31, 1995 1996 ------------- ------------- (UNAUDITED) Long-term debt consists of the following: Note payable to a financial institution, due in monthly installments of $166,250 (principal and interest) to August 1999 with an interest rate of 9.5 percent. (see Note 3)..................................................................... $ 6,134,715 $ 5,801,189 Note payable to a financial institution, secured by a building, due in monthly installments of $7,729 (principal and interest) to May 1999, with a balloon payment, interest at Moody's A Bond Index 8.25% at December 31, 1995) plus .125 percent.......................................................................... 950,585 946,278 Note payable to a corporation, secured by specific inventory, due in monthly installments of $167,000 (principal and interest) to December 1998, with an imputed interest rate of 10 percent, net of original issue discount of $154,050......................................................................... 845,950 845,950 Note payable to a corporation, secured by specific inventory, due in monthly installments to August 1997, with an imputed interest rate of 10 percent, net of original issue discount of $4,842. (see Note 10)................................. -- 66,944 Note payable to a corporation, secured by an automobile, due in monthly installments of $1,892 (principal and interest) to August 1997, with an interest rate of 8 percent................................................................ 35,319 26,210 Note payable to a corporation, secured by an automobile, due in monthly installments of $192 (principal and interest) to March 1998, with an interest rate of 7.9 percent.............................................................. 4,703 3,505 Notes payable to a corporation, secured by equipment, due in monthly installments of $196 to $347 (principal and interest) to February 2000, with interest rates of 24 percent to 46 percent......................................................... 12,304 9,040 ------------- ------------- 7,983,576 7,699,116 Less -- Current portion............................................................. 1,815,220 1,867,624 ------------- ------------- $ 6,168,356 $ 5,831,492 ------------- ------------- ------------- -------------
Future annual principal payments on long-term debt at December 31, 1995 are as follows: 1996..................... $1,815,220 1997..................... 1,932,038 1998..................... 2,051,398 1999..................... 1,295,826 2000..................... 19,736 2001..................... 869,358 ---------- $7,983,576 ---------- ----------
F-11 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- INCOME TAXES: The components of the provision (benefit) for income taxes consist of the following at December 31:
1994 1995 ----------- ------------ Current: Federal.......................................................... $ 77,721 $ (77,100) State............................................................ 29,209 (6,056) ----------- ------------ 106,930 (83,156) ----------- ------------ Deferred: Federal.......................................................... (3,334) (14,164) State............................................................ (1,136) (6,000) ----------- ------------ (4,470) (20,164) ----------- ------------ Total:......................................................... $ 102,460 $ (103,320) ----------- ------------ ----------- ------------
Current income tax benefit consists primarily of an estimated income tax receivable and the difference between the Company's estimated and actual 1994 income tax liability. The reconciliation of income tax expense computed at U.S. Federal statutory rates to income tax expense (benefit) at December 31, 1995 is as follows:
1994 1995 ----------- ------------ Tax at U.S. Federal statutory rates................................ $ 105,719 $ (108,173) State income taxes, net of federal effect.......................... 19,085 (18,898) Other, net......................................................... (22,344) 23,751 ----------- ------------ $ 102,460 $ (103,320) ----------- ------------ ----------- ------------
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 as of December 31, 1995 are as follows: Depreciation..................................................... $ (28,192) --------- Gross deferred tax liabilities................................. (28,192) --------- Inventory reserve................................................ 29,840 Allowance for doubtful accounts.................................. 19,442 Operating accruals............................................... 3,544 Net operating loss carryforwards................................. 82,528 --------- Gross deferred tax assets...................................... 135,354 --------- Deferred tax assets valuation allowance........................ (82,528) --------- $ 24,634 --------- ---------
The net deferred tax asset at December 31, 1995 is included in other assets in the accompanying balance sheet. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has established a valuation allowance for net operating loss carryforwards. The Company has net operating loss carryforwards of approximately F-12 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- INCOME TAXES: (CONTINUED) $223,000 and $111,000 for federal and state purposes, respectively, which expire in 2010 and 2000, respectively. Realization of future tax benefits from utilization of the net operating loss carryforwards may be subject to certain limitations if ownership changes occur in the future. NOTE 10 -- COMMITMENTS AND CONTINGENCIES: The Company leases equipment and facilities under noncancelable operating and capital leases. As of December 31, 1995, the annual minimum lease commitments are:
YEAR ENDING DECEMBER 31 CAPITAL OPERATING - ------------------------------------------------------------------------------ ----------- ----------- 1996.......................................................................... $ 37,656 $ 43,808 1997.......................................................................... 26,366 28,639 1998.......................................................................... 24,108 25,599 1999.......................................................................... 13,418 11,967 2000.......................................................................... 2,280 2,820 ----------- ----------- 103,828 $ 112,833 ----------- ----------- Less -- Amount representing interest.......................................... 24,410 ----------- 79,418 Less -- Current portion....................................................... 26,178 ----------- $ 53,240 ----------- -----------
Rent expense for the years ended December 31, 1994, and 1995 was $181,572 and $135,568, respectively. In 1996, the Company entered into an agreement to purchase approximately $1.6 million of inventory from a vendor. Under the terms of the agreement, the Company will remit 17 monthly installments of $100,000 beginning in April 1996. As of March 31, 1996, the Company had received $71,786 of inventory under this agreement (see Note 8). The Company supplies certain parts to its customers through various consignment agreements, under which the Company takes possession of a vendors inventory and exclusive marketing agreements, under which the Company markets the vendors inventory which remains in the vendors possession. These agreements are generally entered into on a long-term basis. In February 1996, an action was brought against the Company arising out of a dispute relating to a consignment agreement between the Company and a customer. The plaintiff is claiming damages of $3,518,000, interest, attorney fees, punitive damages and treble damages under R.I.C.O. Management believes they have adequately accrued for the Company's potential liability and denies liability for the remaining claims. This estimate could change in the near term and that change could be material. NOTE 11 -- NONRECURRING LOSS ON SETTLEMENT: On April 8, 1994, the Company entered into an agreement to settle various asserted claims made by one of its key officers to avoid the cost and the uncertainties of litigation. Under the terms of the settlement, the Company paid $112,000 in cash and transferred the common stock of ADI Manufacturing, Inc., a former subsidiary, to this officer. In return, the key officer agreed to drop all claims against the Company and to resign as an officer of the Company. Management believes this separation is in the best interest of the Company. The amount charged to operations during 1994 was $376,075. NOTE 12 -- CONCENTRATION OF CREDIT RISK: Concentrations of credit risk with respect to trade accounts receivable are generally diversified due to the large number of customers and their dispersion worldwide. As discussed in Note 4, during F-13 AVIATION DISTRIBUTORS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- CONCENTRATION OF CREDIT RISK: (CONTINUED) 1995, as a result of the aircraft transaction (see Note 3), the Company had one large customer that accounted for 28 percent of net sales for the year. The note receivable related to this large customer represented 38 percent of total assets at December 31, 1995. The Company had two large customers in 1994 which accounted for approximately 22 percent of net sales, and approximately 30.5 percent of trade accounts receivable at December 31, 1994. The Company performs ongoing credit evaluations and insures a large portion of its accounts receivable through an export credit insurance policy for the majority of the international customers. NOTE 13. -- VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1994 and 1995, activity with respect to the Company's allowance for doubtful accounts is summarized as follows:
DECEMBER 31, -------------------- 1994 1995 --------- --------- Beginning balance................................................................ $ -- $ 12,207 Charged to expense............................................................... 12,207 36,400 Amounts written off.............................................................. -- -- --------- --------- Ending balance................................................................... $ 12,207 $ 48,607 --------- --------- --------- ---------
NOTE 14. -- SUBSEQUENT EVENTS STOCK OPTION PLAN On July 10, 1996, the Company adopted the Aviation Distributors, Inc 1996 Stock Option and Incentive Plan (the Plan) which provides for the issuance of up to a maximum of 2,856,000 shares of the Company's common stock to employees, non-employee directors and independent contractors at the sole discretion of the board of directors. The Plan provides for the issuance of incentive stock options and non-qualified stock options. Options issued under the Plan may be accompanied by stock appreciation rights, as defined. 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. REINCORPORATION On July 12, 1996, the Company reincorporated in the State of Delaware, increasing its authorized number of Common Shares to 10,000,000, $.01 par value, and increasing the number of Common Shares outstanding to 2,100,000. All share and per share data have been retroactively restated in the accompanying financial statements to give effect to the above items. Effective July 12, 1996, the Company also authorized the issuance of up to 3,000,000 shares of preferred stock, $.01 par value. F-14 - ----------------------------------------------------- ----------------------------------------------------- - ----------------------------------------------------- ----------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 9 Dividend Policy........................................................... 9 Capitalization............................................................ 10 Dilution.................................................................. 11 Selected Financial Data................................................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 13 Business.................................................................. 17 Management................................................................ 23 Certain Transactions...................................................... 33 Principal and Selling Stockholder......................................... 33 Shares Eligible for Future Sale........................................... 33 Description of Capital Stock.............................................. 35 Underwriting.............................................................. 37 Legal Matters............................................................. 38 Experts................................................................... 38 Additional Information.................................................... 38 Index to Financial Statements............................................. F-1
-------------------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,000,000 SHARES [LOGO] AVIATION DISTRIBUTORS INCORPORATED COMMON STOCK ---------------------- PROSPECTUS ---------------------- CRUTTENDEN ROTH INCORPORATED , 1996 - ----------------------------------------------------- ----------------------------------------------------- - ----------------------------------------------------- ----------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the GCL empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include judgments, fines, amounts paid in settlement and expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such officer or director acted in good faith and in manner he reasonably believed to be in or not opposed to the corporation's best interests, and, with respect to criminal proceedings, had no reasonable cause to believe his conduct was illegal. A Delaware corporation may indemnify its officers and directors against expenses actually and reasonably incurred by them in connection with an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation in the performance of his duty. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred in connection therewith. Section 102(b)(7) of the GCL further provides that a corporation in its certificate of incorporation may eliminate or limit the personal liability of its directors to the corporation or its stockholders for breach of their fiduciary duties in certain circumstances. In accordance with Section 145 of the GCL, the Company's Certificate provides that the Company shall indemnify its officers and directors against, among other things, any and all judgments, fines, penalties, amounts paid in settlements and expenses paid or incurred by virtue of the fact that such officer or director was acting in such capacity to the extent not prohibited by law. In addition, as permitted by Section 102(b)(7) of the GCL, the Company's Certificate contains a provision limiting the personal liability of the Company's directors for violations of their fiduciary duties to the fullest extent permitted by the Delaware Law. This provision eliminates each director's liability to the Company or its stockholders for monetary damages except (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which a director derived an improper personal benefit. The general effect of this provision is to eliminate a director's personal liability for monetary damages for actions involving a breach of his or her fiduciary duty of care, including any such actions involving gross negligence. Also, in accordance with the GCL and pursuant to the Company's Certificate, the Company is authorized to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Company would have the power to indemnify such person against liability under the GCL. [The Company has entered into agreements (the "Indemnification Agreements") with certain directors and officers of the Company (the "Indemnified Parties") which require the Company to indemnify each Indemnified Party against, and to advance expenses incurred by each Indemnified Party in the defense of, any claim arising out of his or her employment to the fullest extent permitted under law. The Indemnification Agreements also provide, among other things, for (i) advancement by II-1 the Company of expenses incurred by the director or officer in defending certain litigation, (ii) the appointment of an independent legal counsel to determine whether the director or officer is entitled to indemnity and (iii) the continued maintenance by the Company of directors' and officers' liability insurance, if available on reasonable terms.] ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ----------------- SEC registration fee....................................................... $ 3,173 NASD filing fee............................................................ 1,420 Nasdaq National Market Listing Fee......................................... * Blue Sky fees and expenses................................................. * Printing and engraving expenses............................................ * Legal fees and expenses.................................................... * Accounting fees and expenses............................................... * Transfer Agent and Registrar fees.......................................... * Miscellaneous expenses..................................................... * ----------------- Total.................................................................. $ * ----------------- -----------------
- ------------------------ * To be filed by amendment. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. None ITEM 27. EXHIBITS. (a) Exhibits *1.1 Form of Underwriting Agreement. *3.1 Amended and Restated Certificate of Incorporation of the Registrant. *3.2 Bylaws, as amended, of the Registrant. *4.1 Specimen Common Stock Certificate. *5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom. *10.2 1996 Stock Option and Incentive Plan. *10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian Airlines and Aviation Distributors Incorporated. *10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air China Group Import & Export Trading Co. and Aviation Distributors Incorporated. *10.5 Revolving Credit Facilities, dated October 20, 1995, by and between Aviation Distributors Incorporated and Far East National Bank. 23.1 Consent of Arthur Andersen LLP. *23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (See page II-4).
- ------------------------ * To be filed by amendment. II-2 ITEM 28. UNDERTAKINGS. The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorizes this Registration Statement to be signed on its behalf by the undersigned, in the City of Irvine, State of California, on the 12th day of July, 1996. AVIATION DISTRIBUTORS INCORPORATED By: /s/ OSAMAH S. BAKHIT ----------------------------------- Osamah S. Bakhit CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Osamah S. Bakhit as such person's true and lawful attorney-in-fact and agent, with the full power of substitution and resubstitution, for such person in any and all capacities (including such person's capacity as a director and/or officer of Aviation Distributors Incorporated), to sign any and all amendments to this Registration Statement (including post-effective amendments pursuant to Rule 462(b) or otherwise), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities stated. SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------------------------ ---------------- /s/ OSAMAH S. BAKHIT ------------------------------------ Chief Executive Officer, President and Director July 12, 1996 Osamah S. Bakhit (Principal Executive Officer) /s/ JEFFREY G. WARD ------------------------------------ Executive Vice President July 12, 1996 Jeffrey G. Ward /s/ MARK W. ASHTON ------------------------------------ Chief Financial Officer, Vice President, Finance July 12, 1996 Mark W. Ashton and Director (Principal Financial Officer) /s/ LAURA M. BIRGBAUER ------------------------------------ Treasurer (Principal Accounting Officer) July 12, 1996 Laura M. Birgbauer /s/ BRUCE H. HAGLUND ------------------------------------ Secretary and Director July 12, 1996 Bruce H. Haglund
II-4 INDEX TO EXHIBITS
EXHIBITS PAGE - ----------- --------- *1.1 Form of Underwriting Agreement.................................................................. *3.1 Amended and Restated Certificate of Incorporation of the Registrant............................. *3.3 Bylaws, as amended, of the Registrant........................................................... *4.1 Specimen Common Stock Certificate............................................................... *5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom................................................. *10.2 1996 Stock Option and Incentive Plan............................................................ *10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian Airlines and Aviation Distributors Incorporated................................................ *10.4 Aircraft Purchase Agreement, dated January 4, 1995, by and between Air China Group Import & Export Trading Co. and Aviation Distributors Incorporated...................................... *10.5 Revolving Credit Facilities, dated October 20, 1995, by and between Aviation Distributors Incorporated and Far East National Bank........................................................ 23.1 Consent of Arthur Andersen LLP.................................................................. *23.2 Consent of Counsel (included in Exhibit 5.1).................................................... 24.1 Power of Attorney (See page II-4)...............................................................
- ------------------------ * To be filed by amendment. EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references made to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Orange County, California July 12, 1996 -----END PRIVACY-ENHANCED MESSAGE-----