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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended _____________________
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period _________ from _________
Commission file number 000-30510
AVIATION HOLDINGS GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 22-2545898
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15675 Northwest 15th Avenue, Miami, Florida 33169
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(Address of Principal Executive Offices) (Zip Code)
(305) 624-6700
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock
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(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES NO X
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB
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The Issuer's revenues for its most recent fiscal year were $15,859,271.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 29, 2000 was $4,473,686, based on the average
of the closing bid and asked prices of the Registrant's common stock as reported
by the Nasdaq OTC Bulletin Board.
As of March 30, 2000, the Registrant had outstanding, 4,219,315 shares
of common stock.
Transitional Small Business Disclosure Format (check one).
YES NO X
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Form 10-KSB
INDEX
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Page
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PART I
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Item 1. Description of Business......................................................................... 1
Item 2. Description of Property......................................................................... 9
Risk Factors ................................................................................... 9
Item 3. Legal Proceedings............................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............................................. 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........................................ 11
Item 6. Management's Discussion and Analysis............................................................ 14
Item 7. Financial Statements............................................................................ 18
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................... 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act............................................................. 18
Item 10. Executive Compensation.......................................................................... 21
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................. 24
Item 12. Certain Relationships and Related Transactions.................................................. 25
Item 13. Exhibits List and Reports on Form 8-K........................................................... 26
Index to Financial Statements.............................................................................. F-1
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FORWARD LOOKING STATEMENTS
Some of the statements contained in this report 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;
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.
PART I
Item 1. Description of Business.
General
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. 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.
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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.
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.
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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 on 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 re-used 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.
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.
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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 year ended December 31, 1998 and the year ended December 31,
1999, Aviation Holdings International's total revenues were approximately as
follows:
12/31/98 12/31/99
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83% from inventory sales; 94% from inventory sales;
16% from engine sales; and 5% 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.
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.
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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 1% of our gross revenues on a consolidated
basis for the year ended December 31, 1998 and the year ended December 31, 1999,
respectively. 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 second quarter of
2000.
Pasco-FLA's total financial commitment to the joint venture is
$1,000,000. As of December 31, 1999, Aviation Holdings International had funded
approximately $700,000 of this total and intends to fund the remaining
approximately $300,000 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. Through December 31, 1999, Pasco-FLA has received distributions 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.
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 $349,250
in revenue from Aero-Link.
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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. This credit
facility has been renewed through September 2000. As of February 28, 2000,
Aviation Holdings International had an aggregate availability of approximately
$2,816,096 million and an outstanding balance due to Comerica under the
revolving line of credit of approximately $2,395,000 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
our managerial experience with increased capital and continuing to build upon
our 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 December 31, 1999, we had successfully completed approximately eight bulk
inventory purchases in excess of $100,000. We believe that due to our
experience, we will be able to complete an increased number of larger bulk
purchases.
Purchase and Sale of Jet Turbine Engines and Aircraft
We intend 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.
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Pursue Acquisitions of Complementary Businesses
We intend to 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. Any such
acquisition will require debt or equity financing, which we have not yet
obtained.
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 the reliable and timely delivery of
purchased products. This location also provides access to exceptional import and
export facilities.
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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 year 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 year ended December 31, 1999, the top 10 customers
accounted for approximately 55% of net sales, and one customer, Offshore
Aviation Holdings, Ltd. accounted for 23% 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.
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Employees
As of December 31, 1999, Aviation Holdings Group employed three 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.
Item 2. Description of 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 $2,650 under a one year lease that expires
December 31, 2000. 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.
Risk Factors
An investment in our common stock is very risky. Investors should
carefully consider the following factors in addition to the other information in
this Registration Statement, in evaluating an investment in our common stock.
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 December 31,
1999, Aviation Holdings International had tangible net worth (as defined by
Comerica Bank) of approximately $3,450,000 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 February 28, 2000, the outstanding
balance due to Comerica Bank was $2,395,000.
We Have A Limited Operating History
We have a limited operating history. 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.
We May Fail To Obtain Needed Funding
We intend to sell equity securities and/or incur additional debt in order to
expand our current operations and acquire complementary businesses. If we are
unable to raise this capital it will have an adverse effect on our plans to
expend operations, although it would not impair current operations. We do not
know if additional funds will be available on acceptable terms, if at all.
9
<PAGE>
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 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.
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 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.
10
<PAGE>
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 awards against us. We do not carry product liability insurance and
therefore we would be required to pay any judgment levied against us.
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 December 31,
1999, these excess balances were $403,377 and $413,649, 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.
Item 3. Legal Proceedings.
We are not currently involved in any litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders during the fourth
quarter of 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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."
From August 2, 1999 through December 31, 1999, broker/dealers continued to
submit quotations in the National Quotation Bureau's Pink Sheets. The following
table presents the range of the high and low bid 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, mark-down or commission,
and may not represent actual transactions.
11
<PAGE>
High Low
---- ---
Year Ended December 31, 1998
First Quarter 4.75 3.469
Second Quarter 5.875 3.625
Third Quarter 5.875 4
Fourth Quarter 5 3
Year Ending December 31, 1999
First Quarter 5.25 3
Second Quarter 5.25 4
Third Quarter 4.50 0.51
Fourth Quarter 2.75 0.75
Records of our stock transfer agent indicate that as of March 24, 2000,
there were 75 record holders of our common stock.
Dividend Policy
Neither Aviation Holdings Group nor AHI has paid any cash dividends to
date or anticipates or contemplates paying cash dividends in the foreseeable
future. Under the terms of the Comerica Credit Agreement, AHI is prohibited from
declaring or paying cash dividends without the consent of Comerica Bank.
Management intends to utilize all available funds for the purposes of financing
and developing AHI's business.
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.
12
<PAGE>
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 13
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."
In February and March 2000 we issued $400,000 in face amount of
convertible promissory notes to three investors in consideration of advances
totaling $400,000. Each investor represented, and we determined, that such
investor was an "accredited investor."
Aviation Holdings International
The following sets forth all sales of unregistered securities during
the past three years by Aviation Holdings International or its predecessors:
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.
13
<PAGE>
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.
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 6. Management's Discussion and Analysis.
This Management's Discussion and Analysis should be read in conjunction
with the Company's consolidated financial statements and accompanying notes
starting on page F-1. This annual report 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").
14
<PAGE>
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.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Results of Operations
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International, Inc. 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 for the period May 1998 through
December 31, 1998 only. Our financial statements for the year ended December 31,
1999 include the results for Aviation Holdings International for the entire
year.
Net sales of aircraft and engine spare parts were $15,859,271 for the
year ended December 31, 1999 as compared to $8,365,197 for the year ended
December 31,1998. The increase in net sales of aircraft and engine spare parts
was due to reflecting a full year of Aviation Holdings International operations
in 1999 versus a partial year in 1998. In addition, in 1999, we realized revenue
in the amount of approximately $3.7 million from the sale of a DC-10 30
airframe.
Cost of goods sold was $11,711,084 and our cost of sales percentage was
73.8% for the year ended December 31, 1999. Cost of goods sold was $5,839,049
and our cost of sales percentage was 69.8% for the year ended December 31, 1998.
Our increase in cost of goods sold was due to our reporting of a full year of
Aviation Holdings International operations in 1999 versus only a partial year in
1998. Included in cost of sales for 1999 was approximately $3.3 million for the
cost of the DC-10 30 airframe which resulted in an increase in our cost of sales
of 4.17% for the year. Excluding the airframe sale our cost of sales percentage
for 1999 was 69.7%.
Salary and wage expenses increased to $1,451,056 in the year ended
December 31, 1999 from $1,300,172 in the year ended December 31, 1998, an
increase of $150,884. This increase is primarily the result of our reporting of
a full year of Aviation Holdings International operations in 1999 versus only a
partial year in 1998, which resulted in increased salary and wage expense of
approximately $448,000. The increase of approximately $364,000 was also
partially due to increased salaries and bonuses to our employees resulting from
personnel hired in 1999 and approximately $84,000 of compensation expense we
recorded for options issued to our employees in 1999, offset by $380,328 of
nonrecurring noncash compensation expense for common stock and options to
purchase common stock granted to the President of our Company in 1998.
General and administrative expenses increased to $2,091,439 in the year
ended December 31, 1999 from $1,771,560 in the year ended December 31, 1998, an
increase of $319,879. The increase is primarily the result of our reporting of a
full year of Aviation Holdings International operations in 1999 versus only a
partial year in 1998, which resulted in an increase in general and
administrative expense of approximately $979,000. This increase was offset by a
reduction of bad debt expense of approximately $630,000 we recorded in 1998 on a
promissory note due the Company from Environmental Waste Solutions, Inc. The
promissory note was sold by the Company in 1999.
15
<PAGE>
Professional fees were $256,560 in the year ended December 31, 1999 and
$617,099 in the year ended December 31, 1998. We incurred additional accounting
and legal expenses related to our efforts to acquire businesses in the year
ended December 31, 1998 which were not consummated with the exception of the
acquisition our controlling interest in Aviation Holdings International.
Interest expense was $644,073 in the year ended December 31, 1999 and
$96,044 in the year ended December 31, 1998. This increase was due to additional
borrowings from Comerica bank by Aviation Holdings International and
stockholders and amortization of a $393,849 discount on the notes payable to the
John G. Jacobs Trust and Nancy Plotkin.
Interest income was $27,272 in the year ended December 31, 1999 and
$72,825 in the year ended December 31, 1998. We stopped recording interest on
the Environmental Waste Solutions note receivable in July 1998, after the note
was in default and no interest was recorded on this note in 1999.
Income from the Synor-A joint venture was $21,774 in the year ended
December 31, 1999 compared to a loss of $8,313 in the year ended December 31,
1998. We expect increased income starting in the third quarter of 2000 and
forward once Synor-A completes its FAA certification.
Income tax benefit was $40,259 in the year ended December 31, 1999 and
income tax expense was $186,863 in the year ended December 31, 1998. The benefit
in 1999 is primarily the result of our filing amended tax returns for Aviation
Holdings International in 1999 for the 1998 tax year offset by taxes due from
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 are
able to offset the earnings of Aviation Holdings International against our
losses. At December 31, 1999 and December 31, 1998, we have recorded a valuation
allowance against the income tax benefits that would have been generated by our
losses incurred for the years ended December 31, 1999 and December 31, 1998,
respectively.
Minority interest was $44,907 in the year ended December 31,1999 and
$3,702 in the year ended December 31, 1998. The increase is the result of
increased profitability of Aviation Holdings International offset by our
increased ownership percentage in 1999.
As a result of the foregoing, our net loss was $250,543 for the year
ended December 31, 1999, which was a decrease from a net loss of $1,384,780 for
the year ended December 31, 1998. Basic and diluted loss per common share
decreased from $.46 for the year ended December 31, 1998 to $.06 for the year
ended December 31, 1999.
Liquidity and Capital Resources
As of December 31, 1999 our principal source of liquidity included cash
and cash equivalents of $426,688, compared with cash and cash equivalents of
$363,690 as of December 31, 1998. As of December 31, 1999, total outstanding
debt was $2,157,588 compared to $1,665,081 as of December 31, 1998. Aviation
Holdings International obtained a revolving working capital line of credit from
Comerica Bank in August 1998. At December 31, 1999, the amount of principal owed
to the bank was $2,125,000. 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 December 31, 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.
16
<PAGE>
Cash used in operations for 1999 and 1998 was $159,053 and $1,828,124.
The decrease in cash used in operations in 1999 was a result of a reduction in
net losses and smaller increases in operating assets over 1998 levels. Cash used
in operations in 1998 was a result of an operating loss and significant
increases in operating assets over 1997 levels.
Cash used in investing activities for the year ended December 31, 1999
was $278,541 compared to $97,007 of cash used for investing activities in the
year ended December 31, 1998. Cash used in the year ended December 31, 1999 was
related primarily to the purchases of equipment of $80,342 and additional
investment in SYNOR-A Joint Venture of $200,000. Cash used for the year ended
December 31, 1998 was for funds we advanced under the Environmental Waste
Solutions credit facility of $535,100, purchases of equipment of $88,198 and
additional investment in SYNOR-A Joint Venture of $300,000, which was offset by
the cash acquired in the acquisition of the controlling interest in Aviation
Holdings International of $830,331.
Cash provided by financing activities for the year ended December 31,
1999 was $500,592 compared to $2,286,646 for the year ended December 31, 1998.
The primary sources of cash provided from the year ended December 31, 1999
related to $625,000 borrowed on the bank line of credit, proceeds received from
the sale of securities, net of offering costs paid, in the amount of $265,000,
proceeds from EWS note of 43,880, partially offset by repayments of the
short-term borrowings of $250,000, deferred offering costs of $100,882 and
advances to stockholders of $76,528. The source of cash provided from the year
ended December 31, 1998 was $1,500,000 borrowed on the bank line of credit,
$250,000 of short-term borrowings, and advances from stockholders, net of
repayments, of $550,284.
We believe that existing cash balances and the credit agreement with
Comerica will be sufficient to meet the capital requirements of our current
business for the next twelve months. We expect to offer our common stock in an
initial public offering in the second quarter of 2000 and we expect to raise
approximately $4 million in gross proceeds which we will use to pay down debt
and to acquire additional inventory. We will, however, require additional equity
or debt financing in order to implement our expansion plans and, in particular,
the expansion of our business into 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.
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
We have not experienced any material business interruptions or supplier delays
from Year 2000 computer issues to date and have not discovered any Year 2000
problems in internal computer systems material to our operations. However, the
failure of our internal systems or those of any of our customers, vendors,
suppliers or service providers could have a material adverse affect on our
operations.
Plan of Operation
Over the next twelve months, we intend 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. These plans will require additional capital, which we intend to
obtain through a public offering of equity securities and/or through additional
debt financing.
Aviation Holdings International owns a one-half interest in a DC10-30
flight simulator. 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
September 30, 2001.
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We believe that anticipated cash flows from operations 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.
This credit facility has been renewed through September 2000. As of December 31,
1999, the maximum amount available to Aviation Holdings International under this
formula was approximately $2,191,588 million, and the outstanding balance was
approximately $2,125,000 million.
We do not anticipate material capital expenditures for the coming
fiscal year unless we acquire one or more complementary businesses as described
above.
Item 7. Financial Statements.
The Financial Statements are included in this annual report beginning on
page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The Directors and executive officers of Aviation Holdings Group and
Aviation Holdings International, their ages and positions are set forth below:
<TABLE>
<CAPTION>
<S> <C>
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 and Aviation
Holdings Group
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
</TABLE>
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<PAGE>
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 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.
19
<PAGE>
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.
20
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Aviation Holdings Group's
directors, certain of its officers and persons who own more than ten percent of
its common stock (collectively the "Reporting Persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission") and to furnish Aviation Holdings Group with copies of these
reports.
Based on its review of the copies of these reports received by it, and
representations received from Reporting Persons, Aviation Holdings Group
believes that not all filings required to be made by the Reporting Persons for
the period February 3, 2000 through March 31, 2000 were made on a timely basis.
Joseph D. Nelson, Simon Chiang, Michael Cirillo Theodore H. Gregor, Joseph J.
Janusz and APP Investments filed Forms 3 late in connection with Aviation
Holdings Group's initial registration under the Exchange Act as it appears that
Argaman, Inc. has not filed.
Item 10. Executive Compensation.
The following table reflects compensation paid or accrued during the
indicated fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal All other
Position Year Salary Bonus Other(1) Compensation
- - ------------------------------- --------- --------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Joseph J. Nelson 1999 184,000 50,000 0.00 0.00
President, Chief 1998 160,000 29,999 20,128(2) 0.00
Executive Officer
and Director
Simon Chiang 1999 110,000 26,000 0.00 0.00
Executive Vice 1998 87,653 21,500 0.00 0.00
President and
Director
Joseph F. Janusz 1999 86,000 21,500 0.00 0.00
Vice President of 1998 78,000 14,500 62,500(3) 0.00
Aviation Holdings
International
</TABLE>
21
<PAGE>
(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 December 31, 1999.
<TABLE>
<CAPTION>
Number of
Options/Warrant % of Options
s Granted to Exercise or Earliest
Name Granted Employees (1) Base Price Exercise Date Expiration Date
---- ------- ------------- ---------- ------------- -----------------
<S> <C> <C> <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 1999.
(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 December 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.
22
<PAGE>
<TABLE>
<CAPTION>
Value of Unexercised In-the Money
Number of Unexercised Options Options
at December 31, 1999 at December 31, 1999
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<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. 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
23
<PAGE>
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. As of the date of this prospectus, 255,750 options are
outstanding under the Plan, which replaced 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
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 March 24, 2000: (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.
NAME SHARES PERCENT
- - ---- ------ -------
Joseph J. Nelson(1)(2) 471,800 11.2
Joseph F. Janusz(1)(3) 70,000 1.7
Simon Chiang(1)(4) 187,123 4.4
Michael J. Cirillo(1)(5) 234,000 5.5
Theodore H. Gregor(6) 10,000 0.2
1495 Southeast Avenue
Hialeah, FL 33010
APP Investments, Inc.(7) 745,000 17.7
Two Penn Center Plaza
Suite 605
Philadelphia, PA 19102
Argaman, Inc.(8) 600,000 14.2
M.S.A. Trust Company, Ltd., Co.
Daniel Frisch Street
64731 Tel Aviv, Israel
24
<PAGE>
NAME SHARES PERCENT
- - ---- ------ -------
Norton Herrick Security Trust 395,000 9.4
Norton Herrick, Trustee
20 Community Place
Morrestown, NJ 07960
All officers and directors
as a group(2)(3)(4)(7) 972,923 23.1
- - --------------------------------------------
(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 engaged in making investments on behalf of its
shareholders. 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.
Item 12. Certain Relationships and Related Transactions.
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 $151,709 as of
December 31, 1999, which amounts Mr. Chiang has agreed to repay prior to
December 31, 2000. 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."
25
<PAGE>
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. These notes were paid in full in
December 1999.
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 Services, Inc.
("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. IP is an affiliate of Howard M.
Appel, who may be considered an organizer of Aviation Holdings International.
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.
Item 13. Exhibits List and Reports on Form 8-K.
(a) The following financial statements are filed as part of this registration
statement.
AVIATION HOLDINGS GROUP, INC.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1999
Consolidated Statements of Operation for the Years Ended
December 31, 1998 and 1999
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998
and 1999
Notes to Financial Statements
(b) The following exhibits are filed as part of this registration statement.
Exhibit numbers correspond to the exhibit requirements of Regulation S-B.
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C> <C>
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 Plotkin Warrant*
4.3 Jacobs Warrant*
4.4 D.A.R. Group Warrant*
4.5 Dallas Investments Warrant*
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
Share Exchange Agreement between The D.A.R. Group and EYEQ Networking, Inc. *
(a) Share Exchange Agreement between The Eastwind Group, Inc. and EYEQ Networking, Inc.*
(b) Share Exchange Agreement between KAB Investments, Inc. and EYEQ Networking, Inc.*
(c) Share Exchange Agreement between Godwin Finance Ltd. and EYEQ Networking, Inc.*
(d) Share Exchange Agreement between Clifton Capital Ltd. and EYEQ Networking, Inc.*
(e) Share Exchange Agreement between Elanken Family Trust and EYEQ Networking, Inc.*
(f) Share Exchange Agreement between Joseph Laura and EYEQ Networking, Inc.*
(g) Share Exchange Agreement between Dallas Investments, Ltd. and EYEQ Networking, Inc.*
(h) Share Exchange Agreement between Joseph Nelson and EYEQ Networking, Inc.*
(i) Share Exchange Agreement between Fersam International Ltd. and EYEQ Networking, Inc.*
(j) Share Exchange Agreement between I.P. Services Inc. and EYEQ Networking, Inc.*
(k) Share Exchange Agreement between Discretionary Investment Trust dated 7/7/93and EYEQ
Networking
(l) Share Exchange Agreement between Brian Due and EYEQ Networking, Inc.*
(m) Share Exchange Agreement between Bill Seidle and EYEQ Networking, Inc.*
(n) Share Exchange Agreement between Leonard Bloom and EYEQ Networking, Inc.*
(o) Share Exchange Agreement between Sheng Kuang Chiang and EYEQ Networking, Inc.*
(p) Share Exchange Agreement between Bing Ju Chiang and EYEQ Networking, Inc.*
(q) Share Exchange Agreement between Impact Investment Company, Ltd. and EYEQ Networking, Inc.*
(r) Share Exchange Agreement between Silvertown International Corp. and EYEQ Networking, Inc.*
(s) Share Exchange Agreement between Janet and Robert Weinstein and EYEQ Networking, Inc.*
(t) Share Exchange Agreement between Amaury Borges and EYEQ Networking, Inc.*
(u) Share Exchange Agreement between SPH Equities, Inc. and EYEQ Networking, Inc.*
(v) Share Exchange Agreement between Bella Shrem and EYEQ Networking, Inc.*
(w) Share Exchange Agreement between Mustang Electronics Inc. Affiliated Defined Benefits Pension
Plan and EYEQ Networking, Inc.*
(x) Share Exchange Agreement between Gary Cunningham and EYEQ Networking, Inc.*
(y) Share Exchange Agreement between Ron Halper and EYEQ Networking, Inc.*
(z) Share Exchange Agreement between John Hunter and EYEQ Networking, Inc.*
(aa) Share Exchange Agreement between Eugene Savonen and EYEQ Networking, Inc.*
(bb) Share Exchange Agreement between William Voohees and EYEQ Networking, Inc.*
(cc) Share Exchange Agreement between Arthur Lucchesi and EYEQ Networking, Inc.*
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(dd) Share Exchange Agreement between Gerard Bartolomeo and EYEQ Networking, Inc.*
(ee) Share Exchange Agreement between Neal Erps and EYEQ Networking, Inc.*
(ff) Share Exchange Agreement between Tor Osmundsen and EYEQ Networking, Inc.*
(gg) Share Exchange Agreement between James Catania and EYEQ Networking, Inc.*
(hh) Share Exchange Agreement between Legal America of Virginia, Ltd. and EYEQ Networking, Inc.*
(ii) Share Exchange Agreement between Joseph Janusz and EYEQ Networking, Inc.*
(jj) Share Exchange Agreement between Rozel International Holdings, Ltd. and EYEQ Networking, Inc.*
(kk) Share Purchase Agreement with Argaman, Inc.*
(ll) Argaman, Inc. Stock Purchase Warrant*
10.7 (a) Amended and Restated Comerica Bank Credit Agreement dated
September 1, 1999*
(b) Comerica Bank Master Revolving Note dated September 1, 1999*
(c) Comerica Guaranty dated September 1, 1999 with Aviation
Holdings Group, Inc.*
(d) Comerica Guaranty dated September 1, 1999 with Pasco Int'l Aviation Corp., Aero-Link Flight
Systems, Inc., Aero-Link Flight Systems Limited and Pasco Financial Services Limited*
(e) Comerica Bank Security Agreement dated August 12, 1998*
(f) Advance Formula Agreement dated August 12, 1998*
(g) Comerica Bank Security Agreement dated as of September 1, 1999 with Aviation Holdings
Group, Inc.*
(h) Comerica Bank Security Agreement dated as of September 1, 1999
with Aero-Link Flight Systems, Inc.*
(i) Comerica Bank Security Agreement dated as of September 1, 1999 with Aero-Link Flight Systems
Limited*
(j) Comerica Bank Security Agreement dated as of September 1, 1999 with Pasco Financial Services
Limited*
(k) Comerica Bank Security Agreement dated as of September 1, 1999
with Pasco Int'l Aviation Corp.
10.8 Indemnity Agreement with Directors and Officers*
10.9 Consulting Agreement*
10.10 Purchase Agreement*
10.11 Stock Purchase Agreement among Jet Aviation Trading, Inc., PASCO International Aviation Corp., et al.*
10.12 Employment Agreement with Joseph J. Janusz*
10.13 Cooperative Agreement between PASCO International Aviation Corporation, Inc. and China Northern Airlines*
10.14 Consignment Contract between Jet Aviation Trading, Inc. and Fersam International, Ltd. dated December 1,
1996*
10.15 Manufacturers Representative Agreement with Mirandy Products, Ltd. dated January 27, 1997*
10.16 Sales Representation Agreement between Aviation Holdings International, Inc. and Accessory Technologies
Corporation dated January 1, 1995*
10.17 Sales Representation Agreement between Aviation Holdings International at Aero Kool Corporation dated
January 1, 1999*
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.18 Sales Representation Agreement between Aviation Holdings International and AAS Landing Gear Services, inc.
dated April 1, 1999*
10.19 Agreement between Aero-Link Flight Systems Corp. Ltd. and China Airlines*
10.20 Modification of Employment Agreement for Simon Chiang*
11 Computation of Net Loss Per Share
21.1 Subsidiaries of the Company*
27. Financial Data Schedule
*Incorporated by reference to Registration Statement on Form SB-2, File No. 333-75169.
</TABLE>
29
<PAGE>
AVIATION HOLDINGS GROUP, INC.
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F2
Consolidated Balance Sheets as of December 31, 1998 and 1999 F3
Consolidated Statements of Operation for the Years Ended
December 31, 1998 and 1999 F5
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1998 and 1999 F6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999 F7
Notes to Financial Statements F9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Aviation Holdings Group, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of Aviation
Holdings Group, Inc. (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1999 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, 1999 and 1998, and the consolidated results of
its operations, changes in stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
February 4, 2000
F-2
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
ASSETS
1998 1999
-------- ----------
<S> <C> <C>
Current Assets
Cash $ 363,690 $ 426,688
Trade receivables, net 2,842,545 1,710,014
Inventory 3,220,062 4,700,636
Employee advances 4,040 16,866
Advances to stockholder - related party 75,181 151,709
Prepaid expenses 24,728 39,776
Refundable income taxes 16,200 16,200
---------- -----------
Total Current Assets 6,546,446 7,061,889
---------- -----------
Property and Equipment, Net 303,121 324,188
---------- -----------
Other Assets
Investment in joint venture 503,042 710,189
Deposits 17,382 16,713
Note receivable, net 900,000 -
Interest receivable from stockholders - related party 25,827 47,627
Intangibles, net 357,766 672,859
Deferred offering costs 109,782 749,342
---------- -----------
Total Other Assets 1,913,799 2,196,730
---------- -----------
Total Assets $8,763,366 $ 9,582,807
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Current Liabilities
Short-term borrowings - bank $ 1,500,000 $ 2,125,000
Short-term borrowings - others 148,685 -
Current portion of long-term debt 3,272 8,099
Accounts payable 2,130,906 2,620,343
Accrued expenses 404,498 376,597
Advances from stockholders 782,500 1,000
Income taxes payable 204,700 53,000
---------- -----------
Total Current Liabilities 5,174,561 5,184,039
Long-term debt, net of current portion 13,124 24,489
---------- -----------
Total Liabilities 5,187,685 5,208,528
---------- -----------
Minority Interest 1,186,964 346,943
---------- -----------
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; shares;
At December 31, 1999 authorized - 18,000,000
shares; issued, issuable and outstanding -
4,219,315 347 422
Additional paid-in capital 4,148,457 6,037,544
Less subsidiary stock subscription receivable -
related parties (280,000) (280,000)
Accumulated deficit (1,480,087) (1,730,630)
---------- -----------
Total Stockholders' Equity 2,388,717 4,027,336
---------- -----------
Total Liabilities and Stockholders' Equity $8,763,366 $ 9,582,807
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Operations
Year Ended December 31, 1998, and 1999
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Net Sales $ 8,365,197 $ 15,859,271
Cost of Goods Sold 5,839,049 11,711,084
----------- ------------
Gross Profit 2,526,148 4,148,187
----------- ------------
Operating Expenses
Salaries and wages 1,300,172 1,451,056
General and administrative 1,771,560 2,091,439
Professional fees 617,099 256,560
----------- ------------
Total Operating Expenses 3,688,831 3,799,055
----------- ------------
Income (Loss) from Operations (1,162,683) 349,132
Other Income (Expense)
Interest expense (96,044) (644,073)
Interest income 72,825 27,272
Income (loss) from joint venture (8,313) 21,774
----------- ------------
Total Other Expense (31,532) (595,027)
----------- ------------
Loss Before Income Taxes and Minority Interest (1,194,215) (245,895)
Income Tax (Expense) Benefit (186,863) 40,259
----------- ------------
Loss Before Minority Interest (1,381,078) (205,636)
Minority Interest (3,702) (44,907)
----------- ------------
Net Loss $(1,384,780) (250,543)
=========== ============
Basic and Diluted Loss Per Common Share $ (.46) $ (.06)
=========== ============
Average Common Shares - Basic and Diluted 3,035,856 4,021,216
=========== ============
</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
Year Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Additional Stock
---------------------------- Paid-In Subscription Accumulated
Shares Amount Capital Receivable Deficit
-------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
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 payable 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, net of offering cost paid 118,000 12 264,988 - -
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 - -
Common stock issued in connection with
$250,000 notes payable 11,000 2 43,412 - -
Compensatory stock options issued - - 83,625 - -
Net loss - - - - (250,543)
---------- ----- ----------- --------- -----------
Balances as of December 31, 1999 4,219,315 $ 422 $ 6,037,544 $(280,000) $(1,730,630)
========== ===== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1999
--------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,384,780) $ (250,543)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Compensatory common stock and options 401,161 83,625
Minority interest 3,702 44,907
Loss (income) from joint venture 3,976 (21,774)
Depreciation and amortization 54,979 129,327
Amortization of financing fees 37,573 393,849
Provision for bad debts 841,410 30,000
Reserve for obsolete inventory 66,579 -
Expensed deferred acquisition costs 10,673 -
Change in assets and liabilities
(Increase) decrease in
Trade receivables (1,059,241) 1,102,531
Inventory (613,306) (1,480,574)
Interest receivable (64,351) (21,800)
Prepaid expenses and deposits 27,905 (14,379)
Refundable income taxes (16,200) -
Increase (decrease) in
Accounts payable (169,081) (49,240)
Accrued expenses (173,823) 46,718
Income taxes payable 204,700 (151,700)
------------- ------------
Total Adjustments (443,344) 91,490
------------- ------------
Net Cash Used in Operating Activities (1,828,124) (159,053)
------------- ------------
Cash Flows from Investing Activities
Note receivable advances (535,100) -
Employee advances (4,040) (12,826)
Purchases of equipment (88,198) (80,342)
Cash acquired in Aviation Holdings International,
Inc. acquisition 830,331 -
Investment in joint venture (300,000) (200,000)
Distribution from joint venture - 14,627
------------- ------------
Net Cash Used in Investing Activities $ (97,007) $ (278,541)
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-7
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1999
--------------- ----------------
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from bank line of credit $ 1,500,000 $ 625,000
Proceeds from short-term borrowing 250,000 -
Repayments of short-term borrowings - (250,000)
Repayments on long-term debt (2,270) (5,878)
Payments of deferred offering costs (11,368) (100,882)
Proceeds from sale of EWS note - 43,880
Advances from (to) stockholders,
net of repayments 550,284 (76,528)
Proceeds from sale of stock, net of
offering costs paid - 265,000
-------------- ------------
Net Cash Provided by Financing Activities 2,286,646 500,592
-------------- ------------
Net Increase in Cash 361,515 62,998
Cash, Beginning of Period 2,175 363,690
-------------- ------------
Cash, End of Period $ 363,690 $ 426,688
============== ============
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest and Income Taxes
Interest $ 21,202 $ 167,093
============== ============
Income Taxes $ 8,191 $ 111,441
============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-8
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
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. 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 an inactive,
publicly-quoted company with nominal assets and liabilities until the period May
through July 1998, when 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").
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 buying, 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 December 31, 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
December 31, 1999.
Aero HK and its wholly-owned subsidiary, Aero-Link Flight Systems, Inc., a
Florida corporation (collectively, "Aero-Link"), have entered into an
agreement to act as the global marketing representative (except in the
Taiwan region) for China Airlines, Taiwan. In this capacity, Aero-Link is
responsible for promoting and marketing China Airlines' aircraft
maintenance, turbine engine and component repair and overhaul business.
Aero-Link also functions as a purchasing agent in the United States on
behalf of PASCO HK. These consolidated financial statements include revenue
of approximately $349,000 from Aero-Link for the year ended December 31,
1999.
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
F-9
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Enterprise
The Company had previously been 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 Environmental Waste Solutions, Inc. (see Note 8)
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
The accompanying consolidated financial statements include the accounts of the
Company and its 96%-owned subsidiary, AHI. The operations of AHI have been
included ratably, based on the percentage of ownership of AHI, in these
consolidated financial statements since May 1998, the initial date of the
acquisition. 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 financial reporting to a calendar
year basis beginning on January 1, 1999.
For comparability purposes, the 1998 figures have been reclassified where
appropriate to conform with the financial statement presentation used in 1999.
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 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.
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.
F-10
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 1999, the amount of funds that exceeded FDIC
insurance was $403,377 and $413,649, respectively. AHI also maintained funds in
banks that were not FDIC-insured. At December 31, 1998 and 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
year ended December 31, 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. 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.
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 1999. Consignment inventory is not
included in inventory amounts.
F-11
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 in 1998,
and share exchanges (see Note 17) which occurred in 1999, are 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 (see Note 13), 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 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 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.
F-12
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
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 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, since the acquisition, have been
included in the accompanying consolidated financial statements for the years
ended December 31, 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 December 31, 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
F-13
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 5 - JOINT VENTURE (Continued)
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 December
31, 1999. In August 1999, SYNOR-A distributed $14,627 to the Company.
Condensed financial information for the Company's investment in the joint
venture is as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Balance Sheet:
Total assets $ 3,706,753 $ 3,993,474
================ ===============
Total liabilities $ 223,515 $ 96,060
================ ===============
Statement of Operations:
Revenues $ 510,610 $ 1,455,961
Expenses 526,516 1,368,871
---------------- ---------------
Net Income (Loss) $ (15,906) $ 87,090
================ ===============
Aviation Holdings International's Share of (Loss) Income $ (3,976) $ 21,774
================ ===============
</TABLE>
NOTE 6 - TRADE RECEIVABLES
Trade receivables consisted of the following at:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Accounts receivable $ 3,162,545 $ 1,920,014
Allowance for doubtful accounts (320,000) (210,000)
---------------- ---------------
Trade receivables, net $ 2,842,545 $ 1,710,014
================ ===============
</TABLE>
NOTE 7 - INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Inventory $ 3,440,062 $ 4,920,636
Allowance for obsolete and slow-moving goods (220,000) (220,000)
---------------- ---------------
Total $ 3,220,062 $ 4,700,636
================ ===============
</TABLE>
F-14
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 8 - NOTES RECEIVABLE AND CREDIT RISK
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"), whereby the Company would have remained as the surviving entity. EWS
was formed for the purpose of serving as a holding company for three operating
subsidiaries which were to be acquired. EWS failed to acquire the operating
subsidiaries, and on June 2, 1998 the Company exercised its option to terminate
the letter agreement.
In December 1997, the Company agreed to provide a $2,000,000 credit facility
(the "Credit Facility") to EWS and its potential acquirees. 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. During the first two quarters of 1998, the
Company advanced an additional $535,100 to EWS. The loan was secured by a
mortgage on real estate owned by one of the acquiree companies. Interest accrued
at the rate of 10% per annum on the principal balance and on any overdue
interest. Principal and interest were due on July 1, 1998. 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. 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. A valuation allowance was recorded in
1998 for the 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 have been offset
with a valuation allowance. The amount recorded for this loan receivable at
December 31, 1998 was $900,000 (principal balance of $1,475,100 plus interest
receivable of $58,310, less a valuation allowance of $633,410).
On August 31, 1999, the Company sold its note receivable from EWS 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 approximately $44,000 in cash.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------------- ---------------
<S> <C> <C>
Leasehold improvements $ 143,321 $ 163,405
Office furniture and equipment 76,687 87,897
Computer equipment 81,372 123,232
Software 45,184 52,373
Trucks 28,676 50,746
---------------- ---------------
375,240 477,653
Accumulated depreciation (72,119) (153,465)
---------------- ---------------
Total $ 303,121 $ 324,188
================ ===============
</TABLE>
Depreciation expense was $30,245 and $ 81,346 for the year ended December 31,
1998 and 1999, respectively.
F-15
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 10 - INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------------- ---------------
<S> <C> <C>
Goodwill $ 375,000 $ 738,075
Deferred financing costs 7,500 -
---------------- ---------------
382,500 738,075
Less accumulated amortization (24,734) (65,216)
---------------- ---------------
Total $ 357,766 $ 672,859
================ ===============
</TABLE>
Amortization expense was $24,734 and $47,981 for the years ended December 31,
1998 and 1999, respectively.
NOTE 11 - 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 the prime rate, secured solely by 80,000
shares of the Company's common stock. 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. This note remained outstanding at December
31, 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
remained outstanding as of December 31, 1999. The note bears interest at 6% per
annum.
AHI recorded interest income of approximately $19,844 and $21,800 for the years
ended December 31, 1998 and 1999, respectively, on the outstanding stock
subscription receivables. As of December 31, 1998 and 1999, the accrued interest
receivable on the stock subscription receivables was $25,827 and $47,627,
respectively.
NOTE 12 - ADVANCES AND BORROWINGS - STOCKHOLDERS AND RELATED PARTIES
The Company advanced funds to and received advances from certain stockholders
during 1998 and 1999. At December 31, 1998 and 1999, the Company owed $781,500
and $0, respectively, of such advances to IP Services, Inc. and $1,000 to FAC
Enterprises, Inc. In 1999, the Company sold a note receivable to IP Services
Inc. to satisfy its obligation (see Note 8).
AHI made non-interest bearing advances, net of repayments, to an officer
amounting to $75,181and $151,709 as of December 31, 1998 and 1999, respectively.
F-16
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 13 - SHORT-TERM BORROWINGS
Bank
On August 12, 1998, AHI obtained a revolving working capital line of credit from
Comerica Bank. At December 31, 1998 and 1999, the amount outstanding on the
credit line was $1,500,000 and $2,125,000, 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. At
December 31, 1999, AHI failed to meet the tangible net worth covenant, as
defined by the loan agreement, and therefore was in default under the loan
agreement.
Short-term borrowings - other consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------------- ---------------
<S> <C> <C>
Unrelated investor notes $ 250,000 $ -
Less unamortized note discount 101,315 -
---------------- ---------------
$ 148,685 $ -
================ ===============
</TABLE>
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
and accrued 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 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 recorded a note discount of $138,888 in connection with the stock
that was issued as an inducement for making the loans of $250,000. The discount
was amortized over the term of the notes using the effective interest method.
The effective interest rate was 343%. As of December 31, 1998 and 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 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. The financing fees were 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.
On July 15, 1999, the noteholders and the Company agreed to a 60-day extension
of the maturity date in exchange for the noteholders receiving 6,000 shares of
the Company's common stock.
On September 15, 1999, the noteholders and the Company agreed to a 30-day
extension of the maturity date in exchange for the noteholders receiving 5,000
shares of the Company's common stock.
On October 15, 1999, the noteholders and the Company agreed to a 30-day
extension of the $250,000 notes in exchange for payment of all accrued interest.
F-17
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
The Company repaid the principal and remaining accrued interest in November
1999.
NOTE 14 - 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% and requires monthly payments of principal
and interest of $371. As of December 31, 1998 and 1999, the outstanding balance
of the note was $16,396 and $12,818, respectively.
In December 1999, the Company purchased a forklift and financed the purchase
through a four-year note payable. The note bears interest at an annual rate of
8.9% with monthly payments of principal and interest of $491.13. As of December
31, 1999 the outstanding balance of the note was $19,770.
Maturities of long-term debt are as follows:
Year ended December 31:
2000 $ 8,099
2001 8,729
2002 9,410
2003 6,350
--------------
$ 32,588
==============
NOTE 15 - 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 are presented
below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Deferred tax assets :
Federal and state deferred tax benefit arising from
net operating loss carryforwards $ 162,000 $ 461,000
Accrued expenses 30,000 33,000
Reserves and allowances 410,000 138,000
Note discount amortization 12,000 -
Compensation for employee stock options 144,000 175,000
Undistributed loss from foreign subsidiaries 93,000 173,000
---------------- ---------------
851,000 980,000
Less valuation allowance (842,000) (978,000)
---------------- ---------------
Total deferred tax assets 9,000 2,000
---------------- ---------------
Deferred tax liability
Accelerated depreciation (9,000) (2,000)
---------------- ---------------
Net deferred tax asset $ - $ -
================ ===============
</TABLE>
F-18
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 15 - INCOME TAXES (Continued)
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Current
Federal $ (152,970) $ 34,960
State (33,893) 5,299
Deferred
Federal 500,900 (139,000)
State 103,863 (24,000)
Tax benefit of net operating loss carryforward 139,400 299,000
---------------- ---------------
557,300 176,259
Less valuation allowance (744,163) (136,000)
---------------- ---------------
Income Tax (Expense) $ (186,863) $ 40,259
================ ===============
</TABLE>
The Company has a loss carryforward of approximately $1,166,000 as of December
31, 1999 that may be offset against future taxable income. The carryforward will
expire between the years 2009 and 2019.
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,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
U.S. federal statutory income tax rate 34% 34%
Federal income tax benefit at statutory rate $ 406,000 $ 83,600
State and local income tax benefits, net of effect of
federal benefit 65,700 39,800
Non-deductible expenses (11,100) (12,800)
Tax benefit from NOL carryback 60,800 85,500
Other difference 11,070 (19,841)
Valuation allowance (719,333) (136,000)
---------------- ---------------
Income Tax (Expense) Benefit $ (186,863) $ 40,259
================ ===============
Effective Income Tax Rate (15.6)% 16.4%
================ ===============
</TABLE>
NOTE 16 - 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 was renewed for one year and expires December 31, 2000 and
contains monthly rental obligations of $2,650 for 2000.
Rent expense for the periods ended December 31, 1998 and 1999 was $56,586 and
$110,914, respectively.
F-19
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 17 - CAPITAL STOCK ACTIVITY
Common Stock
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 75,000 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 connection with the offering, the Company paid $30,000 in
investment banking fees.
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 in exchange 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
13) 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.
On July 15, 1999, the Company and the noteholders entered into an agreement to
further extend the maturity date of the $250,000 notes to September 14, 1999. In
consideration of the extension, the Company granted the noteholders 6,000 shares
of the Company's common stock. This resulted in the Company recording a
financing fee of $25,913. On September 15, 1999, the Company and the noteholders
entered into an agreement to further extend the maturity date of the $250,000
notes to October 14, 1999. In consideration of the extension, the Company
granted the noteholders 5,000 shares of the Company's common stock. This
resulted in the Company recording a financing fee of $17,499.
F-20
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 17 - 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:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1999
------------------------------- -------------------------------
Net Loss Per Share Net Loss Per Share
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
As Reported Under APB 25 $ (1,384,780) $ (.46) $ (250,543) $ (.06)
=============== ============= =============== =============
Pro Forma Under SFAS 123 $ (1,476,291) $ (.49) $ (262,755) $ (.07)
=============== ============= =============== =============
</TABLE>
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 1999 and
1998, where exercise price equals or exceeds the market price on the grant date,
was $0. 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.
1998 1999
------------- -------------
Risk free rate 5.09% 5.83%
Expected years until exercise 2.25 5.00
Expected stock volatility 33.08% 61.25%
Dividend yield 0% 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.
NOTE 18 - 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, 1999.
F-21
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 18 - COMPENSATORY STOCK OPTION PLAN (Continued)
During 1998, the Company granted options to the Chief Executive Officer ("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 of AHI
authorized the issuance of 250,750 stock options under the Plan, and of these
options, 50,750 were subsequently canceled. No stock options issued under this
Plan have been exercised.
The Company and 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.
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 at an exercise
price of $2.50.
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
============ ============= ============ ============ ===============
December 31, 1999
$2.50 455,750 3.45 $ 2.50 435,750 $ 2.50
============ ============= ============ ============ ===============
</TABLE>
NOTE 19 - 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.
F-22
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 20 - 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 -----------------------------------
Price 1998 1999
------------ ---------------- ---------------
<S> <C> <C> <C>
Options $2.50 200,000 455,750
Warrants $3.75 - 100,000
$4.00 - 15,000
$4.50 - 210,000
------------ -----------
Total common shares potentially issuable 200,000 780,750
============ ===========
</TABLE>
The following table represents AHI's outstanding options and warrants:
<TABLE>
<CAPTION>
December 31,
Exercise -----------------------------------
Price 1998 1999
------------ ---------------- ---------------
<S> <C> <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 21 - 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 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 May 31, 1998, the President of AHI entered into an employment
agreement with the Company to serve as President and CEO of the Company. 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.
F-23
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued)
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 22 - 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 year ended
December 31, 1999:
Year Ended
May - Dec. December 31,
1998 1999
--------------- ---------------
United States $ 4,632,079 $ 10,287,478
Africa and Middle East 104,396 443,426
Europe 659,898 1,234,267
Latin America 59,694 655,515
Asia 2,909,130 3,238,585
--------------- ---------------
Total $ 8,365,197 $ 15,859,271
=============== ===============
In December 1999, the Company purchased a DC-10/30 airframe from Intalogik Ltd.
for an aggregate purchase price of $3.3 million. The Company sold the airframe
in December 1999 to Offshore Aviation Holdings Limited, an unrelated entity, for
an aggregate sales price of $3.7 million. This transaction accounted for
approximately 23.3% of sales and 28.2% of cost of sales for the year ended
December 31, 1999.
NOTE 23 - 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.
F-24
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 24 - 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 $105,915 and $538,677 of deferred offering costs in accrued
expenses at December 31, 1998 and December 31, 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.
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.
In July 1999, the Company recorded $25,914 in financing costs in connection with
its issuance of 6,000 shares of common stock to the holders of the $250,000
notes in consideration for the extension of the maturity date of the notes.
In August 1999, the Company recorded $83,625 of compensation expense in
connection with the issuance of 55,750 options to employees.
In September 1999, the Company recorded $17,499 in financing costs in connection
with its issuance of 5,000 shares of common stock to the holders of the $250,000
notes in consideration for the extension of the maturity date of the notes.
In December 1999, the Company financed the purchase of a forklift in the amount
of $22,070 with a note payable.
NOTE 25 - RELATED PARTY DISCLOSURES NOT DISCLOSED ELSEWHERE
For the year ended December 31, 1999, the Company had sales to and purchased
inventory from a company affiliated with a director of the Company in the amount
of $50,264 and $48,418, respectively.
NOTE 26 - SUBSEQUENT EVENTS
In February 2000, the Company became a reporting company under Rule 15(c) of the
Securities and Exchange Act of 1934.
F-25
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
NOTE 26-SUBSEQUENT EVENTS (Continued)
In the first quarter of 2000, the Company was advanced approximately $400,000 by
four accredited investors. The Company expects to issue convertible promissory
notes with a maturity date of one year from the date of receipt of funds in
connection with the funds received.
F-26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Miami, State of
Florida on March 29, 2000.
AVIATION HOLDINGS GROUP, INC.
By: /s/ JOSEPH J. NELSON
-----------------------------------------
Joseph J. Nelson
President and Chief Executive Officer
By: /s/ JOSEPH F. JANUSZ
-----------------------------------------
Joseph F. Janusz
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on March 29, 2000.
-----------------------------------------
Joseph J. Nelson, Chairman,
President and Chief Executive Officer
-----------------------------------------
Joseph F. Janusz,
Vice President and Chief Financial
Officer
-----------------------------------------
Simon Chiang, Executive Vice President
and Director
-----------------------------------------
Theodore H. Gregor, Director
30
<PAGE>
Exhibit 11
Computation of Net Loss Per Share
Year Ended December 31,
-----------------------------------------
1998 1999
-----------------------------------------
Net Loss $(1,384,780) $(250,543)
Basic and Diluted weighted average
common shares outstanding 3,035,856 4,021,216
-----------------------------------------
Basic and Diluted Loss Per Share $(0.46) $(0.06)
=========================================
This table has been prepared using Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" for all applicable periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 363,690 426,688
<SECURITIES> 0 0
<RECEIVABLES> 3,162,545 2,220,014
<ALLOWANCES> (320,000) (210,000)
<INVENTORY> 3,220,062 4,700,636
<CURRENT-ASSETS> 6,546,446 7,061,889
<PP&E> 375,240 477,653
<DEPRECIATION> (72,119) (153,465)
<TOTAL-ASSETS> 8,763,366 9,582,807
<CURRENT-LIABILITIES> 5,174,561 5,184,039
<BONDS> 13,124 24,489
0 0
0 0
<COMMON> 347 422
<OTHER-SE> 2,388,370 4,027,336
<TOTAL-LIABILITY-AND-EQUITY> 8,763,366 9,582,807
<SALES> 8,365,197 15,859,271
<TOTAL-REVENUES> 8,365,197 15,859,271
<CGS> 5,839,049 11,711,084
<TOTAL-COSTS> 5,839,049 11,711,084
<OTHER-EXPENSES> 3,015,842 3,769,055
<LOSS-PROVISION> 672,989 30,000
<INTEREST-EXPENSE> 96,044 644,073
<INCOME-PRETAX> (1,194,215) (245,895)
<INCOME-TAX> 186,863 (40,259)
<INCOME-CONTINUING> (1,384,780) (250,543)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,384,780) (250,543)
<EPS-BASIC> (0.46) (0.06)
<EPS-DILUTED> (0.46) (0.06)
</TABLE>
