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As filed with the Securities and Exchange Commission on September 9, 1999
Registration No. 333-75169
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
AVIATION HOLDINGS GROUP, INC.
(Name of Small Business Issuer in Its Charter)
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Delaware 5008 22-2945898
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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15675 Northwest 15th Avenue
Miami, Florida 33169
(305) 624-6700
(Address and telephone number of
Principal Executive Officers and Principal Place of Business)
Joseph J. Nelson, President
AVIATION HOLDINGS GROUP, INC.
15675 Northwest 15th Avenue
Miami, Florida 33169
(305) 624-6700
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(Name, Address and Telephone Number of Agent For Service)
with copy to:
Michael C. Forman, Esq.
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
(215) 568-6060
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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after 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 registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ]
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CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities To Be Offering Price Per Aggregate Offering Registration
To Be Registered Registered (1)(2) Unit(3) Price(3) Fee(4)
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Units, each unit consisting
of two shares of
common stock, $.0001 par value
and One Class A Warrant 825,000 $8.50 $7,012,500 $1,950
Common stock, $.0001 par
value 1,650,000 __ __ __
Class A Warrants to purchase
common stock 825,000 __ __ __
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(1) This Registration Statement covers such additional indeterminate number
of shares of common stock as may be issued pursuant to Rule 416 under
the Securities Act of 1993 (the "Act") by reason of adjustments in the
number of shares of common stock pursuant to anti-dilution provisions
contained in the Class A Warrant Agreement governing the Class A
Warrants to prevent dilution resulting from stock splits, stock
dividends or similar transactions. Because such additional shares of
common stock will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Includes up to 75,000 units, and 150,000 shares of common stock and
75,000 Class A Warrants included in such units, that may be purchased
from the Company at the option of the Underwriter solely to cover
over-allotments, if any.
(3) Estimated solely for purposes of calculating registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as
amended.
(4) Previously paid
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 or until the Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1999
PROSPECTUS
AVIATION HOLDINGS GROUP, INC.
750,000 Units, each Unit Consisting of Two
Shares of Common Stock and a Class A Warrant to
Purchase One Share of Common Stock
Aviation Holdings Group is offering up to a maximum of 750,000 units at
the purchase price of $___ per unit. Each unit is comprised of two shares of
common stock and one Class A Warrant. Each Class A Warrant is exercisable into
one share of common stock at the purchase price of $___. The Class A Warrants
shall be exercisable for a period of three years upon registration with the
Securities and Exchange Commission and shall be redeemable by us at $.001 per
Class A Warrant if the market value of a share of common stock exceeds $_____.
The shares of common stock and Class A Warrants that make up each unit may not
be separated or sold separately until 45 days after the date of issuance. We
expect that the initial public offering price for the units will be between
$5.00 and $6.00 per unit.
Silver Capital Group, a division of LCP Capital Corp., will serve as
the underwriter for this public offering and will purchase 750,000 units for
resale to the public. We have granted an option to the underwriter, exercisable
for a period of 30 days after the date of this prospectus, to purchase up to an
additional 75,000 units from us at the public offering price set forth in this
prospectus less the underwriting discounts and commissions. The underwriter may
exercise this option only for the purpose of filling orders for units in excess
of 750,000 units, if any.
Prior to August 2, 1999, shares of our common stock were sold on the
OTC Bulletin Board under the trading symbol "AHGI" pursuant to the provisions of
Rule 15c2-11 promulgated under the Securities Exchange Act of 1934. Since August
2, 1999, several broker/dealers have continued to submit quotations in the
National Quotation Bureau's Pink Sheets.
We have applied to have the units, common stock and Class A Warrants
quoted on the American Stock Exchange under the trading symbols "_____________,"
"_____________" and "___________," respectively.
Investing in units involves certain risks. See "Risk Factors" on pages
4 to 9.
Offering of Units Per Unit Total
o Public Offering Price $____ $____
o Underwriting Discounts and Commissions $____ $____
o Proceeds to the Company $____ $____
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Prospectus dated _______, 1999
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY................................................................................................1
FINANCIAL INFORMATION.............................................................................................2
RISK FACTORS......................................................................................................3
The Underwriter Has Limited Underwriting Experience...............................................................3
We Are In Default Under Our Credit Facility.......................................................................3
We Have A Limited Operating History On Which To Evaluate An Investment In This Offering...........................3
We May Fail To Obtain Additional Funding If Needed................................................................3
A Downturn In The Airline Industry Would Adversely Affect Our Business............................................3
Consolidation In The Aircraft Parts Industry Could Reduce Our Market
Share....................................................................................................4
Stricter Government Regulations Could Reduce The Value Of Our Inventory
And/Or Require Significant Expenditures..................................................................4
Our Planned Expansion Into The Jet Engine Business Will Subject Us To
Additional Risks.........................................................................................4
Our Operating Results Could Be Adversely Affected By Fluctuations
In Demand................................................................................................4
Our Business May Subject Us To Expensive Product Liability Claims.................................................4
Our Ownership Of Aviation Holdings International Is Subject To Significant
Possible Dilution........................................................................................5
Our Business Could be Adversely Affected if our Customers or Suppliers Encounter
Year 2000 Problems.......................................................................................5
We Maintain Bank Account Balances in Excess of Insured Amounts....................................................5
The Units, Common Stock And Warrants May Be Subject To Certain Limitations
Upon Trading Activities..................................................................................5
The Warrants May Not Be Exercisable If We Do Not Maintain A Current
Prospectus And Registrations.............................................................................6
We May Be Able To Redeem The Class A Warrants At A Time Adverse To The Interest
Of A Class A Warrant Holder..............................................................................6
WHERE YOU CAN GET MORE INFORMATION................................................................................6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................................................6
DILUTION .........................................................................................................8
USE OF PROCEEDS...................................................................................................9
MARKET PRICE OF THE COMMON STOCK..................................................................................9
DIVIDEND POLICY .................................................................................................10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................11
BUSINESS ........................................................................................................18
MANAGEMENT.......................................................................................................26
PRINCIPAL STOCKHOLDERS...........................................................................................30
CERTAIN TRANSACTIONS.............................................................................................31
DISCRIPTION OF SECURITIES........................................................................................34
UNDERWRITING.....................................................................................................36
LEGAL MATTERS....................................................................................................37
EXPERTS ........................................................................................................37
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information you should consider before investing in the units we are offering.
You should read the entire prospectus carefully. You should also read our
financial statements and the notes to the financial statements.
Aviation Holdings Group
We specialize in the sale, lease, exchange and purchase of technical
spare parts for fixed-wing commercial jet transport aircraft manufactured by
Boeing, McDonnell Douglas, Airbus and Lockheed. Technical spares are aircraft or
engine parts affecting the performance of an aircraft or engine. We also provide
our customers with inventory management services. We intend to pursue
opportunities involving the purchase, sale and lease of jet turbine engines, jet
turbine aircraft and related aviation industry equipment.
Our operations are in the United States. However, we also conduct
operations in Europe and South America, and in China and other parts of Asia .
Our executive offices are located at 15675 Northwest 15th Avenue,
Miami, Florida 33169. Our telephone number is (305) 624-6700. We also have
offices in Beijing and Hong Kong, China.
The Offering
The following table excludes 255,750 shares of common stock reserved
for issuance upon the exercise of stock options outstanding as of August 31,
1999 under our Stock Option Plan and 494,250 shares of common stock available
for the future grant of stock options and other equity securities under the
Stock Option Plan. This table also excludes 200,000 shares of common stock
reserved for issuance to Joseph Nelson on the exercise of options granted under
the terms of his employment agreement. See "Management." This table also
excludes 325,000 shares issuable upon exercise of outstanding warrants. See
"Description of Securities--Outstanding Warrants."
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Common Stock Currently Outstanding .......................4,214,315 shares of common stock
Securities Offered by the Company.........................750,000 units, each unit consisting of two
shares of common stock and one Class A
Warrant, for an aggregate of 1,500,000
shares of common stock and 750,000 Class A
Warrants.
Common Stock to be Outstanding
after the Offering .......................................5,714,315 shares of common stock
Dividend Policy...........................................We intend to retain all future earnings to
fund the development and growth of our
business. Therefore, we do not currently
anticipate paying cash dividends. See
"Dividend Policy."
Use of Proceeds by the Company............................To fund our financial commitment to
the SYNOR-A joint venture, to purchase additional
inventory, to retire indebtedness, to purchase jet
turbine engines, to fund acquisitions and for general
corporate purposes. See "Use of Proceeds."
Proposed American Stock Exchange Symbols.................."______," "_______" and "_______"
for the common stock, units and
Class A Warrants, respectively.
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SELECTED FINANCIAL INFORMATION
Set forth below is the historical selected financial information with
respect to Aviation Holdings Group for the fiscal years ended December 31, 1997
and December 31, 1998, and for the six months ended June 30, 1998 and the six
months ended June 30, 1999. Information for the fiscal year ended December 31,
1998 and the six months ended June 30, 1998 reflects operations of Aviation
Holdings International from May 1998 through December 31, 1998 and June 30,
1998, respectively.
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FISCAL YEAR ENDED SIX MONTHS ENDED
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DECEMBER 31, JUNE 30,
INCOME STATEMENT 1997 1998 1998 1999
INFORMATION
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Revenue. ........................ $ 0 8,365,197 2,067,356 6,371,942
Net Income (Loss)................ (57,437) (1,384,780) (1,135,375) (160,868)
Net Income (Loss) per Share...... (0.06) (0.46) (0.43) (0.04)
Weighted Average Shares
Outstanding.................... 1,046,235 3,035,856 2,610,511 3,854,092
BALANCE SHEET
INFORMATION AT END OF
PERIOD
Working Capital.................. $1,371,885 2,156,060
Total Assets..................... 8,763,366 10,306,267
Total Liabilities................ 5,187,685 5,940,904
Minority Interest................ 1,186,964 345,391
Stockholders' Equity............. 2,388,717 4,019,972
Net Tangible Book Value
Per Share...................... 0.58 0.69
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RISK FACTORS
Investing in the units is very risky. Investors should carefully
consider the following factors in addition to the other information in this
prospectus, in evaluating an investment in Aviation Holdings Group, Inc.
The Underwriter Has Limited Underwriting Experience
Silver Capital Group, a division of LCP Capital Corp. has agreed to act
as underwriter in connection with our offering of units. The underwriter, its
affiliates and predecessors have engaged in only limited underwriting activities
and have been the lead or sole underwriter in only a few public offerings during
the past five years. Accordingly, the underwriter's lack of public offering
experience may affect the offering of the units and the common stock or the
subsequent development of a public trading market for the units or the common
stock, and purchasers of the units or the common stock may suffer a lack of
liquidity in their investment. See "Underwriting."
We Are In Default Under Our Credit Facility
Aviation Holdings International is required to maintain tangible net
worth of $4,250,000 under its Comerica Bank credit facility. As of June 30,
1999, Aviation Holdings International had tangible net worth (as defined by
Comerica Bank) of $3,660,800 and therefore was in default. Comerica Bank has not
declared an event of default and continues to advance funds, and we anticipate
that our receipt of the proceeds from the offering will permit us to cure the
default. However, in the event that we are unable to cure the default or obtain
replacement financing, Comerica Bank could declare an event of default and
exercise its rights as a secured lender to collect the accounts receivable and
sell the assets of Aviation Holdings International in an amount sufficient to
repay the loan. As of August 31, 1999, the outstanding balance due to Comerica
Bank was $2,075,000.
We Have A Limited Operating History On Which To Evaluate An Investment In This
Offering
We have a limited operating history on which you must base your
investment decision and are subject to all of the risks associated with
development stage enterprises. We had no significant operations prior to the
acquisition of a majority of the outstanding shares of capital stock of Aviation
Holdings International, which only commenced operations in October 1996 and has
a correspondingly limited operating history. Accordingly, we are subject to
various risks common to developing businesses, including cash flow difficulties,
competition for customers and employees and delays in implementing business
plans. We intend to expand our operations, which will substantially increase our
expenses and will likely decrease our cash flow and earnings in the near future.
Our ability to operate profitably will depend on increasing sales, maintaining
adequate profit margins and a continuing demand for Aviation Holdings
International's products and services. Our expansion plans may have a negative
impact on our profitability, at least in the short term, as significant expenses
will be incurred prior to the receipt of additional revenues. See "Financial
Statements" and "Business."
We May Fail To Obtain Additional Funding If Needed
Our inability to raise additional capital when needed would have an
adverse effect on our plans to expand operations. We anticipate that this
offering will generate net proceeds of approximately $3,230,000. We believe that
revenues from operations will be sufficient to fund our operational requirements
for the foreseeable future and that the net proceeds from the offering will be
sufficient to expand our existing business. However, we may need to raise
additional funds for acquisitions. We do not know if additional funds will be
available on acceptable terms, if at all.
A Downturn In The Airline Industry Would Adversely Affect Our Business
An economic downturn in the airline industry could have a serious
negative impact on our business. Since our customers consist primarily of
commercial airlines, original equipment manufacturers, aircraft maintenance and
repair facilities and aircraft parts distributors, our business is impacted by
all of the economic factors which affect the aircraft and airline industry. When
the airline industry experiences an economic downturn, there is typically a
corresponding reduction in demand for spare aircraft parts and related services
which causes price reductions and increased credit risks associated with doing
business. Additionally, the price of aircraft fuel affects the spare aircraft
parts market. Older
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aircraft into which aircraft spare parts are most often placed tend to be less
fuel efficient and become less viable as the price of aircraft fuel increases.
Consolidation In The Aircraft Parts Industry Could Reduce Our Market Share
The airline industry is currently experiencing a reduction in the
number of approved parts suppliers and a consolidation of the spare parts
redistribution market. Although we presently are an "approved" supplier of 26
airlines, we cannot be certain that we will be able to maintain or expand this
status. Our revenues will be reduced if we are unable to do so. A number of
major airlines have reduced the number of "approved" suppliers during the last
few years from as many as 50 to as few as five. Airlines choose "approved"
suppliers based on a number of factors including product offerings and quality,
management reputation and experience, financial strength and cost. Also, the
reduction in the supplier base for airlines has contributed to a consolidation
in the redistribution market which is likely to continue.
Stricter Government Regulations Could Reduce The Value Of Our Inventory And/Or
Require Significant Expenditures
The aircraft parts which make up our inventory are subject to strict
regulatory standards. If stricter standards are enacted, then some of our
inventory may lose some or all of its value. Our inventory consists principally
of overhauled, serviceable, repairable and new aircraft parts that are purchased
from many sources. Before parts may be installed in an aircraft or engine, they
must meet certain standards of condition established by the United States
Federal Aviation Administration and/or similar regulatory agencies abroad.
Specific regulations vary from country to country, although regulatory
requirements in other countries generally coincide with FAA requirements. Parts
must also be traceable to sources deemed acceptable by such agencies. Although
we believe that the great majority of our inventory meets industry requirements,
some parts may not meet applicable standards or standards may change in the
future, in which case we will have to modify or scrap such parts. See "Business
- - Government Regulation and Traceability."
Our Planned Expansion Into The Jet Engine Business Will Subject Us To Additional
Risks
Although we have made only limited purchases of turbine engines and no
purchases of turbine aircraft for resale in the past, we intend to expand these
activities in the future. These activities will involve risks not present in our
current business. Market prices and demand for this type of equipment are
subject to volatility, and we could suffer substantial losses if equipment
cannot be resold at prices above the prices we paid, or if we must hold
equipment in inventory for extended time periods. These activities will also
require us to commit substantial capital, which will come from the proceeds of
the offering. Such funds will not be available for other activities. In
addition, the equipment may need repair work, which increases the costs
associated with resale and may adversely affect our profitability.
Our Operating Results Could Be Adversely Affected By Fluctuations In Demand
Our operating results will be affected by many factors, including the
timing of orders from customers, inventory purchases in anticipation of future
sales, bulk inventory purchases, and purchases and financing requirements for
aircraft engines or aircraft and the mix of available technical spare parts
maintained, at any time, in our inventory. A significant portion of our
operating expenses are relatively fixed. Since we typically do not obtain
long-term purchase orders or commitments from our customers, we must anticipate
the future volume of orders based upon the historical purchasing patterns of our
customers and upon our discussions with them as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on our business, financial
condition and results of operations. See "Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our Business May Subject Us To Expensive Product Liability Claims
Our business exposes us to possible claims for personal injury or death
which may result from a failure of equipment we sold. We believe that we have
taken adequate precautions to assure the quality and traceability of the parts
we sell, and we have not had any claims for product liability. However, we
cannot be certain that we will not be the subject of lawsuits based on the
failure of parts which we sold in the marketplace. These lawsuits may result in
damage
4
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awards against us. We do not carry product liability insurance and therefore we
would be required to pay any judgment levied against us. See "Business - Product
Liability and Legal Proceedings."
Our Ownership Of Aviation Holdings International Is Subject To Significant
Possible Dilution
We have pledged 51% of the outstanding stock of Aviation Holdings
International to secure $250,000 in loans made to us in October 1998 by Nancy
Plotkin and the John G. Jacobs Trust. These loans have a final maturity date of
September 17, 1999. If we are unable to pay these loans at maturity, then the
lenders will have the right to sell these shares of Aviation Holdings
International common stock in an amount sufficient to repay the loans, thus
reducing our ownership of Aviation Holdings International.
Our Business Could be Adversely Affected if our Customers Encounter Year 2000
Problems
If the computer software programs and operating systems of our vendors,
customers and other third parties with whom we transact business are not "Year
2000" compliant, then our business could experience disruption and other
problems in early 2000. All of our hardware and software has been upgraded or
replaced so that it can interpret appropriately the upcoming calendar year 2000,
and our computer software programs and operating systems are "Year 2000"
compliant. However, we have not fully determined the extent to which our
vendors, customers and other persons with whom we transact business have systems
which are "Year 2000" compliant. In the event that a material portion of our
suppliers or customer's suffer business disruption as the result of "Year 2000"
problems, we could be adversely affected. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000 Issue."
We Maintain Bank Account Balances in Excess of Insured Amounts
We maintain our principal banking relationships with Comerica Bank, our
working capital lender, and Citibank. As a result, our account balances
typically exceed FDIC insurance limits. As of December 31, 1998 and June 30,
1999, these excess balances were $403,377 and $607,359, respectively. In the
event of the failure of a bank in which we have such an excess balance, we could
lose some or all of such excess.
The Units, Common Stock And Warrants May Be Subject To Certain Limitations Upon
Trading Activities
In the event that the common stock, the units and the Class A Warrants
are not listed on the American Stock Exchange, trading of our securities may be
subject to material limitations as a consequence of certain provisions of the
Securities Exchange Act of 1934 which limit the activities of broker-dealers
effecting transactions in "penny stocks."
"Penny stocks" are equity securities with a market price below $5.00
per share other than a security that is registered on a national exchange;
included for quotation in the NASDAQ system; or whose issuer has net tangible
assets of more than $2,000,000 and has been in continuous operation for greater
than three (3) years. Issuers who have been in operation less than three (3)
years must have net tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under
Section 15(g) of the Exchange Act require broker-dealers engaging in
transactions in "penny stocks," to first provide to their customers a series of
disclosures and documents, including: (i) a standardized risk disclosure
document identifying the risks inherent in investment in "penny stocks;" (ii)
all compensation received by the broker-dealer in connection with the
transaction; (iii) current quotation prices and other relevant market data; and
(iv) monthly account statements reflecting the fair market value of the
securities. In addition, these rules require that a broker-dealer obtain
financial and other information from a customer, determine that transactions in
penny stocks are suitable for such customer and deliver a written statement to
such customer setting forth the basis for such determination.
If the common stock and units are not listed, they presently will
constitute "penny stocks." In that event, trading activities for the common
stock and units will be made more difficult for broker-dealers than in the case
of securities not defined as "penny stock." This may have the result of
depressing the market for our securities and an investor may find it difficult
to dispose of such securities.
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Further, under the Exchange Act, and the regulations thereunder, any
person engaged in a distribution of the common stock or units offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the common stock during the applicable "cooling off' periods prior to
the commencement of such distribution.
The Warrants May Not Be Exercisable If We Do Not Maintain A Current Prospectus
And Registrations.
We intend to maintain registration of the common stock underlying the
Class A Warrants so that holders of Class A Warrants may exercise them and sell
the underlying common stock, but we cannot assure you that we will be able to do
so. If we cannot, the Class A Warrants may have limited value.
We May Be Able To Redeem The Class A Warrants At A Time Adverse To The Interest
Of A Class A Warrant Holder.
We have the right to redeem the Class A Warrants at any time for a
price of $.01 per share if the average closing price for the common stock equals
or exceeds $_____ for a specified period of time. This could force holders to
exercise the Class A Warrants, and pay the exercise price, at a time when they
otherwise would not do so. See "Description of Securities--Class A Warrants."
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to our Registration Statement. If you would like more information,
write or call us at:
AVIATION HOLDINGS GROUP, INC.
15675 Northwest 15th Avenue
Miami, Florida 33169
Telephone: (305) 624-6700
Facsimile: (305) 623-9307
Our fiscal year ends on December 31. We intend to provide annual
reports containing audited financial statements and other appropriate reports to
our shareholders. In addition, we intend to become a reporting company and file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any reports, statements or other information
we file at the SEC's public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
the public on the SEC Internet site at http\\www.sec.gov.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.
Important factors that may cause actual results to differ from
forward-looking statements may include, for example,
o the success or failure of our efforts to implement our
business strategy, including expanding our international
operations;
o our ability to raise sufficient capital to expand our business;
o the effect of changing economic conditions on the airline and
aircraft industries;
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o changes in government regulations, tax rates and similar matters;
o our ability to attract and retain quality employees; and
o other risks which may be described in our future filings with the
SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
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DILUTION
As of June 30, 1999, the net tangible book value of our common stock
was $2,890,224, or $0.69 per share of common stock, based upon 4,208,315 shares
outstanding. "Net tangible book value" per share represents the amount of our
total tangible assets reduced by our total liabilities and minority interest and
divided by the number of shares of common stock outstanding. After giving effect
to the sale of 750,000 units being offered by us in this offering at an assumed
initial public offering price of $5.50 per unit less underwriting discounts and
commissions and estimated offering expenses we owe, our pro forma net tangible
book value at June 30, 1999 would have been $6,120,224, or $1.07 per share of
common stock, based upon 5,708,315 shares outstanding. This does not include the
750,000 shares issuable on exercise of the Class A Warrants. This represents an
immediate increase in net tangible book value of $0.38 per share to existing
stockholders and an immediate dilution per share of $1.68 to new investors
purchasing shares in this offering. "Dilution per share to new investors"
represents the difference between the price per share of common stock in this
offering and the pro forma net tangible book value per share at June 30, 1999,
as adjusted to give effect to this offering.
Public offering price per share(1).................................... $2.75
Net tangible book value per share before offering.................. $0.69
Increase per share attributable to new investors................... $0.38
Pro forma net tangible book value per share after offering......... $1.07
Dilution per share to new investors................................ $1.68
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(1) Before deduction of underwriting discounts and commissions and
estimated offering expenses .
The foregoing computations exclude (i) an aggregate of 255,750 shares
of common stock reserved for issuance upon exercise of outstanding stock options
under our stock option plan, as amended, at a weighted average exercise price of
$2.50 per share; and (ii) 525,000 shares of common stock reserved for issuance
upon exercise of other outstanding warrants and options. Any exercise of such
options or warrants may result in further dilution to new investors.
The following table summarizes on a pro forma basis as of June 30,
1999, the number of shares of common stock we issued, the total consideration we
received and the average price per share paid by the existing stockholders and
to be paid by purchasers of our common stock in the offering (before deducting
offering expenses and underwriting discounts and commissions) at an assumed
public offering price of $2.75 per share. Excluded from the amount of
consideration from existing stockholders is $249,119 recorded for the shares and
warrants issued to Nancy Plotkin and the John G. Jacobs Trust from APP
Investments in consideration of the Company's extension of payment of their
$250,000 notes payable.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
Average Price
Number Percent Amount Percent Per Share
------------- ------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Existing Common Stockholders 4,208,315 73.7% 6,105,881 59.7% $1.45
New Investors 1,500,000 26.3 4,125,000 40.3 $2.75
Total 5,708,315 100.0 10,230,881 100.0 $1.79
</TABLE>
8
<PAGE>
USE OF PROCEEDS
Our net proceeds from the offering will be approximately $3,230,000,
assuming a public offering price of $5.50 per unit and after deducting
underwriting discounts and commissions and estimated offering expenses. If the
underwriter exercises its option in full however, we estimate to receive net
proceed from this offering of $3,602,000.
Over the twelve months following completion of the sale of the units,
we intend to use the net proceeds as follows:
o $0.3 million to fund the remaining portion of our commitment
to the SYNOR-A joint venture (see "Business-Asian
Operations");
o approximately $0.6 million to fund purchases of additional
inventory;
o approximately $0.8 million to pay off outstanding debt, of
which $250,000 will be applied to repay working capital loans
bearing interest at 10% and maturing September 17, 1999. The
remainder will be used to pay down the principal balance of
our line of credit, which is payable on demand and bears
interest at Comerica Bank's prime rate plus 1%. See "Business
- Operations - Credit Facilities."
o approximately $0.9 million of the net proceeds to fund
purchases of aircraft and/or jet turbine engines; and
o approximately $0.6 million of the net proceeds for general
corporate purposes, including possible business acquisitions.
If the underwriter exercises its option in full, $0.2 million of the
additional proceeds would be applied to purchase inventory, $0.1 million would
be used to pay down the line of credit, and $0.1 million would be available for
general corporate purposes.
We have had discussions with a number of acquisition candidates which
primarily are FAA certified aircraft part repair facilities in various parts of
the country. We also have had discussions with aircraft parts manufacturers and
distributors. It is too early to tell which, if any, of these potential business
acquisitions will take place. We anticipate that any business acquisitions will
be accomplished using a combination of cash and shares of our common stock for
the purchase price.
The amounts actually expended for the purposes described above could
vary significantly depending on, among other things, our ability to obtain
capital from other sources, the demand for our services and the availability of
inventory, jet engines and aircraft at attractive prices.
Pending application of the net proceeds we receive from the offering,
we intend to invest the funds in short-term investment-bearing, investment grade
securities or guaranteed obligations of the United States government.
MARKET PRICE OF THE COMMON STOCK
Prior to August 2, 1999, our common stock was traded in the
over-the-counter market through the OTC Bulletin Board under the symbol "AHGI."
Since August 2, 1999, broker/dealers have continued to submit quotations in the
National Quotation Bureau's Pink Sheets. The market for our common stock is
sporadic, and the quarterly average daily volume of shares traded since
formation ranged from a low of 25,944 shares to a high of 37,957 shares. The
following table presents the range of the high and low bid and average daily
volume information for our common stock for the periods indicated, which
information was provided by the Nasdaq Stock Market, Inc. and the National
Quotation Bureau, LLC. The quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent actual
transactions.
9
<PAGE>
<TABLE>
<CAPTION>
Average
Daily
High Low Volume (Shares)
---- --- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1998
First Quarter 4.75 3.469 27,172
Second Quarter 5.875 3.625 37,957
Third Quarter 5.875 4 26,473
Fourth Quarter 5 3 31,366
Year Ending December 31, 1999
First Quarter 5.25 3 25,944
Second Quarter 5.25 4 29,524
Third Quarter (through August 31, 1999) 4.50 1 45,593
</TABLE>
Records of our stock transfer agent indicate that as of August 17,
1999, there were 68 record holders of our common stock.
DIVIDEND POLICY
We have not paid any cash dividends to date, and do not anticipate or
contemplate paying cash dividends in the foreseeable future. Under the terms of
its credit agreement with Comerica Bank, Aviation Holdings International is
prohibited from declaring or paying cash dividends to Aviation Holdings Group
without the consent of Comerica Bank. We intend to utilize all available funds
for the purposes set forth above under "Use of Proceeds."
10
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's financial
statements and accompanying notes. This prospectus contains certain
forward-looking information, which involves risks and uncertainties. The actual
results could differ from the results we anticipate. See "Special Note Regarding
Forward-Looking Statements."
Overview
Our principal asset is our ownership of a controlling interest in
Aviation Holdings International. Accordingly, our results of operations are
highly dependent upon the results of operations of Aviation Holdings
International.
Aviation Holdings International was incorporated in Florida on May 28,
1997 as Schuylkill Acquisition Corp. for the purpose of acquiring, by merger,
the business and operations of Jet Aviation Trading, Inc. On July 28, 1997,
Schuylkill Acquisition Corp. acquired 100% of the outstanding common stock of
Jet Aviation Trading, Inc., a Florida corporation, in exchange for 1,776,800
shares of common stock of Schuylkill Acquisition Corp. in a one-for-one stock
exchange. The former Jet Aviation Trading, Inc. was incorporated in the state of
Florida on October 3, 1996 for the purpose of buying, selling, leasing and
exchanging spare parts for fixed-wing commercial jet transport aircraft.
Effective July 28,1997, the name of Schuylkill Acquisition Corp. was changed to
Jet Aviation Trading, Inc. Effective September 15, 1998, the name of Jet
Aviation Trading, Inc. was changed to Aviation Holdings International.
The effect of the transaction between Schuylkill Acquisition Corp. and
the former Jet Aviation Trading, Inc. was a reverse merger. Accordingly, the
historical financial statements presented for Aviation Holdings International
are those of the accounting survivor, Jet Aviation Trading, Inc., and the
stockholders' equity of the merged company was recapitalized to reflect the
capital structure of the surviving legal entity (Schuylkill Acquisition Corp.)
and the retained earnings of Jet Aviation Trading, Inc.
In February 1998, Aviation Holdings International acquired all or a
majority of the capital stock of PASCO International Aviation Corp., PASCO
International Aviation Corp. Limited, PASCO Financial Services Limited and
Aero-Link Flight Systems Limited (collectively "PASCO").
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date and our
financial statements for the year ended December 31, 1998 include the results of
Aviation Holdings International's operations for the period May 1998 through
December 31, 1998.
Aviation Holdings International currently derives its revenues from
selling, leasing and exchanging spare parts for fixed-wing commercial jet
transport aircraft, selling turbine jet engines and management services.
We have only a limited operating history upon which you may base an
evaluation of our operations and prospects. Although since our inception we
have experienced increased net sales, we may experience significant fluctuations
in our gross margins and operating results in the future, both on an annual and
quarterly basis. Various factors cause these fluctuations, including general
economic conditions, specific economic conditions in the commercial aviation
industry, the availability and price of surplus aviation parts, the size and
timing of customer orders, returns by and allowances to customers and our cost
of capital.
Six Months Ended June 30, 1999 v. Six Months Ended June 30, 1998.
Results of Operation
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date
11
<PAGE>
and our financial statements for the six months ended June 30, 1999 include the
results of Aviation Holdings International's operations. The financial
statements for the six months ended June 30, 1998 include the results of
Aviation Holdings International for the period May 4, 1998 through June 30, 1998
only.
Net sales of aircraft and engine parts were $6,371,942 for the six
months ended June 30, 1999 as compared to $2,067,356 for the six months ended
June 30, 1998. The increase in net sales of aircraft and engine parts was due to
our acquisition of the controlling interest in Aviation Holdings International.
Cost of goods sold was $4,253,559 for the six months ended June 30,
1999 as compared to $1,593,776 for the six months ended June 30, 1998. Gross
profit increased to $2,118,383 in the six months ended June 30, 1998 from
$473,580 in the six months ended June 30, 1998. Our increases in cost of goods
sold and gross profit were due to our acquisition of the controlling interest in
Aviation Holdings International.
Salary and wage expense was $646,019 in the six months ended June 30,
1999 and $715,710 in the six months ended June 30, 1998. This overall decrease
is a result of an increase from the acquisition of the controlling interest in
Aviation Holdings International offset by a nonrecurring compensation bonus
expense recorded May 1998 in the amount of $360,200 for options issued to our
CEO.
General and administrative expenses were $998,381 in the six months
ended June 30, 1999 and $716,798 for the six months ended June 30, 1998. Our
general and administrative expenses for the six months ended June 30, 1998
consisted primarily of a valuation allowance on a promissory note due to the
Company from Environmental Waste Systems, Inc. which has been sold by the
Company (see "Certain Transactions"), a nonrecurring expense. Our general and
administrative expenses for the six months ended June 30, 1999 related primarily
to Aviation Holdings International's operations.
Professional fees were $128,332 in the six months ended June 30, 1999
and $197,798 in the six months ended June 30, 1998. We incurred additional
accounting and legal expenses related to our efforts to acquire businesses in
the first six months of 1998. Activities related to acquisitions in the first
six months of 1999 declined.
Interest expense was $449,305 in the six months ended June 30, 1999 and
$1,908 in the six months ended June 30, 1998. This increase was primarily due to
additional borrowings from Comerica Bank and stockholders and amortization of
the discount on the notes payable to the John G. Jacobs Trust and Nancy Plotkin.
Interest income was $15,492 in the six months ended June 30, 1999 and
$64,670 in the six months ended June 30, 1998. We stopped recording interest on
the Environmental Waste Solutions note receivable after the note was in default
and therefore interest income decreased.
Income from the joint venture was $19,651 in the six months ended June
30, 1999 and $2,486 in the six months ended June 30, 1998. This increase is
primarily a result of our investment in the SYNOR-A Joint Venture which we
acquired along with our controlling interest in Aviation Holdings International.
Income tax expense was $49,000 in the six months ended June 30, 1999
and $13,022 in the six months ended June 30, 1998. This increase is primarily
due to Aviation Holdings International's earnings for the three months ended
March 31, 1999. As of March 31, 1999, we qualified to file a consolidated income
tax return under the Internal Revenue Code. Therefore, as of April 1, 1999 we
were able to offset the earnings of Aviation Holdings International against our
losses. At June 30, 1999 and June 30, 1998, due to the uncertainty of our
ability to generate future earnings, we have recorded a valuation allowance for
the income tax benefits that would have been generated by our losses incurred
for the six months ended June 30, 1998 and June 30, 1999, respectively.
Minority interest was $43,357 in the six months ended June 30, 1999 and
$30,875 in the six months ended June 30, 1998. This increase is mainly due to
the acquisition of the controlling interest in Aviation Holdings International.
As a result of the foregoing, our net loss was $160,868 for the six
months ended June 30, 1999, which was a decrease from a net loss of $1,135,375
for the six months ended June 30, 1998. Basic and diluted loss per common share
decreased from $.43 for the six months ended June 30, 1998 to $.04 for the six
months ended June 30, 1999.
12
<PAGE>
Liquidity and Capital Resources
As of June 30, 1999, our principal source of liquidity included cash
and cash equivalents of $581,991, compared with cash and cash equivalents of
$365,383 as of June 30, 1998. As of June 30, 1999, total outstanding debt was
$3,137,911 compared to $983,374 as of June 30, 1998. Aviation Holdings
International obtained a revolving working capital line of credit from Comerica
Bank in 1998. At June 30, 1999, the amount of principal owed to the bank was
$2,075,000. The credit agreement governing the revolving line of credit provides
for a maximum aggregate borrowing limit of $3,500,000, subject to certain
borrowing restrictions and is secured by substantially all of Aviation Holdings
International's assets. The line of credit bears interest per annum at Comerica
Bank's prime rate plus 1%. As of June 30, 1999, Aviation Holdings International
did not meet the tangible net worth covenant of $4,250,000 in the Comerica Bank
credit agreement, which puts it in technical default under the terms of the
credit agreement. Comerica Bank has, however, continued to make advances under
the credit agreement.
Cash used in operating activities for the six months ended June 30,
1999 was $282,995, which was primarily attributable to overall decreases in
accounts payable and accrued expenses amounting to $254,729, and increases in
accounts receivable of $361,668 and inventory of $20,898 offset by losses from
operations after adding back non-cash expenses. Cash used in operating
activities for the six months ending June 30, 1998 was $596,763, which was
primarily attributable to increases in accounts receivable of $539,932 and
inventory of $531,542 and offset partially by an increase in accounts payable of
$569,644 and operating losses.
Cash flows used in investing activities for the six months ended June
30, 1999 was $235,108 compared with $152,298 of cash provided for the six months
ended June 30, 1998. For the six months ended June 30, 1999, cash used was
related primarily to the investment in the SYNOR-A joint venture of $200,000 and
the purchase of property and equipment for $36,192. For the six months ended
June 30, 1998, the primary use of cash was funding advances under the
Environmental Waste Solutions credit facility of $535,100 and purchase of
property and equipment for $142,933, which was offset by $830,331 of cash
acquired in the acquisition of Aviation Holdings International, Inc.
Cash provided by financing activities for the six months ended June 30,
1999 was $736,404 compared with $807,673 for the six months ended June 30, 1998.
Cash provided for the six months ended June 30, 1999 primarily resulted from the
proceeds from the sale of stock of $295,000 and additional borrowings under the
bank line of credit of $575,000 partially offset by repayments of advances from
stockholders and debt of $73,852. For the six months ended June 30, 1998, the
primary source of cash were advances from our stockholders of $807,952.
We believe that existing cash balances, the credit agreement with
Comerica and the proceeds of this offering will be sufficient to meet our
capital requirements for at least the next eighteen months, including those
expenditures described in "Use of Proceeds" and, in particular, the capital
required for expansion of our turbine engine and aircraft sales. Thereafter, if
our capital requirements increase, we could be required to secure additional
sources of capital. There can be no assurance we will be capable of securing
additional capital or that the terms upon which such capital will be available
to us will be acceptable.
Year ended December 31, 1998 v. Year Ended December 31, 1997
Results of Operations
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date and our
financial statements for the year ended December 31, 1998 include the results of
Aviation Holdings International's operations for the period May 1998 through
December 31, 1998.
Net sales of aircraft and engine spare parts were $8,365,197 for the
year ended December 31, 1998 as compared to $0 for the year ended December
31,1997. The increase in net sales of aircraft and engine spare parts was due to
our acquisition of the controlling interest in Aviation Holdings International.
13
<PAGE>
Cost of goods sold was $5,839,049 for the year ended December 31, 1998
as compared to $0 for the year ended December 31, 1997. Our increase in cost of
goods sold was due to the sales generated by the acquisition of the controlling
interest in Aviation Holdings International.
Salary and wage expenses increased to $1,300,172 in the year ended
December 31, 1998 from $0 in the year ended December 31, 1997. This increase is
primarily the result of our acquisition of the controlling interest in Aviation
Holdings International and $380,328 of noncash compensation expense for common
stock and options to purchase common stock granted to our President.
General and administrative expenses increased to $1,771,560 in the year
ended December 31, 1998 from $15,950 in the year ended December 31, 1997. This
increase is primarily due to our acquisition of the controlling interest in
Aviation Holdings International, our increased acquisition activities during the
first five months of 1998, and the provision in the amount of $633,410 for a
valuation allowance on the Environmental Waste Solutions note.
Professional fees increased to $617,099 in the year ended December 31,
1998 from $48,227 in the year ended December 31, 1997. This increase is
primarily due to our acquisition of the controlling interest in Aviation
Holdings International and to our increased acquisition activities during the
first five months of 1998.
Interest expense increased to $96,044 in the year ended December 31,
1998 from $0 in the year ended December 31, 1997. The increase is due to
interest incurred on advances from our stockholders, interest on borrowings
under the Comerica credit facility by Aviation Holdings International and
amortization of the discount on the notes payable to the John G. Jacobs Trust
and Nancy Plotkin.
Interest income increased to $72,825 in the year ended December 31,
1998 from $6,740 in the year ended December 31, 1997. The increase is primarily
due to the interest recorded under the Environmental Waste Solutions note
receivable.
Loss from the joint venture increased to $8,313 in the year ended
December 31, 1998 from $0 in the year ended December 31, 1997. The increase is
due to the losses recorded on our investment in the SYNOR-A Joint Venture.
Income tax expense increased to $186,863 in the year ended December 31,
1998 from $0 in the year ended December 31, 1997. The increase is primarily the
result of income generated by Aviation Holdings International. We have recorded
a valuation allowance against our deferred tax asset because we are unable to
determine if we will ever generate taxable income to utilize those benefits.
Minority interest increased to $3,702 in the year ended December
31,1998 from $0 in the year ended December 31, 1997. This increase is primarily
due to our acquisition of less than 100% of Aviation Holdings International in
1998.
As a result of the foregoing, net loss increased to $1,384,780 for the
year ended December 31, 1998 as compared to $57,437 for the year ended December
31, 1997. Basic and diluted loss per share of common stock increased from $.06
in the year ended December 31, 1997 as compared to $.46 for the year ended
December 31, 1998.
Liquidity and Capital Resources
As of December 31, 1998 our liquidity and capital resources included
cash and cash equivalents of $363,690 and working capital of $1,371,885,
compared with cash and cash equivalents of $2,175 and a working capital deficit
of $36,128 for the year ended December 31, 1997. The increase in working capital
was primarily due to our acquisition of the controlling interest in Aviation
Holdings International.
Cash used in operating activities for the year ended December 31, 1998
was $1,828,124 compared to $41,009 for the year ended December 31, 1997. Cash
used in the year ended December 31, 1998 was primarily to fund increases in
accounts receivable of $1,059,241, inventory of $613,306, interest receivable of
$64,351, and to reduce accounts payable by $169,081 and accrued expenses by
$173,823. Cash provided for the year ended December 31, 1998 was primarily due
to a decrease in prepaid expenses of $27,905 and an increase in income taxes
payable of $188,500. Cash used in the year ended December 31, 1997 was primarily
related to increases in interest receivable of $6,740 and prepaid
14
<PAGE>
expenses of $2,957, and a decrease in the amount due to stockholder of $7,207.
Cash provided for the year ended December 31, 1997 was due to an increase in
accrued expenses of $8,000.
Cash used in investing activities for the year ended December 31, 1998
was $97,007 compared to $950,673 of cash used for investing activities in the
year ended December 31, 1997. Cash used in the year ended December 31, 1998 was
for funds we advanced under the Environmental Waste Systems credit facility of
$535,100, purchases of equipment of $88,198 and additional investment in SYNOR-A
Joint Venture of $300,000. Cash provided for the year ended December 31, 1998
was due to the cash acquired in the acquisition of the controlling interest in
Aviation Holdings International of $830,331. The primary components of cash
used in the year ended December 31, 1997 was from funds we advanced under the
Environmental Waste Solutions credit facility of $940,000.
Cash provided by financing activities for the year ended December 31,
1998 was $2,286,646 compared to $993,857 for the year ended December 31, 1997.
The primary sources of cash provided from the year ended December 31, 1998
related to $1,500,000 borrowed on the bank line of credit, $50,000 borrowed from
the John G. Jacobs Trust, $200,000 borrowed from Nancy Plotkin, and advances
from stockholders, net of repayments, of $550,284. The source of cash provided
from the year ended December 31, 1997 was the proceeds received from the sale of
securities, net of offering costs paid, in the amount of $993,857.
Since our principal sources of funds are those generated by Aviation
Holdings International, the following sets forth certain information relating to
the operations of Aviation Holdings International for the periods indicated.
Aviation Holdings International formerly maintained its accounting records on a
fiscal year basis ending August 31. Beginning January 1, 1999, Aviation Holdings
International has changed its reporting to a calendar year basis.
Year ended August 31, 1998 v. October 3, 1996 (Date of Inception) to August 31,
1997.
Results of Operations
Aviation Holdings International's net sales of aircraft and engine
spare parts for the fiscal year ended August 31, 1998 increased $6,858,043, or
110%, over the period ended August 31, 1997. During this period, domestic sales
increased by 119% from $3,559,585 to $7,788,597, and international sales
increased 99% from $2,655,968 to $5,284,999. The increase in net sales was due
to several factors which include the sale of a single jet engine to Federal
Express for $2,000,000, the addition of new sales personnel, increased customer
penetration, increased investment in, and availability of, inventory and the
expansion of services offered to customers.
Cost of sales was $11,066,005 for the fiscal year ended August 31, 1998
and $4,684,864 for the fiscal period ended August 31, 1997, which is an increase
of 136% resulting from the increase in sales. There was a decrease in gross
profit from 25% to 15%. The decrease in gross profit was primarily due to a
lower profit margin on the cost of the jet engine sold to Federal Express and
the establishment of reserves for obsolete and slow-moving inventory of
$515,421.
General and administrative expenses decreased $441,735 in the fiscal
year ended August 31, 1998, or 15% compared to the fiscal period ended August
31, 1997. General and administrative expenses were 19% of operating revenues for
the fiscal year ended August 31, 1998, compared to 46% for the fiscal period
ended August 31, 1997. There was nonrecurring compensation expense recorded in
the period ended August 31, 1997 for the issuance of common stock to Aviation
Holdings International's founders in the amount of $1,399,600. The decrease in
this expense in the year ended August 31, 1998 was offset by increases in salary
expense of $630,807, professional fees of $96,145, and other general and
administrative expenses of $230,913, so that overall general administrative
costs only decreased by $441,735.
As a result of these and other factors, Aviation Holdings International
generated a loss from operations of $295,264 for the fiscal year ended August
31, 1998, compared to a loss of $1,383,641 for the fiscal period ended August
31, 1997.
15
<PAGE>
Liquidity and Capital Resources
Aviation Holdings International's liquidity and capital resources
included cash and cash equivalents of $559,578 and working capital of $2,632,231
as of August 31, 1998 compared with cash and cash equivalents of $341,660 and
working capital of $3,246,086 as of August 31, 1997. The principal reason for
the decrease in working capital was the increase in the reserves for
uncollectible accounts and the establishment of the reserve for obsolete and
slow-moving inventory.
Cash provided by operations was $90,180 for the fiscal year ended
August 31, 1998 compared to cash used in operating activities of $1,516,173 for
the fiscal period ended August 31, 1997. For the fiscal year ended August 31,
1998, cash provided was primarily attributable to increases in accounts payable
and accrued expenses of $1,325,114. Cash used in the fiscal year ended August
31, 1998 was primarily related to increases in inventory of $922,519, accounts
receivable of $516,035, and prepaid expenses amounting to $57,805. Cash provided
from the period ended August 31, 1997 was $1,179,058 which was primarily from
increases in accounts payable and accrued expenses. For the period ended August
31, 1997, cash was primarily used to fund increases in inventory of $1,006,754,
accounts receivable of $1,857,119, and prepaid expenses of $29,610.
Cash used in investing activities was $412,142 for the fiscal year
ended August 31, 1998 compared to $121,730 for the fiscal period ended August
31, 1997. Fort the year ended August 31, 1998, cash was used for the acquisition
of property and equipment of $212,142 and the funding of the SYNOR-A joint
venture commitment of $200,000. The primary use of cash for the period ended
August 31, 1997 was for the acquisition of property and equipment of $96,730.
Cash provided by financing activities was $539,880 for the fiscal year
ended August 31, 1998 compared to $1,979,563 for the fiscal period ended August
31, 1997. Cash from the fiscal year ended August 31, 1998 was from proceeds from
the issuance of stock in the amount of $165,000 and borrowings under the line of
credit of $425,000. Cash provided by the fiscal period ended August 31, 1997 was
from the proceeds received from stockholder loans, net of repayments, in the
amount of $1,070,000, and proceeds from the issuance of securities in the amount
of $923,313.
Inflation
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material effect on our results of operations or
financial condition. Increases in fuel costs due to inflation may adversely
affect demand for used aircraft that typically are less fuel efficient, thereby
decreasing demand for aircraft and engine components and spare parts for these
aircraft.
Year 2000 Issue
The widespread use of computer programs that rely on two-digit dates to
perform computations and decision making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the U.S. and Internationally.
We recently upgraded all of our current computer hardware and software
applications as part of our normal business operations, and we believe that all
of our hardware and software applications are year 2000 compliant. As this
upgrade would have occurred in any event, we had no additional costs
attributable to the Year 2000 issue. We have completed an assessment of our
non-information technology systems, and we are not currently aware of any Year
2000 problems relating to these systems which would materially adversely affect
our business operating results or financial condition.
16
<PAGE>
We are currently reviewing the efforts of our vendors and customers to
become Year 2000 compliant. Letters and questionnaires have been or are in the
process of being sent to all critical entities with which we do business to
assess their Year 2000 readiness. To date, we have received minimal responses.
Each of the companies that have responded have assured us that they have already
addressed, or that they will address on a timely basis, all of their known
significant Year 2000 issues. In particular, we have been assured that the
principal electronic database on which we advertise parts, ILS, is Year 2000
compliant. Although this review is continuing, we are not currently aware of any
vendor or customer circumstances that may materially adversely impact us.
We cannot assure you that Year 2000 compliance plans of our vendors and
customers will be completed on a timely manner. With respect to vendors, we
believe that there are sufficient numbers of vendors of parts that any Year 2000
problems encountered by a particular vendor will not adversely impact our
ability to purchase inventory. In the event that any particular customer
encounters Year 2000 difficulties, it may impact our sales to, or collection of
receivables from, that customer until the problems are resolved. We believe that
our sales are sufficiently diversified that this would not result in a material
adverse impact on operating results. In addition, any such disruption is likely
to be temporary and result in a delay, rather than loss, of sales to that
customer. However, if a number of customers experience problems resulting in
significant delays in payment on outstanding accounts receivable, we could
experience material cash flow difficulties until such problems are resolved.
The great majority of aircraft spare parts in our inventory do not
involve computers or embedded chips that might present Year 2000 problems. We
have contacted our vendors of the parts that might have such problems to assess
the Year 2000 compliance of those parts. If any such parts are determined to be
Year 2000 non-compliant, we will seek to return them to the vendor and believe
that we will be successful in doing so. However, we cannot be sure that this
will always be the case, and some parts may be rendered unsaleable as a result.
We do not believe that this will be material in amount.
Plan of Operation
Following the completion of this offering we intend to use a portion of
the proceeds, as well as trade credit, to expand our inventory of aircraft and
engine spare parts and to acquire turbine jet engines and/or aircraft. We also
anticipate hiring additional employees, particularly in the marketing area.
Aviation Holdings International owns a one-half interest in a DC10-30
flight simulator. See "Certain Transactions." Our management, and the co-owner
of the DC10-30 flight simulator, have determined that the flight simulator will
be best utilized if disassembled and sold as spare parts to current users of
DC10 parts and peripheral equipment. We anticipate this liquidation will be
completed by the end of 1999.
We believe that anticipated cash flows from operations, together with
net proceeds we receive from the offering, will meet our anticipated short term
cash needs for working capital and will enable us to make future inventory
expenditures for the foreseeable future. On August 12, 1998, Aviation Holdings
International entered into a credit agreement with Comerica Bank whereby
Comerica Bank agreed to extend a revolving line of credit to Aviation Holdings
International of up to $3,500,000. The revolving line of credit is intended to
fund working capital needs such as inventory purchases and, subject to
Comerica's approval, strategic acquisitions. The funds advanced to Aviation
Holdings International by Comerica are secured by the assets of Aviation
Holdings International. The outstanding balance may not at any time exceed the
sum of (a) 85% of Aviation Holdings International's eligible accounts receivable
and (b) 35% of Aviation Holdings International's eligible inventory. As of
August 31, 1999, the maximum amount available to Aviation Holdings International
under this formula was approximately $2.592 million, and the outstanding balance
was approximately $2.075 million.
We do not anticipate material capital expenditures for the coming
fiscal year other than as described above under "Use of Proceeds."
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BUSINESS
General
Aviation Holdings Group was incorporated in January 1998 as a Delaware
corporation and wholly-owned subsidiary of EyeQ Networking, Inc., a Colorado
corporation formed in May 1988. In February, 1998, EyeQ Networking, Inc. merged
with and into Aviation Holdings Group, with Aviation Holdings Group surviving as
the newly merged entity under the name of EyeQ Networking, Inc. In September
1998, Aviation Holdings Group changed its name from EyeQ Networking, Inc. to
Aviation Holdings Group, Inc.
We acquired approximately 96% of the issued and outstanding capital
stock of Aviation Holdings International through a series of share exchanges in
which holders of Aviation Holdings International common stock exchanged it for
newly-issued shares of Aviation Holdings Group common stock.
We are in the aircraft and engine spare parts redistribution business
and specialize in the sale, lease, exchange and purchase of technical spare
parts for fixed-wing commercial jet transport aircraft manufactured by Boeing,
McDonnell Douglas, Airbus and Lockheed. As part of this business, we provide
customers with inventory management services including new product distribution,
technical purchasing, maintenance and repair management, consignment marketing
and purchase/leaseback of technical spare parts inventory. We also pursue
opportunities involving the purchase, sale and lease of jet turbine engines, jet
turbine aircraft and related aviation industry equipment.
Industry Overview
The aircraft spare parts redistribution market includes sellers of
parts other than parts manufacturers. This market is highly fragmented, with a
limited number of large, well-capitalized companies selling a broad range of
aircraft spare parts and many smaller competitors servicing particular segments
of the aircraft spare parts industry. We believe that significant trends
affecting the aircraft spare parts market will increase our overall size and at
the same time eliminate some market participants and cause consolidation in the
industry due to the inability of some participants to compete efficiently. These
trends are:
Growth in Market for Aircraft Spare Parts
Boeing's 1999 Market Outlook estimates that:
o the worldwide fleet of commercial passenger airplanes will
more than double from 12,600 airplanes at the end of 1998 to
28,400 airplanes by 2018; and
o cargo jet aircraft will increase from 1,545 airplanes in 1998
to 3,036 airplanes by 2018.
Seventy percent of the airplanes delivered to cargo operators are expected to be
used aircraft which were converted from commercial passenger service. Further,
the number of planes in service for more than 10 years is continuing to
increase, and these older planes are the primary market for parts
redistributors. Finally, cost considerations are forcing many airlines and
repair and maintenance facilities to utilize aircraft spare parts sold by
redistributors, instead of purchasing new parts for inventory. We believe that
all of these factors will increase the demand for aircraft spare parts from the
redistribution market.
Increased Outsourcing of Inventory Management Function
Airlines incur substantial expenditures in connection with fuel, labor
and aircraft ownership. During the last decade, airlines have come under
increasing pressure from consumers to reduce air travel costs. Although some
expenditures required to operate an airline are beyond the direct control of
airline operators (e.g., the price of fuel and labor costs), we believe that
obtaining replacement parts from the redistribution market and outsourcing
inventory management functions are steps airlines will take to manage these
functions with less expense and greater efficiency.
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Increasing Emphasis on Traceability
Due to concerns regarding unapproved aircraft spare parts, regulatory
authorities now require airlines to maintain stricter parts documentation. This
requirement has, in turn, been extended by airlines to the spare parts vendors .
The sophistication required to track the history of an inventory consisting of
thousands of aircraft spare parts is considerable and has required companies to
invest significantly in information systems technology. On March 25, 1999 our
quality control systems were certified by the Airline Suppliers Association as
meeting its quality system standards and FAA guidelines.
Increased Consignment
Certain of our customers adjust inventory levels on a periodic basis by
disposing of excess aircraft spare parts. Traditionally, larger airlines have
used internal personnel to manage such dispositions. We believe that major
airlines and other owners of aircraft spare parts are increasingly entering into
long-term consignment agreements with redistributors in order to concentrate on
their core businesses and to more effectively redistribute their excess parts
inventories. By consigning inventories to a redistributor such as us, customers
are able to distribute their aircraft spare parts to a larger number of
prospective inventory buyers, allowing the customer to maximize the value of its
inventory. Consignment also enables us to offer for sale significant parts
inventory at minimal capital cost to us.
Increased Leasing
We believe that cost considerations will cause airlines to lease,
rather than purchase, more spare parts and engines. This would benefit us by:
o providing a steady income stream over a period of time from
lease payments;
o upon termination of the lease, we would regain the part or
engine for subsequent sale; and
o provide the opportunity to obtain additional financing.
Operations
Our core business is buying and selling aircraft and engine spare
parts. We purchase spare parts from numerous unaffiliated sources, including
airlines, original equipment manufacturers and other parts distributors. We have
also pursued opportunities to purchase and sell related aviation industry
equipment. For example, Aviation Holdings International acquired a 50% interest
in a DC10 flight simulator and related support package and software. We also
provide value-added inventory management services to our customers. We believe
that inventory management services provide significant opportunities for
expansion of our business in the future. We also intend to develop business as a
redistributor of turbine jet engines and become involved in the purchase, sale
and lease of jet turbine aircraft and engines.
Aircraft and Engine Spare Parts
Aircraft and engine spare parts can be categorized by their ongoing
ability to be repaired and returned to service. The general categories are as
follows:
o rotable: means 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
reused an indefinite number of times. An important type of
rotable is a "life limited" part, which means it has a
predetermined designated number of allowable flight hours
and/or flights after which it is rendered unusable;
o repairable means a part limited by the number of times it can
be repaired before it must be discarded; and
o expendable means a part which is used and not thereafter
repaired for further use.
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Rotable and repairable aircraft and engine spare parts are further
classified as:
o factory new means parts that have never been installed or used
which are purchased from manufacturers or their authorized
distributors, aircraft manufacturers and engine manufacturers;
o new surplus means parts that have never been installed or used
which are purchased from excess stock of airlines, repair
facilities or other redistributors;
o overhauled means a part that has been completely disassembled,
inspected, repaired, reassembled and tested by a licensed
repair facility;
o serviceable means a part repaired by an approved maintenance
center that is functional and meets any manufacturer or time
and cycle restrictions applicable to it; and
o as removed means a part that requires functional testing,
repair or overhaul by a licensed facility prior to being
returned to service in an aircraft or engine.
A factory new, new surplus, overhauled or serviceable part designation indicates
that the part can be immediately utilized on an aircraft.
Inventory Purchases and Sales
Our daily operations encompass inventory sales, brokering and
exchanging aircraft spare parts. We advertise our available inventories held for
sale or exchange on the Inventory Locator Service ("ILS"), the Airline Inventory
Redistribution System ("AIRS") and BCOM electronic databases. Buyers of aircraft
spare parts can access the ILS, AIRS and BCOM databases and determine the
companies which have the desired inventory available. We estimate that 25% of
our daily sales activity results from an ILS, AIRS or BCOM inquiry. All major
airlines and repair agencies subscribe to one or more of these databases and
accordingly, we maintain continual on-line direct access with them. ILS, AIRS
and BCOM do not, however, list price information relating to particular parts.
The ability to properly evaluate and price spare parts and to predict
competitive supply and demand trends derives from management experience in the
industry. We are currently developing an internet web site that will describe in
detail the parts and services we offer.
We typically have over 50,000 line items in stock. We monitor market
availability, pricing and historical data on a continuous basis. We sell new,
overhauled and serviceable replacement parts from our inventory and buy them at
the request of its customers against a specific order. We usually purchase parts
for our own account and sell them to our customers.
For the twelve months ended December 31, 1998 and the six months ended
June 30, 1999, Aviation Holdings International's total revenues were
approximately as follows:
12/31/98 6/30/99
-------- -------
83% from inventory sales; 93% from inventory sales;
16% from engine sales; and 6% from engine sales; and
1% from consignment sales. 1% from consignment sales.
Inventory Management Services
We provide a number of inventory management services to our customers.
These services assist airlines in downsizing their inventory management
operations, thus enabling them to utilize their capital more efficiently and
reduce costs. We believe we can provide an inventory management program geared
to any particular customer's requirements. Such programs would be supported by
our operating agreements with various airlines and independent repair agencies.
We do not charge separately for these services, but consider them to be a
marketing advantage to our inventory sales.
Consignment
By consigning inventories to a redistributor such as us, consignors are
able to distribute their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the consignor to maximize the value of its inventory.
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Consignment also enables us to sell a broad range of parts at minimal capital
cost. We anticipate that revenues from consignment will increase as a percentage
of total revenues in the future.
Purchasing Services
We purchase spare parts on behalf of smaller and start-up airlines.
This service allows our customers to take advantage of our greater purchasing
power, repair management services, information systems technology, quality and
logistics systems and industry expertise. We do not charge separately for these
services, but consider them to be a marketing tool for our inventory sales.
Asian Operations
While the majority of our operations are conducted in the United
States, we also operate in Asia and the Pacific Rim directly and through a joint
venture with a third party and a number of subsidiaries. These Asian operations
currently account for approximately 20% of our gross revenues on a consolidated
basis and we intend to continue to expand them. The Asian operations are
supervised by Simon Chiang, Vice President for Asia and the Pacific Rim. From
our Miami headquarters, business is conducted through a number of entities
controlled by us that share employees and office facilities. There are two
employees in Hong Kong, one in Shenyang and one in Beijing. The bulk of the
Asian operations consist of business similar to our core operations in the
United States and Europe. We intend to expand the Asian operations to include
other lines of business related to aviation.
Pasco International Aviation Corp. Ltd., a Hong Kong corporation
("Pasco-HK") and majority-owned subsidiary of Aviation Holdings International,
accounted for approximately 13% and 2% of our gross revenues on a consolidated
basis for the year ended December 31, 1998 and the six months ended June 30,
1999. The following is a list of some of its major customers: Ameco Beijing, Air
China Group, China Northern Airlines Sanya Branch, China Sandong Airlines, China
Southwest Airlines, China Northwest Airlines, China Shanghai Airlines, China
Airlines-Taiwan, HAECO-HK, Cathay Pacific Airlines and Thai Airways.
Shenyang Northern Aircraft Maintenance & Engineering Co., Ltd. is a
Sino-American joint venture company established in November 1997. The joint
venture mainly deals with inspection, repair and recertification of DC9, MD80
and A300-600 components, line replacement units, instruments and avionics. It
also represents some of the world's leading original equipment manufacturers for
certain items. It is the first Sino-foreign joint venture approved by the Civil
Aviation Administration of China in the avionics and accessories repair field
and which commenced operations in March 1998. Twenty-five percent of the joint
venture is held by PASCO International Aviation Corporation, Inc., a Florida
corporation and a subsidiary of Aviation Holdings International ("Pasco-FLA").
China Northern Airlines, one of the largest airlines in China, holds the
remaining 75%. The joint venture is currently certified by the Chinese aviation
authorities and expects to complete FAA certification by the end of 1999.
Pasco-FLA's total financial commitment to the joint venture is
$1,000,000. As of June 30, 1999, Aviation Holdings International had funded
approximately $700,000 of this total and intends to fund the remaining
approximately $300,000 with proceeds from this offering and from internal
operations. Under the terms of the joint venture, Pasco-FLA is entitled to
certain preferences in any initial distributions of net income. This preference
provides that Pasco-FLA will recoup its investment prior to any regular
distributions being made to China Northern. Pasco-FLA provides technological
advice to the joint venture and promotes, markets and sells its services. The
joint venture serves approximately 14 airlines. In July 1999, Pasco-FLA received
an initial distribution of approximately $14,600 from the joint venture.
Pasco Financial Services Ltd., Corp., a Hong Kong corporation and
majority-owned subsidiary of Aviation Holdings International
("Pasco-Financial"), specializes in providing financing from banks on behalf of
airlines for aircraft and aviation-related purchases. Pasco-Financial was
recently appointed by China Southwest Airlines to work with banks to provide
financing for three newly-purchased Boeing B737-800 aircraft which are expected
to be delivered in 1999 and 2000. Pasco-Financial has also been appointed by
certain airlines to act as their agent for the sale or lease of aircraft on
behalf of such airlines. Pasco-Financial was also invited by China Southwest
Airlines to arrange the leasing of one of their B757-200 aircraft. To date,
Aviation Holdings International has not recognized any revenue from
Pasco-Financial.
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China Airlines, located in Taipei, Taiwan, has a sophisticated, quality
conscious engine overhaul facility and aircraft maintenance center. Its
maintenance base is located in Taipei, Taiwan. Their $150 million investment in
facilities, equipment, backshops and support mechanisms was completed in 1997
and is certified by every major aviation regulatory authority in the world. Two
majority owned subsidiaries of Aviation Holdings International, Aero-Link Flight
Systems Ltd., a Hong Kong corporation, and Aero-Link Flight System, Inc., a
Florida corporation (collectively, "Aero-Link"), act as China Airlines' global
marketing representative outside of Taiwan. To date, we have recognized $122,866
in revenue from Aero-Link.
Credit Facilities
On August 12, 1998, Aviation Holdings International entered into a
Credit Agreement with Comerica Bank ("Comerica") whereby Comerica agreed to
extend a revolving line of credit to Aviation Holdings International in an
amount not to exceed $3,500,000. The revolving line of credit is intended to
fund, if necessary, working capital needs, such as inventory purchases, and,
subject to Comerica's approval, strategic acquisitions. The funds advanced to
Aviation Holdings International by Comerica are secured by the assets of
Aviation Holdings International and may not at any time exceed the sum of (a)
85% of Aviation Holdings International's eligible accounts receivable and (b)
35% of Aviation Holdings International's eligible inventory. As of August 31,
1999, Aviation Holdings International had an aggregate availability of
approximately $2.592 million and an outstanding balance due to Comerica under
the revolving line of credit of approximately $2.075 million.
Strategy
We believe that we can become a low cost leader in the redistribution
market, as well as in the inventory management services industry, by combining
its managerial experience with increased capital and continuing to build upon
its present operations. The essential elements of our business strategy are:
Internal Growth
We seek to increase our operating revenues and operating income through
continued customer penetration in our existing markets and expansion into new
markets. We intend to achieve such growth by continuing to increase the size and
scope of our inventory and by continuing to expand our marketing efforts
worldwide. We will also expand our inventory management, leasing and consignment
services to allow our customers to reduce their costs of operations by
outsourcing some or all of their inventory management and supply functions and
to take advantage of opportunities to maximize the value of their spare parts
inventory. We will seek to establish and maintain close working relationships
with our customers and to become their vendor of choice.
Capitalize on Large Bulk Purchase Opportunities
Although opportunities to purchase large inventories in bulk in the
aircraft spare parts industry cannot be predicted, historically they become
available on a regular basis. "Bulk" purchase opportunities arise when:
o airlines, in order to reduce capital requirements, sell large
amounts of inventory in a single transaction;
o inventories of aircraft spare parts are sold in conjunction
with asset sales or bankruptcy proceedings, or
o when operators upgrade their fleet.
In these situations, we can obtain large inventories of aircraft spare parts at
a lower cost than can ordinarily be obtained by purchasing on an individual
basis. This results generally in higher gross margins on sales of such parts. As
of June 30, 1999, we had successfully completed approximately eight bulk
inventory purchases in excess of $100,000. We believe that due to our
experience, and as a result of additional capital, we will be able to complete
an increased number of larger bulk purchases.
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Purchase and Sale of Jet Turbine Engines and Aircraft
We believe that with sufficient financial resources, we would be in a
position to increase our activity in the market for the purchase and sale of jet
turbine engines and aircraft. This market is extremely competitive and capital
intensive. We feel, however, that our management has the expertise and industry
contacts to make prudent purchases, which are the key to profitability in this
market.
Pursue Acquisitions of Complementary Businesses
We will also seek acquisitions of other companies, assets or product
lines that would complement or expand our existing aircraft spare parts
redistribution and inventory management services business. We believe that such
acquisitions will enable us to achieve economies of scale and expand the product
and service lines available to our customers. We are currently evaluating a
number of acquisition opportunities, including several FAA certified aircraft
part repair facilities. No commitments or binding agreements have been entered
into to date and accordingly, no assurance can be given that any of the
acquisitions currently being considered will be consummated.
Diversification
We are interested in contracting with manufacturers of specialty
products that could diversify our product line. New product distribution
agreements would allow us to exploit our established network of customers, while
providing a value-added service to smaller manufacturers who lack marketing
expertise and distribution capabilities. On a cost basis, such contracts prove
to be lucrative for us, as we are in a position to reap residual commissions
without any of the associated product costs or liability. On January 23, 1997,
we entered into such an agreement with Mirandy Products Ltd., a leading
manufacturer of lavatory systems cleaner for aircraft. We feel that distribution
sales of Mirandy's latest product, "Mirabowl," will serve to augment ours
existing line of products and services. Mirabowl is essentially a lavatory
system cleaner and deodorizer that has been designed for flush tank treatment of
all types. Mirandy also manufacturers "Super Vinall," a multi-purpose aircraft
wash which removes carbon and hydraulic fluid buildup from fuselage areas,
degreases aircraft parts and may be used as an interior cleaner for the cabin
area. We intend to begin active marketing of these products in the near future
and have not realized revenues from sales of these products to date. We are
currently negotiating agreements with other manufacturers whose products relate
to aircraft environmental systems and fluid processing systems.
We have also been awarded the opportunity to represent six FAA/JAA
approved repair stations throughout specific areas of the world. This
representation applies to component, aircraft and engine repair services
originating from various national and international customers. This opportunity
should allow us to recognize additional income, receive volume discounts on
products and obtain increased recognition in the commercial aviation community,
which will enhance overall brand awareness. We have entered into contracts with
additional maintenance providers and intend to pursue additional relationships.
We also are seeking to expand our operations in Asia and the Pacific
Rim to include the arrangement of aircraft financing and leasing, aircraft
repair and maintenance coordination, technology consulting and the facilitation
of contracts and cross-border business arrangements between aviation-related
entities from different countries. See "Business - Asian Operations."
Sales and Marketing; Customers
We utilize twelve inside and outside salespersons and a network of
independent representatives in our sales and marketing efforts. The respective
Directors of Sales, Marketing and New Business Development provide the synergy
and management which is responsible for obtaining new customers and maintaining
relationships with existing customers. The majority of Aviation Holdings
International's day-to-day sales are accomplished through our inside sales
force.
We provide sales and delivery services seven days a week, 24 hours a
day. This service is critical to provide support to airline customers which, at
any time, may have an aircraft grounded in need of a particular part. Our South
Florida location, with easy access to Miami International Airport and Fort
Lauderdale International Airport, assists in
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the reliable and timely delivery of purchased products. This location also
provides access to exceptional import and export facilities.
We have over 140 customers, which include aircraft and engine
manufacturers, commercial passenger airlines, air cargo carriers, maintenance
and repair facilities, original equipment manufacturers and other aircraft parts
redistribution companies. During the twelve month period ended December 31,
1998, Aviation Holdings International's top 10 customers accounted for
approximately 47% of net sales, and one customer, Federal Express Corp.,
accounted for more than 16% of net sales. During the six month period ended
June 30, 1999, the top 10 customers accounted for approximately 45% of net
sales, and one customer, Nielsen Aviation Corp. accounted for 6% of net sales.
Management Information System
We have upgraded our management information systems by acquiring
computer hardware and software. Our data system is being developed to
incorporate state-of-the-art records imaging, archiving, inventory and asset
management analysis, financial record and other support systems. We believe that
upon full implementation, our data management system will be adequate to manage
our requirements in accordance with our forecasted growth.
Competition
The aircraft spare parts redistribution market is highly-fragmented.
Competition is generally based on price, availability of product and quality,
including traceability. Our major competitors include AAR Corp., Aero
Controls Corp., Solair, Inc., The Memphis Group and Aviation Sales Company.
There is also substantial competition, both domestically and overseas, from
smaller, independent dealers who generally participate in niche markets. Several
of our competitors have greater financial and other resources.
The jet turbine engine and jet turbine aircraft market is currently
dominated by various financial institutions, such as GE Capital, CIT Group, and
International Lease Finance Corp. as well as the major competitors from the
spare parts redistribution market. The market also includes many smaller
entities who engage in transactions on an infrequent basis.
Government Regulation and Traceability
The FAA regulates the manufacture, repair and operation of all
aircraft, engines and aircraft and engine parts operated in the United States.
Its regulations are designed to ensure that all aircraft and aviation equipment
are continuously maintained in proper condition for the safe operation of
aircraft. Similar rules apply in other countries. All aircraft must be
maintained under a continuous condition monitoring program and must periodically
undergo thorough inspection and maintenance. The inspection, maintenance and
repair procedures for the various types of aircraft and equipment are prescribed
by regulatory authorities and can be performed only by certified technicians at
certified repair facilities. Certification and conformance is required before
installation of a part on an aircraft. Presently, whenever necessary with
respect to a particular part, we utilize FAA and/or Joint Aviation Authority
("JAA") certified repair stations to repair and certify parts to ensure
worldwide marketability. Our operations may in the future be subject to new and
more stringent regulatory requirements. In that regard, we closely monitor the
FAA and industry trade groups in an attempt to understand how possible future
regulations might impact us. See "Risk Factors -- Stricter Government
Regulations Could Reduce The Value Of Our Inventory And/Or Require Significant
Expenditures."
An important factor in the aircraft and engine spare parts
redistribution market relates to the documentation or traceability that is
supplied with an aircraft or engine spare part. We require all of our suppliers
to provide adequate documentation as required by the industry and the regulatory
agencies. We are designing out data management system to image, capture, manage
and communicate this documentation.
Employees
As of August 31, 1999, Aviation Holdings Group employed two persons and
Aviation Holdings International employed 32 persons, including two in Hong Kong,
one in Shenyang and one in Beijing. None of these employees are covered by
collective bargaining agreements. We believe that our relations with our
employees are good.
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Properties
Our offices and warehouse facilities are located in Miami, Florida.
These facilities comprise a total of approximately 17,600 square feet. The
premises are subject to a lease, under which Aviation Holdings International is
the tenant, dated January 1, 1997 and subsequently amended on November 1, 1997,
which expires on December 31, 2000. Annual rental is $78,348 plus pass-through
of (1) utilities, (2) increases in real estate taxes, (3) assessments, (4)
increases in insurance and (5) a pro rata share of assessments imposed by the
industrial park's association. Rent is subject to a cost of living increase
adjustment. We have two additional one year options to renew. These facilities
are adequate for our present and anticipated needs. Pasco-HK leases office
space in Hong Kong at a monthly rental of $2,500 under a two year lease that
expires December 31, 1999. Pasco-HK also leases twenty square meters of office
space in Beijing at an annual rental of $3,600 under a three year lease that
expires November 20, 2001.
Product Liability and Legal Proceedings
Our business exposes us to possible claims for personal injury or death
which may result from a failure of aircraft spare parts sold by it. Management
takes what it believes are adequate precautions to ensure the quality and
traceability of the aircraft parts which it sells. We have a director of quality
control whose responsibilities include implementation of our quality control
system and supervision of our licensed airframe and powerplant inspectors and
operations personnel. Our President, with over 20 years of experience in the
industry, also works with the director of quality control. Parts that require
maintenance are submitted to FAA/JAA certified facilities for overhaul and
recertification as required. We also ensure that all parts received or shipped
are accompanied by proper documentation. The director of quality control also
supervises our document traceability program. We do not carry product liability
insurance. See "Risk Factors -- Our Business May Subject Us To Expensive Product
Liability Claims."
Neither Aviation Holdings Group nor Aviation Holdings International is
currently involved in any litigation.
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MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of Aviation Holdings Group and
Aviation Holdings International, their ages and positions are set forth below:
Joseph J. Nelson 49 President, Chief Executive Officer and
Director of Aviation Holdings International
and Aviation Holdings Group
Simon Chiang 44 Executive Vice President of Aviation Holdings
International and Aviation Holdings Group and
Director of Aviation Holdings International
Michael J. Cirillo 31 Director of Aviation Holdings International
and Aviation Holdings Group
Theodore H. Gregor 48 Director of Aviation Holdings International
and Aviation Holdings Group
Joseph F. Janusz 47 Vice President-Finance and Chief Financial
Officer of Aviation Holdings International
Joseph J. Nelson has been our President, Chief Executive Officer and a
Director since August 1998 and President, Chief Executive Officer and a Director
of Aviation Holdings International since October 1996. Prior to October 1996 he
was Senior Vice-President of The AGES Group, L.P. ("AGES"), responsible for the
operations of four divisions with revenues of approximately $100 million, and
held other positions with AGES since October 1990. Prior thereto, Mr. Nelson was
with Ryder Corporation attaining the position of Vice President of Sales. Mr.
Nelson holds a B.S. degree from DePaul University and an M.B.A. in Finance from
Farleigh Dickinson University.
Simon Chiang has been Executive Vice President since August 1999, prior
to which he was Vice President of Asia and Pacific Rim Operations and a Director
of Aviation Holdings International since February 1998 and has been a Director
of ours since August 1998. From 1986 to 1995, Mr. Chiang was President of Simon
International Trading Corp., a company engaged primarily in the import and
export of aviation tooling. Mr. Chiang is also the founder and has served as
President of Pacific Airlines Support Corp. and of Pasco-Financial from 1995 to
1998. Mr. Chiang holds a B.A. degree from Fu Ren University, Taipei, Taiwan.
Michael J. Cirillo has been President of The D.A.R. Group, Inc., an
investment banking firm and President of CBM Consultants, Inc., a marketing and
consulting firm since 1995. From 1987 through 1995 Mr. Cirillo was an officer
and director of Flex Resources, Inc., a temporary and permanent employment firm.
Mr. Cirillo has been a Director of Aviation Holdings International since June
1997 and a Director of Aviation Holdings Group since August 1998. Mr. Cirillo
holds a B.S. degree from Farleigh Dickinson University.
Theodore H. Gregor has been a director of Aviation Holdings
International since October 1997 and a director of Aviation Holdings Group since
August 1998. Since 1972, he has been the President of Aero Kool Corporation, a
privately-held company engaged in business as an FAA approved repair facility.
Mr. Gregor holds a B.S. degree in Mechanical Engineering from the University of
Miami.
Joseph F. Janusz has been Vice President of Finance and Chief Financial
Officer of Aviation Holdings International since June 1, 1997. From March 1996
through May 1997, he was a practicing certified public accountant. From
September 1993 through March 1996, Mr. Janusz was the Chief Financial and
Operations Officer of Homeshield Industries, Inc. a privately-held manufacturing
company. Mr. Janusz received a B.S. degree in Accounting from the
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University of Florida. He is a member of the American Institute of CPAs, the
Florida Institute of CPAs and is a licensed real estate broker in Florida.
The officers of Aviation Holdings Group and Aviation Holdings
International are elected by the Board of Directors of Aviation Holdings Group
and Aviation Holdings International, respectively, to serve until their
successors are elected and qualified. The Directors are elected at the annual
meeting of the stockholders.
Aviation Holdings Group's Certificate of Incorporation and Bylaws and
Aviation Holdings International's Certificate of Incorporation and Bylaws
provide for the indemnification of, and advancement of expenses to, directors
and officers. Aviation Holdings International has also entered into agreements
to provide indemnification for its Directors and executive officers.
Committees
Our Board of Directors has not to date established any committees, but
intends to establish an Audit Committee in connection with the listing of its
securities on the American Stock Exchange. The Audit Committee will recommend
the independent accountants appointed by the Board of Directors to audit our
financial statements, and will review with such accountants the scope of their
audit and their report thereon, including any questions and recommendations that
may arise relating to such audit and report of our internal accounting and
auditing procedures.
Director Compensation
Our Directors have not received any compensation for their services as
Directors in the past. We intend to pay directors who are not employed by us a
fee of $500 for each meeting of the Board of Directors attended and $500 for
each committee meeting attended.
In addition, all Directors will receive stock option grants under the
Stock Option Plan for serving on our Board of Directors. Options to purchase
5,000 shares of common stock will be automatically granted to each Director on
December 31 of each year, starting December 31, 1999, at an option exercise
price equal to the closing bid or sales price of the common stock on such date.
Additionally, Directors appointed to the Board of Directors of Aviation Holdings
International in the future will be granted options to purchase 10,000 shares of
common stock at an exercise price equal to the closing bid or sales price of the
common stock on the date of their appointment.
Executive Compensation
The following table reflects compensation paid or accrued during the
indicated fiscal years, which end on August 31 of the indicated year with
respect to compensation paid or accrued by Aviation Holdings International and
which end on December 31 of the indicated year with respect to compensation paid
or accrued by Aviation Holdings Group.
27
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
All other
Name and Principal Position Year Salary Bonus Other(1) Compensation
- ------------------------------- --------- --------------- --------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
Joseph J. Nelson President, Chief 1998 160,000 29,999 20,128 (2) 0.00
Executive Officer 1997 160,000 11,153 0.00 0.00
and Director
Simon Chiang Executive Vice 1998 87,653 21,500 0.00 0.00
President and
Director
Joseph F. Janusz Vice President of 1998 78,000 14,500 62,500 (3) 0.00
Aviation Holdings 1997 29,500 0.00 0.00 0.00
International
</TABLE>
(1) Does not include perquisites and other personal benefits, securities or
property if the aggregate amount of such compensation for each of the
persons listed did not exceed the lesser of (i) $50,000 or (ii) ten
percent of the combined salary and bonus for such person during the
applicable year.
(2) Represents 4,000 shares of the common stock granted on August 1, 1998
by the Company's Board of Directors at $5.03 per share. The shares were
issued in consideration of services rendered.
(3) Represents 25,000 shares of Aviation Holdings International's common
stock granted on June 11, 1998 by Aviation Holdings International's
Board of Directors at $2.50 per share. The shares were issued by
Aviation Holdings International in consideration of services rendered.
The following table contains information concerning stock options
granted to officers and directors through August 31, 1999.
<TABLE>
<CAPTION>
Number of % of Options Earliest
Options/Warrants Granted to Employees Exercise or Exercise
Name Granted (1) Base Price Date Expiration Date
---- ---------------- -------------------- ------------ -------- ---------------
<S> <C> <C> <C> <C> <C>
Joseph Nelson 50,000 12.5% 2.50 12/24/97 December 23, 2002
Joseph Nelson 200,000 49.8% 2.50 5/31/98 May 30, 2003
Joseph Nelson 25,000 6.2% 2.50 5/31/98 May 30, 2003
Joseph Janusz 20,000 5.0% 2.50 10/29/98 June 11, 2004
Joseph Janusz 20,000 5.0% 2.50 12/24/97 June 11, 2004
Joseph Janusz 15,000 3.7% 2.50 5/31/98 June 11, 2004
Simon Chiang 15,000 3.7% 2.50 2/12/99(2) February 11, 2003
Simon Chiang 10,000 2.5% 2.50 5/31/98 May 30, 2003
Theodore Gregor 10,000 2.5% 2.50 11/6/97 November 5, 2002
</TABLE>
(1) Excludes from total options those options canceled due to employee
termination and options canceled under the provisions of Joseph
Nelson's employment agreement. The cancellations amounted to 35,000
options shares in 1998 and 15,750 option shares in the six months
ended June 30, 1999.
28
<PAGE>
(2) Options vest as to 5,000 shares on February 12 of each year, commencing
February 12, 1999.
The following table sets forth information regarding the number and
value of options held as of August 31, 1999 by the directors and officers, based
on an assumed value of $2.75 per share of common stock. No options have been
exercised to date.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-the Money Options
Name at July 1, 1999 at July 1, 1999
---- ------------------------------- -----------------------------------------
Exercisable Unexercisable Exercisable Unexerciseable
----------- ------------- ----------- --------------
<S> <C> <C>
Joseph Nelson 275,000 --- $68,750 ---
Joseph Janusz 55,000 --- $13,750 ---
Simon Chiang 15,000 10,000 $ 3,750 $2,500
Theodore Gregor 10,000 --- $ 2,500 ---
</TABLE>
Employment Agreements
Aviation Holdings Group and Mr. Nelson have entered into an employment
agreement dated as of May 31, 1998 providing for Mr. Nelson's employment as
President and Chief Executive Officer of Aviation Holdings Group. The agreement
has a term of three years and, thereafter, continues on a month-to-month basis.
The agreement provides for compensation consisting of (i) annual base
compensation of $175,000, (ii) an annual bonus equal to 3% of the pre-tax net
income of Aviation Holdings Group (exclusive of the pre-tax net income of
Aviation Holdings International) and 3% of the pre-tax net income of Aviation
Holdings International, and (iii) certain fringe and other employee benefits
that are made available to the senior executives of Aviation Holdings Group.
Pursuant to the agreement, Mr. Nelson was granted options to purchase 200,000
shares of common stock at a price of $2.50 per share. The options are fully
vested and expire on May 31, 2003. In the event of a change in control of
Aviation Holdings Group other than one approved by its Board of Directors or in
the event that Mr. Nelson's employment is terminated by Aviation Holdings Group
for any reason other than his death or disability or for "cause" (as defined in
the agreement), Mr. Nelson will be entitled to receive a lump sum payment equal
to his annual base compensation multiplied by three. In the event of Mr.
Nelson's death or disability, Mr. Nelson or his estate shall receive Mr.
Nelson's base compensation for 24 months or the remainder of the term of the
agreement, whichever is shorter.
Aviation Holdings International and Simon Chiang have entered into an
employment agreement dated as of February 12, 1998, as amended August 1, 1999,
providing for Mr. Chiang's employment as Vice President of Aviation Holdings
International prior to August 1, 1999, and Executive Vice President of Aviation
Holdings Group and Aviation Holdings International thereafter. The agreement has
a term of three years and thereafter continues on a month-to-month basis. The
agreement provides for compensation consisting of (i) annual base compensation
of $131,000 ($95,000 prior to August 1, 1999), (ii) an annual graduated bonus
based on a percentage of Aviation Holdings International's net sales from
business conducted within China (0% of first $1.5 million; 1% of next $1
million; 2% of next $1.5 million; 3% of next $1.5 million; and 4% of net sales
in excess of $5.5 million), and (iii) certain fringe and other employee benefits
that are made available to similarly situated executives of Aviation Holdings
International. Pursuant to the agreement, Mr. Chiang was granted options, under
Aviation Holdings International's Stock Option Plan, to purchase 15,000 shares
of Aviation Holdings International common stock at a price of $2.50 per share.
The options vest at the rate of 5,000 per year. In the event that Mr. Chiang's
employment is terminated by Aviation Holdings International for any reason other
than his death or disability or for "cause" (as defined in the agreement), Mr.
Chiang will be entitled to receive any bonus due to the date of such event and
his annual base compensation for the unexpired term of the agreement. In the
event of Mr. Chiang's death, his estate shall be entitled to receive Mr.
Chiang's base compensation for sixty days.
Aviation Holdings International and Joseph F. Janusz have entered into
an employment agreement dated as of June 11, 1999 pursuant to which Mr. Janusz
serves as Chief Financial Officer of Aviation Holdings International.
29
<PAGE>
The agreement has a term of two years and provides for (i) annual base
compensation of $89,500, (ii) an annual bonus, and (iii) benefits consistent
with Aviation Holdings International's then current policies and reasonable
expense reimbursement. Pursuant to the agreement, Mr. Janusz was granted, under
Aviation Holdings International's Stock Option Plan, options to purchase 20,000
shares of Aviation Holdings International common stock. In the event that Mr.
Janusz's employment is terminated by Aviation Holdings International for reasons
other than his death or permanent disability or for "cause" (as definition the
agreement), Mr. Janusz will be entitled to receive his annual base compensation
for 12 months prorated, annualized and calculated through the date of
termination. In the event that Mr. Janusz's employment is terminated for
disability, Mr. Janusz shall be entitled to receive his base compensation for
six months. In the event of Mr. Janusz's death, his estate shall be entitled to
receive Mr. Janusz's base compensation for six months. The agreement provides
that Aviation Holdings International will require any successor to all or
substantially all of the business or assets of Aviation Holdings International
to assume Aviation Holdings International's obligations under the agreement.
Stock Option Plan
On September 1, 1997, the Board of Directors of Aviation Holdings
International adopted a Stock Option Plan which was superseded, effective March
1, 1999, by a Stock Option Plan of Aviation Holdings Group (the "Plan"). This
Plan provides for the grant of Incentive Stock Options, Non-qualified Stock
options and Stock Appreciation Rights to employees selected by the Board of
Directors of Aviation Holdings Group, or Compensation Committee. The Plan also
sets forth applicable rules and regulations for stock options granted to
non-employee directors. To date, 255,750 options have been granted under the
Plan, replacing the same number of options granted under the predecessor plan,
including 75,000 to Mr. Nelson, 25,000 to Mr. Chiang, 10,000 to Mr. Gregor and
55,000 to Mr. Janusz. The Plan is subject to stockholder approval and will be
submitted to the stockholders at our annual meeting in 1999.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock (including common stock acquirable
within 60 days pursuant to options, warrants, conversion privileges or other
rights) of the Company as of June 30, 1999 (i) by each of the Company's
directors and executive officers, (ii) all executive officers and directors as a
group, and (iii) all persons known by the Company to own beneficially more than
5% of the common stock. All persons listed have sole voting and investment power
over the indicated shares unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT
-------------------------------------
NAME SHARES Before Offering After Offering(9)
- ---- ------ --------------- -----------------
<S> <C> <C> <C>
Joseph J. Nelson (1) (2) 475,800 11.3 8.3
Joseph F. Janusz (1) (3) 70,000 1.7 1.2
Simon Chiang (1) (4) 187,123 4.4 3.3
Michael J. Cirillo (1) (5) 234,000 5.6 4.1
Theodore H. Gregor (6) 10,000 0.2 0.2
1495 Southeast Avenue
Hialeah, FL 33010
APP Investments, Inc. (7) 915,000 21.7 16.0
Two Penn Center Plaza
Suite 605
Philadelphia, PA 19102
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
PERCENT
-------------------------------------
NAME SHARES Before Offering After Offering(9)
- ---- ------ --------------- -----------------
<S> <C> <C> <C>
Argaman, Inc. (8) 600,000 14.2 10.5
M.S.A. Trust Company, Ltd., Co.
Daniel Frisch Street
64731 Tel Aviv, Israel
Norton Herrick 220,000 5.2 3.8
2295 Corporate Blvd., N.W.
Boca Raton, FL 33431
All officers and directors as
a group (2) (3) (4) (7) 976,923 23.2 17.1
</TABLE>
- -----------------
(1) The addresses for Messrs. Nelson, Janusz, Chiang and Cirillo are c/o
Aviation Holdings Group, Inc., 15675 N.W. 15th Avenue, Miami, Florida
33169
(2) Includes 275,000 shares subject to options presently exercisable.
(3) Includes 55,000 shares subject to options presently exercisable.
(4) Includes 55,556 shares held by Ann Chiang, Mr. Chiang's wife. Also
includes 15,000 shares subject to options presently exercisable.
(5) Includes 30,000 shares of common stock, and warrants to purchase
200,000 shares of common stock, owned by the D.A.R. Group, Inc. of
which Mr. Cirillo is the President. Also includes 4,000 shares owned by
RP Capital Growth, L.P., of which Mr. Cirillo is a partner.
(6) Includes 10,000 shares subject to options presently exercisable.
(7) APP is a personal holding company. The sole shareholder of APP is
Andrew P. Panzo. Neither APP nor Mr. Panzo is affiliated with any
officer, director, or other principal stockholder.
(8) Includes warrants to purchase 100,000 shares of common stock. Argaman
is an Israeli corporation making investments on behalf of a group of
investors. Argaman is not affiliated with any officer, director or
other principal stockholder.
(9) Does not include exercise of the underwriter's option.
CERTAIN TRANSACTIONS
Effective October 1, 1996, Aviation Holdings International issued
600,000 shares of its common stock to Jet Avionics Systems, Inc. ("Jet
Avionics") in consideration of a promissory note in the principal amount of
$175,000, payable on demand, together with accrued interest at the applicable
federal rate. Aviation Holdings International also entered into a Consignment
Agreement with Jet Avionics, whereby Aviation Holdings International agreed to
sell certain inventory of technical spares for the benefit of Aviation Holdings
International and Jet Avionics. The Consignment Agreement was for a period of
one year and provided for the delivery of inventory by Jet Avionics to Aviation
Holdings International and the storage by Aviation Holdings International, on a
segregated basis, of such inventory. Title to such inventory remained with Jet
Avionics until sale to a third party, at which time title passed to Aviation
Holdings International and then to the third party. Aviation Holdings
International insured the inventory. The Consignment Agreement provided that
Aviation Holdings International retained 25% of the selling price of the
inventory and remitted
31
<PAGE>
the balance of 75% to Jet Avionics. Jet Avionics certified that each item of
inventory covered by the Agreement was maintained by an FAA approved source and
was properly documented. Pursuant to such Consignment Agreement, Aviation
Holdings International sold to third parties certain of the consignment
inventory for approximately $452,000 and owed Jet Avionics $303,000 after giving
effect to a $36,000 payment.
On August 29, 1997, Aviation Holdings International and Jet Avionics
entered into a Consignment Cancellation and Purchase Agreement whereby (i) Jet
Avionics canceled the debt of $303,000 and (ii) Aviation Holdings International
purchased the remaining consignment inventory with a value of approximately
$336,000 from Jet Avionics all in exchange for 230,000 shares of Aviation
Holdings International's common stock, $4,000 in cash, and the cancellation of
$175,000 of indebtedness of Jet Avionics to Aviation Holdings International. The
President and sole shareholder of Jet Avionics is Sharon Taoz. Ms. Taoz was
employed by Aviation Holdings International, as an account executive, from
October 3, 1996 through August 31, 1997 and was paid $37,000. Ms. Taoz is
married to a current employee of Aviation Holdings International.
On October 3, 1996, Aviation Holdings International sold 80,000 shares
of its common stock to IP Services, Inc. ("IP") for $24,510. IP is an affiliate
of Howard M. Appel. During 1996 FAC Enterprises, Inc. ("FAC"), an affiliate of
Mr. Appel, loaned Aviation Holdings International aggregate of $325,000. During
the year, Aviation Holdings International repaid $125,000. The balance
($200,000) was repaid on August 29, 1997 through the issuance of 100,000 shares
of Aviation Holdings International common stock. FAC was also issued 7,500
shares for advisory services rendered. Mr. Appel may be deemed to have been an
organizer of Aviation Holdings International.
On November 1, 1996, Aviation Holdings International sold 192,000
shares of its common stock to its president, Joseph J. Nelson, in consideration
of a promissory note in the principal amount of $80,000 payable on demand. The
outstanding balance as of June 30, 1999 was $80,000. The note bears interest at
the applicable federal rate.
On November 14, 1996, Aviation Holdings International entered into a
contract with Fersam International Ltd. ("Fersam") for the purchase of a
one-half interest in a CAE Electronics Ltd. Sigma six (6) axis DC-10 simulator
(the "DC-10 simulator"). In consideration for the purchase of this interest,
Aviation Holdings International paid $125,000 in cash and issued 40,000 shares
of Aviation Holdings International common stock valued at $100,000. On March 28,
1997, Aviation Holdings International entered into another contract with Fersam
for the purchase of one (1) Novoview 2000 Visual Support System, Simulator Spare
Parts Package and Maintenance Training Data Package to be used in connection
with the DC-10 simulator. In consideration of and as payment for the purchase of
these assets, Aviation Holdings International issued 200,000 shares of Aviation
Holdings International common stock valued at $500,000.
On March 27, 1997, Silvertown International Corp. ("Silvertown") loaned
Aviation Holdings International $120,000. This loan was evidenced by a
promissory note payable to Silvertown, due on June 27, 1997, together with
interest at 6% per annum. In consideration for this unsecured loan, Aviation
Holdings International issued to Silvertown 4,800 shares of Aviation Holdings
International common stock. This note was extended for an additional three (3)
months. On May 12, 1997, Silvertown loaned Aviation Holdings International
$250,000. This loan was evidenced by a promissory note payable to Silvertown,
due on or about July 27, 1997, together with interest at 6% per annum. In
consideration for this unsecured loan, Aviation Holdings International issued to
Silvertown 10,000 shares of Aviation Holdings International common stock. On
August 29, 1997, Aviation Holdings International satisfied the principal amounts
of these promissory notes through the issuance of 185,000 shares of Aviation
Holdings International common stock to Silvertown.
On May 23, 1997, Joseph Laura loaned $500,000 to Aviation Holdings
International. This loan was evidenced by a promissory note payable to Mr.
Laura, due on the earlier of May 31, 1998 or Aviation Holdings International
obtaining equity financing in excess of $1,000,000, together with interest at
12% per annum. Aviation Holdings International satisfied the principal amount of
this note through the issuance of 250,000 shares of common stock to Mr. Laura on
August 29, 1997.
On May 30, 1997, The D.A.R. Group, Inc., an affiliate of Michael J.
Cirillo, a director of Aviation Holdings International, was issued 200,000
shares of Aviation Holdings International common stock, for $200. On June 1,
1997, The D.A.R. Group, Inc., was issued warrants to purchase 950,000 shares of
Aviation Holdings International common
32
<PAGE>
stock for a fee in connection with advice concerning the formation,
capitalization and structure of Schuylkill Acquisition Corp. See "Description of
Securities -- Outstanding Warrants."
On February 12, 1998, Aviation Holdings International consummated a
transaction whereby Aviation Holdings International acquired all or a majority
of the outstanding capital stock of a number of companies controlled by Simon
Chiang in return for 150,000 shares of Aviation Holdings International common
stock. The entities acquired are as follows: 100% of the capital stock of PASCO
International Aviation Corp., a Florida corporation; 90% of the capital stock of
PASCO International Aviation Corp. Limited, a Hong Kong Corporation; 80% of the
capital stock of PASCO Financial Services Limited, a Hong Kong corporation; and
100% of the capital stock of Aero-Link Flight Systems Limited, a Hong Kong
Corporation. Simultaneously with the aforementioned transactions, Aviation
Holdings International and Mr. Chiang entered into an employment agreement
pursuant to which Mr. Chiang serves as Aviation Holdings International's Vice
President for Asia and the Pacific Rim Operations. See "Management - Employment
Agreements."
On October 15, 1998, Nancy Plotkin and the John C. Jacobs Trust loaned
an aggregate of $250,000 to the Company. These loans were evidenced by
promissory notes due March 15, 1999 (subject to extension by the Company to May
15,1 999), bear interest at 10% per annum and are secured by the pledge of 51%
of the outstanding stock of Aviation Holdings International. As additional
consideration for the loans, the Company issued 20,000 shares of its common
stock to Nancy Plotkin and 5,000 shares to the John C. Jacobs Trust.
In May 1999 the Company extended the maturity date of these promissory
notes to July 14, 1999 and issued a warrant to purchase 12,000 shares of common
stock to Nancy Plotkin and a warrant to purchase 3,000 shares of common stock to
the John G. Jacobs Trust as consideration for this extension. The warrants are
exercisable for three years from the date of grant at an exercise price of $4.00
per share. In August 1999, the note holders agreed to extend the maturity date
of these promissory notes to September 17, 1999 upon issuance of 4,800 shares of
common stock to Nancy Plotkin and 1,200 shares of common stock to the John G.
Jacobs Trust.
On March 3, 1999, Aviation Holdings Group purchased 600,000 shares of
Aviation Holdings International common stock from Argaman, Inc. ("Argaman") in
exchange for 500,000 shares of the common stock and a warrant to purchase an
additional 100,000 shares at an exercise price of $3.75 per share.
On June 1, 1999, Aviation Holdings Group issued warrants to purchase
210,000 shares of common stock to the D.A.R. Group, Inc. and Dallas Investments,
Ltd. in consideration for the cancellation of warrants to purchase 1,000,000
shares of common stock of Aviation Holdings International.
On August 31, 1999 Aviation Holdings Group sold to IP its interest in a
promissory note from Environmental Waste Solutions, Inc. with a book value of
$900,000 which is secured by a mortgage on a 60 acre parcel of land in
Colchester, Connecticut. The purchase price was $900,000 plus 50% of any net
proceeds received from the debtor or on foreclosure. The note and mortgage
related to advances made by Aviation Holdings Group to the debtor in connection
with a proposed transaction prior to the Company's acquisition of Aviation
Holdings International and unrelated to the Company's current business.
33
<PAGE>
DESCRIPTION OF SECURITIES
General
We are authorized to issue 18,000,000 shares of common stock, $.0001
par value per share, of which 4,208,315 shares are outstanding. An additional
750,000 shares of common stock are reserved for issuance pursuant to our Stock
Option Plan.
Within the limits and restrictions contained in the Certificate of
Incorporation, board of directors has the authority, without further action by
the stockholders, to issue up to 2,000,000 shares of preferred stock, $.0001 par
value per share, in one or more series, and to fix, as to any such series, the
dividend rate, redemption prices, preferences on liquidation or dissolution,
sinking fund terms, if any, conversion rights, voting rights, and any other
preferences or special rights and qualifications. As of the date hereof, we have
no preferred stock issued and outstanding.
Shares of preferred stock issued by our board of directors could be
utilized, under certain circumstances, to make an attempt to gain control of us
more difficult or time consuming. For example, shares of preferred stock could
be issued with certain rights which might have the effect of diluting the
percentage of common stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid which the
board of directors determines is not in our best interests of us and our
stockholders. This provision may be viewed as having possible anti-takeover
effects. A takeover transaction frequently affords stockholders the opportunity
to sell their shares at a premium over current market prices. The board of
directors has not authorized any series of preferred stock, and there are no
agreements, understandings or plans for the issuance of any preferred stock.
Units
Each unit offered hereby consists of two shares of common stock and one
Class A Warrant. The two shares of common stock and Class A Warrants that make
up each unit may not be separated or sold separately until 45 days after the
date of issuance.
Common Stock
Holders of common stock have equal rights to receive dividends when, as
and if declared by the board of directors, out of funds legally available
therefor. Holders of common stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of common stock are entitled upon our liquidation to share
ratably in the net assets available for distribution, subject to the rights, if
any, of holders of any preferred stock then outstanding. Shares of common stock
are not redeemable and have no preemptive or similar rights. All outstanding
shares of common stock are fully paid and non-assessable.
Class A Warrants
Each Class A Warrant will entitle the registered holder to purchase one
share of common stock at an exercise price of $________ per share during the
three year period commencing on the issuance date. No fractional shares of
common stock will be issued in connection with the exercise of Class A Warrants.
Upon exercise, we will pay the holder the value of any such fractional shares in
cash, based upon the market value of the common stock at such time.
Unless extended by us at our discretion, the Class A Warrants will
expire at 5:00 p.m., New York time, on the third anniversary of the original
issuance date. In the event a holder of Class A Warrants fails to exercise the
Class A Warrants prior to their expiration, the Class A Warrants will expire and
the holder thereof will have no further rights with respect to the Class A
Warrants.
We may redeem the Class A Warrants at a price of $.01 per Class A
Warrant, at any time once they become exercisable upon not less than 30 days
prior written notice if the average closing price or bid price of the common
stock as reported by the principal exchange on which the common stock is traded,
the Nasdaq National Market or SmallCap
34
<PAGE>
Market or the National Quotation Bureau, Incorporated, as the case may be,
equals or exceeds $____ per share for any twenty (20) consecutive trading days
ending within five (5) days prior to the date on which notice of redemption is
given.
No Class A Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of common stock issuable upon
exercise of such Class A Warrants under an effective registration statement
filed with the qualification under the securities laws of the state or residence
of the holder of such Class A Warrants. Although we intend to have all shares so
qualified for sale in those states where the units are being offered and to
maintain a current prospectus relating thereto until the expiration of the Class
A Warrants, subject to the terms of the Warrant Agreement, there can be no
assurance that it will be able to do so.
A holder of Class A Warrants will not have any rights or privileges as
a shareholder prior to the exercise of the Class A Warrants. We are required to
keep available a sufficient number of authorized shares of common stock to
permit exercise of the Class A Warrants.
The exercise price of the Class A Warrants and the number of shares
issuable upon exercise of the Class A Warrants will be subject to adjustment to
protect against dilution in the event of stock dividends, stock splits,
combinations, subdivisions and reclassifications. No assurance can be given that
the market price of our common stock will exceed the exercise price of the Class
A Warrants at any time during the exercise period.
Outstanding Warrants
Warrants to purchase 1,000,000 shares of Aviation Holdings
International common stock were issued in June 1, 1997 in connection with its
organization. This included warrants to purchase 950,000 shares issued to D.A.R.
Group, Inc., of which Michael J. Cirillo is the principal. On June 1, 1999, all
of these warrants were exchanged for warrants to purchase 210,000 shares of
Aviation Holdings Group common stock. Each warrant entitles the holder to
purchase one share of Aviation Holdings Group common stock at an exercise price
of $4.50 until June 30, 2002. We may redeem the warrants at $.05 upon the
occurrence of both of the following events: (a) the listing of our common stock
on a securities exchange and (b) our common stock trading in excess of $5.25 per
share for a ten day period.
On March 31, 1999, we issued to Argaman, Inc. a warrant to purchase up
to 100,000 shares of common stock at an exercise price of $3.75 per share until
March 4, 2002.
On May 15, 1999, Aviation Holdings Group issued to Nancy Plotkin and
the John G. Jacobs Trust warrants to purchase 12,000 shares and 3,000 shares,
respectively, of our common stock at an exercise price of $4.00 per share until
May 15, 2004.
The warrants described above provide for adjustment of the exercise
price and for a change in the number of shares issuable upon exercise to protect
holders against dilution in the event of a stock dividend, stock split,
combination or reclassification of our common stock. A warrant may be exercised
upon surrender of the warrant certificate on or prior to the expiration date (or
earlier redemption date) of such warrant at the offices of our transfer agent,
with the form of "Election to Purchase" completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or bank check)
for the number of shares with respect to which the warrant is being exercised.
Shares issued upon exercise of warrants and paid for in accordance with the
terms of the warrants will be fully paid and nonassessable.
The warrants do not confer upon the holder thereof any voting or other
rights of a stockholder.
Transfer Agent
StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, Pennsylvania 19003,
serves as transfer agent for the common stock of Aviation Holdings International
and the Company.
35
<PAGE>
UNDERWRITING
Silver Capital Group, a division of LCP Capital has agreed, subject to
the terms and conditions contained in an underwriting agreement to purchase the
750,000 units offered hereby at the offering price less the underwriting
discount set forth on the cover page of the Prospectus. The underwriter is
committed to purchase all of such units, if any are purchased.
The underwriter has advised us that it proposes to offer the units to
the public at the public offering prices set forth on the cover page of this
prospectus, and to certain securities dealers at such price less a concession of
not more than $_____ per unit, and that the underwriter and such dealers may
reallot to other dealers, including the underwriter, a discount not in excess of
$______ per unit. After this offering, the public offering price and concessions
and discounts may be changed by the underwriter. No reduction in such terms will
change the amount of proceeds to be received by us as set forth on the cover
page of this prospectus.
We have granted an option to the underwriter, exercisable for a period
of 30 days after the date of this prospectus, to purchase up to an additional
75,000 units from us at the public offering prices set forth on the cover page
of this prospectus less the underwriting discounts and commissions. The
underwriter may exercise this option only for the purpose of covering
over-allotments, if any.
The underwriting agreement provides that we will indemnify the
underwriter against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments the underwriter may be required
to make in respect thereof.
Aviation Holdings Group, its executive officers and directors have
agreed not to, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of common stock,
units or other capital stock of Aviation Holdings Group, or any securities
convertible into, or exercisable or exchangeable for, any shares of common stock
or other capital stock of Aviation Holdings Group or any right to purchase or
acquire common stock or other capital stock of Aviation Holdings Group for a
period of 360 days after the date of this prospectus without the prior written
consent of the underwriter, except for options granted pursuant to the Stock
Option Plan. The underwriter may, in its sole discretion, at any time and
without prior notice, release all shares or any portion thereof subject to such
lock-up agreements.
The public offering prices for the common stock and the units have been
determined through negotiations between Aviation Holdings Group and the
underwriter. Among the factors considered in making such determination will be
prevailing market conditions, Aviation Holdings Group's financial and operating
history and condition, its prospects and the prospects of the industry in
general, its management, of Aviation Holdings Group, and the market prices of
securities for companies in businesses similar to that of Aviation Holdings
Group. The offering prices of the units do not necessarily bear any relationship
to the assets, book value, net worth or earnings history of Aviation Holdings
Group. The offering price of the units should not necessarily be considered an
indication of the actual value of the units.
In connection with the offering of the units, the underwriter and its
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the common stock or the units. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase common
stock for the purpose of stabilizing its market price. The underwriter also may
create a short position for the account of the underwriter by selling more
common stock in connection with the offering than they are committed to purchase
from Aviation Holdings Group, and in such case may purchase common stock in the
open market following completion of the offering to cover all or a portion of
such short position. The underwriter may also cover all or a portion of such
short position, up to 75,000 shares of common stock, by exercising the
underwriter's over-allotment option referred to previously. Any of the
transactions described in this paragraph may result in the maintenance of the
price for the common stock or the units at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph are required and, if they are undertaken, then they may be
discontinued at any time.
The underwriter and its predecessors have been actively engaged in the
securities brokerage and investment banking business since 1984. However, they
have engaged in only limited underwriting activities, and have been the
36
<PAGE>
lead or sole underwriter in only a few public offerings during the last five
years. Accordingly, there can be no assurance that the underwriter's lack of
public offering experience will not affect the proposed public offering of the
units or the common stock or the subsequent development of a trading market for
the common stock. Therefore, purchasers of the units or shares of common stock
offered hereby may suffer a lack of liquidity in their investment or a material
diminution of the value of their investments. The underwriter is a member of the
National Association of Securities Dealers, Inc. and is registered as a
Securities broker-dealer in 46 states. See "Risk Factors - The Underwriter has
Limited Underwriting Experience."
LEGAL MATTERS
The validity of the common stock offered hereby will passed upon for us
by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia, Pennsylvania,
and for the underwriter by ___________________.
EXPERTS
The financial statements of the Company for the fiscal years ended
December 31, 1998 and December 31, 1997 included in this prospectus have been
audited by L J Soldinger Associates, certified public accountants, and are
included herein in reliance upon the authority of said firm as experts on
accounting and auditing.
37
<PAGE>
AVIATION HOLDINGS GROUP, INC.
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
----
AVIATION HOLDINGS GROUP, INC.
Independent Auditors' Report F2
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited) F3
Consolidated Statements of Operation for the Years Ended December 31, 1997 and 1998
and for the Six Months Ended June 30, 1998 and 1999 (Unaudited) F5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997 and 1998 and for the Six Months Ended June30, 1999 (Unaudited) F6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1998
and for the Six Months Ended June 30, 1998 and 1999 (Unaudited) F7
Notes to Financial Statements F9
JET AVIATION TRADING, INC.
Independent Auditors' Report F29
Balance Sheet as of August 31, 1997 F30
Statement of Income, October 3, 1996 (Date of Inception) to August 31, 1997 F31
Statement of Changes in Stockholders' Equity, October 3, 1996 (Date of Inception)
to August 31, 1997 F32
Statement of Cash Flows October 3, 1996 (Date of Inception) to August 31, 1997 F33
Notes to Financial Statements F34
AVIATION HOLDINGS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet as of May 31, 1998 (Unaudited) F42
Condensed Consolidated Statements of Operations and Accumulated Deficit for the Periods
October 3, 1996 (Date of Inception) Through May 31, 1997 (Unaudited) and the Nine
Months Ended May 31, 1998 (Unaudited) F44
Condensed Consolidated Statements of Cash Flows for the Periods October 3, 1996 (Date of
Inception) Through May 31, 1997 (Unaudited) and the Nine Months Ended May 31,
1998 (Unaudited) F45
Notes to Interim Financial Statements (Unaudited) F46
PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Combined Statement of Operations for the
Year Ended December 31, 1998 (Unaudited) P2
Pro Forma Condensed Consolidated Combined Statement of Operations for the
Six Months Ended June 30, 1999 (Unaudited) P3
Notes to Unaudited Pro Forma Condensed Consolidated Combined Financial
Statements (Unaudited) P4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Aviation Holdings Group, Inc.
Miami, FL
We have audited the accompanying consolidated balance sheets of Aviation
Holdings Group, Inc. (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1998. 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 consolidated financial position of Aviation Holdings
Group, Inc. as of December 31, 1998, and the consolidated results of its
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1997 and 1998 in conformity with generally accepted accounting
principles.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
June 22, 1999
F-2
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 363,690 $ 581,991
Trade receivables, net 2,842,545 3,163,403
Inventory 3,220,062 3,240,960
Employee advances 4,040 2,956
Advances to stockholder - related party 75,181 133,707
Prepaid expenses 24,728 46,483
Refundable income taxes 16,200 16,200
Note receivable, net - 900,000
--------------- ---------------
Total Current Assets 6,546,446 8,085,700
--------------- ---------------
Property and Equipment, Net 303,121 301,839
--------------- ---------------
Other Assets
Investment in joint venture 503,042 722,693
Deposits 17,382 16,713
Note receivable, net 900,000 -
Interest receivable from stockholders - related party 25,827 36,637
Intangibles, net 357,766 704,541
Deferred offering costs 109,782 438,144
--------------- ---------------
Total Other Assets 1,913,799 1,918,728
--------------- ---------------
Total Assets $ 8,763,366 $ 10,306,267
=============== ===============
</TABLE>
Theaccompanying notes are an integral
part of the financial statements.
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------------ ---------------
(Unaudited)
<S> <C> <C>
Current Liabilities
Short-term borrowings - bank $ 1,500,000 $ 2,075,000
Short-term borrowings - others 148,685 265,481
Current portion of long-term debt 3,272 3,666
Accounts payable 2,130,906 1,720,672
Accrued expenses 404,498 828,621
Advances from stockholders 782,500 782,500
Income taxes payable 204,700 253,700
------------------ ---------------
Total Current Liabilities 5,174,561 5,929,640
------------------ ---------------
Long-term debt, net of current portion 13,124 11,264
------------------ ---------------
Total Liabilities 5,187,685 5,940,904
------------------ ---------------
Minority Interest 1,186,964 345,391
------------------ ---------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock; no par value; authorized - 2,000,000 shares;
issued - none - -
Common stock; $.0001 par value; At December 31, 1998 authorized -
18,000,000 shares; issued, issuable and outstanding - 3,474,815
At June 30, 1999 authorized - 18,000,000 shares; issued,
issuable and outstanding - 4,208,315 347 420
Additional paid-in capital 4,148,457 5,940,507
Less subsidiary stock subscription receivable - related parties (280,000) (280,000)
Accumulated deficit (1,480,087) (1,640,955)
------------------ ---------------
Total Stockholders' Equity 2,388,717 4,019,972
------------------ ---------------
Total Liabilities and Stockholders' Equity $ 8,763,366 $ 10,306,267
================== ===============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-4
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- ---------------------------------
1997 1998 1998 1999
-------------- --------------- -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ - $ 8,365,197 $ 2,067,356 $ 6,371,942
Cost of Goods Sold - 5,839,049 1,593,776 4,253,559
-------------- --------------- -------------- ---------------
Gross Profit - 2,526,148 473,580 2,118,383
-------------- --------------- -------------- ---------------
Operating Expenses
Salaries and wages - 1,300,172 715,710 646,019
General and administrative 15,950 1,771,560 716,798 998,381
Professional fees 48,227 617,099 197,798 128,332
-------------- --------------- -------------- ---------------
Total Operating Expenses 64,177 3,688,831 1,630,306 1,772,732
-------------- --------------- -------------- ---------------
Income (Loss) from Operations (64,177) (1,162,683) (1,156,726) 345,651
Other Income (Expense)
Interest expense - (96,044) (1,908) (449,305)
Interest income 6,740 72,825 64,670 15,492
Income (loss) from joint venture - (8,313) 2,486 19,651
-------------- --------------- -------------- ---------------
Total Other Income (Expense) 6,740 (31,532) 65,248 (414,162)
-------------- --------------- -------------- ---------------
Loss Before Income Taxes and
Minority Interest (57,437) (1,194,215) (1,091,478) (68,511)
Income Tax Expense - (186,863) (13,022) (49,000)
-------------- --------------- -------------- ---------------
Loss Before Minority Interest (57,437) (1,381,078) (1,104,500) (117,511)
Minority Interest - (3,702) (30,875) (43,357)
-------------- --------------- -------------- ---------------
Net Loss $ (57,437) $ (1,384,780) $ (1,135,375) $ (160,868)
============== =============== ============== ===============
Basic and Diluted Loss Per Common Share $ (.06) $ (.46) $ (.43) $ (.04)
============== =============== ============== ===============
Average Common Shares - Basic and Diluted 1,046,235 3,035,856 2,610,511 3,854,092
============== =============== ============== ===============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-5
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Stock
------------------------------ Paid-In Subscription Accumulated
Shares Amount Capital Receivable Deficit
------------ -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1996 637,000 $ 64 $ 30,599 $ - $ (37,870)
Common stock issued for services -
related party 1,000,000 100 900 - -
Cancellation of common stock (87,000) (9) 9 - -
Common stock issued for cash 800,000 80 999,920 - -
Additional offering costs - - (46,143) - -
Liabilities paid or forgiven by
stockholder - related party - - 24,332 - -
Net loss - - - - (57,437)
------------ -------------- -------------- ------------- -------------
Balances as of December 31, 1997 2,350,000 235 1,009,617 - (95,307)
Common stock issued in the Aviation
Holdings International, Inc. acquisition 1,095,815 110 2,619,626 - -
Stock subscription receivable from
officers' subsidiary stock - related
parties - - (280,000) -
Compensatory common stock
options issued - - 360,200 - -
Common stock issued to officer -
related party 4,000 - 20,128 - -
Common stock and warrants issued
in connection with $250,000 note 25,000 2 138,886 - -
Net loss - - - - (1,384,780)
------------ -------------- -------------- ------------- -------------
Balances as of December 31, 1998 3,474,815 347 4,148,457 (280,000) (1,480,087)
Common stock and warrants issued in
the Aviation Holdings International,
Inc. acquisition 500,000 50 1,041,498 - -
Common stock issued in connection
with 506 offering 118,000 12 294,988 - -
Common stock issued by major
stockholder on behalf of Company in
connection with $250,000 notes payable - - 176,015 - -
Common stock issued in the Aviation
Holdings acquisition 115,500 11 206,445 - -
Common stock issued by major
stockholder on behalf of Company in
connection with $250,000 notes payable - - 43,190 - -
Warrants issued by Company in
connection with $250,000 notes payable - - 29,914 - -
Net loss (160,868)
------------ -------------- -------------- ------------- -------------
Balances as of June 30, 1999 (Unaudited) 4,208,315 $ 420 $ 5,940,507 $ (280,000) $ (1,640,955)
============ ============== ============== ============= =============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-6
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- -------------------------------
1997 1998 1998 1999
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (57,437) $ (1,384,780) $ (1,135,375) $ (160,868)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Compensatory common stock and options - 401,161 370,617 -
Common stock issued for services - related parties 1,000 - -
Minority interest - 3,702 30,875 43,357
Loss (income) from joint venture - 3,976 (2,486) (19,651)
Depreciation and amortization - 54,979 10,284 60,754
Amortization of financing fees 37,573 343,453
Provision for bad debts - 841,410 639,410 30,000
Reserve for obsolete inventory - 66,579 9,000 -
Liability paid on behalf of company by
stockholder - related party 10,000 - - -
Liability forgiven by stockholder - related party 14,332 - - -
Expensed deferred acquisition costs 10,673 10,673 -
Change in assets and liabilities -
(Increase) decrease in
Trade receivables - (1,059,241) (480,096) (350,858)
Inventory - (613,306) (531,542) (20,898)
Interest receivable (6,740) (64,351) (59,836) (10,810)
Prepaid expenses and deposits (2,957) 27,905 5,428 8,255
Refundable income taxes (16,200) (20,000) -
Increase (decrease) in
Due to stockholder - related party (7,207) - - -
Accounts payable - (169,081) 569,644 (410,234)
Accrued expenses 8,000 (173,823) (13,359) 155,505
Income taxes payable - 204,700 - 49,000
-------------- -------------- -------------- --------------
Total Adjustments 16,428 (443,344) 538,612 (122,127)
-------------- -------------- -------------- --------------
Net Cash Used in Operating Activities (41,009) (1,828,124) (596,763) (282,995)
-------------- -------------- -------------- --------------
Cash Flows from Investing Activities
Note receivable advances (940,000) (535,100) (535,100) -
Employee advances - (4,040) - 1,084
Purchases of equipment - (88,198) (142,933) (36,192)
Cash acquired in Aviation Holdings International,
Inc. acquisition - 830,331 830,331 -
Investment in joint venture - (300,000) - (200,000)
Payments for deferred acquisition costs (10,673) - - -
-------------- -------------- -------------- --------------
Net Cash (Used in) Provided by Investing Activities (950,673) (97,007) 152,298 (235,108)
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-7
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- -------------------------------
1997 1998 1998 1999
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from bank line of credit $ - $ 1,500,000 $ - $ 575,000
Proceeds from short-term borrowing - 250,000 - -
Repayments of short-term borrowings - - - (13,860)
Repayments on long-term debt - (2,270) (279) (1,466)
Payments of deferred offering costs - (11,368) - (59,744)
Advances from (to) stockholders,
net of repayments - 550,284 807,952 (58,526)
Proceeds from sale of stock, net of
offering costs paid 993,857 - - 295,000
-------------- -------------- -------------- --------------
Net Cash Provided by Financing Activities 993,857 2,286,646 807,673 736,404
-------------- -------------- -------------- --------------
Net Increase in Cash 2,175 361,515 363,208 218,301
Cash, Beginning of Period - 2,175 2,175 363,690
-------------- -------------- -------------- --------------
Cash, End of Period $ 2,175 $ 363,690 $ 365,383 $ 581,991
============== ============== ============== ==============
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest and Income Taxes
Interest $ - $ 21,202 $ - $ 71,601
============== ============== ============== ==============
Income Taxes $ - $ 8,191 $ - $ -
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-8
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS
Background
Aviation Holdings Group, Inc., together with its subsidiaries, is hereinafter
referred to as the "Company." Aviation Holdings Group, Inc. (formerly EYEQ
Networking, Inc.) was incorporated under the laws of the State of Colorado on
May 19, 1988 and reincorporated in the State of Delaware in January 1998. The
Company was initially intended to serve as a public shell company, defined as an
inactive, publicly-quoted company with nominal assets and liabilities. It was
intended that such a public shell would be attractive to privately-held
companies interested in becoming publicly traded by means of a business
combination with the Company rather than by offering their own securities to the
public.
The Company entered into a letter agreement dated November 20, 1997, pursuant to
which the Company intended to merge with Environmental Waste Solutions, Inc.
("EWS"), a Nevada corporation, whereby the Company would have remained as the
surviving entity. EWS was formed for the purpose of serving as a holding company
for operating subsidiaries which were to be acquired and which engage in waste
recycling and disposal. EWS failed to acquire the operating subsidiaries, and on
June 2, 1998 the Company exercised its option to terminate the letter agreement.
During the period May through July 1998, the Company acquired 74% of Aviation
Holdings International, Inc. ("AHI") (formerly Jet Aviation Trading, Inc.)
through common stock share exchanges and by a block purchase of common stock. In
the first six months of 1999, the Company increased its ownership interest in
AHI to 96% through a series of common stock share exchanges. AHI has two
wholly-owned subsidiaries, PASCO International Aviation Corp., a Florida
corporation ("PASCO Florida"), and Aero-Link Flight Systems Limited, a Hong Kong
corporation ("Aero HK"), and two majority-owned subsidiaries, PASCO
International Aviation Corporation Limited, a Hong Kong corporation ("PASCO
HK"), of which it owns 90%, and PASCO Financial Services Limited, a Hong Kong
corporation ("PASCO Financial HK"), of which it owns 80%. AHI acquired its
interests in these subsidiaries in February 1998. (PASCO Florida, PASCO HK,
PASCO Financial HK and Aero HK are sometimes hereinafter referred to
collectively as "PASCO"). Subsequent to its initial stock acquisition of AHI,
the Company changed its name from EYEQ Networking, Inc. to Aviation Holdings
Group, Inc.
On March 26, 1999 the Company filed a registration statement with the United
States Securities and Exchange Commission to sell its securities to the public
in an initial public offering of its common stock.
Nature of Operations
The nature of operations for each entity is as follows:
AHI is in the business of buying, selling, leasing and exchanging spare
parts and engines for fixed-wing commercial jet transport aircraft.
PASCO HK operations consist of purchasing, selling and leasing of aircraft
components and engines in Asia and the Pacific Rim.
PASCO Florida holds a 25% interest in Shenyang Northern Aircraft
Maintenance & Engineering Co., Ltd. ("SYNOR-A"), a Sino-American joint
venture. The Company has recognized minimal revenue from PASCO Florida as
of June 30, 1999.
PASCO Financial HK's objective is to procure financing from banks on behalf
of airlines for their aircraft and aviation-related purchases. PASCO
Financial HK also intends to function on behalf of certain airlines and act
as their agent in connection with the sale or lease of aircraft. The
Company had not recognized any revenue from PASCO Financial HK as of June
30, 1999.
Aero HK and its wholly-owned subsidiary, Aero-Link Flight Systems, Inc., a
Florida corporation, have entered into an agreement to act as the global
marketing representative (except in the Taiwan region) for China Airlines,
Taiwan.
F-9
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS (Continued)
In this capacity they are responsible for promoting and marketing China
Airlines' aircraft maintenance, turbine engine and component repair and
overhaul business. This entity also functions as a purchasing agent in the
United States on behalf of PASCO HK. The Company has recognized minimal
revenue from Aero-Link as of June 30, 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Development Stage Enterprise
The Company was a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting for Development
Stage Enterprises." The Company started development stage activities in 1997 by
raising capital through a private placement offering in order to actively pursue
a merger with EWS as well as pursue other potential business combinations. The
Company ceased being in the development stage in 1998 upon the acquisition of a
majority interest in AHI.
Consolidated Financial Statements and Interim Information
The interim consolidated financial data as of June 30, 1999 and for the six
months ended June 30, 1999 and 1998 is unaudited. The information reflects all
adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to fairly present 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.
The accompanying consolidated interim financial statements include the accounts
of the Company and its 96%-owned subsidiary, AHI. The operations of AHI have
been included in these consolidated financial statements since the initial date
of acquisition (May 1998), ratably based on the percentage of ownership of AHI.
The accounts of AHI include all of its majority and wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated. The
outside investors' interests have been recorded as minority interest.
AHI formerly maintained its accounting records on a fiscal year basis ending on
August 31. AHI's accounting records have been restated to a calendar year basis
for consolidation purposes. AHI changed its reporting to a calendar year basis
beginning on January 1, 1999.
For comparability purposes, the 1997 figures have been reclassified where
appropriate to conform with the financial statement presentation used in 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates. Significant estimates
included here in the financial statements and in the accompany notes include the
allowance for doubtful accounts, loan valuation allowance, reserve for obsolete
and slow-moving inventory, depreciable lives for property and equipment and
income tax rates. It is at least reasonably possible that the estimates used
will change within the next year.
F-10
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Earnings per share is calculated in accordance with Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" ("SFAS 128"). Basic earnings
per share is computed based upon the weighted average number of shares of common
stock outstanding for the period and excludes any potential dilution. Diluted
earnings per share reflect potential dilution from the exercise of, or the
conversion of, securities into common stock.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
Concentration of Credit Risk
The Company provides credit in the normal course of business and performs
ongoing credit evaluations of its customers while maintaining a provision for
potential credit losses which, when realized, have been within the range of
management's expectations.
During the periods presented in these financial statements, AHI maintained cash
balances in excess of the Federal Deposit Insurance Corporation ("FDIC") insured
limits. At December 31, 1998 and June 30, 1999, the amount of funds that
exceeded FDIC insurance was $403,377 and $607,359, respectively. AHI also
maintained funds in banks that were not FDIC insured. At December 31, 1998 and
June 30, 1999, AHI maintained a balance of $22,536 and $2,536, respectively, in
the Israel Discount Bank Limited, an international bank that operates in the
United States. Management does not believe that a significant risk existed by
maintaining balances in excess of the FDIC insured limit.
During the period from February 12, 1998 through December 31, 1998 and for the
six months ended June 30, 1999, PASCO HK maintained bank accounts in Hong Kong
with the Kwong On Bank, Limited. The accounts were denominated in United States
Dollars, Hong Kong Dollars and German Deutsche Marks. None of the accounts were
FDIC insured. During the period, the accounts denominated in foreign currencies
and the effects of the translation of foreign currency accounts into United
States Dollars were immaterial.
Revenue and Cost Recognition
Revenue and the associated cost of sales are recognized when parts are shipped
to the customer. Amounts received or paid in advance are recorded either as
deferred income or as prepaid, and are recognized in the period in which the
parts are shipped to customers or received by the Company. Revenue and the
related cost of consigned inventory are recognized when the parts are shipped to
the customer.
Inventories
Inventory is stated at the lower of cost or market. Cost of aircraft parts is
determined on a specific identification basis, except at June 30, 1998, when
cost was determined by using the gross profit method. When parts are purchased
in lots, costs are assigned to individual parts or the individual parts are
expensed at a predetermined percentage of the sales price until the cost of the
lot is recovered. Costs to repair, inspect and/or modify the parts are charged
to the specific part when incurred. Inventories held by the Company on
consignment from others are not included in the inventory in the accompanying
financial statements. Provisions have been made for the estimated effect of
excess and obsolete inventories. Such allowance is based on management's best
estimate, which is subject to change. Actual realizable results could
significantly differ from this estimate.
F-11
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks Regarding Inventory
Inventory consists principally of overhauled, serviceable, repairable and new
aircraft parts that are purchased from many sources. Before parts may be
installed in aircraft, they must meet certain standards of condition established
by the Federal Aviation Administration ("FAA") and/or the equivalent regulatory
agencies in other countries. Specific regulations vary from country to country,
although regulatory requirements in other countries generally coincide with FAA
requirements. Parts owned or acquired by the Company may not meet applicable
standards or standards may change in the future, causing parts which are already
contained in the Company's inventory to be scrapped or modified.
Aircraft manufacturers may also develop new parts to be used in lieu of parts
already contained in the inventory. In all such cases, to the extent that such
parts are included in inventory, the value of such parts may be reduced.
Consignment Inventory
The Company currently maintains consignment inventories and its revenues from
consignment arrangements accounted for approximately one percent of net sales
for the periods ended December 31, 1998 and June 30, 1999. Consignment inventory
is not included in inventory amounts.
Deferred Offering Costs
Deferred offering costs consist of amounts paid or accrued for professional
fees, commissions, filing fees and other costs incurred by the Company in
connection with the filing of its registration statement with the Securities and
Exchange Commission for a public offering. These amounts will be recorded as a
reduction of the proceeds when the offering is completed. If the offering is not
completed, the costs will be expensed.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment are
depreciated using the straight-line method over their estimated useful lives
ranging from five to seven years. Leasehold improvements are amortized over the
shorter of their useful lives or the remaining periods of the related leases.
Intangibles
Intangibles consist of goodwill, unamortized note discounts and deferred
offering costs. Goodwill, which originated from the PASCO acquisition and the
1999 share exchanges (Note 4), is being amortized over fifteen years using the
straight-line method. The unamortized note discount, which originated from the
warrants issued in connection with the maturity date extension of the $250,000
notes, is being amortized using the effective interest rate method over the life
of the extension period exercised.
Fair Value of Financial Instruments
The carrying value of accounts receivable, accounts payable, accrued expenses
and accrued offering costs approximates the fair market value due to the
relatively short maturity of these instruments.
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standard No. 109 ("SFAS 109"), "Accounting for Income Taxes." Income
taxes are recorded in the period in which the related transactions have been
recognized in the financial statements, net of the valuation allowances which
are recorded against deferred tax assets because future utilization of these
assets and liabilities cannot be determined. Deferred tax assets and/or
liabilities are
F-12
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
recorded for the expected future tax consequences of temporary differences
between the tax basis and the financial reporting of assets and liabilities.
Compensatory Stock-Based Arrangements
Management has elected to utilize the guidelines of Accounting Principles Board
Opinion No. 25 to account for the value of stock-based compensation arrangements
that will be entered into by the Company in exchange for services performed by
employees.
Subsequent Accounting Pronouncements Implementation
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "Reporting on the Costs of Start- up Activities." SOP 98-5, which is
effective for fiscal years beginning after December 15, 1998, provides guidance
on the financial reporting of start-up costs and organizations costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. As the Company has expensed these costs historically, the adoption of
this standard during the first quarter of 1999 did not have a significant impact
on results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of this
statement to have a significant impact on results of operations, financial
position or cash flows.
NOTE 3 - REINCORPORATION/CHANGE OF CORPORATE NAME
In January 1998, the Company reincorporated in the State of Delaware, decreasing
its authorized common and preferred stock shares to 18,000,000 and 2,000,000,
respectively.
On August 31, 1998, both the Company and AHI amended their Articles of
Incorporation to change their corporate names to Aviation Holdings Group, Inc.
and Aviation Holdings International, Inc., respectively.
NOTE 4 - ACQUISITION
During the second and third quarters of 1998, the Company acquired 74.08% of
AHI. The business combination was treated as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The Company
entered into share exchange agreements ("Exchange Agreements") with various AHI
stockholders. Based upon the terms of the underlying agreements, the Company
exchanged one share of common stock for between 1.667 to 2.5 shares of the AHI's
common stock. The Company also acquired 80,000 shares of AHI common stock from a
stockholder of the Company in repayment of a loan from the Company for $100,000.
Through these exchanges and the acquisition from a stockholder, the Company
issued 1,095,815 shares of its common stock in return for 2,468,080 shares
(74.08%) of AHI's issued and outstanding common stock as of December 31, 1998.
The original shareholders of the Company continued to maintain majority
ownership after the AHI acquisition. The Company shares of common stock received
by the former shareholders of AHI gave them the same rights as all other common
shareholders of the Company. No special controlling or voting rights were
accorded to any shares. The acquisitions have been accounted for as a purchase
by the Company with a purchase price of $2,719,736. The purchase price was
derived from the underlying book value of the assets and liabilities of AHI. No
fair value adjustments were deemed necessary as management believes that the
values of the assets and liabilities approximated the fair values at the time of
the acquisitions. The operations of AHI,
F-13
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 4 - ACQUISITION (Continued)
since the acquisition, have been included in the accompanying consolidated
financial statements for the year ended December 31, 1998 and the six months
ended June 30, 1998 and 1999.
In March 1999, the Company entered into a share exchange agreement with a
stockholder of AHI, thereby increasing the Company's ownership percentage of AHI
to 92%. In return for 600,000 shares of AHI stock, the Company exchanged 500,000
shares of its common stock and a warrant to purchase 100,000 shares of its
common stock at an exercise price of $3.75 per share and an exercise period of
three years. The value of the Company's securities that were tendered in the
exchange were valued at $1,041,498, resulting in the Company recording goodwill
of $321,679.
In April 1999, the Company entered into a series of share exchange agreements
with stockholders of AHI, thereby increasing its ownership percentage of AHI to
96%. In return for 137,500 shares of AHI stock, the Company exchanged 115,500
shares of its common stock. The value of the Company's securities that were
tendered in the exchange were valued at $206,445, resulting in the Company
recording goodwill of $41,396.
NOTE 5 - JOINT VENTURE
SYNOR-A is a Sino-American joint venture company that was established in
November 1997 by PASCO Florida and China Northern Airlines ("CNA") under an
agreement with a term of eleven years. PASCO Florida holds a 25% interest in
SYNOR-A and CNA holds the remaining 75% interest. SYNOR-A primarily deals with
inspection, repair and recertification of DC9, MD80, and A300-600 components,
instruments and avionics. SYNOR-A has been approved by the Civil Aviation
Administration of China in the avionics accessories repair field. SYNOR-A
received licenses necessary to commence operations in November 1997. Operations
commenced in March 1998. The Company reports this investment on the equity
method of accounting.
PASCO Florida's total financial investment commitment to SYNOR-A is $1,000,000.
As of June 30, 1999, $708,332 of this commitment had been funded. Under the
terms of the joint venture, PASCO Florida is entitled to certain preferences in
any distributions of net income of SYNOR-A. These preferences are intended to
provide that PASCO Florida will recover its investment in SYNOR-A prior to any
regular distributions made to CNA. PASCO Florida's role in SYNOR-A is to provide
technological advice to SYNOR-A and to promote, market and sell the services of
SYNOR-A. The Company has recognized minimal revenue from SYNOR-A as of June 30,
1999.
Condensed financial information for the Company's investment in the joint
venture is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance Sheet:
Total Assets $ 3,706,753 $ 4,239,394
================ ===============
Total Liabilities 223,515 370,003
================ ===============
Statement of Operations:
Revenues 510,610 759,033
Expenses 526,516 680,428
---------------- ---------------
Net Income (Loss) (15,906) 78,605
================ ===============
Aviation Holdings International's Share of (Loss) Income $ (3,976) $ 19,651
================ ===============
</TABLE>
F-14
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 6 - DISCONTINUED MERGER
On November 20, 1997, the Company entered into a letter agreement (the "Letter
Agreement") which sets forth the terms of a series of transactions that would
have resulted in EWS merging into the Company (the "Merger") (see Note 1). Under
the terms of the Letter Agreement, the Company would have been the surviving
entity. As a prerequisite of its merger with the Company, EWS was required to
complete a merger with three companies that had entered into agreements to be
acquired by EWS (the "Acquisitions"). The companies were: J. M. Container, Inc.,
a New Hampshire corporation ("JMC"), which operates a waste transfer station and
recycling center in New Hampshire; Waste Placement, Inc., a Connecticut
corporation ("WPI"), which operates a waste brokerage business located in
Massachusetts; and Municipal Enterprises, Inc., a Connecticut corporation
("MEI"), which owns a sixty-acre parcel of real estate in Colchester,
Connecticut which contains an inactive sanitary landfill. In accordance with the
Letter Agreement, the Company had the right to consummate the Merger as soon as
practicable following the completion of the EWS Acquisitions, or, prior to the
completion of the EWS Acquisitions, the Company had the option to terminate the
Letter Agreement at its sole discretion. On June 2, 1998, as a result of EWS not
consummating the Acquisitions, the Company exercised its option to terminate the
Letter Agreement. As of December 31, 1997, the Company had incurred deferred
acquisition costs in the amount of $10,673. These costs were expensed during the
year ending December 31, 1998.
NOTE 7 - TRADE RECEIVABLES
Trade receivables consisted of the following at:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
<S> <C> <C>
Accounts receivable $ 3,162,545 $ 3,513,403
Allowance for doubtful accounts (320,000) (350,000)
---------------- ---------------
Net Trade Receivables $ 2,842,545 $ 3,163,403
================ ===============
NOTE 8 - INVENTORIES
Inventories are comprised of the following:
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
Inventory $ 3,440,062 $ 3,460,960
Allowance for obsolete and slow-moving goods (220,000) (220,000)
---------------- ---------------
Total $ 3,220,062 $ 3,240,960
================ ===============
</TABLE>
NOTE 9 - DC-10 FLIGHT SIMULATOR AND SUPPORT PACKAGE
On November 1, 1996, AHI entered into an agreement with a company domiciled in
the Netherlands (the "Seller") to purchase a one-half ownership in a DC 10-30
flight simulator and all associated equipment required to operate the flight
simulator. The agreement called for the Seller and AHI to equally participate in
all revenues generated from the sale, lease or disassembly of the hardware of
the flight simulator. AHI paid the Seller $125,000 in cash and issued 40,000
shares of its common stock, which was valued at $2.50 per share, for the flight
simulator. AHI intended to sell the flight simulator as a complete package.
F-15
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 9 - DC-10 FLIGHT SIMULATOR AND SUPPORT PACKAGE (Continued)
On March 28, 1997, AHI entered into a second agreement with the Seller to
purchase one Novoview 2000 Visual System ("Novoview 2000") to be used in
conjunction with the DC 10-30 flight simulator. The purchase price was $500,000,
and AHI satisfied its obligation by issuing 200,000 shares of its common stock
at an ascribed value of $2.50 per share. AHI is to receive 100% of the revenues
generated from the sale of these items. The interest in the simulator, Novoview
2000 and freight costs were recorded at AHI's cost of $734,421. In 1998, AHI
changed its sales strategy. Instead of selling the simulator and the Novoview
2000 as a complete unit, AHI decided to sell the components individually as
spare parts. In conjunction with this change in strategy, AHI expensed $335,000
in 1998, prior to its acquisition by the Company, in order to reflect the
decrease in market value of the avionics and physical structure as spare parts.
The remaining value is recorded in the Company's inventory.
This Seller is also a purchaser and supplier of spare parts from and to the
Company.
NOTE 10 - NOTES RECEIVABLE AND CREDIT RISK
Credit Facility
In December 1997, the Company agreed, subject to the availability of its
funding, to provide a $2,000,000 credit facility (the "Credit Facility") to EWS,
JMC and MEI. This Credit Facility was provided in anticipation of the
contemplated merger between EWS and the Company. At December 31, 1997, the
Company had advanced $940,000 to EWS in connection with the Credit Facility. The
loan was unsecured at December 31, 1997, and subsequently became evidenced by a
promissory note dated February 17, 1998 and secured by a mortgage on real estate
owned by MEI. Interest commenced on December 2, 1997 and accrues at the rate of
10% per annum on the principal balance and on any overdue interest. Principal
and interest were due on the earlier of July 1, 1998 or the date of any event of
default. At July 1, 1998, EWS had disbursed all of the funds received from the
Company, had no business operations, and had not consummated the acquisitions of
the three companies it was to acquire before merging with the Company. The
Company may need to foreclose on the property to recover the principal and
interest receivable and foreclosure costs. During 1998, the Company and EWS
restructured the loan by extending the maturity date to February 1, 1999.
Accrued interest as of July 1, 1998 of approximately $58,000 was added to the
existing principal balance at that date. The new principal balance, along with
additional advances, accrued interest through the maturity date. During the
first two quarters of 1998, the Company advanced an additional $535,100 to EWS
under this Credit Facility. A valuation allowance has been recorded in 1998 for
these additional advances as well as for the accrued interest through July 1,
1998. The Company ceased recording interest on this receivable subsequent to
July 1, 1998 since any interest recorded would be offset with a valuation
allowance. The amount recorded for this loan receivable at December 31, 1998 and
June 30, 1999 was $900,000 (principal balance of $1,475,100 plus interest
receivable of $58,310, less a valuation allowance of $633,410). The loan is
currently in default and management may be required to foreclose on the
property. The Company has received no interest payments on the loan. An
independent market value appraisal, dated October 16, 1998, that values the
secured real estate at $1,000,000, based on the assumptions and limiting
conditions set forth in the report, has been furnished to the Company.
F-16
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 11 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
<S> <C> <C>
Leasehold improvements $ 143,321 $ 161,405
Office furniture and equipment 76,687 81,675
Computer equipment 81,372 90,550
Software 45,184 49,127
Trucks 28,676 28,676
---------------- ---------------
375,240 411,433
Accumulated depreciation (72,119) (109,594)
---------------- ---------------
Total $ 303,121 $ 301,839
================ ===============
</TABLE>
NOTE 12 - INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
<S> <C> <C>
Goodwill $ 375,000 $ 738,075
Deferred financing costs 7,500 29,914
---------------- ---------------
382,500 767,989
Less accumulated amortization (24,734) (63,448)
---------------- ---------------
Total $ 357,766 $ 704,541
================ ===============
</TABLE>
NOTE 13 - STOCK SUBSCRIPTION RECEIVABLE
On February 12, 1998, AHI issued 160,000 shares of common stock to PASCO's
former majority stockholder (the "Vice President") in return for two promissory
notes aggregating $365,000 and the assignment from PASCO of inventory valued at
$35,000. AHI received a three-month non-interest bearing promissory note for
$165,000, which had recourse against the personal assets of the Vice President,
and was paid in full in May 1998. The second note is a three-year promissory
note for $200,000 bearing interest at prime, secured solely by 80,000 shares of
the Company's common stock ("Nonrecourse Note"). The shares of common stock have
been pledged as security and are held in escrow in accordance with a stock
pledge agreement dated February 12, 1998. The Nonrecourse Note remained
outstanding at June 30, 1999.
In October 1996, AHI issued 192,000 shares of its common stock to its Chief
Executive Officer in exchange for a demand promissory note of $80,000 which
remains outstanding as of June 30, 1999. The note bears interest at 6% per
annum.
F-17
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 13 - STOCK SUBSCRIPTION RECEIVABLE (Continued)
AHI recorded interest income of approximately $19,844 and $10,810 for the year
ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively, on the outstanding stock subscription receivables. As of December
31, 1998 and June 30, 1999, the accrued interest receivable on the stock
subscription receivables was $25,827 and $36,637, respectively.
NOTE 14 - ADVANCES AND BORROWINGS - STOCKHOLDERS AND RELATED PARTIES
The Company advanced funds to and received advances from certain stockholders
during 1998. At December 31, 1998 and June 30, 1999, the Company owed $781,500
of such advances to IP Services, Inc. and $1,000 to FAC Enterprises, Inc. At
June 30, 1999, accrued interest on these advances amounted to $60,674. The
stockholder advances bear interest at 10% per annum. The amounts owed to IP
Services, Inc. are due on demand; however, demand may not be made prior to
repayment of funds due from EWS (see Notes 10 and 27).
AHI made non-interest bearing advances, net of repayments, to an officer
amounting to $75,181 and $58,526 at December 31, 1998 and June 30, 1999,
respectively. At June 30, 1999, the amount of advances outstanding was $133,707.
NOTE 15 - SHORT-TERM BORROWINGS
On August 12, 1998, AHI obtained a revolving working capital line of credit from
Comerica Bank. At December 31, 1998 and June 30, 1999, the amount outstanding on
the credit line was $1,500,000 and $2,075,000, respectively. The loan agreement,
provides for a maximum aggregate borrowing limit of $3,500,000, subject to a
limitation amount of eighty-five percent of eligible Company receivables and
thirty-five percent of eligible Company inventory as defined in the loan
agreement. This revolving line of credit is secured by substantially all of
AHI's assets, and is due on demand. The line of credit bears interest at the
Bank's prime rate plus 1%. The loan agreement contains certain covenants which
require AHI to maintain minimum thresholds on specific financial ratios.
As of December 31, 1998 and June 30, 1999, AHI had not met the tangible net
worth covenant required by the credit agreement. Under the terms of the loan
agreement, the bank has the right to demand full and immediate repayment of its
loan. As of the date of this report, the bank has not indicated to the Company
that it intends to make such a demand.
Short term borrowings - other consisted of the following:
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
Unrelated investor notes $ 250,000 $ 250,000
Financed insurance premium - 15,481
---------------- ---------------
250,000 265,481
Less unamortized note discount 101,315 -
---------------- ---------------
$ 148,685 $ 265,481
================ ===============
On October 15, 1998, the Company borrowed $250,000 in the aggregate from two
unrelated investors. The loans had an initial maturity date of March 15, 1999
with two one-month extension periods and bear interest at a rate of 10% per
annum. As additional consideration for such borrowings, the Company issued
25,000 shares of the Company's common stock to the investors. As an additional
inducement to the investors to loan money to the Company, a stockholder of the
Company conveyed to the investors warrants to purchase 75,000 shares of the
Company's common stock at an
F-18
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 15 - SHORT-TERM BORROWINGS (Continued)
exercise price of $4.00 per share, and agreed to transfer a maximum of 45,000
shares of the Company's common stock upon the occurrence of an event of default
or an extension of the maturity date by the Company. The Company has pledged 51%
of the issued and outstanding shares of common stock of AHI as security. On
March 15, and April 15, 1999, the Company exercised its option to extend payment
for one month.
The Company recorded a note discount of $138,888 as a result of the stock issued
as an inducement for making the loans of $250,000. The discount is being
amortized over the term of the notes using the effective interest method. The
effective interest rate is 343%. As of December 31, 1998 and June 30, 1999, the
unamortized discount totaled $101,315 and $0, respectively. In addition, the
Company incurred financing fees of $176,015 and $43,190 on March 15, 1999 and
April 15, 1999, respectively as a result of the stock transferred by a
shareholder of the Company to the noteholders as consideration for the extension
of the maturity date. On May 15, 1999, the Company and the noteholders entered
into an agreement to further extend the maturity date of the $250,000 notes to
July 14, 1999. In consideration of the extension, the Company granted the
noteholders warrants to purchase 15,000 shares of the Company's common stock.
The warrants have an exercise price of $4.00, a term of five years and have a
one year restriction on their sale or transfer. This resulted in the Company
recording a financing fee in the amount of $29,914, of which $22,934 had been
amortized as of June 30, 1999. The financing fees are being amortized over the
extension periods. The note discount and financing fees represented the fair
market value of the securities at the date they were issuable.
In March 1999, AHI financed its insurance obligations through a nine-month note
with Premium Assignment Corporation. The note bears interest at an annual rate
of 8.5 % with monthly principal and interest payments of $2,721.
As of June 30, 1999, the outstanding balance of the note was $15,481.
NOTE 16 - LONG-TERM DEBT
In February 1998, AHI purchased a vehicle and financed the purchase through a
five-year note with General Motors Acceptance Corporation. The note bears
interest at an annual rate of 5.9% with monthly payments, principal and interest
of $371. As of December 31, 1998 and June 30, 1999, the outstanding balance of
the note was $16,396 and $14,930, respectively.
Maturities of long-term debt are as follows:
Year ended December 31:
1999 $ 3,272
2000 3,776
2001 4,005
2002 4,247
2003 1,096
--------------
$ 16,396
==============
NOTE 17 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts used for income tax purposes. The tax
effects of temporary differences and net operating loss carryforwards that give
rise to significant portions of the deferred tax assets recognized at December
31 are presented below:
F-19
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 17 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
---------------- ---------------
<S> <C> <C>
Deferred tax assets :
Federal and state deferred tax benefit arising from
net operating loss carryforwards $ 27,397 $ 162,000
Accrued expenses - 30,000
Reserves and allowances - 410,000
Note discount amortization - 12,000
Compensation for employee stock options - 144,000
Undistributed loss from foreign subsidiaries - 93,000
---------------- ---------------
27,397 851,000
Less valuation allowance (27,397) (842,000)
---------------- ---------------
Total deferred tax assets - 9,000
---------------- ---------------
Deferred tax liability
Accelerated depreciation - (9,000)
---------------- ---------------
Net deferred tax asset $ - $ -
================ ===============
</TABLE>
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
---------------- ---------------
<S> <C> <C>
Current
Federal $ - $ (152,970)
State - (33,893)
Deferred
Federal - 500,900
State - 103,863
Tax benefit of net operating loss carryforward 27,397 139,400
---------------- ---------------
27,397 557,300
Less valuation allowance (27,397) (744,163)
---------------- ---------------
Income Tax (Expense) $ - $ (186,863)
================ ===============
</TABLE>
F-20
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 17 - INCOME TAXES (Continued)
The Company has a loss carryforward of approximately $487,000 as of December 31,
1998 that may be offset against future taxable income. The carryforward will
expire between the years 2009 and 2014.
The following table presents the principal reasons for the difference between
the Company's effective tax rates and the United States federal statutory income
tax rate of 34%.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
---------------- ---------------
<S> <C> <C>
U.S. federal statutory income tax rate 34% 34%
Federal income tax benefit at statutory rate $ 9,359 $ 406,000
State and local income tax benefits, net of effect of
federal benefit 5,165 65,700
Non-deductible expenses - (11,100)
Tax benefit from NOL carryback and carryforward - 60,800
Other differences - 11,070
Valuation allowance for deferred income tax benefit (14,524) (719,333)
---------------- ---------------
Income Tax Expense $ - $ (186,863)
================ ===============
Effective Income Tax Rate 0% (15.6)%
================ ===============
</TABLE>
NOTE 18 - OFFICE AND WAREHOUSE FACILITY
AHI leases its Miami, Florida office and warehouse facility from a company
partially owned by one of its stockholders. The lease expires December 31, 2000
and has two one-year options to renew. The monthly rental is $6,529 plus the
pass through of certain expenses. Pasco HK leases office space in Hong Kong. The
Hong Kong lease expires December 31, 1999 and contains monthly rental
obligations of $2,500 for 1998 and $2,650 for 1999.
Rent expense for the periods ended December 31, 1998 and June 30, 1999 was
$56,586 and $64,131, respectively. AHI's minimum obligation under existing
leases is as follows:
December 31, June 30,
1998 1999
---------------- ---------------
(Unaudited)
Year Ending:
1999 $ 109,850 $ -
2000 78,350 99,350
2001 - 39,176
---------------- ---------------
$ 188,200 $ 138,526
================ ===============
F-21
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 19 - CAPITAL STOCK ACTIVITY
Common Stock
On August 15, 1997, the Company issued 1,000,000 shares of common stock as
partial payment for legal fees and costs advanced by a law firm owned by a
stockholder and related party of the Company. The stockholder is the son of the
former President and the sole Director of the Company at the time of the
transaction.
On November 17, 1997, the stockholders of the Company entered into an agreement
to sell 1,410,000 shares of common stock, representing approximately 86% of the
outstanding shares of the Company, to unrelated parties. As a condition of the
agreement, 87,000 shares of common stock were canceled and the then existing
officers and directors of the Company were required to resign. On November 20,
1997, after the close of the transaction, there were 1,550,000 shares of common
stock outstanding. Certain shares are subject to lock-up agreements or
restrictions which limit the holders' ability to sell them. The November 17,
1997 agreement also required all debts and liabilities of the Company to be paid
out of the purchase price at the closing. Prior to the closing, the Company owed
a stockholder and related party $24,332. This liability was comprised of $10,000
of costs advanced on behalf of the Company and $14,332 for legal services
provided to the Company. The amount owed was paid from the proceeds of the sale
of stock and consequently the Company was released from its obligation. The
Company recorded the satisfaction of this liability as additional paid-in
capital.
In December 1997, the Company completed a private offering of 800,000 shares of
common stock at a price of $1.25 per share, amounting to total gross proceeds of
$1,000,000. Offering costs amounted to $6,143 and have been reflected as a
reduction of additional paid-in capital.
During the second and third quarters of 1998, the Company entered into share
exchange agreements with various AHI stockholders. Based on the terms of the
underlying agreements, the Company exchanged one share of common stock for
between 1.667 to 2.5 shares of AHI's common stock. The Company issued 1,095,815
shares of common stock in connection with these share exchanges.
On June 11, 1998, AHI's Board of Directors granted its Chief Financial Officer
("CFO"), 25,000 shares of AHI's common stock valued at $62,500. The shares of
common stock were issued by AHI in consideration of services rendered by the CFO
for the fiscal year ended August 31, 1998.
On August 1, 1998, the Company issued 4,000 shares to its Chief Executive
Officer for services rendered, resulting in compensation expense of $20,128.
On October 15, 1998, the Company borrowed $250,000 from two unrelated investors.
As an inducement to make the loans, the Company issued 25,000 shares of the
Company's common stock and warrants to purchase shares of its common stock at an
exercise price of $4.00 per share to the investors.
In March 1999, the Company completed a private offering of 118,000 shares of
common stock at a price of $2.50 per share, amounting to gross proceeds of
$295,000.
In March 1999, the Company entered into a share exchange agreement with a
stockholder of AHI to acquire additional shares of AHI stock. The Company issued
500,000 shares of its common stock and a warrant to purchase 100,000 shares of
its common stock at an exercise price of $3.75 per share in connection with this
transaction.
In April and June 1999, the Company entered into share exchange agreements with
various AHI stockholders. Based on the terms of the underlying agreements, the
Company exchanged one share of common stock for between 1 to 1.667 shares of
AHI's common stock. The Company issued 115,500 shares of common stock in
connection with these share exchanges.
F-22
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 19 - CAPITAL STOCK ACTIVITY (Continued)
During 1997, the Company adopted the provisions of Statement Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known. Had compensation expense
for the year ended December 31, 1998 been determined under the fair value
provisions of SFAS 123, the Company's net loss and net loss per share would have
differed as follows:
December 31,
1998
----------------------------
Net Loss Per Share
------------ -----------
As Reported Under APB 25 $ (1,384,780) $ (.46)
(.26)
============ ===========
Pro Forma Under SFAS 123 $ (1,476,291) $ (.49)
============ ===========
No such differences between the application of APB 25 and SFAS 123 existed for
1997.
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
weighted average fair values of options at their grant date during 1998, where
exercise price equals the market price on the grant date, was $0. The weighted
average fair value of options at their grant date during 1998, where the
exercise price exceeds the market price on the grant date, was $0. No such
options were granted during 1997. The estimated fair value of each option
granted is calculated using the Black Scholes option pricing model. The
following summarizes the weighted average of the assumptions used in the model.
1997 1998
------------- -------------
Risk free rate - 5.09%
Expected years until exercise - 2.25%
Expected stock volatility - 33.08%
Dividend yield - 0%
Preferred Stock
No shares of the Company's no par value preferred stock have been issued or are
outstanding. Dividends, voting rights, and other terms, rights and preferences
of the preferred shares have not yet been designated but may be so designated by
the Board of Directors from time to time.
F-23
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 20 - COMPENSATORY STOCK OPTION PLAN
In 1994 the Company adopted a Compensatory Stock Option Plan (the "CSO Plan")
which provides for the granting of options to employees, officers, directors and
consultants of the Company. The number of shares which can be purchased under
this plan is limited to 1,000,000 shares. The CSO Plan is not intended to
qualify as an "incentive stock option plan" under Section 422 of the Internal
Revenue Code. The exercise prices of the options granted under the CSO Plan are
to be determined by the Board of Directors or other CSO Plan administrators but
shall not be lower than eighty-five percent of the fair market value of a share
of common stock on the date the option is granted. The options under the CSO
Plan vest immediately upon grant unless otherwise specified, and are valid for
ten years. The Company will incur compensation expense to the extent that the
market value of the stock at the date of grant exceeds the amount the grantee is
required to pay for the options. There were no options granted under the CSO
Plan as of December 31, 1997.
During 1998, the Company granted options to the CEO to purchase 200,000 shares
of common stock at an exercise price of $2.50 per share. All of these options
vested upon the execution of the CEO's employment agreement and expire five
years later. The Company recognized compensation expense of $360,200 for
services rendered.
Restatement of Stock Option Plan
On October 29, 1997, the Board of Directors of AHI adopted a stock option plan
(the "Plan") which became effective September 1, 1997. This Plan provided for
the grant of incentive stock options, non-qualified stock options and stock
appreciation rights not exceeding 750,000 shares, in the aggregate, to selected
employees. The Plan also sets forth applicable rules and regulations for stock
options granted to non-employee directors. The Board of Directors authorized the
issuance of 250,750 stock options under the Plan, and of these options, 50,750
were subsequently canceled. No stock options had been exercised under this Plan.
AHI subsequently amended and restated the Plan, and all active participants of
the Plan became included in the stock option plan of the Company. The options to
acquire AHI stock outstanding at the time of the restatement were replaced by
options to acquire Company stock on a share-for-share basis.
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Shares Life Price Shares Price
------------ ------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
$2.50 200,000 4.42 $ 2.50 200,000 $ 2.50
============ ============= ============ ============ ===============
June 30, 1999 (Unaudited)
$2.50 400,000 3.79 $ 2.50 390,000 $ 2.50
============ ============= ============ ============ ===============
</TABLE>
F-24
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 21 - EMPLOYEE STOCK COMPENSATION PLAN
In 1994 the Company adopted an employee stock compensation plan (the "ESC Plan")
which provides for shares of the Company's common stock to be granted to
employees, officers, directors and consultants of the Company. The number of
shares of common stock which can be awarded under this plan is limited to
1,000,000 shares. The Company will incur compensation expense to the extent of
the market value of the stock at the date of grant of the stock award to the
employee. The ESC Plan will be administered by the Board of Directors or a
committee of directors. There has been no stock awarded under the ESC Plan to
date.
NOTE 22 - LOSS PER SHARE
The Company adopted SFAS 128 in 1997, and has followed the guidelines of SFAS
128 in the presentation of earnings and loss per share for all periods presented
in the financial statements. Options and warrants to purchase common stock are
not included in the computation of diluted loss per share because the effect of
these instruments would be anti-dilutive for the loss periods presented. The
common shares potentially issuable arising from these instruments, which were
outstanding during the periods presented in the financial statements, are as
follows:
<TABLE>
<CAPTION>
December 31,
Exercise -------------------------- June 30,
Price 1997 1998 1999
------------ ------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C>
Options $2.50 - 200,000 400,000
Warrants $3.75 - - 100,000
$4.00 - - 15,000
$4.50 - - 210,000
------------ ------------ --------------
Total common shares potentially issuable - 200,000 725,000
============ ============ ==============
</TABLE>
The following table represents AHI's outstanding options and warrants:
<TABLE>
<CAPTION>
Exercise December 31, June 30,
Price 1998 1999
------------ ---------------- ---------------
(Unaudited)
<S> <C> <C>
Options $2.50 212,750 -
Warrants $4.00 1,000,000 -
---------------- ---------------
Total common shares potentially issuable 1,212,750 -
================ ===============
</TABLE>
All AHI options and warrants that were outstanding at December 31, 1998 were
amended and restated to those of the Company.
NOTE 23 - COMMITMENTS AND CONTINGENCIES
The Company supplies certain inventory parts to its customers through various
consignment agreements, under which the Company takes possession of a vendor's
inventory. These agreements are generally entered into on a long-term basis.
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
F-25
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 23 - COMMITMENTS AND CONTINGENCIES (Continued)
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 no product liability insurance to protect it from such claims.
An uninsured loss could have a materially adverse affect upon the Company's
financial condition.
Effective as of May 31, 1998, the President of AHI entered into an employment
agreement with the Company to serve as President and Chief Executive Officer of
the Company ("CEO"). In accordance with the employment agreement, the CEO also
became a Director of the Company. The agreement reaffirms debt obligations
connected to a stock purchase of AHI shares by the CEO which was initiated under
a prior agreement. The term of the employment agreement is for a period of three
years and may be extended on a month-to-month basis thereafter. The employment
agreement calls for a base compensation and a bonus arrangement based upon a
percentage of pre-tax income.
Effective February 14, 1998, in conjunction with the purchase of the PASCO
entities by AHI, the majority stockholder of PASCO entered into an employment
agreement with AHI to serve as Vice President (the "Vice President"). In
accordance with the employment agreement, the Vice President also became a
Director of AHI. His duties include the responsibility for, and the oversight
of, AHI's operations in Asia and the Pacific Rim. The term of his employment
agreement is for three years and may be extended on a month-to-month basis
thereafter. The agreement calls for a base salary and bonus arrangement based
upon a percentage of sales to China, whereby one-half of any bonus earned
annually in excess of $25,000 is to be applied against the outstanding balance
of the Vice President's obligation under a three-year promissory note dated
February 12, 1998. The Vice President was granted options to purchase 15,000
shares of AHI's common stock at an exercise price of $2.50 per share. One-third
of these options vest annually over a three-year period beginning February 14,
1999.
NOTE 24 - SEGMENT INFORMATION
The Company is in the business of acquiring companies and upon acquiring a
majority interest in AHI in 1998, the Company became a supplier, distributor and
broker of commercial aircraft technical spares for commercial airlines
worldwide, which it considers to be an additional segment.
The information with respect to revenue, by geographic area, is presented in the
table below for the period from May 1998, when the Company acquired a
controlling interest in AHI, through December 31, 1998, and for the six months
ended June 30, 1999.
May - Dec. Jan. - June
1998 1999
--------------- ---------------
(Unaudited)
United States $ 4,632,079 $ 3,388,144
Africa and Middle East 104,396 169,065
Europe 659,898 653,666
Latin America 59,694 425,872
Asia 2,909,130 1,735,195
--------------- ---------------
Total $ 8,365,197 $ 6,371,942
=============== ===============
F-26
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTES 24 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998 June 30, 1999
--------------------------------- ----------------------------- ------------------------------
Business Segments Acquisitions Aviation Acquisitions Aviation Acquisitions Aviation
--------------- --------------- ------------- ------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ 8,365,197 $ - $ 2,067,356 $ - $ 6,371,942
Interest income 54,472 18,353 54,472 10,198 - 15,492
Interest expense 65,392 30,652 - 1,908 372,024 77,281
Depreciation and
amortization 2,679 52,300 - 54,096 7,567 53,187
Segment profit (loss) (1,397,449) 12,669 (1,213,930) 78,555 (451,990) 291,122
Segment assets 1,367,548 7,395,818 999,290 7,085,341 1,345,125 8,961,142
Capital expenditures - 88,198 - 142,933 - 36,192
</TABLE>
NOTE 25 - EMPLOYEE BENEFIT PLAN
On January 1, 1999 the Company adopted a 401(k) savings plan that covers
substantially all employees. Under the terms of the 401(k) savings plan,
employees are entitled to contribute a maximum of 15% of their total
compensation, within limitations established by the Internal Revenue Code.
NOTE 26 - SUPPLEMENTAL CASH FLOW INFORMATION
In 1998, the Company advanced funds to one of its stockholders. The Company
received 80,000 shares of AHI stock as repayment of $100,000 of the
stockholder's obligation.
In 1998, the Company issued 1,095,815 shares of its common stock in exchange for
2,368,880 shares of AHI common stock.
In October, 1998, the Company issued 25,000 shares of its common stock to two
unrelated investors in connection with a loan to the Company of $250,000.
The Company had $40,000, $105,915 and $268,617 of deferred offering costs in
accrued expenses at December 31, 1997 and 1998 and June 30, 1999, respectively.
In March, 1999, AHI financed a portion of its insurance premium amounting to
$29,341 with a note payable.
On March 15, 1999, the Company recorded $176,015 in deferred financing costs
when a major shareholder of the Company transferred 35,000 shares of the
Company's common stock to the investors of the $250,000 notes.
In March, 1999, the Company issued 500,000 shares of its common stock in
exchange for 600,000 shares of AHI common stock, resulting in goodwill of
$321,679 and a reduction in minority interest of $719,869.
F-27
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the Six-Month Periods
Ended June 30, 1998 and 1999 is Unaudited)
NOTE 26 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
In April and June 1999, the Company issued 115,500 shares of its common stock in
exchange for 133,000 shares of AHI common stock, resulting in goodwill of
$41,396 and a reduction in minority interest of $165,061.
On April 15, 1999, the Company recorded $43,190 in deferred financing costs when
a major shareholder of the Company transferred 10,000 shares of the Company's
common stock to the investors of the $250,000 notes.
On May 15, 1999, the Company recorded $29,914 in deferred financing costs for
the issuance of 15,000 warrants to purchase the Company's common stock to the
investors of the $250,000 notes.
NOTE 27 - SUBSEQUENT EVENTS
In April and June 1999, the Company entered into a series of share exchanges
with certain remaining AHI stockholders. The Company exchanged 115,500 shares of
its common stock in return for 137,500 shares of AHI common stock, bringing the
Company's ownership of AHI to 96%.
In June 1999 the Company issued warrants to purchase 210,000 shares of the
Company's common stock at $4.50 per share, with an exercise period through June
30, 2002 ("Warrants"). The Warrants were issued by the Company in order to
replace warrants to purchase 1,000,000 shares of AHI common stock previously
issued by AHI in June 1997. The terms of the Warrants are identical to the terms
of the AHI warrants. The Warrants were issued to a related party, an entity
whose president is a director of the Company, and to an unrelated investor. The
related party received 200,000 Warrants and the unrelated investor received
10,000 Warrants. The Warrants include certain anti-dilutive provisions. The
Company has the right to call the Warrants for $.05 per Warrant, if the
Company's common stock meets certain performance objectives and the Company
offers its common stock for trading on a national exchange.
In June 1999, the Company and the holders of the $250,000 note payable (see Note
15) agreed to extend the maturity date of the note to July 14, 1999. In
consideration of the extension, the Company issued warrants to purchase 15,000
shares of the Company's common stock at $4.00 per share, with an exercise period
through May 15, 2004. These warrants include certain anti-dilutive provisions,
and the shares of the Company's common stock covered by the warrants contain
restrictions on transfer for one year.
NOTE 28 - EVENTS UNAUDITED SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT
On July 15, 1999, the maturity date of the $250,000 notes was extended to
September 17, 1999. In consideration for the extension, a shareholder of the
Company delivered 6,000 shares of the Company's common stock to the noteholders.
On August 11, 1999, the Company granted 55,750 options to purchase the Company's
common stock to certain employees under its stock option plan.
On August 31, 1999, the Company sold its note receivable from EWS (see Note 10)
to a stockholder in exchange for the cancellation of $855,000 of obligations
payable to the stockholder for advances of cash to the Company and accrued
interest thereon, plus $45,000 in cash.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Jet Aviation Trading, Inc.
We have audited the accompanying balance sheet of Jet Aviation Trading,
Inc. as of August 31, 1997, and the related statements of income, stockholders'
equity, and cash flows for the period from October 3, 1996 (Date of Inception)
through August 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides 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 Jet Aviation Trading, Inc.
as of August 31, 1997, and the results of its operations and cash flows for the
period from October 3, 1996 (Date of Inception) through August 31, 1997, in
conformity with generally accepted accounting principles.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
October 9, 1997, except as to Note 12
which is as of October 29, 1997
F-29
<PAGE>
JET AVIATION TRADING, INC.
BALANCE SHEET
AUGUST 31, 1997
ASSETS
Current assets:
Cash...................................................... $ 341,660
Accounts receivable, less $93,000 allowance for doubtful
accounts............................................... 1,764,119
Inventory................................................. 1,532,333
DC-10 flight simulator held for resale (Note 3)........... 734,421
Deferred tax asset........................................ 23,000
Prepaid expenses and other current assets................. 29,610
----------
Total current assets.............................. 4,425,143
----------
Property and equipment, less accumulated depreciation of
$8,293.................................................... 88,437
Deferred offering costs..................................... 22,750
Deposit-Boeing.............................................. 25,000
----------
$4,561,330
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 977,706
Accrued expenses.......................................... 144,540
Accrued interest.......................................... 19,611
Income taxes payable...................................... 37,200
----------
Total current liabilities......................... 1,179,057
----------
Deferred tax liability...................................... 2,000
----------
Stockholders' equity:
Preferred stock, par value $.10 per share, 3,000,000
shares authorized, and no shares issued and
outstanding............................................ --
Common stock, par value $.001 per share; 30,000,000 shares
authorized, and 2,996,500 shares issued and
outstanding............................................ 2,997
Additional paid-in capital................................ 4,840,917
Accumulated Deficit....................................... (1,383,641)
----------
3,460,273
Less: Stockholders' notes receivable (Note 8)............... (80,000)
----------
Total stockholder's equity........................ 3,380,273
----------
$4,561,330
==========
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF OPERATIONS
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Sales, net of returns and allowances........................ $ 6,215,553
Cost of sales............................................... 4,684,864
-----------
Gross profit.............................................. 1,530,689
-----------
Selling, general and administrative expenses................ 2,881,660
-----------
Operating Loss.............................................. (1,350,971)
-----------
Other income (expense):
Interest income........................................... $ 21,867
Interest expense.......................................... (38,337) (16,470)
-------- -----------
Loss before income taxes.................................... (1,367,441)
Income tax expense:
Current................................................... 37,200
Deferred.................................................. (21,000) 16,200
-------- -----------
Net Loss.......................................... $(1,383,641)
===========
Net Loss per share................................ $ (.83)
===========
Weighted average number of common shares outstanding........ 1,672,968
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDER'S
------------------ PAID-IN ACCUMULATED NOTE
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
--------- ------ ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founding stockholders...... 1,200,000 $1,200 $ 778,800 $ -- $(255,000) $ 525,000
Issuance of common stock in
connection with the
purchase of equipment and
aircraft parts............. 10,000 10 24,990 -- -- 25,000
Issuance of common stock in
connection with private
placement.................. 312,000 312 745,997 -- -- 746,309
Issuance of common stock in
connection with purchase of
DC-10 Simulator held for
resale..................... 240,000 240 599,760 -- -- 600,000
Issuance of common stock in
connection with debt....... 14,800 15 36,985 -- -- 37,000
Issuance of common stock to
founders of Schuylkill
Acquisition Corp........... 400,000 400 999,600 -- -- 1,000,000
Issuance of common stock in a
private offering by
Schuylkill Acquisition
Corp. ..................... 47,200 47 95,856 -- -- 95,903
Issuance of 1,000,000
warrants................... -- -- 50,000 -- -- 50,000
Accumulated deficit of
Schuylkill Acquisition
Corp. adjusted due to
merger..................... -- -- (35,298) -- -- (35,298)
Conversion of $370,000 of
notes payable to common
stock...................... 185,000 185 369,815 -- -- 370,000
Conversion of $200,000
stockholder loan to common
stock and payment of
$15,000 advisory fee in
common stock............... 107,500 108 214,892 -- -- 215,000
Conversion of $500,000 note
payable to common stock.... 250,000 250 499,750 -- -- 500,000
Issuance of common stock for
the payment of amounts due
to a stockholder and for
the purchase of remaining
consigned inventory........ 230,000 230 459,770 -- 175,000 635,000
Net Loss..................... -- -- -- (1,383,641) -- (1,383,641)
--------- ------ ---------- ----------- --------- ----------
Balance, August 31, 1997..... 2,996,500 $2,997 $4,840,917 $(1,383,641) $ (80,000) $3,380,273
========= ====== ========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF CASH FLOWS
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
Cash flows from operating activities:
Net (loss)................................................ $(1,383,641)
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 8,293
Allowance for doubtful accounts........................ 93,000
Noncash compensation expense related to sale of
founders shares....................................... 400,000
Noncash compensation expense related to sale of
Schuylkill Acquisition founders shares................ 999,600
Noncash compensation expense related to warrants....... 50,000
Noncash compensation relating to an advisory fee....... 15,000
Noncash compensation relating to loan origination
fee................................................... 37,000
Deferred tax asset, net of deferred tax liability...... (21,000)
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable.................................. (1,857,119)
Inventory (Note 6)................................... (872,333)
Cash paid in connection with purchase of DC-10 flight
simulator........................................... (134,421)
Prepaid expenses and other current assets............ (29,610)
Increase (decrease) in:
Accounts payable..................................... 977,706
Accrued expenses..................................... 144,541
Accured interest..................................... 19,611
Income tax payable................................... 37,200
-----------
Total adjustments................................. (132,532)
-----------
Net cash used for operating activities...................... (1,516,173)
-----------
Cash flows from investing activities:
Deposit--Boeing........................................... (25,000)
Purchase of property and equipment........................ (96,730)
-----------
Net cash used for investing activities............ (121,730)
-----------
Cash flows from financing activities:
Deferred offering costs................................... (22,750)
Proceeds from stockholder loans, subsequently converted to
common stock........................................... 1,195,000
Payments on stockholder loans............................. (125,000)
Proceeds from issuance of securities...................... 932,313
-----------
Net cash provided by financing activities......... 1,979,563
-----------
Cash, ending................................................ $ 341,660
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Interest paid............................................. $ 24,103
-----------
Income taxes paid......................................... $ --
===========
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
Organization and History -- Schuylkill Acquisition Corp. ("the Company" or
"SAC") was incorporated in Florida on May 28, 1997, for the purpose of acquiring
by merger the business and operations of Jet Aviation Trading, Inc. ("Old Jet")
upon the completion of a stock offering by the Company. On July 28, 1997, the
Company acquired 100% of the outstanding common stock of Old Jet in exchange for
1,776,800 shares of common stock of the Company in a one for one stock exchange.
Old Jet was incorporated in the state of Florida on October 3, 1996 for the
purpose of buying, selling, leasing and exchanging spare parts for fixed-wing
commercial jet transport aircraft. Effective July 28, 1997, the Company's name
was changed from Schuylkill Acquisition Corp. to Jet Aviation Trading, Inc.
Merger and Recapitalization -- The merger was completed on July 28, 1997,
whereby SAC acquired 100% of the outstanding common stock of Old Jet in exchange
for 1,776,800 shares of common stock of SAC in a one for one stock exchange. The
merger has been accounted for as a purchase.
The effect of the transaction was a reverse merger, whereas SAC changed its
name to Jet Aviation Trading, Inc. and Old Jet became the acquiring entity and
accounting survivor. Accordingly, the historical financial statements presented
are those of the accounting survivor, Old Jet, and the stockholders' equity of
the merged Company was recapitalized to reflect the capital structure of the
surviving legal entity and the accumulated deficit of Old Jet at the time of
merger.
Nature of Business and Credit Policies -- The Company buys, sells, leases
and exchanges spare parts for fixed-wing commercial jet transport aircraft. The
Company's customers are primarily commercial passenger and cargo operators,
original equipment manufacturers and Federal Aviation Administration and Joint
Aviation Authority repair stations throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and extends
credit to its customers based upon its evaluations. If creditworthiness is
questionable, parts are shipped COD. The allowance for doubtful accounts is
based upon the expected collection of accounts receivable.
Cash Equivalents -- The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
Revenue and Cost Recognition -- The Company recognizes revenue when parts
are shipped to the customer. Amounts paid in advance are recorded as deferred
income and recognized in the period in which the parts are shipped. The Company
recognizes revenue and the related cost of consigned inventory when the parts
are shipped to the customer.
Inventories -- Inventory is stated at the lower of cost or market. Cost of
aircraft parts is determined on a specific identification basis. When parts are
purchased in lots, the individual parts are expensed at a predetermined
percentage of the sales price until the cost of the lot is recovered. Costs to
repair, inspect and/or modify the parts are charged to the specific part when
incurred. Inventories held by the Company on consignment from others are not
included in the inventory in the accompanying financial statements.
Deferred Offering Costs -- Amounts paid or accrued for costs related to the
anticipated public offering will be recorded as a reduction of the proceeds when
the offering is completed. If the offering is not completed, the costs will be
expensed.
Income Taxes -- The Company accounts for income taxes on an asset and
liability approach for financial accounting. Deferred income tax assets and
liabilities are computed annually for temporary differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
F-34
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share -- Net income per common share is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Warrants issued during the period are not considered dilutive, and
therefore, are not included in the computation of net income per share.
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share". The adoption of SFAS 128 did not have an effect on the
computation of earnings per share because the effective date is December 15,
1997, and earlier application is not permitted.
Recoverability of Long Lived Assets -- The Company has adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company is not aware of
any events or circumstances which indicate the existence of an impairment which
would be material to the Company's financial statements.
Financial Instruments -- The carrying amount of cash, accounts receivable,
accounts payable and accrued expenses approximates fair value as of August 31,
1997. The carrying value of the stockholder's note receivable at August 31,
1997, approximates fair value.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates based on
management's knowledge and experience. Accordingly, actual results could differ
from those estimates.
2. RELATED PARTY TRANSACTIONS
CONSIGNMENT AGREEMENT WITH RELATED PARTY
The Company entered into a Consignment Agreement (the "Agreement") with a
related party, Jet Avionics Systems, Inc. ("Avionics"), effective October 3,
1996, wherein the Company agreed to sell certain consignment inventory of
technical spare parts belonging to Avionics and pay Avionics 75% of the sales
price collected for the inventory sold. The sales price is the gross sales price
less any costs involved if any item of inventory is required to be overhauled,
certified or modified in order to be sold. Total consideration to be paid for
the inventory under the Agreement was $675,000. Pursuant to such Agreement, the
Company sold approximately $452,000 of parts during the year to third parties
and Avionics was due $339,000 of this amount. During the year, the Company paid
Avionics $36,000 of the amount due. On August 29, 1997, the Company and Avionics
entered into a Consignment Cancellation and Purchase Agreement whereby the
Company purchased the remaining inventory not sold with a value of approximately
$336,000 from Avionics and thereafter paid the balance of $639,000 in exchange
for 230,000 shares of the Company's common stock valued at $2.00 per share, the
cancellation of $175,000 of indebtedness of Avionics due the Company, and $4,000
in cash.
The president and sole stockholder of Avionics was employed by the Company
from October 3, 1996 through October 2, 1997. The president and sole stockholder
is the daughter of an employee of the Company who served in a non-executive
capacity as Vice President of Special Projects.
F-35
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OFFICE AND WAREHOUSE FACILITY
The Company leases its office and warehouse facility from a company
partially owned by a stockholder of the Company under a four year lease expiring
December 31, 2000 with two one year options to renew. The monthly rental is
$4,609 plus applicable sales tax and pass through of expenses. Rent expense was
$29,435 for the period ended August 31, 1997. At August 31, 1997, the Company
was obligated under this operating lease arrangement as follows:
YEARS ENDING AUGUST 31, AMOUNT
- ---------------------- --------
1998........................................................ $ 55,308
1999........................................................ 55,308
2000........................................................ 55,308
2001........................................................ 18,436
--------
$184,360
========
3. PURCHASE OF DC-10 FLIGHT SIMULATOR AND SUPPORT PACKAGE
On November 1, 1996, the Company entered into an agreement with a company
domiciled in the Netherlands (the "seller" or the "Netherlands Company") to
purchase one half (50%) ownership in a DC 10-30 six axis flight simulator and
all associated equipment required to operate the flight simulator. The agreement
calls for the seller and the Company to equally participate in all revenues
generated from the sale, lease or disassembly of the hardware of the flight
simulator. The Company paid the seller $125,000 in cash and issued 40,000 shares
of the Company's common stock valued at $2.50 per share for the flight simulator
The Company intends to sell the flight simulator as a complete package.
On March 28, 1997, the Company entered into a second agreement with the
seller to purchase one Novoview 2000 Visual System, one package of simulator
parts, one maintenance training/procedure manual and one data support package
used to support the DC 10-30 flight simulator. The price of the items purchased
was $500,000 and the Company paid for the items by issuing 200,000 shares of its
common stock at $2.50 per share. The Company will receive 100% of the revenues
generated from the sale of these items. The interest in the simulator, related
items and freight costs are reflected in the accompanying balance sheet as DC-10
flight simulator totaling $734,421.
This Netherlands Company is also a purchaser and supplier of spare parts
from and to the Company. During the year ended August 31, 1997, the Netherlands
Company purchased spare parts totaling $82,775 from the Company, and sold
$183,331 of spare parts to the Company in addition to the DC 10-30 flight
simulator. At August 31, 1997, the Company was owed $1,375 by the Netherlands
Company and the Company owed the Netherlands Company $47,750. Additionally, the
Netherlands Company held $22,400 of the Company's inventory in their warehouse
at August 31, 1997.
4. RISKS REGARDING THE COMPANY'S INVENTORY
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft parts that are purchased from many sources.
Before parts may be installed in an aircraft, they must meet certain standards
of condition established by the Federal Aviation Administration ("FAA") and/or
the equivalent regulatory agencies in other countries. Specific regulations vary
from country to country, although regulatory requirements in other countries
generally coincide with FAA requirements. Parts owned or acquired by the Company
may not meet applicable standards or standards may change in the future, causing
parts, which are already contained in the Company's inventory to be scrapped or
modified. Aircraft manufacturers may also develop new parts to be used in lieu
of parts already contained in the Company's inventory. In all such cases, to the
extent that the Company has such parts in its inventory, their value may be
reduced.
F-36
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. CONSIGNMENT INVENTORY
By consigning inventories to a redistributor such as the Company, customers
are able to distribute their aircraft spare parts to a large number of
prospective inventory buyers, allowing the customer to maximize the value of its
inventory. Consignment also enables the Company to offer for sale significant
parts inventory at minimal capital cost. The Company currently maintains or
manages or has consignment agreement in place and its revenues from consignment
arrangement have accounted for approximately 5% of net sales for the period
ended August 31, 1997.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at August 31, 1997:
Furniture and fixtures...................................... $28,715
Computer equipment.......................................... 27,068
Leasehold improvements...................................... 30,443
Software.................................................... 10,504
-------
96,730
Less: Accumulated depreciation.............................. (8,293)
-------
$88,437
=======
Property and equipment is depreciated on a straight-line basis with useful
lives ranging from 5 to 7 years. Depreciation expense for the period was $8,293.
7. CAPITAL STOCK
PREFERRED STOCK
Within the limits and restrictions contained in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 3,000,000 shares of Preferred Stock, $.10
par value per share, in one or more series, and to fix, as to any such series,
the dividend rate, redemption prices, preferences on liquidation or dissolution,
sinking fund terms, if any, conversion rights, voting rights, and any other
preferences or special rights and qualifications.
COMMON STOCK
Founders' shares totaling 400,000 common shares were issued on May 28,
1997, to four entities for par value of $.001. Net proceeds from the issuance of
founders' shares was $400. Compensation expenses was charged for the difference
between the fair market value per share of $2.50 and $.001 per share paid or a
total charge of $999,600.
During 1997, the Company sold 47,200 shares of common stock for $2.50 per
share resulting in total proceeds of $118,000. Deferred offering costs of
$22,098 have been reflected as a reduction of the proceeds of the private
placement offering.
On July 17, 1997, the Company issued 1,776,800 shares of common stock to
acquire 100% of the outstanding common stock of Jet Aviation in a 1 for 1 stock
exchange.
WARRANTS
On June 1, 1997, 1,000,000 warrants were issued in connection with the
organization of Schuylkill Acquisition Corp. to related parties for an advisory
fee. The Company has reserved 1,000,000 shares of its common stock for exercise
of the warrants. Each warrant entitles the holder to purchase one share of
common
F-37
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock at an exercise price of $4.50 until June 30, 2002. The warrants are
redeemable by the Company at $.05 upon the occurrence of both of the following
events: (a) the listing of the Company's shares of common stock on a securities
exchange, and (b) the Company's common stock is trading in excess of $5.25 per
share for a ten day period.
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, for non-employee stock compensation. Accordingly, the warrants
referred to above have been valued at $.05 per warrant and expensed.
CONVERSION OF DEBT
During October and November, 1996, an affiliate of a stockholder loaned the
Company $325,000. The loans were payable on demand and did not bear a stated
interest rate. During the year $125,000 was repaid. On August 29, 1997, the
Company converted $200,000 of the loan to 100,000 shares of common stock at
$2.00 per share.
On March 27 and May 12, 1997, the Company borrowed $370,000 from a
stockholder and entered into two short term notes payable, bearing interest at
6% per annum. One of the notes was extended on June 19, 1997, and interest was
increased to 10% per annum. On August 29, 1997, the Company and stockholder
converted the notes payable to 185,000 shares of common stock at $2.00 per share
and the Company paid the interest accrued on the short term notes payable
through that date.
On May 23, 1997, prior to the merger, Schuylkill Acquisition Corp. borrowed
$500,000 from a stockholder, evidence by a promissory note bearing interest at
12%. On August 29, 1997, the promissory note was converted to 250,000 shares of
common stock at $2.00 per share, and the Company paid the accrued interest
through that date.
COMMON STOCK TRANSACTIONS OF JET AVIATION TRADING, INC. (OLD JET) PRIOR TO
MERGER
On October 3, 1996, Old Jet sold 408,000 founders' shares of common stock
for total proceeds of $125,000. Effective October 1, 1996, Old Jet issued
600,000 shares of the Old Jet's common stock for a $175,000 note bearing
interest of 6% to Avionics. Further, effective November 1, 1996, Old Jet issued
192,000 shares of common stock to its President for a $80,000 note bearing
interest of 6%. See Note 2 and Note 8. Compensation expenses was charged for the
difference between the fair market value of $2.50 per share and $.417 per share
or a total charge of $400,000. See Note 2 and Note 8.
On October 22, 1996, Old Jet issued 10,000 shares valued at $2.50 per share
in partial payment of the purchase of equipment and aircraft parts totaling
$50,000.
On January 22, 1997, Old Jet issued 40,000 shares of Old Jet's common stock
in partial payment for the purchase of a DC-10 flight simulator. See Note 3.
Also, on January 22, 1997, and June 2, 1997, Old Jet issued 312,000 shares of
common stock in private placement transactions. Net proceeds from the private
placement totaled $746,309, after giving effect to $33,691 in offering costs.
On March 31, 1997, Old Jet issued 200,000 shares of common stock valued at
$2.50 per share in connection with the purchase of a DC-10 flight simulator
support package. See Note 3.
On April 4, 1997, and May 12, 1997, Old Jet issued a total of 14,800 shares
valued at $2.50 per share, for a total of $37,000, to a stockholder as
additional incentive for providing stockholder loans. The expense has been
recorded as debt issue costs.
F-38
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' NOTES RECEIVABLE
Stockholders' notes receivable relate to the issuance of Old Jet's common
stock as follows:
- Effective October 1, 1996, Old Jet issued 600,000 shares of common stock
to Avionics for a $175,000 note bearing interest at 6%. The note was
canceled in partial payment of the amounts due under the Consignment
Cancellation and Purchase Agreement. See Note 2.
- On November 1, 1996, Old Jet issued 192,000 shares of common stock to its
president for an $80,000 note bearing interest at 6%. Should the
president earn bonuses per his employment contract, one half of the
bonuses in excess of $25,000 earned annually, may be applied to the
outstanding note balance. The note is due on demand and is unsecured.
9. INCOME TAXES
The income tax provision was comprised of the following at August 31, 1997:
Current:
Federal................................................... $ 30,500
State..................................................... 6,700
Deferred:
Federal................................................... (16,700)
State..................................................... (4,300)
--------
Income tax provision........................................ $ 16,200
========
A reconciliation between the statutory rate and the effective rate is as
follows for the year ended August 31, 1997:
Federal statutory tax rate.................................. 34.0%
State statutory rate, net of federal benefit................ 3.6
Permanent difference and other.............................. 12.8
----
Effective tax rate.......................................... 50.4%
====
Significant components of the Company's deferred tax assets and
liabilities, computed using currently enacted tax rates, are as follows at
August 31, 1997:
Current items:
Assets:
Allowances for doubtful accounts which are currently
nondeductible......................................... $23,000
-------
Net current deferred tax assets............................. $23,000
=======
Long-term items:
Property and equipment principally due to the use of
accelerated depreciation for tax purposes.............. $(2,000)
-------
Net long-term deferred tax liabilities...................... $(2,000)
=======
10. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
Effective November 1, 1996, Old Jet entered into an employment contract
with its president for a three year period and the agreement automatically
extends on a month to month basis thereafter. Base compensation
F-39
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is $160,000 per year, plus 3% of the pretax net income of the Company. The
agreement also calls for one half of the bonus in excess of $25,000 earned
annually by the president to be applied to reduce the outstanding balance of the
president's obligation under his promissory note given to Old Jet for his stock.
See Note 6.
Effective October 3, 1996, Old Jet entered into an employment contract with
an individual who is an affiliate of Avionics as an employee for a three year
period. Base compensation is $120,000 per year, plus a bonus determined by the
Board of Directors. On October 2, 1997, the Company and the employee mutually
agreed to the termination of said employment agreement dated October 3, 1996.
The Company and individual have entered into a Consulting Agreement on October
3, 1997, for a twelve month period ending October 2, 1998. Base compensation is
$4,000 per month, plus a commission of 15% of the collected purchase price of
sales, and 15% of the purchase price of material for resale which the individual
introduces to the Company.
11. SALES TO MAJOR CUSTOMERS
The Company sells, leases and exchanges spare parts for fixed-wing
commercial jet transport aircraft to foreign and domestic customers.
The information with respect to revenue, by geographic area, is presented
in the table below for the period from October 3, 1997 (inception) through
August 31, 1997.
United States............................................... $3,559,585
Africa and Middle East...................................... 36,119
Europe...................................................... 938,896
Latin America............................................... 25,140
Asia........................................................ 1,655,813
----------
Total............................................. $6,215,553
==========
One Asian customer accounted for 20% of the Company's sales in fiscal 1997.
12. SUPPLEMENTAL NON-CASH FLOW INFORMATION
Effective October 3, 1996, Old Jet issued 192,000 shares of common stock to
its President for a $80,000 note bearing interest of 6%. Compensation expenses
was charged for the difference between the fair market value of $2.50 per share
and $.417 per share or a total charge of $400,000.
During the year the Company purchased equipment and aircraft parts with a
value of $50,000 by issuing 10,000 shares of common stock at $2.50 per share and
paying the remainder in cash.
As part of the purchase of the DC-10 flight simulator and support package
for $734,421, the Company issued 240,000 shares of common stock at $2.50 per
share and paid the remainder in cash.
As part of its cost of borrowing money during the year the Company issued
14,800 shares of common stock valued at $2.50 per share to a stockholder of the
Company.
On August 29, 1997, the Company issued 230,000 shares of common stock
valued at $2.00 per share, canceled a $175,000 note due to the Company by
Avionics and paid $4,000 in cash in satisfaction of a $303,000 debt due Avionics
and the purchase of the remaining consigned inventory valued at $336,000.
Schuylkill Acquisition Corp. (prior to merging with Old Jet) issued
founders' shares totaling 400,000 on May 28, 1997 to four entities for par value
of $.001. Net proceeds from the issuance of founders' shares was $400.
Compensation expenses was charged for the difference between the fair market
value of $2.50 per share and $.001 per share paid or a total charge of $999,600.
F-40
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On August 29, 1997, the Company converted four notes payable totaling
$1,070,000 by issuing 535,000 shares of common stock at a value of $2.00 per
share.
On August 29, 1997, the Company paid $15,000 as an advisory fee to a
related party by issuing 7,500 shares of common stock at a value of $2.00 per
share.
13. CONCENTRATION OF CREDIT RISK INVOLVING CASH
During the year, the Company maintained cash balances in excess of the
Federally insured limits. The Company maintained the balances in four banks, one
of which is a major money center bank. Three of the banks are Federally insured.
A fourth bank, Israel Discount Bank Limited is a major international bank and
operates in the United States under the Edge Act, but is not Federally insured.
At August 31, 1997, the Company had balances under $100,000 in the three
Federally insured banks, but maintained a balance of $264,550 in Israel Discount
Bank Limited. However, the Company does not believe a significant risk existed
in having the balance with Israel Discount Bank Limited.
14. SUBSEQUENT EVENTS
On October 29, 1997, the Board of Directors adopted a Stock Option Plan
(the "Plan") effective September 1, 1997. This Plan provides for the grant to
employees selected by the Board of Directors, or Compensation Committee, of
incentive stock options, non-qualified stock options and stock appreciation
rights in the aggregate not exceeding 750,000 shares. The Plan also sets forth
applicable rules and regulations for stock options granted to non-employee
directors. The Board of Directors authorized the issuance of 74,500 stock
options. The Plan is subject to stockholder approval and will be submitted to
the stockholders at the Company's annual meeting in 1998.
F-41
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
May 31,
1998
----------------
(Unaudited)
<S> <C>
Current Assets
Cash $ 555,742
Trade receivables (Net of allowance for doubtful
accounts of $112,000) 1,991,302
Inventory 2,544,335
Interest receivable from stockholder - related party 13,046
Prepaid expenses 49,676
Deferred tax benefit 135,000
----------------
Total Current Assets 5,289,101
----------------
Property and Equipment, Net 381,428
----------------
Other Assets
Investment in joint venture 212,564
Deposits 17,385
Intangibles - goodwill 367,740
----------------
Total Other Assets 597,689
----------------
Total Assets $ 6,268,218
================
</TABLE>
See notes to financial statements.
F-42
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31,
1998
----------------
(Unaudited)
<S> <C>
Current Liabilities
Accounts payable $ 2,139,672
Current portion of long-term debt 14,334
Advances from stockholder - related party 57,035
Accrued expenses 424,407
----------------
Total Current Liabilities 2,635,448
----------------
Noncurrent Liabilities
Long-term debt, net of current portion 4,332
Deferred income taxes 1,000
----------------
Total Noncurrent Liabilities 5,332
----------------
Total Liabilities 2,640,780
----------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $.10 per share; 3,000,000 shares
authorized, and no shares issued and outstanding -
Common stock, par value $.001 per share; 30,000,000 shares
authorized, and authorized and 3,306,500 shares issued and outstanding 3,307
Additional Paid-In Capital 5,615,608
Less stock subscriptions receivable (280,000)
Accumulated deficit (1,711,477)
----------------
Total Stockholders' Equity 3,627,438
----------------
Total Liabilities and Stockholders' Equity $ 6,268,218
================
</TABLE>
See notes to financial statements.
F-43
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
October 3,
1996 Nine Months
Through Ended
May 31, May 31,
1997 1998
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 3,644,071 $ 9,841,005
Cost of Goods Sold 2,644,623 8,591,981
---------------- ----------------
Gross Profit 999,448 1,249,024
---------------- ----------------
Operating Expenses
Salaries and wages 371,107 845,245
General and administrative 511,216 849,090
Non-compensation stock expense 1,399,601 -
---------------- ----------------
Total Operating Expenses 2,281,924 1,694,335
---------------- ----------------
Loss from Operations (1,282,476) (445,311)
---------------- ----------------
Other Income (Expense)
Interest income 10,806 18,583
Interest expense (23,060) (16,340)
Interest in earnings of joint venture - 4,232
---------------- ----------------
Total Other Income (Expense) (12,254) 6,475
---------------- ----------------
Loss Before Income Taxes (1,294,730) (438,836)
---------------- ----------------
Income Tax Benefit (Expense)
Current (34,000) -
Deferred 19,000 111,000
---------------- ----------------
Total Income Tax Benefit (Expense) (15,000) 111,000
---------------- ----------------
Net Loss (1,309,730) (327,836)
Accumulated Deficit, Beginning of Period - (1,383,641)
---------------- ----------------
Accumulated Deficit, End of Period $ (1,309,730) $ (1,711,477)
================ ================
Basic and Diluted Loss Per Common Share (.91) (.11)
================ ================
Weighted Average Number of Common Shares
Outstanding: 1,439,742 3,119,137
================ ================
</TABLE>
See notes to financial statements
F-44
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
October 3, 1996 Nine Months
Through Ended
May 31, 1997 May 31, 1998
----------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (1,309,730) $ (327,836)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 4,374 33,583
Provision for doubtful accounts 93,000 19,000
Earnings of joint venture - (4,232)
Reserve for obsolete inventory - 488,421
Noncash compensation expenses related to sale of
founders shares 1,399,601 -
Withdrawn offering costs - 22,750
Deferred income taxes (19,000) (111,000)
Change in assets and liabilities
Increase in
Accounts receivable (1,934,179) (248,183)
Inventory (1,554,418) (860,002)
Prepaid expenses and other current assets (43,804) (8,112)
Deposits - (17,385)
Increase (decrease) in
Accounts payable 1,770,308 1,161,966
Income taxes payable 34,000 (37,200)
Accrued expenses 97,372 260,256
---------------- -------------
Total Adjustments (152,746) 699,862
---------------- -------------
Net Cash (Used in ) Provided by Operating Activities (1,462,476) 372,026
---------------- -------------
Cash Flows from Investing Activities
Purchase of property and equipment (79,914) (168,637)
Investment in joint venture - (100,000)
---------------- -------------
Net Cash Used in Investing Activities (79,914) (268,637)
---------------- -------------
Cash Flows From Financing Activities
Principal payments on long-term debt - (3,010)
Deferred offering costs (21,285) -
Advances from stockholders - related party 121,727 -
Payments on acquired stockholder obligation - related party - (51,297)
Loans from stockholders, net of repayments 640,000 -
Proceeds from sales of securities 871,309 165,000
---------------- -------------
Net Cash Provided by Financing Activities 1,611,751 110,693
---------------- -------------
Net increase in cash 69,361 214,082
Cash, Beginning of Period - 341,660
---------------- -------------
Cash, End of Period $ 69,361 $ 555,742
================ =============
</TABLE>
See notes to financial statements
F-45
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements
NOTE 1- BASIS OF PRESENTATION
Interim Condensed Consolidated Financial Statements
- ---------------------------------------------------
The interim condensed consolidated financial statements include the accounts of
Aviation Holdings International, Inc. (formerly Jet Aviation Trading, Inc.) and
its majority-owned subsidiaries (collectively "AHI" or the "Company") after
elimination of significant intercompany accounts and transactions.
The interim consolidated financial data as of May 31, 1998 and for the nine
months then ended and the period October 3, 1996 (date of inception) through May
31, 1997 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.
The interim consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained elsewhere
in the Prospectus for the year ended August 31, 1997.
Change of Majority Ownership
- ----------------------------
Effective May 31, 1998, various Company shareholders entered into share exchange
agreements ("Exchange Agreements") with Aviation Holdings Group, Inc. (formerly
EYEQ Networking, Inc.) ("AHGI"). Under the Exchange Agreements, one share of
AHGI's common stock was exchanged for between 1.667 to 2.5 shares of the
Company's common stock depending on the terms of the underlying agreement. AHGI
also purchased a block of 80,000 shares of the Company's common stock from a
stockholder for $100,000. Through these exchanges and the purchase, AHGI
acquired 2,016,280 shares (60.98%) of the Company's issued and outstanding
common stock as of May 31, 1998.
Additional Exchange Agreements were executed in June and July 1998. As of
September 30, 1998, AHGI had acquired an aggregate of 2,468,080 shares (74.08%)
of the Company's issued and outstanding common stock.
This interim consolidated financial data is presented as of the most recent
fiscal quarter of the Company coinciding with the change of ownership.
Subsequent operations are consolidated in the AHGI financial statements. The
acquisition has been accounted for as a purchase by AHGI.
NOTE 2 -ACQUISITIONS AND MERGERS
Effective February 12, 1998, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with PASCO International Aviation Corp., a Florida
corporation ("PASCO Florida"), PASCO International Aviation Corporation Limited,
a Hong Kong corporation ("PASCO HK"), PASCO Financial Services Limited, a Hong
Kong corporation ("PASCO Financial HK"), and Aero-Link Flight Systems Limited, a
Hong Kong corporation ("Aero HK"), and their major stockholder ("Seller").
(PASCO Florida, PASCO HK, PASCO Financial HK and Aero HK are hereinafter
referred to collectively as "PASCO").
The Seller received 150,000 shares of the Company's common stock, entered into a
three-year employment contract with the Company (see Note 4), and retained
primarily all of the operating tangible assets and liabilities of the acquired
companies. An interest in a joint venture owned by PASCO and a corresponding
liability that were approximately equivalent in value were transferred to the
Company under the terms of the Purchase Agreement.
The acquisition was apportioned as follows:
The Company acquired 90% of the outstanding common stock of PASCO HK in
exchange for 40,000 shares of the Company's common stock. PASCO HK
operations consist of purchasing, selling and leasing of aircraft
components and engines in Asia and the Pacific Rim.
F-46
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Notes to Interim Financial Statements
NOTE 2 -ACQUISITIONS AND MERGERS (Continued)
The Company acquired 100% of the outstanding common stock of PASCO
Florida in exchange for 100,000 shares of the Company's common stock.
PASCO Florida holds a 25% interest in Shenyang Northern Aircraft
Maintenance & Engineering Co., Ltd., a Sino-American joint venture
(SYNOR-A) (see Note 3). The Seller retained a 22% interest in future
distributions to be received by PASCO Florida after its capital
investment is recovered. The Company recognized minimal revenue from
PASCO Florida as of May 31, 1998.
The Company acquired 80% of the outstanding common stock of PASCO
Financial HK in exchange for 1,000 shares of the Company's common stock.
The objective of PASCO Financial HK is to procure financing from banks on
behalf of airlines for their aircraft and aviation-related purchases.
PASCO Financial HK also intends to function on behalf of certain airlines
and act as their agent in connection with the sale or lease of aircraft.
The Company has not recognized any revenue from PASCO Financial HK as of
May 31, 1998.
The Company acquired 100% of the outstanding common stock of Aero HK in
exchange for 9,000 shares of the Company's common stock. Aero HK and its
wholly owned subsidiary Aero-Link Flight Systems, Inc., a Florida
Corporation ("AERO Florida"), (collectively, "Aero-Link") have entered
into an agreement to act as the global marketing representative (except
the Taiwan region) for China Airlines, Taiwan. In this capacity they are
responsible for promoting and marketing China Airlines' aircraft
maintenance, turbine engine and component repair and overhaul business.
AERO Florida also functions as a purchasing agent in the United States on
behalf of PASCO HK.
All of the aforementioned acquisitions have been accounted for as purchases, and
all operations have been included in the accompanying consolidated financial
statements since the date of the acquisitions.
The Seller assigned inventory to the Company as partial payment for common stock
purchased by the Seller (see Note 6). The Company was responsible for collecting
the pre-purchase receivables of PASCO and applying those proceeds against the
pre-purchase payables of PASCO, a stock subscription payable to the Company on
behalf of the Seller (see Note 6) and the balance to an assumed Seller
obligation.
NOTE 3 - JOINT VENTURE
SYNOR-A is a Sino-American Joint venture company which was established in
November 1997 by PASCO Florida and China Northern Airlines ("CNA") under the
terms of an eleven-year agreement. PASCO Florida holds a twenty-five percent
interest in SYNOR-A and CNA holds the remaining 75% interest. SYNOR-A primarily
deals with inspection, repair and recertification of DC9, MD80, and A300-600
components, instruments and avionics. SYNOR-A has been approved by the Civil
Aviation Administration of China in the avionics accessories repair field. In
November 1997, SYNOR-A received the licenses necessary to commence operations.
Operations commenced in March 1998. The term of the joint venture arrangement is
eleven years. The Company reflects this investment on its financial statements
using the equity method of accounting.
PASCO Florida's total financial investment commitment to SYNOR-A is $1,000,000.
As of May 31, 1998, the Company had funded $208,332 of this commitment. Under
the terms of the joint venture, PASCO Florida is entitled to certain preferences
in any distributions of the net income of SYNOR-A. This distribution preference
is effectively intended to provide that PASCO Florida recovers its investment in
SYNOR-A prior to any regular distributions being made to CNA. PASCO Florida's
role in SYNOR-A is to provide technological advice to SYNOR-A and promote,
market and sell the services of SYNOR-A. The Company has recognized minimal
revenue from SYNOR-A as of May 31, 1998.
F-47
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Notes to Interim Financial Statements
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Effective May 31, 1998, the President of the Company entered into an employment
agreement with AHGI to serve as President and Chief Executive Officer of AHGI
("CEO"). In accordance with the employment agreement the CEO also became a
director of AHGI. The agreement reaffirms debt obligations of the CEO to the
Company which were initiated under a prior agreement in connection with the
purchase of common stock. The term of the employment agreement is three years
and may be extended on a month to month basis thereafter. In addition to base
compensation, the CEO is entitled to a bonus arrangement based upon a percentage
of pretax income. In addition, the CEO was granted options to purchase 200,000
shares of AHGI's common stock at an exercise price of $2.50 per share. All of
these options are vested and expire five years from the effective date of the
new employment agreement.
Effective February 14, 1998, in conjunction with the Purchase Agreement, the
Seller, PASCO's majority shareholder, entered into an employment agreement with
the Company to serve as Vice President. In accordance with the employment
agreement, the Seller also became a director of the Company. Duties include
responsibility for and oversight of the Company's operations in Asia and the
Pacific Rim. The term of the employment agreement, which includes base
compensation and a bonus as defined in the agreement, is three years and may be
extended on a month-to-month basis thereafter. The agreement requires one-half
of the bonus in excess of $25,000 earned annually to be applied as a reduction
of the outstanding balance of the Seller's obligation under a three-year
promissory note dated February 12, 1998 (see Note 6). The Seller was granted
options to purchase 15,000 shares of the Company's common stock at an exercise
price of $2.50 per share. One-third of these options vest annually over a
three-year period beginning February 14, 1999 and expire five years from the
date of grant.
NOTE 5 - SALES TO MAJOR CUSTOMERS
The Company sells, leases and exchanges spare parts for fixed-wing commercial
jet transport aircraft to foreign and domestic customers.
The information with respect to revenue, by geographic area, is presented in the
table below for the period from October 3, 1996 (inception) through May 31, 1997
and for the nine months ended May 31, 1998.
May 31,
-----------------------------------
1997 1998
---------------- ---------------
United States $ 2,185,179 $ 6,317,145
Africa and Middle East 33,869 47,595
Europe 421,104 1,332,712
Latin America 9,520 73,925
Asia 994,399 2,069,628
---------------- ---------------
Total $ 3,644,071 $ 9,841,005
================ ===============
For the period October 3, 1996 (inception) through May 31, 1997, AHI had sales
to three customers of $840,850, $618,530 and $377,201, respectively, of more
than ten percent of total revenues. For the nine months ended May 31, 1998, AHI
had sales to one customer in the amount of $2,195,000 that accounted for more
than twenty percent of total revenues.
F-48
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Notes to Interim Financial Statements
NOTE 6 - STOCK SUBSCRIPTIONS RECEIVABLE
On February 12, 1998, the Company issued 160,000 shares of common stock to the
Seller in exchange for two promissory notes aggregating $365,000 and the
assignment from PASCO of inventory valued at $35,000. One of the notes received
by the Company was a three-month non-interest bearing promissory note for
$165,000 which had recourse against the personal assets of the Seller ("Recourse
Note"). The Recourse Note was paid in full prior to May 31, 1998. The other note
is a three-year promissory note for $200,000 which bears interest at 8.5% and is
secured solely by 80,000 shares of the Company's common stock ("Nonrecourse
Note"). The shares of common stock which have been pledged as security are held
in escrow in accordance with a stock pledge agreement dated February 12, 1998.
The Nonrecourse Note remained outstanding at September 30, 1998.
The Company was responsible to collect all of the pre-purchase accounts
receivable of PASCO on behalf of the Seller. A portion of these funds, amounting
to $165,000, was used to pay the principal due on the Recourse Note prior to May
31, 1998.
The Company recorded interest income on outstanding stock subscription
receivables of approximately $8,700 for the nine months ended May 31, 1998 and
$3,156 for the period October 3, 1996 through May 31, 1997. As of May 31, 1998
and 1997, accrued interest receivable on subscription receivables was $13,045
and $3,156, respectively.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK INVOLVING CASH
During the periods presented in these financial statements, the Company
maintained cash balances in excess of the Federal Deposit Insurance Corporation
(FDIC) insured limits. At May 31, 1998, the amount of funds that exceeded FDIC
insurance was $297,745. The Company also maintained funds in banks that were not
FDIC insured. At May 31, 1998 and 1997 the Company maintained balances of
$367,067 and $176,389, respectively in Israel Discount Bank Limited, an
international bank that operates in the United States under the Edge Act. The
Company does not believe a significant risk existed in having the balances in
excess of the FDIC-insured limit.
During the period from February 12, 1998 through May 31, 1998, PASCO HK
maintained bank accounts in Hong Kong with the Kwong On Bank, Limited. The
accounts were denominated in US Dollars, Hong Kong Dollars and German Deutsche
Marks. None of the accounts were FDIC insured. During the period, the accounts
denominated in foreign currencies and the effects of translation of foreign
currency accounts into US dollars were immaterial.
NOTE 8 - FLIGHT SIMULATOR AND SUPPORT PACKAGE
In 1998, the Company changed its sales strategy regarding a flight simulator
maintained in inventory. Instead of selling the simulator as a complete unit,
the Company decided to sell the individual components of the unit. In
conjunction with this change in strategy, the Company has taken a charge against
income of $335,000 during the nine-month period ended May 31, 1998 in order to
reflect the decrease in market value of the avionics and the structure as spare
parts.
NOTE 9 - LONG TERM DEBT
In February 1998, the Company purchased a delivery van. The Company financed the
purchase through a five-year note with General Motors Acceptance Corporation
having an interest rate of 5.9% and monthly payments of $371. As of May 31, 1998
the balance of the note was $18,666.
F-49
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Notes to Interim Financial Statements
NOTE 10 - LEASED EQUIPMENT
Commencing on May 20, 1998, the Company leased a flight computer with a cost of
$129,000 to a customer. The lease term was for four months. Payments on the
lease amounted to $9,000 per month and the equipment was returned by the
customer on September 20, 1998. The Company temporarily reclassified the leased
item from inventory to property and equipment and depreciated the computer using
the straight-line method over a five-year life during the term of the lease.
NOTE 11 - STOCK OPTION PLAN
Effective September 1, 1997 the Company adopted a qualified incentive stock
option and stock appreciation rights plan that has a term of ten years. A
maximum of 750,000 shares of common stock may be issued under the plan to any
employee or consultant of the Company or any of its subsidiaries. The option
price, the number of shares, the grant date and the vesting are determined at
the discretion of the Company's Board of Directors. Options granted under the
plan are generally exercisable for a period not to exceed ten years. Upon
termination, an employee has three months to exercise any vested options. If any
individual or entity acquires an eighty percent interest in the voting classes
of stock of the Company, the plan automatically terminates.
The Company has elected to account for the stock option plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, no compensation expense has been
recognized for the stock options issued.
Following is a summary of option transactions during the nine months ended May
31, 1998:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------------------ -----------------
<S> <C> <C>
Outstanding at September 1, 1997 0
Granted 234,750 $ 2.50
Exercised 0
Canceled (40,000) $ 2.50
------------------ -----------------
Outstanding at May 31, 1998 194,750 $ 2.50
================== =================
Shares Available for Grant 555,250
==================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at May 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise of Outstanding Contractual Exercise of Exercise
Price Options Life Price Options Price
- ---------------- ------------------ ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 2.50 194,750 9.67 $ 2.50 166,500 $ 2.50
======== ========
</TABLE>
F-50
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Notes to Interim Financial Statements
NOTE 11 - STOCK OPTION PLAN (Continued)
The Company subsequently amended and restated this plan, and all active
participants became included in the stock option plan of AHGI. The options to
acquire the Company's stock, outstanding at the time of the restatement, were
replaced by options to acquire AHGI Company stock on a share-for-share basis.
NOTE 12 - INTANGIBLES
The resulting goodwill from the purchase of the PASCO entities is being
amortized on a straight-line basis over 15 years.
NOTE 13 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash was paid for the following items as follows:
Period Ended May 31,
-----------------------------------------
1997 1998
------------------ ------------------
Interest $ 12,285 $ 27,115
================== ==================
Taxes $ 0 $ 16,200
================== ==================
The Company had the following non-cash transactions:
In October 1996, the Company issued stock in the amount of $625,000 as
consideration for the purchase of inventory.
In October 1996, the Company issued stock in exchange for promissory notes
aggregating $255,000.
In connection with the acquisition of PASCO in February 1998, the Company issued
stock with a value of $375,000 to the Seller. The company issued additional
stock to the Seller in exchange for a promissory note in the amount of $200,000
and inventory valued at $35,000.
In February 1998, the Company financed the purchase of a delivery van in the
amount of $21,676.
F-51
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated combined financial
statements are based on the historical financial statements of Aviation Holdings
Group, Inc. ("AHGI") and the historical financial statements of Aviation
Holdings International, Inc. ("AHI"), an entity in which AHGI acquired a
majority interest during May 1998 and additional interests in June and July 1998
and March, April and June 1999 (both entities collectively referred to as the
"Company"). Specifically, the following unaudited pro forma condensed
consolidated combined financial statements present, as if the acquisition of AHI
had been consummated as of January 1, 1998, the pro forma results of operations
of the Company for the six months ended June 30, 1999 and for the year ended
December 31, 1998. The information presented is derived from, should be read in
conjunction with, and is qualified in its entirety by reference to, the separate
historical financial statements and the notes thereto appearing elsewhere in
this Prospectus/SB2 or incorporated elsewhere in this Prospectus/SB2 by
reference. The unaudited pro forma condensed combined financial data has been
included for comparative purposes only and does not purport to be indicative (i)
of the results of operations or financial position which actually would have
been obtained if the AHI acquisition had been effected at January 1, 1998 or
(ii) of the financial position or results of operations which may be obtained in
the future.
The post-acquisition results of operations of AHI have been included in the
historical operations of the Company. Pro forma adjustments to record the
preacquisition results of operations of AHI are included in the accompanying pro
forma financial information.
P-1
<PAGE>
AVIATION HOLDINGS GROUP, INC
Pro Forma Condensed Consolidated Combined Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Aviation
Aviation Holdings
Holdings International As
Group, Inc. Inc. Adjustments Restated
--------------- -------------- --------------- -------------
<S> <C> <C> <C>
Net Sales $ 0 $ 14,201,107 - $ 14,201,107
Cost of Goods Sold - 10,972,724 - 10,972,724
--------------- -------------- --------------- -------------
Gross Profit 0 3,228,383 - 3,228,383
Operating Expenses
Salaries and wages 380,328 1,340,879 - 1,721,207
General and administrative 709,872 1,602,965 - 2,312,837
Professional fees 283,734 315,010 - 598,744
--------------- -------------- --------------- -------------
Total Operating Expenses 1,373,934 3,258,854 - 4,632,788
--------------- -------------- --------------- -------------
Loss from Operations (1,373,934) (30,471) - (1,404,405)
Other (Expense) Income
Interest expense (65,391) (29,067) - (94,458)
Interest income 54,472 28,888 - 83,360
Loss from joint venture - (5,290) - (5,290)
--------------- -------------- --------------- -------------
Total Other Expense (10,919) (5,469) - (16,388)
--------------- -------------- --------------- -------------
Loss Before Income Taxes and Minority Interest (1,384,853) (35,940) - (1,420,793)
Income Tax Expense (8,893) (115,615) - (124,508)
--------------- -------------- --------------- -------------
Loss Before Minority Interest (1,393,746) (151,555) - (1,545,301)
Minority Interest - - 5,759 5,759
--------------- -------------- --------------- -------------
Net Loss $ (1,393,746) $ (151,555) $ 5,759 $ (1,539,542)
=============== ============== =============== =============
Basic and Diluted Loss Per Common Share $ (0.38)
=============
Weighted Average Number of Common Shares
Outstanding 4,068,047
=============
</TABLE>
The accompanying notes are an integral part of this unaudited
pro forma condensed consolidated combined statement of operations.
P-2
<PAGE>
AVIATION HOLDINGS GROUP, INC
Pro Forma Condensed Consolidated Combined Statement of Operations
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Aviation
Aviation Holdings
Holdings International As
Group, Inc. Inc. Adjustments Restated
--------------- --------------- --------------- -------------
<S> <C> <C> <C>
Net Sales $ - $ 6,371,942 - $ 6,371,942
Cost of Goods Sold - 4,253,559 - 4,253,559
--------------- --------------- --------------- -------------
Gross Profit - 2,118,383 - 2,118,383
Operating Expenses
Salaries and wages - 646,019 - 646,019
General and administrative 33,715 964,666 - 998,381
Professional fees 2,894 125,438 - 128,332
--------------- --------------- --------------- -------------
Total Operating Expenses 36,609 1,736,123 - 1,772,732
--------------- --------------- --------------- -------------
Income (Loss) from Operations (36,609) 382,260 - 345,651
Other (Expense) Income
Interest expense (372,024) (77,281) - (449,305)
Interest income - 15,492 - 15,492
Income from joint venture - 19,651 - 19,651
--------------- --------------- --------------- -------------
Total Other Expense (372,024) (42,138) - (414,162)
--------------- --------------- --------------- -------------
Income (Loss) Before Income Taxes and
Minority Interest (408,633) 340,122 - (68,511)
Income Tax Expense - (49,000) - (49,000)
--------------- --------------- --------------- -------------
Income (Loss) Before Minority Interest (408,633) 291,122 - (117,511)
Minority Interest - - (11,063) (11,063)
--------------- --------------- --------------- -------------
Net Income (Loss) $ (408,633) $ 291,122 $ (11,063) $ (128,574)
=============== =============== =============== =============
Earnings Per Common Share $ (0.03)
=============
Weighted Average Number of Common Shares
Outstanding 4,165,884
=============
</TABLE>
The accompanying notes are an integral part of this unaudited
pro forma condensed consolidated combined statement of operations.
P-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(1) The unaudited pro forma information for the year ended December 31, 1998
and for the six months ended June 30, 1999 has been prepared using the
hypothetical assumption that the acquisition of 96% of the outstanding
stock of AHI occurred as of January 1, 1998. A 61% majority interest in
AHI was acquired through various share exchange agreements and a block
purchase of common stock in May 1998. Additional exchange agreements were
executed in June and July 1998 and March, April and June 1999 which
increased the ownership percentage of AHI to 96%. These transactions have
been accounted for as a purchase.
(2) This presentation assumes that the issuance of approximately 1,711,315
shares of AHGI's common stock, exchanged in the acquisition, were
exchanged at January 1, 1998 instead of at the time of the acquisitions in
1998 and 1999.
(3) There were no intercompany sales during the periods presented. All
intercompany transactions have been eliminated.
(4) Outside interests have been recorded as minority interest.
P-4
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized in connection with
this offering to give any information or to make representations other than
those contained in this Prospectus. This Prospectus does not constitute an offer
or a solicitation in any jurisdiction to any person to whom 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
there has been no change in the circumstances, create an implication that there
has been no change in the circumstances of the Company or the facts herein set
forth since the date hereof.
-------------------
Until _________, 1999 (90 days after the date of the
Prospectus), all dealers effecting transactions in the
registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is
in addition to the dealers' obligation to deliver a Prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
================================================================================
750,000 Units, each Unit Consisting of
Two Shares of Common Stock
and One Class A Warrant
----------------------
AVIATION HOLDINGS
GROUP, INC.
-------------------
PROSPECTUS
-------------------
________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents, and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Our bylaws provide for the indemnification of officers, directors and
third parties acting on behalf of the Company if such person acted in good faith
and in a manner reasonably believed to be in and not opposed to our best
interest and, with respect to any criminal action or proceeding, the indemnified
party had no reason to believe his conduct was unlawful.
We intend to enter into indemnification agreements with our directors
and executive officers in addition to the indemnification provided for in our
bylaws, and intend to enter into indemnification agreements with any new
directors and executive officers in the future.
The form of Underwriting Agreement filed as an Exhibit hereto provides
for the indemnification of our directors and officers in certain circumstances
as provided therein.
We intend to procure insurance, which would afford officers and
directors insurance coverage for losses arising from claims based on breaches of
duty, negligence, error and other wrongful acts, including liabilities under the
Securities Act.
Pursuant to Section 607.0850 of the Florida Business Corporation Act,
Aviation Holdings International has the power to indemnify directors, officers,
employees or agents. Aviation Holdings International's Articles of Incorporation
and Bylaws provide for indemnification of directors and officers. In addition,
Aviation Holdings International's executive officers and directors have entered
into agreements with the Aviation Holdings International which also indemnifies
them for certain acts and omissions.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance of the
securities being registered are as follows:
SEC Registration Fee..............................$ 1,950
Printing Expenses.................................. 50,000
Accounting Fees and Expenses........................225,000
Legal Fees and Expenses............................ 175,000
Blue Sky Fees and Expenses........................ 10,000
Transfer Agent and Registrar Fees and Expenses.... 5,000
Miscellaneous...................................... 15,000
Total.....................................$481,950
========
All amounts, except the SEC registration fee, are estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The Company
The following sets forth all sales of unregistered securities during
the past three years by Aviation Holdings Group, Aviation Holdings International
and its predecessors:
In August 1997, EyeQ Networking, Inc. issued 1,000,000 shares of its
common stock to John D. Basher, Jr., pursuant to Rule 701 promulgated under the
Securities Act as payment of professional services rendered to the Company by
Mr. Basher.
In December 1997, EyeQ Networking, Inc. issued 800,000 shares of its
common stock to nine accredited investors pursuant to Rule 504 promulgated under
the Securities Act in return for $1,000,000 less $40,000 in investment banking
fees.
In May, June and July 1998, EyeQ Networking, Inc. issued 1,095,815
shares of its common stock to 25 shareholders of Jet Aviation Trading, Inc.
pursuant to Rule 506 promulgated under the Securities Act in consideration of
the receipt of 2,468,080 shares of common stock of Jet Aviation Trading, Inc.
Each of the shareholders of Jet Aviation Trading, Inc. who participated in the
transaction made representations stating that he or she was an "accredited
investor" (as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act).
On August 1, 1998, we issued 4,000 shares of its common stock to Joseph
J. Nelson pursuant to Section 4(2) of the Securities Act as consideration for
services rendered.
In October, 1998, we issued a $200,000 promissory note and 20,000
shares of its common stock to Nancy Plotkin, and a $50,000 promissory note and
5,000 shares of its common stock to the John G. Jacobs Trust, in consideration
of loans totaling $250,000, pursuant to Rule 506 promulgated under the
Securities Act. In May 1999 we extended the maturity date of these promissory
notes to July 14, 1999 and issued a warrant to purchase 12,000 shares of common
stock to Nancy Plotkin and a warrant to purchase 3,000 shares of common stock to
the John G. Jacobs Trust as consideration for this extension. The warrants are
exercisable for three years from the date of grant at an exercise price of $4.00
per share. In July 1999, we extended the maturity date of these promissory notes
to September 17, 1999 and issued 4,800 shares of common stock to Nancy Plotkin
and 1,200 shares of common stock to the John G. Jacobs Trust.
On March 3, 1999, we issued 500,000 shares of its common stock and a
warrant to purchase an additional 100,000 shares of the common stock at an
exercise price of $3.75 per share, to Argaman, Inc. under Section 4(2) of the
Securities Act in exchange for 600,000 shares of Aviation Holdings International
common stock.
In March 1999, we issued 118,000 shares of common stock to five
accredited investors pursuant to Rule 506 promulgated under the Securities Act
in exchange for $295,000.
In April and June, 1999 we issued 115,500 shares of common stock to
thirteen shareholders of Aviation Holdings International pursuant to Rule 506
under the Securities Act in consideration of the receipt of 137,500 shares of
Aviation Holdings International common stock. Each Aviation Holdings
International shareholder participating in the transaction represented, and we
determined, that he or she was an "accredited investor."
II-2
<PAGE>
Aviation Holdings International
The following sets forth all sales of unregistered securities during
the past three years by Aviation Holdings International or its predecessors:
In connection with the initial capitalization of Jet Aviation Trading,
Inc. in October and November of 1996, Jet Aviation Trading, Inc. issued a total
of 1,200,000 shares of its common stock for a total consideration of $780,000
consisting of $125,000 in cash, $255,000 in promissory notes and $400,000 in
non-cash compensation expense. The seven investors consisted of six business
entities and one individual, and all of the seven investors made representations
regarding their status as accredited investors.
On December 31, 1996, Jet Aviation Trading, Inc. issued 10,000 shares
of its common stock to William Seidel pursuant to Section 4(2) of the Securities
Act in return for spare parts that became part of the inventory of Jet Aviation
Trading, Inc.
In February and March 1997, Jet Aviation Trading, Inc. issued an
aggregate of 292,000 shares of its common stock to eleven accredited investors
pursuant to Rule 506 promulgated under the Securities Act for an aggregate
consideration of $730,000 in cash, less $33,691 paid as broker-dealer costs in
connection with the offering.
On March 14, 1997, Jet Aviation Trading, Inc. issued 40,000 shares of
its common stock to Fersam International Ltd. ("Fersam") in return for inventory
consisting of a one-half interest in certain flight-simulation equipment. On
March 28, 1997, Jet Aviation Trading, Inc. issued 200,000 shares of its common
stock to Fersam in return for computer software and training materials to be
used in connection with aforementioned flight-simulation equipment. On June 2,
1997, Jet Aviation Trading, Inc. issued 20,000 shares of common stock to Fersam
in return for $50,000 in cash. All of the issuances to Fersam were made pursuant
to Section 4(2) of the Securities Act.
On June 2, 1997, Jet Aviation Trading, Inc. issued 14,800 shares of its
common stock to Silvertown International Corp. ("Silvertown") pursuant to
Section 4(2) of the Securities Act as an inducement for loans made by Silvertown
to Jet Aviation Trading, Inc.
In June and July 1997, Jet Aviation Trading, Inc. (i) issued an
aggregate of 47,200 shares of its common stock to 99 investors pursuant to Rule
504 promulgated under the Securities Act for an aggregate consideration of
$118,000 in cash and payment of certain professional fees, (ii) issued 100,000
shares of its common stock to FAC Enterprises pursuant to Section 4(2) of the
Securities Act in repayment of a $250,000 loan and 7,500 shares to FAC
Enterprises as consulting fees, and (iii) issued 150,000 shares of its common
stock to Fersam International, Ltd. pursuant to Section 4(2) of the Securities
Act as payment for inventory previously held on consignment for Fersam
International, Ltd.
On August 29, 1997, Jet Aviation Trading, Inc. issued (i) 80,000 shares
of its common stock to Jet Avionics Systems, Inc. in return for spare parts
inventory, (ii) 250,000 shares of its common stock to Joseph Laura in repayment
of a $500,000 loan and (iii) 185,000 shares of its common stock to Silvertown in
repayment of $370,000 of outstanding notes. Each of the issuances was made
pursuant to Section 4(2) of the Securities Act.
On June 1, 1997, Jet Aviation Trading, Inc. issued warrants to purchase
950,000 shares of common stock to the D.A.R. Group and warrants to purchase
50,000 shares of its common stock to Dallas Investment Group in return for
certain services. These issuances were made pursuant to Section 4(2) of the
Securities Act.
On February 12, 1998, Aviation Holdings International issued 150,000
shares of its common stock to Simon Chiang pursuant to Section 4(2) of the
Securities Act in exchange for the outstanding capital stock in various
companies owned by Simon Chiang, and issued 160,000 shares to Mr. Chiang in
exchange for inventory valued at $35,000 and two promissory notes totaling
$365,000.
II-3
<PAGE>
On June 11, 1998, Aviation Holdings International issued 25,000 shares
of its common stock to Joseph F. Janusz pursuant to Section 4(2) of the
Securities Act as consideration for services rendered.
In connection with the initial capitalization of Schuylkill Acquisition
Corp. (which later merged with Jet Aviation Trading, Inc. and changed its name
to "Jet Aviation Trading, Inc.") in May 1997, Schuylkill Acquisition Corp.
issued an aggregate of 400,000 shares of its common stock to four accredited
investors for an aggregate consideration of $400 in cash and $999,600 in
non-cash compensation expense.
No Commissions or other remuneration was paid in connection with the
above described sales of common stock.
Item 27. Exhibits.
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 (a) Certificate of Incorporation, as amended*
(b) Articles of Merger or Share Exchange*
(c) Certificate of Ownership and Merger*
(d) Certificate of Amendment*
3.2 Bylaws of the Company, as amended to date*
4.1 Form of Common Stock Certificate*
4.2 Form of Class A Warrant
4.3 Warrant Agreement
4.4 Deposit Agreement
4.5 Plotkin Warrant*
4.6 Jacobs Warrant*
4.7 D.A.R. Group Warrant*
4.8 Dallas Investments Warrant*
5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP*
10.1 1999 Stock Option Plan*
10.2 Employment Agreement of Joseph J. Nelson*
10.3 Employment Agreement of Simon Chiang*
10.4 Lease for Company Headquarters*
10.5 Share Exchange Agreements
(a) Share Exchange Agreement between The D.A.R. Group and EYEQ Networking, Inc.*
(b) Share Exchange Agreement between The Eastwind Group, Inc. and EYEQ Networking, Inc.*
(c) Share Exchange Agreement between KAB Investments, Inc. and EYEQ Networking, Inc.*
(d) Share Exchange Agreement between Godwin Finance Ltd. and EYEQ Networking, Inc.*
(e) Share Exchange Agreement between Clifton Capital Ltd. and EYEQ Networking, Inc.*
(f) Share Exchange Agreement between Elanken Family Trust and EYEQ Networking, Inc.*
(g) Share Exchange Agreement between Joseph Laura and EYEQ Networking, Inc.*
(h) Share Exchange Agreement between Dallas Investments, Ltd. and EYEQ Networking, Inc.*
(i) Share Exchange Agreement between Joseph Nelson and EYEQ Networking, Inc.*
(j) Share Exchange Agreement between Fersam International Ltd. and EYEQ Networking, Inc.*
(k) Share Exchange Agreement between I.P. Services Inc. and EYEQ Networking, Inc.*
(l) Share Exchange Agreement between Discretionary Investment Trust dated 7/7/93 and EYEQ Networking, Inc.*
(m) Share Exchange Agreement between Brian Due and EYEQ Networking, Inc.*
(n) Share Exchange Agreement between Bill Seidle and EYEQ Networking, Inc.*
(o) Share Exchange Agreement between Leonard Bloom and EYEQ Networking, Inc.*
(p) Share Exchange Agreement between Sheng Kuang Chiang and EYEQ Networking, Inc.*
(q) Share Exchange Agreement between Bing Ju Chiang and EYEQ Networking, Inc.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(r) Share Exchange Agreement between Impact Investment Company, Ltd. and EYEQ Networking, Inc.*
(s) Share Exchange Agreement between Silvertown International Corp. and EYEQ Networking, Inc.*
(t) Share Exchange Agreement between Janet and Robert Weinstein and EYEQ Networking, Inc.*
(u) Share Exchange Agreement between Amaury Borges and EYEQ Networking, Inc.*
(v) Share Exchange Agreement between SPH Equities, Inc. and EYEQ Networking, Inc.*
(w) Share Exchange Agreement between Bella Shrem and EYEQ Networking, Inc.*
(x) Share Exchange Agreement between Mustang Electronics Inc. Affiliated Defined Benefits Pension Plan and EYEQ
Networking, Inc.*
(y) Share Exchange Agreement between Gary Cunningham and EYEQ Networking, Inc.*
(z) Share Exchange Agreement between Ron Halper and EYEQ Networking, Inc.*
(aa) Share Exchange Agreement between John Hunter and EYEQ Networking, Inc.*
(bb) Share Exchange Agreement between Eugene Savonen and EYEQ Networking, Inc.*
(cc) Share Exchange Agreement between William Voohees and EYEQ Networking, Inc.*
(dd) Share Exchange Agreement between Arthur Lucchesi and EYEQ Networking, Inc.*
(ee) Share Exchange Agreement between Gerard Bartolomeo and EYEQ Networking, Inc.*
(ff) Share Exchange Agreement between Neal Erps and EYEQ Networking, Inc.*
(gg) Share Exchange Agreement between Tor Osmundsen and EYEQ Networking, Inc.*
(hh) Share Exchange Agreement between James Catania and EYEQ Networking, Inc.*
(ii) Share Exchange Agreement between Legal America of Virginia, Ltd. and EYEQ Networking, Inc.*
(jj) Share Exchange Agreement between Joseph Janusz and EYEQ Networking, Inc.*
(kk) Share Exchange Agreement between Rozel International Holdings, Ltd. and EYEQ Networking, Inc.*
10.6 (a) Share Purchase Agreement with Argaman, Inc.*
(b) Argaman, Inc. Stock Purchase Warrant*
10.7 (a) Plotkin Promissory Note*
(b) Collateral Pledge Agreement*
(c) Plotkin Securities Transfer Agreement*
(d) Plotkin Stock Purchase Agreement*
10.8 (a) Jacobs Promissory Note*
(b) Jacobs Securities Transfer Agreement*
(c) Jacobs Stock Pledge Agreement*
10.9 (a) Comerica Bank Credit Agreement dated August 12, 1998*
(b) Comerica Bank Master Revolving Note dated August 12, 1998*
(c) Comerica Bank Security Agreement dated August 12, 1998*
(d) Advance Formula Agreement dated August 12, 1998*
10.10 (a) Consignment Agreement*
(b) Consignment, Cancellation and Purchase Agreement*
10.11 Indemnity Agreement with Directors and Officers*
10.12 Consulting Agreement*
10.13 Simulator Purchase Agreement*
10.14 Purchase Agreement*
10.15 Stock Purchase Agreement among Jet Aviation Trading, Inc., PASCO International Aviation Corp., et al.*
10.16 Form of Lock-up Agreement**
10.17 Employment Agreement with Joseph J. Janusz
10.18 Cooperative Agreement between PASCO International Aviation Corporation, Inc. and China Northern Airlines*
10.19 Consignment Contract between Jet Aviation Trading, Inc. and Fersam International, Ltd. dated December 1, 1996*
10.20 Manufacturers Representative Agreement with Mirandy Products, Ltd. dated January 27, 1997*
10.21 Sales Representation Agreement between Aviation Holdings International, Inc. and Accessory Technologies
Corporation dated January 1, 1995*
10.22 Sales Representation Agreement between Aviation Holdings International at Aero Kool Corporation dated January 1,
1999*
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.23 Sales Representation Agreement between Aviation Holdings International and AAS Landing Gear Services, inc. dated
April 1, 1999*
10.24 Agreement between Aero-Link Flight Systems Corp. Ltd. and China Airlines*
10.25 Modification of Employment Agreement for Simon Chiang
11 Computation of Net Loss Per Share
21.1 Subsidiaries of the Company*
23.1 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit 5.1)
23.2 Consent of LJ Soldinger Associates
27 Financial Data Schedule
</TABLE>
- --------------
* Previously Filed
**To be filed by amendment
Item 28. Undertakings.
The undersigned registrant hereby undertakes that it will:
(1) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(2) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(3) Provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(4) Treat 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 undersigned under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the undersigned of expenses incurred or paid by a
director, officer or controlling persons of the undersigned 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
undersigned 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.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Miami, State of Florida on this 9th day of
September, 1999.
AVIATION HOLDINGS GROUP, INC.
By: JOSEPH J. NELSON
--------------------------------------
Joseph J. Nelson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on this 9th day of September, 1999.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
JOSEPH J. NELSON President and Chief Executive September 9, 1999
- ------------------------------------- Officer, Director
Joseph J. Nelson (Principal Executive Officer)
JOSEPH F. JANUSZ Vice President and Chief Financial September 9, 1999
- ------------------------------------ Officer
Joseph F. Janusz (Principal Accounting and
Financial Officer)
SIMON CHIANG* Vice President and Director September 9, 1999
- ------------------------------------
Simon Chiang
MICHAEL J. CIRILLO* Director September 9, 1999
- ------------------------------------
Michael J. Cirillo
THEODORE H. GREGOR* Director September 9, 1999
- ------------------------------------
Theodore H. Gregor
*By JOSEPH J. NELSON September 9, 1999
---------------------------------
Joseph J. Nelson
Attorney-in-fact
</TABLE>
II-7
<PAGE>
Exhibit 1.1
AVIATION HOLDINGS GROUP, INC.
750,000 Units(1)
Each Unit consists of Two Shares of
Common Stock and One Redeemable
Common Stock Purchase Warrant to Purchase
One Share of Common Stock
UNDERWRITING AGREEMENT
----------------------
________________, 1999
Silver Capital Group
______________________
______________________
______________________
Dear Sirs:
The undersigned, AVIATION HOLDINGS GROUP, INC., a Delaware corporation
(the "Company"), hereby confirms its agreement with you (the "Underwriter"):
1. Description of Units. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the Underwriter (the "Offering"),
pursuant to the Preliminary Prospectus and the Prospectus (both, as hereinafter
defined) 750,0000 Units (the "Firm Offered Units"), at a price of [$____] per
Unit (less a ten (10%) percent discount thereon). In addition, the Company
hereby proposes to grant to the Underwriter an option (the "Over-Allotment
Option") to acquire on or before 5:00 p.m. Eastern Standard Time on the ___ day
of ____________, 1999 to purchase up to an additional 75, 000 Units to cover any
over-allotment in the Offering, at a price of [$____] per Unit (less a ten (10%)
percent discount thereon). Any and all Units to be purchased by the Underwriter
pursuant to the Over-Allotment Option are referred to herein as the "Optional
Offered Units." The Firm Offered Units, and the Optional Offered Units are
sometimes collectively referred to herein as the "Units." Each Unit consists of
two (2) shares of the Company's common stock, $.0001 par value per share
("Common Stock") and one (1) redeemable common stock purchase
- --------
(1) Plus an option to purchase from the Company up to 75,000 additional Units
to cover over-allotments.
<PAGE>
warrant ("Warrant") to purchase one (1) share of the Company's Common Stock. The
Common Stock and Warrants are sometimes referred to herein as the "Securities".
Each Warrant entitles the holder to purchase one (1) share of Common
Stock at the price of $______ per share of Common Stock for three (3) years
following the date of the Prospectus until 5:00 p.m. Eastern Daylight Time on
the ____ day of ________________, 2002, when the Warrants expire (the
"Expiration Date"). Each Warrant is detachable and separately transferable from
the Common Stock issued with such Warrant as part of a Unit commencing thirty
(30) days following the date of the Prospectus or earlier in the event that the
Underwriter shall so elect in its sole discretion.
2. Representations and Warranties of the Company and the Underwriter.
(a) The Company represents and warrants to, and agrees with the
Underwriter, and the Company acknowledges that the Underwriter is relying upon
such representations, warranties and agreements, that:
(i) A registration statement on Form SB-2 (File No.
333-75169) with respect to the Units, including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules of Regulations") of the
Commission thereunder, and one or more amendments to such registration statement
may have been so filed. After the execution of the Underwriting Agreement, the
Company will file with the Commission either: (A) if such registration
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, a prospectus in the form most recently included in
an amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424 (b) under the
Act and as have been provided to and approved by the Underwriter; or (B) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriter prior to the execution of the
Underwriting Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when it was
or is declared effective (the "Effective Time"), including all financial
schedules and exhibits thereto and including any information omitted therefrom
pursuant to Rule 430A under the Act and included in the Prospectuses (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion relating to the offering of Units filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the Effective Time); the term "Prospectus" means the
prospectus relating to the offering of Units first filed with the Commission
pursuant to Rule 424 (b) under the Act or, if no prospectus is required to be
filed pursuant to said Rule 424(b), such term means the prospectus relating to
the offering of Units included in the Registration Statement.
2
<PAGE>
(ii) No securities commission or regulatory authority
(referred to herein, singly, as "Regulatory Authority" and collectively, as
"Regulatory Authorities") has issued any order preventing or suspending the use
of any Preliminary Prospectus. When each Preliminary Prospectus was filed with
the appropriate Regulatory Authorities such document did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. At the Effective Time, each of the
Registration Statement and the Prospectus: (A) contained or will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the applicable
securities legislation and the rules and regulations of the appropriate
Regulatory Authority thereunder; and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this
Subsection (ii) do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or any
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use therein or to statements contained in such document
relating to the Underwriter.
(iii) The Company has been duly incorporated and is validly
existing as a corporation and in good standing under the laws of the State of
Delaware and is duly qualified to transact business under the laws of such other
jurisdictions where the ownership or leasing of its property or the conduct of
its business requires such qualification.
(iv) The Company has full corporate power and corporate
authority to own or lease its property and conduct its businesses as described
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(v) The Company has corporate power and corporate authority to
enter into the Underwriting Agreement; to issue, sell and deliver the Units and
the shares of Common Stock and the Warrants comprising such Units to be sold to
the Underwriter and/or publicly offered pursuant to the Underwriting Agreement;
and to carry out all the terms and provisions hereof and thereof to be carried
out by it, except to the extent that rights to indemnity and contribution under
the Underwriting Agreement may be limited by federal or state securities laws or
the public policy underlying such laws.
(vi) The authorized issued and outstanding capital stock of
the Company is as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and non-assessable; the Common Stock conforms in all respects to
statements in the Prospectus (or if the Prospectus is not in existence, the most
recent Preliminary Prospectus) relating to such securities. No holders of
outstanding shares of capital stock of the Company are entitled to any
preemptive or any similar rights to subscribe for any of the Units; there are no
outstanding rights, warrants, or options to acquire, or instruments convertible
into or exchangeable for, any shares of capital stock of the Company which are
not fully disclosed in the
3
<PAGE>
Prospectus; and, except as disclosed in the Prospectus, no holders of securities
of the Company are entitled to have such Units registered under the Registration
Statement.
(vii) The financial statements and schedules, if applicable,
of the Company, included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present the financial condition of the Company and the results of
operations as of the dates and for the periods therein specified. Such financial
statements and schedules, if applicable, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved. The selected financial data and capitalization set forth under
the headings "Selected Financial Data," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated therein, the
information included therein. In addition the "Use of Proceeds" as set forth in
the Registration Statement and the Prospectus sets forth the Company's
intentions for the use of the proceeds of this Offering in all material
respects.
(viii) L J Soldinger Associates, the auditors who have
certified the most recent financial statements of the Company, and have
delivered their report with respect to the audited financial statements and
schedules, if applicable, included in the Registration Statements and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as required by the
Act.
(ix) No legal or governmental proceedings are pending to which
the Company is a party or to which the property of the Company is subject that
are required to be described in the Registration Statement or the Prospectus and
are not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and, to the knowledge of the Company, no such
proceedings have been threatened against the Company or with respect to any of
its property; and no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) or filed as required.
(x) The execution and delivery of the Underwriting Agreement
by the Company, the issuance, offering and sale of the Units, the shares of the
Common Stock and the Warrants comprising such Units to the Underwriter and/or
the public offering thereof by the Company pursuant to the Underwriting
Agreement, the compliance by the Company with the other provisions of the
Underwriting Agreement, and the consummation of the other transactions herein
and therein contemplated do not: (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, stock exchange, securities association or other third party, except:
(1) such as have been obtained, (2) such as may be required under state
securities or blue sky laws, (3) if the registration statement filed with
respect to the Units (as amended) is not effective under the Act as of the time
of execution hereof, such as may be required (and shall be obtained as provided
in this Agreement) under the Act and the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), (4) such as may be required (and shall be obtained
as provided in this Agreement) under applicable securities and other laws or (5)
such as may be required (and shall be
4
<PAGE>
obtained as provided in this Agreement) under the rules of the American Stock
Exchange and/or NASDAQ, or (B) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, lease or other agreement or instrument to
which, the Company is a party or by which the Company or any of its property is
bound, or the charter documents or by-laws of the Company or any statute or any
judgment, decree, order or regulation of any court or other governmental
authority or any arbitrator applicable to the Company, which breach or violation
would have a material adverse effect on the Company, or stock exchange or
securities association applicable to the Company.
(xi) Except in each case as described in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus): (A) the Company has not,
outside the ordinary course of its business, incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction; (B)
the Company has not purchased or entered into any agreement to purchase any of
its outstanding capital stock, nor declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; (C) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company; (D) there has been no material charge in the proposed use of the
proceeds of this Offering as described in the Prospectus.
(xii) Since December 31, 1998, there has not been any material
adverse change in the management, business, properties, prospects, results of
operations, condition (financial or otherwise) or general affairs of the Company
and its subsidiaries, taken as a whole (a "Material Adverse Effect"), whether or
not arising from transactions in the ordinary course of business.
(xiii) The Company is not in violation of any applicable
federal, state, local or foreign law, rule or regulation, the breach or
violation of which would have a material adverse effect on the Company,
including, without limitation, any laws, rules or regulations relating to
discharge of materials into the environment, and the Company is in compliance
with all terms and conditions of any required permit, license approval, except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), the breach or violation
of which would have a material adverse effect on the Company.
(xiv) The Company possesses all certificates, authorizations,
permits and licenses issued by the appropriate federal, state, local or
foregoing regulatory authorities necessary to conduct its business as currently
conducted in all material respects and as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), and the Company has not received any notice
of proceedings relating to the revocation or modification of any such
certificates, authorizations, permits and licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company, except as described in or
contemplated by the Registration Statement and Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
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(xv) Except as disclosed in the Prospectus, the Company has
not received any notice (written or oral) by any person or entity alleging
potential liability (including, without limitation, potential liability for
discharge of materials into the environment and any clean up costs, governmental
response costs, natural resources damages, property damages, personal injuries,
or penalties) arising out of, based on or resulting from: (A) the business
and/or operations of the Company, including, without limitation, the presence or
release into the environment of any chemicals, pollutants, contaminants, wastes,
toxic substance, petroleum or petroleum products, at any location, whether or
not owned by the Company; or (B) circumstances forming the basis or any
violation or alleged violation of any environmental laws.
(xvi) Except as disclosed in the Prospectus, there are no past
or present actions, activities, event or incidents, that could reasonably be
expected to form the basis of any claim against the Company or, to the Company's
knowledge, against any person or entity whose liability for any claim the
Company may have retained or assumed either contractually or by operation of
law.
(xvii) The Company has not at any time since the date of its
incorporation: (A) made any unlawful contributions to any candidate for
political office, or failed to disclose fully any contribution in violation of
law, or (B) made any payment to any state, federal or foreign government office
or official, or other person charged for similar public or quasi-public duties
(other than payments required or permitted by applicable laws).
(xviii) No default exists, and no event has occurred which,
with notice or lapse of time or both, would constitute a default in the due
performance and observance of, or would conflict with or result in, breach or
violation of any term, covenant or condition of any indenture, mortgage, deed of
trust, lease or other agreement (including, without limitation, each agreement
listed in Item 10 of Part II of the Registration Statement) or instrument to
which the Company is a party or by which the Company or any of its property is
bound, which default, breach or violation would individually, or in the
aggregate, materially adversely affect the Company.
(xix) To the extent described in the Prospectus, the Company
owns or possesses the rights to use trademarks, trade names and licenses and
proprietary or other confidential information currently used by it in connection
with its business, and the Company has received no notice of infringement of or
conflict with rights asserted against the Company by any third party with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a material
adverse effect on the Company, except as described in or contemplated by the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xx) All health, medical, welfare and other employee benefit
plans, and all deferred compensation plans, stock option plans, or other
contracts, agreements, plans or arrangements for the benefit or compensation of
employees maintained by the Company or to which the Company is obligated to
contribute, comply in all material respects with and are administered in
accordance with all applicable federal and state laws, rules, and regulations.
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(xxi) The Company has good and marketable title to all
property owned by it, in each case free and clear of all security interests,
liens, encumbrances, equities, claims and other defects except such as do not
materially adversely affect the value of such property and do not interfere with
the use made or proposed to be made of such property by the Company (and except
for property leased by the Company, as to which the Company has a valid
leasehold interest).
(xxii) No labor dispute with the employees of the Company
exist or is threatened or imminent that could, singly or in the aggregate, have
a material adverse effect on the Company, except as described in or contemplated
by the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xxiii) The Company does not, and does not intend to conduct
its operations in a manner that will subject it to registration as, "investment
company" under the Investment Company Act of 1940, as amended.
(xxiv) The Company has filed all federal, state and local tax
returns that are required to be filed or have requested extensions thereof
(except in any case in which the failure so to file would not, singly or in the
aggregate, have a material adverse effect on the Company) and have paid all
taxes required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxv) Except as noted in the Company's financial statements
contained in the Prospectus, the Company neither owns any shares of stock or any
other equity securities of any corporation nor has any equity interest in any
firm, partnership, association or other entity.
(xxvi) Within the period commencing on incorporation of the
Company and ending on the date hereof, the Company has not paid any dividend
under circumstances such that, immediately before or after giving effect
thereto, the Company: (A) was insolvent; (B) had unreasonably small capital with
which to conduct its business; or (C) intended to incur debts beyond its ability
to pay such debts as they mature. As used in this Agreement, the term
"insolvent" means, with respect to the Company, that: (A) the fair value of its
property is less than the total amount of its liabilities; or (B) the present
fair saleable value of its assets is less than the amount required to pay its
probable liabilities and debts as they become absolute and matured.
(xxvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company has not entered into any material transaction with any of its
affiliates.
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(xxviii) The principal shareholders of the Company are as set
forth in the Prospectus under the heading "Principal Stockholders" and the
officers, directors and principal stockholders are the beneficial owners of the
shares of Common Stock of the Company as set forth therein.
(xxix) The Company, with the assistance of its external
auditor makes and keeps accurate books and records reflecting its assets and
maintains internal accounting controls which provide reasonable assurance that:
(A) transactions are executed in accordance with management's authorization; (B)
transactions are recorded as necessary to permit preparation of the Company's
financial statements and to maintain accountability for the assets of the
Company; (C) access to the assets of the Company is permitted only in accordance
with management's authorization; and (D) the recorded accounts and
accountability of the assets of the Company is compared with existing assets at
reasonable intervals.
(xxx) The Units and the shares of Common Stock comprising part
of the Units have been duly authorized, and reserved and set aside and when
certificates therefor are countersigned by the Company's transfer agent and
issued and delivered to and paid for by the Underwriter pursuant to the
Underwriting Agreement, will be validly issued, fully paid and non-assessable.
(xxxi) The Warrants have been duly authorized and when issued
and delivered to and paid for by the Underwriter pursuant to the Underwriting
Agreement, will have been duly executed, issued and delivered and will
constitute valid and legally binding obligations of the Company, and the holders
thereof shall be entitled to the benefits of the Warrant Agreement pursuant to
which the Warrants are to be issued (the "Warrant Agreement") which shall be
substantially in the form filed as an exhibit to the Registration Statement. The
shares of Common Stock issuable upon exercise of the Warrants have been reserved
for issuance and when issued in accordance with the terms of the Warrant
Agreement, will be duly and validly authorized, validly issued, fully paid and
non-assessable.
(xxxii) The Units, and the shares of Common Stock and the
Warrants comprising the Units, conform in all respects to statements relating
thereto in the Prospectus.
(xxxiii) The Underwriting Agreement, the Warrant Agreement and
the Underwriter's Option are valid and binding agreements and instruments,
enforceable against the Company in accordance with their respective terms,
assuming due execution and delivery by other parties thereto and subject to
bankruptcy and insolvency laws and other laws generally affecting the
enforceability of creditors' rights, the availability of equitable remedies of
injunction and specific performance and enforceability of rights to indemnity;
and except to the extent that rights to indemnity and contribution under the
Underwriting Agreement may be limited by applicable federal or state securities
laws or the public policy underlying such laws.
(xxxiv) Neither the Company nor any of its officers, directors
or affiliates (within the meaning of the Rules under the Act and the securities
laws) has or will take, directly or indirectly, any action designed to stabilize
or manipulate the price of any security of the Company, or which has constituted
or which might reasonably be expected to cause or result in its stabilization
8
<PAGE>
or manipulation of the price of any security of the Company, to facilitate the
sale or resale of the Units or the shares of Common Stock or the Warrants
comprising such Units or otherwise.
(xxxv) To the Company's knowledge, no stamp or other issuance
taxes, transfer taxes, fees or duties are payable by or on behalf of the
Underwriter in connection with the sale of the Units or the consummation of any
other transaction contemplated pursuant to the Underwriting Agreement.
(xxxvi) To the Company's knowledge, after investigation, at
the Effective Time, the statements in the Registration Statement and the
Prospectus did not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading.
Each Certificate expressly provided for by Section 12 hereof signed
by any officer of the Company and delivered to the Underwriter or counsel for
the Underwriter shall be deemed to be a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
(b) The Underwriter hereby represents and warrants to the Company
that it is a corporation duly incorporated, organized and subsisting under the
laws of the State of _______________, with good and sufficient power, authority
and right to enter into and deliver this Agreement and to complete the
transactions to be completed by it as an Underwriter contemplated hereby, that
it is registered as a broker-dealer with the Commission and is a member of the
National Association of Securities Dealers, Inc. ("NASD"), and that it is not a
"new underwriter" as defined in Item 508(b) of S.E.C. Regulation S-K.
3. Issue. Sales and Delivery of the Firm Offered Units and Optional Offered
Units.
(a) The Company hereby agrees to sell to the Underwriter and the
Underwriter, in reliance upon the representations and warranties contained
herein, and subject to the terms and conditions hereof, agrees to purchase from
the Company 750,000 Firm Offered Units, each Firm Offered Unit consisting of two
(2) (or 1,500,000 in the aggregate) shares of Common Stock and one (1) (or
750,000 in the aggregate) Warrant at a purchase price of [$____] per Firm
Offered Unit (after giving effect to the Underwriter' 10% discount). You agree
to offer the Firm Offered Units to the public initially at the purchase price of
[$____] per Firm Offered Unit. At the Firm Closing Date the Company shall issue
the Offered Units and the shares of Common Stock and the Warrants comprising
such Units to, or to the order of, the Underwriter and deliver to the
Underwriter one or more certificates in definitive form representing the shares
of Common Stock and the Warrants comprising such Firm Offered Units, such Common
Stock and Warrant certificates to be in such denominations and registered in
such name or names as the Underwriter shall notify the Company in writing, not
less than two (2) business days prior to the Firm Closing Date, against payment
by the Underwriter to the Company of an aggregate purchase price for the Firm
Offered Units in lawful money of the United States by certified check or
banker's draft drawn upon a ___________________ Clearing House bank and payable
at par or in immediately available funds together with the Underwriter's receipt
for such Common Stock and Warrant certificates against delivery of the
9
<PAGE>
Company's receipt for such monies. Such delivery of and payment for the Firm
Offered Units shall be made at the offices of ________________________________,
at 10:00 a.m., ________________ time (the "Closing"), on ________________, 1999,
or at such other place, time or date as the Underwriter and the Company may
agree upon or as the Underwriter may determine pursuant to Section 9 hereof,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date". The Company shall contemporaneously pay to the Underwriter
fees with respect to the Offered Units as described in Section 3 hereof, by
certified check or banker's draft, or offset from amounts payable by the
Underwriter against delivery of the Underwriter's receipt therefor. For the
purpose of expediting the checking and packaging of the Firm Offered Units, the
Company agrees to make the stock certificates for shares of the Common Stock and
the Warrants comprising such Firm Offered Units, as the Underwriter may
designate, available for inspection at least 24 hours prior to the Firm Closing
Date. The shares of the Common Stock and the Warrants comprising the Firm
Offered Units will be separately transferrable thirty (30) days after the date
of the Prospectus, or earlier in the event the Underwriter so elects in its sole
discretion.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Offered Units as contemplated by the
Prospectus, the Company hereby grants to the Underwriter an option to purchase
up to 75,000 Units (the "Optional Offered Units"). The purchase price to be paid
for the Optional Offered Units shall be the same price per Unit as set forth
above in Subsection (a) of this Section 3. The Over-Allotment Option may be
exercised as to all or any part thereof from time to time within 30 days after
the date of the Prospectus. The Over-Allotment Option shall be exercised, from
time to time, in whole or in part, by notice in writing specifying the number of
Units with respect to which the Over-Allotment Option is exercised and the date
and time (the "Over-Allotment Option Closing Date") and place for delivery of
and payment for such Optional Offered Units, given by the Underwriter to the
Company at any time prior to 5:00 p.m. (New York time) on the last day for the
exercise of the Over-Allotment Option. The Over-Allotment Option Closing Date
shall not be earlier than two business days or later than seven (7) business
days after such exercise of the Over-Allotment Option and, in any event, shall
not be earlier than the Firm Closing Date. The purchase and sale of the Optional
Offered Units which are specified in the notice of exercise of all or part of
the Over-Allotment Option shall be held on the Over-Allotment Option Closing
Date or such other date or place as may be agreed in writing by the Underwriter
and the Company. The Underwriter shall not be under any obligation to purchase
any of the Optional Offered Units prior to the exercise of the Over-Allotment
Option. Upon exercise of the Over-Allotment Option as provided herein, the
Company shall become obligated to sell to the Underwriter, and, subject to the
terms and conditions herein set forth, the Underwriter shall become obligated to
purchase from the Company, the Optional Offered Units as to which the
Underwriter are then exercising the Over-Allotment Option. If the Over-Allotment
Option is exercised as to all or any portion of the Optional Offered Units, one
or more certificates in definitive (or, if not available, temporary) form for
such Optional Offered Units, and payment therefor, shall be delivered on the
Over-Allotment Option Closing Date in the manner, and upon the terms and
conditions, set forth in Subsection (a) of this Section 3, except that reference
therein to the Firm Offered Units and the Firm Closing Date, shall be construed
to mean Optional Offered Units and Over-Allotment Option Closing Date,
respectively.
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<PAGE>
4. Offering by the Underwriter. Upon the authorization of the release of the
Firm Offered Units, the Underwriter proposes to offer the Firm Offered Units for
sale upon the terms set forth in the Prospectus.
5. Covenants of the Company and the Underwriter.
(a) The Company covenants and agrees with the Underwriter that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Units is required to be delivered under the Act, the Company:
(i) will comply with all requirements imposed upon it by the Act and the rules
and regulations of the Commission thereunder to the extent necessary to permit
the continuance of sales of or dealings in the Units in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented; and
(ii) will not file with the Commission the Prospectus or the amendment referred
to in the second sentence of Section 2 (a) M hereof, any amendment to the
Registration Statement of which the Underwriter shall not previously have been
advised and furnished with a copy for a reasonable period of time prior to the
proposed filing and as to which filing the Underwriter shall have reasonably
objected. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon the reasonable
request by the Underwriter or counsel for the Underwriter, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Units by
the Underwriter, and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective by the Commission as
promptly as possible. The Company will advise the Underwriter, promptly after
receiving notice thereof, of the time when the Registration Statement, or any
amendment thereto, has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed and will provide evidence
satisfactory to the Underwriter of each such filing or effectiveness.
(ii) The Company will advise the Underwriter, promptly after
receiving notice or obtaining knowledge thereof, of: (i) the issuance by any
Regulatory Authority of any stop order suspending the effectiveness of the
Registration Statement or any amendment thereto or any order preventing or
suspending the use of any Preliminary Prospectus, any Prospectus or any
amendment or supplement thereto; (ii) the suspension of the qualification of the
Units for offering or sale in any jurisdiction; (iii) the institution,
threatening or contemplation of any proceeding for any such purpose; or (iv) any
request made by any entity, governmental or otherwise, having jurisdiction over
this offering, is made or is proposed to be made for amending the Registration
Statement, for amending or supplementing any Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
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<PAGE>
(iii) The Company will use its best efforts to arrange for the
qualification of the Units and the shares of Common Stock and the Warrants
comprising the Units for offering and sale under the securities or blue sky laws
of such jurisdictions as the Underwriter may designate, and will continue such
qualification in effect for as long as may be necessary to complete the
distribution of the Units and the shares of Common Stock and the Warrants
comprising the Units, provided however, that in connection with such
qualification the Company shall not be required to qualify as a foreign
corporation in any such jurisdiction.
(iv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or which was constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
(v) If, at any time when a prospectus relating to the Units is
required to be delivered under applicable securities legislation and the rules
and regulations of the appropriate Regulatory Authority thereunder, any event
occurs as a result of which any Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement any Prospectus to
comply with applicable securities legislation and the rules and regulations of
the appropriate Regulatory Authority thereunder, the Company will promptly
notify the Underwriter thereof and, subject to Subsection 10(a) hereof, will
prepare and file with the Commission, and file with or deliver to each other
appropriate Regulatory Authority, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to such Prospectus that
corrects such statement or omission or effects such compliance.
(vi) The Company will, without charge, provide: (i) to the
Underwriter and to counsel for the Underwriter, two signed copies of the
registration statement originally filed with respect to the Units and each
amendment thereto (in each case including exhibits thereto); and (ii) so long as
a prospectus relating to the Units is required to be delivered under the Act, as
many copies of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Underwriter may reasonably request. The Company will
provide or cause to be provided to the Underwriter and to each other Underwriter
or broker-dealer in a selling group for this Offering that so requests in
writing, a copy of the report on Form SCIRE filed by the Company as required by
Rule 463 under the Act.
(vii) The Company at its own expense, will give and continue
to give such financial statements and other information to and as may be
required by the Commission and by any Regulatory Authority in any jurisdiction
in which the Offering is to occur, or the public bodies of the jurisdictions in
which the Units may be qualified. Without limiting the generality of the
foregoing, the Company at its own expense, as soon as practicable, will make
generally available to its security holders and to the Underwriter an earnings
statement of the Company that satisfies the provisions of Section 11(a) of the
Act and Rule 158 thereunder.
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(viii) The Company will apply the net proceeds from the sale
of the Units as set forth under the "Use of Proceeds" heading in the Prospectus.
(ix) During a period of five (5) years from the Effective Time
the Company will furnish to the Underwriter: (A) as soon as practicable after it
is (x) filed with the Commission, any Regulatory Authority or any securities
exchange on which any class of securities of the Company may be listed or (y)
distributed to security holders of the Company, a copy of each annual, interim
and other report or communication so filed or distributed; and (B) as soon as
available, a copy of each report or definitive proxy statement of the Company
filed with the Commission under the Exchange Act, or mailed to security holders
(including, upon written request, all related exhibits thereto).
(x) The Company will use its best efforts to cause the Units
and the shares of Common Stock and the Warrants comprising the Units to be duly
authorized for inclusion in the NASDAQ System, and the American Stock Exchange,
respectively, subject to notice of issuance prior to the Firm Closing Date. It
is understood that the NASD's present rules preclude exercise of any options or
the shares underlying such options acquired in connection with an underwriting
for a period of 12 months from the effective date of the Registration Statement.
(xi) Subsequent to the date of this Agreement and through the
Firm Closing Date, except as otherwise disclosed in the Prospectus, the Company
will not take any action or refrain from taking any action that will result in
the Company incurring any material liability or obligation, direct or
contingent, or enter into any material transaction not in the ordinary course of
its business, and there will not be any material change in capital stock,
short-term debt or long-term debt, obligations under capital leases of the
Company or any issuance of options, warrants, or rights to purchase shares of
any class or series of capital stock of the Company or any agreement to purchase
any of its outstanding capital stock or any declaration or payment of any
dividend on any class or series of capital stock of the Company.
(xii) The Company will provide the Underwriter and its counsel
with copies of all comment letters and all other correspondence and with
contents of any oral comments received from any Regulatory Authority, as soon as
practicable after receipt thereof, and will supply the Underwriter and its
counsel with copies of all filings with the Commission and any other Regulatory
Authority relating to the offering.
(xiii) The Underwriter shall have the right to request the
Company to nominate one (1) nominee of the Underwriter for election to the Board
of Directors for three (3) years following the Effective Date, and the Company
will use its best efforts to cause such nominees to be elected to the Board of
Directors. Until such time as the Underwriter exercises its right to cause a
nominee of the Underwriter to be elected to the Board of Directors and until
such time as such nominee begins to serve on the Board of Directors, the Company
agrees to allow a representative designated by the Underwriter from time to time
to receive timely, written notice of all Board of Directors meetings and notice
of all telephonic Board meetings and the right to attend all Board meetings and
participate in all telephonic Board meetings. The Underwriter shall also have
the right to obtain
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copies of the minutes from all Board of Directors meetings for five (5) years
following the Effective Date of the Registration Statement, whether or not a
representative of the Underwriter attends or participates in any such Board
meeting. The Company agrees to reimburse the Underwriter immediately upon
request therefor of any reasonable travel and lodging expenses directly incurred
in connection with its representative's (whether or not its designated nominee)
attending Company Board meetings on the same basis as the Board members.
(xiv) The Underwriter covenants with the Company that it shall
conduct its business relating to the offering of the Units contemplated herein
reasonably in accordance with all applicable laws.
6. Expenses. The Company agrees to pay all of its costs, fees, taxes and
expenses incident to the performance of its obligations under the Underwriting
Agreement, whether or not the transactions contemplated herein or therein are
consummated or this Agreement is terminated pursuant to Section 12 hereof,
including all costs and expenses incident to: (i) the printing or other
production of documents with respect to the transactions, including all costs of
printing the registration statement originally filed with respect to the Units
and each amendment thereto, each Preliminary Prospectus, each Prospectus and
each amendment or supplement thereto and similar material; (ii) all reasonable
arrangements relating to the delivery to the Underwriter of copies of the
foregoing documents; (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company; (iv)
preparation, issuance and delivery to the Underwriter of any certificates
evidencing the shares of Common Stock and the Warrants comprising the Units,
including all transfer agent's, sub-transfer agent's, registrar's and
sub-registrar's fees; (v) the qualification of the Units and the shares of
Common Stock and the Warrants comprising the Units under state securities and
blue sky laws and all Securities Laws of the United States and its political
subdivisions, including filing fees and reasonable fees and disbursements of
counsel for the Underwriter relating thereto; (vi) the filing fees of the
Commission and the NASD and all other Regulatory Authorities relating to the
Units; and (vii) the inclusion of the Units and the shares of Common Stock and
the Warrants comprising the Units in the NASDAQ System and on the American Stock
Exchange. In addition to the foregoing, in connection with meetings with
prospective investors in the Units, the Company agrees to pay (x) all costs and
expenses incurred by or on behalf of it or its officers or employees, and (y) to
the Underwriter at the closing, costs and expenses up to an amount equal to
three percent (3%) of the gross dollar amount of the offering to the public,
incurred by the Underwriter in connection with such offering, it being
understood that except for the foregoing and the Underwriter' fees described in
Section 3 hereof or other amounts payable in accordance with the terms of this
Agreement, no further expenses or fees shall be payable by the
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Company to the Underwriter. If the sale of the Offered Units provided for herein
is not consummated because any condition to the obligations of the Underwriter
set forth in Section 7 hereof is not satisfied or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by the Underwriter, then the Company agrees to
reimburse the Underwriter upon demand for all out-of-pocket expenses (including
reasonable counsel fees and disbursements) that shall have been incurred by them
in connection with the proposed purchase and sale of the Offered Units;
provided, however, that except if the sale of the offered units is not
consummated because of said failure, refusal or inability on the part of the
Company, the Underwriter shall refund to the Company the amount, if any, by
which said out-of-pocket expenses of the Underwriter are less than the advance
payment of expense allowances theretofore made by the Company.
7. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Offered Units shall be subject, in
the Underwriter's reasonable discretion, to the accuracy of the representations
and warranties of the Company contained herein as of the date hereof and as of
the Firm Closing Date as if made on and as of the Firm Closing Date, to the
accuracy of the statements of the officers of the Company and others made
pursuant to the provisions of this Section 7, to the performance in all material
respects by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have been
declared effective not later than 10:00 a.m., New Jersey time, on the date
on which the amendment to the registration statement originally filed with
respect to the Units or the Registration Statement, as the case may be,
containing information regarding the initial public offering price of the Units
has been filed with the Commission, or such later time and date as shall have
been consented to by the Underwriter; if required, the Prospectus and any
amendments or supplements thereto shall have been filed with the Commission in
the manner and within the time period required by Rule 424(b) under the Act; no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or, to the knowledge of the Company or the
Underwriter, shall be threatened by the Commission; and the Company shall have
complied with any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise).
(b) The Underwriter shall not have advised the Company that the
Registration Statement or any Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in their reasonable
judgment, is material, or omits to state a fact which, in its reasonable
judgment, is material and is required to be stated therein or necessary to make
the statements therein not misleading.
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(c) At the Firm Closing Date, you shall have received the opinion,
dated as of the Firm Closing Date, of Klehr, Harrison, Harvey, Branzburg &
Ellers LLP, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriter, to the effect that:
(i) the Company and its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of organization, with all requisite
corporate power and authority to own their properties and conduct their business
as described in the Registration Statement and Prospectus and are duly qualified
or licensed to do business as foreign corporations and are in good standing in
each other jurisdiction in which the ownership or leasing of their properties or
conduct of their business requires such qualification except where the failure
to qualify or be licensed will not have a Material Adverse Effect;
(ii) the authorized capitalization of the Company as of June
30, 1999 is as set forth in the Registration Statement; the Securities as set
forth in the Registration Statement have been duly authorized and upon payment
of consideration therefor, will be validly issued, fully paid and non-assessable
and conform in all material respects to the description thereof contained in the
Prospectus; to such counsel's knowledge the outstanding shares of capital stock
of the Company and its subsidiaries have not been issued in violation of the
preemptive rights of any shareholder and to such counsel's knowledge the
shareholders of the Company do not have any preemptive rights or other rights to
subscribe for or to purchase, nor are there any restrictions upon the voting or
transfer of any of the capital stock except as provided in the Prospectus or as
required by law. The Securities conform in all material respects to the
respective descriptions thereof contained in the Prospectus; the shares of
Common Stock and the Warrants will have been duly authorized and, when issued
and delivered in accordance with their respective terms, will be duly and
validly issued, fully paid, non-assessable, free of preemptive rights to the
best of their knowledge; to the best of their knowledge, all prior sales by the
Company of the Company's securities, have been made in compliance with or under
an exemption from registration under the Act and applicable state securities
laws; and to the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration rights other than
those which have been waived or satisfied for or relating to the registration of
any shares of Common Stock;
(iii) this Agreement has been duly and validly authorized,
executed and delivered by the Company;
(iv) the certificates evidencing the Securities as described
in the Registration Statement comply in all material respects with the
descriptions set forth therein, and comply with the Delaware General Corporation
Law, as in effect on the date hereof;
(v) except as otherwise disclosed in the Registration
Statement, such counsel knows of no pending or threatened legal or governmental
proceedings to which the Company or its subsidiaries are a party which would
materially adversely affect the business, property, financial condition or
operations of the Company or its subsidiaries; or which question the validity of
the
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<PAGE>
Securities or this Agreement, or of any action taken or to be taken by the
Company pursuant to this Agreement; to such counsel's knowledge there are no
governmental proceedings or regulations required to be described or referred to
in the Registration Statement which are not so described or referred to;
(vi) the execution and delivery of this Agreement and the
incurrence of the obligations herein set forth and the consummation of the
transactions herein contemplated, will not result in a breach or violation of,
or constitute a default under the certificate of incorporation or by-laws of the
Company or its subsidiaries, or to the best knowledge of counsel after due
inquiry, in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or instrument to which the
Company or its subsidiaries is a party or by which they or any of their
properties is bound or in violation of any order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality or court,
domestic or foreign the result of which would have a Material Adverse Effect;
(vii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for that purpose have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) as of the Effective
Date comply as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(viii) in the course of preparation of the Registration
Statement and the Prospectus such counsel has participated in conferences with
the President of the Company with respect to the Registration Statement and
Prospectus and such discussions did not disclose to such counsel any information
which gives such counsel reason to believe that the Registration Statement or
any amendment thereto at the time it became effective contained any untrue
statement of a material fact required to be stated therein or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make statements therein, in light of the
circumstances under which they were made, not misleading (except, in the case of
both the Registration Statement and any amendment thereto and the Prospectus and
any supplement thereto, for the financial statements, notes thereto and other
financial information (including without limitation, the pro forma financial
information) and schedules contained therein, as to which such counsel need
express no opinion);
(ix) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
agreements to which the Company or its Subsidiaries is a party are accurate and
fairly present in all material respects the information required to be shown,
and such counsel is familiar with all contracts and other agreements referred to
in the Registration Statement and the Prospectus and any such amendment or
supplement or filed as
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<PAGE>
exhibits to the Registration Statement, and such counsel does not know of any
contracts or agreements to which the Company or its subsidiaries is a party of a
character required to be summarized or described therein or to be filed as
exhibits thereto which are not so summarized, described or filed; and
(x) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale or delivery of the Common Stock or
Warrants by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking of
any action contemplated herein, other than registrations or qualifications of
the Shares under applicable state or foreign securities or Blue Sky laws and
registration under the Act.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of New York or Delaware upon opinions of
counsel satisfactory to you, in which case the opinion shall state that they
have no reason to believe that you and they are not entitled to so rely.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of public
officials and, as to matters involving the application of laws of any
jurisdiction as to which such counsel is not an expert to the extent
satisfactory in form and scope to counsel for the Underwriter, upon the opinion
of other counsel acceptable to the Underwriter. Copies of such opinions shall be
delivered to the Underwriter and counsel and shall expressly state that all such
counsel may rely on such opinion.
References to the Registration Statement and the Prospectus in this
Subsection (c) shall include any amendment or supplement thereto at the date of
such opinion.
(d) The Underwriter shall have received from L J Soldinger
Associates, letters dated the date hereof and the Firm Closing Date, in form and
substance reasonably satisfactory to the Underwriter, providing you with such
"cold comfort" as you may reasonably require.
(e) The Underwriter shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and Chief Financial Officer of the
Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing Date;
the Registration Statement, as amended as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading; the Prospectus, as
amended or supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; and the Company has
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<PAGE>
performed all covenants and agreements and satisfied an conditions on its part
to be performed or satisfied at or prior to the Firm Closing Date;
(ii) The Registration Statement has become effective and no
order suspending or preventing the use of any Prospectus, or the effectiveness
of the Registration Statement or any amendment thereto has been issued, and to
the best of their knowledge after inquiry, no proceedings for that purpose have
been instituted or threatened, or are contemplated, by any Regulatory Authority;
(iii) the charter documents and by-laws of the Company
attached to the certificate are full, true and correct copies and in effect on
the date thereof;
(iv) the minutes or other records of various proceedings and
actions of the Board of Directors of the Company relating to this offering are
full, true and correct copies thereof and have not been modified or rescinded as
of the date thereof;
(v) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss or interference with its businesses or properties
from fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any material adverse change, or any development involving
a prospective material adverse change, in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company;
(vi) the Company has complied in all material respects with
all terms and conditions and covenants of this Agreement on its part to be
complied with prior to the Firm Closing Date;
(vii) except as described in the Prospectus, the Company is
not party to or bound by any material contract or other material document;
(viii) the only jurisdictions in which the Company owns or
leases material property or conducts material operations are the jurisdictions
described in the Prospectus; and
(ix) such additional matters as the Underwriter may reasonably
request.
(f) The Units and the shares of Common Stock and the Warrants
comprising the Units shall have been approved for inclusion in the NASDAQ
System, [and for trading on the American Stock Exchange, respectively,] subject
to official notice of issuance.
(g) On or before the Firm Closing Date, the Underwriter and counsel
for the Underwriter shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
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All opinions, certificates, letters and documents delivered pursuant
to this Agreement shall comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriter and counsel
for the Underwriter. The Company shall furnish to the Underwriter such conformed
copies of such opinions, certificates, letters and documents required hereunder
in such quantities as the Underwriter and counsel for the Underwriter shall
reasonably request.
The obligation of the Underwriter to purchase and pay for any
Optional Offered Units shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Offered Units as of the Over-Allotment
Option Closing Date. All opinions, certificates, letters and documents delivered
pursuant to this Agreement shall be re-affirmed as the Over-Allotment Option
Closing Date.
8. Conditions of the Obligations of the Company. The obligation of the Company
to sell and deliver the Shares is subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 10:00 a.m. New York time, on the day following the date of this Agreement,
or on such later date as the Company and the Underwriter may agree in writing.
(b) At the Closing Dates, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this Section have been fulfilled on the Firm Closing Date but are not fulfilled
after the Firm Closing Date and prior to the Over-Allotment Option Closing Date,
then only the obligation of the Company to sell and deliver the Shares on
exercise of the Over-Allotment Option shall be affected.
9. Indemnification.
(a) The Company agrees (i) to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any losses, claims, damages or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), to which
such Underwriter or such controlling person may become subject, under the Act or
otherwise, and (ii) to reimburse, as incurred, the Underwriter and such
controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages or liabilities; insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
relating to (i) and (ii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by
the Company specifically for that purpose containing written information
specifically furnished by the Company and filed in any state
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<PAGE>
or other jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be required to indemnify the Underwriter and any
controlling person or be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation of the Registration Statement or any such amendment or
supplement thereof or any such Blue Sky Application or any such preliminary
Prospectus or the Prospectus or any such amendment or supplement thereto,
provided, further that the indemnity with respect to any Preliminary Prospectus
shall not be applicable on account of any losses, claims, damages, liabilities
or litigation arising from the sale of Securities to any person if a copy of the
Prospectus was not delivered to such person at or prior to the written
confirmation of the sale to such person. This indemnity will be in addition to
any liability which the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company,
each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and reasonable attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof and for any violation by the
Underwriter in the sale of such Securities of any applicable state or federal
law or any rule, regulation or instruction thereunder relating to violations
based on unauthorized statements by Underwriter or its representative; provided
that such violation is not based upon any violation of such law, rule or
regulation or instruction by the party claiming indemnification or inaccurate or
misleading information furnished by the Company or its representatives,
including information furnished to the Underwriter as contemplated herein. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
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(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the reasonable fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party and in
the reasonable judgment of the counsel to the indemnified party, it is advisable
for the indemnified party to be represented by separate counsel (in which case
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party, which firm shall be designated in writing by the indemnified
party). No settlement of any action against an indemnified party shall be made
without the consent of the indemnified party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnified party. If it
is ultimately determined that indemnification is not permitted, then an
indemnified party will return all monies advanced to the indemnifying party.
10. Contribution.
In order to provide for just and equitable contribution under
the Act in any case in which the indemnification provided in Section 9 hereof is
requested but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case, notwithstanding the fact that the express provisions of
Section 9 provide for indemnification in such case, then the Company and each
person who controls the Company, in the aggregate, and the Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees) (after
22
<PAGE>
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount for
each of the Shares appearing on the cover page of the Prospectus bears to the
public offering price appearing thereon and the Company shall be responsible for
the remaining portion; provided, however, that if such allocation is not
permitted by applicable law then allocated in such proportion as is appropriate
to reflect relative benefits but also the relative fault of the Company and the
Underwriter and controlling persons, in the aggregate, in connection with the
statements or omissions which resulted in such damages and other relevant
equitable considerations shall also be considered. The relative fault shall be
determined by reference to, among other things, whether in the case of an untrue
statement of a material fact or the omission to state a material fact, such
statement or omission relates to information supplied by the Company or the
Underwriter and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriter agree that it would not be just and equitable if the
respective obligations of the Company and the Underwriter to contribute pursuant
to this Section 10 were to be determined by pro rata or per capita allocation of
the aggregate damages or by any other method of allocation that does not take
account of the equitable considerations referred to in this Section 10. No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. As used in this paragraph, the word
"Company" includes any officer, director, or person who controls the Company
within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company, its officers, directors and controlling persons,
and the Company, its officers, directors and controlling persons shall be
entitled to contribution from the Underwriter to the full extent permitted by
law. The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company and the Underwriter. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
11. Survival. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and the
Underwriter set forth in this Agreement, shall remain in full force and effect
until three years from the Effective Time, regardless of: (i) any investigation
made by or on behalf of the Company, any of their officers or directors, the
Underwriter or any controlling person referred to in Section 9 hereof; and (ii)
delivery of and payment for the Offered Units. Notwithstanding the foregoing
sentence, the respective agreements, covenants, indemnities and other statements
set forth in Sections 6 and 10 hereof shall remain in full force and effect
regardless of any termination or cancellation of this Agreement and shall remain
in full force and effect after Closing.
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12. Termination.
(a) This Agreement, other than Sections 9 and 10 hereof, may be
terminated with respect to the Firm Offered Units or any Optional Offered Units
in the sole discretion of the Underwriter by notice to the Company given prior
to the Firm Closing Date or the Over-Allotment Option Closing Date,
respectively, in the event that the Company shall have failed, refused or been
unable to perform any or all obligations and satisfy any or all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Firm Closing Date or such Over-Allotment Option Closing Date,
respectively:
(i) the Company shall have sustained any material loss or
interference with its business or property from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have been any
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, or any development
involving a prospective material adverse change including, without limitation,
the event that any cessation of employment by the Company of any of the persons
described under the caption "Management" as directors or executive officers of
the Company and/or a change in management or control of the Company shall have
occurred;
(ii) trading in the Units shall have been suspended or halted
by any applicable securities commission or regulator in the United States or by
NASDAQ [or the American Stock Exchange,] or trading in securities in general on
NASDAQ shall have been suspended, or minimum or maximum prices shall have been
established on such exchange, or trading in any securities of the Company shall
have been suspended or halted by any national securities exchange upon which
such securities are listed or the appropriate Regulatory Authorities;
(iii) a banking moratorium shall have been declared by
authorities of the City of New York, the States of _________________ or New
York, or the United States of America; or
(iv) there shall have been: (A) an outbreak of hostilities
between the United States and any foreign power; (B) an outbreak of any other
insurrection or armed conflict involving the United States or the United
Kingdom; or (C) any other calamity or crisis; which in any such case has a
material adverse effect on the financial markets such that in the reasonable
judgment of the Underwriter it is impracticable or inadvisable to proceed with
the public offering or the delivery of the Units, as contemplated by the
Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12 shall
be without liability of any party to any other party except as provided in
Section 11 hereof.
13. Information Supplied by the Underwriter. The information under the heading
"Underwriting" and the statements set forth on the front and back cover page in
any Preliminary Prospectus and Prospectus (to the extent such statements relate
to the Underwriter) constitute the only information furnished by the Underwriter
to the Company for the purposes hereof. The Underwriter confirms that such
statements (to such extent) are correct.
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14. Notices. All communications hereunder shall be in writing and shall be
mailed, delivered or telegraphed and confirmed in writing, and shall, in the
case of notice to the Company, be addressed and sent to the Company at its
address on the cover of the Registration Statement, Attn: Chief Executive
Officer; and, in the case of notice to the Underwriter, be addressed and sent
to: ____________________________________________________, with a copy to its
counsel: ___________________________________, Attn: _______________________.
The Company and the Underwriter may change their respective addresses
for notice, by notice given in the manner aforesaid. Any such notification shall
take effect at the time of receipt.
15. Successors. This Agreement shall enure to the benefit of, and. shall be
binding upon, the Underwriter, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that: (i)
the indemnities of the Company contained in Section 9 of this Agreement shall
also be for the benefit of all officers, directors, employees and agents of the
Underwriter and any person or persons who control the Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act; and (ii) the
indemnities of the Underwriter contained in Section 9 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act. No purchaser of Units from the Underwriter shall be deemed a
successor because of such purchase.
16. Applicable Law. The validity and interpretation of this Agreement, and the
terms and conditions' set forth herein, shall be governed by and construed in
accordance with the laws of the State of _________________, United States of
America without giving effect to any provisions relating to conflicts of laws.
17. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
18. Time of Essence. Time shall be of the essence of this Agreement between the
Company and the Underwriter.
19. Conditions for the Benefit of the Company. The obligation of the Company to
issue the Units is subject to the following terms and conditions which are for
the exclusive benefit of the Company to be performed or complied with at or
prior to the Closing:
(1) the representations and warranties of the Underwriter set
forth in Section 2 (c) shall be true and correct at the
Closing with the same force and effect as if made at and as of
such time; and
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(2) the Underwriter shall have--performed or complied with all of
the terms, covenants and conditions of this Agreement to be
performed or complied with by the Underwriter prior to the
Closing.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding the Underwriter.
AVIATION HOLDINGS GROUP, INC.
By:__________________________
President
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The foregoing Agreement is hereby confirmed and accepted as of the date
first above written.
SILVER CAPITAL GROUP, a division of LCP
CAPITAL
By:____________________________________
President
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<PAGE>
Exhibit 4.2
No W- _________ ________________ Warrants
WARRANT
VOID AFTER ___________________, 2002
STOCK PURCHASE WARRANT CERTIFICATE
FOR PURCHASE OF COMMON STOCK
AVIATION HOLDINGS GROUP, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED, _______________________ or
registered assigns (the "Registered Holder") is the owner of the number of Class
A Redeemable Common Stock Purchase Warrants ("Warrants') specified above. Each
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate and the Warrant agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
par value $.0001 per share ("Common Stock"), of AVIATION HOLDINGS GROUP, INC. a
Florida corporation (the "Company"), at any time between the Initial Warrant
Exercise Date and the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of STOCKTRANS,
INC. as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by
payment of $_____ (the "Purchase Price") in lawful money of the United States of
America in cash or by official bank or certified check made payable to the
Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject to all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated ________________,
1996, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
<PAGE>
The term "Initial Warrant Exercise Date" shall mean
___________________, 1999.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
_________, 2002, or such earlier date as the Warrants shall be redeemed. If such
date shall in the State of New York be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection there with, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitations, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive nay notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.01 per Warrant at any time after ___________, 1999,
provided the Market Price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall exceed $______ [two
times Purchase Price] per share. Notice of redemption shall be given not later
than the thirtieth day before the date fixed for redemption, all as provided int
he Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.01 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Florida.
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This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
AVIATION HOLDINGS GROUP, INC.
By:_______________________________
Joseph J. Nelson
President
[Seal]
STOCKTRANS, INC., as Warrant Agent
By:_______________________________
Its: Authorized Officer
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[Form of Reverse of Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_______ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
____________________________________________________
(please insert social security or other identifying number)
and be delivered to: _________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
_________________________________________________
_________________________________________________
_________________________________________________
(Address)
_________________________________________________
(Date)
_________________________________________________
(Taxpayer Identification Number)
If this Warrant has been solicited by a member of the National Association of
Securities Dealers, Inc., the name of such firm is:
_________________________________________.
Dated: ______________ ___________________________________
Signature of Holder
Signature guaranteed:
__________________________________________
SIGNATURE GUARANTEED
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
__________________________________________________
(please insert social security or other identifying number)
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _____________________________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ______________ ___________________________________
Signature of Holder
Signature guaranteed:
_____________________________________
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SECURITIES AND EXCHANGE
COMMISSION RULE 17Ad-15 (AS PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF
1934).
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<PAGE>
Exhibit 4.3
WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of 1999, by and between AVIATION
HOLDINGS GROUP, INC., a New Jersey corporation ("Company"), and STOCKTRANS,
INC., as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with a public offering of up to _______ Units (the
"Units"), each consisting of two (2) shares of Common Stock, par value $.001 per
share, and one (1) Class A Redeemable Common Stock Purchase Warrant (the
"Warrant") pursuant to an underwriting agreement (the "Underwriting Agreement")
dated ___________, 1999 between the Company and ______________________
("Silver"), the Company will issue up to ________ Warrants;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company,
and the Warrant Agent is willing to so act, in connection with the issuance,
registration, transfer, exchange and redemption of the Warrants, the issuance of
certificates representing the Warrants, the exercise of the Warrants, and the
rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the Company of
which at the date hereof consists of __________ authorized shares, par value
$.001 per share, and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect to the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution, or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include (1) only shares of such
class designated in the Company's Certificate of Incorporation as Common Stock
on the date of the original issue of the Warrants or (ii), in the case of any
reclassification, change, consolidation, merger, sale, or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities, or property
provided for in such section or (iii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
<PAGE>
(b) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located at the date hereof at
______________________________________________.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean _______________ 1999.
(e) "Purchase Price" shall mean the purchase price per share to be
paid upon exercise of each Warrant in accordance with the terms hereof, which
price shall be $_____ per share, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof, and subject to the Company's
right, in its sole discretion, to reduce the Purchase Price upon notice to all
warrantholders.
(f) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.01 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean StockTrans, Inc., as the Company's
transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time)
on ______________________, 2001 or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of New York
be a holiday or a day on which banks are authorized or required to close, then
5:00 P.M. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized or required to
close. Upon notice to all warrantholders the Company shall have the right to
extend the warrant expiration date.
2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant representing such Warrant to purchase one share of Common Stock upon the
exercise thereof, in accordance with the terms hereof, subject to modification
and adjustment as provided in Section 9.
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<PAGE>
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and delivered to the Warrant Agent. Upon
written order of the Company signed by its President or Chairman or a Vice
President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued, and delivered by the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of _________ shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants represented by any Warrant Certificate,
to evidence any unexercised warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed, or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the Purchase
Option; and (vi) those issued at the option of the Company, in such form as may
be approved by the its Board of Directors to reflect any adjustment or change in
the Purchase Price, the number of shares of Common Stock purchasable upon
exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 9 hereof.
3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers, or other marks of identification or
designation and such legends, summaries, or endorsements printed, lithographed,
or engraved thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage or to the requirements of Section 2(b). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange, or in lieu of mutilated, lost, stolen, or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates shall be numbered serially with the letter W.
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President, or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted
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<PAGE>
thereon a facsimile of the Company's seal. Warrant Certificates shall be
manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be an officer of the
Company or to hold the particular office referenced in the Warrant Certificate
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates may nevertheless be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be an officer of the Company
or to hold such office. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
without further action by the Company, except as otherwise provided by Section 4
hereof.
4. Exercise. Each Class A Warrant may be exercised by the Registered
Holder thereof at any time on or after the Initial Exercise Date, but not after
the Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the holder of those
securities upon the exercise of the Warrant as of the close of business on the
Exercise Date. As soon as practicable on or after the Exercise Date the Warrant
Agent shall deposit the proceeds received from the exercise of a Warrant and
shall notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons entitled
to receive the same, a certificate or certificates for the securities
deliverable upon such exercise (plus a certificate for any remaining unexercised
Warrants of the Registered Holder), unless prior to the date of issuance of such
certificates the Company shall instruct the Warrant Agent to refrain from
causing such issuance of certificates pending clearance of checks received in
payment of the Purchase Price pursuant to such Warrants. Upon the exercise of
any Warrant and clearance of the funds received, the Warrant Agent shall
promptly remit the payment received for the Warrant (the "Warrant Proceeds") to
the Company or as the Company may direct in writing.
5. Reservation of Shares; Listing; Payment of Taxes, etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery, be duly and validly issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof, (other than those which the Company shall promptly pay or
discharge) and that upon issuance such shares shall be listed on each national
securities exchange or eligible for inclusion in each automated quotation
system, if any, on which the other shares of outstanding Common Stock of the
Company are then listed or eligible for inclusion.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such
4
<PAGE>
securities may be validly issued or delivered upon such exercise, then the
Company will, to the extent the Purchase Price is less than the Market Price (as
hereinafter defined), in good faith and as expeditiously as reasonably possible,
endeavor to secure such registration or approval and will use its reasonable
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws. With respect to any such securities, however, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp, or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue, and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
5
<PAGE>
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as Warrant Agent, or disposed of or
destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for ail purposes and shall not be affected by any notice to
the contrary. The Warrants which are being publicly offered with shares of
Common Stock pursuant to the Underwriting Agreement will be detachable from the
Common Stock on and after ________, 1999 [45 days after closing] and thereafter
will be transferable separately therefrom.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and loss, theft,
destruction, or mutilation of any Warrant Certificate and (in case of loss,
theft, or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
8. Redemption.
(a) Subject to the provisions of paragraph 2(e) hereof, on not less
than thirty (30) days notice given at any time after the Initial Warrant
Exercise Date, the Warrants may be redeemed, at the option of the Company, at a
redemption price of $0.01 per Warrant, provided the Market Price of the Common
Stock receivable upon exercise of the Warrant shall equal or exceed $_____ per
share (the "Target Price"), subject to adjustment as set forth in Section 8(f)
below. "Market Price" shall mean (i) the average closing bid price for any
twenty (20) consecutive trading days within a period of thirty (30) consecutive
trading days ending within five (5) days prior to the date in question of the
Common Stock as reported by the National Association of Securities Dealers, Inc.
Automatic Quotation System or (ii) the last reported sale price, for twenty (20)
consecutive business days, ending within five(5) days of the date of the notice
of redemption, which notice shall be mailed no later than five days thereafter,
on the primary exchange on which the Common Stock is traded, if the Common Stock
is traded on a national securities exchange.
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<PAGE>
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall mail a
notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at their last address as shall appear on the
records maintained pursuant to Section 6(b). Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given whether
or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrant shall be the Redemption Date. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M.
(New York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Holders of the Warrants shall have no further
rights except to receive, upon surrender of the Warrant, the Redemption Price.
(e) From and after the Redemption Date specified for, the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the redemption price, shall
cease.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall be proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.
9. Adjustment of Exercise Price and Number of Shares of Common Stock or
Warrants.
(a) Subject to the exceptions referred to in Section 9(g) below, in
the event the Company shall, at any time or from time to time after the date
hereof,
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<PAGE>
sell any shares of Common Stock for a consideration per share less than the
Market Price of the Common Stock (as defined in Section 8) on the date of the
sale or issue any shares of Common Stock as a stock dividend to the holders of
Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision,
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price in effect immediately
prior to such Change of Shares shall be changed to a price (including any
applicable fraction of a cent) determined by multiplying the Purchase Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in subsection
9(f)(G) below) for the issuance of such additional shares would purchase at such
current Market Price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
Upon each adjustment of the Purchase Price pursuant this Section 9, the
total number of shares of Common Stock purchasable upon the exercise of each
Warrant shall (subject to the provisions contained in Section 9(b) hereof) be
such number of shares (calculated to the nearest tenth) purchasable at the
Purchase Price in effect immediately prior to such adjustment multiplied by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization, or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a
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consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization, or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage, or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization, or other change, consolidation,
merger, sale, or conveyance by a holder of the number of shares of Common Stock
that might have been purchased upon exercise of such Warrant immediately prior
to such reclassification, capital reorganization, or other change,
consolidation, merger, sale, or conveyance. Any such provision shall include
provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger, or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities, or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations under this Agreement. The
foregoing provisions shall similarly apply to successive reclassification,
capital reorganizations, and other changes of outstanding shares of Common Stock
and to successive consolidations, mergers, sales, or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder, and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefore were expressed in the Warrant Certificates
when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such certificate with the Warrant Agent and cause a brief summary thereof
to be sent by ordinary first class mail to each registered holder of Warrants at
his last address as it shall appear on the registry books of the Warrant Agent.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of
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<PAGE>
the Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock outstanding at any given
time shall include shares of Common Stock owned or held by or for the account of
the Company and the sale or issuance of such treasury shares or the distribution
of any such treasury shares shall not be considered a Change of Shares for
purposes of said sections.
(ii) No adjustment of the Purchase Price shall be made unless
such adjustment would require an increase or decrease of at least $.10 in such
price; provided that any adjustments which by reason of this subsection (ii) are
not required to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $.10 in the Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash of any
rights or warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or any securities convertible into or exchangeable for Common
Stock without the payment of any further consideration other than cash, if any
(such convertible or exchangeable securities being herein called "Convertible
Securities"), or (2) the issuance by the Company, without the receipt by the
Company of any consideration therefor, of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, in each case, if (and only if) the consideration payable to the
Company upon the exercise of such rights, warrants, or options shall consist of
cash, whether or not such rights, warrants, or options, or the right to convert
or exchange such Convertible Securities, are immediately exercisable, and the
price per share for which Common Stock is issuable upon the exercise of such
rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants,
or options, plus the consideration received by the Company for the issuance or
sale of such rights, warrants, or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants, or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of such
rights, warrants, or options) is less than the Market Price of the Common Stock
on the date of the issuance or sale of such rights, warrants, or options, then
the total maximum number of shares of Common Stock issuable upon the exercise of
such rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such rights,
warrants, or options) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
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<PAGE>
(iv) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, if the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company for the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market value or
the Common Stock on the date of the sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(v) In case the Company shall modify the rights of conversion,
exchange, or exercise of any of the securities referred to in subsection (iii)
above or any other securities of the Company convertible, exchangeable, or
exercisable for shares of Common Stock, for any reason other than an event that
would require adjustment to prevent dilution, so that the consideration per
share received by the Company after such modification is less than the Market
Price on the date prior to such modification, the Purchase Price to be in effect
after such modification shall be determined by multiplying the Purchase Price in
effect immediately prior to such event by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding multiplied by the
market price on the date prior to the modification plus the number of shares of
Common Stock which the aggregate consideration receivable by the Company for the
securities affected by the modification would purchase at the Market Price and
of which the denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares of Common Stock to be issued
upon conversion, exchange, or exercise of the modified securities at the
modified rate. Such adjustment shall become effective as of the date upon which
such modification shall take effect.
(vi) On the expiration of any such right, warrant, or option or
the termination of any such right to convert or exchange any such Convertible
Securities, the Purchase Price then in effect hereunder shall forthwith be
readjusted to such Purchase Price as would have obtained (a) had the adjustments
made upon the issuance or sale of such rights, warrants, options, or Convertible
Securities been made upon the basis of the issuance of only the number of shares
of Common Stock theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants, or options or
upon the conversion or exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price as adjusted under
clause (a) for all transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such rights, warrants,
options, or Convertible Securities.
(vii) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or purchase,
or any options for the purchase of, Common Stock or Convertible Securities, the
consideration received by the Company therefore shall be deemed to be the gross
sales price therefor without deducting therefrom any expense paid or incurred by
11
<PAGE>
the Company or any underwriting discounts or commissions or concessions paid or
allowed by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
(i) upon the sale or exercise of the Warrants, including without
limitation the sale or exercise of any of the Warrants comprising the Purchase
Option; or
(ii) upon the sale of any shares of Common Stock in the Company's
initial public offering, including, without limitation, shares sold upon the
exercise of any over-allotment option granted to the Underwriters in connection
with such offering; or
(iii) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants, or options were outstanding on
the date of the original sale of the Warrants or were thereafter issued or sold;
or
(iv) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in the
Purchase Price was made or required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible Securities were
outstanding on the date of the original sale of the Warrants or were thereafter
issued or sold; or
(v) upon the issuance or sale of Common Stock or Convertible
Securities in a private placement unless the issuance or sale price is less than
85% of the Market Price of the Common Stock on the date of issuance, in which
case the adjustment shall only be for the difference between 85% of the Market
Price and the issue or sale price; or
(vi) upon the issuance or sale of Common Stock or Convertible
Securities to shareholders of any corporation which merges into the Company or
from which the Company acquires assets and some or all of the consideration
consists of equity securities of the Company, in proportion to their stock
holdings of such corporation immediately prior to the acquisition but only if no
adjustment is required pursuant to any other provision of this Section 9.
(h) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to this Section 9, or as to the
amount of any such adjustment, if required, shall be binding upon the holders of
the Warrants and the Company if made in good faith by the Board of Directors of
the Company.
(i) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
12
<PAGE>
exchangeable for or carrying a right, warrant, or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants, or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants, or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this section 9(i), that
exercise of warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ Quotation System, the current value shall be the last
reported sale price of the Common Stock on such exchange on the last business
day prior to the date of exercise of this Warrant or if no such sale is made on
such day, the average of the closing bid and asked prices for such day on such
exchange; or
(ii) If the Common Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of this Warrant; or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
11. Warrant Holders Not Deemed Stockholders. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, or conveyance or otherwise), or to receive
notice
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<PAGE>
of meetings, or to receive dividends or subscription rights, until such Holder
shall have exercised such Warrants and been issued shares of Common Stock in
accordance with the provisions hereof.
12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.
13. Agreement of Warrant Holders. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a warrant that:
(a) The warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the holder and as the
absolute, true, and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
14. Cancellation of Warrant Certificates. If the Company shall purchase
or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel
Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, splitup, combination, or exchange.
15. Concerning the Warrant Agent. (a) The Warrant Agent acts hereunder
as agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value, or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
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<PAGE>
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered, or omitted by it in reliance on any warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own gross negligence or wilful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction,
order, or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, President, any Vice President, its
Secretary, or Assistant Secretary, (unless other evidence in respect thereof is
herein specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order, or demand believed by it to
be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses, and liabilities, including
judgments, costs, and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses, and liabilities arising as a result of the Warrant Agent's gross
negligence or wilful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from ail further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own negligence or wilful misconduct), after
giving 60 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or any
inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties, and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act, or deed; but if for any reason
it shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act, or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
15
<PAGE>
shall file notice thereof with the resigning warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any
of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
16. Modification of Agreement. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified, supplemented, or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than 50% of the Warrants
then outstanding; and provided, further, that no change in the number or nature
of the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
17. Notices. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Registered Holder of a Warrant Certificate, at the address of
such holder as shown on the registry books maintained by the Warrant Agent; if
to the Company, ____________________________________, Attention: President, with
a copy sent to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401 Walnut
Street, Philadelphia, Pennsylvania 19102, Attention: Michael C. Forman, Esq. or
at such other address as may have been furnished to the Warrant Agent in writing
by the Company; and if to the Warrant Agent, at its Corporate office.
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<PAGE>
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, without reference to
principles of conflict of laws.
19. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and, the Warrant Agent and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy, or claim, in equity or at law,
or to impose upon any other person any duty, liability, or obligation.
20. Termination. This Agreement shall terminate at the close of
business on the Warrant Expiration Date of all the Warrants or such earlier date
upon which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
AVIATION HOLDINGS GROUP, INC.
By:__________________________
Joseph Nelson, President
STOCKTRANS, INC.
By:__________________________
Authorized Officer
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EXHIBIT A
[Form of Warrant]
<PAGE>
Exhibit 4.4
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT, dated as of ___________, 1999, between AVIATION
HOLDINGS GROUP, INC., a Florida corporation (the "Company"), and
___________________________, a national banking association, as Depositary (the
"Depositary").
WHEREAS, the Company proposes to issue up to ________ units (the
"Units"), each Unit consisting of two shares of the Company's Common Stock,
$.0001 par value (the "Stock"), and one warrant (a "Warrant"), each such Warrant
entitling the holder thereof to purchase one share of such Common Stock, to be
issued pursuant to the Warrant Agreement (the "Warrant Agreement") dated as of
_____________, 1999, between the Company and __________________, as Warrant
Agent (the "Warrant Agent"), all in accordance with the Underwriting Agreement,
dated __________, 1999, between the Company and the Underwriter named therein;
WHEREAS, in furtherance of said Underwriting Agreement, the Company
proposes to deposit with the Depositary concurrently with the sale of the Units
a temporary global certificate or certificates evidencing the Warrants (each a
"Global Warrant Certificate");
WHEREAS, the Stock and the Warrants constituting each Unit will not be
separately transferable prior to the close of business on _______________, 1999
(the "Distribution Date"), and thereafter such Stock and Warrants may be
transferred separately; and
WHEREAS, prior to the close of business on the Distribution Date, the
beneficial ownership of the Stock and the Warrants will be evidenced by the
certificates for the Stock and transfer of the Stock and the Warrants may be
effected only by and in connection with transfers of the Stock.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, and in order to set forth the terms under which the
Global Warrant Certificate will be held and dealt with by the Depositary and its
successors, it is hereby mutually agreed that:
SECTION 1. The Company, simultaneously with the issuance, sale and
delivery of the Units, shall deliver to the Depositary the Global Warrant
Certificate or Certificates evidencing the Warrants included in the Units so
issued, sold and delivered. Each Global Warrant certificate shall be
substantially in the form of the definitive Warrant Certificates set forth in
the Warrant Agreement, but with such omissions, insertions and variations as may
be appropriate for a temporary global warrant certificate, all as may be
determined by the Company and _____________________________ (the
"Representative"). In addition, each Global Warrant Certificate shall contain
substantially the following provision:
"Subject to the terms of a Deposit Agreement, dated as of
______________, 1999, between the Company and
_____________________, as Depositary (the "Depositary"), and
upon the termination thereof, the Company hereby undertakes to
the
<PAGE>
holder hereof to exchange this Global Warrant Certificate for
definitive Warrant Certificates registered in the names of
persons or entities on the Holder List (as defined in the
Deposit Agreement), all in accordance with the terms of the
Deposit Agreement."
Each Global Warrant Certificate so delivered by the Company to the Depositary
will be held by the Depositary upon and subject to the terms of this Agreement,
for the ratable and proportionate benefit of the holders of the Stock (the
"Holders"), as beneficial owners thereof. Each Holder during the term of this
Agreement whose Stock carries the endorsements set forth in Section 2 hereof
will be the beneficial owner of one Warrant, each such Warrant entitling the
holder thereof to purchase one share of Common Stock, $.0001 par value, of the
Company, subject to the provisions of the Warrant Agreement, for every two
shares of Stock held by such Holder. Each Global Warrant Certificate may be held
either in the name of the Depositary or in the name of the nominee thereof as
the Depositary shall request.
SECTION 2. There shall be printed on the Stock to be originally issued
and upon all Stock issued on transfers, exchanges or substitutions thereof prior
to the date of the termination of this Agreement endorsements in substantially
the following form:
[ENDORSEMENT TO APPEAR ON FACE OF STOCK CERTIFICATE]
"Prior to ____________________, 1999, (the
"Distribution Date"), this certificate shall evidence unit(s)
consisting of common share(s) and warrant(s) which share(s)
and warrant(s) may not be transferred separately prior to the
Distribution Date. See reverse for additional terms relating
to such unit(s)."
[ENDORSEMENT TO APPEAR ON REVERSE OF STOCK
CERTIFICATE]
"ENDORSEMENT WITH RESPECT TO DEPOSIT OF
CERTIFICATES FOR WARRANTS"
Under the terms of a Deposit Agreement, dated as of
__________, 1999, between the Company and
____________________, as Depositary (the "Depositary"), and
until the termination thereof (which termination shall occur
on the Distribution Date as defined on the face hereof), the
registered holder of shares of Common Stock on which this
legend is endorsed is the beneficial owner of one Warrant for
every two such shares of common stock held, a certificate for
which Warrant has been deposited with and is held by the
Depositary. Prior to the termination of the Deposit Agreement
such beneficial ownership is transferable only by the transfer
of two such shares of
<PAGE>
Stock on the Common Stock Register of the Company. The
certificates for the Warrants deposited under the Deposit
Agreement will be mailed by insured first-class mail to the
registered holders of Stock at the close of business on the
Distribution Date, at his address as shown on the Common Stock
Register of the Company. No holder of these shares of Stock
who is not the registered holder thereof at the close of
business on such date will be entitled to receive any Warrants
by virtue of this endorsement.
By accepting Stock bearing this endorsement, each holder of
these shares of Stock shall be bound by all the terms and
provisions of the Deposit Agreement (a copy of which is
available upon request to the Company or the Depositary) as
fully and effectively as if he had signed the same."
Until termination of this Agreement, the beneficial interest of each
such Holder in the Global Warrant Certificate held by the Depositary hereunder
shall not be transferable separately, but only by and in connection with the
transfer of the Stock evidencing such interest; and every sale or transfer by
any present or future Holder of a share of Stock bearing the endorsement set
forth shall include the proportionate beneficial interest of such Holder in the
Global Warrant Certificate then held by the Depositary hereunder. By accepting
shares of Stock bearing said endorsement, each Holder, present or future, and
his assigns shall be bound by all of the terms and provisions of this Agreement
as fully and effectually as if he had signed the same.
SECTION 3. This Agreement shall terminate on __________________, 1999
(the "Distribution Date"). As promptly as practicable after the Distribution
Date, the Company shall notify the Holders of such Distribution Date and shall
cause notice of such Distribution Date to be published in a leading newspaper of
general circulation in the financial community in New York City. As promptly as
practicable after the Distribution Date, the Company shall cause the registrar
and transfer agent of the Company's Common Stock to deliver to the Warrant Agent
with a copy to the Depositary a list (the "Holder List") as of the close of
business on the Distribution Date containing the names and addresses of, and
number of shares of Stock held by, each of the Holders of the Stock. Promptly
after it has received notice of such delivery, the Depositary shall deliver the
Global Warrant Certificate, duly endorsed by the Depositary, to the Warrant
Agent with a direction that such certificate be exchanged for warrant
certificates registered in the names of persons or entities on the Holder List
(the "Warrant Certificates") in the amounts required by Section I hereof and the
Depositary will mail or cause to be mailed the Warrant Certificates to such
persons and entities. The Global Warrant, when mailed or delivered to the
Warrant Agent, shall be fully covered by the blanket insurance carried by the
Depository, in connection with the delivery of securities.
SECTION 4. The recitals and statements contained herein shall be taken
as the statements of the Company, and the Depositary assumes no responsibility
for the correctness of the same. The Company shall pay to the Depositary from
time to time such reasonable compensation for its
<PAGE>
services as may be agreed on between it and the Depositary and shall reimburse
the Depositary for all reasonable costs and expenses incurred by it hereunder.
The Depositary may consult with legal counsel (who may be counsel to the
Company) and shall not be liable for any action taken, omitted or suffered by it
in good faith in accordance with the written advice or opinion of such counsel.
The Depositary may rely and shall be protected in acting upon any request,
certificate, opinion of counsel, statement, instrument, report, notice or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties. The Company shall and does, insofar as
may be permitted by law, hereby also indemnify and hold the Depositary harmless
from all liability hereunder, except as a result of the Depositary's bad faith
or negligence. The Holders shall not be liable for any expenses or compensation
of the Depositary and no charge shall be made for such compensation against the
Global Warrant Certificate or the Warrant Certificates. The Depositary shall
only be responsible for the duties and obligations specifically set forth herein
and shall have no responsibility for the accuracy or completeness of the Holder
List. The provisions of this Section 4 and of Sections 3 and 8 hereof shall
survive the termination of this Agreement.
SECTION 5. The Company will pay or cause to be paid the stamp taxes or
other governmental charges, if any, payable upon the transfer and deposit
hereunder of the Global Warrant Certificate and also the stamp taxes or other
governmental charges, if any, payable on termination of this Agreement on the
delivery of the Warrant Certificates to the registered Holders of Stock bearing
the endorsement referred to above. Any stamp taxes or other governmental charges
arising by reason of the transfer by a Holder of the beneficial ownership of the
Warrant Certificates shall be borne by such Holder.
SECTION 6. Any notice pursuant to this Agreement to be given by the
Depositary to the Company shall be sufficiently given if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Depositary) to the Company as follows:
[To Be Provided.]
Attn:__________________
Any notice pursuant to this Agreement to be given by the Company to the
Depositary shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Depositary
with the Company) to the Depositary as follows:
[To Be Provided.]
Attn:__________________
Any notice pursuant to this Agreement to be given by the Company or the
Depositary to any Holder shall be sufficiently given if sent by first-class
mail, postage prepaid, to the address specified for such Holder in the Warrant
Register.
SECTION 7. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of ___________________.
<PAGE>
SECTION 8. Nothing in this Agreement shall be construed to give to any
person or corporation, other than the Company, the Depositary and the Holders
who are the beneficial owners of the Global Warrant Certificate deposited
hereunder, any legal or equitable right, remedy or claim under this Agreement,
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Depositary and such Holders.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
AVIATION HOLDINGS GROUP, INC.
By:__________________________
Name:
Title:
[SEAL]
ATTEST:
By:__________________________
Secretary
__________________________
By:__________________________
Name:
Title:
[SEAL]
ATTEST:
By:__________________________
Secretary
<PAGE>
Exhibit 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into and effective this 11th day
of June, 1999, by and between Aviation Holdings International, Inc., a Florida
corporation (the "Company") and Joseph Janusz ("Employee").
W I T N E S S E T H
WHEREAS, the Company desires to enter into an agreement providing for
the Employee's employment as Chief Financial Officer;
WHEREAS, the Employee is willing to be employed by the Company for two
(2) years;
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein, the parties agree as follows:
1.) The Company will employ Employee and Employee will serve the
Company as Chief Financial Officer for a period of two (2) years
(the "Employment Period").
2.) Employee will devote his best efforts and attention to the affairs
of the Company with emphasis in the following areas:
(a) more accurate and timely reporting of the Company's financial
condition and results of operations;
(b) improvement in employee relations within those departments
which report to him and throughout the corporation and its
affiliates;
(c) improving efficiencies as regards the various accounting
functions (inventory reporting, accounts receivable and
accounts payable management).
3.) (a) As Compensation hereunder, the Company will pay, and Employee
will accept:
(i) Base Compensation of $89,500.00 per annum for the period of
employment from the date hereof through the second anniversary
hereof, payable biweekly, with such upward adjustments as may
from time to time is granted/ At the end of each Employment
Year, Employee and Employer shall negotiate in good faith any
increase in Basic Compensation as may be appropriate for the
next Employment Year.
<PAGE>
(ii) Such bonus, supplemental or incentive compensation and
health, disability or other payment or benefits as are
consistent with the Company's then current policies.
(iii) Such discretionary expenses as are necessary for his
performance of this agreement and for the benefit of the
Company, subject to the submission and approval of written
statements in accordance with the Company's standard policies
as in effect from time to time.
(b) Employee will be entitled to two (2) weeks of paid vacation per
year.
(c) Employee will participate in Aviation Holdings Group, Inc.
Stock Option Plan. All 55,000 stock options granted to the
Employee by Aviation Holdings Group, Inc., which replaced the
same number of options granted under the predecessor plan of
Aviation Holdings International, Inc., shall expire five (5)
years from the date hereof.
4.) The Company hereunder may terminate employee's employment at any
time for "cause" or "disability" as defined herein. "Cause" shall
mean conviction of a felony relating to the business of the
Company, or act of dishonesty either involving Employee's
employment or harmful to Employer or other employees, including
fraud, misappropriation, embezzlement or the like or the
misfeasance, malfeasance or non- feasance of Employee in carrying
out the duties of Employee's employment with Employer, not cured
within thirty (30) days prior notice. "Disability" shall mean a
physical condition of employee which renders him unable to perform
his duties for the Company for a period of six months or longer, as
confirmed in writing by Employee's independent physician,
Employee's employment hereunder will terminate upon Employee's
attainment of age 65 of upon the death of Employee. Upon any such
termination of employment for cause, disability, attainment of age
65 or because of death, the Company will have no further
obligations hereunder.
(a) Upon termination of employee's employment hereunder at the end
of the Term or because of the death or permanent disability of
Employee, Employee or in the event of his death or his mental
incapacity his personal representative, shall be paid his Basic
Compensation hereunder, prorated through the date of
termination. In addition, if termination of this Agreement is
due to the death of the Employee, his estate shall be entitled
to the payment of the Employee's Basic Compensation for six (6)
months after the date of Employee's death.
(b) In the event that employee incurs a disability of either a
physical or mental character which, in the opinion of a
physician selected by the employer, which physician shall be
approved by Employee (which approval shall not be unreasonably
withheld), renders him disabled from performing the usual and
<PAGE>
customary duties to be rendered hereunder or heretofore
rendered by Employee, he shall receive his full Basic
Compensation for the first six (6) months or any part thereof
of continuous disability.
(c) Upon termination of Employee's employment hereunder, for
reasons not for cause, death, permanent disability, his
voluntary leaving or the expiration of the Term hereof, such
reasons to include, without limitation, the dismissal of the
Employee by Employer for reasons not for cause, or the
dissolution of the Employer, Employee shall be entitled to
receive his Basic Compensation for twelve (12) months payable
no less often than semi-monthly following Termination of
Employee's employment under this Employment Agreement
immediately above ("Severance"), prorated, annualized and
calculated through the date of termination.
5.) Any dispute or controversy arising under or in connection with this
agreement will be settled by arbitration, conducted before a panel
of three arbitrators in Miami, Florida, in accordance with the
rules of the American Arbitration Association then in effect. The
arbitrators must be approved by both the Company and the Employee
and their decision will be binding on the parties and conclusive
for all purposes. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. The expense of such arbitration
will be borne by the Company.
6.) The Company will defend any action in which Employee is named
defendant and to which Employee certified to the Company that the
claim resulted from his acting either as directed by the Company or
in the interest of the Company or any corporation, person or other
entity affiliated with the Company.
7.) the Company will promptly require any successor (whether direct or
indirect, to purchase, merger, consolidation, change of control or
otherwise) to all or substantially all of the business or assets of
the Company, by agreement in form and substance satisfactory to
Employee expressly, absolutely, and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform in no such
succession had taken place.
As used herein, "the Company" includes any successor to all or
substantially all of the Company's business or assets which
executes and delivers an agreement provided for in this Section 7
or which otherwise becomes bound by all the terms and provisions of
this Agreement by law.
8.) Any termination of Employee's employment by the Company will be
communicated to Employee at the address set forth below (or such
other address as Employee shall have notified the Company of in
writing for purposes of this Agreement) in a written
<PAGE>
notice and, will specify a termination date no sooner than 30 days
after giving such notice.
9.) Employee represents and warrants to the Company that he is under
no contractual or other restrictions which is inconsistent with
his execution of this Agreement, the performance by him of his
duties hereunder, or with the rights of the Company hereunder.
10.) Employee further agrees that he is being employed by the Company
in a position of trust and responsibility and as a member of
senior management and in consideration thereof, not to take
advantage of or disclose any trade secrets, proprietary, or
confidential information not generally known to the public until
June 11, 2003.
11.) It is the desire and the intent of the parties that the terms and
conditions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, if any
particular term or condition of this Agreement is adjudicated or
becomes by operation of law invalid or unenforceable, the
Agreement will be deemed amended to delete therefrom such term or
condition to the extent necessary to preserve its validity and
enforceability, and the remainder of this Agreement will remain in
full force and effect. A deletion resulting from adjudication will
apply only with respect to the operation of that term or,
condition in the particular jurisdiction in which such
adjudication is made.
12.) Except as otherwise specifically provided herein, Employee's
entitlement to benefits hereunder will not be governed by any duty
to mitigate his damages by seeking further employment nor offset
by any compensation which he may receive from future employment.
13.) No right, benefit, or interest hereunder will be subject to
assignment, anticipation, alienation, sale, encumbrances, charge,
pledge hypothecation or set-off in respect to any claim, debt r
obligation, or to execution, attachment, levy or similar process;
provided, however, that Employee may assign any right, benefit or
interest hereunder if such assignment is permitted under the terms
of any plan or policy of insurance or annuity contract governing
such right, benefit or interest.
14.) This Agreement constitutes the full and complete understanding and
agreement of the parties with respect to the subject matter hereof
and may not be changed or terminated orally.
15.) This Agreement will be governed by and construed in accordance
with the laws of the Sate of Florida, without giving effect to the
Florida conflict of law principles.
<PAGE>
16.) Each notice or communication required or permitted to be given
hereunder will be in writing and will be delivered or mailed by
air or express mail to the address of the Company, or of Employee,
as the case may be, set forth below (or such other address as any
of them may specify as its address by written notice to the
other):
If to the Company:
.
Aviation Holdings International, Inc.
15675 N.W. 15th Avenue
Miami, Florida 33169
If to the Employee:
Joseph Janusz
P.O. Box 4652
Miami Lakes, Florida 33014
17.) This Agreement may be executed in one or more counterpart copies,
each of which will be deemed an original and will become effective
when one or more counterparts shall have been signed by each of
the parties hereto and delivered to the other party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
AVIATION HOLDINGS INTERNATIONAL, INC.
By: /s/ Joseph J. Nelson
-------------------------------
Joseph J. Nelson
President & C.E.O.
Date: 6/11/99
EMPLOYEE
By: /s/ Joseph Janusz
-------------------------------
Joseph Janusz
Date: 6/11/99
<PAGE>
Exhibit 10.25
MODIFICATION OF EMPLOYMENT AGREEMENT
FOR SIMON CHIANG
This modification of employment agreement referring to employment
agreement dated 12th day of February 1998 is made and entered into this 6th day
of August 199 and effective August 1, 1999 by and between Simon Chiang
("employee"), and Aviation Holdings International, Inc. fka (Jet Aviation
Trading, Inc.) a Florida Corporation.
WITNESSETH:
The parties agree as follows:
1. Basic Compensation shall be adjusted to $131,000 per annum as basic
compensation for all services rendered by the employee, but in no
event less frequently than semi-monthly.
2. Employee will hold the title of Executive Vice President of both
Aviation Holdings Group, Inc. and Aviation Holdings International,
Inc.
Employer
Attest: Aviation Holdings, International, Inc.
Fka (Jet Aviation Trading, Inc.)
By: /s/ Joseph Janusz By:/s/ Joseph J. Nelson
------------------------------ -----------------------------------
Joseph J. Nelson
President & C.E.O.
Witnesses:
- ---------------------------------- /s/ Simon Chiang
-----------------------------------
Simon Chiang
- ----------------------------------
<PAGE>
Exhibit 11
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- --------------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Loss $ (57,437) $(1,384,780) $(1,135,175) $ (160,868)
Basic and Diluted weighted
average common shares
outstanding 1,046,235 3,035,856 2,610,511 3,854,092
----------- ----------- ----------- -----------
Basic and Diluted Loss Per
Share $ (0.06) $ (0.46) $ (0.43) $ (0.04)
=========== =========== =========== ===========
</TABLE>
This table has been prepared using Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" for all applicable periods presented.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and the use
of our report dated June 22, 1999, in the Registration Statement and related
Prospectus of Aviation Holdings Group, Inc. for the registration of 750,000
units, each unit consisting of two shares of Common Stock and one Class A
Warrant.
----------------------------
LJ SOLDINGER ASSOCIATES
Arlington Heights, Illinois
July 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 363,690 581,991
<SECURITIES> 0 0
<RECEIVABLES> 3,162,545 3,513,403
<ALLOWANCES> (320,000) (350,000)
<INVENTORY> 3,220,062 3,240,960
<CURRENT-ASSETS> 6,546,446 8,085,700
<PP&E> 375,240 411,433
<DEPRECIATION> (72,119) (109,594)
<TOTAL-ASSETS> 8,763,366 10,306,267
<CURRENT-LIABILITIES> 5,174,661 5,929,640
<BONDS> 13,124 11,264
0 0
0 0
<COMMON> 347 420
<OTHER-SE> 2,388,370 4,019,552
<TOTAL-LIABILITY-AND-EQUITY> 8,763,366 10,306,267
<SALES> 8,365,197 6,371,942
<TOTAL-REVENUES> 8,365,197 6,371,942
<CGS> 5,839,049 4,253,559
<TOTAL-COSTS> 5,839,049 4,253,559
<OTHER-EXPENSES> 3,015,842 1,742,732
<LOSS-PROVISION> 672,969 30,000
<INTEREST-EXPENSE> 96,044 449,305
<INCOME-PRETAX> (1,194,215) (68,511)
<INCOME-TAX> 186,863 49,000
<INCOME-CONTINUING> (1,384,780) (160,868)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,384,780) (160,868)
<EPS-BASIC> (0.46) (0.04)
<EPS-DILUTED> (0.46) (0.04)
</TABLE>
