FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24795
AVIATION GENERAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 73-547645
(State of Incorporation) (IRS Employer
Identification No.)
7200 NW 63rd Street
Hangar 8, Wiley Post Airport
Bethany, Oklahoma 73008
(Address of principal executive offices) (Zip Code)
(405) 440-2255
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes_X___ No_____
There were 7,280,548 Shares of Common Stock Outstanding as of October
31, 1998.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September December 31,
1998 1997
------------------- ------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $782,095 $1,022,024
Certificates of deposits 1,369,558
1,224,845
Accounts receivable 164,646 342,917
Notes receivable from related party 1,007,018 996,971
Notes receivable 13,079 55,269
Inventories 4,362,481 5,610,129
Prepaid expenses and other assets 277,840 203,815
------------------- ------------------
Total current assets 7,976,717 9,455,970
------------------- ------------------
Property and equipment:
Office equipment and furniture 318,960 296,729
Vehicles and aircraft 84,021 84,021
Manufacturing equipment 358,332 354,837
Tooling 520,618 518,648
Leasehold improvements 255,163 237,161
------------------- ------------------
1,537,094 1,491,396
Less: Accumulated depreciation (806,133) (777,940)
------------------- ------------------
Net property and equipment 730,961 713,456
------------------- ------------------
Other assets:
Notes receivable from related party, less current maturities 1,500,000 500,000
Notes receivable - less current maturities 155,638 270,105
------------------- ------------------
Total other assets 1,655,638 770,105
------------------- ------------------
$10,363,316 $10,939,531
=================== ==================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $298,043 $270,254
Accrued expenses 431,138 312,945
Refundable deposits 225,020 75,180
Current portion of long-term debt 2,000 102,000
------------------- ------------------
Total current liabilities 956,201 760,379
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Long-term debt
- -
Shareholders' investment (deficit):
Preferred stock, $100 par value, 20,000
shares authorized; no shares outstanding - -
Common stock, $.50 par value, 10,000,000 shares authorized;
7,280,548 shares issued and outstanding at
September 30, 1998 and December 31, 1997 3,640,274 3,640,274
Additional paid-in capital 37,178,230 37,178,230
Retained earnings (deficit) (31,411,389) (30,639,352)
------------------- ------------------
Total shareholders' investment 9,407,115 10,179,152
------------------- ------------------
$10,363,316 $10,939,531
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
---------------------- -----------------------
<S> <C> <C>
Net sales - aircraft $3,276,189 $2,689,268
Net sales - service 399,005 280,928
---------------------- -----------------------
Total net sales 3,675,194 2,970,196
---------------------- -----------------------
Cost of sales - aircraft 2,743,833 2,421,344
Cost of sales - service 342,404 262,786
---------------------- -----------------------
Total cost of sales 3,086,237 2,684,130
---------------------- -----------------------
Gross margin 588,957 286,066
---------------------- -----------------------
Other operating expenses:
Product development and engineering costs 68,577 77,537
Selling, general and administrative expenses 718,806 631,247
---------------------- -----------------------
Total other operating expenses 787,383 708,784
---------------------- -----------------------
Operating income (loss) (198,426) (422,718)
---------------------- -----------------------
Other income (expenses):
Other income 102,575 65,141
Interest expense 1,958 (33,124)
Other expense (1,296) (2,406)
---------------------- -----------------------
Total other income (expenses) 103,237 29,611
---------------------- -----------------------
Net loss ($95,189) ($393,107)
====================== =======================
Net loss per share:
Weighted average common shares
outstanding, basic and diluted 7,280,548 6,920,548
---------------------- -----------------------
Loss per share, basic and diluted ($0.01) ($0.06)
====================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------------------- -----------------------
<S> <C> <C>
Net sales - aircraft $8,316,882
5,128,070
Net sales - service
915,439 901,311
----------------------- -----------------------
Total net sales 9,232,321 6,029,381
----------------------- -----------------------
Cost of sales - aircraft 5,078,263
7,260,265
Cost of sales - service 804,790
829,608
----------------------- -----------------------
Total cost of sales 8,089,873 5,883,053
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Gross margin (deficit) 1,142,448 146,328
----------------------- -----------------------
Other operating expenses:
Product development and engineering costs 242,238
221,987
Selling, general and administrative expenses 1,751,228
2,027,908
----------------------- -----------------------
Total other operating expenses 2,249,895 1,993,466
----------------------- -----------------------
Operating income (loss) (1,107,447) (1,847,138)
----------------------- -----------------------
Other income (expenses):
Other income 342,223 233,826
Interest expense (1,274) (127,208)
Other expense (5,539)
(2,406)
-----------------------
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Total other income (expenses) 335,410 104,212
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Net loss ($772,037) ($1,742,926)
======================= =======================
Net loss per share:
Weighted average common shares
outstanding, basic and diluted 7,280,548 6,897,920
----------------------- -----------------------
Loss per share, basic and diluted ($0.11) ($0.25)
======================= =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($772,037) ($1,742,926)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities---
Depreciation and amortization 78,380 100,805
Write-off of fixed assets (net)
(209) (35,043)
Changes in operating assets and liabilities,
excluding cash:
Accounts receivable 178,271 (18,948)
Notes receivable - related parties (10,047) 897,002
Notes receivable 156,657 215,604
Inventories 1,247,648 958,168
Prepaid expense and other assets (74,025) (68,147)
Accounts payable 27,789 (193,098)
Accrued expenses 118,193 (143,568)
Refundable deposits 149,840 14,715
--------------------- --------------------
Net cash provided by (used in) operating activities 1,100,460 (15,436)
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (95,676) (15,079)
Investment in Notes - related party (1,000,000) -
Investment in certificates of deposit (144,713) -
Proceeds from sale of property and equipment - 317,700
--------------------- --------------------
Net cash provided by (used in) investing activities (1,240,389) 302,621
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from related parties - 100,000
Proceeds from or (Repayments) of bank borrowings (100,000) 84,500
--------------------- --------------------
Net cash provided by (used in) financing activities (100,000) 184,500
--------------------- --------------------
Net increase (decrease) in cash (239,929) 471,685
Cash and cash equivalents at beginning of period 1,022,024 197,303
--------------------- --------------------
Cash and cash equivalents at end of period $782,095 $668,988
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 3,705 $ 86,504
Income taxes
- -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
1997:
Exchange of $2,000,000 in debentures by related party for 200,000 shares of
common stock. Repayment of accrued interest of $87,369 was waived.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed financial statements included herein have been prepared by the
company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the company believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of the company,
all adjustments necessary to present fairly the financial position of Aviation
General, Incorporated as of September 30, 1998 and December 31, 1997, and the
results of operations for the three month and nine month periods ended September
30, 1998 and 1997, and the cash flows for the nine month period ended September
30, 1998 and 1997 have been included and are of a normal, recurring nature. The
results of operations for such interim periods are not necessarily indicative of
the results for the full year. It is suggested that these condensed financial
statements be read in conjunction with the company's 1997 Annual Report on Form
10-K.
2. The earnings per share of common stock were computed by using the weighted
average number of shares of common stock outstanding during the period. Basic
and diluted amounts are the same for all periods presented.
3. Through January 8, 1997, an affiliate of the company's majority shareholder
provided $100,000 of unsecured debt in the form of a 10% demand note. On
February 1, 1997, the company accepted the offer of its majority shareholder,
and affiliates of the shareholder, to exchange $2,000,000 of demand notes due
June 30, 1997 for 200,000 shares of newly issued common stock. The payment of
accrued interest of $70,382 due for the fourth quarter of 1996 for all demand
notes, and $16,986 accrued on the notes exchanged February 1, 1997 was waived at
the time of the exchange for common stock. The maturity dates of the remaining
balance of notes totaling $900,000 was extended to December 31, 1997, with
interest due and payable June 30, 1997 and December 31, 1997.
4. On October 15, 1997, the Board of Directors of the company authorized the
issuance and sale of 360,000 shares of Common Stock to KuwAm Corporation and its
partners, the company's majority shareholder, at a purchase price of $10.00 per
share. The investment allowed the company to redeem $900,000 in 10% demand notes
and accrued interest. The company's bank lines were also reduced to the minimum,
leaving the company virtually debt free with approximately $2.1 million
available for expansion of the aviation services division and other investments.
5. Inventories consist primarily of finished goods and parts for manufacturing
and servicing aircraft. Inventory costs include all direct manufacturing costs
and applied overhead. These inventories, other than used aircraft, are stated at
the lower of cost or market, and cost is determined by the average-cost method.
Used aircraft are valued on a specific-identification basis at the lower of cost
or current estimated realizable wholesale price. Inventory components at the
balance sheet dates were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
<S> <C> <C>
Raw materials $2,751,830 $2,901,798
Work in process 730,802 819,442
Demonstration aircraft 315,890 1,132,713
Used aircraft 563,959 756,176
----------------- ------------------
Total inventories $4,362,481 $5,610,129
</TABLE>
<PAGE>
6. The company is subject to regulation by the FAA. The company is subject to
inspections by the FAA and may be subjected to fines and other penalties
(including orders to cease production) for noncompliance with FAA regulations.
The company has a Production Certificate from the FAA, which delegates to the
company the inspection of each aircraft. The sale of the company's product
internationally is subject to regulation by comparable agencies in foreign
countries.
The company faces the inherent business risk of exposure to product
liability claims. In 1988, the company agreed to indemnify a former manufacturer
of the Commander single engine aircraft against claims asserted against the
manufacturer with respect to aircraft built from 1972 to 1979. In 1994, Congress
enacted the General Aviation Revitalization Act, which established an
eighteen-year statute of repose for general aviation manufacturers. This
legislation prohibits product liability suits against manufacturers when the
aircraft involved in an accident is more than eighteen years old. This action
effectively eliminated all potential liability for the company with respect to
aircraft produced in the 1970s as of December 31, 1997. The company's product
liability insurance policy with coverage of $10 million per occurrence and $10
million annually in the aggregate with a deductible of $200,000 per occurrence
and annually in the aggregate expired March 1, 1995. Subsequent to March 1,
1995, the company is not insured for product liability claims. Management
believes there is no litigation outstanding which would have a material adverse
effect on the financial position or operations of the company.
7. The company has experienced recurring losses and net cash outflows from
operations since its inception. Since inception, the company has financed its
cash needs with debt, private investor capital, proceeds from an initial public
offering, and proceeds from subsequent stock issuances. During 1997, the company
implemented plans to improve its liquidity and capital and its operational
performance.
Management believes the reduction in net loss and the net cash
generated from operating activities during the first nine months of 1998 is
attributable to the plans implemented in late 1996 and 1997 to provide new
operating revenues for the company. The company created the Aviation Services
Division ("ASD") to sell pre-owned aircraft, provide commissions from aircraft
brokerage services, and market refurbishment capabilities. During 1997, the
company expanded its efforts to purchase pre-owned aircraft, accept aircraft on
trade for new units, and, in most cases, refurbish and resell the aircraft at a
reasonable profit. Revenues from sales of pre-owned aircraft increased by 38% in
1997 and revenues from refurbishment and service increased over 12%. This trend
continues in 1998 as the revenue from sales of new and pre-owned aircraft for
the first nine months of 1998 increased 62% from the first nine months of 1997.
The company will pursue additional opportunities to take advantage of its
factory facilities to offer upgrades to existing aircraft owners for new paint,
interior, and equipment.
The company introduced a new de-icing option for which it received
certification in May 1998 from the FAA, allowing aircraft so equipped to operate
in known icing conditions similar to larger, more expensive aircraft. Sales of
this optional equipment not only provide additional revenues and earnings, but
also increase the value of the aircraft relative to its competition. A number of
other improvements and new options are available on 1998 models.
In addition to the above actions to increase revenue, the company has
made efforts to reduce costs and cash requirements by optimizing its production
schedule using just-in-time scheduling, thereby decreasing inventories to their
lowest levels since production commenced in 1991. Management has reduced the
costs incurred to advertise new aircraft by focusing the advertising efforts at
a specific customer profile. Further reducing selling expenses, the company
completed a consolidation of sales territories, which significantly lowered the
fixed costs of sales and marketing without reducing the number of direct
contacts with qualified customers.
<PAGE>
The company's liquidity was improved with the sale of 360,000 shares of
common stock to its majority shareholder and affiliates for $3,600,000 during
October 1997. The company used approximately $1,500,000 of the $3,600,000
proceeds to repay 10% demand notes and other debt. On May 1, 1998, the company
invested $600,000 in a 10% convertible note issued by Stratesec, Incorporated, a
related party. The note is due December 31, 1999 and provides the right to
exchange the debt for common stock at $8.50 per share. The note also includes
warrants to purchase 100 shares at $2.50 per share of Stratesec, Incorporated
Common Stock for each $1,000 in debt. On August 24, 1998, the company invested
an additional $400,000 in the notes issued by Stratesec, Incorporated. The
balance of the proceeds from the October 1997 equity sale is invested in
short-term certificates of deposit to be used to continue expansion of the ASD
and for other investment opportunities. The company also believes the note
receivable from related party which was reduced by approximately $1,100,000 in
1997 will also provide cash sources during 1998. Although the majority
shareholder, which has invested over $26 million in the company, will probably
continue to fund cash needs of the company if required, there can be no
assurance that this funding will continue.
The company's ability to continue as a going concern is contingent upon
its ability to maintain adequate financing and attain profitable operations. The
financial statements do not include any adjustments relating to the
recoverability or classification of asset amounts or the amount and
classification of liabilities that might be necessary should the company be
unable to continue as a going concern. Although management believes that it has
made significant progress in 1997 and the first three quarters of 1998 by
widening its product line to include the ASD, improving products, establishing a
jet brokerage subsidiary, decreasing sales and marketing expenses, and reducing
debt and related interest expense and it is reasonable to expect the company to
improve revenues, reduce costs, and improve operating results and cash flow in
1998, there can be no assurance that these results can be achieved.
8. On August 5, 1998, Commander Aircraft Company was merged with Aviation
General, Incorporated, a Delaware holding company. Each share of Commander
Aircraft Company common stock was converted into a share of Aviation General,
Incorporated common stock. The merger had no direct affect upon the operations
or management of the company. The stock continued to trade on the NASDAQ
SmallCap Market under the name of Aviation General, Incorporated and the ticker
symbol "AVGE".
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL:
Commander Aircraft Company announced on August 10, 1998, that shareholders
approved the merger of Commander into a subsidiary of Aviation General,
Incorporated, a newly formed Delaware holding company. The merger will not
directly affect the Company's operations or management.
In the merger, each share of Commander common stock was converted into a share
of Aviation General common stock, and Commander became a wholly owned subsidiary
of Aviation General, Incorporated. The stock continued to trade on the Nasdaq
SmallCap Market under the name of Aviation General, Incorporated and the ticker
symbol "AVGE".
On October 8, 1998, Aviation General, Incorporated announced the formation of
Strategic Jet Services, Inc. which will provide consulting, sales, brokerage and
refurbishment services for jet aircraft. Daniel Cretsinger was named President
and Chief Executive Officer. The subsidiary is located at the company's
headquarters in Bethany, Oklahoma and is aggressively pursuing opportunities in
the jet brokerage business.
The company reported sales for the third quarter of 1998 of $3,675,194 and a net
loss of $95,189, or $.01 per share, compared to sales for the quarter ended
September 30, 1997 of $2,970,196 and a net loss of $393,107, or $.06 per share.
For the nine month period ended September 30, 1998 the company's revenues
totaled $9,232,321 and a net loss of $772,037, or $.11 per share, compared to
revenues of $6,029,381 and a net loss of $1,742,926, or $.25 per share for the
nine months ended September 30, 1997.
The company delivered five new, eight pre-owned and three consigned aircraft
during the third quarter of 1998. Aircraft deliveries through September 30, 1998
totaled 36 units compared to 27 aircraft through September 30, 1997. The
aircraft backlog at the end of the third quarter of 1998 stood at approximately
$.6 million. Demand for both new and pre-owned aircraft showed signs of
weakening somewhat for the fourth quarter, with further improvement in revenues
and operating margins not expected for the last quarter.
Cash and certificates of deposit totaled over $2 million at September 30, 1998,
while borrowings remained at $2,000. The company invested an additional $400,000
in 10% convertible notes receivable due December 31, 1999, from a related party
on August 24, 1998.
The company upgraded its computer hardware and software during the first quarter
of 1998 at a cost of approximately $50,000, and believes that its information
system is Year 2000 compliant. The company currently is continuing the process
of assessing the effects of the Year 2000 problem on its suppliers and other
third parties with which it has business relationships to determine whether they
are Year 2000 compliant and whether the problem will adversely affect the
company's operations or the operation of components used in its aircraft.
Although the company does not believe that the key systems in its aircraft,
including instrumentation and avionics, are date-sensitive, there can be no
assurance that these systems will not require remediation. As with all
businesses, the company is unable to predict whether there will be any
disruption in service provided by third parties, such as utilities, that might
affect the company's operations. Although the company currently does not believe
that its costs of Year 2000 compliance will be material, unforeseen problems
could cause costs to be greater than anticipated.
<PAGE>
RESULTS FROM OPERATIONS:
Revenues from the sale of aircraft for the third quarter of 1998 totaled
$3,276,189 compared to $2,689,268 for the comparable period of 1997. The
increase in revenue for the third quarter of 1998 was the result of delivering
16 new and pre-owned aircraft compared to 12 for the third quarter of 1997. For
the first nine months of 1998 revenue from aircraft sales increased to
$8,316,882 compared to $5,128,070 for the nine-month period ended September 30,
1997.
Service revenues of $399,005 for the quarter ended September 30, 1998 increased
42% from the comparable quarter in 1997. The increase in revenues was due to
additional billings for refurbishment of pre-owned aircraft, including several
jobs that were in work at the end of the previous quarter. For the nine months
ended September 30, 1998, service revenues were $915,439,up by approximately 2%
from the prior year total of $901,311.
Due to the increase in sales, cost of aircraft sales for the three month period
ended September 30, 1998 increased to $2,743,833 compared to $2,421,344 for the
three month period ended September 30, 1997. Also as a result of the increase in
revenues, cost of aircraft sales for the nine-month period ended September 30,
1998 increased to $7,260,265 from $5,078,263 for the comparable period in 1997.
Cost of sales for service and parts for the quarter ended September 30, 1998
increased to $342,404 from $262,786 for the quarter ended September 30, 1997.
The increase was due primarily to the increase in revenues from service and
parts as explained above. For the nine-month period ended September 30, 1998,
cost of sales for service and parts increased approximately 3% over the
comparable period of 1997, due to slightly higher material and labor costs.
Product development and engineering costs decreased to $68,577 for the third
quarter of 1998, down 12% from $77,537 for the comparable period in 1997. For
the nine months ended September 30, 1998 product development and engineering
costs decreased to $221,987, down 8% from $242,238 for the first nine months of
1997. Most of the cost reduction was due to the completion of the de-icing
project and less spending for outside technical assistance.
Sales and marketing expense increased approximately 7% for the three-month
period ended September 30, 1998, to $436,043 from $408,723 for the comparable
period ended September 30, 1997. For the nine-month period ended September 30,
1998 sales and marketing costs totaled $1,319,769 compared to $1,096,412 for the
comparable period in 1997. For the first nine months of 1998, advertising and
promotional expenses increased approximately $160,000 from the comparable period
of 1997. Commissions on aircraft sales increased in the third quarter and first
nine months of 1998 due to higher sales volume, while other areas of costs
remained relatively the same as the comparable period of 1997.
General and administrative expenses increased to $282,763 for the third quarter
of 1998 from $222,524 for the comparable period in 1997. The increase was due
primarily to the start-up costs, including legal fees, pertaining to the
establishment of Strategic Jet Services, Inc. and to various routine payroll,
insurance and tax expenses. For the nine months ended September 30, 1998 general
and administrative expenses were approximately the same, increasing to $708,139
from $654,816 for the nine months ended September 30, 1997.
Other income increased to $102,575 for the quarter ended September 30, 1998 from
$65,141 for the quarter ended September 30, 1997. The increase was due to
interest earned on the 10% convertible $1,000,000 notes receivable dated May 1,
1998 and August 24, 1998 and the interest earned on certificates of deposit.
Other income, consisting primarily of interest earned, increased to $342,223 for
the nine-month period ended September 30, 1998 from $233,826 for the comparable
period of 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
Cash balances decreased to $782.095 at September 30, 1998 from $1,022,024 at
December 31, 1997 due to increasing the investment in notes receivable by
$1,000,000 during 1998. The company maintained a balance in short-term
certificates of deposit of $1,369,558, which mature and are re-invested in
30-day increments. Management invested $100,000 to establish its new subsidiary,
Strategic Jet Services, Inc. The company used $400,000 in cash to acquire a 10%,
convertible note from Stratesec, Incorporated, a related party, bringing the
total investment to $1,000,000. Accounts receivable balances decreased by
$178,271 at September 30, 1998 due to the payment in January for an aircraft
sold and delivered in the prior quarter. Other notes receivable decreased to
$1,675,735 at September 30, 1998 from $1,822,345 from December 31, 1997 due to
regular monthly payments received from debtors and payment in full of one note.
The balance due from related parties increased from $1,496,971 at December 31,
1997 to $2,507,018 at September 30, 1998, due primarily to the $1,000,000
convertible notes from Stratesec, Incorporated. The notes are due December 31,
1999 and accrue interest at 10%, payable June 30 and December 31. Each note is
convertible at $8.50 per share into common stock of Stractesec, Incorporated,
and includes warrants to purchase 100 shares of common stock at $2.50 per share
for each $1,000 in debt.
Inventories decreased to $4,362,481 at September 30, 1998 from $5,610,129 at
December 31, 1997. Raw materials, parts, and work in process decreased
approximately $239,000 while completed aircraft inventories decreased about
$1,009,000 as the company sold two of its three demonstration aircraft and
continued to turnover used aircraft that are held in inventory. Prepaid expenses
and other current assets increased to $277,840 at September 30, 1998 compared to
$203,815 at December 31, 1997, reflecting prepayments for parts and material.
Total fixed assets increased by $95,676 during the first nine months of 1998.
The increase was primarily due to the upgrade of the Company's computer hardware
and software systems, at a cost of approximately $50,000, which are year 2000
compliant as of June 30, 1998. The company also spent approximately $20,000 for
a new telephone system in the third quarter of 1998. In addition to the above
fixed assets expenditures, the Company does not plan to spend significant funds
for new property, plant and equipment for the balance of fiscal 1998. Most
expenditures will be for repairs or replacements and for leasehold improvements
which are not expected to exceed $50,000 for the balance of the fiscal year.
Accounts payable increased to $298,043 at September 30, 1998 from $270,254 at
December 31, 1997. The increase was due primarily to purchases of new parts and
equipment to support increased production of new aircraft and for refurbishment
parts and material, which were purchased on open account. Accrued expenses
increased to $431,138 at September 30, 1998 from $312,945 at December 31, 1997.
The increase in accrued expenses is attributable to amounts owed for the
acquisition of pre-owned aircraft and increases in accrued warranty, payroll
taxes and miscellaneous expenses.
Refundable deposits increased to $225,020 at September 30, 1998 from $75,180
reflecting a large deposit for service work to restore a customer's damaged
aircraft. Bank lines, providing the Company with borrowing capacity to $600,000,
were maintained at the minimum $2,000 at September 30, 1998 from $102,000 at
December 31, 1997, representing the Company's only borrowings.
The Company does not carry insurance for product liability and could be subject
to substantial financial risk in the event of an unfavorable judgement arising
from litigation involving its products. Although the Company is not aware of any
pending claims, there is no guarantee that claims will not be asserted in the
future. The lease between Commander Aircraft Company and the Oklahoma City
Airport Trust expires in October 1998. Management has negotiated a new 5-year
lease with an option for an addition 5 years at very favorable terms. The lease
will be duly executed by both parties in early November.
<PAGE>
The Company has had losses and net cash outflows since its inception, and its
independent public accountants have indicated that there is doubt about its
ability to continue as a going concern. In 1997, management implemented plans to
improve the Company's operational performance and liquidity and capital
resources. The principal elements of these plans are (i) to expand its Aviation
Services Division, which purchases, refurbishes, and sells pre-owned piston
aircraft; (ii) offer additional options on its new aircraft; (iii) reduce
inventory costs through just-in-time production scheduling; (iv) reduce
marketing expenses through more focused advertising and implementation of a more
efficient marketing organization; and (v) offer consulting, brokerage and
refurbishment services for jet aircraft. In addition, in October 1997, the
Company's majority shareholder and affiliates purchased 360,000 newly issued
shares of common stock for $3,600,000. The Company used approximately $1,500,000
of the proceeds to repay debt, leaving it virtually debt free by the end of
1997. At September 30, 1998, over $1.3 million was available for working capital
requirements, for the expansion of the Aviation Services Division and other
investment opportunities.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 10, 1998, the shareholders of Commander Aircraft Company, the
Company's predecessor, approved the merger of Commander Aircraft Company into a
subsidiary of the Company. The shareholder vote in connection with this
transaction was 5,700,125 shares for, 3,900 shares against, and 346,960 shares
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K :
A report was filed on Form 8-K dated August 6, 1998 reporting the merger of
Commander Aircraft Company into Aviation General, Incorporated (the "Company").
The shares of common stock, $.50 par value, of Aviation General, Incorporated, a
Delaware corporation, were deemed registered under section 12(g) of the
Securities and Exchange Act of 1934, as amended. The Company is a "successor
issuer" to Commander Aircraft Company, a Virginia corporation and as a result of
the merger in which one share of Company common stock was exchanged for each
outstanding share of Commander Aircraft Company common stock, and Commander
became a wholly owned subsidiary of the Company.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVIATION GENERAL INCORPORATED
(Registrant)
By: /s/ Stephen R. Buren
Stephen R. Buren
Vice President Finance
(Chief Financial Officer and
Authorized Signatory)
Date: November 6, 1998
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