SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998 Commission file number 0-9974
United States Aircraft Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-3518487
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3121 East Greenway Road, Suite 201, Phoenix, Arizona 85032
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(602) 765-0500
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of each Class)
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
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(Title of class)
Indicate by check mark whether registrant: (1) has filed all reports
required 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of January 5, 1999, the aggregate market value of the Class A voting
Common Stock held by non-affiliates of the registrant, computed by reference to
the closing sales price of such stock as of such date on the NASDAQ OTC Bulletin
Board, was $352,160. Shares of Common Stock held by each officer and director
and by each person who owned 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive and may not
apply for other purposes. The registrant also has outstanding Class B voting
Common Stock, although there is no public market for such stock.
As of January 5, 1999, there were 9,927,504 shares of the registrant's
Class A Common Stock outstanding and 4,962,801 shares of the registrant's Class
B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 26
ITEM 3. LEGAL PROCEEDINGS................................................. 26
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS................. 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.............................. 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.................... 37
ITEM 11. EXECUTIVE COMPENSATION............................................ 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 42
SIGNATURES.................................................................. 43
Financial Statements........................................................ F-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Prior to the acquisition of Neo Vision, Inc. ("Neo Vision"), United States
Aircraft Corporation (the "Company") was engaged in the adult real estate
education industry, the travel service industry, and the ownership of real
estate. See, "BUSINESS OF UNITED STATES AIRCRAFT CORPORATION." On June 30, 1998,
the Company entered into an Exchange Agreement dated as of June 30, 1998 among
all of the former shareholders of Neo Vision, Inc., an Arizona corporation ("Neo
Vision") and the Company pursuant to which the Company has issued 2,000,000
shares of Class A Common Stock to all of the former shareholders of Neo Vision
in exchange for all of the capital stock of Neo Vision (the "Exchange") and
pursuant to which Neo Vision has become a wholly owned subsidiary of the Company
and additional shares of a new class of common stock will be issued to the
former shareholders of Neo Vision. Consistent with the Exchange Agreement, the
Company's stockholders will be asked to approve a proposal to amend and restate
the Company's Certificate of Incorporation, authorizing: (i) the
reclassification of the Company's Class A Common Stock and Class B Common Stock
into a single new class of common stock ("New Common Stock") pursuant to the
following ratios: shares of Class A Common Stock will be reclassified into
shares of New Common Stock on the basis of 10 shares of Class A Common Stock
into one share of New Common Stock and shares of Class B Common Stock will be
reclassified into New Common Stock on the basis of 13 shares of Class B Common
Stock into one share of New Common Stock; (ii) the issuance of up to 100,000,000
shares of New Common Stock; (iii) the issuance of up to 75,000,000 shares of
preferred stock; (iv) the change of name of the Company from United States
Aircraft Corporation to Neo Vision Systems, Inc.; and (v) make certain technical
amendments set forth in the Company's First Restated Certificate of
Incorporation. Neo Vision provides advertising, programming, and information to
remote audiences using computer, video, and signal transmission technology,
accomplished by showing mixed-media programming and advertising onto video
screen walls in regional shopping malls or airports through satellite
transmission from Neo Vision's production facility in Phoenix, Arizona. See,
"BUSINESS OF NEO VISION, INC."
BUSINESS OF NEO VISION, INC.
INTRODUCTION
Neo Vision, Inc. ("Neo Vision") provides advertising, programming, and
information to remote audiences using computer, video, and signal transmission
technology. This is accomplished by showing mixed-media programming and
advertising onto video screen walls ("video walls") in regional shopping malls
or airports through satellite transmission from Neo Vision's production facility
in Phoenix, Arizona.
Neo Vision's video walls are highly visible and can range from 6-12 feet in
height to 10-30 feet in width, depending upon the particular configuration of
each mall or airport site. The sound system accompanying the screen is designed
to make it the center of attraction and highly audible. The audio sound system
is programmed to adjust its volume according to the traffic in the mall at any
given time. The visual image is greater than that of a television.
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Neo Vision was incorporated in Arizona on June 29, 1997, and until June
1998 was a development stage company. Neo Vision has a 75% interest in NV-1,
LLC, an Arizona limited liability company formed in August 1997. NV-1, LLC owns
and operates the first video wall using Neo Vision's technology that is located
at Meadows Mall in Las Vegas, Nevada. References to Neo Vision herein include
NV-1, LLC, unless the context indicates otherwise.
CONCEPT
Neo Vision was conceived as a means to deliver cost-effective advertising
to large shopping audiences. Neo Vision sells advertisements (showings) in the
form of 30-second units to national, regional, and local companies. These
showings are put on Neo Vision video walls twice during a 90-minute time period.
During this same 90-minute period, Neo Vision integrates music, video, and
public service showings. In general, Neo Vision will show each 30-second
advertising spot approximately 440 times monthly, depending upon the season of
the year and operating hours.
Neo Vision seeks to persuade potential customers to use its services as an
alternative or supplemental advertisement placement strategy because the cost
per thousand of potential customers reached by an advertiser on a Neo Vision
video wall is much less than competing advertisement placement strategies.
MARKET
Malls with 8 to 12 million customers visited annually are Neo Vision's
primary target, with a secondary emphasis on major airport terminals. Neo
Vision's video walls advertising methods not only offer advertisers significant
advantages over other forms of advertising, but can also help direct the impulse
purchases of each mall visitor.
Neo Vision's video walls allow advertisers to send a direct message to the
potential customers who are shopping in a mall. This substantially increases the
likelihood of increasing sales by providing messages that motivate the customers
to seek out immediately available products and services to meet their needs and
impulse buying decisions.
Moreover, malls are seeking an atmosphere to assist them in increasing
repeat visits to the mall and increasing the length of the customers' visits.
One strategy malls may seek to employ is to provide exciting visual effects and
entertainment. In addition, advertisers at airports seek to attract travelers
arriving in a city to their products and services. Neo Vision meets these needs
by offering high-impact programming combining multi-media effects, music, news,
current events, and advertising in a visually charged atmosphere.
Further, Neo Vision believes that advertisers will seek to employ Neo
Vision's video walls as an alternative or supplemental placement strategy that
is more cost effective than competing advertisement placement strategies.
Traditional advertising is becoming more expensive and agencies are being
directed to cut costs. Up to now, their focus has been on reducing management
layers and cutting internal costs. Neo Vision offers a way to reduce their
client's expenditures without reducing their own payroll or profitability.
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MARKETING STRATEGY
Neo Vision's marketing strategy is based on securing specific target
locations to establish its video walls. The plan is designed to be implemented
with strategic partners that will enhance Neo Vision's presence within the
marketplace.
Neo Vision intends to seek to sell a maximum of 50 to 60 ads per screen per
month. To accomplish this in each major market, Neo Vision intends to employ an
in-house sales force, but also will develop a relationship with local sellers of
mall and street advertising. The size of each sales unit will depend upon the
number of malls serviced in each market area and the overall size of the market.
Additionally, Neo Vision intends to enter into strategic partner relationships
with national advertising agencies to fill the ad spots within the 90-minute
periods employed in its marketing strategy. This also will determine the number
of in-house sales personnel required.
Ads will be sold on a contractual basis with standard industry discounts
offered for six and twelve month contracts. Because advertising is so
time-sensitive, a small premium will be charged for ad changes, when made weekly
by the advertising companies and their agencies.
Neo Vision will advertise in trade publications and attend trade shows on a
regular basis. Standard public relations, media events, and other strategies
will be staged at the opening of each new market. Neo Vision will expand its
markets by targeting locations with high patron traffic counts such as airports,
trade shows, convention centers, and sports arenas, both national and
international.
PRODUCTION AND TRANSMISSION
Neo Vision does not design or produce advertisements shown on its video
walls. Instead, production of advertisements is undertaken by advertising
agencies or their agents that specialize in creating advertising for their
clients. The Neo Vision system operates in the following manner:
1. The 30-second commercials are sent to Neo Vision's Phoenix, Arizona
headquarters where each beta or analog tape is converted to a
world-wide standard digital video/audio format known as MPEG-2
compression technology.
2. These digital files are transferred by satellite or internet
connections to the malls or other customer locations, and then are
stored on a computer designed to Neo Vision's specifications.
3. At a preprogrammed time, the computer converts the MPEG-2 format back
to analog video for transmission and playback through a video
projector located at the specified site onto a video wall.
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The result is an audio/visual product presented to shoppers in regional
shopping malls or travelers arriving at airports.
Neo Vision's system technology is administered internally by a Neo Vision
computer specialist.
DEVELOPMENT
Neo Vision has constructed three video walls in Las Vegas, Nevada at a
total cost of $471,546 and has purchased approximately $91,477 in equipment for
its main transmission facilities of its Phoenix, Arizona office. During its
development phase, Neo Vision invested approximately $362,000 in the development
of its video wall system, consisting primarily of consulting fees to technical
personnel. All of these development costs have been included in the operating
costs for Neo Vision during the year ended September 30, 1998.
LAS VEGAS VIDEO WALLS
The first Neo Vision video wall was installed in Meadows Mall, Las Vegas,
Nevada in April 1998. Two additional video walls were installed in June 1998 in
the recently opened "D" concourse in the McCarran International airport in Las
Vegas, Nevada.
Neo Vision leases wall space for its video walls at McCarran Airport and
Meadows Mall in Las Vegas, Nevada under operating lease agreements, expiring
June 2003 and September 2002, respectively. The base rent under the McCarran
lease is increased annually by the greater of 5% or 20% of the gross billings
for advertising on the video walls. The Meadows Mall agreement provides for the
payment of rent at a rate of 15% of the gross consideration received for
advertising on the video wall. Rent expense under these lease agreements for the
year ended September 30, 1998 was $60,000.
FUTURE SITES
Subject to the availability of sufficient capital, Neo Vision plans to
rapidly expand its video wall concept in malls and airports throughout the
United States. Neo Vision currently is in negotiations for establishing video
wall systems at two airport sites and six mall sites.
PRICING
Each showing consists of a 30 second spot appearing approximately 440 times
monthly. Neo Vision's current monthly pricing for a showing is approximately
$2,950 in malls and $3,950 in airports. Neo Vision believes this pricing is
substantially less than radio, television, and newspaper advertising costs on a
per customer basis in the comparable markets.
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TECHNOLOGY
Neo Vision does not hold any patents on any of its technologies relating to
its video wall system. Neo Vision does not believe that its technology can be
patented. Thus, Neo Vision relies on proprietary know-how and confidential
information and employs confidentiality agreements with its employees and
contractors to protect the processes, concepts, and documentation associated
with its proprietary rights. However, such methods do not afford complete
protection and there can be no assurance that competitors will not independently
develop technology similar to Neo Vision's video wall system.
SUPPLIERS
Neo Vision's video walls are constructed to specification by third party
contractors. The average cost of developing a new video wall is approximately
$250,000, subject to variation based upon size and configuration of a video wall
in a particular location. A video wall system generally consists of a screen,
projector audio system, and computer controls that are all readily available
from various manufacturers. The installation of a video wall system is completed
by general contractors under the supervision of Neo Vision staff and is expected
to be completed and operating approximately four to six weeks after site
approval.
COMPETITION
Neo Vision is not aware of any advertising systems similar to Neo Vision's
current video wall system. Neo Vision's competition in airports currently
consists of fixed advertising (primarily static boards) and other similar
structures. There is at least one company offering an advertising service
consisting of a series of three monitors attached to their booth in the center
of a mall aisle. This format provides low visual impact and, because of the size
of the screen, the sound and picture have limited visibility.
However, because of the proprietary nature of Neo Vision's video wall
system, competitors could seek to duplicate Neo Vision's technology. Thus, Neo
Vision will seek sufficient capital for Neo Vision to deploy its video wall
system in order to create brand name recognition and economies of scale.
EMPLOYEES
At September 30, 1998, Neo Vision had six employees, two of which are
managerial, two of which are technical, one of which is involved with sales, and
one of which is administrative. Further, Neo Vision employs five independent
contractors, three of whom provide technical services to Neo Vision, and two of
whom are sales representatives in Las Vegas, Nevada.
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BUSINESS OF UNITED STATES AIRCRAFT CORPORATION
INTRODUCTION
Prior to the acquisition of Neo Vision, the Company was engaged in the
adult real estate education industry, the travel services industry, and the
ownership of real estate related to the planned development of a chain of RV
Parks. The Company intends to continue in these businesses; however the RV Park
operation is in the planning phase and the acquisition and development of parks
will not be launched until the project is capitalized. The Company was
previously active in the modification of the DC-3/C-47 aircraft and real estate
property management both of which were discontinued in 1984 and 1997
respectively.
The Company owns plans and specifications for the turbo-prop engine
conversion for the DC-3/C-47 aircraft, and has investigated methods of realizing
this investment. Possible methods to realize the Company's investment in the
plans and specifications include a new licensing agreement, sale of the plans
and specifications, acquisition or by obtaining financing and successful future
development. As of September 30, 1996, the Company was unable to identify any
cash flows from its investment in the plans and specifications. Accordingly, an
impairment loss of $649,999, that represents the excess of the carrying amount
over the present value of the identifiable net cash flow, has been included in
operations for the year ended September 30, 1996.
The Company was incorporated in Delaware on October 6, 1978 and began
operations in April 1980. The principal executive offices of the Company are
located at 3121 East Greenway Rd., Suite 201, Phoenix, Arizona 85032, telephone
number (602) 765-0500.
ADULT EDUCATION
GENERAL
The Company's adult education operation is conducted by its wholly owned
subsidiaries Ford Schools, Inc. and Western College, Inc.
Ford Schools, Inc. is an Arizona real estate training organization
providing the required training to individuals seeking a real estate
salesperson's or broker's license, and continuing education for licensed
salespersons and brokers.
Effective January 1, 1996, the Company acquired Western College, Inc. a
real estate training organization providing the same courses of study. On
January 1, 1996, the operations of Ford and Western were combined at the Western
campus and operated as a single school under the name of Western College/Ford
Schools.
Effective May 1, 1998, the Company adopted the name Westford College, Inc.
for its adult education operation. The school and its courses of study are
approved by the Arizona Department of Real Estate.
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In 1998, the State of Arizona required the following real estate training:
Courses and Hours
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Real Estate Salesperson License Principles of Real Estate - 90 hours
Real Estate Brokers License Principles of Real Estate - 90 hours
Renewal of License Various courses approved by Real Estate
Department generally 3 to 6 hours in length.
Total 24 hours every two years.
Currently, the required training must be completed in a classroom setting.
The Arizona Department of Real Estate is currently reviewing this requirement in
order to consider the establishment of policies and procedures for "out of the
classroom" or "distance" learning. Under consideration are, among other methods
of distance learning, computer-aided classroom settings, compact disc-based
program that can be studied at home, the Internet, and satellite TV and videos.
The Company intends to develop course materials to present distance learning
courses when such policies and procedures are adopted by the Arizona Department
of Real Estate.
During the three years ended September 30, 1998, student enrollments and
tuition revenues were as follows:
Average
Students Revenue Tuition
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Sales Licensing
1998 1,249 $294,715 $235.96
1997 1,049 $261,099 $248.90
1996 937 $204,453 $218.19
Broker Licensing
1998 38 $ 13,340 $351.05
1997 34 $ 14,840 $436.47
1996 (1) 41 $ 18,507 $451.39
Renewal
1998 10,896 $152,977 $14.04
1997 9,835 $134,206 $13.64
1996 (1) 7,252 $106,908 $14.74
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(1) Represents the combined operations of Western College, Inc. and Ford
Schools, Inc. since January 1, 1996. Statistics prior to January 1, 1996
represent Ford Schools, Inc. only.
There are approximately 50,000 licensed real estate salesperson and brokers
in Arizona. The number of individuals taking the licensing examination each
month varies, generally increasing as real estate activity increases and
decreasing when real estate activity decreases. In the fiscal year 1998, the
number taking the State of Arizona sales licensing tests that were given each
month ranged from approximately 300 to 450. Even though there are significant
numbers taking the licensing exam each month, the number of licensed personnel
remains relatively constant as a significant number of licensees choose to let
their licenses lapse.
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Western College/Ford Schools has continued its planned expansion program
with the opening of a second campus in northeast Phoenix, Arizona. Currently,
the two campuses, each with three class rooms, are located as follows:
West Campus 4425 West Olive, Suite #128
Glendale, Arizona
Northeast Campus 3121 East Greenway Rd., Suite #201
Phoenix, Arizona
STRATEGY
The Company advertises its real estate programs in metropolitan Phoenix
telephone directories plus through direct mail to its referral sources. In
October 1996, the Company began publishing the Renewal News, a monthly magazine
for real estate licensees with a circulation of approximately 15,000. The
magazine includes the class schedule for both locations along with relevant
articles and paid advertising revenue in the year ended September 30, 1998 was
$24,679. The Company has launched a program to increase the circulation, and the
advertising revenue plus expand the editorial content. Utilizing its existing
base in adult real estate education, the Company intends to expand and profit
from the adult career education field. Subject to the availability of any
necessary financing, the Company intends to expand into other geographic markets
and to expand its curriculum to include training for other professionals such as
travel and insurance agents, accountants and home inspectors. The expansion is
expected to include the offering of home study courses which in some cases will
use computer networks, video conferencing, and interactive multimedia courses,
all of which provide enhanced education and training that is not bound by time
or location. The Company may seek to acquire other adult education schools,
although the Company has not identified any particular acquisition candidates.
COMPETITION
At September 30, 1998, there were approximately four proprietary schools
for real estate training in the Phoenix metropolitan area that offered both
license and license renewal education. The Company believes that another
metropolitan Phoenix based school has the largest market share in Arizona,
although the Company does not know its total market share. While small schools
will continue to be formed, management believes the trend will be toward larger
schools, providing high quality instruction and a variety of programs.
TRAVEL SERVICES
GENERAL
The Company, through acquisitions, implemented its travel services division
on July 1, 1997. Effective July 1, 1997 the Company purchased certain assets of
Travel Easy, Inc. and in August 1997 the assets of FirsTravel, both of which
were full service travel agencies. The Travel Easy agency has been closed and
its approximately 175 independent contractor Home Based Travel Agents became
affiliated with the Company's travel agency operated as FirsTravel.
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FirsTravel is a full service travel agency registered with the Airline
Reporting Corporation. It serves the retail market from its office at 4700 North
Central Avenue, Phoenix Arizona and serves its approximately 175 independent
contractor Home Based Travel Agents located throughout the country by processing
the tickets and reservations for such agents.
Sales for the travel agency segment for the year ended September 30, 1998
and the three months from acquisition through September 30, 1997 were as
follows:
1998 1997
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Airline tickets $682,955 $339,217
Hotels 117,116 81,861
Automobiles 31,934 26,255
Cruises 247,822 116,508
Tours 189,905 161,362
Other 11,957 51,341
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Total Sales $1,281,689 $776,544
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STRATEGY
In October 1997, the major airlines changed their commission rate to travel
agencies from 10% to 8%. Accordingly, in January 1998 FirsTravel adopted the
policy of generally charging its customers a $10 service fee for each airline
ticket generated. Further, the Company intends to continue its policy to promote
leisure travel, such as tours and cruises, where the commissions generally range
from 10% to 13%. Management believes that the travel services operation can be
expanded through the acquisition of other travel service companies and that
FirsTravel can be expanded through the recruitment of new Home Based Travel
Agents. Additionally, the Company is in the process of implementing a travel
education program for individuals desiring to enter the travel services industry
and continuing education for active travel agents. The education program will be
presented by the Company's adult education division.
COMPETITION
The Company's travel services business competes with large national travel
agencies, including American Express and Thomas Cook, as well as with many
smaller local travel agencies.
REAL ESTATE PROPERTY MANAGEMENT
Hansen & Associates, Inc. dba Property Masters is a Phoenix, Arizona
residential real estate brokerage that specializes in management of single
family residential homes. In August 1997 the Company decided to discontinue this
line of business and sold the stock in Hansen & Associates Inc. to the president
of the subsidiary in a transaction that was effective on September 30, 1997,
with a resulting gain on the sale of $53,796.
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EMPLOYEES
Immediately prior to the Exchange, the Company had 15 employees. Further,
the Company had approximately 175 independent contractor home based travel
agents and fifteen to twenty independent contractor instructors for the real
estate training school.
THE EXCHANGE
BACKGROUND OF AND REASONS FOR THE EXCHANGE
During the past three years, the Company was considering a number of
alternatives to grow its business. The Company determined that the acquisition
of compatible businesses would offer stockholders an opportunity to own a
business which would have expanding growth opportunities. The Company during
this period explored a number of business opportunities for growing its
business, and concluded that expansion into the travel industry was compatible
with the Company's adult real estate educational activities. Thus, the Company
acquired two travel agencies during 1997. The Company continued to seek other
alternatives for expansion and entered into a number of discussions with owners
of other potential businesses, none of which the Company determined would
benefit the Company's stockholders.
On April 9, 1998, the Company had its first substantive meeting with Neo
Vision. This meeting was initiated by the Company. At this meeting, Mr.
Eastlick, then the Chief Executive Officer of the Company, and Mr. Al Lundstrom,
then the Chief Executive Officer of Neo Vision, met to discuss a possible
transaction. They discussed possible terms of a combination as well as the
structure of the proposed combined entity and the advantages of such a
combination. Meetings continued through April 1998. At these meeting information
was exchanged about both companies and a tentative agreement was developed.
Management of the Company determined that Neo Vision was in a high growth area
and that the experience of the Company in the service business was compatible
with Neo Vision's video wall advertising business, which involved a significant
service component. In addition, Neo Vision did not have the in-house financial
management which the Company was able to offer, and the Company believed that
the management of the two companies would provide a good overlap of expertise
and experience. On May 1, 1998, a tentative agreement was presented to the
Company's Board of Directors, who approved the concept and authorized Mr.
Eastlick to continue negotiations with Neo Vision. The parties' valuation of Neo
Vision was based largely on the growth potential of Neo Vision and the cost
savings and growth potential of a combined entity. After numerous additional
negotiating sessions and the completion of due diligence, the Exchange Agreement
was approved and closed on June 30, 1998.
The Company determined to enter into the Exchange Agreement and issue
2,000,000 shares of Class A Common Stock, with an additional 4,577,000 shares of
New Common Stock upon approval of the stockholders of the Company. The Company
and Neo Vision believed that the immediate acquisition of Neo Vision pursuant to
the Exchange Agreement would allow the former management of Neo Vision and the
management of the Company to begin working together immediately to accomplish
the Company's business objectives.
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In accordance with the Exchange Agreement, Anthony Christopher, the former
principal shareholder of Neo Vision, was elected a director and executive
officer of the Company. Mr. Christopher subsequently resigned his position as
both a director and as an employee on November 9, 1998. Mr. Christopher, the
Company, and Neo Vision entered into a separation agreement on December 17,
1998. The separation agreement provides that the Company will pay Mr.
Christopher $41,250 in accrued compensation. Payments will be $2000 per month
commencing February 1, 1999, and increase to $5000 per month commencing May 1,
1999, continuing at that rate until the entire $41,250 has been paid. If the
Company fails to pay this accrued compensation within the specified timeframe,
the agreement provides that Mr. Christopher is entitled to treble damages.
However, if the stockholders do not approve the reclassification, then Mr.
Christopher is not entitled to any payment of accrued compensation from the
Company. Under the agreement, Mr. Christopher waived his rights to receive
600,000 of New Common Stock to which he was entitled under the Exchange
Agreement. Of these shares, 400,000 are to be issued to the debenture holders of
Neo Vision on a pro rata basis and 200,000 are to be issued to a financial
consultant to Neo Vision for past services rendered to Neo Vision. Further, Mr.
Christopher may not compete with Neo Vision in the video wall business until
December 17, 1999. If Neo Vision has twelve video walls in operation by December
17, 1999, then Mr. Christopher cannot compete for another one year period. The
separation agreement provides that Mr. Christopher will consult with the Company
and Neo Vision on an informal basis at his discretion. In addition, the
agreement provides that Mr. Christopher will vote in favor of the amendment and
restatement of the Company's certificate of incorporation. Finally, each party
to the separation agreement released each other party from all past or present
claims and obligations.
The Company believes that the period between initial issuance of shares
under the Exchange Agreement and the submission of the proposals pursuant to
this Proxy Statement to stockholders of the Company has confirmed management's
belief that the transactions pursuant to the Exchange Agreement will be to the
benefit of the stockholders of the Company.
The Company's Board believes the Exchange Agreement and the exchange of
shares thereunder (the "Exchange") are fair to and in the best interests of the
Company's stockholders for, without limitation, the following reasons: (i) the
Company's current operations have limited growth potential, operating in small
growth rate industries; (ii) Neo Vision's video wall advertising service has
significant growth potential, operating in an expanding industry where start-up
companies can potentially achieve market penetration; (iii) the video wall
advertising line of business offers the Company an opportunity for long-term
growth; (iv) the Company's resources and Neo Vision's video wall advertising
service offer the Company the potential for increased revenues from operations,
greater access to financial resources, and the opportunity for improved
liquidity for the Company's stockholders.
The Company also considered certain potentially negative factors,
including: (a) the possibility of an initial increase in losses; (b) the loss of
control by the Company's stockholders; (c) and Neo Vision's limited operating
history, which exposes the Company to risks associated with start-up companies.
The Company determined not to obtain an independent fairness opinion as to
the financial terms of the Exchange Agreement because the Company believes that
the cost of obtaining such an opinion was prohibitive in light of the Company's
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financial situation. In addition, the valuation of the Company and Neo Vision
was negotiated by the respective managements of the two companies in an
arms-length transaction.
EXCHANGE RATIO
Pursuant to the Exchange Agreement, 2,000,000 shares of the Company's Class
A Common Stock (equivalent to 200,000 shares of New Common Stock) were issued in
exchange for 6,250,000 shares of Neo Vision Common Stock. Additionally, the
Exchange Agreement provides that an additional 4,577,560 shares New Common Stock
will be issued to former Neo Vision shareholders upon stockholder approval of
the reclassification of the Company's Class A Common Stock and Class B Common
Stock. These shares will be apportioned among these former shareholders in
proportion to their ownership interest in Neo Vision prior to its acquisition by
the Company, except that Anthony Christopher, the former principal shareholder
of Neo Vision, has agreed to waive receipt of 600,000 of such shares. If the
proposal to reclassify the Company's Class A Common Stock and Class B Common
Stock is adopted, the Class A Common Stock will be reclassified into New Common
Stock on the basis of 10 shares of Class A Common Stock into one share of New
Common Stock and the Class B Common Stock will be reclassified on the basis of
13 shares of the Class B Common Stock into one share of New Common Stock. Each
holder of shares of the Company's Class A Common Stock or Class B Common Stock
exchanged pursuant to the reclassification who would have otherwise been
entitled to receive a fraction of a share of the Company's New Common Stock
(after taking into account all certificates delivered by such holder) will
receive, in lieu thereof cash (without interest) in an amount equal to such
fractional portion of the closing price per share at the Effective Time.
EFFECTIVE TIME; EXCHANGE OF CERTIFICATES FOR CERTIFICATES REPRESENTING THE
COMPANY'S NEW COMMON STOCK
The Exchange Agreement was approved by the Company's Board of Directors,
executed, and became effective on June 30, 1998. As soon as reasonably
practicable after the stockholders' approval of the amendment and restatement of
the Company's Certificate of Incorporation and the filing of the amended and
restated Certificate of Incorporation reflecting the reclassification of the
Company's Class A Common Stock and Class B Common Stock into shares of the
Company's New Common Stock (the "Effective Time"), the Company will mail to each
holder a record of the Company's Class A Common Stock and Class B Common Stock
as of the date of the reclassification, a letter of transmittal and instructions
for surrendering certificates formerly representing the Company's Class A Common
Stock and Class B Common Stock in exchange for a certificate or certificates
representing the number of shares of the Company's New Common Stock into which
such shares were reclassified.
FAILURE OF STOCKHOLDERS TO APPROVE THE PROPOSALS
If the stockholders do not approve the amendment and restatement of the
Company's Certificate of Incorporation resulting in the reclassification of the
Company's Class A Common Stock and Class B Common Stock into New Common Stock,
then each of the former shareholders of Neo Vision will have the right to
rescind the Exchange Agreement. The Company believes that in view of the fact
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that more than 90% of the shares of New Common Stock which would be issued to
the former shareholders of Neo Vision depend on such approval, and in view of
the fact that there will be no other consideration in lieu thereof if there is
no such stockholder approval, then in the event of the failure of the
stockholders to approve the amendment and restatement of the Company's
Certificate of Incorporation, each of the shareholders likely would rescind the
Exchange Agreement. In such event, the acquisition of the shares of Neo Vision
acquired by the Company with respect to each such shareholder would be
rescinded. Depending on the number of shareholders who rescinded the Exchange
Agreement, it is possible that the Company would become a minority shareholder
of Neo Vision. The Company would, however, be required to bear the costs and
expenses of its transactions with Neo Vision, including the cost of this Proxy
Statement, even if every shareholder of Neo Vision rescinded the Exchange
Agreement.
If the Company's stockholders do not ratify and approve the Exchange
Agreement, then the Company's board of directors reserves the right to
reconsider any one or more of the terms of the Exchange Agreement, apart from
the financial terms of the Exchange. However, the failure of the stockholders to
ratify and approve the Exchange Agreement will not result in the rescission of
the Exchange Agreement.
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SPECIAL CONSIDERATIONS
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT
ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "PROJECT" OR "CONTINUE" OR THE NEGATIVE THEREOF OR
OTHER COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS AND CERTAIN OTHER FACTORS
NOTED THROUGHOUT THIS ANNUAL REPORT AND EXHIBITS HERETO AND THERETO CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PREDICTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS.
The following factors, in addition to those discussed elsewhere in this
Annual Report, should be carefully considered in evaluating the Company and its
business.
RISKS ASSOCIATED WITH THE EXCHANGE
LACK OF FAIRNESS OPINION
The Company has not obtained an opinion or any independent financial advice
that the consideration received by the Company's stockholders in connection with
the Exchange Agreement and the reclassification of the Company's Class A Common
Stock and Class B Common Stock into New Common Stock is fair to the Company's
stockholders from a financial point of view. In particular, the Company did not
obtain any independent evaluation of the terms of the Exchange Agreement,
including the exchange ratio of shares of Neo Vision Common Stock for shares of
the Company's Class A Common Stock and New Common Stock contained therein. The
Company also did not obtain any independent evaluation in determining whether
the 10/13 exchange ratio between the Class A Common Stock and Class B Common
Stock was fair from a financial point of view. Therefore, each stockholder must
make his or her own determination as to the fairness of the Exchange Agreement
and the reclassification of the Company's Class A Common Stock and Class B
Common Stock without any expert advice. Stockholders should consider consulting
their own financial advisors prior to voting on the ratification and approval of
the Exchange Agreement and the amendment and restatement of the Company's
Certificate of Incorporation. There can be no assurance that the terms of the
Exchange Agreement or the reclassification of the Class A Common Stock and Class
B Common Stock into New Common Stock are fair to stockholders from a financial
point of view.
CONFLICTS OF INTEREST
The approval by the Board of Directors of the Exchange Agreement, the
reclassification of the Company's Class A Common Stock and Class B Common Stock,
and the adoption of the 1998 Stock Option Plan are subject to substantial
conflicts of interest. Messrs. Albert Lundstrom and Jack Eberenz, both former
shareholders of Neo Vision or their affiliates, will receive 1,405,311
additional shares of New Common Stock upon the ratification and approval of the
Exchange Agreement and the approval of the reclassification of the Company's
Class A Common Stock and Class B Common Stock. Further, such former shareholders
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of Neo Vision, as well as Harry Eastlick, the former President and Chief
Executive Officer of the Company, and now its Chief Financial Officer, were
granted options to acquire a total of 825,000 shares of New Common Stock at an
exercise price of $1.00 per share. Mr. Anthony Christopher, the former principal
shareholder of Neo Vision, will receive 2,676,450 shares of New Common Stock
upon the approval of the reclassification. Moreover, Messrs. Lundstrom,
Eastlick, and Eberenz have entered into employment agreements through December
31, 2003, providing for annual salaries of $150,000, $120,000 and $60,000,
respectively. In addition, the three non-officer directors of the Company,
Messrs. Cline, Manning, and Thomas, each received options to acquire 5,000
shares of New Common Stock at $1.00 per share. Thus, in determining whether to
approve the Exchange Agreement, all of such current directors and officers were
subject to substantial conflicts of interest. There can be no assurance that
such conflicts of interest did not have a material adverse effect on the terms
of the Exchange Agreement or the Exchange thereunder.
DEPENDENCE UPON MANAGEMENT
Prior to the Exchange Agreement, the Company's Board of Directors consisted
of Harry Eastlick, Donald Cline, Whipple Manning, and John Thomas. In accordance
with the Exchange Agreement, the Company's Board of Directors elected Anthony
Christopher, Albert Lundstrom, and Jack Eberenz as directors and executive
officers of the Company. In addition, the Company entered into employment
agreements with Messrs. Christopher, Lundstrom, Eberenz, and Eastlick. Mr.
Christopher, the former principal shareholder of Neo Vision, subsequently
resigned as both an employee and as a director. He has entered into a separation
agreement with the Company and Neo Vision. However, Mr. Christopher will no
longer be available to assist the Company, except at his discretion. In
addition, there will likely be a period of adjustment for both the officers and
employees of the Company as new management of the Company is instituted.
Further, the education, training, and experience of each officer engaged in the
management and operation of each line of business for the Company is critical to
the success of the Company. Thus, the loss of any of the current officers at the
Company could result in a significant decrease in the Company's prospects for
success. In addition, there is no assurance that this new management group will
be able to achieve profitability for the Company.
RESIGNATION OF ANTHONY CHRISTOPHER
In accordance with the Exchange Agreement, Anthony Christopher, the former
principal shareholder of Neo Vision, was elected a director and executive
officer of the Company. Mr. Christopher subsequently resigned his position as
both a director and as an employee on November 9, 1998. Mr. Christopher, the
Company, and Neo Vision entered into a separation agreement on December 17,
1998. The separation agreement provides that the Company will pay Mr.
Christopher $41,250 in accrued compensation. Payments will be $2000 per month
commencing February 1, 1999, and increase to $5000 per month commencing May 1,
1999, continuing at that rate until the entire $41,250 has been paid. If the
Company fails to pay this accrued compensation within the specified timeframe,
the agreement provides that Mr. Christopher is entitled to treble damages.
However, if the stockholders do not approve the reclassification, then Mr.
Christopher is not entitled to any payment of accrued compensation from the
Company. Under the agreement, Mr. Christopher waived his rights to receive
600,000 of New Common Stock to which he was entitled under the Exchange
Agreement. Of these shares, 400,000 are to be issued to the Debenture holders on
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a pro rata basis and 200,000 are to be issued to a financial consultant to Neo
Vision for past services rendered to Neo Vision. Further, Mr. Christopher may
not compete with Neo Vision in the video wall business until December 17, 1999.
If Neo Vision has twelve video walls in operation by December 17, 1999, then Mr.
Christopher cannot compete for another one year period. The separation agreement
provides that Mr. Christopher will consult with the Company and Neo Vision on an
informal basis at his discretion. In addition, the agreement provides that Mr.
Christopher will vote in favor of the amendment and restatement of the Company's
certificate of incorporation. Finally, each party to the separation agreement
released each other party from all past or present claims and obligations.
CONTINUING LOSSES; NEED FOR ADDITIONAL FUNDING
Company's business activities prior to the acquisition of Neo Vision have
suffered continuing losses and Neo Vision has incurred losses since inception.
See "RISK FACTORS - "Risks Associated with Neo Vision" and "Risks Associated
with of the Company." As a result, the Company had outstanding indebtedness of
approximately $519,000 at September 30, 1998, and Neo Vision had outstanding
indebtedness of approximately $1,268,000 at such date. Although the Company will
not assume the Neo Vision indebtedness, that indebtedness will not be repaid as
a result of the merger and will remain the obligation of Neo Vision after the
merger. The Company expects that $800,000 of Neo Vision indebtedness will be
converted into New Common Stock upon the approval of the Exchange Agreement and
registration of such shares under the Securities Act of 1933, as amended.
Currently, neither the Company nor Neo Vision has the ability to repay such
debt. Further, the Company may experience increased losses as a result of the
anticipated expansion of Neo Vision's business. The Company will require
substantial additional funding to cover these losses and expand its business.
This funding may include debt and equity financing, all of which may be highly
dilutive to the stockholders of the Company. No assurance can be given as to the
ability of the Company to obtain needed financing or the terms of such
financing. The inability of the Company to obtain necessary financing could
result in the inability of the Company to expand its business or even continue
its operations. See "CONSOLIDATED FINANCIAL STATEMENTS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
CONTROL BY EXISTING STOCKHOLDERS
As of the date hereof, the former shareholders of Neo Vision own 2,000,000
shares of Class A Common Stock (equivalent to 200,000 shares of New Common
Stock) representing approximately 20% of the outstanding shares of the Class A
Common Stock. Subsequent to the reclassification of the Company's Class A Common
Stock and Class B Common Stock and the issuance of the 3,977,560 additional
shares of New Common Stock pursuant to the Exchange Agreement (as adjusted to
reflect Anthony Christopher's waiver of rights to receive 600,000 shares), the
former shareholders of Neo Vision will own approximately 70% of the Company's
outstanding New Common Stock. As a result, former shareholders of Neo Vision
will be able to effectively control matters requiring approval by stockholders
of the Company, including the election of the Company's Board of Directors.
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RISKS ASSOCIATED WITH ISSUANCE OF PREFERRED STOCK
Approval of the amendment and restatement of the Company's Certificate of
Incorporation will enable the Company to issue up to 75,000,000 shares of
preferred stock. While providing flexibility in connection with possible
financings, acquisitions, and other corporate purposes, the issuance of
Preferred Stock, among other things, could adversely affect the relative voting
power of the holders of common stock, could have a dilutive effect on earnings
per share, and under certain circumstances, be used as a means of discouraging,
delaying, or preventing a change in control of the Company. There are no
outstanding shares of Preferred Stock at the present time, or any commitments,
options or other rights presently outstanding for the issuance of Preferred
Stock. The Company has no present plan to issue shares of its Preferred Stock,
although the Company's need for additional financing increases the likelihood
the Company may find it necessary or desirable to issue Preferred Stock.
RIGHTS TO ACQUIRE SHARES
A total of 967,500 shares of New Common Stock have been reserved for
issuance upon exercise of options previously granted under the Company's 1998
Stock Option Plan (the "1998 Plan"), at an exercise price of $1.00 per share, a
total of 160,150 shares of New Common Stock have been reserved for issuance upon
exercise of warrants previously granted by Neo Vision at a weighted average
exercise price of $3.00 per share, and, based on the outstanding principal and
accrued interest of Neo Vision debentures (the "Debentures") at December 31,
1998, 1,156,818 shares have been reserved for issuance pursuant to such
Debentures. In addition, Anthony Christopher agreed to waive receipt of 600,000
shares of New Common Stock, 400,000 of which are to be made available to the
Debenture holders and convertible into New Common Stock. During the terms of
such options, warrants, and Debentures, the holders thereof will have an
opportunity to profit from an increase in the market price of Common Stock with
resulting dilution in the interests of holders of Common Stock. The existence of
such stock options and warrants may adversely affect the terms on which the
Company can obtain additional financing, and the holders of such options and
warrants can be expected to exercise such options at a time when the Company, in
all likelihood, would be able to obtain additional capital by offering shares of
its Common Stock on terms more favorable to the Company than those provided by
the exercise of such options and warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock of the Company in the public
market following the Exchange and reclassification of the Company's Class A
Common Stock and Class B Common Stock into New Common Stock could adversely
affect prevailing market prices. Of the 7,220,608 shares of New Common Stock to
be outstanding after the Exchange and reclassification of the Company's Class A
Common Stock and Class B Common Stock, assuming the maximum issuance of shares
under the Exchange Agreement and the conversion of all New Vision debentures,
approximately 2,176,000 shares will be eligible for resale in the public market
without restriction. Upon completion of the Exchange and reclassification of the
Company's Class A Common Stock and Class B Common Stock, approximately 5,045,000
shares will be eligible for resale in the public market after a one year period
subject to compliance with Rule 144 under the Securities Act. Further, the
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Company will have outstanding options and warrants convertible into up to
1,127,650 shares of New Common Stock. These outstanding options and warrants
will be immediately exercisable.
CHANGE IN CONTROL PROVISIONS
The Company's proposed First Restated Certificate of Incorporation (the
"Restated Certificate") and the Delaware General Corporation Law (the "General
Corporation Law") contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of the Company, even
when these attempts may be in the best interests of stockholders. The Restated
Certificate also authorizes the Board of Directors, without stockholder
approval, to issue one or more series of preferred stock which could have voting
and conversion rights that adversely affect the relative voting power of the
holders of Common Stock. The General Corporation Law also imposes conditions on
certain business combination transactions with "interested stockholders" (as
defined therein).
ABSENCE OF LIQUID PUBLIC MARKET
The Company's Class B Common Stock is not publicly traded. The Company's
Class A Common Stock is traded on the NASDAQ OTC Bulletin Board on an extremely
limited basis. As a result of the Company having two classes of Common Stock and
the extremely limited trading market for the Company's Class A Common stock,
trading in the Class A Common Stock has been subject to substantial
fluctuations. Moreover, in view of such a limited market it may be extremely
difficult for any owner of the Class A Common Stock to sell shares without
having an adverse effect on the market price of the Common Stock. The
reclassification of both Class A Common Stock and Class B Common Stock into a
single new class of Common Stock may decrease the liquidity of any stockholder's
investment, especially since the reclassification will reduce the number of
freely tradable shares of Class A Common Stock to one-tenth of their former
number. Further, the Company's New Common Stock will not be traded on the NASDAQ
SmallCap market, and it is unlikely that such stock would be so traded in the
foreseeable future. The Company's New Common Stock also may constitute a "penny
stock" under the rules and regulations of the Securities and Exchange
Commission, and such designation may have an adverse effect on the market in the
Company's New Common Stock.
LACK OF DIVIDENDS
The Company intends to employ all available funds for the development of
its business and, accordingly, does not intend to declare or pay cash dividends
in the foreseeable future.
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RISKS ASSOCIATED WITH NEO VISION
NEW BUSINESS CONCEPT; LIMITED OPERATING HISTORY; CONTINUING LOSSES;
GOING-CONCERN CONSIDERATIONS
The Company intends to make the Neo Vision video wall advertising line of
business its primary focus in the immediate future. Neo Vision was incorporated
in June 1997 and completed its development stage in June 1998. Neo Vision has a
limited operating history with respect to the distribution and marketing of its
video wall advertising business. Thus, Neo Vision will be subject to all of the
risks inherent with a start-up business. In particular, Neo Vision has had
negative cash flow and operating losses since inception. Neo Vision reported a
net loss of approximately $(675,865) for the year ended September 30, 1998. Neo
Vision will require capital provided by securities offerings, and in all
likelihood, significant additional capital to fully implement its business plan
and expand its operations. There can be no assurance that Neo Vision will be
able to achieve, or maintain, profitable operations or positive cash flow at any
time in the future. In addition, the report by Neo Vision's independent
certified public accountants on Neo Vision's financial statements for the fiscal
year ended September 30, 1998 states that Neo Vision's significant operating
losses raise substantial doubt about Neo Vision's ability to continue as a going
concern. See "CONSOLIDATED FINANCIAL STATEMENTS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
NEED FOR ADDITIONAL CAPITAL; RISK OF SUBSTANTIAL DILUTION
The Company anticipates that Neo Vision will require substantial additional
funding to adequately meet management's growth objectives and fully implement
its business plan. Further, in the event that Neo Vision is unable to obtain
sufficient financing, there is no assurance that Neo Vision will be able to
successfully penetrate the video wall advertising marketplace, and achieve
widespread acceptance. The Company may seek additional debt or equity financing
through banks, other financial institutions, companies, or individuals.
Management has engaged financial consultants to assist in obtaining $3,000,000
to $5,000,000 in additional capital and Neo Vision has received a letter of
intent for a $250,000 sale and leaseback of the installed equipment at one of
its locations. No assurance can be given that the Company will be able to obtain
any such additional equity or debt financing on satisfactory terms or at all. No
assurance can be given that any such financing, if obtained, will be adequate to
meet Neo Vision's needs for the foreseeable future. If the Company is not able
to successfully obtain sufficient capital, through securities offerings and from
additional sources, Neo Vision's ability to continue as a viable line of
business for the Company will be substantially impaired.
EXISTING DEBT OBLIGATIONS
As of September 30, 1998, Neo Vision had approximately $800,000 in
outstanding convertible debt obligations with interest at rates of 10% and 12%
per annum with total interest accrued at December 31, 1998 of $61,230. The
debentures and accrued interest are convertible into approximately 999,990
shares of New Common Stock at December 31, 1998 which includes 400,000 shares of
New Common Stock which have been waived by Anthony Christopher for issuance to
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such Debenture holders. There is no assurance that Neo Vision will have
sufficient funds to satisfy or extend the debt obligations. No assurance can be
given that the Company or Neo Vision can achieve, or maintain, profitability. If
it cannot, Neo Vision will be unable to pay its debt obligations.
UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF PRODUCTS; LIMITED MARKETING
EXPERIENCE
Neo Vision has just started marketing its video wall advertising service.
Neo Vision has entered into two agreements, both in Las Vegas, Nevada, to
provide its video wall advertising service. Neo Vision is negotiating other
agreements to offer its service to various malls and airports throughout the
country. However, there can be no assurance that additional agreements will be
executed in the near future or that existing agreements will be profitable. As
is typical with new services, demand and market acceptance for Neo Vision's
services are subject to a high level of uncertainty. The profitability will be
highly dependent on its ability to persuade its potential customers to implement
the use of its video wall technology rather than more traditional methods of
advertising. Achieving widespread market acceptance for the video wall
advertising service will require substantial marketing efforts and the
expenditure of sufficient funds to create brand recognition, customer demand,
and to cause potential customers to consider the potential benefits of Neo
Vision's service as against more traditional advertising methods to which they
have long been accustomed. Moreover, Neo Vision's ability to achieve widespread
market acceptance will depend in part on Neo Vision's ability to locate, hire,
and retain sufficient qualified marketing personnel and to fund marketing
efforts. There can be no assurance that the video wall advertising service will
achieve widespread market acceptance or that Neo Vision's marketing efforts will
result in profitable operations.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
Neo Vision's operating results will be affected by a wide variety of
factors that could adversely affect its total revenue and profitability. These
factors, many of which are beyond the control of the Company and Neo Vision,
include creating and continuing interest in video wall advertising; Neo Vision's
success in obtaining and maintaining customer satisfaction with video wall
advertising; the level and timing of the demand for Neo Vision's services and
Neo Vision's ability to expand its personnel, equipment, and administrative
support functions; changes in the mix of services it provides; technological
changes; and competition and competitive pressures on prices. Neo Vision's
revenue and results of operations also may be subject to fluctuations based upon
general economic conditions. If there were to be a general economic downturn or
a recession, there would be a material adverse effect on Neo Vision's business,
operating results, and financial condition.
LACK OF DIVERSIFICATION; RISKS OF INVESTING IN LIMITED PRODUCTS
The success of Neo Vision's business, and thus of the Company, will depend
almost entirely on the market acceptance of the video wall method of
advertising. The plan of operation, therefore, subjects Neo Vision to the
economic fluctuations within the advertising industry and increases the risk
associated with its operations. This primary dependence on one type of service
(a situation the Company expects will continue for the foreseeable future)
renders Neo Vision more vulnerable than companies with a more diversified
offering of services. Significant delays in development could greatly affect Neo
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Vision's competitiveness. There can be no assurance that Neo Vision's video wall
method of advertising will not become obsolete earlier than anticipated. There
also can be no assurance that the Company will be able to devote sufficient
resources to the research and development effort required to enable Neo Vision
to meet future technological changes. An investment in any aspect of the
technological industry is speculative and historically has involved a high
degree of risk.
RISK OF LONG TERM ACCEPTANCE OF VIDEO WALL ADVERTISING
Because Neo Vision's video wall advertising method is new, it is difficult
to estimate the acceptance by potential advertising service users and in turn,
rates of rejection or dissatisfaction with the video wall method of advertising.
The failure of Neo Vision to achieve long-term acceptance of the video wall
method of advertising would have a material adverse effect upon Neo Vision, and
thus the Company's business.
MANAGEMENT OF GROWTH
The Company plans to expand Neo Vision's business significantly over the
next 12 months. The expansion of Neo Vision's business will require it to
enhance its operational, financial, and information systems; to motivate and
manage its existing personnel and to attract and retain additional managerial,
technical, and marketing personnel; to enhance its technical equipment; and to
expand the development and marketing of video wall method of advertising. The
failure of Neo Vision to expand its systems, personnel, equipment, and
administrative resources on an effective basis could have a material adverse
effect on Neo Vision's business, and thus the Company's business, operating
results, and financial condition.
NEED FOR ADDITIONAL DEVELOPMENT OF CERTAIN PRODUCTS
The Company anticipates that Neo Vision's future research and development
activities combined with experience gained from future users of its video wall
advertising service could result in the need for further refinement and
development. The Company also expects Neo Vision to modify its services for
particular locations. There can be no assurance that unforeseen circumstances
will not require expensive additional development of Neo Vision's video wall
advertising service. In addition, the Company may in the future need to make
improvements of its video wall advertising service in order for it to remain
competitive. The costs for any such improvements may be substantial.
COMPETITION
Neo Vision's business is primarily proprietary in nature. Neo Vision does
not have patent protection for any of its proprietary technology and does not
believe that such protection is available. Thus, potential competitors could
implement advertising services similar to Neo Vision's video walls. Therefore,
no assurance can be given that Neo Vision's method of video wall advertising
will be able to successfully compete with these potential competitors. Further,
Neo Vision will be competing against advertising companies who utilize more
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traditional methods of advertising and have established relationships with
potential Neo Vision clients. In addition, Anthony Christopher, the former
principal shareholder of Neo Vision, may compete against the Company after one
year, or two years if Neo Vision has a specified number of video walls operating
at the end of the first year.
YEAR 2000 COMPLIANCE
Neo Vision has assessed its Year 2000 issues and its readiness for this
potential problem. Neo Vision has examined its information technology systems
and believes that, given that its operations do not depend on information
technology as such, the Year 2000 should have no effect on its information
technology systems.
Further, Neo Vision has assessed its non-information technology systems and
believes that Neo Vision is Year 2000 compliant because it is operated using
personal, as opposed to mainframe, computer technology. These personal computers
were purchased in the last three years and run on a standard operating system.
In addition, all software run by Neo Vision is standard, off-the-shelf software
purchased in the last three years. Thus, due to the dates of purchase of its
systems, Neo Vision believes that all of its systems are Year 2000 compliant.
Beginning in January 1999, Neo Vision plans to obtain assurances from the
manufacturers of its personal computers that such computers are indeed Year 2000
compliant. This will complete Neo Vision's internal examination of Year 2000
issues.
In establishing a Year 2000 remediation program, Neo Vision intends to soon
enter its next phase by implementing an examination procedure for its
third-party suppliers and vendors. As a component of this program, beginning in
January 1999 Neo Vision intends to send written requests for assurances that
these third parties are addressing their own Year 2000 issues. Most
significantly, Neo Vision intends to address the Year 2000 readiness state of
the providers of its satellite delivery system by requesting a written Year 2000
compliance program which these providers are implementing.
The cost of Neo Vision's Year 2000 compliance program has not had, and is
not expected to have, a material impact on its results of operations, financial
condition, or liquidity. Neo Vision has not been required to prematurely replace
equipment due to Year 2000 issues, nor has it needed to hire Year 2000 solution
providers. Further, Neo Vision does not anticipate the necessity of such
expenses in the future. Finally, Neo Vision anticipates that the cost of
ensuring compliance of third parties will be minimal.
Neo Vision anticipates, in its reasonably likely worst case Year 2000
scenario, that the failure of its clients and suppliers to adequately address
their own Year 2000 issues could impact such parties' ability to provide the
materials used in constructing new video walls or to make payments for Neo
Vision's services. In addition, the failure of the providers of the satellite
delivery system to address Year 2000 issues could negatively impact Neo Vision's
ability to transmit signals onto its video walls, which could interrupt the
images displayed on these walls. This could adversely affect Neo Vision's
business, financial condition, cash flows, and results of operations.
Neo Vision's greatest Year 2000 concern is the transmission of signals onto
its video walls. Neo Vision is in the process of completing its contingency
plans for such an event. In the event of an interruption of the satellite
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delivery system, Neo Vision anticipates being able to reroute the signals for
delivery over conventional landlines at little additional cost. Neo Vision feels
that the cost to engage stand-by providers for signal delivery outweighs the
potential benefit of such contracts at this time. If Neo Vision is not satisfied
with the steps taken by the satellite provider to prepare for the Year 2000, Neo
Vision will contract for additional providers at that time. Neo Vision
anticipates receiving this information and making this determination by July
1999. This analysis, and any action taken as a result of this analysis, will
complete Neo Vision's contingency plans. Even if action is necessary, Neo Vision
anticipates that its contingency plans will be completed by August 1999.
RISKS ASSOCIATED WITH THE COMPANY
LACK OF PROFITABLE OPERATIONS
The Company's real estate school, travel agency, and real estate lines of
business experienced a net loss of $(189,484) and a net loss of $(49,922) for
the fiscal years ended September 30, 1998 and 1997, respectively. No assurance
can be given that the Company will be able to attain or maintain a profitable
level of operations for these lines of business in the future, or that it will
not continue to incur operating losses. Management expects the addition of Neo
Vision ultimately will improve its operating results; however, since Neo Vision
has just completed its development stage, no assurance can be given that it will
contribute to the profitability of the Company or that the Company's non-Neo
Vision lines of business will not cause additional losses.
GOING-CONCERN CONSIDERATIONS
At September 30, 1998, the Company was in default on certain convertible
debentures, and had a working capital deficiency of $414,921. Management is
taking actions to alleviate these conditions, including seeking additional
financing, which the Company's management believes will provide the opportunity
for the Company to continue as a going concern. However, no assurance can be
given that the Company will be successful in obtaining necessary financing or
that the Company will continue as an operating entity without additional
financing. In addition, the report by the Company's independent certified public
accountants on the Company's financial statements for the fiscal year ended
September 30, 1998 states that the Company's significant operating losses raise
substantial doubt about the Company's ability to continue as a going concern.
See "CONSOLIDATED FINANCIAL STATEMENTS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
CURRENT DEFAULTS ON EXISTING OBLIGATIONS
The Company currently is in default on the payment of various convertible
debentures in the outstanding principal amount of $56,450 that matured in
December 1996 plus related accrued interest payable at September 30, 1998 of
approximately $33,600. The Company has had no contact from the debenture
holders, who if they elected not to convert the debentures into common shares
pursuant to the debentures, could bring legal action against the Company. The
debentures and accrued interest would be converted into approximately 120,067
Class A Shares (12,007 New Common Shares) if the debenture holders elected to
convert. The Company currently does not have the ability to pay any of the
defaulted debentures and no assurance can be given that the Company will have
sufficient capital to pay such debts.
23
<PAGE>
DEPENDENCY ON ECONOMIC CONDITIONS ON THE ADULT EDUCATION AND TRAVEL SERVICE
BUSINESS
The Company's real estate school and travel agency line of business is
largely dependent on economic growth in its market area. At present, adult
education serves the real estate industry, which is experiencing significant
growth. Real estate education generally declines when real estate activity
declines. Travel services also generally follow general economic trends. If the
current economic activity slows, the depressed economy could slow and possibly
frustrate the Company's operations.
COMPETITION
The markets in which the Company sells its real estate school and travel
agency services are highly competitive. In the travel services industry, the
Company faces competition from larger and better capitalized companies, such as
American Express and Thomas Cook, which are better able to withstand operating
losses and the effects of a cyclical market. In the real estate school industry,
the Company competes with numerous local real estate schools offering similar
instructional courses.
YEAR 2000 COMPLIANCE
The Company has assessed its Year 2000 issues and its readiness for this
potential problem. The Company has examined its information technology systems
and believes that, given that the Company's operations do not depend on
information technology as such, the Year 2000 should have no effect on its
information technology systems.
Further, the Company has assessed its non-information technology systems
and believes that it is Year 2000 compliant because the Company is operated
using personal, as opposed to mainframe, computer technology. These personal
computers were purchased in the last three years and run on a standard operating
system. In addition, all software run by the Company is standard, off-the-shelf
software purchased in the last three years. Thus, due to the dates of purchase
of its systems, the Company believes that all of its systems are Year 2000
compliant. Beginning in January 1999, the Company plans to obtain assurances
from the manufacturers of its personal computers that such computers are indeed
Year 2000 compliant. This will complete the Company's internal examination of
Year 2000 issues.
In establishing a Year 2000 remediation program, the Company intends to
soon enter its next phase by implementing an examination procedure for its
third-party suppliers and vendors. As a component of this program, beginning in
January 1999 the Company intends to send written requests for assurances that
these third parties are addressing their own Year 2000 issues. Most
significantly, the Company intends to address the Year 2000 readiness state of
its reservations system provider, which is operated using mainframe technology,
by requesting a written Year 2000 compliance program which this provider is
implementing.
The cost of the Company's Year 2000 compliance program has not had, and is
not expected to have, a material impact on the Company's results of operations,
financial condition, or liquidity. The Company has not been required to
prematurely replace equipment due to Year 2000 issues, nor has the Company
24
<PAGE>
needed to hire Year 2000 solution providers. Further, the Company does not
anticipate the necessity of such expenses in the future. Finally, the Company
anticipates that the cost of ensuring compliance of third parties will be
minimal.
The Company anticipates, in its reasonably likely worst case Year 2000
scenario, that the failure of its clients and suppliers to adequately address
their own Year 2000 issues could impact such parties' ability to provide the
information used in booking travel arrangements or to make payments for travel
agency services to the Company. In addition, the failure of the providers of the
travel agency reservations system could negatively impact the Company's ability
to make reservations for its customers. This could adversely affect the
Company's business, financial condition, cash flows, and results of operations.
The Company's greatest Year 2000 concern is the travel agency reservations
system. The Company has considered contingency plans for such an event, but has
ultimately concluded that no such plans are feasible due to the centralized
nature of the airline reservations system. However, due to the importance of
this system to the entire industry, the Company anticipates that the providers
of this system will provide assurances of their own Year 2000 compliance. If
this system fails as a result of a Year 2000 problem, the Company could lose
revenue generated from booking reservations. If such failure was prolonged, the
Company's financial condition could be negatively impacted.
LIQUIDITY
The Company had a working capital deficiency of $414,921 at September 30,
1998. Obtaining positive working capital and the completion of the Company's
expansion is dependent on the successful expansion of Neo Vision's video wall
advertising business, renegotiations of certain current liabilities, and
obtaining other long-term financing.
25
<PAGE>
ITEM 2. PROPERTIES
Neo Vision leases approximately 700 square feet of office space in Phoenix,
Arizona where its administrative, production, and transmission facilities are
located, at an annual rent of approximately $12,720.
The Company maintains is corporate offices within the Westford campus at
3121 East Greenway Road, Suite 201 in Phoenix, Arizona 85032.
Westford maintains two campuses. The West campus is located at 4425 West
Olive, Suite 128 in Glendale, Arizona. The campus has three classrooms and
office space and is leased pursuant to a lease expiring in May 2001. The lease
rental is paid at $2,182 per month for eleven months each year with no rental
paid in December of each year.
The Northeast campus is located at 3121 East Greenway Road, Suite 201 in
Phoenix, Arizona. The campus has three classrooms and office space and is leased
pursuant to a five year lease expiring July 31, 2001. The monthly rent is $1,689
increasing to $2,343 over the term of the lease, plus common area charges that
approximate $585 per month.
FirsTravel maintains its office at 4700 North Central Avenue, Suite 205 in
Phoenix, Arizona. The office space is leased pursuant to a two year lease
expiring on December 31, 1999, the monthly rent is currently $333.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class B Common Stock is not publicly traded. The Company's
Class A Common Stock is traded on the NASDAQ OTC Bulletin Board under the symbol
"UAIRA". At September 30, 1998 and for the eight prior quarters, no significant
market has existed for the Company's Class A Common Stock. However, a diminutive
number of shares have traded during the last eight quarters at a low of $.01 and
a high of $.15. On January 5, 1999, the closing price of the Company's Class A
Common Stock was $0.05 per share. As of January 5, 1999 there were approximately
850 holders of record of the Company's Class A Common Stock and approximately 40
holders of record of the Company's Class B Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
and does not intend to declare or pay any cash dividend in the foreseeable
future. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend on the Company's earnings, if any, its capital
requirements, and financial condition and such other factors as the Board of
Directors may consider.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
and is qualified in its entirety by, the respective audited financial statements
and notes thereto of the Company, included on pages F-1 through F-24, the
audited financial statement and note thereto as of September 30, 1998 and for
the year then ended of Neo Vision, Inc. on pages F-25 through F-35.
27
<PAGE>
FOR THE YEAR ENDED SEPTEMBER 30,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues $110,480 $193,640 $ 386,173 $1,222,243 $1,875,354
Gross profit -- -- -- 76,875 117,864
Income (loss)
before interest
expense, dep. and
amortization 7,011 48,509 33,604 (66,770) (129,582)
Depreciation and
Amortization 9,629 7,729 15,281 26,412 39,766
Interest Expense 37,950 9,819 12,979 14,933 20,136
(Loss) from Write
Off of Plans and
Spec -- -- (649,999) -- --
Income (loss) from
Discontinued
Operations(1) (4,373) (2,356) 11,671 58,193(2) --
Net Income (loss) (44,941) 28,605 (632,984) (49,922) (189,484)
Net Income (loss)
per share (.01) .00 (.06) (.00) (.01)
BALANCE SHEET DATA:
Total Assets 802,690 803,169 278,669 1,066,159 504,833
Long-term debt 404,307 127,933 31,967 620,979 5,360
Total Liabilities 622,161 220,008 240,992 941,404 519,097
Shareholders'
Investment 180,529 583,161 36,677 124,755 (14,264)
CASH FLOW DATA:
Cash provided
(used) in operating
activities (11,187) 3,690 (8,534) 34,025 (6,142)
Cash used in
investing
activities (606) (24,895) (9,080) (117,264) 13,076
Cash provided by
financing activities 2,599 25,663 22,092 93,529 (19,291)
- ----------
(1) The four years ended September 30, 1996 have been restated to reflect
Hansen & Associates, Inc. dba Property Masters as a discontinued operation.
(2) Includes the $53,796 gain on the sale of Hansen and Associates, Inc. dba
Property Masters.
28
<PAGE>
SUMMARY PER SHARE DATA
FOR THE YEAR ENDED SEPTEMBER 30,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
PER SHARE DATA:
UNITED STATES AIRCRAFT
CORP & SUBSIDIARIES
Net Income (loss)
Historical (.01) .00 (.06) .00 (.00)
Pro Forma(1) (.01) .01 (.11) (.01) (.01)
Book Value
Historical -- -- -- -- (.01)
Pro Forma(2) -- -- -- -- .02
NEO VISION, INC.
Net Income (loss)
Historical Equivalent -- -- -- -- (.00)
Pro Forma(3) -- -- -- -- (.00)
Book Value
Historical Equivalent -- -- -- -- (.00)
Pro Forma(3) -- -- -- -- (.00)
- ----------
(1) Pro forma net income (loss) per share for each of the five years ended
September 30, is based on the weighted average shares outstanding as
adjusted for the Exchange of the Class A and Class B shares into shares of
New Common Stock of 5,575,258; 5,575,258; 5,650,063; 5,743,918; 5,802,147
respectively. Pro forma weighted average shares outstanding for the year
ended September 30, 1997 and 1998 is 5,812,471 and 5,941,230.
(2) Book value per share is based on the shares outstanding at September 30,
1997 and September 30, 1998 and Pro forma Book value is based on the shares
outstanding adjusted for the Exchange of the Class A and Class B shares for
the New Common Stock.
(3) Equivalent pro forma net income (loss) per share for each of the five years
ended September 30 is based on the net income (loss) per share and the book
value per share of the registrant multiplied by the exchange ratio of .2436
(1,163,670 to 4,777,560).
(4) Dividends per share are not presented as neither entity has previously
declared any dividends.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AS WELL AS CERTAIN STATEMENTS AND INFORMATION UNDER ITEM 1
"BUSINESS" INCLUDE CERTAIN FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT,
THE WORDS "EXPECTS," "INTENDS," "PLANS" AND "ANTICIPATES" AND SIMILAR TERMS ARE
INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS THAT RELATE TO THE COMPANY'S
FUTURE PERFORMANCE. SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED HERE.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED UNDER "BUSINESS - SPECIAL CONSIDERATIONS."
RESULTS OF OPERATIONS
COMPARISON 1998 TO 1997
The total revenue of $1,875,354 for the year ended September 30, 1998 is
made up of $494,258 or 26% from the real estate education segment and $1,281,689
or 68% from the travel agency segment with the remaining $99,407 or 6%
consisting of consulting and miscellaneous income. Total revenue increased by
$630,122 in 1998 compared to a $836,070 increase in 1997.
The loss before interest, depreciation and amortization expense increased
by $62,812. The increased loss consists of the following:
Increase in Real Estate Education 1998 operating
income over 1997 $ 39,313
Increases in Travel Agency 1998 operating loss over 1997 $ (3,395)
Increase in consulting and other income $ 90,418
Increase in general corporate overhead $(189,148)
The increase in real estate education 1998 operating income over 1997
consists of the following:
INCREASE
1998 1997 (DECREASE)
---- ---- ----------
Revenue $494,258 $436,710 $57,548
-------- -------- -------
Costs and expenses
Personnel expense 251,414 245,085 6,329
Facility cost 61,553 54,659 6,894
Other operating cost 91,772 86,760 5,012
-------- -------- -------
Total 404,739 386,504 18,235
-------- -------- -------
Operating income $ 89,519 $ 50,206 $39,313
======== ======== =======
The operating income from the adult education division improved by $39,313.
The improvement was due to an $57,548 increase in revenues offset by a $18,235
increase in operating costs. The revenue increase is the result of additional
enrollments including those at the new East campus, and due to a $6,320 increase
30
<PAGE>
in advertising revenue related to the publication of the Renewal News. The
operating cost increase consists of an $6,329 increase in personnel expense,
$6,894 increase in facility costs and $5,012 increase in other operating costs.
The travel services operation was started on July 1, 1997 with the purchase
of an existing travel agency and the operating results are included for the year
ended September 30, 1998 with comparable amounts for the three months from the
date of acquisition to September 30, 1997 as follows:
INCREASE
1998 1997 (DECREASE)
---- ---- ----------
Sales $ 1,281,689 $ 776,544 $ 505,145
Cost of sales 1,163,825 699,669 464,156
----------- --------- ---------
Gross profit 117,864 76,875 40,989
----------- --------- ---------
Operating costs
Personnel expense 99,811 48,553 51,258
Facility cost 8,297 2,534 5,763
Other operating costs 29,184 41,821 (12,637)
----------- --------- ---------
Total 137,292 92,908 44,384
----------- --------- ---------
Operating income (loss) $ (19,428) $ (16,033) $ 3,395
=========== ========= =========
Sales for the travel agency operation increased by $505,145 for the year
ended September 30, 1998 over the agencies sales for the three months ended
September 30, 1997 with a gross profit increase of $40,989. The gross profit
percentage declined from 9.9% to 9.2% primarily due to an increase in the
portion of sales attributable to airline ticket sales where the gross profit
percentage is generally at 8%. Operating costs for the year ended September 30,
1998 were $137,292 compared to $92,908 for the three months ended September 30,
1997, which reflects the restructuring of travel agency operations to reduce the
fixed operating costs to approximate $30,000 per quarter.
The Company has earned a consulting fee of $412,999 relating to its
research project on the recreational vehicle park industry net of its
contribution to RVP-L.L.C. The Company for over two years has investigated the
recreational vehicle park industry and instituted a program to establish a chain
of RV parks. In connection therewith the Company has earned a consulting fee
from an unrelated individual, who desires to participate in the RV Park program,
for its research and development, from which it will contribute $1,700,000 to
RVP-L.L.C. The net consulting fee at September 30, 1998 consists of the
following:
+ Fee, net of contribution to RVP-L.L.C. $300,000
+ Equity in RVP-L.L.C. 112,999
--------
$412,999
========
31
<PAGE>
The consulting fee revenue was earned upon completion of the research and
the agreement with the unrelated individual. However, for financial reporting
purposes the consulting fee revenue will not be recognized until it is received.
The costs related to earning the consulting fee consisted primarily of executive
compensation and travel, all of which has been expensed over the period of the
project.
Other revenue includes $90,000 of management fees from Neo Vision, Inc.,
the unconsolidated subsidiary acquired on June 30, 1998 and other miscellaneous
income of $9,407 which exceeded other miscellaneous income for 1997 by $418.
General corporate overhead increased by $189,148 primarily due to
management compensation increases resulting primarily from the June 30, 1998
acquisition of Neo Vision, Inc. of $140,265 and professional fee increases of
$19,368.
Depreciation and amortization increased by $13,354 primarily due to
increased amortization related to the amortization of the goodwill related to
the travel agency acquisitions.
On September 30, 1997 the company sold its wholly-owned subsidiary Hansen
and Associates, Inc. d/b/a Property Masters after determining to discontinue its
real estate brokerage and property management line of business. The financial
statements have been restated to reflect the operations of the subsidiary as a
discontinued operation reflecting a 1997 operating loss of $4,079 with no
comparable amount for 1998.
COMPARISON 1997 TO 1996
The total revenue of $1,222,243 for the year ended September 30, 1997 is
made up of $436,710 or 36% from the real estate education segment and $776,544
or 63% from the travel agency segment with the remaining 1% being other
miscellaneous income. Total revenue increased by $836,070 in 1997 compared to a
$192,533 increase in 1996.
The loss before interest, depreciation and amortization expense increased
by $100,374. The increased loss consists of the following:
Reduction in Real Estate Education 1997
Operating Income Over 1996 $22,820
Operating Loss From
Travel Agency Operation During
the Three Months from Acquisition
on July 1, 1997 $16,033
Increase in General Corporate Overhead $28,125
Decrease in Other Revenue $33,396
32
<PAGE>
The reduction in real estate education 1997 operating income over 1996
consists of the following:
INCREASE
1997 1996 (DECREASE)
---- ---- ----------
REVENUE $436,710 $343,788 $ 92,922
-------- -------- ---------
Costs & expenses
Personnel expense 245,085 186,406 58,679
Facility cost 54,659 20,026 34,633
Other operating costs 86,760 64,320 22,430
-------- -------- ---------
Total 386,504 270,762 115,742
-------- -------- ---------
Operating income $ 50,206 $ 73,026 $ (22,820)
======== ======== =========
The operating income from the adult education division declined by $22,820.
The decline was due to an $115,742 increase in operating costs offset by a
$92,922 increase in revenues. The revenue increase is the result of additional
enrollment including those at the new East campus, and due to a $18,035 increase
in advertising revenue related to the publication of the Renewal News. The
operating cost increase consists of a $58,679 increase in personnel expense,
$34,633 increase in facility cost, and $22,430 increase in other operating
costs, all of which increased primarily due to the opening of the East campus in
August 1996.
The travel services operation was started on July 1, 1997 with the purchase
of an existing travel agency and the operating results are included from the
acquisition date through September 30, 1997 with no comparable amounts for
fiscal 1996 as follows:
AMOUNT
------
Sales $776,544
Cost of Sales 699,669
--------
Gross Profit 76,875
Personal Expense $ 48,553
Facility Cost 2,534
Other Operating Costs 41,821
--------
Total Operating Costs $ 92,908
--------
Income (loss) before interest
depreciation and amortization $(16,033)
========
General corporate overhead increased by $28,125 primarily due to management
compensation increases of $16,108 and an increase of legal and accounting fees
of $6,884.
Other revenue declined by $33,396 primarily due to revenue in fiscal 1996
of $30,000 related to a reduction of certain accrued obligations with no
comparable amount in 1997.
Depreciation and amortization increased by $11,131 primarily due to
equipment and business acquisitions. Interest increased by $1,953.
33
<PAGE>
On September 30, 1997, the Company sold its wholly-owned subsidiary Hansen
and Associates, Inc. dba Property Masters after determining to discontinue its
real estate brokerage and property management line of business. The financial
statements have been restated to reflect the operations of the subsidiary as a
discontinued operations reflecting a 1997 operating profit of $4,397 compared to
$11,671 in 1996. The sale of Hansen and Associates, Inc. dba Property Masters
resulted in a gain of $53,796 in 1997 with no comparable amount in 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit decreased $386,966 from September 30, 1997 to
$414,921 at September 30, 1998. Current assets decreased by $20,722 from 1997 to
$98,816 at September 30, 1998. The decrease consists of a $12,357 decrease in
cash, a $6,591 increase in accounts receivable, a $1,000 decrease in notes
receivable related to the sale of Hansen & Associates, Inc., d/b/a Property
Masters, and a $13,956 decrease in prepaid expenses.
Current liabilities decreased $407,688 from 1997 to $513,737. The decrease
consists of a $11,775 decrease in the current portion of long-term debt, a
$30,000 increase in notes payable related to a one year line of credit with a
bank, a decrease of the trust deeds payable to the transfer of the California
land to RVP-LLC, a $7,103 increase related to the accrued interest on the
debentures, a $4,575 increase in accounts payable and a $145,799 increase in
accrued expenses which consisted of the $153,805 increase in estimated
compensation due executive officers offset by decreases in other accruals.
Unearned tuition increased by $17,610 due to the increased enrollments.
Advances to an officer made pursuant to the officer's compensation program
decreased by $27,769 to zero at September 30, 1998. The long term note
receivable of $39,544 at September 30, 1998 related to the sale of Hansen and
Associates, Inc. decreased by $12,500. At September 30, 1998, property and
equipment decreased by $9,541 as a result of equipment acquisitions of $3,520
offset by depreciation of $13,061. In 1998, goodwill increased by $16,031 with a
$20,000 addition due to the Western College, Inc. acquisition offset by
amortization for 1998. Course materials decreased by $1,964 due to the
amortization recorded for 1998. Other assets decreased by $18,455.
The Company has formed RVP-LLC, an Arizona limited liability company for
the purpose of owning recreational vehicle parks that will be leased to and
operated by the Company.
The Company for over two years has investigated the recreational vehicle
park industry and instituted a program to establish a chain of RV Parks. In
connection therewith, the Company has earned a consulting fee for its research
and development of the RV Park program from which it will contribute $1,700,000
to RVP-LLC leaving $300,000 of consulting revenue which, for financial reporting
purposes, will be recognized when it is received.
On June 30, 1998 the Company approved the transfer to RVP-LLC of the 35.66
acres of land in Glenn County, California subject to trust deeds payable in the
amount of $601,000. The land was acquired for the purpose of developing the
initial recreational vehicle park of the planned chain of RV parks. The holder
of the second trust deed filed a notice of default due to non-payment of
34
<PAGE>
interest. The LLC determined not to reinstate the defaulted trust deed and in
August 1998 RVP-LLC lost the California land in a foreclosure sale.
At September 30, 1998, the members equity of RVP-LLC is $1,707,500 and
consists primarily of the $1,700,000 capital contribution to be received from
the consulting fee. The Company will not recognize any equity in RVP-LLC until
the capital contribution of $1,700,000 is received. The Company's interest in
RVP-LLC, if the capital contributions were recognized, would be $135,988.
The July 1997 and August 1997 purchase price of the travel agencies
exceeded the identifiable tangible assets of the agencies by $110,288 and
relates primarily to the value of the income production of the approximately 175
Home Based Travel Agents who place their travel sales through FirsTravel. The
original cost has been reduced by amortization of $5,514 in 1997 and $26,397 in
1998.
Long-term debt decreased by $14,619 due to payments of $26,394 less the
$11,775 decrease in the current portion in 1998. The convertible debentures of
$56,450 of United States Aircraft Corporation plus the related accrued interest
are classified as current liabilities as they were due on December 31, 1996.
Currently, the debentures remain unpaid and the Company believes that they will
eventually be retired through conversion to the Company's New Common Stock,
although no assurance that such a conversion will be elected by the debenture
holders. If the debenture holders do not elect to convert into the Company's New
Common Stock, they could demand payment and seek enforcement through legal
action; however, the Company has had no contact from the debenture holders.
The Company's management has continued its program to expand the services
operations through further expansion of its existing operations plus the
acquisition of other service organizations. The working capital deficiency has
continued to limit the expansion of the Company. The acquisition of Neo Vision,
the collection of the net consulting fee, and the anticipated conversion of the
convertible debentures is expected to resolve the current working capital
deficiency. However, the Company intends to rapidly expand its newly acquired
Neo Vision operation by the expected installation of 21 and 36 video walls in
the years ended September 30, 1999 and 2000, respectively at a projected cost of
$250,000 for each wall. The planned expansion will require additional capital of
approximately $3,000,000 to $5,000,000 by early 1999. Neo Vision has engaged
financial advisors to assist in the funding of its capital needs for the planned
expansion, including private placements. Management believes that the funding
will be a combination of long-term lease and convertible debt financing and that
it will be funded in time to complete the expected installation of video walls
in the year ended September 30, 1999. However, the Company does not intend to
make material commitments for further capital expenditures until financing
becomes available. Additionally, the Company is aggressively investigating
acquisitions of adult education, travel services, or other operations that are
compatible with the existing operations and that can be acquired for the
Company's common stock or with debt that is retired from the cash flow from the
acquired operation. No assurance can be given that the acquisitions or
installation of the video walls will be completed or the private placement to
obtain the required capital infusion will be successful.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto, and the supplemental data commencing at page F-1 of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 18, 1998, the Company engaged Semple & Cooper, LLP Certified
Public Accountant to examine their financial statements for the year ended
September 30, 1998. There were no disagreements with the former accountant on
any matter of accounting principles, financial statement disclosure or auditing
scope or procedure. The change of accountants was approved by the Board of
Directors.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth information concerning each of the directors
and executive officers of the Company:
NAME AGE POSITION
---- --- --------
Albert C. Lundstrom.......... 58 President, Chief Executive Officer, and
Director
Harry V. Eastlick............ 59 Executive Vice President, Treasurer, Chief
Operating Officer, Chief Financial Officer,
and Director
Jack Eberenz................. 56 Executive Vice President, Secretary, and
Director
Donald E. Cline.............. 72 Director
Whipple H. Manning........... 62 Director
John R. Thomas............... 67 Director
ALBERT C. LUNDSTROM has served as President, Chief Executive Officer and a
Director of the Company since June 30, 1998. Mr. Lundstrom has served as Chief
Executive Officer of Neo Vision since its inception in June 1997. From September
1997 to present, he has served as the Managing Partner of LEC and Associates,
LLC, a business consulting firm owned by Mr. Eberenz and Mr. Lundstrom. Prior to
September 1997, for a period in excess of five years, Mr. Lundstrom acted as a
sole proprietor business consultant with clients that included, among others,
Rockwell International and TSM Technical Services & Marketing.
HARRY V. EASTLICK, a certified public accountant, served as Chairman of the
Board, President and Chief Executive Officer of the Company from October 1988
until June 30, 1998. Mr. Eastlick has served as Executive Vice President,
Treasurer, Chief Financial Officer, Chief Operating Officer, and a Director of
the Company since June 30, 1998.
JON G. (JACK) EBERENZ has served as Executive Vice President and a Director
of the Company since June 30, 1998 and has served as the Secretary of Neo Vision
since its inception. From September 1997 to present, he has served as the senior
partner of LEC and Associates, LLC, a business consulting firm owned by Mr.
Eberenz and Mr. Lundstrom. From August 1992 to September 1997, he served as the
Senior Consultant in Arizona for MAP, Inc. of Sherman Oaks, California, a
business consulting firm. From January 1985 until August 1992, he served as a
principal of Impac International, Inc., a business consulting firm.
DONALD E. CLINE has served as a Director of the Company since November
1989. Mr. Cline has served as a business consultant since March 1991 and as the
Director of the State of Arizona Department of Commerce from February 1990 to
March 1991. Mr. Cline served as Chairman of the Board and Chief Executive
37
<PAGE>
Officer of First National Utilities, Inc., an Arizona based water utility
holding company, from September 1987 to February 1990. Prior thereto, Mr. Cline
served as Vice President and Chief Executive Officer of the Arizona operations
of US West. He retired from US West after 37 years of employment.
WHIPPLE H. MANNING has served as a Director of the Company since April
1997. Prior thereto, Mr. Manning served as director from November 1989 to July
1995. Mr. Manning has been an independent real estate consultant since January
1989. From 1983 through 1988 Mr. Manning served as Executive Vice President of
Coast Savings and Loan in charge of the Commercial/Industrial Real Estate Loan
Division. From 1978 to 1983, Mr. Manning was the Senior Vice President of
California Federal Savings and Loan in charge of the Income Property Division.
Prior thereto, Mr. Manning spent 17 years in commercial real estate lending with
Pacific Mutual Life Insurance.
JOHN R. THOMAS, a certified public accountant, has served as a Director of
the Company since November 1989. Mr. Thomas has served as a business consultant
since 1993. From September 1990 to December 1993 he served as the Chairman of
the Board of Directors of G.T. Products, Inc., a manufacturer of flashlight
products and from September 1987 to September 1990, he served as Executive Vice
President, Chief Operating Officer, and Chief Financial Officer of T.G.
Environmental, Inc., a California based construction firm that specialized in
environmental projects. Prior thereto, for a period of 26 years Mr. Thomas was
with the national accounting firm of Coopers & Lybrand where he served as a
partner for the last 16 years.
There currently are no Committees of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered in all capacities to the Company for the fiscal years ended September
30, 1996, 1997, and 1998.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS PAYOUTS ALL
ANNUAL COMPENSATION ------ ------- OTHER
------------------- RESTRICTED SECURITIES COMPEN
NAME AND OTHER ANNUAL STOCK UNDERLYING LTIP -SATION
PRINCIPAL POSITION YEAR(1) SALARY($) BONUS COMPENSATION($) AWARD(S)($) OPTIONS(#) PAYOUTS($) ($)
- ------------------ ------- --------- ----- --------------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albert C. Lundstrom 1998 37,500(2) -- -- -- 300,000 -- --
President and Chief
Executive Officer
Harry V. Eastlick(3) 1998 75,000 -- -- -- 300,000 -- --
Chief Financial 1997 51,000(4) -- -- -- -- -- --
Officer 1996 36,000(4) -- -- -- -- -- --
</TABLE>
- ----------
(1) Fiscal Year Ended September 30.
(2) For the period from July 1, 1998 through September 30, 1998.
(3) Harry Eastlick served as Chief Executive Officer of the Company until June
30, 1998.
(4) Mr. Eastlick received 200,000 shares of Class A Common Stock in each of the
fiscal years 1996 and 1997 as partial payment of the salaries for those
years. The value of these shares was $20,000 in each of those years.
38
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no options outstanding held by any director or executive officer
to acquire the Company's Class A Common Stock or Class B Common Stock prior to
June 30, 1998. On June 30, 1998, the Board of Directors granted options to
acquire shares of New Common Stock to the executive officers of the Company as
follows:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1) IN FISCAL YEAR ($/SH) DATE 5% 10%
---- ------------- -------------- ------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Anthony Christopher 375,000(2) 28% $1.00 June 30, 2008 $236,250 $603,750
Albert C. Lundstrom 300,000 22% $1.00 June 30, 2008 $189,000 $483,000
Harry V. Eastlick 300,000 22% $1.00 June 30, 2008 $189,000 $483,000
Jack Eberenz 225,000 17% $1.00 June 30, 2008 $141,750 $362,250
</TABLE>
- ----------
(1) The options were granted under the Company's 1998 Stock Option Plan,
adopted by the board of Directors on June 30, 1998, subject to stockholder
approval. See "PROPOSAL TO APPROVE THE 1998 STOCK OPTION PLAN."
(2) These options have expired as a result of Mr. Christopher's resignation as
a director and officer of the Company subsequent to fiscal year end.
DIRECTOR COMPENSATION
The three non-officer directors of the Company, Donald E. Cline, Whipple H.
Manning, and John R. Thomas, each received 50,000 shares of Class A Common Stock
during the fiscal year ended September 30, 1997, and Messrs. Cline and Thomas
each received 50,000 shares of Class A Common Stock during the fiscal year ended
September 30, 1996, as director compensation. Each of these three directors also
received 15,000 shares of Class A Common Stock for guaranteeing a bank loan to
the Company during the fiscal year ended September 30, 1997.
EMPLOYMENT AGREEMENTS
Messrs. Lundstrom, Eastlick, and Eberenz have entered into employment
agreements with the Company providing for them to serve in their current
executive positions. The agreements continue until December 31, 2003 and provide
for annual salaries of $150,000, $120,000, and $60,000, respectively, together
with expense reimbursement.
39
<PAGE>
Mr. Anthony Christopher previously had an employment agreement with the
Company providing for annual compensation of $150,000 as the Chairman of the
Board of the Company. On November 9, 1998, Mr. Christopher resigned from the
Company as an employee and as a director. Mr. Christopher entered into a
separation agreement on December 17, 1998 providing for, among other things,
payment of accrued compensation of $41,250 beginning February 1, 1999.
Each employment agreement provides that the executive will receive 75% of
his base salary plus certain benefits to the end of the term of employment if
the executive's employment is terminated by the Company without cause or,
ownership or control of the Company, including illustratively, the majority of
the Board of Directors of the Company becomes vested, directly or indirectly, in
individuals other than individuals approved by the executive. In addition, each
employment agreement contains restrictive covenants pursuant to which the
executive has agreed not to compete with the Company or to solicit any clients
or employees of the Company during the term of the agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Class A Common Stock and Class B Common
Stock as of December 31, 1998, held by each director and executive officer of
the Company, all directors and executive officers as a group, persons known by
the Company to hold more than 5% of the Company's Class A Common Stock or Class
B Common Stock, and three former shareholders of Neo Vision who are not
directors or officers of the Company. The table also provides information with
respect to the pro forma beneficial ownership of the Company's New Common Stock
held by each director and executive officer of the Company, all directors and
executive officers as a group, and all persons expected by the Company to hold
on a pro forma basis more than 5% of the New Common Stock, assuming the maximum
number of shares are issued under the Exchange Agreement:
40
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A CLASS B NEW PERCENT
COMMON COMMON COMMON WITHOUT PERCENT UPON
STOCK STOCK STOCK NEO VISION NEO VISION
BENEFICIALLY BENEFICIALLY BENEFICIALLY DEBENTURE DEBENTURE
NAME OF BENEFICIAL OWNER OWNED PERCENT OWNED PERCENT OWNED(1) CONVERSION CONVERSION(2)
- ------------------------ ----- ------- ----- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Albert C. Lundstrom 614,000(3) 6.1% -- -- 1,766,711(4) 28.3% 23.8%
Harry V. Eastlick 603,708 6.0% 2,600,000(5) 52.3% 560,371(6) 8.9% 7.6%
Jack Eberenz 102,400(7) 1.0% -- -- 469,611(8) 7.6% 6.4%
Donald E. Cline 115,000 1.1% 50,000 1.0% 20,346(9) *% *%
Whipple H. Manning 65,000 .6% 50,000 1.0% 15,346(10) *% *%
John R. Thomas 115,000 1.1% 50,000 1.1% 20,346(11) *% *%
Former Neo Vision
Shareholders(12) 14,400 *% -- -- 34,399(13) *% *%
Anthony Christopher(14) 1,371,600 13.8% -- -- 2,676,450(15) 45.0% 37.6%
Directors and Executive
Officers as a group
(six persons) 1,512,708 15.2% 2,750,000 55.4% 2,608,120(16) 38.4% 32.8%
</TABLE>
- ----------
* Less than one percent.
** All of the officers and directors of the Company can be reached at the
offices of the Company c/o United States Aircraft Corporation, 3121 E.
Greenway, Suite 201, Phoenix, Arizona 85082; (602) 765-0500.
(1) In calculating the percentage or ownership, shares issuable upon exercise
of options are deemed to be outstanding for the purpose of computing the
percentage of shares of New Common Stock owned by each person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of New Common Stock owned by any other person.
(2) Assumes conversion of Neo Vision Debentures, and payment to a financial
consultant to Neo Vision for past services rendered to Neo Vision, of
approximately 1,156,000 shares of Neo Vision Common Stock at December 31,
1998.
(3) Includes 102,400 shares of Class A Common Stock held by LEC & Associates,
L.L.C. of which Mr. Lundstrom and Mr. Eberenz are members.
(4) Includes 1,405,311 additional shares of New Common Stock to be issued to
Mr. Lundstrom and LEC & Associates, L.L.C. pursuant to the Exchange
Agreement and 300,000 shares of New Common Stock issuable upon the
exercise of options.
(5) Includes 2,475,000 shares held in escrow by Security Pacific Bank (now
Bank of America).
(6) Includes 300,000 shares of New Common Stock issuable upon the exercise of
options.
(7) Includes 102,400 shares of Class A Common Stock held by LEC & Associates,
L.L.C. of which Mr. Lundstrom and Mr. Eberenz are members.
(8) Includes 234,371 additional shares of New Common Stock to be issued to LEC
& Associates, L.L.C. pursuant to the Exchange Agreement and 225,000 shares
of New Common Stock issuable upon the exercise of options.
(9) Includes 5,000 shares of New Common Stock issuable upon the exercise of
options.
(10) Includes 5,000 shares of New Common Stock issuable upon the exercise of
options.
(11) Includes 5,000 shares of New Common Stock issuable upon the exercise of
options.
(12) Three former shareholders of Neo Vision, who are not directors or officers
of the Company, and excluding Anthony Christopher.
(13) Includes 32,959 additional shares of New Common Stock to be issued to the
three former shareholders pursuant to the Exchange Agreement.
(14) Mr. Christopher's address is 6632 E. Moreland, Scottsdale, Arizona 85257.
(15) Includes 2,539,290 additional shares of New Common Stock to be issued to
Mr. Christopher pursuant to the Exchange Agreement. Mr. Christopher will
allocate an additional 600,000 shares of New Common Stock to debenture
holders and to a financial consultant to Neo Vision for past services
rendered to Neo Vision.
(16) Includes 840,000 shares of New Common Stock issuable upon the exercise of
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
information contained elsewhere in this Annual Report regarding the Exchange
Agreement as set forth in Exhibit 10.5 to this Annual Report.
There were no other transactions required to be reported pursuant to Item
13.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 Agreement between the shareholders of Western college, Inc.
and United States Aircraft Corporation dated January 29,
1996 (2)
10.2 Employment Agreement between Harry V. Eastlick and United
States Aircraft Corporation dated April 22, 1997 (2)
10.3 Employment Agreement between Andrew Israel and United
States Aircraft Corporation dated December 31, 1995 (2)
10.4 Employment Agreement between Stuart Israel and United
States Aircraft Corporation dated December 31, 1995 (2)
10.5 Exchange Agreement dated as of June 30, 1998 among United
States Aircraft Corporation, Anthony Christopher, Albert C.
Lundstrom, LEC & Associates, L.L.C., Eugene Johnson, Brad
Peterson, and A. Frederick Schaffer, Jr. (3)
10.6 Separation of Employment, Consulting, Settlement, Release
and Share Waiver Agreement by and among Anthony
Christopher, United States Aircraft Corporation, and Neo
Vision, Inc. dated December 17, 1998 (4)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
----------
(1) Incorporated by reference to Registrant's Form 10-K for the fiscal
year ended September 30, 1984 filed with the Commission on or about
February 24, 1989.
(2) Incorporated by reference to Registrant's Form 10-K for the fiscal
year ended September 30, 1996 filed with the Commission on or about
September 29, 1997.
(3) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on or about July 15, 1998.
(4) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on or about December 23, 1998.
(b) Financial Statements filed as part of this Report:
Consolidated Financial Statements and Supplemental Schedules as listed in
the Index to Consolidated Financial Statements on Page F-1 of this Report.
(c) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on July 15, 1998 with
respect to the acquisition of Neo Vision, Inc. by the Registrant.
(d) Financial Statement Schedules:
None
42
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. AIRCRAFT CORPORATION
Date: January 15, 1999 By: /s/ Harry V. Eastlick
-----------------------------
Harry V. Eastlick
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Albert C. Lundstrom President, Chief Executive January 15, 1999
---------------------------- Officer and Director (Principal
Albert C. Lundstrom Executive Officer)
By: /s/ Harry V. Eastlick Executive Vice President, Chief January 15, 1999
---------------------------- Financial Officer, and Director
Harry V. Eastlick (Principal Financial and
Accounting Officer)
By: /s/ Jack Eberenz Executive Vice President,
---------------------------- Secretary, and Director January 15, 1999
Jack Eberenz
By: /s/ Donald E. Cline Director January 15, 1999
----------------------------
Donald E. Cline
By: /s/ Whipple H. Manning Director January 15, 1999
----------------------------
Whipple H. Manning
By: /s/ John R. Thomas Director January 15, 1999
----------------------------
John R. Thomas
</TABLE>
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
UNITED STATES AIRCRAFT CORPORATION
Page
----
Reports of Independent Certified Public Accountant. F-2 and F-3
Balance sheets as of September 30, 1998 and 1997. F-4 and F-5
Statements of operations for each of the three years
in the period ended September 30, 1998. F-6
Statements of shareholders' equity for each of the
three years in the period ended September 30, 1998. F-7
Statements of cash flows for each of the three years
in the period ended September 30, 1998. F-8
Notes to the Financial Statements. F-9 through F-24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NEO VISION, INC.
(A WHOLLY-OWNED UNCONSOLIDATED SUBSIDIARY)
Report of Independent Certified Public Accountant F-25
Consolidated Balance Sheet as of September 30, 1998 F-26
Consolidated Statement of Operations for the year
ended September 30, 1998 F-27
Consolidated Statement of Changes in Stockholders'
Equity for the year ended September 30, 1998 F-28
Consolidated Statement of Cash Flows for the year ended
September 30, 1998 F-29
Notes to Consolidated Financial Statements F-31
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Board of Directors of
United States Aircraft Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of United States
Aircraft Corporation and Subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated 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 consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in All material respects, the financial position, of United States
Aircraft Corporation and Subsidiaries as of September 30, 1998, and the results
of its operations, changes in shareholders' equity, and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company's signiicant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Sempel & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
December 22, 1998
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
United States Aircraft Corporation
I have audited the accompanying consolidated balance sheets of United States
Aircraft Corporation, and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these consolidated
financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining on a test basis evidence
supporting the amounts and disclosure in the consolidated 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. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
States Aircraft Corporation, and subsidiaries as of September 30, 1997, and the
results of their operations and their cash flows for each of the years in the
two year period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ ROBERT MARTIN
Mesa, Arizona
March 19, 1998
F-3
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
---------- ----------
Current assets
Cash $ 8,070 $ 20,427
Accounts receivable, less
allowance for doubtful accounts
of $7,500 (1997) 75,902 69,311
Notes receivable 7,000 8,000
Prepaid expenses 7,844 21,800
---------- ----------
Total current assets 98,816 119,538
Advance to officer 27,769
Notes receivable, net of current
portion 39,544 52,044
Land held for future development 577,327
Investment
RVP- LLC
Neo Vision, Inc. 103,338
Property and equipment, net of
accumulated depreciation of
$79,023 (1998) and $ 65,962 (1997) 47,613 57,154
Goodwill, net of accumulated
amortization of $26,397 (1998) and
$22,428 (1997) 103,339 87,308
Agency acquisitions-goodwill, net of
accumulated amortization of $25,733
(1998) and $5,514 (1997) 84,555 104,774
Course materials 13,754 15,718
Other 13,874 24,527
---------- ----------
Total assets $ 504,833 $1,066,159
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1997
----------- -----------
Current liabilities
Current portion of long term debt $ 26,000 $ 37,775
Notes Payable, bank, with interest at
10 1/2% due March 1999 30,000
Trust deed notes payable 601,000
Convertible debentures and
related accrued interest 90,041 82,938
Accounts payable 90,734 86,159
Accrued expenses 214,062 68,263
Unearned tuition 62,900 45,290
----------- -----------
Total current liabilities 513,737 921,425
Long term debt, net of
current portion 5,360 19,979
----------- -----------
Total liabilities 519,097 941,404
----------- -----------
Commitments
Stockholders' equity (deficit)
Common Stock
Class A: $.50 par value
10,000,000 shares authorized,
9,927,504 (1998) and
7,652,504 (1997) shares
issued and outstanding 4,963,752 3,826,252
Class B: $.001 par value,
5,000,000 shares authorized
4,962,801 shares issued and
outstanding 4,963 4,963
Paid-in-capital (deficit) (1,838,862) (751,827)
Accumulated (deficit) (3,144,117) (2,954,633)
----------- -----------
(14,264) 124,755
----------- -----------
Total liabilities and
Stockholders' equity (deficit) $ 504,833 $ 1,066,159
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Years Ended
September 30, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Revenue
Real estate education $ 494,258 $ 436,710 $ 343,788
Travel agency 1,281,689 776,544
Other 99,407 8,989 42,385
----------- ----------- -----------
Total revenue 1,875,354 1,222,243 386,173
Operating costs and expenses
Cost of sales - travel agency 1,163,825 699,669
Personnel expenses 351,224 292,437 183,700
Facility cost 69,851 57,192 22,025
Other operating costs 120,249 129,076 64,330
General and administrative 299,787 110,639 82,514
Interest 20,136 14,933 12,979
Loss from write off of plans and
Specifications 649,999
Depreciation and amortization 39,766 26,412 15,281
----------- ----------- -----------
2,064,838 1,330,358 1,030,828
----------- ----------- -----------
Income (loss) from continuing
operations (189,484) (108,115) (644,655)
Discontinued operations
Income of Hansen & Associates, Inc.
dba Property Masters 4,397 11,671
Gain on disposal of Hansen &
Associates, Inc. dba Property
Masters 53,796
----------- ----------- -----------
Net income (loss) $ (189,484) $ (49,922) $ (632,984)
----------- ----------- -----------
Basic Net income (loss) per share
from continuing operations $ (.01) $ (.01) $ (.06)
Basic Net income (loss) per share
from discontinued operations $ $ .01 $
----------- ----------- -----------
Basic Net income (loss) per share $ (.01) $ -- $ (.06)
----------- ----------- -----------
Weighted average number of shares
outstanding 13,309,055 11,391,138 10,808,846
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Three Years Ended
September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Capital Stock
-------------
Class A Class B
---------------------- ----------------- Paid-in
Number Number Capital Accumulated
of Shares Amount of Shares Amount (Deficit) (Deficit)
--------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 4,907,504 $2,453,752 4,962,801 $4,963 $ 396,173 $(2,271,727)
Year ended September 30, 1996
Shares issued in acquisition
of Western College, Inc. 1,000,000 500,000 (450,000)
Shares issued in payment for
services rendered 375,000 187,500 (150,000)
Net (loss) (632,984)
--------- ---------- --------- ------ ----------- -----------
Balance, September 30, 1996 6,282,504 $3,141,252 4,962,801 $4,963 $ (203,827) $(2,904,711)
Year ended September 30, 1997
Shares issued in acquisition of
Western College, Inc. 200,000 100,000 (80,000)
Shares issued in travel agency
operations acquisition 500,000 250,000 (200,000)
Shares issued in acquisition of
land held for future development 250,000 125,000 (100,000)
Shares issued in payment for
services rendered 420,000 210,000 (168,000)
Net (loss) (49,922)
--------- ---------- --------- ------ ----------- -----------
Balance, September 30, 1997 7,652,504 $3,826,252 4,962,801 $4,963 $ (751,827) $(2,954,633)
Year ended September 30, 1998
Shares issued in acquisition of
Western College, Inc, 200,000 100,000 (80,000)
Shares issued for loan guarantee 75,000 37,500 (30,000)
Shares issued in acquisition of
Neo Vision, Inc. 2,000,000 1,000,000 (977,035)
Net Income (189,484)
--------- ---------- --------- ------ ----------- -----------
Balance September 30, 1998 9,927,504 $4,963,752 4,962,801 $4,963 $(1,838,862) (3,144,117)
--------- ---------- --------- ------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
UNITED STATES AIRCRAFT CORPORATION
Consolidated Statements of Cash Flows
For the Three Years Ended
September 30, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Net income, (loss) $(189,484) $ (49,922) $(632,984)
Adjustments to reconcile net
income, (loss) to cash provided
by (used in) operating activities
(Income) loss from discontinued operations (4,397) (11,671)
Depreciation 13,061 10,788 8,792
Amortization 26,705 15,624 8,079
Allowance for doubtful accounts 7,500
Gain on disposal of operations (53,796)
Class A Shares issued in payment
for services rendered 7,500 42,000 37,500
Gain from write off of long term debt (30,000)
Loss from write off of plans
and specifications 649,999
Change in assets and liabilities
net of effects from acquisition
Accounts receivable (5,591) (21,977) (31,661)
Other (70,273) (3,069) (15,466)
Prepaid expenses 13,956 (14,609) (5,939)
Notes payable 30,000
Accounts payable 4,575 63,839 6,338
Accrued expenses 145,799 32,052 (14,678)
Unearned tuition 17,610 9,992 20,240
--------- --------- ---------
Net cash provided by (used in) operating
activities of continuing operations (6,142) 34,025 (11,451)
Net cash provided by (used in) discontinued
operations 2,917
--------- --------- ---------
Net cash provided by (used in) operating
activities (6,142) 34,025 (8,534)
Cash flows from investing activities
Changes in advance to officer 27,769 2,815 (4,399)
Decrease in notes receivable 12,500
Cash provided from acquisition of
Western College, Inc. 4,145
Addition to land for future development (51,327)
Investment in RVP-LLC (23,673)
Additions to intangible assets, net (61,172)
Additions to property and equipment (3,520) (7,580) (8,826)
--------- --------- ---------
Net cash provided by (used in)
investing activities 13,076 (117,264) (9,080)
Cash flows from financing activities
Increase in convertible debentures
and related accrued interest 7,103 8,879 17,609
Increase in trust deed notes payable 100,000
Proceeds from long term debt 36,822
Decrease in long term debt (26,394) (15,350) (32,339)
--------- --------- ---------
Net cash provided by (used in)
financing activities (19,291) 93,529 22,092
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (12,357) 10,290 4,478
Cash, beginning of year 20,427 10,137 5,659
--------- --------- ---------
Cash, end of year $ 8,070 $ 20,427 $ 10,137
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES
NATURE OF OPERATIONS
Unites States Aircraft Corporation (Company) was incorporated in Delaware on
October 6, 1978, and commenced operations in April, 1980. The Company, operating
solely in Arizona provides real estate educational services through its wholly
owned subsidiaries Western College, Inc. and Ford Schools, Inc. doing business
as Westford College. Travel agency services are provided through its wholly
owned operating division FirsTravel.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United States
Aircraft Corporation and its wholly owned subsidiaries except Neo Vision, Inc.
whose exchange agreement was entered into on June 30, 1998. Neo Vision, Inc. has
not been consolidated until its acquisition has been fully assured. See Note 6.
All significant intercompany transactions and balances have been eliminated in
consolidation.
RECOGNITION OF REVENUE
Real estate education services tuition fees are generally paid in advance and
recorded as unearned tuition. Tuition revenue is recognized when students attend
classes. Travel agency revenues are recognized at the time of booking travel
arrangements.
Included in revenue during the year ended September 30, 1996, is $30,000 related
to the reduction of certain accrued obligations recorded in prior years.
INDUSTRY SEGMENTS
During 1998 and 1997, approximately 53% and 44%, respectively, of the Company's
travel agency revenue was received from the airline industry. In 1997, the major
airlines reduced their commission rate from ten percent to eight percent, and
set a maximum amount paid on certain commissions. The company subsequently
adopted a policy of charging a service fee for airline tickets issued, and will
continue to promote other forms of leisure travel, such as tours and cruises,
where the commissions are generally higher. However, any adverse change in the
airline industry could have a material effect on the future operations of the
Company.
F-9
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
income tax returns. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
PROPERTY AND EQUIPMENT
Property and equipment consists of office furniture and equipment recorded at
cost, and is depreciated using the straight line method over their estimated
useful lives ranging from five to ten years.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts represents an amount which, in managements
judgement, will be adequate to absorb probable losses on existing accounts
receivable that may become uncollectible.
PLANS AND SPECIFICATIONS
The Company owns plans and specifications for the turbo-prop engine conversion
for the DC-3/C-47 aircraft, and has investigated methods of realizing this
investment. Possible methods to realize the Company's investment in the plans
and specifications include a new licensing agreement, sale of the plans and
specifications, acquisition or by obtaining financing and successful future
development. As of September 30, 1996, the Company was unable to identify any
cash flows from its investment in the plans and specifications. Accordingly, an
impairment loss of $649,999, that represents the excess of the carrying amount
over the present value of the identifiable net cash flow, has been included in
operations for the year ended September 30, 1996.
F-10
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company 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 an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset and a review of industry conditions. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or net realizable
value. As more fully described in the preceding paragraph, "plans and
specifications", the Company recorded an impairment loss of $649,999 during the
year ended September 30, 1996.
GOODWILL
Goodwill results from acquisitions of subsidiaries in which the acquisition cost
exceeded the book value of the net assets acquired. Goodwill is being amortized
using the straight line method over 25 years.
AGENCY ACQUISITIONS
Agency acquisitions result from acquiring travel agency operations and assets in
which the acquisition cost exceeded the book value of net assets acquired and
represent the travel agency's base of customers and home-based travel agents.
Agency acquisitions are being amortized using the straight line method over five
years.
COURSE MATERIALS
Course materials represent the initial cost of the Principles of Real Estate
textbook. The textbook is updated annually and the annual costs are expensed as
incurred. Due to the acquisition of Western College, Inc. and the resulting
change in the use of the textbook, the Company is amortizing the initial cost
over a ten year period.
EARNINGS PER SHARE
Basic earnings per share amounts are based upon the average number of shares
outstanding. The effect of debentures convertible into Class A common stock on
the earnings per share calculations are antidilutive and therefore diluted
earnings per share are not presented.
ADVERTISING
The Company expenses advertising costs when the advertisement occurs. Total
advertising expenses amounted to $14,417, $11,308 and $8,045 in 1998, 1997 and
1996, respectively. There were no capitalized advertising costs for the periods
presented.
F-11
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATION
Certain items included in prior years' financial statements have been
reclassified to conform to the current year financial statement classification.
NOTE 2 - INCOME TAXES
At September 30, 1998, the Company had the following net operating loss and
credit carryovers for income tax purposes:
Taxable Year of Net
Year Expiration Operating Loss
------- ---------- --------------
1996 2011 556,000
1997 2012 77,000
The income tax effect of the net operating loss carryforward gives rise to a
deferred income tax asset as follows:
1998 1997
---------- ----------
Net operating loss carryforwards $ 663,000 $2,654,000
---------- ----------
Gross deferred tax assets 316,000 $1,327,000
Deferred tax asset valuation allowance 316,000 1,327,000
---------- ----------
Net deferred tax asset $ -- $ --
---------- ----------
F-12
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to consolidated Financial Statements (continued)
NOTE 2 - INCOME TAXES (CONTINUED)
The gross deferred tax deferred tax asset is reduced by a valuation allowance
based when upon management's estimate it is more likely than not that the tax
benefits will not be realized. The decrease in the valuation allowance during
the year ended September 30, 1998, is $1,011,000.
NOTE 3 - ADVANCES TO OFFICER
Advances to officer represent non-interest bearing advances with no stated terms
of repayment.
NOTE 4 - NOTES RECEIVABLE
The Company has notes receivable from the sale of Hansen & Associates, Inc. dba
Property Masters consisting of the following:
Note receivable from individual due
in semi-annual payments plus interest
at 7 1/2% $26,500
Non-Compete payments due in monthly
installments of $500 net of imputed interest
by $4,956 20,044
-------
46,544
Less current portion 7,000
-------
Balance September 30, 1998 $39,544
-------
NOTE 5 - INVESTMENTS - RVP-LLC
The Company has formed RVP-LLC, an Arizona limited liability company for the
purpose of owning recreational vehicle parks that will be leased to and operated
by the company.
The Company for over two years has investigated the recreational vehicle park
industry and instituted a program to establish a Chain of RV Parks. In
connection therewith, the Company has earned a consulting fee for its research
and development of the RV Parks program from which it will contribute $1,700,000
to RVP-LLC leaving $300,000 of consulting revenue which for financial reporting
purposes will be recognized when it is received.
On June 30, 1998 the Company approved the transfer to RVP-LLC of the 35.66 acres
of land in Glenn County, California subject to trust deeds payable in the amount
of $601,000. The land was acquired for the purpose of developing the initial
recreational vehicle park of the planned chain of RV parks. The holder of the
second trust deed filed a notice of default due to non payment of interest. The
LLC determined not to reinstate the defaulted trust deed and in August 1998
RVP-LLC lost the California land in a foreclosure sale.
At September 30, 1998, the members equity of RVP-LLC is $1,707,500 and consists
primarily of the $1,700,000 capital contribution to be received from the
consulting fee. For financial reporting purposes The Company has not recognized
any equity in RVP-LLC until the capital contribution of $1,700,000 is received.
The Company's interest in the RVP-LLC if the capital contributions were
recognized would be approximately $135,988.
F-13
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6 - ACQUISITIONS
Effective January 1, 1996 the Company acquired all of the outstanding shares of
Western College, Inc. a real estate training organization whose operations have
been combined with the Company's wholly owned subsidiary, Ford Schools, Inc. The
acquisition was through a tax-free exchange of stock, resulting in the issuance
of 1,000,000 shares of the Company's Class A common stock plus an agreement to
issue an additional 600,000 Class A shares over the following three years
contingent on the gross tuition revenue equaling or exceeding $250,000 per year.
The acquisition is being accounted for by the purchase method. The 1,000,000
shares of Class A common stock has been recorded for accounting purposes at
$50,000. During each of the years ended September 30, 1998 and 1997, an
additional 200,000 shares of Class A common stock were issued pursuant to the
acquisition agreement and recorded for accounting purposes at $20,000. The
$90,000 purchase price exceeds the book value of the net assets of Western
College, Inc. by $99,361 which has been allocated as follows:
Property and equipment $31,713
Goodwill 67,648
The property and equipment is being depreciated over seven years and the
goodwill is being amortized over 25 years. Operations of Western College have
been included in the consolidated statement of operations from the date of
acquisition.
Supplemental cash flow information related to the assets acquired and
liabilities assumed from the acquisition of Western College, Inc., is as
follows:
Assets
Accounts receivable $ 4,500
Property and equipment 31,713
Goodwill 47,648
Deposits 1,904
-------
85,765
Liabilities
Current liabilities 13,587
Long-term debt 6,323
-------
19,910
Class A common shares of
the Company issued for
acquisition 70,000
-------
Cash provided from acquisition $ 4,145
-------
The Company, through asset acquisitions, implemented its travel services
division on July 1, 1997. Effective July 1, 1997, the Company purchased certain
assets of Travel Easy Inc., and in August, 1997, the assets of FirsTravel, both
of which were full service travel agencies. The Travel Easy agency has been
closed and its approximately 175 independent contractor Home Based Travel Agents
became affiliated with the Company's travel agency operated as FirsTravel.
F-14
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6 - ACQUISITIONS (CONTINUED)
The acquisitions are being accounted for by the purchase method. The acquisition
price of $160,643 included the assumption of certain liabilities totaling
$110,643 and the issuance of 500,000 shares of Class A common stock which has
been recorded for accounting purposes at $50,000. The acquisition of the
Company's travel agency operations resulted in the acquisition cost exceeding
the cost of the assets acquired by $110,288. The excess has been recorded as
agency acquisitions-goodwill. At September 30, 1998 and 1997, accumulated
amortization on the agency acquisition is $25,733 and $5,514, respectively.
The results of operations of Western College, Inc., are included in the
consolidated statement of operations since January 1, 1996, the date of
acquisition. The results of operations of the travel services division are
included in the consolidated statement of operations beginning July 1, 1997, the
date of acquisition.
The following supplemental unaudited pro forma information has been prepared
assuming Western College, Inc., and the predecessor travel services operations
had been acquired as of the start of the years ended September 30:
1997 1996
---- ----
Revenue $5,727,606 $2,874,314
---------- ----------
Net income (loss) $ 102,887 $ (472,461)
---------- ----------
Per share based on weighted
average shares of 10,870,305 $ .01 $ (.04)
---------- ----------
At June 30, 1998 the Company acquired all of the outstanding shares of Neo
Vision, Inc. whose principal business purpose is to provide advertising,
programming and information to remote audiences using computer, video and
transmission technology throughout the United States. The merger was closed with
the exchange of 2,000,000 shares of the Company's Class A common stock for all
of the outstanding shares of Neo Vision, Inc. The exchange agreement requires
that an amendment and restatement of the Company's Certificate of Incorporation
be approved by the stockholders authorizing (i) the reclassification of the
Company's Class A Common Stock and Class B Common Stock in a single new class of
Common Stock ("New Common Stock,") pursuant to the following ratios: shares of
Class A Common Stock will be reclassified into shares of New Common Stock on the
basis of 10 shares of Class A Common Stock into one share of New Common Stock
and 13 shares of Class B Common Stock into one share of New Common Stock; (ii)
the issuance of up to 100,000,000 shares of New Common Stock: (iii) the issuance
of up to 75,000,000 shares of preferred stock: (iv) the change of the name of
the Company from United States Aircraft Corporation to Neo Vision Systems, Inc.
and (v) make certain technical amendments to the Company's Certificate of
Incorporation. The exchange agreement provides that if the amendment and
restatement of the Certificate of Incorporation is not approved by a majority of
each of the Class A and Class B stockholders then the Neo Vision stockholders
can each elect to rescind their exchange of shares with the Company.
F-15
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6 - ACQUISITIONS (CONTINUED)
The financial statements of Neo Vision, Inc. will not be consolidated with the
Company, until approval of the amendment and restatement of the Certificate of
incorporation is fully assured. At September 30, 1998, the investment in Neo
Vision, Inc. representing the initial 2,000,000 Class A Common Stock shares
issued for all of the outstanding shares of Neo Vision, Inc. and has been
recorded for financial reporting purposes at $22,965. The investment, Neo
Vision, Inc, includes the following:
Acquisition of Neo Vision, Inc
common shares $ 22,965
Receivable from Neo Vision Inc. 80,373
--------
$103,338
--------
Upon approval of the amendment and restatement of the Certificate of
Incorporation an additional 3,977,560 shares of the New Common Stock will be
issued to the former stockholders of Neo Vision, Inc., approximately 973,000
shares of the New Common Stock will be in exchange for the outstanding Neo
Vision, Inc convertible debentures and 753,000 shares of the New Common Stock
issued in payments of fees to a Neo Vision, Inc. financial advisor. When the
acquisition of Neo Vision, Inc is fully assured it will be accounted for under
the purchase method of accounting as a reverse merger with Neo Vision, Inc.
being the acquirer for financial reporting purposes. See Note 16 for pro forma
financial information showing the consolidated pro forma balance sheet and
operating statements as if the acquisition was fully assured and consumated at
September 30, 1998.
NOTE 7 - GOODWILL
The acquisition of the Company's wholly owned subsidiaries, Western College,
Inc. and Ford Schools, Inc. each resulted in the acquisition cost exceeding the
book value of the net assets acquired. The excess has been recorded as goodwill
and is summarized as follows:
Ford Schools, Inc. $62,088 25 years
Western College, Inc. 67,648 25 years
---------
129,736
Less accumulated
amortization 26,397
---------
$ 103,339
---------
NOTE 8 - CONVERTIBLE DEBENTURES
The convertible debentures of $56,450 and accrued interest of $33,591 in 1998
and $26,488 in 1997 that were due in December, 1996, are convertible into common
shares at $.75 per share. The debentures bear interest at rates of 12% to 14%
per annum. Currently, the debentures remain unpaid and are in default.
F-16
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 9 - LONG TERM DEBT
At September 30, 1998 and 1997, long term debt consists of the following:
1998 1997
------- -------
Note payable, bank, due in monthly
principal payments of $833 plus
interest at 10.5% per annum $ 8,333 $16,665
Notes and payables to trade creditors
with interest ranging from 10% to 18% 23,027 41,089
------- -------
31,360 57,754
Less current portion 26,000 37,775
------- -------
$ 5,360 $19,979
------- -------
At September 30, 1998, maturities of long term debt are as follows:
Year ended
September 30,
-------------
1998 $26,000
1999 5,000
2000 360
-------
$31,360
-------
Substantially all assets are pledged as collateral for long term debt.
NOTE 10 - TRUST DEED NOTES PAYABLE
At September 30, 1997, trust deed notes payable consist of the following:
First trust deed, bearing interest at 14.5% per annum, payable in
$2,066 monthly installments of interest only, due February, 1999 $171,000
Second trust deed, bearing interest at 16% per annum, payable in
$1,333 monthly installments of interest only, due February, 1999 100,000
Seller carryback, bearing interest at 10% per annum, payable in
$2,750 monthly installments of interest only, due February, 2001 330,000
--------
$601,000
--------
On June 30, 1998 the land held for future development subject to the trust deeds
payable was transferred to RVP-LLC a limited liability company formed by the
Company. See note 5.
F-17
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The real estate training services operation leases two classroom facilities,
which include an office facility, pursuant to long term leases with monthly rent
of $4,500. The travel agency operation leases office facilities pursuant to a
long term lease with monthly rent of $333. The Company also has leased certain
computer equipment at a monthly rental of $450 plus taxes and insurance.
Minimum lease payments on long term operating leases are as follows:
Year ended
September 30,
-------------
1999 40,154
2000 35,812
2001 30,445
--------
$106,411
========
Rent expense under these operating leases totaled $73,022, $59,002 and $17,800
for the years ended September 30, 1998, 1997 and 1996 respectively.
The Company is not currently involved in any material litigation.
NOTE 12 - CAPITAL STOCK
The Company's articles of incorporation authorize issuance of two classes of
stock, Class A common stock and Class B common stock. The rights of the Class A
and Class B stockholders differ in the following respects:
The Class A stock has a preference in distribution of the
Company's assets upon liquidation in the amount of $.50 per
share. The liquidation preference is to be reduced by $.005 for
each $.01 of dividends paid on the Class A stock.
Dividends are not to be paid on the Class B stock until
dividends aggregating $.50 per share have been paid on the Class
A stock. Thereafter, both classes of stock are to share ratably
in dividends.
When an aggregate of $1.00 per share in dividends has been paid
on the Class A stock, the Class A stock and the Class B stock
are to be identical in all respects.
The Company intends to request stockholder authorization for New Common Shares
and the reclassification of the Class A and Class B shares into the New Common
shares. See Note 6.
F-18
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 13 - DISCONTINUED OPERATIONS
On September 30, 1997, the Company sold its wholly-owned subsidiary Hansen &
Associates, Inc. dba Property Masters to the President of Hansen & Associates,
Inc. Operating results of Hansen & Associates, Inc. are shown separately in the
accompanying income statements as discontinued operations for the years ending
September 30, 1997 and 1996.
NOTE 14 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, and
unearned tuition approximate fair value because of the short maturity of those
instruments. Financial instruments in notes receivable has no quoted market
prices and, accordingly, a reasonable estimate of fair market value could not be
made without incurring excessive costs. However, the Company believes by
reference to stated interest rates and land held, that the fair value of the
assets would not differ significantly from the carrying value.
Based on prevailing interest rates, the Company estimates that the fair value of
the Company's long-term debt, convertible debentures and related accrued
interest, and trust deed notes payable, approximates carrying value.
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is the cash paid for interest for the three years ended September
30, 1998, 1997, and 1996:
1996 $ 6,841
1997 $27,106
1998 $ 8,783
Supplementary schedule of non-cash activities:
For the year ended September 30, 1996:
Class A shares issued in payment for services rendered $ 37,500
For the year ended September 30, 1997:
Class A shares issued in payment for services rendered $ 42,000
Acquisition of land held for future development:
Class A shares issued 25,000
Assumption of trust deed notes payable 501,000
Class A shares issued in acquisition of Western College, Inc. 20,000
Class A shares issued in acquisition of travel agency operations 50,000
Notes receivable received as consideration for sale of business 60,044
F-19
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
For the year ended September 30, 1998:
Class A shares issued in acquisition of Western College, Inc 20,000
Class A shares issued in acquisition of Neo Vision, Inc. 22,965
Class A shares issued for loan guarantee 7,500
The Class A shares issued for services during the years ended September 30,1997
and 1996 were to the board of directors, and an officer and shareholder of the
Company.
NOTE 16 - BUSINESS SEGMENTS
In 1996, the Company's operations consisted of real estate educational services.
In 1997, it expanded into the travel services business, and certain financial
information related to these two business segments for 1998 and 1997 is
summarized as follows:
Real Estate Travel Corporate &
education services eliminations Consolidated
--------- -------- ------------ ------------
Year ended September 30, 1997
Sales $436,710 $ 776,544 $ 8,989 $1,222,243
Operating income (loss) 38,713 (27,113) (119,715) (108,115)
Identifiable assets 216,583 164,256 685,320 1,066,159
Capital expenditures 4,248 11,570 (8,238) 7,580
Depreciation and
amortization 12,519 10,023 3,870 26,412
Year ended September 30, 1998
Sales $494,258 $1,281,689 $ 99,407 $1,875,354
Operating income (loss) 76,910 (44,111) 162,381 (129,582)
Identifiable assets 240,871 102,946 597,004 940,821
Capital expenditures 3,520
Depreciation and
Amortization 12,877 22,534 4,355 39,766
F-20
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 17 - PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro forma Consolidated Balance Sheets of United Stated
Aircraft Corporation as of September 30, 1998 sets forth the consolidation of
United States Aircraft Corporation with Neo Vision, Inc. under the purchase
method of accounting with a reverse merger and Neo Vision, Inc. being the
acquirer for financial reporting purposes. The pro forma adjustments report the
exchange of the Class A and Class B shares for the New Common stock, the
issuance of 4,577,560 additional New Common shares pursuant to the Exchange
Agreement and approximately 1,126,000 of New Common shares for the conversion of
the Neo Vision, Inc convertible debentures.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS - September 30, 1998
<TABLE>
<CAPTION>
United States
Aircraft Corp. Neo Vision Pro Forma Neo Vision
ASSETS And Subsidiaries Incorporation Combined Adjustments Systems Inc.
---------------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash $ 8,070 $ 83,577 $ 91,647 $ 91,647
Accounts Receivable 75,902 22,699 98,601 98,601
Notes Receivable 7,000 7,000 7,000
Prepaid expenses 7,844 1,349 9,193 9,193
----------- ---------- ----------- ----------
Total current assets 98,816 107,625 206,441 206,441
Investment, Neo Vision, Inc. 103,338 103,338 (103,338)(3)(4)(5)
Note receivable, net of current
portion 39,544 39,544 39,544
Property & equipment, net 47,613 584,094 631,707 631,707
Investment in RVP-LLC
Agency acquisition, net of
amortization 84,555 84,555 84,555
Goodwill, net 103,339 103,339 103,339
Course materials 13,754 13,754 13,754
Other 13,874 18,768 32,642 32,642
----------- ---------- ----------- ----------
Total assets 504,833 710,487 1,215,320 1,111,982
----------- ---------- ----------- ----------
LIABILITIES & STOCKHOLDER'S EQUITY
Current Liabilities
Note Payable, bank $ 30,000 15,000 45,000 45,000
Current portion of
long-term debt 26,000 26,000 26,000
Convertible debentures &
related accrued interest 90,041 746,164 836,205 (746,164) 90,041
Accounts payable 90,734 273,721 364,455 364,455
Accrued expenses 214,062 119,259 333,321 (100,301) 233,020
Unearned revenue 62,900 15,148 78,048 78,048
----------- ---------- ----------- ----------
Total current liabilities 513,737 1,169,292 1,683,029 836,564
Due to United States Aircraft Corp. 80,373 80,373 (80,373)
Long term debt, net 5,360 5,360 5,360
Minority Interest in NV-1, LLC 130,436 130,436 130,436
Stockholders' Equity - Capital stock
Class A: $.50 par value,
9,927,504 issued 4,963,752 4,963,752 (4,963,752)
Class B: $.001 par value,
4,962,801 issued 4,963 4,963 (4,963)
Common Stock, Neo Vision, Inc 6,250 6,250 (6,250)
New Common Shares
$.001 par value, 7,078,303 issued 7,078(1)(2)(3)(6) 7,078
Paid in Capital (1,838,862) (1,838,862) 2,647,270(1)(2)(3)(6) 808,408
Retained earnings (deficit) (3,144,117) (675,864) (3,819,981) 3,144,117 (675,864)
----------- ---------- ----------- ----------
(14,264) (669,614) (683,878) 139,622
----------- ---------- ----------- ----------
Total liabilities and
stockholders' equity $ 504,833 $ 710,487 $ 1,215,320 $1,111,982
=========== ========== =========== ==========
</TABLE>
See explanation of pro forma adjustments on following page.
F-21
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17 - PRO FORMA FINANCIAL INFORMATION (CONTINUED)
Pro Forma Adjustments:
1. To record the exchange of Class A shares outstanding for the New
Common shares on the basis of 10 Class A shares for 1 New Common
Share.
2. To record the exchange of Class B shares outstanding for the New
Common shares on the basis of 13 Class B shares for 1 New Common
shares.
3. To record the 4,577,560 additional New Common shares to be issued to
the former Neo Vision, Inc. shareholders pursuant to the June 30, 1998
exchange agreement.
4. To record elimination of intercompany investment on Neo Vision, Inc
using the purchase method of accounting with a reverse merger and Neo
Vision, Inc being the acquirer for financial reporting purposes.
5. To eliminate intercompany receivables and payables.
6. To record the conversion of the Neo Vision, Inc convertible debentures
and the payment of financial consulting fees all through the issuance
of approximately 1,126,000 shares of New Common stock.
F-22
<PAGE>
UNITED STATES AIRCRAFT CORPORATION, AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17 - PRO FORMA FINANCIAL INFORMATION (CONTINUED)
The following unaudited consolidated statements of operations of Unites States
Aircraft Corporation for the year ended September 30, 1998 sets forth the
consolidation of United States Aircraft Corporation with the Neo Vision, Inc.
under the purchase method of accounting as of the acquisition was competed on
October 1, 1998.
UNAUDITED PROFORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
United States Neo Vision
Aircraft Corp. Pro Forma Systems
And Subsidiaries Neo Vision, Inc. Adjustments Consolidated
---------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue
Real estate education $ 494,258 $ 494,258
Travel Agency 1,281,689 1,281,689
Video Wall advertising 102,209 102,209
Other 99,407 745 (90,000)(1) 10,152
----------- --------- ----------
Total revenue 1,875,354 102,954 1,888,308
----------- --------- ----------
Expenses
Cost of sales travel agency 1,163,825 1,163,825
Personnel expenses 351,224 297,029 648,253
Facility cost 69,851 81,360 151,211
Other operating cost 120,249 181,725 301,974
General and administration 299,787 90,000 (90,000)(1) 299,787
----------- --------- ----------
Total expenses 2,004,936 650,114 2,565,050
----------- --------- ----------
Income (loss) before interest
Expense; Minority interest,
depreciation and amortization (129,582) (547,160) (676,742)
Interest expense 20,136 61,008 81,144
Minority interest in NV-1 LLC loss (44,564) (44,564)
Depreciation and amortization 39,766 112,260 152,026
----------- --------- ----------
Net income (loss) $ (189,484) $(675,864) $ (865,348)
----------- --------- ----------
Pro forma net income (loss) per
New common shares (2) (.12)
----------
</TABLE>
- ----------
(1) To eliminate intercompany management fees.
(2) Based on pro forma shares of 7,078,303 to be outstanding after the exchange
of Class A and B shares for the New Common shares to be authorized and the
New Common shares to be issued in the acquisition of Neo Vision, Inc., the
conversion of the Neo Vision, Inc. convertible debentures and the payment
of financial consulting fees.
F-23
<PAGE>
18 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company has sustained continuing
operating losses.
As shown in the accompanying statement of operations, the Company has incurred a
net loss of $189,484 for the year ended September 30, 1998. Unaudited
information subsequent to September 30, 1998 indicates that losses are
continuing. As of September 30, 1998, the accompanying balance sheet reflects
$14,264 in net stockholders' deficit and negative working capital of $414,921.
The above conditions indicate that the Company may be unable to continue in
existence. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts, or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue in existence.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Board of Directors of
Neo Vision, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Neo Vision, Inc.
and Subsidiary as of September 30, 1998, and the related consolidated statements
of operations, changes in shareholders' equity (deficit), and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated 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 consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neo Vision, Inc. and
Subsidiary as of September 30, 1998, and the results of its operations, changes
in shareholders' equity (deficit), and its cash flows for the year then ended,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ SEMPLE & COOPER, LLP
Certified Public Accountants
Phoenix, Arizona
December 2, 1998
F-25
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 1998
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $ 83,577
Accounts receivable, net (Note 1) 22,699
Debt issue costs, net (Note 1) 18,588
Prepaid expenses 1,349
-----------
Total Current Assets 126,213
-----------
Property and Equipment: (Note 1)
Furniture and fixtures 9,783
Home office equipment 92,565
Video walls 519,655
-----------
622,003
Less: accumulated depreciation (37,909)
-----------
584,094
-----------
Deposits 10,000
Deferred Financing costs (Note 1) 8,768
-----------
Total Assets 18,768
-----------
$ 729,075
===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Note payable (Note 2) $ 15,000
Convertible debentures (Note 3) 800,750
Accounts payable 273,721
Accrued taxes and other 25,950
Accrued interest payable 57,312
Deferred revenue 15,148
Due to a related entity (Note 4) 80,373
-----------
Total Current Liabilities 1,268,254
=========
Commitments (Note 5) --
Minority Interests (Note 1) 130,436
-----------
Shareholders' Equity (Deficit):
Common stock, $.001 par value, 25,000,000
shares authorized, 6,250,000 shares issued
and outstanding 6,250
Accumulated deficit (675,865)
-----------
(669,615)
-----------
Total Liabilities and Shareholders'
Equity (Deficit) $ 729,075
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-26
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended September 30, 1998
Revenues $ 102,954
Operating Costs and Expenses:
Personnel expenses 271,888
Facility costs 73,480
Sales and marketing expense 60,341
General and administrative expenses 244,406
Depreciation and amortization 112,260
---------
Loss from Operations (659,421)
Interest expense (61,008)
Minority Interest in NV-1, LLC Loss 44,564
---------
Net Loss $(675,865)
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-27
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(DEFICIT)
For The Year Ended September 30, 1998
Total
Share-
Common Stock Holders'
------------ Accumulated Equity
Shares Amount Deficit (Deficit)
------ ------ ------- ---------
Balance at September 30, 1997 -- $ -- $ -- $ --
Stock issued for services 6,250,000 6,250 -- 6,250
Net loss for the year ended
September 30, 1998 -- -- (675,865) (675,865)
--------- ------ --------- ---------
Balance at September 30, 1998 6,250,000 $6,250 $(675,865) $(669,615)
========= ====== ========= =========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-28
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended September 30, 1998
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 80,255
Cash paid to suppliers and employees (349,163)
Interest paid (3,696)
---------
Net cash used by operating
activities (272,604)
---------
Cash flows from investing activities:
Purchase of fixed assets (622,003)
---------
Net cash used by investing
activities (622,003)
---------
Cash flows from financing activities:
Proceeds from debt 25,000
Proceeds from convertible debentures 707,811
Capital contributions of minority interests 175,000
Advances from parent company 80,373
Repayment of debt (10,000)
---------
Net cash provided by financing
activities 978,184
---------
Net increase in cash and cash equivalents 83,577
Cash and cash equivalents at beginning of year --
---------
Cash and cash equivalents at end of year $ 83,577
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-29
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For The Year Ended September 30, 1998
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net Loss $(675,865)
---------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 112,260
Minority interest in NV-1, LLC Loss (44,564)
Stock issued for services 6,250
Changes in Assets and Liabilities:
Accounts receivable, net (22,699)
Prepaid expenses (1,349)
Deposits (10,000)
Financing costs (8,768)
Accounts payable 273,721
Accrued taxes and other 25,950
Accrued interest payable 57,312
Deferred revenue 15,148
---------
403,261
---------
Net cash used by operating activities $(272,604)
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-30
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates:
Nature of Operations:
Neo Vision, Inc. is a Corporation which was duly formed and organized under
the laws of the State of Arizona on June 29, 1997. The Company was dormant
until October 1, 1997 when operations commenced. The principal business
purpose of the Company is to provide advertising, programming and
information to remote audiences using computer, video and transmission
technology throughout the United States.
NV-1, LLC, is a limited liability company which was formed in August, 1997.
The Company was dormant until October 1, 1997 when operations commenced.
Neo Vision, Inc. owns an approximate seventy-five percent (75%) interest in
the company. The principal business purpose of the Company is to own and
operate a video screen, using Neo Vision, Inc.'s technology, at Meadows
Mall in Las Vegas, Nevada. Minority Interests represents capital
contributions of NV-1, LLC's minority partners less their proportionate
share of that entities losses.
Merger:
On June 30, 1998, the Company entered into a merger agreement with United
States Aircraft Corporation by exchanging all of its common stock for
2,000,000 shares of Class A common stock of United States Aircraft
Corporation (USAC). Up to an additional 4,577,560 shares will be exchanged
upon USAC's shareholders approving a change in their equity structure, as
well as several other conditions occurring. The merger constituted a
tax-free reorganization and will be accounted for as a reverse merger with
Neo Vision, Inc. as the accounting acquirer. The consolidated financial
statements include only the results of the Company for the period
presented, as the transaction can be reversed if the approval of the USAC
shareholders is not received.
Principles of Consolidation:
The consolidated financial statements include the accounts of Neo Vision,
Inc., and its subsidiary, NV-1, LLC. All significant intercompany accounts
and transactions have been eliminated in the accompanying consolidated
financial statements.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents:
Cash equivalents are considered to be all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of the individual
accounts outstanding, and the Company's prior history of uncollectible
accounts receivable. At September 30, 1998, no allowance has been
established for potentially uncollectible accounts receivable, as in the
opinion of management, all amounts are considered fully collectible.
F-31
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates: (Continued)
Debt Issue Costs:
Debt issue costs represent costs incurred in connection with the Company's
convertible debenture offering. Debt issue costs are being amortized
ratably over the life of the debentures. Amortization expense for the year
ended September 30, 1998 was $74,351.
Property and Equipment:
Propertyand equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the
assets. Maintenance and repairs that neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred. For the
year ended September 30, 1998, depreciation expense was $37,909.
A summary of the estimated useful lives is as follows:
Furniture and fixtures 5 years
Home office equipment 5 years
Video walls 10 years
Deferred Financing Costs:
Deferred financing costs represent costs incurred in connection with the
Company's attempt to secure a bank loan. Financing costs will be charged
ratably over the life of the loan if successfully completed or will be
charged as a period cost if the loan is not secured (See Note 8).
Income Taxes:
For the year ended September 30, 1998, no provisions were made for federal
or state income tax expense due to the net operating loss.
Deferred income taxes arise from timing differences resulting from revenues
and expenses reported for financial accounting and tax reporting purposes
in different periods. Deferred income taxes represent the estimated tax
asset or liability from different depreciation methods used for financial
accounting and tax reporting purposes and for timing differences in the
utilization of net operating loss carryforwards and valuation allowances.
Fair Value of Financial Instruments:
The fair value of the Company's notes payable and convertible debentures is
based on rates currently available from the bank for debt with similar
terms and maturities. The carrying amounts of accounts receivable, debt
issue costs, and deferred revenue approximate fair value because of the
short-term maturity of these items.
2. Note Payable:
At September 30, 1998, note payable consisted of the following:
$25,000 note payable to a bank, bearing interest
at the bank's Index Rate plus 3%, due on demand;
guaranteed by officers of the Corporation. $15,000
=======
F-32
<PAGE>
NEO VISION, INC.AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Convertible Debentures:
At September 30, 1998, convertible debentures consisted of the following:
Series A, bearing interest at 12%, payable in common stock,
convertible at a rate of $1.00 per share, due December,
1998. $472,000
Series B, bearing interest at 10%, payable in common stock,
convertible at a rate of $1.00 per share, due May, 1999. 190,000
Series C, bearing interest at 12%, payable in common stock,
convertible at a rate of $1.25 per share, due May, 1999. 138,750
--------
$800,750
========
The debentures further provide for automatic conversion into common stock
of the Company upon completion of a merger with a public reporting entity.
If all of the debentures convert, Neo Vision, Inc. would issue 833,325
shares of its common stock as of September 30, 1998, to convert the
outstanding principal balance of $800,750 and accrued interest of $57,312.
As of the date of this report, the Series A convertible debentures have not
been paid. The conversion is pending completion of the merger (See Note 1).
The Company further agreed to engage a consultant to assist in the
placement of the debentures. The agreement provides for the payment of a 5%
finders fee, plus the issuance of 756,828 shares of Neo Vision, Inc. common
stock when certain provisions are met, plus warrants for the purchase of
160,150 shares of Neo Vision, Inc. at $3.00 per share. None of the warrants
have been exercised as of September 30, 1998. Issuance of the common stock
has been held in abeyance pending the merger.
4. Due to a Related Entity:
At September 30, 1998, $80,373 is due to USAC. The amount represents
advances received from USAC, is non-interest bearing, and considered
short-term in nature.
5. Lease Obligations:
The Company leases office space in Phoenix, Arizona under cancellable
operating lease agreements with a related entity. Rent expense under these
lease agreements for the year ended September 30, 1998 was $17,610.
The Company also leases wall space for its video walls at McCarran Airport
and Meadows Mall in Las Vegas, Nevada under non-cancellable operating lease
agreements, expiring in June, 2003 and September, 2002, respectively. The
base rent under the McCarran lease is increased annually by the greater of
five percent (5%) per annum, or base rent plus twenty percent (20%) of the
gross billings for advertising on the video walls. The Meadows Mall
agreement provides for the payment of rent at a rate of fifteen percent
(15%) of the gross consideration received for advertising on the video
walls. Rent expense under these lease agreements for the year ended
September 30, 1998 was $87,818.
In addition, the Company is currently leasing a computer under a
cancellable operating lease agreement. Rent expense under the lease
agreement for the year ended September 30, 1998 was $1,320.
F-33
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Lease Obligations: (Continued)
A schedule of future minimum lease payments due under the non-cancellable
operating leases at September 30, 1998, is as follows:
Year
Ending Amount
------ ------
1999 $ 243,250
2000 255,412
2001 268,183
2002 281,592
2003 212,714
----------
$1,261,151
==========
6. Income Taxes and Deferred Income Taxes:
For the year ended September 30, 1998, components of deferred income taxes,
are as follows:
Long-Term Asset(Liability):
Net operating loss carryforward $ 290,000
Accumulated depreciation (1,000)
---------
289,000
Less: valuation allowance (289,000)
---------
$ --
=========
At September 30, 1998, the Company had federal and state net operating loss
carryforwards available to offset future federal and state taxable income,
in the approximate amount of $680,000 expiring primarily through September
30, 2013 and 2003, respectively.
Management has established a valuation allowance equal to the benefit of
the net operating loss carryforward as utilization of that benefit is
uncertain.
7. Consolidated Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
The Company recognized investing and financing activities that affected
assets and liabilities, but did not result in cash receipts or payments:
For the year ended September 30, 1998, these non-cash activities are as
follows:
Stock in the amount of $6,250 was issued for services performed.
The minority interest loss in NV-1, LLC was $44,564.
Convertible debentures were issued net of costs of $92,939.
F-34
<PAGE>
NEO VISION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Going Concern:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company has sustained
continuing operating losses.
The primary business of the Company is to provide advertising, programming,
and information to remote audiences using video walls. Three of these video
walls began operating primarily in June, 1998, the end of the development
phase, and were not yet profitable in the year ended September 30, 1998.
As shown in the accompanying statement of operations, the Company has
incurred a net loss of $675,865 for the year ended September 30, 1998.
Unaudited information subsequent to September 30, 1998 indicates that
losses are continuing. As of September 30, 1998, the accompanying balance
sheet reflects $669,615 in net stockholders' deficit and negative working
capital of $1,142,041.
The above conditions indicate that the Company may be unable to continue in
existence. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
Management has received agreements from most of the debenture holders to
convert their convertible debentures and related accrued interest into
shares of USAC upon completion of the merger. The conversion of the
debentures results in a pro forma net equity of approximately $175,000.
Further, the Company has received a letter of intent for a $250,000 sale
and leaseback of the installed equipment at one of its locations, which
management expects to be funded before mid-February, 1999, pending the
completion of the lender's due diligence procedures. In addition, the
monthly sales of advertising have been increasing since the end of the
development phase, resulting in management's expectation of attaining
positive cash flow from operations commencing in 1999.
F-35
Exhibit 21
Subsidiaries of the Registrant
Name: State of Incorporation:
----- -----------------------
Neo Vision, Inc. Arizona
Western College, Inc. Arizona
Ford Schools, Inc. Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,070
<SECURITIES> 0
<RECEIVABLES> 82,902
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 98,816
<PP&E> 126,636
<DEPRECIATION> 79,023
<TOTAL-ASSETS> 504,833
<CURRENT-LIABILITIES> 513,737
<BONDS> 5,360
0
0
<COMMON> 4,968,715
<OTHER-SE> (4,982,979)
<TOTAL-LIABILITY-AND-EQUITY> 504,833
<SALES> 1,875,354
<TOTAL-REVENUES> 1,875,354
<CGS> 1,163,825
<TOTAL-COSTS> 2,004,936
<OTHER-EXPENSES> 39,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,136
<INCOME-PRETAX> (189,484)
<INCOME-TAX> 0
<INCOME-CONTINUING> (189,484)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,484
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
