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[FOR INFORMATION ONLY]
This registration statement has been filed with the Securities and
Exchange Commission but has not yet become effective. Information contained
herein is subject to completion or amendment.
As filed with the Securities and Exchange Commission on
January 18, 2000.
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-------------------------
Aviation Holdings Group, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 22-2545898
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
15675 Northwest 15th Avenue, Miami, FL 33169
- - -------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(305) 624-6700
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Issuer's Telephone Number
Securities to be registered pursuant to Section 12(b) of the Act:
None
---------------
(Title of Class)
Securities to be registered pursuant to Section 12(g)
of the Act:
Title of Each Class Name of Each Exchange on
to be so Registered Which Each Class is to be Registered
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Common Stock Nasdaq OTC Bulletin Board
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INFORMATION REQUIRED IN
REGISTRATION STATEMENT
PART I
Special Note Regarding Forward-looking Statements
Some of the statements contained in this registration statement 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.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
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.
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
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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.
Increased Leasing
We believe that cost considerations will cause airlines to lease,
rather than purchase, more spare parts and engines. This would benefit us by:
o providing a steady income stream over a period of time from lease
payments-
o upon termination of the lease, we would regain the part or engine for
subsequent sale; and
o provide the opportunity to obtain additional financing.
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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.
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.
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We typically have over 50,000 line items in stock. We monitor market
availability, pricing and historical data on a continuous basis. We sell new,
overhauled and serviceable replacement parts from our inventory and buy them at
the request of its customers against a specific order. We usually purchase parts
for our own account and sell them to our customers.
For the twelve months ended December 31, 1998 and the nine months ended
September 30, 1999, Aviation Holdings International's total revenues were
approximately as follows:
12/31/98 9/30/99
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83% from inventory sales; 95% from inventory sales;
16% from engine sales; and 4% 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.
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 24.7% 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 nine months ended September
30, 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.
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Shenyang Northern Aircraft Maintenance & Engineering Co., Ltd. is a
Sino-American joint venture company established in November 1997. The joint
venture mainly deals with inspection, repair and recertification of DC9, MD80
and A300-600 components, line replacement units, instruments and avionics. It
also represents some of the world's leading original equipment manufacturers for
certain items. It is the first Sino-foreign joint venture approved by the Civil
Aviation Administration of China in the avionics and accessories repair field
and which commenced operations in March 1998. Twenty-five percent of the joint
venture is held by PASCO International Aviation Corporation, Inc., a Florida
corporation and a subsidiary of Aviation Holdings International ("Pasco-FLA").
China Northern Airlines, one of the largest airlines in China, holds the
remaining 75%. The joint venture is currently certified by the Chinese aviation
authorities and expects to complete FAA certification by the end of 1999.
Pasco-FLA's total financial commitment to the joint venture is
$1,000,000. As of September 30, 1999, Aviation Holdings International had funded
approximately $700,000 of this total and intends to fund the remaining
approximately $300,000 with proceeds from this offering and from internal
operations. Under the terms of the joint venture, Pasco-FLA is entitled to
certain preferences in any initial distributions of net income. This preference
provides that Pasco-FLA will recoup its investment prior to any regular
distributions being made to China Northern. Pasco-FLA provides technological
advice to the joint venture and promotes, markets and sells its services. The
joint venture serves approximately 14 airlines. In July 1999, Pasco-FLA received
an initial distribution of approximately $14,600 from the joint venture.
Pasco Financial Services Ltd., Corp., a Hong Kong corporation and
majority-owned subsidiary of Aviation Holdings International
("Pasco-Financial"), specializes in providing financing from banks on behalf of
airlines for aircraft and aviation-related purchases. Pasco-Financial was
recently appointed by China Southwest Airlines to work with banks to provide
financing for three newly-purchased Boeing B737-800 aircraft which are expected
to be delivered in 1999 and 2000. Pasco-Financial has also been appointed by
certain airlines to act as their agent for the sale or lease of aircraft on
behalf of such airlines. Pasco-Financial was also invited by China Southwest
Airlines to arrange the leasing of one of their B757-200 aircraft. To date,
Aviation Holdings International has not recognized any revenue from
Pasco-Financial.
China Airlines, located in Taipei, Taiwan, has a sophisticated, quality
conscious engine overhaul facility and aircraft maintenance center. Its
maintenance base is located in Taipei, Taiwan. Their $150 million investment in
facilities, equipment, backshops and support mechanisms was completed in 1997
and is certified by every major aviation regulatory authority in the world. Two
majority owned subsidiaries of Aviation Holdings International, Aero-Link Flight
Systems Ltd., a Hong Kong corporation, and Aero-Link Flight System, Inc., a
Florida corporation (collectively, "Aero-Link"), act as China Airlines' global
marketing representative outside of Taiwan. To date, we have recognized $122,866
in revenue from Aero-Link.
Credit Facilities
On August 12, 1998, Aviation Holdings International entered into a
Credit Agreement with Comerica Bank ("Comerica") whereby Comerica agreed to
extend a revolving line of credit to Aviation Holdings International in an
amount not to exceed $3,500,000. The revolving line of credit is intended to
fund, if necessary, working capital needs, such as inventory purchases, and,
subject to Comerica's approval, strategic acquisitions. The funds advanced to
Aviation Holdings International by Comerica are secured by the assets of
Aviation Holdings International and may not at any time exceed the sum of (a)
85% of Aviation Holdings International's eligible accounts receivable and (b)
35% of Aviation Holdings International's eligible inventory. This credit
facility has been renewed through September 2000. As of November 30, 1999,
Aviation Holdings International had an aggregate availability of approximately
$2,440,785 million and an outstanding balance due to Comerica under the
revolving line of credit of approximately $2,125,000 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:
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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 September 30, 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.
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,
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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.
We have over 140 customers, which include aircraft and engine
manufacturers, commercial passenger airlines, air cargo carriers, maintenance
and repair facilities, original equipment manufacturers and other aircraft parts
redistribution companies. During the twelve month period ended December 31,
1998, Aviation Holdings International's top 10 customers accounted for
approximately 47% of net sales, and one customer, Federal Express Corp.,
accounted for more than 16% of net sales. During the nine month period ended
September 30, 1999, the top 10 customers accounted for approximately 44.7% of
net sales, and one customer, Aviation Sales Company accounted for 8.6% of net
sales.
Management Information System
We have upgraded our management information systems by acquiring
computer hardware and software. Our data system is being developed to
incorporate state-of-the-art records imaging, archiving, inventory and asset
management analysis, financial record and other support systems. We believe that
upon full implementation, our data management system will be adequate to manage
our requirements in accordance with our forecasted growth.
Competition
The aircraft spare parts redistribution market is highly-fragmented.
Competition is generally based on price, availability of product and quality,
including traceability. Our major competitors include AAR Corp., Aero Controls
Corp., Solair, Inc., The Memphis Group and Aviation Sales Company. There is also
substantial competition, both domestically and overseas, from smaller,
independent dealers who generally participate in niche markets. Several of our
competitors have greater financial and other resources.
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The jet turbine engine and jet turbine aircraft market is currently
dominated by various financial institutions, such as GE Capital, CIT Group, and
International Lease Finance Corp. as well as the major competitors from the
spare parts redistribution market. The market also includes many smaller
entities who engage in transactions on an infrequent basis.
Government Regulation and Traceability
The FAA regulates the manufacture, repair and operation of all
aircraft, engines and aircraft and engine parts operated in the United States.
Its regulations are designed to ensure that all aircraft and aviation equipment
are continuously maintained in proper condition for the safe operation of
aircraft. Similar rules apply in other countries. All aircraft must be
maintained under a continuous condition monitoring program and must periodically
undergo thorough inspection and maintenance. The inspection, maintenance and
repair procedures for the various types of aircraft and equipment are prescribed
by regulatory authorities and can be performed only by certified technicians at
certified repair facilities. Certification and conformance is required before
installation of a part on an aircraft. Presently, whenever necessary with
respect to a particular part, we utilize FAA and/or Joint Aviation Authority
("JAA") certified repair stations to repair and certify parts to ensure
worldwide marketability. Our operations may in the future be subject to new and
more stringent regulatory requirements. In that regard, we closely monitor the
FAA and industry trade groups in an attempt to understand how possible future
regulations might impact us. See "Risk Factors -- Stricter Government
Regulations Could Reduce The Value of Our Inventory And/or Require Significant
Expenditures."
An important factor in the aircraft and engine spare parts
redistribution market relates to the documentation or traceability that is
supplied with an aircraft or engine spare part. We require all of our suppliers
to provide adequate documentation as required by the industry and the regulatory
agencies. We are designing out data management system to image, capture, manage
and communicate this documentation.
Employees
As of 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. Management's Discussion and Analysis or Plan of Operation.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's financial
statements and accompanying notes. This prospectus contains certain
forward-looking information, which involves risks and uncertainties. The actual
results could differ from the results we anticipate. See "Special Note Regarding
Forward-Looking Statements."
Overview
Our principal asset is our ownership of a controlling interest in
Aviation Holdings International. Accordingly, our results of operations are
highly dependent upon the results of operations of Aviation Holdings
International
Aviation Holdings International was incorporated in Florida on May 28,
1997 as Schuylkill Acquisition Corp. for the purpose of acquiring, by merger,
the business and operations of Jet Aviation Trading, Inc. On July 28, 1997,
Schuylkill Acquisition Corp. acquired 100% of the outstanding common stock of
Jet Aviation Trading, Inc., a Florida corporation, in exchange for 1,776,800
shares of common stock of Schuylkill Acquisition Corp. in a one-for-one stock
exchange. The former Jet Aviation Trading, Inc. was incorporated in the state of
Florida on October 3, 1996 for the purpose of buying, selling, leasing and
exchanging spare parts for fixed-wing commercial jet transport aircraft.
Effective July 28,1997, the name of Schuylkill Acquisition Corp. was changed to
Jet Aviation Trading, Inc. Effective September 15, 1998, the name of Jet
Aviation Trading, Inc. was changed to Aviation Holdings International
The effect of the transaction between Schuylkill Acquisition Corp. and
the former Jet Aviation Trading, Inc. was a reverse merger. Accordingly, the
historical financial statements presented for Aviation Holdings International
are those of the accounting survivor, Jet Aviation Trading, Inc., and the
stockholders' equity of the merged company was recapitalized to reflect the
capital structure of the surviving legal entity (Schuylkill Acquisition Corp.)
and the retained earnings of Jet Aviation Trading, Inc.
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In February 1998, Aviation Holdings International acquired all or a
majority of the capital stock of PASCO International Aviation Corp., PASCO
International Aviation Corp. Limited, PASCO Financial Services Limited and
Aero-Link Flight Systems Limited (collectively "PASCO").
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date and our
financial statements for the year ended December 31, 1998 and the nine months
ended September 30, 1998 include the results of Aviation Holdings
International's operations for the period May 1998 through December 31, 1998 and
September 30, 1998, respectively.
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.
Nine Months Ended September 30, 1999 v. Nine Months Ended September 30, 1998
Results of Operation
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date and our
financial statements for the nine months ended September 30, 1999 include the
results of Aviation Holdings International's operations. The financial
statements for the nine months ended September 30, 1998 include the results of
Aviation Holdings International for the period May 4, 1998 through September 30,
1998 only.
Net sales of aircraft and engine parts were $9,342,749 for the nine
months ended September 30, 1999 as compared to $5,094,930 for the nine months
ended September 30, 1998. The increase in net sales of aircraft and engine parts
was due to our acquisition of the controlling interest in Aviation Holdings
International.
Cost of goods sold was $6,048,375 for the nine months ended September
30, 1999 as compared to $3,996,660 for the nine months ended September 30, 1998.
Gross profit increased to $3,294,374 in the nine months ended September 30, 1999
from $1,098,270 in the nine months ended September 30, 1998. Our increases in
cost of goods sold and gross profit were due to our acquisition of the
controlling interest in Aviation Holdings International.
Salary and wage expense was $1,095,200 in the nine months ended
September 30, 1999 and $896,608 in the nine months ended September 30, 1998.
This overall increase is the result of an increase from the acquisition of the
controlling interest in Aviation Holdings International offset by a nonrecurring
compensation bonus expense recorded in May 1998 in the amount of $360,200 for
options issued to our CEO.
General and administrative expenses were $1,435,615 in the nine months
ended September 30, 1999 and $1,157,850 for the nine months ended September 30,
1998. Our general and administrative expenses for the nine months ended
September 30, 1998 consisted primarily of a valuation allowance on a promissory
note due to the Company from Environmental Waste Solutions, Inc. which has been
sold by the Company (see "Certain Transactions"), a nonrecurring expense. Our
general and administrative expenses for the nine months ended September 30, 1999
related primarily to Aviation Holdings International's operations.
10
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Professional fees were $190,512 in the nine months ended September 30,
1999 and $408,713 in the nine months ended September 30, 1998. We incurred
additional accounting and legal expenses related to our efforts to acquire
businesses in the first nine months of 1998. Activities related to acquisitions
in the first nine months of 1999 declined.
Interest expense was $578,148 in the nine months ended September 30,
1999 and $6,057 in the nine months ended September 30, 1998. This increase was
primarily due to additional borrowings from Comerica Bank and stockholders and
amortization of the discount on the notes payable to the John G. Jacobs Trust
and Nancy Plotkin.
Interest income was $21,009 in the nine months ended September 30, 1999
and $66,786 in the nine months ended September 30, 1998. We stopped recording
interest on the Environmental Waste Solutions note receivable after the note was
in default and therefore interest income decreased.
Income from the joint venture was $4,171 in the nine months ended
September 30, 1999 and $5,057 in the nine months ended September 30, 1998. This
decrease is primarily a result of additional costs for FAA certification
incurred by the SYNOR-A Joint Venture investment which we acquired along with
our controlling interest in Aviation Holdings International.
Income tax expense was $56,125 in the nine months ended September 30,
1999 and $3,757 in the nine months ended September 30, 1998. This increase is
primarily due to Aviation Holdings International's earnings for the three months
ended March 31, 1999. As of March 31, 1999, we qualified to file a consolidated
income tax return under the Internal Revenue Code. Therefore, as of April 1,
1999 we are able to offset the earnings of Aviation Holdings International
against our losses. At September 30, 1999 and September 30, 1998, due to the
uncertainty of our ability to generate future earnings, we have recorded a
valuation allowance for the income tax benefits that would have been generated
by our losses incurred for the nine months ended September 30, 1998 and
September 30, 1999, respectively.
Minority interest was $62,870 in the nine months ended September 30,
1999 and ($25,870) in the nine months ended September 30, 1998. This increase is
mainly due to the acquisition of the controlling interest in Aviation Holdings
International.
As a result of the foregoing, our net loss was $98,616 for the nine
months ended September 30, 1999, which was a decrease from a net loss of
$1,277,567 for the nine months ended September 30, 1998. Basic and diluted loss
per common share decreased from $0.49 for the nine months ended September 30,
1998 to $0.03 for the nine months ended September 30, 1999.
Liquidity and Capital Resources
As of September 30, 1999 our principal source of liquidity included
cash and cash equivalents of $497,437 compared with cash and cash equivalents of
$254,994 as of September 30, 1998. As of September 30, 1999, total outstanding
debt was $2,244,176 compared to $739,348 as of September 30, 1998. Aviation
Holdings International obtained a revolving working capital line of credit from
Comerica Bank in August 1998. At September 30, 1999, the amount of principal
owed to the bank was $1,975,000. 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 September 30, 1999, Aviation
Holdings International did not meet the tangible net worth covenant of
$4,250,000 in the Comerica Bank credit agreement, which puts it in technical
default under the terms of the credit agreement. Comerica Bank has, however,
waived the default and continued to make advances under the credit agreement.
Cash used in operating activities for the nine months ended September
30, 1999 was $204,577, which was primarily attributable to overall increases in
accounts payable and decreases in accrued expenses amounting to $373,233, and
increases in accounts receivable of $321,980 and inventory of $813,373, offset
by losses from operations after adding back non-cash expenses. Cash used in
operating activities for the nine months ending September 30, 1998 was
$1,128,893, which was primarily attributable to increases in accounts receivable
of $743,139, inventory of $84,046 and prepaid expenses of $138,472 and offset
partially by an increase in accounts payable of $211,550, a decrease in accrued
expenses of $156,916 and operating losses.
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<PAGE>
Cash flows used in investing activities for the nine months ended
September 30, 1999 was $262,844 compared with $39,401 of cash provided for the
nine months ended September 30, 1998. For the nine months ended September 30,
1999, cash used was related primarily to the investment in the SYNOR-A joint
venture of $200,000 and the purchase of property and equipment for $77,419. For
the nine months ended September 30, 1998, the primary use of cash was funding
advances under the Environmental Waste Solutions credit facility of $535,100,
purchase of property and equipment for $55,830 and investment in the SYNOR-A
joint venture of $200,000, which was offset by $830,331 of cash acquired in the
acquisition of Aviation Holdings International, Inc.
Cash provided by financing activities for the nine months ended
September 30, 1999 was $601,168 compared with $1,342,311 for the nine months
ended September 30, 1998. Cash provided for the nine months ended September 30,
1999 primarily resulted from the net proceeds from the sale of stock of
$265,000, additional borrowings under the bank line of credit of $475,000 and
cash proceeds from the sale of the Environmental Waste Solutions note of $43,880
partially offset by repayments of advances from stockholders and debt of
$103,089 and payment of deferred offering costs of $79,623. In addition, we
obtained an extension of the maturity date of $250,000 borrowed during 1998 from
the John G. Jacobs Trust and Nancy Plotkin. These loans were extended rather
than repaid in order to conserve working capital to support operations. These
loans were paid in full in December 1999. For the nine months ended September
30, 1998, the primary source of cash were advances from our stockholders of
$724,498 and bank line of credit of $675,000, offset by repayments of debt of
$1,409 and payment of deferred offering costs of $55,778.
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 at least the next eighteen months. We will require additional
equity or debt in order to implement our expansion plans and, in particular, the
expansion of our turbine engine and aircraft sales. Thereafter, if our capital
requirements increase, we could be required to secure additional sources of
capital. There can be no assurance we will be capable of securing additional
capital or that the terms upon which such capital will be available to us will
be acceptable.
Year ended December 31, 1998 v. Year Ended December 31, 1997
Results of Operations
Effective in May 1998, we acquired a majority of the common stock of
Aviation Holdings International. Accordingly, our financial statements and those
of Aviation Holdings International were consolidated as of that date and our
financial statements for the year ended December 31, 1998 include the results of
Aviation Holdings International's operations for the period May 1998 through
December 31, 1998.
Net sales of aircraft and engine spare parts were $8,365,197 for the
year ended December 31, 1998 as compared to $0 for the year ended December
31,1997. The increase in net sales of aircraft and engine spare parts was due to
our acquisition of the controlling interest in Aviation Holdings International.
Cost of goods sold was $5,839,049 for the year ended December 31, 1998
as compared to $0 for the year ended December 31, 1997. Our increase in cost of
goods sold was due to the sales generated by the acquisition of the controlling
interest in Aviation Holdings International.
Salary and wage expenses increased to $1,300,172 in the year ended
December 31, 1998 from $0 in the year ended December 31, 1997. This increase is
primarily the result of our acquisition of the controlling interest in Aviation
Holdings International and $380,328 of noncash compensation expense for common
stock and options to purchase common stock granted to our President.
General and administrative expenses increased to $1,771,560 in the year
ended December 31, 1998 from $15,950 in the year ended December 31, 1997. This
increase is primarily due to our acquisition of the controlling interest in
Aviation Holdings International, our increased acquisition activities during the
first five months of 1998, and the provision in the amount of $633,410 for a
valuation allowance on the Environmental Waste Solutions note.
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Professional fees increased to $617,099 in the year ended December 31,
1998 from $48,227 in the year ended December 31, 1997. This increase is
primarily due to our acquisition of the controlling interest in Aviation
Holdings International and to our increased acquisition activities during the
first five months of 1998.
Interest expense increased to $96,044 in the year ended December 31,
1998 from $0 in the year ended December 31, 1997. The increase is due to
interest incurred on advances from our stockholders, interest on borrowings
under the Comerica credit facility by Aviation Holdings International and
amortization of the discount on the notes payable to the John G. Jacobs Trust
and Nancy Plotkin.
Interest income increased to $72,825 in the year ended December 31,
1998 from $6,740 in the year ended December 31, 1997. The increase is primarily
due to the interest recorded under the Environmental Waste Solutions note
receivable.
Loss from the joint venture increased to $8,313 in the year ended
December 31, 1998 from $0 in the year ended December 31, 1997. The increase is
due to the losses recorded on our investment in the SYNOR-A Joint Venture.
Income tax expense increased to $186,863 in the year ended December 31,
1998 from $0 in the year ended December 31, 1997. The increase is primarily the
result of income generated by Aviation Holdings International. We have recorded
a valuation allowance against our deferred tax asset because we are unable to
determine if we will ever generate taxable income to utilize those benefits.
Minority interest increased to $3,702 in the year ended December
31,1998 from $0 in the year ended December 31, 1997. This increase is primarily
due to our acquisition of less than 100% of Aviation Holdings International in
1998.
As a result of the foregoing, net loss increased to $1,384,780 for the
year ended December 31, 1998 as compared to $57,437 for the year ended December
31, 1997. Basic and diluted loss per share of common stock increased from $.06
in the year ended December 31, 1997 as compared to $.46 for the year ended
December 31, 1998.
Liquidity and Capital Resources
As of December 31, 1998 our liquidity and capital resources included
cash and cash equivalents of $363,690 and working capital of $1,371,885,
compared with cash and cash equivalents of $2,175 and a working capital deficit
of $36,128 for the year ended December 31, 1997. The increase in working capital
was primarily due to our acquisition of the controlling interest in Aviation
Holdings International.
Cash used in operating activities for the year ended December 31, 1998
was $1,828,124 compared to $41,009 for the year ended December 31, 1997. Cash
used in the year ended December 31, 1998 was primarily to fund increases in
accounts receivable of $1,059,241, inventory of $613,306, interest receivable of
$64,351, and to reduce accounts payable by $169,081 and accrued expenses by
$173,823. Cash provided for the year ended December 31, 1998 was primarily due
to a decrease in prepaid expenses of $27,905 and an increase in income taxes
payable of $188,500. Cash used in the year ended December 31, 1997 was primarily
related to increases in interest receivable of $6,740 and prepaid expenses of
$2,957, and a decrease in the amount due to stockholder of $7,207. Cash provided
for the year ended December 31, 1997 was due to an increase in accrued expenses
of $8,000.
Cash used in investing activities for the year ended December 31, 1998
was $97,007 compared to $950,673 of cash used for investing activities in the
year ended December 31, 1997. Cash used in the year ended December 31, 1998 was
for funds we advanced under the Environmental Waste Solutions credit facility of
$535,100, purchases of equipment of $88,198 and additional investment in SYNOR-A
Joint Venture of $300,000. Cash provided for the year ended December 31, 1998
was due to the cash acquired in the acquisition of the controlling interest in
Aviation Holdings International of $830,331. The primary components of cash used
in the year ended December 31, 1997 was from funds we advanced under the
Environmental Waste Solutions credit facility of $940,000.
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<PAGE>
Cash provided by financing activities for the year ended December 31,
1998 was $2,286,646 compared to $993,857 for the year ended December 31, 1997.
The primary sources of cash provided from the year ended December 31, 1998
related to $1,500,000 borrowed on the bank line of credit, $50,000 borrowed from
the John G. Jacobs Trust, $200,000 borrowed from Nancy Plotkin, and advances
from stockholders, net of repayments, of $550,284. The source of cash provided
from the year ended December 31, 1997 was the proceeds received from the sale of
securities, net of offering costs paid, in the amount of $993,857.
Since our principal sources of funds are those generated by Aviation
Holdings International, the following sets forth certain information relating to
the operations of Aviation Holdings International for the periods indicated.
Aviation Holdings International formerly maintained its accounting records on a
fiscal year basis ending August 31. Beginning January 1, 1999, Aviation Holdings
International has changed its reporting to a calendar year basis.
Year ended August 31, 1998 v. October 3, 1996 (Date of Inception) to
August 31, 1997
Results of Operations
Aviation Holdings International's net sales of aircraft and engine
spare parts for the fiscal year ended August 31, 1998 increased $6,858,043, or
110%, over the period ended August 31, 1997. During this period, domestic sales
increased by 119% from $3,559,585 to $7,788,597, and international sales
increased 99% from $2,655,968 to $5,284,999. The increase in net sales was due
to several factors which include the sale of a single jet engine to Federal
Express for $2,000,000, the addition of new sales personnel, increased customer
penetration, increased investment in, and availability of, inventory and the
expansion of services offered to customers.
Cost of sales was $11,066,005 for the fiscal year ended August 31, 1998
and $4,684,864 for the fiscal period ended August 31, 1997, which is an increase
of 136% resulting from the increase in sales. There was a decrease in gross
profit from 25% to 15%. The decrease in gross profit was primarily due to a
lower profit margin on the cost of the jet engine sold to Federal Express and
the establishment of reserves for obsolete and slow-moving inventory of
$515,421.
General and administrative expenses decreased $441,735 in the fiscal
year ended August 31, 1998, or 15% compared to the fiscal period ended August
31, 1997. General and administrative expenses were 19% of operating revenues for
the fiscal year ended August 31, 1998, compared to 46% for the fiscal period
ended August 31, 1997. There was nonrecurring compensation expense recorded in
the period ended August 31, 1997 for the issuance of common stock to Aviation
Holdings International's founders in the amount of $1,399,600. The decrease in
this expense in the year ended August 31, 1998 was offset by increases in salary
expense of $630,807, professional fees of $96,145, and other general and
administrative expenses of $230,913, so that overall general administrative
costs only decreased by $441,735.
As a result of these and other factors, Aviation Holdings International
generated a loss from operations of $295,264 for the fiscal year ended August
31, 1998, compared to a loss of $1,383,641 for the fiscal period ended August
31, 1997.
Liquidity and Capital Resources
Aviation Holdings International's liquidity and capital resources
included cash and cash equivalents of $559,578 and working capital of $2,632,231
as of August 31, 1998 compared with cash and cash equivalents of $341,660 and
working capital of $3,246,086 as of August 31, 1997. The principal reason for
the decrease in working capital was the increase in the reserves for
uncollectible accounts and the establishment of the reserve for obsolete and
slow-moving inventory.
Cash provided by operations was $90,180 for the fiscal year ended
August 31, 1998 compared to cash used in operating activities of $1,516,173 for
the fiscal period ended August 31, 1997. For the fiscal year ended August 31,
1998, cash provided was primarily attributable to increases in accounts payable
and accrued expenses of $1,325,114. Cash used in the fiscal year ended August
31, 1998 was primarily related to increases in inventory of $922,519, accounts
receivable of $516,035, and prepaid expenses amounting to $57,805. Cash provided
from the period ended August 31, 1997 was $1,179,058 which was primarily from
increases in accounts payable and accrued expenses. For the period ended August
31, 1997, cash was primarily used to fund increases in inventory of $1,006,754,
accounts receivable of $1,857,119, and prepaid expenses of $29,610.
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Cash used in investing activities was $412,142 for the fiscal year
ended August 31, 1998 compared to $121,730 for the fiscal period ended August
31, 1997. Fort the year ended August 31, 1998, cash was used for the acquisition
of property and equipment of $212,142 and the funding of the SYNOR-A joint
venture commitment of $200,000. The primary use of cash for the period ended
August 31, 1997 was for the acquisition of property and equipment of $96,7 30.
Cash provided by financing activities was $539,880 for the fiscal year
ended August 31, 1998 compared to $1,979,563 for the fiscal period ended August
31, 1997. Cash from the fiscal year ended August 31, 1998 was from proceeds from
the issuance of stock in the amount of $165,000 and borrowings under the line of
credit of $425,000. Cash provided by the fiscal period ended August 31, 1997 was
from the proceeds received from stockholder loans, net of repayments, in the
amount of $1,070,000, and proceeds from the issuance of securities in the amount
of $923,313.
Inflation
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material effect on our results of operations or
financial condition. Increases in fuel costs due to inflation may adversely
affect demand for used aircraft that typically are less fuel efficient, thereby
decreasing demand for aircraft and engine components and spare parts for these
aircraft.
Year 2000 Issue
The widespread use of computer programs that rely on two-digit dates to
perform computations and decision making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the U.S. and Internationally.
We recently upgraded all of our current computer hardware and software
applications as part of our normal business operations, and we believe that all
of our hardware and software applications are year 2000 compliant. As this
upgrade would have occurred in any event, we had no additional costs
attributable to the Year 2000 issue. We have completed an assessment of our
non-information technology systems, and we are not currently aware of any Year
2000 problems relating to these systems which would materially adversely affect
our business operating results or financial condition. As of January 14, 2000,
we have not experienced any year 2000 problems, nor are we aware of any year
2000 problems experienced by any of our vendors or customers.
The great majority of aircraft spare parts in our inventory do not
involve computers or embedded chips that might present Year 2000 problems. We
have contacted our vendors of the parts that might have such problems to assess
the Year 2000 compliance of those parts. If any such parts are determined to be
Year 2000 non-compliant, we will seek to return them to the vendor and believe
that we will be successful in doing so. However, we cannot be sure that this
will always be the case, and some parts may be rendered unsaleable as a result.
We do not believe that this will be material in amount.
Plan of Operation
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. See "Certain Transactions." Our management, and the co-owner
of the DC10-30 flight simulator, have determined that the flight simulator will
be best utilized if disassembled and sold as spare parts to current users of
DC10 parts and peripheral equipment. We anticipate this liquidation will be
completed by the end of 1999.
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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 November 30,
1999, the maximum amount available to Aviation Holdings International under this
formula was approximately $2,440,785 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 3. Description of Property.
Our offices and warehouse facilities are located in Miami, Florida.
These facilities comprise a total of approximately 17,600 square feet. The
premises are subject to a lease, under which Aviation Holdings International is
the tenant, dated January 1, 1997 and subsequently amended on November 1, 1997,
which expires on December 31, 2000. Annual rental is $78,348 plus pass-through
of (1) utilities, (2) increases in real estate taxes, (3) assessments, (4)
increases in insurance and (5) a pro rata share of assessments imposed by the
industrial park's association. Rent is subject to a cost of living increase
adjustment. We have two additional one year options to renew. These facilities
are adequate for our present and anticipated needs. Pasco-HK leases office space
in Hong Kong at a monthly rental of $2,500 under a two year lease that expires
December 31, 1999. Pasco-HK also leases twenty square meters of office space in
Beijing at an annual rental of $3,600 under a three year lease that expires
November 20, 2001.
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.
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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 September 30,
1999, Aviation Holdings International had tangible net worth (as defined by
Comerica Bank) of $3,863,176 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 November 30, 1999, the outstanding balance due to Comerica
Bank was $2,125,000.
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.
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.
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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.
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 September
30, 1999, these excess balances were $403,377 and $670,391, 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 4. 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 December 31, 1999 (i) by each of the Company's
directors and executive officers, (ii) all executive
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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
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) 972,923 23.1
(4) (7)
- - --------------------------------------------
(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.
19
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
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> <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>
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.
20
<PAGE>
The officers of Aviation Holdings Group and Aviation Holdings
International are elected by the Board of Directors of Aviation Holdings Group
and Aviation Holdings International, respectively, to serve until their
successors are elected and qualified. The Directors are elected at the annual
meeting of the stockholders.
Aviation Holdings Group's Certificate of Incorporation and Bylaws and
Aviation Holdings International's Certificate of Incorporation and Bylaws
provide for the indemnification of, and advancement of expenses to, directors
and officers. Aviation Holdings International has also entered into agreements
to provide indemnification for its Directors and executive officers.
Committees
Our Board of Directors has not to date established any committees, but
intends to establish an Audit Committee. The Audit Committee will recommend the
independent accountants appointed by the Board of Directors to audit our
financial statements, and will review with such accountants the scope of their
audit and their report thereon, including any questions and recommendations that
may arise relating to such audit and report of our internal accounting and
auditing procedures.
Director Compensation
Our Directors have not received any compensation for their services as
Directors in the past. We intend to pay directors who are not employed by us a
fee of $500 for each meeting of the Board of Directors attended and $500 for
each committee meeting attended.
In addition, all Directors will receive stock option grants under the
Stock Option Plan for serving on our Board of Directors. Options to purchase
5,000 shares of common stock will be automatically granted to each Director on
December 31 of each year, starting December 31, 1999, at an option exercise
price equal to the closing bid or sales price of the common stock on such date.
Additionally, Directors appointed to the Board of Directors of Aviation Holdings
International in the future will be granted options to purchase 10,000 shares of
common stock at an exercise price equal to the closing bid or sales price of the
common stock on the date of their appointment.
Item 6. Executive Compensation.
The following table reflects compensation paid or accrued during the
indicated fiscal years, which end on August 31 of the indicated year with
respect to compensation paid or accrued by Aviation Holdings International and
which end on December 31 of the indicated year with respect to compensation paid
or accrued by Aviation Holdings Group.
Summary Compensation Table
<TABLE>
<CAPTION>
All other
Name and Principal Position Year Salary Bonus Other(1) Compensation
- - ------------------------------- --------- --------------- --------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Joseph J. Nelson 1998 160,000 29,999 20,128 (2) 0.00
President, Chief 1997 160,000 11,153 0.00 0.00
Executive Officer
and Director
Simon Chiang 1998 87,653 21,500 0.00 0.00
Executive Vice
President and
Director
Joseph F. Janusz 1998 78,000 14,500 62,500 (3) 0.00
Vice President of 1997 29,500 0.00 0.00 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 November 30, 1999.
<TABLE>
<CAPTION>
Number of % of Options
Options/Warrants Granted to Exercise or Earliest
Name Granted Employees (1) Base Price Exercise Date Expiration Date
---- ------- ------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Joseph Nelson 50,000 12.5% 2.50 12/24/97 December 23, 2002
Joseph Nelson 200,000 49.8% 2.50 5/31/98 May 30, 2003
Joseph Nelson 25,000 6.2% 2.50 5/31/98 May 30, 2003
Joseph Janusz 20,000 5.0% 2.50 10/29/98 June 11, 2004
Joseph Janusz 20,000 5.0% 2.50 12/24/97 June 11, 2004
Joseph Janusz 15,000 3.7% 2.50 5/31/98 June 11, 2004
Simon Chiang 15,000 3.7% 2.50 2/12/99 (2) February 11, 2003
Simon Chiang 10,000 2.5% 2.50 5/31/98 May 30, 2003
Theodore Gregor 10,000 2.5% 2.50 11/6/97 November 5, 2002
</TABLE>
(1) Excludes from total options those options canceled due to employee
termination and options canceled under the provisions of Joseph Nelson's
employment agreement. The cancellations amounted to 35,000 options shares
in 1998 and 50,750 option shares in the nine months ended September 30,
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.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-the Money Options
Name at November 30, 1999 at November 30, 1999
---- ------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Exercisable Unexercisable Exercisable Unexercisable
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>
22
<PAGE>
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 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
23
<PAGE>
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 7. Certain Relationships and Related Transactions.
Effective October 1, 1996, Aviation Holdings International issued
600,000 shares of its common stock to Jet Avionics Systems, Inc. ("Jet
Avionics") in consideration of a promissory note in the principal amount of
$175,000, payable on demand, together with accrued interest at the applicable
federal rate. Aviation Holdings International also entered into a Consignment
Agreement with Jet Avionics, whereby Aviation Holdings International agreed to
sell certain inventory of technical spares for the benefit of Aviation Holdings
International and Jet Avionics. The Consignment Agreement was for a period of
one year and provided for the delivery of inventory by Jet Avionics to Aviation
Holdings International and the storage by Aviation Holdings International, on a
segregated basis, of such inventory. Title to such inventory remained with Jet
Avionics until sale to a third party, at which time title passed to Aviation
Holdings International and then to the third party. Aviation Holdings
International insured the inventory. The Consignment Agreement provided that
Aviation Holdings International retained 25% of the selling price of the
inventory and remitted the balance of 75% to Jet Avionics. Jet Avionics
certified that each item of inventory covered by the Agreement was maintained by
an FAA approved source and was properly documented. Pursuant to such Consignment
Agreement, Aviation Holdings International sold to third parties certain of the
consignment inventory for approximately $452,000 and owed Jet Avionics $303,000
after giving effect to a $36,000 payment.
On August 29, 1997, Aviation Holdings International and Jet Avionics
entered into a Consignment Cancellation and Purchase Agreement whereby (i) Jet
Avionics canceled the debt of $303,000 and (ii) Aviation Holdings International
purchased the remaining consignment inventory with a value of approximately
$336,000 from Jet Avionics all in exchange for 230,000 shares of Aviation
Holdings International's common stock, $4,000 in cash, and the cancellation of
$175,000 of indebtedness of Jet Avionics to Aviation Holdings International. The
President and sole shareholder of Jet Avionics is Sharon Taoz. Ms. Taoz was
employed by Aviation Holdings International, as an account executive, from
October 3, 1996 through August 31, 1997 and was paid $37,000. Ms. Taoz is
married to a current employee of Aviation Holdings International.
On October 3, 1996, Aviation Holdings International sold 80,000 shares
of its common stock to IP Services, Inc. ("IP") for $24,510. IP is an affiliate
of Howard M. Appel. During 1996 FAC Enterprises, Inc. ("FAC"), an affiliate of
Mr. Appel, loaned Aviation Holdings International aggregate of $325,000. During
the year, Aviation Holdings International repaid $125,000. The balance
($200,000) was repaid on August 29, 1997 through the issuance of 100,000 shares
of Aviation Holdings International common stock. FAC was also issued 7,500
shares for advisory services rendered. Mr. Appel may be deemed to have been an
organizer of Aviation Holdings International.
On November 1, 1996, Aviation Holdings International sold 192,000
shares of its common stock to its president, Joseph J. Nelson, in consideration
of a promissory note in the principal amount of $80,000 payable on demand. The
outstanding balance as of September 30, 1999 was $80,000. The note bears
interest at the applicable federal rate.
On November 14, 1996, Aviation Holdings International entered into a
contract with Fersam International Ltd. ("Fersam") for the purchase of a
one-half interest in a CAE Electronics Ltd. Sigma six (6) axis DC-10 simulator
(the "DC-10 simulator"). In consideration for the purchase of this interest,
Aviation Holdings International paid $125,000 in cash and issued 40,000 shares
of Aviation Holdings International common stock valued at $100,000. On March 28,
1997, Aviation Holdings International entered into another contract with Fersam
for the purchase of one (1) Novoview 2000 Visual Support System, Simulator Spare
Parts Package and Maintenance Training Data Package to be used in connection
with the DC-10 simulator. In consideration of and as payment for the purchase of
these assets, Aviation Holdings International issued 200,000 shares of Aviation
Holdings International common stock valued at $500,000.
On March 27, 1997, Silvertown International Corp. ("Silvertown") loaned
Aviation Holdings International $120,000. This loan was evidenced by a
promissory note payable to Silvertown, due on June 27, 1997, together with
24
<PAGE>
interest at 6% per annum. In consideration for this unsecured loan, Aviation
Holdings International issued to Silvertown 4,800 shares of Aviation Holdings
International common stock. This note was extended for an additional three (3)
months. On May 12, 1997, Silvertown loaned Aviation Holdings International
$250,000. This loan was evidenced by a promissory note payable to Silvertown,
due on or about July 27, 1997, together with interest at 6% per annum. In
consideration for this unsecured loan, Aviation Holdings International issued to
Silvertown 10,000 shares of Aviation Holdings International common stock. On
August 29, 1997, Aviation Holdings International satisfied the principal
amounts of these promissory notes through the issuance of 185,000 shares of
Aviation Holdings International common stock to Silvertown.
On May 23, 1997, Joseph Laura loaned $500,000 to Aviation Holdings
International. This loan was evidenced by a promissory note payable to Mr.
Laura, due on the earlier of May 31, 1998 or Aviation Holdings International
obtaining equity financing in excess of $1,000,000, together with interest at
12% per annum. Aviation Holdings International satisfied the principal amount of
this note through the issuance of 250,000 shares of common stock to Mr. Laura on
August 29, 1997.
On May 30, 1997, The D.A.R. Group, Inc., an affiliate of Michael J.
Cirillo, a director of Aviation Holdings International, was issued 200,000
shares of Aviation Holdings International common stock, for $200. On June 1,
1997, The D.A.R. Group, Inc., was issued warrants to purchase 950,000 shares of
Aviation Holdings International common stock for a fee in connection with advice
concerning the formation, capitalization and structure of Schuylkill Acquisition
Corp. See "Description of Securities-Outstanding Warrants."
On February 12, 1998, Aviation Holdings International consummated a
transaction whereby Aviation Holdings International acquired all or a majority
of the outstanding capital stock of a number of companies controlled by Simon
Chiang in return for 150,000 shares of Aviation Holdings International common
stock. The entities acquired are as follows: 100% of the capital stock of PASCO
International Aviation Corp., a Florida corporation; 90% of the capital stock of
PASCO International Aviation Corp. Limited, a Hong Kong Corporation; 80% of the
capital stock of PASCO Financial Services Limited, a Hong Kong corporation; and
100% of the capital stock of Aero-Link Flight Systems Limited, a Hong Kong
Corporation. In connection with these transactions, Aviation Holdings
International paid certain amounts on behalf of the acquired companies for which
Mr. Chiang agreed to be liable in the aggregate amount of $133,707 as of
September 30, 1999, which amounts Mr. Chiang has agreed to repay prior to
December 31, 1999. Simultaneously with the aforementioned transactions, Aviation
Holdings International and Mr. Chiang entered into an employment agreement
pursuant to which Mr. Chiang serves as Aviation Holdings International's Vice
President for Asia and the Pacific Rim Operations. See "Management - Employment
Agreements."
On October 15, 1998, Nancy Plotkin and the John C. Jacobs Trust loaned
an aggregate of $250,000 to the Company. These loans were evidenced by
promissory notes due March 15, 1999 (subject to extension by the Company to May
15,1 999), bear interest at 10% per annum and are secured by the pledge of 51%
of the outstanding stock of Aviation Holdings International. As additional
consideration for the loans, the Company issued 20,000 shares of its common
stock to Nancy Plotkin and 5,000 shares to the John C. Jacobs Trust. In May 1999
the Company extended the maturity date of these promissory notes to July 14,
1999 and issued a warrant to purchase 12,000 shares of common stock to Nancy
Plotkin and a warrant to purchase 3,000 shares of common stock to the John G.
Jacobs Trust as consideration for this extension. The warrants are exercisable
for three years from the date of grant at an exercise price of $4.00 per share.
In August 1999, the note holders agreed to extend the maturity date of these
promissory notes to September 17, 1999 upon issuance of 4,800 shares of common
stock to Nancy Plotkin and 1,200 shares of common stock to the John G. Jacobs
Trust. In September 1999, the note holders agreed to extend the maturity date of
these promissory notes to October 17, 1999 upon issuance of 4,000 shares of
common stock to Nancy Plotkin and 1,000 shares of common stock to the John G.
Jacobs Trust. In October 1999, the noteholders agreed to extend the maturity
date of these promissory notes to November 17, 1999 upon prepayment of interest
on the notes through the end of the extension. 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.
25
<PAGE>
On June 1, 1999, Aviation Holdings Group issued warrants to purchase
210,000 shares of common stock to the D.A.R. Group, Inc. and Dallas Investments,
Ltd. in consideration for the cancellation of warrants to purchase 1,000,000
shares of common stock of Aviation Holdings International.
On August 31, 1999 Aviation Holdings Group sold to IP its interest in a
promissory note from Environmental Waste Solutions, Inc. with a book value of
$900,000 which is secured by a mortgage on a 60 acre parcel of land in
Colchester, Connecticut. The purchase price was $900,000 plus 50% of any net
proceeds received from the debtor or on foreclosure. The note and mortgage
related to advances made by Aviation Holdings Group to the debtor in connection
with a proposed transaction prior to the Company's acquisition of Aviation
Holdings International and unrelated to the Company's current business.
Item 8. Legal Proceedings.
Product Liability and Legal Proceedings
Our business exposes us to possible claims for personal injury or death
which may result from a failure of aircraft spare parts sold by it. Management
takes what it believes are adequate precautions to ensure the quality and
traceability of the aircraft parts which it sells. We have a director of quality
control whose responsibilities include implementation of our quality control
system and supervision of our licensed airframe and powerplant inspectors and
operations personnel. Our President, with over 20 years of experience in the
industry, also works with the director of quality control. Parts that require
maintenance are submitted to FAA/JAA certified facilities for overhaul and
recertification as required. We also ensure that all parts received or shipped
are accompanied by proper documentation. The director of quality control also
supervises our document traceability program. We do not carry product liability
insurance. We are not currently involved in any litigation.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder 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."
Since August 2, 1999, broker/dealers have continued to submit quotations in the
National Quotation Bureau's Pink Sheets. The market for our common stock is
sporadic, and the quarterly average daily volume of shares traded since
formation ranged from a low of 16,302 shares to a high of 37,957 shares. The
following table presents the range of the high and low bid and average daily
volume information for our common stock for the periods indicated, which
information was provided by the Nasdaq Stock Market, Inc. and the National
Quotation Bureau, LLC. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
Average
Daily
High Low Volume (Shares)
---- --- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1998
First Quarter 4.75 3.469 27,172
Second Quarter 5.875 3.625 37,957
Third Quarter 5.875 4 26,473
Fourth Quarter 5 3 31,366
Year Ending December 31, 1999
First Quarter 5.25 3 25,944
Second Quarter 5.25 4 29,524
Third Quarter 4.50 0.51 33,194
Fourth Quarter (through
December 15, 1999) 2.75 0.75 16,302
</TABLE>
Records of our stock transfer agent indicate that as of December 31,
1999, there were 74 record holders of our common stock.
26
<PAGE>
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.
Item 10. Recent Sales of Unregistered Securities.
The Company
The following sets forth all sales of unregistered securities during
the past three years by Aviation Holdings Group, Aviation Holdings International
and its predecessors:
In August 1997, EyeQ Networking, Inc. issued 1,000,000 shares of its
common stock to John D. Basher, Jr., pursuant to Rule 701 promulgated under the
Securities Act as payment of professional services rendered to the Company by
Mr. Basher.
In December 1997, EyeQ Networking, Inc. issued 800,000 shares of its
common stock to nine accredited investors pursuant to Rule 504 promulgated under
the Securities Act in return for $1,000,000 less $40,000 in investment banking
fees.
In May, June and July 1998, EyeQ Networking, Inc. issued 1,095,815
shares of its common stock to 25 shareholders of Jet Aviation Trading, Inc.
pursuant to Rule 506 promulgated under the Securities Act in consideration of
the receipt of 2,468,080 shares of common stock of Jet Aviation Trading, Inc.
Each of the shareholders of Jet Aviation Trading, Inc. who participated in the
transaction made representations stating that he or she was an "accredited
investor" (as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act).
On August 1, 1998, we issued 4,000 shares of its common stock to Joseph
J. Nelson pursuant to Section 4(2) of the Securities Act as consideration for
services rendered.
In October, 1998, we issued a $200,000 promissory note and 20,000
shares of its common stock to Nancy Plotkin, and a $50,000 promissory note and
5,000 shares of its common stock to the John G. Jacobs Trust, in consideration
of loans totaling $250,000, pursuant to Rule 506 promulgated under the
Securities Act. In May 1999 we extended the maturity date of these promissory
notes to July 14, 1999 and issued a warrant to purchase 12,000 shares of common
stock to Nancy Plotkin and a warrant to purchase 3,000 shares of common stock to
the John G. Jacobs Trust as consideration for this extension. The warrants are
exercisable for three years from the date of grant at an exercise price of $4.00
per share. In July 1999 we extended the maturity date of these promissory notes
to September 17, 1999 and issued 4,800 shares of common stock to Nancy Plotkin
and 1,200 shares of common stock to the John G. Jacobs Trust.
27
<PAGE>
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."
Aviation Holdings International
The following sets forth all sales of unregistered securities during
the past three years by Aviation Holdings International or its predecessors:
In connection with the initial capitalization of Jet Aviation Trading,
Inc. in October and November of 1996, Jet Aviation Trading, Inc. issued a total
of 1,200,000 shares of its common stock for a total consideration of $780,000
consisting of $125,000 in cash, $255,000 in promissory notes and $400,000 in
non-cash compensation expense. The seven investors consisted of six business
entities and one individual, and all of the seven investors made representations
regarding their status as accredited investors.
On December 31, 1996, Jet Aviation Trading, Inc. issued 10,000 shares
of its common stock to William Seidle pursuant to Section 4(2) of the Securities
Act in return for spare parts that became part of the inventory of Jet Aviation
Trading, Inc.
In February and March 1997, Jet Aviation Trading, Inc. issued an
aggregate of 292,000 shares of its common stock to eleven accredited investors
pursuant to Rule 506 promulgated under the Securities Act for an aggregate
consideration of $730,000 in cash, less $33,691 paid as broker-dealer costs in
connection with the offering.
On March 14, 1997, Jet Aviation Trading, Inc. issued 40,000 shares of
its common stock to Fersam International Ltd. ("Fersam") in return for inventory
consisting of a one-half interest in certain flight-simulation equipment. On
March 28, 1997, Jet Aviation Trading, Inc. issued 200,000 shares of its common
stock to Fersam in return for computer software and training materials to be
used in connection with aforementioned flight-simulation equipment. On June 2,
1997, Jet Aviation Trading, Inc. issued 20,000 shares of common stock to Fersam
in return for $50,000 in cash. All of the issuances to Fersam were made pursuant
to Section 4(2) of the Securities Act.
On June 2, 1997, Jet Aviation Trading, Inc. issued 14,800 shares of its
common stock to Silvertown International Corp. ("Silvertown") pursuant to
Section 4(2) of the Securities Act as an inducement for loans made by Silvertown
to Jet Aviation Trading, Inc.
In June and July 1997, Jet Aviation Trading, Inc. (i) issued an
aggregate of 47,200 shares of its common stock to 99 investors pursuant to Rule
504 promulgated under the Securities Act for an aggregate consideration of
$118,000 in cash and payment of certain professional fees, (ii) issued 100,000
shares of its common stock to FAC Enterprises pursuant to Section 4(2) of the
Securities Act in repayment of a $250,000 loan and 7,500 shares to FAC
Enterprises as consulting fees, and (iii) issued 150,000 shares of its common
stock to Fersam International, Ltd. pursuant to Section 4(2) of the Securities
Act as payment for inventory previously held on consignment for Fersam
International, Ltd.
On August 29, 1997, Jet Aviation Trading, Inc. issued (i) 80,000 shares
of its common stock to Jet Avionics Systems, Inc. in return for spare parts
inventory, (ii) 250,000 shares of its common stock to Joseph Laura in repayment
of a $500,000 loan and (iii) 185,000 shares of its common stock to Silvertown in
repayment of $370,000 of outstanding notes. Each of the issuances was made
pursuant to Section 4(2) of the Securities Act.
28
<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 11. Description of Securities.
General
We are authorized to issue 18,000,000 shares of common stock, $.0001
par value per share, of which 4,219,315 shares are outstanding. An additional
750,000 shares of common stock are reserved for issuance pursuant to our Stock
Option Plan.
Within the limits and restrictions contained in the Certificate of
Incorporation, board of directors has the authority, without further action by
the stockholders, to issue up to 2,000,000 shares of preferred stock, $.0001 par
value per share, in one or more series, and to fix, as to any such series, the
dividend rate, redemption prices, preferences on liquidation or dissolution,
sinking fund terms, if any, conversion rights, voting rights, and any other
preferences or special rights and qualifications. As of the date hereof, we have
no preferred stock issued and outstanding.
Shares of preferred stock issued by our board of directors could be
utilized, under certain circumstances, to make an attempt to gain control of us
more difficult or time consuming. For example, shares of preferred stock could
be issued with certain rights which might have the effect of diluting the
percentage of common stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid which the
board of directors determines is not in our best interests of us and our
stockholders. This provision may be viewed as having possible anti-takeover
effects. A takeover transaction frequently affords stockholders the opportunity
to sell their shares at a premium over current market prices. The board of
directors has not authorized any series of preferred stock, and there are no
agreements, understandings or plans for the issuance of any preferred stock.
Common Stock
Holders of common stock have equal rights to receive dividends when, as
and if declared by the board of directors, out of funds legally available
therefor. Holders of common stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of common stock are entitled upon our liquidation to share
ratably in the net assets available for distribution, subject to the rights, if
any, of holders of any preferred stock then outstanding. Shares of common stock
are not redeemable and have no preemptive or similar rights. All outstanding
shares of common stock are fully paid and non-assessable.
29
<PAGE>
Outstanding Warrants
Warrants to purchase 1,000,000 shares of Aviation Holdings
International common stock were issued in June 1, 1997 in connection with its
organization. This included warrants to purchase 950,000 shares issued to D.A.R.
Group, Inc., of which Michael J. Cirillo is the principal. On June 1, 1999, all
of these warrants were exchanged for warrants to purchase 210,000 shares of
Aviation Holdings Group common stock. Each warrant entitles the holder to
purchase one share of Aviation Holdings Group common stock at an exercise price
of $4.50 until June 30, 2002. We may redeem the warrants at $.05 upon the
occurrence of both of the following events: (a) the listing of our common stock
on a securities exchange and (b) our common stock trading in excess of $5.25 per
share for a ten day period.
On March 31, 1999, we issued to Argaman, Inc. a warrant to purchase up
to 100,000 shares of common stock at an exercise price of $3.75 per share until
March 4, 2002.
On May 15, 1999, Aviation Holdings Group issued to Nancy Plotkin and
the John G. Jacobs Trust warrants to purchase 12,000 shares and 3,000 shares,
respectively, of our common stock at an exercise price of $4.00 per share until
May 15, 2004.
The warrants described above provide for adjustment of the exercise
price and for a change in the number of shares issuable upon exercise to protect
holders against dilution in the event of a stock dividend, stock split,
combination or reclassification of our common stock. A warrant may be exercised
upon surrender of the warrant certificate on or prior to the expiration date (or
earlier redemption date) of such warrant at the offices of our transfer agent,
with the form of "Election to Purchase" completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or bank check)
for the number of shares with respect to which the warrant is being exercised.
Shares issued upon exercise of warrants and paid for in accordance with the
terms of the warrants will be fully paid and nonassessable.
The warrants do not confer upon the holder thereof any voting or other
rights of a stockholder.
Transfer Agent
StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, Pennsylvania 19003,
serves as transfer agent for the common stock of Aviation Holdings International
and the Company.
Item 12. Indemnification of Directors and Officers.
Aviation Holdings Group has adopted in its Certificate of
Incorporation and Bylaws the provisions of Section 102(b)(7) of the Delaware
General Corporation Law which eliminate or limit the personal liability of a
director of Aviation Holdings Group or its stockholders for monetary damages for
breach of fiduciary duty as a director, except that this provision shall not
eliminate or limit the liability of a director for any breach of the director's
duty of loyalty to Aviation Holdings Group or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a known
violation of the law, under Section 174 of the Delaware General Corporation Law,
or for any transaction from which the director derived an improper personal
benefit.
Further, Aviation Holdings Group's Bylaws provide that Aviation
Holdings Group shall indemnify all persons whom it may indemnify pursuant to
Section 145 of the Delaware Corporation Law to the full extent permitted
therein. Section 145 provides, subject to various exceptions and limitations,
that Aviation Holdings Group may indemnify its directors or officers if such
30
<PAGE>
director or officer is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer of Aviation Holdings Group, or is or was serving at
the request of Aviation Holdings Group as a director or officer of another
corporation, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of Aviation
Holdings Group, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be made by a majority of a quorum of disinterested members of the
Board of Directors, independent legal counsel or the stockholders of Aviation
Holdings Group. In addition, Aviation Holdings Group shall indemnify its
directors or officers to the extent that they have been successful on the merits
or otherwise in defense of any such action, suit or proceeding, or in the
defense of any claim, issue or matter therein, against expenses (including
attorneys' fees) actually and reasonably incurred by them in connection
therewith.
Item 13. Financial Statements
The Financial Statements are attached to the registration statement
beginning on page F-1.
Item 14. Changes in and Disagreements with Accountants.
None.
Item 15. Financial Statements and Exhibits
(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 September 30,
1999 (Unaudited) Consolidated Statements of Operation for the Years
Ended December 31, 1997 and 1998
and for the Nine Months Ended September 30, 1998 and 1999 (Unaudited)
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997 and 1998 and for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1998 and for the Nine Months Ended September 30, 1998 and
1999 (Unaudited)
Notes to Financial Statements
JET AVIATION TRADING, INC.
Independent Auditors' Report
Balance Sheet as of August 31, 1997
Statement of Income, October 3, 1996 (Date of Inception) to
August 31, 1997
Statement of Changes in Stockholders' Equity, October 3, 1996
(Date of Inception) to August 31, 1997
Statement of Cash Flows October 3, 1996 (Date of Inception) to
August 31, 1997
Notes to Financial Statements
31
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet as of May 31, 1998 (Unaudited)
Condensed Consolidated Statements of Operations and Accumulated Deficit
for the Periods October 3, 1996 (Date of Inception) Through May 31,
1997 (Unaudited) and the Nine Months Ended May 31, 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Periods October
3, 1996 (Date of Inception) Through May 31, 1997 (Unaudited) and the
Nine Months Ended May 31, 1998 (Unaudited)
Notes to Interim Financial Statements (Unaudited)
PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Combined Statement of Operations for
the Year Ended December 31, 1998 (Unaudited)
Pro Forma Condensed Consolidated Combined Statement of Operations for
the Nine Months Ended September 30, 1999 (Unaudited)
Notes to Unaudited Pro Forma Condensed Consolidated Combined Financial
Statements (Unaudited)
(b) The following exhibits are filed as part of this registration statement.
Exhibit numbers correspond to the exhibit requirements of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <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
(a) Share Exchange Agreement between The D.A.R. Group and EYEQ Networking, Inc. *
(b) Share Exchange Agreement between The Eastwind Group, Inc. and EYEQ Networking, Inc.*
(c) Share Exchange Agreement between KAB Investments, Inc. and EYEQ Networking, Inc.*
(d) Share Exchange Agreement between Godwin Finance Ltd. and EYEQ Networking, Inc.*
(e) Share Exchange Agreement between Clifton Capital Ltd. and EYEQ Networking, Inc.*
(f) Share Exchange Agreement between Elanken Family Trust and EYEQ Networking, Inc.*
(g) Share Exchange Agreement between Joseph Laura and EYEQ Networking, Inc.*
(h) Share Exchange Agreement between Dallas Investments, Ltd. and EYEQ Networking, Inc.*
(i) Share Exchange Agreement between Joseph Nelson and EYEQ Networking, Inc.*
(j) Share Exchange Agreement between Fersam International Ltd. and EYEQ Networking, Inc.*
(k) Share Exchange Agreement between I.P. Services Inc. and EYEQ Networking, Inc.*
(l) Share Exchange Agreement between Discretionary Investment Trust dated 7/7/93 and EYEQ
Networking, Inc.*
(m) Share Exchange Agreement between Brian Due and EYEQ Networking, Inc.*
(n) Share Exchange Agreement between Bill Seidle and EYEQ Networking, Inc.*
(o) Share Exchange Agreement between Leonard Bloom and EYEQ Networking, Inc.*
(p) Share Exchange Agreement between Sheng Kuang Chiang and EYEQ Networking, Inc.*
(q) Share Exchange Agreement between Bing Ju Chiang and EYEQ Networking, Inc.*
(r) Share Exchange Agreement between Impact Investment Company, Ltd. and EYEQ Networking, Inc.*
(s) Share Exchange Agreement between Silvertown International Corp. and EYEQ Networking, Inc.*
(t) Share Exchange Agreement between Janet and Robert Weinstein and EYEQ Networking, Inc.*
(u) Share Exchange Agreement between Amaury Borges and EYEQ Networking, Inc.*
(v) Share Exchange Agreement between SPH Equities, Inc. and EYEQ Networking, Inc.*
(w) Share Exchange Agreement between Bella Shrem and EYEQ Networking, Inc.*
(x) Share Exchange Agreement between Mustang Electronics Inc. Affiliated Defined Benefits Pension
Plan and EYEQ Networking, Inc.*
(y) Share Exchange Agreement between Gary Cunningham and EYEQ Networking, Inc.*
(z) Share Exchange Agreement between Ron Halper and EYEQ Networking, Inc.*
(aa) Share Exchange Agreement between John Hunter and EYEQ Networking, Inc.*
(bb) Share Exchange Agreement between Eugene Savonen and EYEQ Networking, Inc.*
(cc) Share Exchange Agreement between William Voohees and EYEQ Networking, Inc.*
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C>
(dd) Share Exchange Agreement between Arthur Lucchesi and EYEQ Networking, Inc.*
(ee) Share Exchange Agreement between Gerard Bartolomeo and EYEQ Networking, Inc.*
(ff) Share Exchange Agreement between Neal Erps and EYEQ Networking, Inc.*
(gg) Share Exchange Agreement between Tor Osmundsen and EYEQ Networking, Inc.*
(hh) Share Exchange Agreement between James Catania and EYEQ Networking, Inc.*
(ii) Share Exchange Agreement between Legal America of Virginia, Ltd. and EYEQ Networking, Inc.*
(jj) Share Exchange Agreement between Joseph Janusz and EYEQ Networking, Inc.*
(kk) Share Exchange Agreement between Rozel International Holdings, Ltd. and EYEQ Networking, Inc.*
10.6 (a) Share Purchase Agreement with Argaman, Inc.*
(b) Argaman, Inc. Stock Purchase Warrant*
10.7 (a) Plotkin Promissory Note*
(b) Collateral Pledge Agreement*
(c) Plotkin Securities Transfer Agreement*
(d) Plotkin Stock Purchase Agreement*
10.8 (a) Jacobs Promissory Note*
(b) Jacobs Securities Transfer Agreement*
(c) Jacobs Stock Pledge Agreement*
10.9 (a) 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.
10.10 (a) Consignment Agreement*
(b) Consignment, Cancellation and Purchase Agreement*
10.11 Indemnity Agreement with Directors and Officers*
10.12 Consulting Agreement*
10.13 Simulator Purchase Agreement*
10.14 Purchase Agreement*
10.15 Stock Purchase Agreement among Jet Aviation Trading, Inc., PASCO International Aviation Corp., et al.*
10.16 Employment Agreement with Joseph J. Janusz*
10.17 Cooperative Agreement between PASCO International Aviation Corporation, Inc. and China Northern
Airlines*
10.18 Consignment Contract between Jet Aviation Trading, Inc. and Fersam International, Ltd. dated December 1,
1996*
10.19 Manufacturers Representative Agreement with Mirandy Products, Ltd. dated January 27, 1997*
10.20 Sales Representation Agreement between Aviation Holdings International, Inc. and Accessory Technologies
Corporation dated January 1, 1995*
10.21 Sales Representation Agreement between Aviation Holdings International at Aero Kool Corporation dated
January 1, 1999*
10.22 Sales Representation Agreement between Aviation Holdings International and AAS Landing Gear Services,
inc. dated April 1, 1999*
10.23 Agreement between Aero-Link Flight Systems Corp. Ltd. and China Airlines*
10.24 Modification of Employment Agreement for Simon Chiang*
11 Computation of Net Loss Per Share*
21.1 Subsidiaries of the Company*
23.1 Consent of LJ Soldinger Associates*
</TABLE>
- - ----------
*Incorporated by reference to Registration Statement on Form SB-2,
File No. 333-75169.
33
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
AVIATION HOLDINGS GROUP, INC.
<S> <C> <C>
Date: January 18, 2000 By: /s/ JOSEPH J. NELSON
--------------------------- ---------------------
Joseph J. Nelson
President and Chief Executive Officer
Date: January 18, 2000 By: /s/ JOSEPH F. JANUSZ
--------------------------- ---------------------
Joseph F. Janusz
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
</TABLE>
<PAGE>
AVIATION HOLDINGS GROUP, INC.
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
AVIATION HOLDINGS GROUP, INC.
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 (Unaudited) .. F-3
Consolidated Statements of Operation for the Years Ended December 31, 1997 and 1998 and
for the Nine Months Ended September 30, 1998 and 1999 (Unaudited) ..................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December
31, 1997 and 1998 and for the Nine Months Ended September 30, 1999 and 1998
(Unaudited) ........................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1998 and
for the Nine Months Ended September 30, 1998 and 1999 (Unaudited) ..................... F-7
Notes to Financial Statements ........................................................... F-9
JET AVIATION TRADING, INC.
Independent Auditors' Report ............................................................ F-30
Balance Sheet as of August 31, 1997 ..................................................... F-31
Statement of Income, October 3, 1996 (Date of Inception) to August 31, 1997 ............. F-32
Statement of Changes in Stockholders' Equity, October 3, 1996 (Date of Inception) to
August 31, 1997 ....................................................................... F-33
Statement of Cash Flows October 3, 1996 (Date of Inception) to August 31, 1997 .......... F-34
Notes to Financial Statements ........................................................... F-35
AVIATION HOLDINGS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet as of May 31, 1998 (Unaudited) ..................... F-43
Condensed Consolidated Statements of Operations and Accumulated Deficit for the Periods
October 3, 1996 (Date of Inception) Through May 31, 1997 (Unaudited) and the Nine
Months Ended May 31, 1998 (Unaudited) ................................................. F-45
Condensed Consolidated Statements of Cash Flows for the Periods October 3, 1996 (Date of
Inception) Through May 31, 1997 (Unaudited) and the Nine Months Ended May 31, 1998
(Unaudited) ........................................................................... F-46
Notes to Interim Financial Statements (Unaudited) ....................................... F-47
PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Combined Statement of Operations for the Year Ended
December 31, 1998 (Unaudited) ......................................................... P-2
Pro Forma Condensed Consolidated Combined Statement of Operations for the Nine Months
Ended September 30, 1999 (Unaudited) .................................................. P-3
Notes to Unaudited Pro Forma Condensed Consolidated Combined Financial Statements
(Unaudited) ........................................................................... P-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Aviation Holdings Group, Inc.
Miami, FL
We have audited the accompanying consolidated balance sheets of Aviation
Holdings Group, Inc. (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aviation Holdings
Group, Inc. as of December 31, 1998, and the consolidated results of its
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1997 and 1998 in conformity with generally accepted accounting
principles.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
June 22, 1999
F-2
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash ........................................................... $ 363,690 $ 497,437
Trade receivables, net ......................................... 2,842,545 3,118,220
Inventory ...................................................... 3,220,062 4,033,434
Employee advances .............................................. 4,040 4,091
Advances to stockholder -- related party ....................... 75,181 151,709
Prepaid expenses ............................................... 24,728 42,723
Refundable income taxes ........................................ 16,200 16,200
----------- ------------
Total Current Assets ........................................ 6,546,446 7,863,814
----------- ------------
Property and Equipment, Net ....................................... 303,121 321,981
----------- ------------
Other Assets
Investment in joint venture .................................... 503,042 692,585
Deposits ....................................................... 17,382 16,713
Note receivable, net ........................................... 900,000 --
Interest receivable from stockholders -- related party ......... 25,827 42,132
Intangibles, net ............................................... 357,766 695,127
Deferred offering costs ........................................ 109,782 677,082
----------- ------------
Total Other Assets .......................................... 1,913,799 2,123,639
----------- ------------
Total Assets ...................................................... $ 8,763,366 $ 10,309,434
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- ----------------
(Unaudited)
<S> <C> <C>
Current Liabilities
Short-term borrowings -- bank ......................................... $ 1,500,000 $ 1,975,000
Short-term borrowings -- others ....................................... 148,685 255,444
Current portion of long-term debt ..................................... 3,272 3,418
Accounts payable ...................................................... 2,130,906 2,854,567
Accrued expenses ...................................................... 404,498 436,822
Advances from stockholders ............................................ 782,500 1,000
Income taxes payable .................................................. 204,700 229,000
------------ ------------
Total Current Liabilities .......................................... 5,174,561 5,755,251
------------ ------------
Long-term debt, net of current portion ................................... 13,124 10,314
------------ ------------
Total Liabilities .................................................. 5,187,685 5,765,565
------------ ------------
Minority Interest ........................................................ 1,186,964 364,906
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock; no par value; authorized -- 2,000,000 shares;
issued -- none ....................................................... -- --
Common stock; $.0001 par value; At December 31, 1998 authorized --
18,000,000 shares; issued, issuable and outstanding -- 3,474,815
At September 30, 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) (1,579,003)
------------ ------------
Total Stockholders' Equity ......................................... 2,388,717 4,178,963
------------ ------------
Total Liabilities and Stockholders' Equity ......................... $ 8,763,366 $ 10,309,434
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------ --------------------------------
1997 1998 1998 1999
------------ --------------- --------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales .............................................. $ -- $ 8,365,197 $ 5,094,930 $9,342,749
Cost of Goods Sold ..................................... -- 5,839,049 3,996,660 6,048,375
--------- ------------ ------------ ----------
Gross Profit ........................................... -- 2,526,148 1,098,270 3,294,374
--------- ------------ ------------ ----------
Operating Expenses
Salaries and wages .................................... -- 1,300,172 896,608 1,095,200
General and administrative ............................ 15,950 1,771,560 1,157,850 1,435,615
Professional fees ..................................... 48,227 617,099 408,713 190,512
--------- ------------ ------------ ----------
Total Operating Expenses ............................... 64,177 3,688,831 2,463,171 2,721,327
--------- ------------ ------------ ----------
Income (Loss) from Operations .......................... (64,177) (1,162,683) (1,364,901) 573,047
Other Income (Expense)
Interest expense ...................................... -- (96,044) (6,057) (578,148)
Interest income ....................................... 6,740 72,825 66,786 21,009
Income (loss) from joint venture ...................... -- (8,313) 5,057 4,171
--------- ------------ ------------ ----------
Total Other Income (Expense) ........................... 6,740 (31,532) 65,786 (552,968)
--------- ------------ ------------ ----------
Loss Before Income Taxes and Minority Interest ......... (57,437) (1,194,215) (1,299,115) 20,079
Income Tax Expense ..................................... -- (186,863) (3,757) (56,125)
--------- ------------ ------------ ----------
Loss Before Minority Interest .......................... (57,437) (1,381,078) (1,302,872) (36,046)
Minority Interest ...................................... -- (3,702) 25,305 (62,870)
--------- ------------ ------------ ----------
Net Loss ............................................... $ (57,437) $ (1,384,780) $ (1,277,567) (98,916)
========= ============ ============ ==========
Basic and Diluted Loss Per Common Share ................ $ (.06) $ (.46) $ (.49) $ (.03)
========= ============ ============ ==========
Average Common Shares -- Basic and Diluted ............. 1,046,235 3,035,856 2,610,511 3,954,459
========= ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Stock
------------------------ Paid-In Subscription Accumulated
Shares Amount Capital Receivable Deficit
------------ --------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1996 .......... 637,000 $64 $ 30,599 $ -- $ (37,870)
Common stock issued for services --
related party ............................ 1,000,000 100 900 -- --
Cancellation of common stock .............. (87,000) (9) 9 -- --
Common stock issued for cash .............. 800,000 80 999,920 -- --
Additional offering costs ................. -- -- (46,143) -- --
Liabilities paid or forgiven by
stockholder -- related party ............. -- -- 24,332 -- --
Net loss .................................. -- -- -- -- (57,437)
--------- ----- ---------- ---------- ------------
Balances as of December 31, 1997 .......... 2,350,000 235 1,009,617 -- (95,307)
Common stock issued in the Aviation
Holdings International, Inc.
acquisition .............................. 1,095,815 110 2,619,626 -- --
Stock subscription receivable from
officers' subsidiary stock -- related
parties .................................. -- -- -- (280,000) --
Compensatory common stock options
issued ................................... -- -- 360,200 -- --
Common stock issued to officer --
related party ............................ 4,000 -- 20,128 -- --
Common stock and warrants issued in
connection with $250,000 note
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 .................................. -- -- -- -- (98,916)
--------- ----- ---------- ---------- ------------
Balances as of September 30, 1999
(Unaudited) .............................. 4,219,315 $422 $6,037,544 $ (280,000) $ (1,579,003)
========= ===== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1998
-------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ................................................... $ (57,437) $ (1,384,780)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Compensatory common stock and options .................... -- 401,161
Common stock issued for services -- related parties ...... 1,000
Minority interest ........................................ -- 3,702
Loss (income) from joint venture ......................... -- 3,976
Depreciation and amortization ............................ -- 54,979
Amortization of financing fees ........................... -- 37,573
Provision for bad debts .................................. -- 841,410
Reserve for obsolete inventory ........................... -- 66,579
Liability paid on behalf of company by
stockholder -- related party ............................ 10,000 --
Liability forgiven by stockholder -- related party . 14,332 --
Expensed deferred acquisition costs ...................... -- 10,673
Change in assets and liabilities
(Increase) decrease in
Trade receivables ..................................... -- (1,059,241)
Inventory ............................................. -- (613,306)
Interest receivable ................................... (6,740) (64,351)
Prepaid expenses and deposits ......................... (2,957) 27,905
Refundable income taxes ............................... (16,200)
Increase (decrease) in
Due to stockholder -- related party ................... (7,207) --
Accounts payable ...................................... -- (169,081)
Accrued expenses ...................................... 8,000 (173,823)
Income taxes payable .................................. -- 204,700
---------- -------------
Total Adjustments .................................... 16,428 (443,344)
---------- -------------
Net Cash Used in Operating Activities ....................... (41,009) (1,828,124)
---------- -------------
Cash Flows from Investing Activities
Note receivable advances ................................... (940,000) (535,100)
Employee advances .......................................... -- (4,040)
Purchases of equipment ..................................... -- (88,198)
Cash acquired in Aviation Holdings International, Inc.
acquisition .............................................. -- 830,331
Investment in joint venture ................................ -- (300,000)
Distribution from joint venture ............................ -- --
Payments for deferred acquisition costs .................... (10,673) --
---------- -------------
Net Cash (Used in) Provided by Investing Activities ......... (950,673) (97,007)
---------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1999
----------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ................................................... $ (1,277,567) $ (98,916)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Compensatory common stock and options .................... 395,953 83,625
Common stock issued for services -- related parties ...... -- --
Minority interest ........................................ (25,305) 62,871
Loss (income) from joint venture ......................... (5,057) (4,170)
Depreciation and amortization ............................ 28,023 86,690
Amortization of financing fees ........................... -- 383,932
Provision for bad debts .................................. 632,410 30,000
Reserve for obsolete inventory ........................... 39,000 --
Liability paid on behalf of company by
stockholder -- related party ............................ -- --
Liability forgiven by stockholder -- related party ....... -- --
Expensed deferred acquisition costs ...................... 10,673 --
Change in assets and liabilities
(Increase) decrease in
Trade receivables ..................................... (684,664) (305,675)
Inventory ............................................. (84,046) (813,373)
Interest receivable ................................... (58,475) (16,305)
Prepaid expenses and deposits ......................... (138,472) 12,015
Refundable income taxes ............................... (16,000) --
Increase (decrease) in
Due to stockholder -- related party ................... -- --
Accounts payable ...................................... 211,550 723,662
Accrued expenses ...................................... (156,916) (373,233)
Income taxes payable .................................. -- 24,300
------------- ----------
Total Adjustments .................................... 148,674 (105,661)
------------- ----------
Net Cash Used in Operating Activities ....................... (1,128,893) (204,577)
------------- ----------
Cash Flows from Investing Activities
Note receivable advances ................................... (535,100) --
Employee advances .......................................... -- (52)
Purchases of equipment ..................................... (55,830) (77,419)
Cash acquired in Aviation Holdings International, Inc.
acquisition .............................................. 830,331 --
Investment in joint venture ................................ (200,000) (200,000)
Distribution from joint venture ............................ -- 14,627
Payments for deferred acquisition costs .................... -- --
------------- ----------
Net Cash (Used in) Provided by Investing Activities ......... 39,401 (262,844)
------------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ----------------------------
1997 1998 1998 1999
---------- -------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from bank line of credit ................ $ -- $ 1,500,000 $ 675,000 $ 475,000
Proceeds from short-term borrowing ............... -- 250,000 -- --
Repayments of short-term borrowings .............. -- -- -- (23,897)
Repayments on long-term debt ..................... -- (2,270) (1,409) (2,664)
Payments of deferred offering costs .............. -- (11,368) (55,778) (79,623)
Proceeds from sale of EWS note ................... -- -- -- 43,880
Advances from (to) stockholders,
net of repayments .............................. -- 550,284 724,498 (76,528)
Proceeds from sale of stock, net of
offering costs paid ............................ 993,857 -- -- 265,000
-------- ----------- ---------- ---------
Net Cash Provided by Financing Activities ......... 993,857 2,286,646 1,342,311 601,168
-------- ----------- ---------- ---------
Net Increase in Cash .............................. 2,175 361,515 252,819 133,747
Cash, Beginning of Period ......................... -- 2,175 2,175 363,690
-------- ----------- ---------- ---------
Cash, End of Period ............................... $ 2,175 $ 363,690 $ 254,994 $ 497,437
======== =========== ========== =========
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest and Income Taxes
Interest ......................................... $ -- $ 21,202 $ 2,992 $ 190,638
======== =========== ========== =========
Income Taxes ..................................... $ -- $ 8,191 $ 20,815 $ 31,825
======== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 -- DESCRIPTION OF THE BUSINESS
Background
Aviation Holdings Group, Inc., together with its subsidiaries, is
hereinafter referred to as the "Company." Aviation Holdings Group, Inc.
(formerly EYEQ Networking, Inc.) was incorporated under the laws of the State
of Colorado on May 19, 1988 and reincorporated in the State of Delaware in
January 1998. The Company was initially intended to serve as a public shell
company, defined as an inactive, publicly-quoted company with nominal assets
and liabilities. It was intended that such a public shell would be attractive
to privately-held companies interested in becoming publicly traded by means of
a business combination with the Company rather than by offering their own
securities to the public.
The Company entered into a letter agreement dated November 20, 1997,
pursuant to which the Company intended to merge with Environmental Waste
Solutions, Inc. ("EWS"), a Nevada corporation, whereby the Company would have
remained as the surviving entity. EWS was formed for the purpose of serving as
a holding company for operating subsidiaries which were to be acquired and
which engage in waste recycling and disposal. EWS failed to acquire the
operating subsidiaries, and on June 2, 1998 the Company exercised its option to
terminate the letter agreement.
During the period May through July 1998, the Company acquired 74% of
Aviation Holdings International, Inc. ("AHI") (formerly Jet Aviation Trading,
Inc.) through common stock share exchanges and by a block purchase of common
stock. In the first six months of 1999, the Company increased its ownership
interest in AHI to 96% through a series of common stock share exchanges. AHI
has two wholly-owned subsidiaries, PASCO International Aviation Corp., a
Florida corporation ("PASCO Florida"), and Aero-Link Flight Systems Limited, a
Hong Kong corporation ("Aero HK"), and two majority-owned subsidiaries, PASCO
International Aviation Corporation Limited, a Hong Kong corporation ("PASCO
HK"), of which it owns 90%, and PASCO Financial Services Limited, a Hong Kong
corporation ("PASCO Financial HK"), of which it owns 80%. AHI acquired its
interests in these subsidiaries in February 1998. (PASCO Florida, PASCO HK,
PASCO Financial HK and Aero HK are sometimes hereinafter referred to
collectively as "PASCO"). Subsequent to its initial stock acquisition of AHI,
the Company changed its name from EYEQ Networking, Inc. to Aviation Holdings
Group, Inc.
On March 26, 1999 the Company filed a registration statement with the
United States Securities and Exchange Commission to sell its securities to the
public in an initial public offering of its common stock.
Nature of Operations
The nature of operations for each entity is as follows:
AHI is in the business of buying, selling, leasing and exchanging spare
parts and engines for fixed-wing commercial jet transport aircraft.
PASCO HK operations consist of purchasing, selling and leasing of aircraft
components and engines in Asia and the Pacific Rim.
PASCO Florida holds a 25% interest in Shenyang Northern Aircraft
Maintenance & Engineering Co., Ltd. ("SYNOR-A"), a Sino-American joint venture.
The Company has recognized minimal revenue from PASCO Florida as of September
30, 1999.
PASCO Financial HK's objective is to procure financing from banks on
behalf of airlines for their aircraft and aviation-related purchases. PASCO
Financial HK also intends to function on behalf of certain airlines and act as
their agent in connection with the sale or lease of aircraft. The Company had
not recognized any revenue from PASCO Financial HK as of September 30, 1999.
F-9
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 -- DESCRIPTION OF THE BUSINESS -- (Continued)
Aero HK and its wholly-owned subsidiary, Aero-Link Flight Systems, Inc., a
Florida corporation, have entered into an agreement to act as the global
marketing representative (except in the Taiwan region) for China Airlines,
Taiwan.
In this capacity they are responsible for promoting and marketing China
Airlines' aircraft maintenance, turbine engine and component repair and
overhaul business. This entity also functions as a purchasing agent in the
United States on behalf of PASCO HK. The Company has recognized minimal revenue
from Aero-Link as of September 30, 1999.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Development Stage Enterprise
The Company was a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting for Development
Stage Enterprises." The Company started development stage activities in 1997 by
raising capital through a private placement offering in order to actively
pursue a merger with EWS as well as pursue other potential business
combinations. The Company ceased being in the development stage in 1998 upon
the acquisition of a majority interest in AHI.
Consolidated Financial Statements and Interim Information
The interim consolidated financial data as of September 30, 1999 and for
the nine months ended September 30, 1999 and 1998 is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments that,
in the opinion of management, are necessary to fairly present the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for a full fiscal year.
The accompanying consolidated interim financial statements include the
accounts of the Company and its 96%-owned subsidiary, AHI. The operations of
AHI have been included in these consolidated financial statements since the
initial date of acquisition (May 1998), ratably based on the percentage of
ownership of AHI. The accounts of AHI include all of its majority and
wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated. The outside investors' interests have been recorded as
minority interest.
AHI formerly maintained its accounting records on a fiscal year basis
ending on August 31. AHI's accounting records have been restated to a calendar
year basis for consolidation purposes. AHI changed its reporting to a calendar
year basis beginning on January 1, 1999.
For comparability purposes, the 1997 figures have been reclassified where
appropriate to conform with the financial statement presentation used in 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Significant estimates
F-10
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
included here in the financial statements and in the accompanying 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.
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 September 30, 1999, the amount of
funds that exceeded FDIC insurance was $403,377 and $670,391, respectively. AHI
also maintained funds in banks that were not FDIC insured. At December 31, 1998
and September 30, 1999, AHI maintained a balance of $22,536 and $2,536,
respectively, in the Israel Discount Bank Limited, an international bank that
operates in the United States. Management does not believe that a significant
risk existed by maintaining balances in excess of the FDIC insured limit.
During the period from February 12, 1998 through December 31, 1998 and for
the nine months ended September 30, 1999, PASCO HK maintained bank accounts in
Hong Kong with the Kwong On Bank, Limited. The accounts were denominated in
United States Dollars, Hong Kong Dollars and German Deutsche Marks. None of the
accounts were FDIC insured. During the period, the accounts denominated in
foreign currencies and the effects of the translation of foreign currency
accounts into United States Dollars were immaterial.
Revenue and Cost Recognition
Revenue and the associated cost of sales are recognized when parts are
shipped to the customer. Amounts received or paid in advance are recorded
either as deferred income or as prepaid, and are recognized in the period in
which the parts are shipped to customers or received by the Company. Revenue
and the related cost of consigned inventory are recognized when the parts are
shipped to the customer.
Inventories
Inventory is stated at the lower of cost or market. Cost of aircraft parts
is determined on a specific identification basis, except at September 30, 1998,
when cost was determined by using the gross profit
F-11
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
method. When parts are purchased in lots, costs are assigned to individual
parts or the individual parts are expensed at a predetermined percentage of the
sales price until the cost of the lot is recovered. Costs to repair, inspect
and/or modify the parts are charged to the specific part when incurred.
Inventories held by the Company on consignment from others are not included in
the inventory in the accompanying financial statements. Provisions have been
made for the estimated effect of excess and obsolete inventories. Such
allowance is based on management's best estimate, which is subject to change.
Actual realizable results could significantly differ from this estimate.
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 September 30, 1999.
Consignment inventory is not included in inventory amounts.
Deferred Offering Costs
Deferred offering costs consist of amounts paid or accrued for
professional fees, commissions, filing fees and other costs incurred by the
Company in connection with the filing of its registration statement with the
Securities and Exchange Commission for a public offering. These amounts will be
recorded as a reduction of the proceeds when the offering is completed. If the
offering is not completed, the costs will be expensed.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment are
depreciated using the straight-line method over their estimated useful lives
ranging from five to seven years. Leasehold improvements are amortized over the
shorter of their useful lives or the remaining periods of the related leases.
Intangibles
Intangibles consist of goodwill, unamortized note discounts and deferred
offering costs. Goodwill, which originated from the PASCO acquisition and the
1999 share exchanges (Note 4), is being amortized over fifteen years using the
straight-line method. The unamortized note discount, which originated from the
warrants issued in connection with the maturity date extension of the $250,000
notes, is being amortized using the effective interest rate method over the
life of the extension period exercised.
F-12
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start- up Activities." SOP 98-5,
which is effective for fiscal years beginning after December 15, 1998, provides
guidance on the financial reporting of start-up costs and organizations costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. As the Company has expensed these costs historically, the adoption
of this standard during the first quarter of 1999 did not have a significant
impact on results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of this
statement to have a significant impact on results of operations, financial
position or cash flows.
NOTE 3 -- REINCORPORATION/CHANGE OF CORPORATE NAME
In January 1998, the Company reincorporated in the State of Delaware,
decreasing its authorized common and preferred stock shares to 18,000,000 and
2,000,000, respectively.
On August 31, 1998, both the Company and AHI amended their Articles of
Incorporation to change their corporate names to Aviation Holdings Group, Inc.
and Aviation Holdings International, Inc., respectively.
NOTE 4 -- ACQUISITION
During the second and third quarters of 1998, the Company acquired 74.08%
of AHI. The business combination was treated as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
Company entered into share exchange agreements ("Exchange Agreements") with
various AHI stockholders. Based upon the terms of the underlying agreements,
the Company exchanged
F-13
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 4 -- ACQUISITION -- (Continued)
one share of common stock for between 1.667 to 2.5 shares of the AHI's common
stock. The Company also acquired 80,000 shares of AHI common stock from a
stockholder of the Company in repayment of a loan from the Company for
$100,000. Through these exchanges and the acquisition from a stockholder, the
Company issued 1,095,815 shares of its common stock in return for 2,468,080
shares (74.08%) of AHI's issued and outstanding common stock as of December 31,
1998. The original shareholders of the Company continued to maintain majority
ownership after the AHI acquisition. The Company shares of common stock
received by the former shareholders of AHI gave them the same rights as all
other common shareholders of the Company. No special controlling or voting
rights were accorded to any shares. The acquisitions have been accounted for as
a purchase by the Company with a purchase price of $2,719,736. The purchase
price was derived from the underlying book value of the assets and liabilities
of AHI. No fair value adjustments were deemed necessary as management believes
that the values of the assets and liabilities approximated the fair values at
the time of the acquisitions. The operations of AHI, since the acquisition,
have been included in the accompanying consolidated financial statements for
the year ended December 31, 1998 and the nine months ended September 30, 1998
and 1999.
In March 1999, the Company entered into a share exchange agreement with a
stockholder of AHI, thereby increasing the Company's ownership percentage of
AHI to 92%. In return for 600,000 shares of AHI stock, the Company exchanged
500,000 shares of its common stock and a warrant to purchase 100,000 shares of
its common stock at an exercise price of $3.75 per share and an exercise period
of three years. The value of the Company's securities that were tendered in the
exchange were valued at $1,041,498, resulting in the Company recording goodwill
of $321,679.
In April 1999, the Company entered into a series of share exchange
agreements with stockholders of AHI, thereby increasing its ownership
percentage of AHI to 96%. In return for 137,500 shares of AHI stock, the
Company exchanged 115,500 shares of its common stock. The value of the
Company's securities that were tendered in the exchange were valued at
$206,445, resulting in the Company recording goodwill of $41,396.
NOTE 5 -- JOINT VENTURE
SYNOR-A is a Sino-American joint venture company that was established in
November 1997 by PASCO Florida and China Northern Airlines ("CNA") under an
agreement with a term of eleven years. PASCO Florida holds a 25% interest in
SYNOR-A and CNA holds the remaining 75% interest. SYNOR-A primarily deals with
inspection, repair and recertification of DC9, MD80, and A300-600 components,
instruments and avionics. SYNOR-A has been approved by the Civil Aviation
Administration of China in the avionics accessories repair field. SYNOR-A
received licenses necessary to commence operations in November 1997. Operations
commenced in March 1998. The Company reports this investment on the equity
method of accounting.
PASCO Florida's total financial investment commitment to SYNOR-A is
$1,000,000. As of September 30, 1999, $708,332 of this commitment had been
funded. Under the terms of the joint venture, PASCO Florida is entitled to
certain preferences in any distributions of net income of SYNOR-A. These
preferences are intended to provide that PASCO Florida will recover its
investment in SYNOR-A prior to any regular distributions made to CNA. PASCO
Florida's role in SYNOR-A is to provide technological advice to SYNOR-A and to
promote, market and sell the services of SYNOR-A. The Company has recognized
minimal revenue from SYNOR-A as of September 30, 1999. In August 1999, SYNOR-A
distributed $14,627 to the Company.
F-14
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 5 -- JOINT VENTURE -- (Continued)
Condensed financial information for the Company's investment in the joint
venture is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance Sheet:
Total Assets .................................................. $ 3,706,753 $ 3,720,291
=========== ===========
Total Liabilities ............................................. 223,515 101,252
=========== ===========
Statement of Operations:
Revenues ...................................................... 510,610 1,079,045
Expenses ...................................................... 526,516 1,062,365
----------- -----------
Net Income (Loss) ................................................ (15,906) 16,680
=========== ===========
Aviation Holdings International's Share of (Loss) Income ......... $ (3,976) $ 4,170
=========== ===========
</TABLE>
NOTE 6 -- DISCONTINUED MERGER
On November 20, 1997, the Company entered into a letter agreement (the
"Letter Agreement") which sets forth the terms of a series of transactions that
would have resulted in EWS merging into the Company (the "Merger") (see Note
1). Under the terms of the Letter Agreement, the Company would have been the
surviving entity. As a prerequisite of its merger with the Company, EWS was
required to complete a merger with three companies that had entered into
agreements to be acquired by EWS (the "Acquisitions"). The companies were: J.
M. Container, Inc., a New Hampshire corporation ("JMC"), which operates a waste
transfer station and recycling center in New Hampshire; Waste Placement, Inc.,
a Connecticut corporation ("WPI"), which operates a waste brokerage business
located in Massachusetts; and Municipal Enterprises, Inc., a Connecticut
corporation ("MEI"), which owns a sixty-acre parcel of real estate in
Colchester, Connecticut which contains an inactive sanitary landfill. In
accordance with the Letter Agreement, the Company had the right to consummate
the Merger as soon as practicable following the completion of the EWS
Acquisitions, or, prior to the completion of the EWS Acquisitions, the Company
had the option to terminate the Letter Agreement at its sole discretion. On
June 2, 1998, as a result of EWS not consummating the Acquisitions, the Company
exercised its option to terminate the Letter Agreement. As of December 31,
1997, the Company had incurred deferred acquisition costs in the amount of
$10,673. These costs were expensed during the year ending December 31, 1998.
NOTE 7 -- TRADE RECEIVABLES
Trade receivables consisted of the following at:
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
Accounts receivable ..................... $ 3,162,545 $ 3,468,220
Allowance for doubtful accounts ......... (320,000) (350,000)
----------- -----------
Net Trade Receivables ................ $ 2,842,545 $ 3,118,220
=========== ===========
F-15
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 8 -- INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Inventory ............................................ $ 3,440,062 $ 4,253,434
Allowance for obsolete and slow-moving goods ......... (220,000) (220,000)
----------- -----------
Total ............................................. $ 3,220,062 $ 4,033,434
=========== ===========
</TABLE>
NOTE 9 -- DC-10 FLIGHT SIMULATOR AND SUPPORT PACKAGE
On November 1, 1996, AHI entered into an agreement with a company
domiciled in the Netherlands (the "Seller") to purchase a one-half ownership in
a DC 10-30 flight simulator and all associated equipment required to operate
the flight simulator. The agreement called for the Seller and AHI to equally
participate in all revenues generated from the sale, lease or disassembly of
the hardware of the flight simulator. AHI paid the Seller $125,000 in cash and
issued 40,000 shares of its common stock, which was valued at $2.50 per share,
for the flight simulator. AHI intended to sell the flight simulator as a
complete package.
On March 28, 1997, AHI entered into a second agreement with the Seller to
purchase one Novoview 2000 Visual System ("Novoview 2000") to be used in
conjunction with the DC 10-30 flight simulator. The purchase price was
$500,000, and AHI satisfied its obligation by issuing 200,000 shares of its
common stock at an ascribed value of $2.50 per share. AHI is to receive 100% of
the revenues generated from the sale of these items. The interest in the
simulator, Novoview 2000 and freight costs were recorded at AHI's cost of
$734,421. In 1998, AHI changed its sales strategy. Instead of selling the
simulator and the Novoview 2000 as a complete unit, AHI decided to sell the
components individually as spare parts. In conjunction with this change in
strategy, AHI expensed $335,000 in 1998, prior to its acquisition by the
Company, in order to reflect the decrease in market value of the avionics and
physical structure as spare parts. The remaining value is recorded in the
Company's inventory.
This Seller is also a purchaser and supplier of spare parts from and to
the Company.
NOTE 10 -- NOTES RECEIVABLE AND CREDIT RISK
Credit Facility
In December 1997, the Company agreed, subject to the availability of its
funding, to provide a $2,000,000 credit facility (the "Credit Facility") to
EWS, JMC and MEI. This Credit Facility was provided in anticipation of the
contemplated merger between EWS and the Company. At December 31, 1997, the
Company had advanced $940,000 to EWS in connection with the Credit Facility.
The loan was unsecured at December 31, 1997, and subsequently became evidenced
by a promissory note dated February 17, 1998 and secured by a mortgage on real
estate owned by MEI. Interest commenced on December 2, 1997 and accrues at the
rate of 10% per annum on the principal balance and on any overdue interest.
Principal and interest were due on the earlier of July 1, 1998 or the date of
any event of default. At July 1, 1998, EWS had disbursed all of the funds
received from the Company, had no business operations, and had not consummated
the acquisitions of the three companies it was to acquire before merging with
the Company. The Company may need to foreclose on the property to recover the
principal and interest receivable and foreclosure costs. During 1998, the
Company and EWS restructured the loan by extending the maturity date to
February 1, 1999. Accrued interest as of July 1, 1998 of approximately $58,000
was added to the existing principal balance at that date. The new principal
balance, along with additional advances, accrued interest through the maturity
F-16
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 10 -- NOTES RECEIVABLE AND CREDIT RISK -- (Continued)
date. During the first two quarters of 1998, the Company advanced an additional
$535,100 to EWS under this Credit Facility. A valuation allowance has been
recorded in 1998 for these additional advances as well as for the accrued
interest through July 1, 1998. The Company ceased recording interest on this
receivable subsequent to July 1, 1998 since any interest recorded would be
offset with a valuation allowance. The amount recorded for this loan receivable
at December 31, 1998 was $900,000 (principal balance of $1,475,100 plus
interest receivable of $58,310, less a valuation allowance of $633,410).
NOTE 11 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
Leasehold improvements ................. $ 143,321 $ 169,289
Office furniture and equipment ......... 76,687 87,404
Computer equipment ..................... 81,372 114,917
Software ............................... 45,184 52,373
Trucks ................................. 28,676 28,676
--------- ----------
375,240 452,659
Accumulated depreciation ............ (72,119) (130,678)
--------- ----------
Total ............................... $ 303,121 $ 321,981
========= ==========
NOTE 12 -- INTANGIBLES
Intangibles consisted of the following:
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
Goodwill ................................. $ 375,000 $ 738,075
Deferred financing costs ................. 7,500 17,499
--------- ---------
382,500 755,574
Less accumulated amortization ......... (24,734) (60,447)
--------- ---------
Total ................................. $ 357,766 $ 695,127
========= =========
NOTE 13 -- STOCK SUBSCRIPTION RECEIVABLE
On February 12, 1998, AHI issued 160,000 shares of common stock to PASCO's
former majority stockholder (the "Vice President") in return for two promissory
notes aggregating $365,000 and the assignment from PASCO of inventory valued at
$35,000. AHI received a three-month non-interest bearing promissory note for
$165,000, which had recourse against the personal assets of the Vice President,
and was paid in full in May 1998. The second note is a three-year promissory
note for $200,000 bearing interest at prime, secured solely by 80,000 shares of
the Company's common stock ("Nonrecourse Note"). The shares of common stock
have been pledged as security and are held in escrow in accordance with a stock
pledge agreement dated February 12, 1998. The Nonrecourse Note remained
outstanding at September 30, 1999.
In October 1996, AHI issued 192,000 shares of its common stock to its
Chief Executive Officer in exchange for a demand promissory note of $80,000
which remains outstanding as of September 30, 1999. The note bears interest at
6% per annum.
F-17
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 13 -- STOCK SUBSCRIPTION RECEIVABLE -- (Continued)
AHI recorded interest income of approximately $19,844 and $16,304 for the
year ended December 31, 1998 and the nine-month period ended September 30,
1999, respectively, on the outstanding stock subscription receivables. As of
December 31, 1998 and September 30, 1999, the accrued interest receivable on
the stock subscription receivables was $25,827 and $42,132, respectively.
NOTE 14 -- ADVANCES AND BORROWINGS - STOCKHOLDERS AND RELATED PARTIES
The Company advanced funds to and received advances from certain
stockholders during 1998. At December 31, 1998 and September 30, 1999, the
Company owed $781,500 and $0, respectively, of such advances to IP Services,
Inc. and $1,000 to FAC Enterprises, Inc. The amounts owed to IP Services, Inc.
are due on demand; however, demand may not be made prior to repayment of funds
due from EWS (see Notes 10 and 27).
AHI made non-interest bearing advances, net of repayments, to an officer
amounting to $75,181 and $151,709 at December 31, 1998 and September 30, 1999,
respectively.
NOTE 15 -- SHORT-TERM BORROWINGS
On August 12, 1998, AHI obtained a revolving working capital line of
credit from Comerica Bank. At December 31, 1998 and September 30, 1999, the
amount outstanding on the credit line was $1,500,000 and $1,975,000,
respectively. The loan agreement provides for a maximum aggregate borrowing
limit of $3,500,000, subject to a limitation amount of eighty-five percent of
eligible Company receivables and thirty-five percent of eligible Company
inventory as defined in the loan agreement. This revolving line of credit is
secured by substantially all of AHI's assets, and is due on demand. The line of
credit bears interest at the Bank's prime rate plus 1%. The loan agreement
contains certain covenants which require AHI to maintain minimum thresholds on
specific financial ratios.
As of December 31, 1998 and June 30, 1999, AHI had not met the tangible
net worth covenant required by the credit agreement. Under the terms of the
loan agreement, the bank has the right to demand full and immediate repayment
of its loan. As of the date of this report, the bank has not indicated to the
Company that it intends to make such a demand.
Short term borrowings -- other consisted of the following:
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
Unrelated investor notes ............... $ 250,000 $ 250,000
Financed insurance premium ............. -- 5,444
--------- ---------
250,000 255,444
Less unamortized note discount ......... 101,315 --
--------- ---------
$ 148,685 $ 255,444
========= =========
On October 15, 1998, the Company borrowed $250,000 in the aggregate from
two unrelated investors. The loans had an initial maturity date of March 15,
1999 with two one-month extension periods and bear interest at a rate of 10%
per annum. As additional consideration for such borrowings, the Company issued
25,000 shares of the Company's common stock to the investors. As an additional
inducement to the investors to loan money to the Company, a stockholder of the
Company conveyed to the investors warrants to purchase 75,000 shares of the
Company's common stock at an exercise price of $4.00 per share, and agreed to
transfer
F-18
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 15 -- SHORT-TERM BORROWINGS -- (Continued)
a maximum of 45,000 shares of the Company's common stock upon the occurrence of
an event of default or an extension of the maturity date by the Company. The
Company has pledged 51% of the issued and outstanding shares of common stock of
AHI as security. On March 15 and April 15, 1999, the Company exercised its
option to extend payment for one month.
The Company recorded a note discount of $138,888 as a result of the stock
issued as an inducement for making the loans of $250,000. The discount is being
amortized over the term of the notes using the effective interest method. The
effective interest rate is 343%. As of December 31, 1998 and September 30,
1999, the unamortized discount totaled $101,315 and $0, respectively. In
addition, the Company incurred financing fees of $176,015 and $43,190 on March
15, 1999 and April 15, 1999, respectively as a result of the stock transferred
by a shareholder of the Company to the noteholders as consideration for the
extension of the maturity date. On May 15, 1999, the Company and the
noteholders entered into an agreement to further extend the maturity date of
the $250,000 notes to July 14, 1999. In consideration of the extension, the
Company granted the noteholders warrants to purchase 15,000 shares of the
Company's common stock. The warrants have an exercise price of $4.00, a term of
five years and have a one year restriction on their sale or transfer. This
resulted in the Company recording a financing fee in the amount of $29,914 (see
Note 28). The financing fees are being amortized over the extension periods.
The note discount and financing fees represented the fair market value of the
securities at the date they were issuable.
In March 1999, AHI financed its insurance obligations through a nine-month
note with Premium Assignment Corporation. The note bears interest at an annual
rate of 8.5 % with monthly principal and interest payments of $2,721. As of
September 30, 1999, the outstanding balance of the note was $5,444.
NOTE 16 -- LONG-TERM DEBT
In February 1998, AHI purchased a vehicle and financed the purchase
through a five-year note with General Motors Acceptance Corporation. The note
bears interest at an annual rate of 5.9% with monthly payments, principal and
interest of $371. As of December 31, 1998 and September 30, 1999, the
outstanding balance of the note was $16,396 and $13,732, respectively.
Maturities of long-term debt are as follows:
Year ended December 31:
1999 $ 3,272
2000 3,776
2001 4,005
2002 4,247
2003 1,096
--------
$ 16,396
========
F-19
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 17 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts used for income tax purposes. The tax
effects of temporary differences and net operating loss carryforwards that give
rise to significant portions of the deferred tax assets recognized at December
31 are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets :
Federal and state deferred tax benefit arising from net operating loss
carryforwards ....................................................... $ 27,397 $ 162,000
Accrued expenses ..................................................... -- 30,000
Reserves and allowances .............................................. -- 410,000
Note discount amortization ........................................... -- 12,000
Compensation for employee stock options .............................. -- 144,000
Undistributed loss from foreign subsidiaries ......................... -- 93,000
--------- ----------
27,397 851,000
Less valuation allowance ................................................ (27,397) (842,000)
--------- ----------
Total deferred tax assets ............................................... -- 9,000
--------- ----------
Deferred tax liability
Accelerated depreciation ............................................. -- (9,000)
--------- ----------
Net deferred tax asset ............................................... $ -- $ --
========= ==========
</TABLE>
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
------------ ---------------
<S> <C> <C>
Current
Federal ................................................ $ -- $ (152,970)
State .................................................. -- (33,893)
Deferred ................................................
Federal ................................................ -- 500,900
State .................................................. -- 103,863
Tax benefit of net operating loss carryforward ......... 27,397 139,400
--------- -----------
27,397 557,300
Less valuation allowance ................................ (27,397) (744,163)
--------- -----------
Income Tax (Expense) ................................ $ -- $ (186,863)
========= ===========
</TABLE>
The Company has a loss carryforward of approximately $487,000 as of
December 31, 1998 that may be offset against future taxable income. The
carryforward will expire between the years 2009 and 2014.
The following table presents the principal reasons for the difference
between the Company's effective tax rates and the United States federal
statutory income tax rate of 34%.
F-20
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 17 -- INCOME TAXES -- (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
----------- ---------------
<S> <C> <C>
U.S. federal statutory income tax rate ............................... 34% 34%
Federal income tax benefit at statutory rate ......................... $ 9,359 $ 406,000
State and local income tax benefits, net of effect of federal benefit 5,165 65,700
Non-deductible expenses .............................................. -- (11,100)
Tax benefit from NOL carryback and carryforward ...................... -- 60,800
Other differences .................................................... -- 11,070
Valuation allowance for deferred income tax benefit .................. (14,524) (719,333)
--------- ----------
Income Tax Expense .................................................. $ -- $ (186,863)
========= ==========
Effective Income Tax Rate ........................................... 0% (15.6)%
========= ==========
</TABLE>
NOTE 18 -- OFFICE AND WAREHOUSE FACILITY
AHI leases its Miami, Florida office and warehouse facility from a company
partially owned by one of its stockholders. The lease expires December 31, 2000
and has two one-year options to renew. The monthly rental is $6,529 plus the
pass through of certain expenses. Pasco HK leases office space in Hong Kong.
The Hong Kong lease expires December 31, 1999 and contains monthly rental
obligations of $2,500 for 1998 and $2,650 for 1999.
Rent expense for the periods ended December 31, 1998 and September 30,
1999 was $56,586 and $84,352, respectively. AHI's minimum obligation under
existing leases is as follows:
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
Year Ending:
1999 ......... $ 109,850 $ --
2000 ......... 78,350 85,850
2001 ......... -- 19,588
--------- ---------
$ 188,200 $ 105,438
========= =========
NOTE 19 -- CAPITAL STOCK ACTIVITY
Common Stock
On August 15, 1997, the Company issued 1,000,000 shares of common stock as
partial payment for legal fees and costs advanced by a law firm owned by a
stockholder and related party of the Company. The stockholder is the son of the
former President and the sole Director of the Company at the time of the
transaction.
On November 17, 1997, the stockholders of the Company entered into an
agreement to sell 1,410,000 shares of common stock, representing approximately
86% of the outstanding shares of the Company, to unrelated parties. As a
condition of the agreement, 87,000 shares of common stock were canceled and the
then existing officers and directors of the Company were required to resign. On
November 20, 1997, after the close of the transaction, there were 1,550,000
shares of common stock outstanding. Certain shares are subject to lock-up
agreements or restrictions which limit the holders' ability to sell them. The
November 17, 1997 agreement also required all debts and liabilities of the
Company to be paid out of the purchase price at the closing. Prior to the
closing, the Company owed a stockholder and related party $24,332. This
liability was
F-21
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 19 -- CAPITAL STOCK ACTIVITY -- (Continued)
comprised of $10,000 of costs advanced on behalf of the Company and $14,332 for
legal services provided to the Company. The amount owed was paid from the
proceeds of the sale of stock and consequently the Company was released from
its obligation. The Company recorded the satisfaction of this liability as
additional paid-in capital.
In December 1997, the Company completed a private offering of 800,000
shares of common stock at a price of $1.25 per share, amounting to total gross
proceeds of $1,000,000. Offering costs amounted to $6,143 and have been
reflected as a reduction of additional paid-in capital.
During the second and third quarters of 1998, the Company entered into
share exchange agreements with various AHI stockholders. Based on the terms of
the underlying agreements, the Company exchanged one share of common stock for
between 1.667 to 2.5 shares of AHI's common stock. The Company issued 1,095,815
shares of common stock in connection with these share exchanges.
On June 11, 1998, AHI's Board of Directors granted its Chief Financial
Officer ("CFO"), 25,000 shares of AHI's common stock valued at $62,500. The
shares of common stock were issued by AHI in consideration of services rendered
by the CFO for the fiscal year ended August 31, 1998.
On August 1, 1998, the Company issued 4,000 shares to its Chief Executive
Officer for services rendered, resulting in compensation expense of $20,128.
On October 15, 1998, the Company borrowed $250,000 from two unrelated
investors. As an inducement to make the loans, the Company issued 25,000 shares
of the Company's common stock and warrants to purchase shares of its common
stock at an exercise price of $4.00 per share to the investors.
In March 1999, the Company completed a private offering of 118,000 shares
of common stock at a price of $2.50 per share, amounting to gross proceeds of
$295,000. In 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 July 1999, the Company issued 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 September 1999, the Company issued 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.
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
F-22
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 19 -- CAPITAL STOCK ACTIVITY -- (Continued)
generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known. Had compensation expense
for the year ended December 31, 1998 been determined under the fair value
provisions of SFAS 123, the Company's net loss and net loss per share would
have differed as follows:
December 31,
1998
-----------------------------
Net Loss Per Share
---------------- ----------
As Reported Under APB 25 ......... $ (1,384,780) $ (.46)
============= ========
Pro Forma Under SFAS 123 ......... $ (1,476,291) $ (.49)
============= ========
No such differences between the application of APB 25 and SFAS 123 existed
for 1997.
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period and additional options may be issued in future years. The
weighted average fair values of options at their grant date during 1998, where
exercise price equals the market price on the grant date, was $0. The weighted
average fair value of options at their grant date during 1998, where the
exercise price exceeds the market price on the grant date, was $0. No such
options were granted during 1997. The estimated fair value of each option
granted is calculated using the Black Scholes option pricing model. The
following summarizes the weighted average of the assumptions used in the model.
1997 1998
------ ----------
Risk free rate ......................... -- 5.09%
Expected years until exercise .......... -- 2.25%
Expected stock volatility .............. -- 33.08%
Dividend yield ......................... -- 0%
Preferred Stock
No shares of the Company's no par value preferred stock have been issued
or are outstanding. Dividends, voting rights, and other terms, rights and
preferences of the preferred shares have not yet been designated but may be so
designated by the Board of Directors from time to time.
NOTE 20 -- COMPENSATORY STOCK OPTION PLAN
In 1994 the Company adopted a Compensatory Stock Option Plan (the "CSO
Plan") which provides for the granting of options to employees, officers,
directors and consultants of the Company. The number of shares which can be
purchased under this plan is limited to 1,000,000 shares. The CSO Plan is not
intended to qualify as an "incentive stock option plan" under Section 422 of
the Internal Revenue Code. The exercise prices of the options granted under the
CSO Plan are to be determined by the Board of Directors or other CSO Plan
administrators but shall not be lower than eighty-five percent of the fair
market value of a share of common stock on the date the option is granted. The
options under the CSO Plan vest immediately upon grant unless otherwise
specified, and are valid for ten years. The Company will incur compensation
expense to the extent that the market value of the stock at the date of grant
exceeds the amount the grantee is required to pay for the options. There were
no options granted under the CSO Plan as of December 31, 1997.
During 1998, the Company granted options to the CEO to purchase 200,000
shares of common stock at an exercise price of $2.50 per share. All of these
options vested upon the execution of the CEO's employment agreement and expire
five years later. The Company recognized compensation expense of $360,200 for
services rendered.
F-23
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 20 -- COMPENSATORY STOCK OPTION PLAN -- (Continued)
Restatement of Stock Option Plan
On October 29, 1997, the Board of Directors of AHI adopted a stock option
plan (the "Plan") which became effective September 1, 1997. This Plan provided
for the grant of incentive stock options, non-qualified stock options and stock
appreciation rights not exceeding 750,000 shares, in the aggregate, to selected
employees. The Plan also sets forth applicable rules and regulations for stock
options granted to non-employee directors. The Board of Directors authorized
the issuance of 250,750 stock options under the Plan, and of these options,
50,750 were subsequently canceled. No stock options had been exercised under
this Plan.
AHI subsequently amended and restated the Plan, and all active
participants of the Plan became included in the stock option plan of the
Company. The options to acquire AHI stock outstanding at the time of the
restatement were replaced by options to acquire Company stock on a
share-for-share basis.
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of 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
======= ==== ======= ======= =======
September 30, 1999 (Unaudited)
$2.50 .......................... 455,750 3.89 $ 2.50 435,750 $ 2.50
======= ==== ======= ======= =======
</TABLE>
NOTE 21 -- EMPLOYEE STOCK COMPENSATION PLAN
In 1994 the Company adopted an employee stock compensation plan (the "ESC
Plan") which provides for shares of the Company's common stock to be granted to
employees, officers, directors and consultants of the Company. The number of
shares of common stock which can be awarded under this plan is limited to
1,000,000 shares. The Company will incur compensation expense to the extent of
the market value of the stock at the date of grant of the stock award to the
employee. The ESC Plan will be administered by the Board of Directors or a
committee of directors. There has been no stock awarded under the ESC Plan to
date.
NOTE 22 -- LOSS PER SHARE
The Company adopted SFAS 128 in 1997, and has followed the guidelines of
SFAS 128 in the presentation of earnings and loss per share for all periods
presented in the financial statements. Options and warrants to purchase common
stock are not included in the computation of diluted loss per share because the
effect of these instruments would be anti-dilutive for the loss periods
presented. The common shares potentially issuable arising from these
instruments, which were outstanding during the periods presented in the
financial statements, are as follows:
F-24
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 22 -- LOSS PER SHARE -- (Continued)
<TABLE>
<CAPTION>
December 31,
Exercise ------------------ September 30,
Price 1997 1998 1999
---------- ------ --------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Options .......................................... $ 2.50 -- 200,000 435,750
Warrants ......................................... $ 3.75 -- -- 100,000
$ 4.00 -- -- 15,000
$ 4.50 -- -- 210,000
---- ------- -------
Total common shares potentially issuable ......... 200,000 760,750
==== ======= =======
</TABLE>
The following table represents AHI's outstanding options and warrants:
<TABLE>
<CAPTION>
Exercise December 31, September 30,
Price 1998 1999
---------- -------------- --------------
(Unaudited)
<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 23 -- COMMITMENTS AND CONTINGENCIES
The Company supplies certain inventory parts to its customers through
various consignment agreements, under which the Company takes possession of a
vendor's inventory. These agreements are generally entered into on a long-term
basis.
The Company neither manufacturers nor repairs aircraft parts, and requires
that all of the parts that it sells are properly documented and traceable to
their original source. Although the Company has never been subject to product
liability claims, there is no guarantee that the Company could not be subject
to liability from its potential exposure relating to faulty aircraft parts in
the future. The Company maintains no product liability insurance to protect it
from such claims. An uninsured loss could have a materially adverse affect upon
the Company's financial condition.
Effective as of May 31, 1998, the President of AHI entered into an
employment agreement with the Company to serve as President and Chief Executive
Officer of the Company ("CEO"). In accordance with the employment agreement,
the CEO also became a Director of the Company. The agreement reaffirms debt
obligations connected to a stock purchase of AHI shares by the CEO which was
initiated under a prior agreement. The term of the employment agreement is for
a period of three years and may be extended on a month-to-month basis
thereafter. The employment agreement calls for a base compensation and a bonus
arrangement based upon a percentage of pre-tax income.
Effective February 14, 1998, in conjunction with the purchase of the PASCO
entities by AHI, the majority stockholder of PASCO entered into an employment
agreement with AHI to serve as Vice President (the "Vice President"). In
accordance with the employment agreement, the Vice President also became a
Director of AHI. His duties include the responsibility for, and the oversight
of, AHI's operations in Asia and the Pacific Rim. The term of his employment
agreement is for three years and may be extended on a month-to-month basis
thereafter. The agreement calls for a base salary and bonus arrangement based
upon a percentage of sales to China, whereby one-half of any bonus earned
annually in excess of $25,000 is to be
F-25
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 23 -- COMMITMENTS AND CONTINGENCIES -- (Continued)
applied against the outstanding balance of the Vice President's obligation
under a three-year promissory note dated February 12, 1998. The Vice President
was granted options to purchase 15,000 shares of AHI's common stock at an
exercise price of $2.50 per share. One-third of these options vest annually
over a three-year period beginning February 14, 1999.
NOTE 24 -- SEGMENT INFORMATION
The Company is in the business of acquiring companies and upon acquiring a
majority interest in AHI in 1998, the Company became a supplier, distributor
and broker of commercial aircraft technical spares for commercial airlines
worldwide, which it considers to be an additional segment.
The information with respect to revenue, by geographic area, is presented
in the table below for the period from May 1998, when the Company acquired a
controlling interest in AHI, through December 31, 1998, and for the nine months
ended September 30, 1999.
May - Dec. Jan. - Sept.
1998 1999
-------------- -------------
(Unaudited)
United States .................. $ 4,632,079 $ 5,172,056
Africa and Middle East ......... 104,396 245,130
Europe ......................... 659,898 1,069,589
Latin America .................. 59,694 549,410
Asia ........................... 2,909,130 2,306,564
----------- -----------
Total ....................... $ 8,365,197 $ 9,342,749
=========== ===========
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------
Acquisitions Aviation
Business Segments --------------- --------------
<S> <C> <C>
Revenues .............................. $ -- $ 8,365,197
Interest income ....................... 54,472 18,353
Interest expense ...................... 65,392 30,652
Depreciation and amortization ......... 2,679 52,300
Segment profit (loss) ................. (1,397,449) 12,669
Segment assets ........................ 1,367,548 7,395,818
Capital expenditures .................. -- 88,198
<CAPTION>
September 30, 1998 September 30, 1999
-------------------------------- ------------------------------
Acquisitions Aviation Acquisitions Aviation
Business Segments --------------- --------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues .............................. $ -- $ 5,094,930 $ -- $ 9,342,749
Interest income ....................... 54,268 12,518 -- 21,009
Interest expense ...................... -- 6,057 455,684 122,464
Depreciation and amortization ......... -- 28,023 4,821 81,869
Segment profit (loss) ................. (1,221,747) (55,820) (587,968) 489,052
Segment assets ........................ 956,567 6,963,997 1,007,181 9,302,253
Capital expenditures .................. -- 55,830 -- 77,419
</TABLE>
NOTE 25 -- EMPLOYEE BENEFIT PLAN
On January 1, 1999 the Company adopted a 401(k) savings plan that covers
substantially all employees. Under the terms of the 401(k) savings plan,
employees are entitled to contribute a maximum of 15% of their total
compensation, within limitations established by the Internal Revenue Code.
NOTE 26 -- SUPPLEMENTAL CASH FLOW INFORMATION
In 1998, the Company advanced funds to one of its stockholders. The
Company received 80,000 shares of AHI stock as repayment of $100,000 of the
stockholder's obligation.
In 1998, the Company issued 1,095,815 shares of its common stock in
exchange for 2,368,880 shares of AHI common stock.
F-26
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 26 -- SUPPLEMENTAL CASH FLOW INFORMATION -- (Continued)
In October, 1998, the Company issued 25,000 shares of its common stock to
two unrelated investors in connection with a loan to the Company of $250,000.
The Company had $40,000, $105,915 and $268,617 of deferred offering costs
in accrued expenses at December 31, 1997 and 1998 and September 30, 1999,
respectively.
In March, 1999, AHI financed a portion of its insurance premium amounting
to $29,341 with a note payable.
On March 15, 1999, the Company recorded $176,015 in deferred financing
costs when a major shareholder of the Company transferred 35,000 shares of the
Company's common stock to the investors of the $250,000 notes.
In March, 1999, the Company issued 500,000 shares of its common stock in
exchange for 600,000 shares of AHI common stock, resulting in goodwill of
$321,679 and a reduction in minority interest of $719,869.
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. As of September 30, 1999, $7,582 had been amortized.
NOTE 27 -- SUBSEQUENT EVENTS
In April and June 1999, the Company entered into a series of share
exchanges with certain remaining AHI stockholders. The Company exchanged
115,500 shares of its common stock in return for 137,500 shares of AHI common
stock, bringing the Company's ownership of AHI to 96%.
In June 1999, the Company issued warrants to purchase 210,000 shares of
the Company's common stock at $4.50 per share, with an exercise period through
June 30, 2002 ("Warrants"). The Warrants were issued by the Company in order to
replace warrants to purchase 1,000,000 shares of AHI common stock previously
issued by AHI in June 1997. The terms of the Warrants are identical to the
terms of the AHI warrants. The Warrants were issued to a related party, an
entity whose president is a director of the Company, and to an unrelated
investor. The related party received 200,000 Warrants and the unrelated
investor received 10,000 Warrants. The Warrants include certain anti-dilutive
provisions. The Company has the right to call the Warrants for $.05 per
Warrant, if the Company's common stock meets certain performance objectives and
the Company offers its common stock for trading on a national exchange.
F-27
<PAGE>
AVIATION HOLDINGS GROUP, INC.
Notes to Financial Statements -- (Continued)
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 27 -- SUBSEQUENT EVENTS -- (Continued)
In June 1999, the Company and the holders of the $250,000 note payable
(see Note 15) agreed to extend the maturity date of the note to July 14, 1999.
In consideration of the extension, the Company issued warrants to purchase
15,000 shares of the Company's common stock at $4.00 per share, with an
exercise period through May 15, 2004. These warrants include certain
anti-dilutive provisions, and the shares of the Company's common stock covered
by the warrants contain restrictions on transfer for one year.
NOTE 28 -- EVENTS UNAUDITED SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT
On July 15, 1999, the maturity date of the $250,000 notes was extended to
September 17, 1999. In consideration for the extension, a shareholder of the
Company delivered 6,000 shares of the Company's common stock to the
noteholders.
On August 11, 1999, the Company granted 55,750 options to purchase the
Company's common stock to certain employees under its stock option plan.
On August 31, 1999, the Company sold its note receivable from EWS (see
Note 10) to a stockholder in exchange for the cancellation of $855,000 of
obligations payable to the stockholder for advances of cash to the Company and
accrued interest thereon, plus $45,000 in cash.
In September 1999, the Company issued 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.
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, of which $7,582 had been amortized as of September 30, 1999.
On October 4, 1999, the maturity date of the $250,000 notes was extended
to October 17, 1999. In consideration for the extension, the Company delivered
5,000 shares of the Company's common stock to the noteholders.
On October 15, 1999, the maturity date of the $250,000 notes was extended
to November 16, 1999. Except for the additional interest incurred, no other
additional consideration was provided for the extension.
For the nine months ended September 30, 1999, the Company had sales to a
company affiliated with a director of the Company in the amount of
approximately $44,000.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Jet Aviation Trading, Inc.
We have audited the accompanying balance sheet of Jet Aviation Trading,
Inc. as of August 31, 1997, and the related statements of income, stockholders'
equity, and cash flows for the period from October 3, 1996 (Date of Inception)
through August 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jet Aviation Trading, Inc.
as of August 31, 1997, and the results of its operations and cash flows for the
period from October 3, 1996 (Date of Inception) through August 31, 1997, in
conformity with generally accepted accounting principles.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
October 9, 1997, except as to Note 12
which is as of October 29, 1997
F-29
<PAGE>
JET AVIATION TRADING, INC.
BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash .................................................................................... $ 341,660
Accounts receivable, less $93,000 allowance for doubtful accounts........................ 1,764,119
Inventory ............................................................................... 1,532,333
DC-10 flight simulator held for resale (Note 3) ......................................... 734,421
Deferred tax asset ...................................................................... 23,000
Prepaid expenses and other current assets ............................................... 29,610
------------
Total current assets ............................................................... 4,425,143
------------
Property and equipment, less accumulated depreciation of $8,293........................... 88,437
Deferred offering costs .................................................................. 22,750
Deposit-Boeing ........................................................................... 25,000
------------
$ 4,561,330
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 977,706
Accrued expenses ........................................................................ 144,540
Accrued interest ........................................................................ 19,611
Income taxes payable .................................................................... 37,200
------------
Total current liabilities .......................................................... 1,179,057
------------
Deferred tax liability ................................................................... 2,000
------------
Stockholders' equity:
Preferred stock, par value $.10 per share, 3,000,000 shares authorized, and no shares
issued and outstanding ................................................................ --
Common stock, par value $.001 per share; 30,000,000 shares authorized, and
2,996,500 shares issued and outstanding ............................................... 2,997
Additional paid-in capital .............................................................. 4,840,917
Accumulated Deficit ..................................................................... (1,383,641)
------------
3,460,273
Less: Stockholders' notes receivable (Note 8) ............................................ (80,000)
------------
Total stockholder's equity ......................................................... 3,380,273
------------
$ 4,561,330
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF OPERATIONS
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
<TABLE>
<S> <C> <C>
Sales, net of returns and allowances ......................... $ 6,215,553
Cost of sales ................................................ 4,684,864
------------
Gross profit .............................................. 1,530,689
------------
Selling, general and administrative expenses ................. 2,881,660
------------
Operating Loss ............................................... (1,350,971)
------------
Other income (expense):
Interest income ............................................. $ 21,867
Interest expense ............................................ (38,337) (16,470)
--------- ------------
Loss before income taxes ..................................... (1,367,441)
Income tax expense:
Current ..................................................... 37,200
Deferred .................................................... (21,000) 16,200
--------- ------------
Net Loss ............................................... $ (1,383,641)
============
Net Loss per share ..................................... $ (.83)
============
Weighted average number of common shares outstanding ......... 1,672,968
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Stockholder's
Paid-In Accumulated Note
Shares Amount Capital Deficit Receivable Total
----------- -------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founding stockholders ............ 1,200,000 $1,200 $ 778,800 $ -- $ (255,000) $ 525,000
Issuance of common stock in
connection with the purchase
of equipment and aircraft
parts ............................ 10,000 10 24,990 -- -- 25,000
Issuance of common stock in
connection with private place-
ment ............................. 312,000 312 745,997 -- -- 746,309
Issuance of common stock in
connection with purchase of
DC-10 Simulator held for
resale ........................... 240,000 240 599,760 -- -- 600,000
Issuance of common stock in
connection with debt ............. 14,800 15 36,985 -- -- 37,000
Issuance of common stock to
founders of Schuylkill Acqui-
sition Corp. ..................... 400,000 400 999,600 -- -- 1,000,000
Issuance of common stock in a
private offering by Schuylkill
Acquisition Corp. ................ 47,200 47 95,856 -- -- 95,903
Issuance of 1,000,000 warrants..... -- -- 50,000 -- -- 50,000
Accumulated deficit of
Schuylkill Acquisition Corp.
adjusted due to merger ........... -- -- (35,298) -- -- (35,298)
Conversion of $370,000 of notes
payable to common stock .......... 185,000 185 369,815 -- -- 370,000
Conversion of $200,000 stock-
holder loan to common stock
and payment of $15,000 advi-
sory fee in common stock ......... 107,500 108 214,892 -- -- 215,000
Conversion of $500,000 note
payable to common stock .......... 250,000 250 499,750 -- -- 500,000
Issuance of common stock for
the payment of amounts due
to a stockholder and for the
purchase of remaining con-
signed inventory ................. 230,000 230 459,770 -- 175,000 635,000
Net Loss .......................... -- -- -- (1,383,641) -- (1,383,641)
--------- ------ ---------- ------------ ---------- ------------
Balance, August 31, 1997 .......... 2,996,500 $2,997 $4,840,917 $ (1,383,641) $ (80,000) $ 3,380,273
========= ====== ========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
JET AVIATION TRADING, INC.
STATEMENT OF CASH FLOWS
OCTOBER 3, 1996 (DATE OF INCEPTION) TO AUGUST 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net (loss) ......................................................................... $ (1,383,641)
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 8,293
Allowance for doubtful accounts .................................................. 93,000
Noncash compensation expense related to sale of founders shares .................. 400,000
Noncash compensation expense related to sale of Schuylkill Acquisition
founders shares ................................................................. 999,600
Noncash compensation expense related to warrants ................................. 50,000
Noncash compensation relating to an advisory fee ................................. 15,000
Noncash compensation relating to loan origination fee ............................ 37,000
Deferred tax asset, net of deferred tax liability ................................ (21,000)
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable ............................................................. (1,857,119)
Inventory (Note 6) .............................................................. (872,333)
Cash paid in connection with purchase of DC-10 flight simulator ................. (134,421)
Prepaid expenses and other current assets ....................................... (29,610)
Increase (decrease) in:
Accounts payable ................................................................. 977,706
Accrued expenses ................................................................. 144,541
Accured interest ................................................................. 19,611
Income tax payable ............................................................... 37,200
------------
Total adjustments ............................................................. (132,532)
------------
Net cash used for operating activities .............................................. (1,516,173)
------------
Cash flows from investing activities:
Deposit--Boeing .................................................................... (25,000)
Purchase of property and equipment ................................................. (96,730)
------------
Net cash used for investing activities ........................................ (121,730)
------------
Cash flows from financing activities:
Deferred offering costs ............................................................ (22,750)
Proceeds from stockholder loans, subsequently converted to common stock ............ 1,195,000
Payments on stockholder loans ...................................................... (125,000)
Proceeds from issuance of securities ............................................... 932,313
------------
Net cash provided by financing activities ..................................... 1,979,563
------------
Cash, ending ........................................................................ $ 341,660
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Interest paid ...................................................................... $ 24,103
------------
Income taxes paid .................................................................. $ --
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
Organization and History -- Schuylkill Acquisition Corp. ("the Company" or
"SAC") was incorporated in Florida on May 28, 1997, for the purpose of
acquiring by merger the business and operations of Jet Aviation Trading, Inc.
("Old Jet") upon the completion of a stock offering by the Company. On July 28,
1997, the Company acquired 100% of the outstanding common stock of Old Jet in
exchange for 1,776,800 shares of common stock of the Company in a one for one
stock exchange. Old Jet was incorporated in the state of Florida on October 3,
1996 for the purpose of buying, selling, leasing and exchanging spare parts for
fixed-wing commercial jet transport aircraft. Effective July 28, 1997, the
Company's name was changed from Schuylkill Acquisition Corp. to Jet Aviation
Trading, Inc.
Merger and Recapitalization -- The merger was completed on July 28, 1997,
whereby SAC acquired 100% of the outstanding common stock of Old Jet in
exchange for 1,776,800 shares of common stock of SAC in a one for one stock
exchange. The merger has been accounted for as a purchase.
The effect of the transaction was a reverse merger, whereas SAC changed
its name to Jet Aviation Trading, Inc. and Old Jet became the acquiring entity
and accounting survivor. Accordingly, the historical financial statements
presented are those of the accounting survivor, Old Jet, and the stockholders'
equity of the merged Company was recapitalized to reflect the capital structure
of the surviving legal entity and the accumulated deficit of Old Jet at the
time of merger.
Nature of Business and Credit Policies -- The Company buys, sells, leases
and exchanges spare parts for fixed-wing commercial jet transport aircraft. The
Company's customers are primarily commercial passenger and cargo operators,
original equipment manufacturers and Federal Aviation Administration and Joint
Aviation Authority repair stations throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and extends
credit to its customers based upon its evaluations. If creditworthiness is
questionable, parts are shipped COD. The allowance for doubtful accounts is
based upon the expected collection of accounts receivable.
Cash Equivalents -- The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
Revenue and Cost Recognition -- The Company recognizes revenue when parts
are shipped to the customer. Amounts paid in advance are recorded as deferred
income and recognized in the period in which the parts are shipped. The Company
recognizes revenue and the related cost of consigned inventory when the parts
are shipped to the customer.
Inventories -- Inventory is stated at the lower of cost or market. Cost of
aircraft parts is determined on a specific identification basis. When parts are
purchased in lots, the individual parts are expensed at a predetermined
percentage of the sales price until the cost of the lot is recovered. Costs to
repair, inspect and/or modify the parts are charged to the specific part when
incurred. Inventories held by the Company on consignment from others are not
included in the inventory in the accompanying financial statements.
Deferred Offering Costs -- Amounts paid or accrued for costs related to
the anticipated public offering will be recorded as a reduction of the proceeds
when the offering is completed. If the offering is not completed, the costs
will be expensed.
Income Taxes -- The Company accounts for income taxes on an asset and
liability approach for financial accounting. Deferred income tax assets and
liabilities are computed annually for temporary differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
F-34
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION -- (Continued)
Net Income Per Share -- Net income per common share is computed by
dividing net income by the weighted average number of shares outstanding during
the period. Warrants issued during the period are not considered dilutive, and
therefore, are not included in the computation of net income per share.
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings Per Share". The adoption of SFAS 128 did not have an effect on
the computation of earnings per share because the effective date is December
15, 1997, and earlier application is not permitted.
Recoverability of Long Lived Assets -- The Company has adopted Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The Company is
not aware of any events or circumstances which indicate the existence of an
impairment which would be material to the Company's financial statements.
Financial Instruments -- The carrying amount of cash, accounts receivable,
accounts payable and accrued expenses approximates fair value as of August 31,
1997. The carrying value of the stockholder's note receivable at August 31,
1997, approximates fair value.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates based on
management's knowledge and experience. Accordingly, actual results could differ
from those estimates.
2. RELATED PARTY TRANSACTIONS
CONSIGNMENT AGREEMENT WITH RELATED PARTY
The Company entered into a Consignment Agreement (the "Agreement") with a
related party, Jet Avionics Systems, Inc. ("Avionics"), effective October 3,
1996, wherein the Company agreed to sell certain consignment inventory of
technical spare parts belonging to Avionics and pay Avionics 75% of the sales
price collected for the inventory sold. The sales price is the gross sales
price less any costs involved if any item of inventory is required to be
overhauled, certified or modified in order to be sold. Total consideration to
be paid for the inventory under the Agreement was $675,000. Pursuant to such
Agreement, the Company sold approximately $452,000 of parts during the year to
third parties and Avionics was due $339,000 of this amount. During the year,
the Company paid Avionics $36,000 of the amount due. On August 29, 1997, the
Company and Avionics entered into a Consignment Cancellation and Purchase
Agreement whereby the Company purchased the remaining inventory not sold with a
value of approximately $336,000 from Avionics and thereafter paid the balance
of $639,000 in exchange for 230,000 shares of the Company's common stock valued
at $2.00 per share, the cancellation of $175,000 of indebtedness of Avionics
due the Company, and $4,000 in cash.
The president and sole stockholder of Avionics was employed by the Company
from October 3, 1996 through October 2, 1997. The president and sole
stockholder is the daughter of an employee of the Company who served in a
non-executive capacity as Vice President of Special Projects.
OFFICE AND WAREHOUSE FACILITY
The Company leases its office and warehouse facility from a company
partially owned by a stockholder of the Company under a four year lease
expiring December 31, 2000 with two one year options to renew. The monthly
rental is $4,609 plus applicable sales tax and pass through of expenses. Rent
expense was $29,435 for the period ended August 31, 1997. At August 31, 1997,
the Company was obligated under this operating lease arrangement as follows:
F-35
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. RELATED PARTY TRANSACTIONS -- (Continued)
YEARS ENDING AUGUST 31, AMOUNT
- - ------------------------- ----------
1998 .............................................. $ 55,308
1999 .............................................. 55,308
2000 .............................................. 55,308
2001 .............................................. 18,436
--------
$184,360
========
3. PURCHASE OF DC-10 FLIGHT SIMULATOR AND SUPPORT PACKAGE
On November 1, 1996, the Company entered into an agreement with a company
domiciled in the Netherlands (the "seller" or the "Netherlands Company") to
purchase one half (50%) ownership in a DC 10-30 six axis flight simulator and
all associated equipment required to operate the flight simulator. The
agreement calls for the seller and the Company to equally participate in all
revenues generated from the sale, lease or disassembly of the hardware of the
flight simulator. The Company paid the seller $125,000 in cash and issued
40,000 shares of the Company's common stock valued at $2.50 per share for the
flight simulator The Company intends to sell the flight simulator as a complete
package.
On March 28, 1997, the Company entered into a second agreement with the
seller to purchase one Novoview 2000 Visual System, one package of simulator
parts, one maintenance training/procedure manual and one data support package
used to support the DC 10-30 flight simulator. The price of the items purchased
was $500,000 and the Company paid for the items by issuing 200,000 shares of
its common stock at $2.50 per share. The Company will receive 100% of the
revenues generated from the sale of these items. The interest in the simulator,
related items and freight costs are reflected in the accompanying balance sheet
as DC-10 flight simulator totaling $734,421.
This Netherlands Company is also a purchaser and supplier of spare parts
from and to the Company. During the year ended August 31, 1997, the Netherlands
Company purchased spare parts totaling $82,775 from the Company, and sold
$183,331 of spare parts to the Company in addition to the DC 10-30 flight
simulator. At August 31, 1997, the Company was owed $1,375 by the Netherlands
Company and the Company owed the Netherlands Company $47,750. Additionally, the
Netherlands Company held $22,400 of the Company's inventory in their warehouse
at August 31, 1997.
4. RISKS REGARDING THE COMPANY'S INVENTORY
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft parts that are purchased from many sources.
Before parts may be installed in an aircraft, they must meet certain standards
of condition established by the Federal Aviation Administration ("FAA") and/or
the equivalent regulatory agencies in other countries. Specific regulations
vary from country to country, although regulatory requirements in other
countries generally coincide with FAA requirements. Parts owned or acquired by
the Company may not meet applicable standards or standards may change in the
future, causing parts, which are already contained in the Company's inventory
to be scrapped or modified. Aircraft manufacturers may also develop new parts
to be used in lieu of parts already contained in the Company's inventory. In
all such cases, to the extent that the Company has such parts in its inventory,
their value may be reduced.
5. CONSIGNMENT INVENTORY
By consigning inventories to a redistributor such as the Company,
customers are able to distribute their aircraft spare parts to a large number
of prospective inventory buyers, allowing the customer to maximize the value of
its inventory. Consignment also enables the Company to offer for sale
significant parts inventory at minimal capital cost. The Company currently
maintains or manages or has consignment agreement in place and its revenues
from consignment arrangement have accounted for approximately 5% of net sales
for the period ended August 31, 1997.
F-36
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at August 31, 1997:
Furniture and fixtures .................................. $ 28,715
Computer equipment ...................................... 27,068
Leasehold improvements .................................. 30,443
Software ................................................ 10,504
--------
96,730
Less: Accumulated depreciation .......................... (8,293)
--------
$ 88,437
========
Property and equipment is depreciated on a straight-line basis with useful
lives ranging from 5 to 7 years. Depreciation expense for the period was
$8,293.
7. CAPITAL STOCK
PREFERRED STOCK
Within the limits and restrictions contained in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 3,000,000 shares of Preferred Stock, $.10
par value per share, in one or more series, and to fix, as to any such series,
the dividend rate, redemption prices, preferences on liquidation or
dissolution, sinking fund terms, if any, conversion rights, voting rights, and
any other preferences or special rights and qualifications.
COMMON STOCK
Founders' shares totaling 400,000 common shares were issued on May 28,
1997, to four entities for par value of $.001. Net proceeds from the issuance
of founders' shares was $400. Compensation expenses was charged for the
difference between the fair market value per share of $2.50 and $.001 per share
paid or a total charge of $999,600.
During 1997, the Company sold 47,200 shares of common stock for $2.50 per
share resulting in total proceeds of $118,000. Deferred offering costs of
$22,098 have been reflected as a reduction of the proceeds of the private
placement offering.
On July 17, 1997, the Company issued 1,776,800 shares of common stock to
acquire 100% of the outstanding common stock of Jet Aviation in a 1 for 1 stock
exchange.
WARRANTS
On June 1, 1997, 1,000,000 warrants were issued in connection with the
organization of Schuylkill Acquisition Corp. to related parties for an advisory
fee. The Company has reserved 1,000,000 shares of its common stock for exercise
of the warrants. Each warrant entitles the holder to purchase one share of
common stock at an exercise price of $4.50 until June 30, 2002. The warrants
are redeemable by the Company at $.05 upon the occurrence of both of the
following events: (a) the listing of the Company's shares of common stock on a
securities exchange, and (b) the Company's common stock is trading in excess of
$5.25 per share for a ten day period.
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, for non-employee stock compensation. Accordingly, the warrants
referred to above have been valued at $.05 per warrant and expensed.
F-37
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. CAPITAL STOCK -- (Continued)
CONVERSION OF DEBT
During October and November, 1996, an affiliate of a stockholder loaned
the Company $325,000. The loans were payable on demand and did not bear a
stated interest rate. During the year $125,000 was repaid. On August 29, 1997,
the Company converted $200,000 of the loan to 100,000 shares of common stock at
$2.00 per share.
On March 27 and May 12, 1997, the Company borrowed $370,000 from a
stockholder and entered into two short term notes payable, bearing interest at
6% per annum. One of the notes was extended on June 19, 1997, and interest was
increased to 10% per annum. On August 29, 1997, the Company and stockholder
converted the notes payable to 185,000 shares of common stock at $2.00 per
share and the Company paid the interest accrued on the short term notes payable
through that date.
On May 23, 1997, prior to the merger, Schuylkill Acquisition Corp.
borrowed $500,000 from a stockholder, evidence by a promissory note bearing
interest at 12%. On August 29, 1997, the promissory note was converted to
250,000 shares of common stock at $2.00 per share, and the Company paid the
accrued interest through that date.
COMMON STOCK TRANSACTIONS OF JET AVIATION TRADING, INC. (OLD JET) PRIOR TO
MERGER
On October 3, 1996, Old Jet sold 408,000 founders' shares of common stock
for total proceeds of $125,000. Effective October 1, 1996, Old Jet issued
600,000 shares of the Old Jet's common stock for a $175,000 note bearing
interest of 6% to Avionics. Further, effective November 1, 1996, Old Jet issued
192,000 shares of common stock to its President for a $80,000 note bearing
interest of 6%. See Note 2 and Note 8. Compensation expenses was charged for
the difference between the fair market value of $2.50 per share and $.417 per
share or a total charge of $400,000. See Note 2 and Note 8.
On October 22, 1996, Old Jet issued 10,000 shares valued at $2.50 per
share in partial payment of the purchase of equipment and aircraft parts
totaling $50,000.
On January 22, 1997, Old Jet issued 40,000 shares of Old Jet's common
stock in partial payment for the purchase of a DC-10 flight simulator. See Note
3. Also, on January 22, 1997, and June 2, 1997, Old Jet issued 312,000 shares
of common stock in private placement transactions. Net proceeds from the
private placement totaled $746,309, after giving effect to $33,691 in offering
costs.
On March 31, 1997, Old Jet issued 200,000 shares of common stock valued at
$2.50 per share in connection with the purchase of a DC-10 flight simulator
support package. See Note 3.
On April 4, 1997, and May 12, 1997, Old Jet issued a total of 14,800
shares valued at $2.50 per share, for a total of $37,000, to a stockholder as
additional incentive for providing stockholder loans. The expense has been
recorded as debt issue costs.
8. STOCKHOLDERS' NOTES RECEIVABLE
Stockholders' notes receivable relate to the issuance of Old Jet's common
stock as follows:
-- Effective October 1, 1996, Old Jet issued 600,000 shares of common stock
to Avionics for a $175,000 note bearing interest at 6%. The note was
canceled in partial payment of the amounts due under the Consignment
Cancellation and Purchase Agreement. See Note 2.
-- On November 1, 1996, Old Jet issued 192,000 shares of common stock to
its president for an $80,000 note bearing interest at 6%. Should the
president earn bonuses per his employment contract, one half of the
bonuses in excess of $25,000 earned annually, may be applied to the
outstanding note balance. The note is due on demand and is unsecured.
F-38
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
9. INCOME TAXES
The income tax provision was comprised of the following at August 31,
1997:
Current:
Federal ............................................... $ 30,500
State ................................................. 6,700
Deferred:
Federal ............................................... (16,700)
State ................................................. (4,300)
---------
Income tax provision .................................... $ 16,200
=========
A reconciliation between the statutory rate and the effective rate is as
follows for the year ended August 31, 1997:
Federal statutory tax rate .............................. 34.0%
State statutory rate, net of federal benefit ............ 3.6
Permanent difference and other .......................... 12.8
-----
Effective tax rate ...................................... 50.4%
=====
Significant components of the Company's deferred tax assets and
liabilities, computed using currently enacted tax rates, are as follows at
August 31, 1997:
<TABLE>
<S> <C>
Current items:
Assets:
Allowances for doubtful accounts which are currently nondeductible ................. $ 23,000
--------
Net current deferred tax assets .......................................................... $ 23,000
========
Long-term items:
Property and equipment principally due to the use of accelerated depreciation for tax
purposes ................................................................................. $ (2,000)
--------
Net long-term deferred tax liabilities ................................................... $ (2,000)
========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
Effective November 1, 1996, Old Jet entered into an employment contract
with its president for a three year period and the agreement automatically
extends on a month to month basis thereafter. Base compensation is $160,000 per
year, plus 3% of the pretax net income of the Company. The agreement also calls
for one half of the bonus in excess of $25,000 earned annually by the president
to be applied to reduce the outstanding balance of the president's obligation
under his promissory note given to Old Jet for his stock. See Note 6.
Effective October 3, 1996, Old Jet entered into an employment contract
with an individual who is an affiliate of Avionics as an employee for a three
year period. Base compensation is $120,000 per year, plus a bonus determined by
the Board of Directors. On October 2, 1997, the Company and the employee
mutually agreed to the termination of said employment agreement dated October
3, 1996. The Company and individual have entered into a Consulting Agreement on
October 3, 1997, for a twelve month period ending October 2, 1998. Base
compensation is $4,000 per month, plus a commission of 15% of the collected
purchase price of sales, and 15% of the purchase price of material for resale
which the individual introduces to the Company.
F-39
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
11. SALES TO MAJOR CUSTOMERS
The Company sells, leases and exchanges spare parts for fixed-wing
commercial jet transport aircraft to foreign and domestic customers.
The information with respect to revenue, by geographic area, is presented
in the table below for the period from October 3, 1997 (inception) through
August 31, 1997.
United States ..................................... $3,559,585
Africa and Middle East ............................ 36,119
Europe ............................................ 938,896
Latin America ..................................... 25,140
Asia .............................................. 1,655,813
----------
Total ........................................... $6,215,553
==========
One Asian customer accounted for 20% of the Company's sales in fiscal
1997.
12. SUPPLEMENTAL NON-CASH FLOW INFORMATION
Effective October 3, 1996, Old Jet issued 192,000 shares of common stock
to its President for a $80,000 note bearing interest of 6%. Compensation
expenses was charged for the difference between the fair market value of $2.50
per share and $.417 per share or a total charge of $400,000.
During the year the Company purchased equipment and aircraft parts with a
value of $50,000 by issuing 10,000 shares of common stock at $2.50 per share
and paying the remainder in cash.
As part of the purchase of the DC-10 flight simulator and support package
for $734,421, the Company issued 240,000 shares of common stock at $2.50 per
share and paid the remainder in cash.
As part of its cost of borrowing money during the year the Company issued
14,800 shares of common stock valued at $2.50 per share to a stockholder of the
Company.
On August 29, 1997, the Company issued 230,000 shares of common stock
valued at $2.00 per share, canceled a $175,000 note due to the Company by
Avionics and paid $4,000 in cash in satisfaction of a $303,000 debt due
Avionics and the purchase of the remaining consigned inventory valued at
$336,000.
Schuylkill Acquisition Corp. (prior to merging with Old Jet) issued
founders' shares totaling 400,000 on May 28, 1997 to four entities for par
value of $.001. Net proceeds from the issuance of founders' shares was $400.
Compensation expenses was charged for the difference between the fair market
value of $2.50 per share and $.001 per share paid or a total charge of
$999,600.
On August 29, 1997, the Company converted four notes payable totaling
$1,070,000 by issuing 535,000 shares of common stock at a value of $2.00 per
share.
On August 29, 1997, the Company paid $15,000 as an advisory fee to a
related party by issuing 7,500 shares of common stock at a value of $2.00 per
share.
13. CONCENTRATION OF CREDIT RISK INVOLVING CASH
During the year, the Company maintained cash balances in excess of the
Federally insured limits. The Company maintained the balances in four banks,
one of which is a major money center bank. Three of the banks are Federally
insured. A fourth bank, Israel Discount Bank Limited is a major international
bank and operates in the United States under the Edge Act, but is not Federally
insured. At August 31, 1997, the Company had balances under $100,000 in the
three Federally insured banks, but maintained a balance of $264,550 in Israel
Discount Bank Limited. However, the Company does not believe a significant risk
existed in having the balance with Israel Discount Bank Limited.
F-40
<PAGE>
JET AVIATION TRADING, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
14. SUBSEQUENT EVENTS
On October 29, 1997, the Board of Directors adopted a Stock Option Plan
(the "Plan") effective September 1, 1997. This Plan provides for the grant to
employees selected by the Board of Directors, or Compensation Committee, of
incentive stock options, non-qualified stock options and stock appreciation
rights in the aggregate not exceeding 750,000 shares. The Plan also sets forth
applicable rules and regulations for stock options granted to non-employee
directors. The Board of Directors authorized the issuance of 74,500 stock
options. The Plan is subject to stockholder approval and will be submitted to
the stockholders at the Company's annual meeting in 1998.
F-41
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 31,
1998
--------------
(Unaudited)
<S> <C>
ASSETS
Current Assets
Cash ............................................................................ $ 555,742
Trade receivables (Net of allowance for doubtful accounts of $112,000) .......... 1,991,302
Inventory ....................................................................... 2,544,335
Interest receivable from stockholder -- related party ........................... 13,046
Prepaid expenses ................................................................ 49,676
Deferred tax benefit ............................................................ 135,000
------------
Total Current Assets ......................................................... 5,289,101
------------
Property and Equipment, Net ........................................................ 381,428
------------
Other Assets
Investment in joint venture ..................................................... 212,564
Deposits ........................................................................ 17,385
Intangibles -- goodwill ......................................................... 367,740
------------
Total Other Assets ........................................................... 597,689
------------
Total Assets ....................................................................... $ 6,268,218
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................................ $ 2,139,672
Current portion of long-term debt ............................................... 14,334
Advances from stockholder -- related party ...................................... 57,035
Accrued expenses ................................................................ 424,407
------------
Total Current Liabilities .................................................... 2,635,448
------------
Noncurrent Liabilities
Long-term debt, net of current portion .......................................... 4,332
Deferred income taxes ........................................................... 1,000
------------
Total Noncurrent Liabilities ................................................. 5,332
------------
Total Liabilities ........................................................... 2,640,780
------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $.10 per share; 3,000,000 shares authorized, and no
shares issued and outstanding .................................................. --
Common stock, par value $.001 per share; 30,000,000 shares authorized, and
authorized and 3,306,500 shares issued and outstanding ......................... 3,307
Additional Paid-In Capital ...................................................... 5,615,608
Less stock subscriptions receivable ............................................. (280,000)
Accumulated deficit ............................................................. (1,711,477)
------------
Total Stockholders' Equity ......................................................... 3,627,438
------------
Total Liabilities and Stockholders' Equity ......................................... $ 6,268,218
============
</TABLE>
See notes to financial statements.
F-42
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
October 3, 1996 Nine Months
Through Ended
May 31, May 31,
1997 1998
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales ..................................................... $ 3,644,071 $ 9,841,005
Cost of Goods Sold ............................................ 2,644,623 8,591,981
------------- -------------
Gross Profit .................................................. 999,448 1,249,024
------------- -------------
Operating Expenses
Salaries and wages ......................................... 371,107 845,245
General and administrative ................................. 511,216 849,090
Non-compensation stock expense ............................. 1,399,601 --
------------- -------------
Total Operating Expenses ................................ 2,281,924 1,694,335
------------- -------------
Loss from Operations .................................... (1,282,476) (445,311)
------------- -------------
Other Income (Expense)
Interest income ............................................ 10,806 18,583
Interest expense ........................................... (23,060) (16,340)
Interest in earnings of joint venture ...................... -- 4,232
------------- -------------
Total Other Income (Expense) ............................ (12,254) 6,475
------------- -------------
Loss Before Income Taxes ...................................... (1,294,730) (438,836)
------------- -------------
Income Tax Benefit (Expense)
Current .................................................... (34,000) --
Deferred ................................................... 19,000 111,000
------------- -------------
Total Income Tax Benefit (Expense) ...................... (15,000) 111,000
------------- -------------
Net Loss ...................................................... (1,309,730) (327,836)
Accumulated Deficit, Beginning of Period ...................... -- (1,383,641)
------------- -------------
Accumulated Deficit, End of Period ............................ $ (1,309,730) $ (1,711,477)
============= =============
Basic and Diluted Loss Per Common Share ....................... (.91) (.11)
============= =============
Weighted Average Number of Common Shares Outstanding: ......... 1,439,742 3,119,137
============= =============
</TABLE>
See notes to financial statements.
F-43
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
October 3, 1996 Nine Months
Through Ended
May 31, 1997 May 31, 1998
----------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss ............................................................. $ (1,309,730) $ (327,836)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization ...................................... 4,374 33,583
Provision for doubtful accounts .................................... 93,000 19,000
Earnings of joint venture .......................................... -- (4,232)
Reserve for obsolete inventory ..................................... -- 488,421
Noncash compensation expenses related to sale of founders
shares ............................................................ 1,399,601 --
Withdrawn offering costs .......................................... -- 22,750
Deferred income taxes .............................................. (19,000) (111,000)
Change in assets and liabilities
Increase in
Accounts receivable ............................................. (1,934,179) (248,183)
Inventory ....................................................... (1,554,418) (860,002)
Prepaid expenses and other current assets ....................... (43,804) (8,112)
Deposits ........................................................ -- (17,385)
Increase (decrease) in
Accounts payable ................................................ 1,770,308 1,161,966
Income taxes payable ............................................ 34,000 (37,200)
Accrued expenses ................................................ 97,372 260,256
------------- -----------
Total Adjustments .............................................. (152,746) 699,862
------------- -----------
Net Cash (Used in ) Provided by Operating Activities (1,462,476) 372,026
------------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment ................................... (79,914) (168,637)
Investment in joint venture .......................................... -- (100,000)
------------- -----------
Net Cash Used in Investing Activities ........................ (79,914) (268,637)
------------- -----------
Cash Flows From Financing Activities
Principal payments on long-term debt ................................. -- (3,010)
Deferred offering costs .............................................. (21,285) --
Advances from stockholders -- related party .......................... 121,727 --
Payments on acquired stockholder obligation -- related party ......... -- (51,297)
Loans from stockholders, net of repayments ........................... 640,000 --
Proceeds from sales of securities .................................... 871,309 165,000
------------- -----------
Net Cash Provided by Financing Activities .................... 1,611,751 110,693
------------- -----------
Net increase in cash .................................................. 69,361 214,082
Cash, Beginning of Period ............................................. -- 341,660
------------- -----------
Cash, End of Period ................................................... $ 69,361 $ 555,742
============= ===========
</TABLE>
See notes to financial statements
F-44
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements
NOTE 1 -- BASIS OF PRESENTATION
Interim Condensed Consolidated Financial Statements
The interim condensed consolidated financial statements include the
accounts of Aviation Holdings International, Inc. (formerly Jet Aviation
Trading, Inc.) and its majority-owned subsidiaries (collectively "AHI" or the
"Company") after elimination of significant intercompany accounts and
transactions.
The interim consolidated financial data as of May 31, 1998 and for the
nine months then ended and the period October 3, 1996 (date of inception)
through May 31, 1997 is unaudited. The information reflects all adjustments,
consisting only of normal recurring adjustments, that in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the periods indicated. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for a full fiscal year.
The interim consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained elsewhere
in the Prospectus for the year ended August 31, 1997.
Change of Majority Ownership
Effective May 31, 1998, various Company shareholders entered into share
exchange agreements ("Exchange Agreements") with Aviation Holdings Group, Inc.
(formerly EYEQ Networking, Inc.) ("AHGI"). Under the Exchange Agreements, one
share of AHGI's common stock was exchanged for between 1.667 to 2.5 shares of
the Company's common stock depending on the terms of the underlying agreement.
AHGI also purchased a block of 80,000 shares of the Company's common stock from
a stockholder for $100,000. Through these exchanges and the purchase, AHGI
acquired 2,016,280 shares (60.98%) of the Company's issued and outstanding
common stock as of May 31, 1998.
Additional Exchange Agreements were executed in June and July 1998. As of
September 30, 1998, AHGI had acquired an aggregate of 2,468,080 shares (74.08%)
of the Company's issued and outstanding common stock.
This interim consolidated financial data is presented as of the most
recent fiscal quarter of the Company coinciding with the change of ownership.
Subsequent operations are consolidated in the AHGI financial statements. The
acquisition has been accounted for as a purchase by AHGI.
NOTE 2 -- ACQUISITIONS AND MERGERS
Effective February 12, 1998, the Company entered into a stock purchase
agreement (the "Purchase Agreement") with PASCO International Aviation Corp., a
Florida corporation ("PASCO Florida"), PASCO International Aviation Corporation
Limited, a Hong Kong corporation ("PASCO HK"), PASCO Financial Services
Limited, a Hong Kong corporation ("PASCO Financial HK"), and Aero-Link Flight
Systems Limited, a Hong Kong corporation ("Aero HK"), and their major
stockholder ("Seller"). (PASCO Florida, PASCO HK, PASCO Financial HK and Aero
HK are hereinafter referred to collectively as "PASCO").
The Seller received 150,000 shares of the Company's common stock, entered
into a three-year employment contract with the Company (see Note 4), and
retained primarily all of the operating tangible assets and liabilities of the
acquired companies. An interest in a joint venture owned by PASCO and a
corresponding liability that were approximately equivalent in value were
transferred to the Company under the terms of the Purchase Agreement.
The acquisition was apportioned as follows:
The Company acquired 90% of the outstanding common stock of PASCO HK in
exchange for 40,000 shares of the Company's common stock. PASCO HK operations
consist of purchasing, selling and leasing of aircraft components and engines
in Asia and the Pacific Rim.
F-45
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements -- (Continued)
NOTE 2 -- ACQUISITIONS AND MERGERS -- (Continued)
The Company acquired 100% of the outstanding common stock of PASCO
Florida in exchange for 100,000 shares of the Company's common stock. PASCO
Florida holds a 25% interest in Shenyang Northern Aircraft Maintenance &
Engineering Co., Ltd., a Sino-American joint venture (SYNOR-A) (see Note
3). The Seller retained a 22% interest in future distributions to be
received by PASCO Florida after its capital investment is recovered. The
Company recognized minimal revenue from PASCO Florida as of May 31, 1998.
The Company acquired 80% of the outstanding common stock of PASCO
Financial HK in exchange for 1,000 shares of the Company's common stock.
The objective of PASCO Financial HK is to procure financing from banks on
behalf of airlines for their aircraft and aviation-related purchases. PASCO
Financial HK also intends to function on behalf of certain airlines and act
as their agent in connection with the sale or lease of aircraft. The
Company has not recognized any revenue from PASCO Financial HK as of May
31, 1998.
The Company acquired 100% of the outstanding common stock of Aero HK in
exchange for 9,000 shares of the Company's common stock. Aero HK and its
wholly owned subsidiary Aero-Link Flight Systems, Inc., a Florida
Corporation ("AERO Florida"), (collectively, "Aero-Link") have entered into
an agreement to act as the global marketing representative (except the
Taiwan region) for China Airlines, Taiwan. In this capacity they are
responsible for promoting and marketing China Airlines' aircraft
maintenance, turbine engine and component repair and overhaul business.
AERO Florida also functions as a purchasing agent in the United States on
behalf of PASCO HK.
All of the aforementioned acquisitions have been accounted for as
purchases, and all operations have been included in the accompanying
consolidated financial statements since the date of the acquisitions.
The Seller assigned inventory to the Company as partial payment for common
stock purchased by the Seller (see Note 6). The Company was responsible for
collecting the pre-purchase receivables of PASCO and applying those proceeds
against the pre-purchase payables of PASCO, a stock subscription payable to the
Company on behalf of the Seller (see Note 6) and the balance to an assumed
Seller obligation.
NOTE 3 -- JOINT VENTURE
SYNOR-A is a Sino-American Joint venture company which was established in
November 1997 by PASCO Florida and China Northern Airlines ("CNA") under the
terms of an eleven-year agreement. PASCO Florida holds a twenty-five percent
interest in SYNOR-A and CNA holds the remaining 75% interest. SYNOR-A primarily
deals with inspection, repair and recertification of DC9, MD80, and A300-600
components, instruments and avionics. SYNOR-A has been approved by the Civil
Aviation Administration of China in the avionics accessories repair field. In
November 1997, SYNOR-A received the licenses necessary to commence operations.
Operations commenced in March 1998. The term of the joint venture arrangement
is eleven years. The Company reflects this investment on its financial
statements using the equity method of accounting.
PASCO Florida's total financial investment commitment to SYNOR-A is
$1,000,000. As of May 31, 1998, the Company had funded $208,332 of this
commitment. Under the terms of the joint venture, PASCO Florida is entitled to
certain preferences in any distributions of the net income of SYNOR-A. This
distribution preference is effectively intended to provide that PASCO Florida
recovers its investment in SYNOR-A prior to any regular distributions being
made to CNA. PASCO Florida's role in SYNOR-A is to provide technological advice
to SYNOR-A and promote, market and sell the services of SYNOR-A. The Company
has recognized minimal revenue from SYNOR-A as of May 31, 1998.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Effective May 31, 1998, the President of the Company entered into an
employment agreement with AHGI to serve as President and Chief Executive
Officer of AHGI ("CEO"). In accordance with the
F-46
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements -- (Continued)
NOTE 4 -- COMMITMENTS AND CONTINGENCIES -- (Continued)
employment agreement the CEO also became a director of AHGI. The agreement
reaffirms debt obligations of the CEO to the Company which were initiated under
a prior agreement in connection with the purchase of common stock. The term of
the employment agreement is three years and may be extended on a month to month
basis thereafter. In addition to base compensation, the CEO is entitled to a
bonus arrangement based upon a percentage of pretax income. In addition, the
CEO was granted options to purchase 200,000 shares of AHGI's common stock at an
exercise price of $2.50 per share. All of these options are vested and expire
five years from the effective date of the new employment agreement.
Effective February 14, 1998, in conjunction with the Purchase Agreement,
the Seller, PASCO's majority shareholder, entered into an employment agreement
with the Company to serve as Vice President. In accordance with the employment
agreement, the Seller also became a director of the Company. Duties include
responsibility for and oversight of the Company's operations in Asia and the
Pacific Rim. The term of the employment agreement, which includes base
compensation and a bonus as defined in the agreement, is three years and may be
extended on a month-to-month basis thereafter. The agreement requires one-half
of the bonus in excess of $25,000 earned annually to be applied as a reduction
of the outstanding balance of the Seller's obligation under a three-year
promissory note dated February 12, 1998 (see Note 6). The Seller was granted
options to purchase 15,000 shares of the Company's common stock at an exercise
price of $2.50 per share. One-third of these options vest annually over a
three-year period beginning February 14, 1999 and expire five years from the
date of grant.
NOTE 5 -- SALES TO MAJOR CUSTOMERS
The Company sells, leases and exchanges spare parts for fixed-wing
commercial jet transport aircraft to foreign and domestic customers.
The information with respect to revenue, by geographic area, is presented
in the table below for the period from October 3, 1996 (inception) through May
31, 1997 and for the nine months ended May 31, 1998.
May 31,
-------------------------------
1997 1998
-------------- --------------
United States .................. $ 2,185,179 $ 6,317,145
Africa and Middle East ......... 33,869 47,595
Europe ......................... 421,104 1,332,712
Latin America .................. 9,520 73,925
Asia ........................... 994,399 2,069,628
----------- -----------
Total ....................... $ 3,644,071 $ 9,841,005
=========== ===========
For the period October 3, 1996 (inception) through May 31, 1997, AHI had
sales to three customers of $840,850, $618,530 and $377,201, respectively, of
more than ten percent of total revenues. For the nine months ended May 31,
1998, AHI had sales to one customer in the amount of $2,195,000 that accounted
for more than twenty percent of total revenues.
NOTE 6 -- STOCK SUBSCRIPTIONS RECEIVABLE
On February 12, 1998, the Company issued 160,000 shares of common stock to
the Seller in exchange for two promissory notes aggregating $365,000 and the
assignment from PASCO of inventory valued at $35,000. One of the notes received
by the Company was a three-month non-interest bearing promissory note for
$165,000 which had recourse against the personal assets of the Seller
("Recourse Note"). The Recourse Note was paid in full prior to May 31, 1998.
The other note is a three-year promissory note for $200,000 which bears
interest at 8.5% and is secured solely by 80,000 shares of the Company's common
stock ("Nonrecourse Note"). The shares of common stock which have been pledged
as security are held in escrow in accordance with a stock pledge agreement
dated February 12, 1998. The Nonrecourse Note remained outstanding at September
30, 1998.
F-47
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements -- (Continued)
NOTE 6 -- STOCK SUBSCRIPTIONS RECEIVABLE -- (Continued)
The Company was responsible to collect all of the pre-purchase accounts
receivable of PASCO on behalf of the Seller. A portion of these funds,
amounting to $165,000, was used to pay the principal due on the Recourse Note
prior to May 31, 1998.
The Company recorded interest income on outstanding stock subscription
receivables of approximately $8,700 for the nine months ended May 31, 1998 and
$3,156 for the period October 3, 1996 through May 31, 1997. As of May 31, 1998
and 1997, accrued interest receivable on subscription receivables was $13,045
and $3,156, respectively.
NOTE 7 -- CONCENTRATIONS OF CREDIT RISK INVOLVING CASH
During the periods presented in these financial statements, the Company
maintained cash balances in excess of the Federal Deposit Insurance Corporation
(FDIC) insured limits. At May 31, 1998, the amount of funds that exceeded FDIC
insurance was $297,745. The Company also maintained funds in banks that were
not FDIC insured. At May 31, 1998 and 1997 the Company maintained balances of
$367,067 and $176,389, respectively in Israel Discount Bank Limited, an
international bank that operates in the United States under the Edge Act. The
Company does not believe a significant risk existed in having the balances in
excess of the FDIC-insured limit.
During the period from February 12, 1998 through May 31, 1998, PASCO HK
maintained bank accounts in Hong Kong with the Kwong On Bank, Limited. The
accounts were denominated in US Dollars, Hong Kong Dollars and German Deutsche
Marks. None of the accounts were FDIC insured. During the period, the accounts
denominated in foreign currencies and the effects of translation of foreign
currency accounts into US dollars were immaterial.
NOTE 8 -- FLIGHT SIMULATOR AND SUPPORT PACKAGE
In 1998, the Company changed its sales strategy regarding a flight
simulator maintained in inventory. Instead of selling the simulator as a
complete unit, the Company decided to sell the individual components of the
unit. In conjunction with this change in strategy, the Company has taken a
charge against income of $335,000 during the nine-month period ended May 31,
1998 in order to reflect the decrease in market value of the avionics and the
structure as spare parts.
NOTE 9 -- LONG TERM DEBT
In February 1998, the Company purchased a delivery van. The Company
financed the purchase through a five-year note with General Motors Acceptance
Corporation having an interest rate of 5.9% and monthly payments of $371. As of
May 31, 1998 the balance of the note was $18,666.
NOTE 10 -- LEASED EQUIPMENT
Commencing on May 20, 1998, the Company leased a flight computer with a
cost of $129,000 to a customer. The lease term was for four months. Payments on
the lease amounted to $9,000 per month and the equipment was returned by the
customer on September 20, 1998. The Company temporarily reclassified the leased
item from inventory to property and equipment and depreciated the computer
using the straight-line method over a five-year life during the term of the
lease.
NOTE 11 -- STOCK OPTION PLAN
Effective September 1, 1997 the Company adopted a qualified incentive
stock option and stock appreciation rights plan that has a term of ten years. A
maximum of 750,000 shares of common stock may be issued under the plan to any
employee or consultant of the Company or any of its subsidiaries. The option
price, the number of shares, the grant date and the vesting are determined at
the discretion of the Company's
F-48
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements -- (Continued)
NOTE 11 -- STOCK OPTION PLAN -- (Continued)
Board of Directors. Options granted under the plan are generally exercisable
for a period not to exceed ten years. Upon termination, an employee has three
months to exercise any vested options. If any individual or entity acquires an
eighty percent interest in the voting classes of stock of the Company, the plan
automatically terminates.
The Company has elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, no compensation expense
has been recognized for the stock options issued.
Following is a summary of option transactions during the nine months ended
May 31, 1998:
Weighted
Number Average
of Exercise
Shares Price
------------ -----------
Outstanding at September 1, 1997 ......... 0
Granted .................................. 234,750 $ 2.50
Exercised ................................ 0
Canceled ................................. (40,000) $ 2.50
------- -------
Outstanding at May 31, 1998 .............. 194,750 $ 2.50
======= =======
Shares Available for Grant ............... 555,250
=======
The following table summarizes information about fixed stock options
outstanding at May 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise of Outstanding Contractual Exercise of Exercise
Price Options Life Price Options Price
- - --------------- ---------------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 2.50 194,750 9.67 $ 2.50 166,500 $ 2.50
======= =======
</TABLE>
The Company subsequently amended and restated this plan, and all active
participants became included in the stock option plan of AHGI. The options to
acquire the Company's stock, outstanding at the time of the restatement, were
replaced by options to acquire AHGI Company stock on a share-for-share basis.
NOTE 12 -- INTANGIBLES
The resulting goodwill from the purchase of the PASCO entities is being
amortized on a straight-line basis over 15 years.
NOTE 13 -- SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash was paid for the following items as follows:
Period Ended May 31,
----------------------
1997 1998
-------- --------
Interest ................................. $ 12,285 $ 27,115
======== ========
Taxes .................................... $ 0 $ 16,200
======== ========
F-49
<PAGE>
AVIATION HOLDINGS INTERNATIONAL, INC
Notes to Interim Financial Statements -- (Continued)
NOTE 13 -- SUPPLEMENTAL CASH FLOW DISCLOSURES -- (Continued)
The Company had the following non-cash transactions:
In October 1996, the Company issued stock in the amount of $625,000 as
consideration for the purchase of inventory.
In October 1996, the Company issued stock in exchange for promissory notes
aggregating $255,000.
In connection with the acquisition of PASCO in February 1998, the Company
issued stock with a value of $375,000 to the Seller. The company issued
additional stock to the Seller in exchange for a promissory note in the amount
of $200,000 and inventory valued at $35,000.
In February 1998, the Company financed the purchase of a delivery van in
the amount of $21,676.
F-50
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated combined
financial statements are based on the historical financial statements of
Aviation Holdings Group, Inc. ("AHGI") and the historical financial statements
of Aviation Holdings International, Inc. ("AHI"), an entity in which AHGI
acquired a majority interest during May 1998 and additional interests in June
and July 1998 and March, April and June 1999 (both entities collectively
referred to as the "Company"). Specifically, the following unaudited pro forma
condensed consolidated combined financial statements present, as if the
acquisition of AHI had been consummated as of January 1, 1998, the pro forma
results of operations of the Company for the six months ended June 30, 1999 and
for the year ended December 31, 1998. The information presented is derived
from, should be read in conjunction with, and is qualified in its entirety by
reference to, the separate historical financial statements and the notes
thereto appearing elsewhere in this Prospectus/SB2 or incorporated elsewhere in
this Prospectus/SB2 by reference. The unaudited pro forma condensed combined
financial data has been included for comparative purposes only and does not
purport to be indicative (i) of the results of operations or financial position
which actually would have been obtained if the AHI acquisition had been
effected at January 1, 1998 or (ii) of the financial position or results of
operations which may be obtained in the future.
The post-acquisition results of operations of AHI have been included in
the historical operations of the Company. Pro forma adjustments to record the
preacquisition results of operations of AHI are included in the accompanying
pro forma financial information.
P-1
<PAGE>
AVIATION HOLDINGS GROUP, INC
Pro Forma Condensed Consolidated Combined Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Aviation
Aviation Holdings
Holdings International As
Group, Inc. Inc. Adjustments Restated
--------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net Sales ....................................... $ 0 $14,201,107 -- $ 14,201,107
Cost of Goods Sold .............................. -- 10,972,724 -- 10,972,724
------------ ----------- ---------- ------------
Gross Profit .................................... 0 3,228,383 -- 3,228,383
Operating Expenses
Salaries and wages ............................ 380,328 1,340,879 -- 1,721,207
General and administrative .................... 709,872 1,602,965 -- 2,312,837
Professional fees ............................. 283,734 315,010 -- 598,744
------------ ----------- ---------- ------------
Total Operating Expenses ........................ 1,373,934 3,258,854 -- 4,632,788
------------ ----------- ---------- ------------
Loss from Operations ............................ (1,373,934) (30,471) -- (1,404,405)
Other (Expense) Income
Interest expense .............................. (65,391) (29,067) -- (94,458)
Interest income ............................... 54,472 28,888 -- 83,360
Loss from joint venture ....................... -- (5,290) -- (5,290)
------------ ----------- ---------- ------------
Total Other Expense ............................. (10,919) (5,469) -- (16,388)
------------ ----------- ---------- ------------
Loss Before Income Taxes and Minority
Interest ....................................... (1,384,853) (35,940) -- (1,420,793)
Income Tax Expense .............................. (8,893) (115,615) -- (124,508)
------------ ----------- ---------- ------------
Loss Before Minority Interest ................... (1,393,746) (151,555) -- (1,545,301)
Minority Interest ............................... -- -- 5,759 5,759
------------ ----------- ---------- ------------
Net Loss ........................................ $ (1,393,746) $ (151,555) $5,759 $ (1,539,542)
============ =========== ========== ============
Basic and Diluted Loss Per Common Share ......... $ (0.38)
============
Weighted Average Number of Common Shares
Outstanding .................................... 4,068,047
============
</TABLE>
The accompanying notes are an integral part of this unaudited
pro forma condensed consolidated combined statement of operations.
P-2
<PAGE>
AVIATION HOLDINGS GROUP, INC
Pro Forma Condensed Consolidated Combined Statement of Operations
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Aviation
Aviation Holdings
Holdings International As
Group, Inc. Inc. Adjustments Restated
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ...................................... $ -- $6,371,942 -- $6,371,942
Cost of Goods Sold ............................. -- 4,253,559 -- 4,253,559
---------- ---------- --------- ----------
Gross Profit ................................... -- 2,118,383 -- 2,118,383
Operating Expenses
Salaries and wages ........................... -- 646,019 -- 646,019
General and administrative ................... 33,715 964,666 -- 998,381
Professional fees ............................ 2,894 125,438 -- 128,332
---------- ---------- --------- ----------
Total Operating Expenses ....................... 36,609 1,736,123 -- 1,772,732
---------- ---------- --------- ----------
Income (Loss) from Operations .................. (36,609) 382,260 -- 345,651
Other (Expense) Income
Interest expense ............................. (372,024) (77,281) -- (449,305)
Interest income .............................. -- 15,492 -- 15,492
Income from joint venture .................... -- 19,651 -- 19,651
---------- ---------- --------- ----------
Total Other Expense ............................ (372,024) (42,138) -- (414,162)
---------- ---------- --------- ----------
Income (Loss) Before Income Taxes
and Minority Interest ......................... (408,633) 340,122 -- (68,511)
Income Tax Expense ............................. -- (49,000) -- (49,000)
---------- ---------- --------- ----------
Income (Loss) Before Minority Interest ......... (408,633) 291,122 -- (117,511)
Minority Interest .............................. -- -- (11,063) (11,063)
---------- ---------- --------- ----------
Net Income (Loss) .............................. $ (408,633) $ 291,122 $ (11,063) $ (128,574)
========== ========== ========= ==========
Earnings Per Common Share ...................... $ (0.03)
==========
Weighted Average Number of Common Shares
Outstanding ................................... 4,165,884
==========
</TABLE>
The accompanying notes are an integral part of this unaudited
pro forma condensed consolidated combined statement of operations.
P-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(1) The unaudited pro forma information for the year ended December 31, 1998
and for the six months ended June 30, 1999 has been prepared using the
hypothetical assumption that the acquisition of 96% of the outstanding
stock of AHI occurred as of January 1, 1998. A 61% majority interest in
AHI was acquired through various share exchange agreements and a block
purchase of common stock in May 1998. Additional exchange agreements were
executed in June and July 1998 and March, April and June 1999 which
increased the ownership percentage of AHI to 96%. These transactions have
been accounted for as a purchase.
(2) This presentation assumes that the issuance of approximately 1,711,315
shares of AHGI's common stock, exchanged in the acquisition, were
exchanged at January 1, 1998 instead of at the time of the acquisitions in
1998 and 1999.
(3) There were no intercompany sales during the periods presented. All
intercompany transactions have been eliminated.
(4) Outside interests have been recorded as minority interest.
P-4
