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As filed with the Securities and Exchange Commission on October 22, 1999
Registration No. 333-75169
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
AMENDMENT NO. 4
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)
</TABLE>
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:
Lawrence D. Rovin, Esq.
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
(215) 568-6060
-----------------------------------
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
==========================================================================================================================
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 __ __ __
Common stock, $.0001
par value, issuable upon
exercise of Class A Warrants 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 OCTOBER 22, 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 $2.75. 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 $5.50.
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.
M.S. Farrell & Co., Inc., 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.
Investing in units involves certain risks. See "Risk Factors" on pages
3 to 6.
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.
M.S. FARRELL & CO., INC.
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 Will 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 .........................................................................................................7
USE OF PROCEEDS...................................................................................................8
MARKET PRICE OF THE COMMON STOCK..................................................................................8
DIVIDEND POLICY ..................................................................................................9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................10
BUSINESS ........................................................................................................17
MANAGEMENT.......................................................................................................25
PRINCIPAL STOCKHOLDERS...........................................................................................29
CERTAIN TRANSACTIONS.............................................................................................30
DESCRIPTION OF SECURITIES........................................................................................33
UNDERWRITING.....................................................................................................35
LEGAL MATTERS....................................................................................................36
EXPERTS ........................................................................................................36
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PROSPECTUS SUMMARY
Aviation Holdings Group
Aviation Holdings Group is a holding company and currently has no
operations other than ownership of 96% of the outstanding capital stock of
Aviation Holdings International. 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 .......................4,219,315 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 .......................................5,719,315 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."
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<PAGE>
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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
----------------- ------------------
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
M.S. Farrell & Co., Inc. 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, although it would not impair
current operations. We anticipate that this offering will generate net proceeds
of approximately $3,230,000. We believe that revenues from operations and net
proceeds from the offering will be sufficient to fund our operational
requirements for at least eighteen months and that the net proceeds from the
offering also 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
November 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 Will Be Subject To Certain Limitations Upon
Trading Activities
Trading of our securities will be subject to material limitations, at
least initially, 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 $5.50 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
- -----------
(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 4.50 0.51 33,194
</TABLE>
Records of our stock transfer agent indicate that as of September 30,
1999, there were 74 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. In addition, we obtained an extension of the
maturity date of $250,000 borrowed during 1998 from the John G. Jacobs Trust and
Nancy Plotkin. These loans were extended rather than repaid in order to conserve
working capital to support operations. 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 is a holding company and currently has no
operations other than the ownership of 96% of the outstanding capital stock of
Aviation Holdings International. 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 September 30, 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 Group and
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 Group since September 1999 and 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. 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 September 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. We do not know who beneficially owns the
shares held by Argaman, and representatives of Argaman have refused
to provide that information to us.
(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. In connection with these transactions, Aviation Holdings
International paid certain amounts on behalf of the acquired companies for which
Mr. Chiang agreed to be liable in the aggregate amount of $133,707 as of June
30, 1999, which amounts Mr. Chiang has agreed to repay prior to December 31,
1999. 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. In September 1999, the note holders agreed to extend the maturity date of
these promissory notes to October 17, 1999 upon issuance of 4,000 shares of
common stock to Nancy Plotkin and 1,000 shares of common stock to the John G.
Jacobs Trust. In October 1999, the noteholders agreed to extend the maturity
date of these promissory notes to November 17, 1999 upon prepayment of interest
on the notes through the end of the extension.
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 $2.75 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 $5.50 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
M.S. Farrell & Co., Inc. 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.
On September 17, 1999, the maturity date of the $250,000 notes was extended
to October 17, 1999. In consideration for the extension, the Company issued
5,000 shares of its common stock to the noteholders.
On October 14, 1999, the maturity date of the $250,000 notes was extended to
November 17, 1999 in consideration for the prepayment of interest on the notes
through the extension date.
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."
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<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 Seidle 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.
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<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
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 19th day of
October, 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 19th day of October, 1999.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
JOSEPH J. NELSON President and Chief Executive October 19, 1999
- ------------------------------------- Officer, Director
Joseph J. Nelson (Principal Executive Officer)
JOSEPH F. JANUSZ Vice President and Chief Financial October 19, 1999
- ------------------------------------ Officer
Joseph F. Janusz (Principal Accounting and
Financial Officer)
SIMON CHIANG* Vice President and Director October 19, 1999
- ------------------------------------
Simon Chiang
MICHAEL J. CIRILLO* Director October 19, 1999
- ------------------------------------
Michael J. Cirillo
THEODORE H. GREGOR* Director October 19, 1999
- ------------------------------------
Theodore H. Gregor
*By JOSEPH J. NELSON October 19, 1999
---------------------------------
Joseph J. Nelson
Attorney-in-fact
</TABLE>
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<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.
/s/ LJ SOLDINGER
----------------------------
LJ SOLDINGER ASSOCIATES
Arlington Heights, Illinois
October 22, 1999
