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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30, 1999
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 73-1547645
(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 7,078,520 Shares of Common Stock Outstanding as of July 15, 1999.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $364,516 $645,706
Investment in debt securities - related party 200,000 1,000,000
Accounts receivable 213,152 6,941
Notes receivable from related party 1,508,320 1,507,843
Notes receivable 21,501 21,286
Inventories 5,818,234 5,783,398
Prepaid expenses and other assets 324,555 259,860
------------------- ------------------
Total current assets 8,450,278 9,225,034
------------------- ------------------
Property and equipment:
Office equipment and furniture 348,323 347,565
Vehicles and aircraft 84,021 84,021
Manufacturing equipment 358,332 358,332
Tooling 527,496 525,536
Leasehold improvements 311,764 309,144
------------------- ------------------
1,629,936 1,624,598
Less: Accumulated depreciation (905,302) (850,313)
------------------- ------------------
Net property and equipment 724,634 774,285
------------------- ------------------
Other assets:
Notes receivable - less current maturities 135,388 148,649
=================== ==================
Total other assets 135,388 148,649
=================== ==================
$9,310,300 $10,147,968
=================== ==================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $388,491 $622,618
Accrued expenses 357,068 343,100
Refundable deposits 146,855 252,498
Notes payable 781,150 600,000
------------------- ------------------
Total current liabilities 1,673,564 1,818,216
------------------- ------------------
Long-term debt - -
Shareholders' investment (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding - -
Common stock, $.50 par value, 20,000,000
shares authorized; 7,078,520 shares
issued and outstanding at June 30, 1999
and 7,280,548 shares issued and outstanding
at December 31, 1998 3,539,259 3,640,274
Additional paid-in capital 36,917,551 37,178,230
Retained earnings (deficit) (32,820,074) (32,488,752)
------------------- ------------------
Total shareholders' investment 7,636,736 8,329,752
------------------- ------------------
==================
$9,310,300 $10,147,968
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVIATION GENERAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---------------------- -----------------------
<S> <C> <C>
Net sales - aircraft $2,660,398 $2,402,010
Net sales - service 394,712 231,888
---------------------- -----------------------
Total net sales 3,055,110 2,633,898
---------------------- -----------------------
Cost of sales - aircraft 2,119,402 2,162,718
Cost of sales - service 275,985 245,360
---------------------- -----------------------
Total cost of sales 2,395,387 2,408,078
---------------------- -----------------------
Gross margin (deficit) 659,723 225,820
---------------------- -----------------------
Other operating expenses:
Product development and engineering costs 75,233 75,258
Selling, general and administrative expenses 573,417 670,091
---------------------- -----------------------
Total other operating expenses 648,650 745,349
---------------------- -----------------------
Operating income (loss) 11,073 (519,529)
---------------------- -----------------------
Other income (expenses):
Other income 54,534 86,783
Interest expense (17,144) (471)
Other expense (219) (2,135)
---------------------- -----------------------
Total other income (expenses) 37,171 84,177
---------------------- -----------------------
Net income (loss) $48,244 ($435,352)
====================== =======================
Net income (loss) per share:
Weighted average common shares
outstanding, basic and diluted 7,171,108 7,280,548
---------------------- -----------------------
Income (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>
Six Months Ended June 30,
1999 1998
----------------------- -----------------------
<S> <C> <C>
Net sales - aircraft $4,305,051 $5,040,693
Net sales - service 1,008,351 516,434
----------------------- -----------------------
Total net sales 5,313,402 5,557,127
----------------------- -----------------------
Cost of sales - aircraft 3,860,643 4,516,432
Cost of sales - service 646,737 487,204
----------------------- -----------------------
Total cost of sales 4,507,380 5,003,636
----------------------- -----------------------
Gross margin (deficit) 806,022 553,491
----------------------- -----------------------
Other operating expenses:
Product development and engineering costs 154,271 153,410
Selling, general and administrative expenses 1,063,389 1,309,102
----------------------- -----------------------
Total other operating expenses 1,217,660 1,462,512
----------------------- -----------------------
Operating income (loss) (411,638) (909,021)
----------------------- -----------------------
Other income (expenses):
Other income 111,401 239,648
Interest expense (30,168) (3,232)
Other expense (916) (4,243)
----------------------- -----------------------
Total other income (expenses) 80,317 232,173
----------------------- -----------------------
Net loss ($331,321) ($676,848)
======================= =======================
Net loss per share:
Weighted average common shares
outstanding, basic and diluted 7,220,001 7,280,548
----------------------- -----------------------
Loss per share, basic and diluted ($0.05) ($0.09)
======================= =======================
</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>
Six Months Ended June 30,
1999 1998
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($331,321) ($676,848)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities---
Depreciation and amortization 54,989 52,248
Write-off of fixed assets (net) - -
Changes in operating assets and liabilities,
excluding cash:
Accounts receivable (206,211) 326,389
Notes receivable - related parties (477) 11,557
Notes receivable 13,046 14,375
Inventories (34,836) 576,014
Prepaid expense and other assets (64,696) (42,330)
Accounts payable (234,127) 105,227
Accrued expenses 13,968 58,952
Refundable deposits (105,643) 160,897
--------------------- --------------------
Net cash provided by (used in) operating activities (895,308) 586,481
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,338) (66,784)
Investment in Notes - related party - (600,000)
Proceeds from note repayment - related party 800,000.00
Investment in certificates of deposit - (624,845)
Proceeds from sale of property and equipment - -
--------------------- --------------------
Net cash provided by (used in) investing activities 794,662 (1,291,629)
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from related parties 181,150 -
Purchase of treasury stock (361,694) -
Repayments of borrowings from bank line - (100,000)
--------------------- --------------------
Net cash provided by (used in) financing activities (180,544) (100,000)
--------------------- --------------------
Net increase (decrease) in cash (281,190) (805,148)
Cash and cash equivalents at beginning of period 645,706 1,022,024
--------------------- --------------------
Cash and cash equivalents at end of period $364,516 $216,876
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 28,796 $ 471
Income taxes - -
</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 June 30, 1999 and December 31, 1998, and the results
of operations for the three month and six month periods ended June 30, 1999 and
1998, and the cash flows for the six month periods ended June 30, 1999 and 1998
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 1998 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. The Company purchased 219,450 shares of its common stock at an aggregate
purchase price of $396,537.50 from its majority shareholder during the period
beginning March 11, 1999 through June 29, 1999. This price was consistent with
shares trading freely on the Nasdaq SmallCap Market on that date. A total of
17,422 shares were issued to the accounts of qualified participants in the
employees' 401(k) program. The balance of the common stock purchased, totaling
202,028, shares was cancelled.
4. 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:
June 30, 1999 December 31, 1998
Raw materials $3,295,737 $3,112,257
Work in process 640,952 602,457
Demonstration aircraft 1 ,241,323 987,325
Used aircraft 640,222 1,081,359
Total inventories $5,818,234 $5,783,398
5. 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. Management believes that
the interest of shareholders is better served by vigorously defending claims
through the services of highly qualified specialists and attorneys rather than
retaining product liability insurance to settle exorbitant and unjustified
claims. 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.
6. Since commencement of production in 1992, annual revenues have increased
significantly and annual losses have substantially declined, concurrent with
ongoing investment in the Company's future. Cash needs have been financed with
debt, private investor capital, proceeds from an initial public offering, and
proceeds from subsequent stock issuances. The Company continues to broaden its
general aviation capabilities by increasing its business in the pre-owned piston
and jet markets. These markets are much larger than the market for new high
performance, single engine aircraft. Furthermore, this diversifies the Company's
business and revenue base and is synergistic with the manufacturing, marketing
and support services of our high performance, single engine Commander aircraft.
Management believes the reduction for 1998 in net loss from operations
and the continued improvements in margins for 1999 is attributable to plans
implemented in late 1996 and 1997 to provide new revenues for the Company.
During 1998 the Company continued to expand the Aviation Services Division,
which sells pre-owned aircraft and markets refurbishment services. Also in 1998,
the Company expanded its efforts to purchase pre-owned aircraft, accept aircraft
on trade for new units, and refurbish and sell the aircraft. Revenue from sales
of pre-owned aircraft increased by 69% in 1998 and revenues from refurbishment
and service increased over 11%. For the first six months of 1999 revenue from
pre-owned aircraft sales increased 37% over the first six months of 1998 and
revenues from services and parts increased 95% for the same period. Management
expects growth to continue for both refurbishment services and pre-owned
aircraft sales in the future. The Company continues to take advantage of its
factory facilities to market upgrades to existing aircraft owners for new paint,
interior and equipment.
In October 1998 the Company announced the formation of Strategic Jet
Services, Inc., a wholly owned subsidiary established to provide brokerage,
sale, consulting and refurbishment work for jet aircraft. Income from this line
of business is expected to begin improving the Company's profitability in 1999.
During the second quarter of 1999, a brokerage commission was earned for the
sale of a pre-owned Boeing 727 jet. The Company is continuing to expand efforts
in this market.
The Company introduced a new de-icing option and received certification
from the Federal Aviation Administration in 1998, allowing equipped aircraft 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.
In addition to the above actions by the Company to increase revenue,
management has made efforts to reduce costs and cash requirements by optimizing
its production schedule using just-in-time scheduling, thereby systematically
decreasing inventories and payables since production commenced in 1992.
Management has reduced the costs incurred to advertise new aircraft by focusing
its marketing efforts at a specific customer profile.
The Company continues to advertise in industry and trade publications
at a significantly reduced level, while directly contacting potential customers
whose demographic characteristics closely match the typical customer, especially
in the areas of income, pilot experience, and types of businesses with
demonstrated regional travel requirements. Further reducing selling expenses,
the Company completed a reorganization of its service center, paint and interior
shops into a completion center to focus on the growing after-market
refurbishment business.
The Company has expanded its operations to include the Aviation
Services Division and Strategic Jet Services, Inc., improved its products,
dramatically decreased sales and marketing expenses and reduced debt and
interest expense. Management believes that it has made significant progress
since 1998 and it is reasonable to expect the Company to continue to improve
revenues, reduce costs, improve operating results and stabilize cash flow in
1999. Due to numerous factors beyond the control of the Company, there can be no
assurances that these results will be achieved.
7. 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:
For the three months ended June 30, 1999, Aviation General, Incorporated
reported revenues of $3,055,110 and net income of $48,244, or $.01 per share,
compared to revenues for the second quarter of 1998 of $2,633,898 and a net loss
of $435,352, or $.06 per share.
For the six months ended June 30, 1999, revenues were $5,313,402 compared to
$5,557,127 for the first six months of 1998. The net loss for the six month
period ended June 30, 1999 was $331,321, or $.05 per share, compared to a net
loss of $676,848, or $.09 per share for the six months ended June 30, 1998.
RESULTS FROM OPERATIONS:
Revenues from the sale of aircraft for the second quarter of 1999 totaled
$2,660,398 compared to $2,402,010 for the comparable period of 1998. The
increase in revenue for the second quarter of 1999 was the result of delivering
11 new and pre-owned aircraft plus a commission for one jet aircraft compared to
10 aircraft sold for the second quarter of 1998. For the first six months of
1999 revenues from aircraft sales and broker commissions totaled $4,305,051
compared to $5,040,693 for the comparable period in 1998. The decrease was due
to slower sales in the first quarter of 1999 compared to 1998. Through the first
six months of 1999, the Company delivered 19 new, pre-owned or brokered piston
aircraft, compared to 20 for the first six months of 1998.
Service revenues of $394,712 for the quarter ended June 30, 1999 increased 70%
from $231,888 for the comparable quarter in 1998. For the six months ended June
30, 1999 service revenues totaled $1,008,351; an increase of 95% from $516,434
for the six months ended June 30, 1998. The increase in revenues was due to
additional billings for refurbishment of pre-owned aircraft and service billings
to customers, including one large rebuild job totaling over $240,000 during the
first quarter of 1999.
Cost of aircraft sales for the three month period ended June 30, 1999 decreased
to $2,119,402 from $2,162,718 for the three month period ended June 30, 1998.
The decrease was due primarily to the change in mix of new and pre-owned
aircraft sold during the period. For the first six months of 1999 cost of
aircraft sales decreased to $3,860,643 from $4,516,432 for the comparable period
in 1998. The decrease was due to the mix between new and pre-owned piston sales
and fewer total units delivered during the period.
Cost of sales for service and parts for the quarter ended June 30, 1999
increased to $275,985 from $245,360 for the quarter ended June 30, 1998. The
increase was due entirely to the increase in volume. Costs increased only 12% as
sales increased 70%, due to lower operating costs and increased billings from
service and parts as explained above. For the six months ended June 30, 1999
cost of sales for service increased 33% to $646,737 from $487,204 for the six
months ended June 30, 1998. The increase was due to the large increase in
revenues (up 95%).
Product development and engineering costs remained virtually unchanged for the
three months ended June 30, 1999 totaling $75,233 compared to $75,258 for the
comparable period in 1998. For the six months ended June 30, 1999 product
development and engineering expenses totaled $154,271 compared to $153,410 for
the six months ended June 30, 1998.
Sales and marketing expense decreased over 19% for the three-month period ended
June 30, 1999 to $361,866 from $448,467 for the comparable period ended June 30,
1998. Included in the second quarter of 1999 are costs totaling $51,421,
consisting primarily of salaries, travel and office expenses for the Company's
subsidiary, Strategic Jet Services, Inc. Advertising and show expenses were
reduced during the second quarter of 1999 by $124,000 from the second quarter of
1998, due to fewer media ads and show expenses. All other areas of expense
decreased slightly due to the reduction in advertising, personnel and
demonstrator aircraft usage.
For the six months ended June 30, 1999, sales and marketing expenses decreased
27% to $643,924 from $883,727 for the same period in 1998. Included in the first
six months of 1999 are costs relating to Strategic Jet Services of $99,715. As
well as a $141,185 reduction in advertising and show expense in 1999, printing,
travel and salary and commission expenses were also reduced.
General and administrative expenses decreased approximately 5% to $211,551 for
the second quarter of 1999 from $221,624 for the second quarter of 1998. For the
six months ended June 30, 1999 general and administrative expenses decreased to
$419,465 from $425,375 from the six months ended June 30, 1998. The decrease was
due to a number of small changes in various areas of expense, including payroll,
insurance and tax expenses.
Other income decreased to $54,534 for the quarter ended June 30, 1999 from
$86,783 for the quarter ended June 30, 1998. For the six months ended June 30,
1999, other income decreased to $111,401 from $239,648 for the six months ended
June 30, 1998. The decrease was due to interest earned on certificates of
deposit held by the Company that were converted to cash during 1998. Interest
expense increased to $17,144 for the second quarter of 1999 from $471 for the
comparable period in 1998. For the first six months of 1999 interest expense
totaled $30,168 compared to $3,232 for the first six months of 1998. This
increase was due to borrowings on the Company's line of credit with banks.
LIQUIDITY AND CAPITAL RESOURCES:
Cash balances decreased to $364,516 at June 30, 1999 from $645,706 at December
31, 1998. Accounts receivable increased to $213,152 at June 30, 1999 from $6,941
at December 31, 1998 due to one pre-owned aircraft that was sold and awaiting
pick up by the customer. Notes receivable decreased to $156,189 at June 30, 1999
from $169,935 at December 31, 1998 due to regular monthly payments received from
the debtors. The balance due from the note receivable from related parties was
$1,508,320 at June 30, 1999 and $1,507,843 at December 31, 1998. The note
receivable from the related party was due June 30, 1999 and was extended until
June 30, 2000. The note is personally guaranteed by Mishal Al Sabah, a director
and major shareholder of the Company, and is collateralized by common stock of
Aviation General, Incorporated. During the first quarter of 1999, Stratesec,
Incorporated redeemed $800,000 of the $1,000,000 notes receivable. The $200,000
of note receivable from Stratesec, Incorporated is due December 31, 1999 and
accrues interest at 10%, payable June 30 and December 31. The note is
convertible into common stock of Stractesec, Incorporated at $8.50 per share,
and includes warrants to purchase 100 shares of common stock at $2.50 per share
for each $1,000 in debt.
Inventories increased to $5,818,234 at June 30, 1999 from $5,783,398 at December
31, 1998. Raw materials, parts, and work in process increased approximately
$222,000 while completed aircraft inventories increased about $254,000 as the
company maintained four demonstration aircraft on hand at June 30, 1999 and
three at December 31, 1998. Inventory of pre-owned aircraft decreased by
$441,000 at June 30, 1999 from December 31, 1998. Prepaid expenses and other
current assets increased to $324,555 at June 30, 1999 compared to $259,860 at
December 31, 1998, reflecting prepayments for parts, material and tooling
services.
During the first three months of 1999 expenditures for fixed assets totaled
$5,338, which were primarily for tooling, leasehold improvements and
miscellaneous office equipment. The Company does not plan to spend significant
funds for new property, plant and equipment for the balance of fiscal 1999. Most
expenditures will be for repairs or replacements of plant equipment, and for
computer hardware and software improvements which are not expected to exceed
$25,000 for the balance of the fiscal year.
Accounts payable decreased to $388,491 at June 30, 1999 from $622,618 at
December 31, 1998. The decrease was due primarily to a reduction of purchases of
new parts and equipment to support production of new aircraft and for
refurbishment parts and material, which were purchased on open account. Accrued
expenses increased to $357,068 at June 30, 1999 from $343,100 at December 31,
1998. The increase in accrued expenses is attributable to amounts owed for
payroll taxes, accrued employee benefits, and miscellaneous expenses.
Refundable deposits decreased to $146,855 at March 31, 1999 from $252,498 at
December 31, 1998 reflecting a large deposit for service work applied to a
payment to restore a customer's damaged aircraft which was completed and paid
during the first quarter of 1999.
Borrowings from bank lines increased to $781,150 at June 30, 1999 from $600,000
at December 31, 1998. The Company has two credit facilities in place to fund
aircraft held for sale. In addition, a working capital revolving credit line is
expected to be in place by September 30, 1999. The note for the $600,000 credit
line at a local bank was not renewed and the balance will be paid from the
proceeds of the new credit facility or whenever aircraft held as collateral are
sold.
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.
Since commencement of production in 1992, annual revenues have increased
significantly and annual losses have substantially declined, concurrent with
ongoing investment in the Company's future. Cash needs have been financed with
debt, private investor capital, proceeds from an initial public offering, and
proceeds from subsequent stock issuances. The Company continues to broaden its
general aviation capabilities by increasing its business in the pre-owned piston
and jet markets. These markets are much larger than the market for new high
performance, single engine aircraft. Furthermore, this diversifies the Company's
business and revenue base and is synergistic with the manufacturing, marketing
and support services of our high performance, single engine Commander aircraft.
Management believes the reduction in net loss from operations is attributable to
plans implemented in late 1996 and 1997 to provide new revenues for the Company.
During 1998 the Company continued to expand the Aviation Services Division,
which sells pre-owned aircraft and markets refurbishment services. Also in 1998,
the Company expanded its efforts to purchase pre-owned aircraft, accept aircraft
on trade for new units, and refurbish and sell the aircraft at a reasonable
profit. Revenue from sales of pre-owned aircraft increased by 69% in 1998 and
revenues from refurbishment and service increased over 11%. For the first six
months of 1999, revenues from pre-owned aircraft sales have increased 37% and
revenues from refurbishment and service increased 95%. Management expects growth
to continue in 1999 for both refurbishment services and pre-owned aircraft
sales. The Company continues to take advantage of its factory facilities to
market upgrades to existing aircraft owners for new paint, interior and
equipment.
In October 1998 the Company announced the formation of Strategic Jet Services,
Inc. (SJS), a wholly owned subsidiary established to provide brokerage, sale,
consulting and refurbishment work for jet aircraft. Income from this line of
business is expected to begin improving the Company's profitability in 1999.
During the second quarter of 1999, one jet aircraft was sold by SJS and a
commission of $107,750 was earned.
The Company introduced a new de-icing option and received certification from the
Federal Aviation Administration in 1998, allowing equipped aircraft 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.
In addition to the above actions by the Company to increase revenue, management
has made efforts to reduce costs and cash requirements by optimizing its
production schedule using just-in-time scheduling, thereby systematically
decreasing inventories and payables since production commenced in 1992.
Management has reduced the costs incurred to advertise new aircraft by focusing
its marketing efforts at a specific customer profile.
The Company continues to advertise in industry and trade publications at a
significantly reduced level, while directly contacting potential customers whose
demographic characteristics closely match the typical customer, especially in
the areas of income, pilot experience, and types of businesses with demonstrated
regional travel requirements. Further reducing selling expenses, the Company
completed a reorganization of its service center, paint and interior shops into
a completion center to focus on the growing after-market refurbishment business.
The Company has expanded its operations to include the Aviation Services
Division and Strategic Jet Services, Inc., improved its products, dramatically
decreased sales and marketing expenses and reduced debt and interest expense.
Management believes that it has made significant progress in 1998 and it is
reasonable to expect the Company to improve revenues, reduce costs, improve
operating results and stabilize cash flow in 1999. Due to numerous factors
beyond the control of the Company, there can be no assurances that these results
will be achieved.
Year 2000 Compliance
The Y2K problem, or millennium bug, refers to the possibility that computers may
not perform properly on or after January 1, 2000, because their programming may
recognize dates ending with 00 as the year 1900, rather than the year 2000. The
problem is worldwide in scope and affects computers both large and small,
including virtually any machine or electronic equipment that uses computer
chips.
During 1998 the Company spent over $45,000 to upgrade its internal computer
systems to be Y2K compliant. The Information Systems Manager, along with senior
management, has continued to review key suppliers of parts, materials and
services, as well as its banks, 401(k) provider, and insurance companies, to
insure that each has a readiness plan for Y2K. Virtually all surveyed have made
assurances that their systems are compliant or they have a specific plan to
insure compliance in the near future.
During the second quarter of 1999, the Company purchased a new software program
for tracking property, plant and equipment, as well as depreciation of its fixed
assets for accounting and valuation purposes. A new file server will be acquired
during the third quarter of 1999 with a total cost for this hardware not
expected to exceed $10,000.
A contingency plan will be prepared and approved by October 31, 1999, even
though management believes that they have successfully addressed the Y2K
challenge. Due to the complexity of the year 2000 issues and the interdependence
between companies, government agencies, utilities, financial institutions and
other entities, it is impossible to guarantee that the Company's year 2000
readiness program will be completely successful.
Forward-Looking Statements
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements, other than statements of historical fact, included in this
Form 10-Q that addresses activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including matters having to do with expected and future aircraft sales and
services revenues, the Company's ability to fund its operations and repay debt,
business strategies, expansion and growth of operations and other such matters,
are forward-looking statements. These statements are based on certain
assumptions and analyses made by our management in light of its experience and
its perception of historical trends, current conditions, expected future
developments, and other factors it believes are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including general economic and business conditions, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company, the Company's performance on its current contracts and its success
in obtaining new contracts, the Company's ability to attract and retain
qualified employees, and other factors, many of which are beyond the Company's
control. You are cautioned that these forward-looking statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in such statements.
ITEM 3. QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The registrant has no material market risk associated with interest rates,
foreign currency exchange rates or commodity prices.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 11, 1999. At the
meeting, the shareholders elected the following individuals as members of the
Board of Directors: Wirt D. Walker, III, N. Gene Criss, and Mishal Yousef Saud
Al Sabah.
The voting results of the election of directors and the other matters voted upon
at the meeting are as follows:
Election of Directors:
Votes Votes
For Withheld
Nominee:
Wirt D. Walker, III 6,507,096 2,000
N. Gene Criss 6,507,096 2,000
Mishal Yousef Saud Al Sabah 6,507,096 2,000
Other Matters:
Abstentions
Description of Votes Votes and Broker
Matter: For Against Non-Votes
Approval of amendment to the Company's
1993 Stock Option Plan 5,786,868 176,958 505,551
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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: August 12, 1999
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