U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 0-10190-0
AERO SERVICES INTERNATIONAL, INC.
(Exact name of small business issuer as
specified in its charter)
LOUISIANA 72-0385274
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
660 Newtown-Yardley Road, Newtown, PA 18940
(Address of principal executive offices
(215) 860-5600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of July 31, 1999: Common stock (without par value)
7,998,052 shares.
Transitional Small Business Disclosure Format (Check one): Yes No X
AERO SERVICES INTERNATIONAL, INC. & SUBSIDIARIES
INDEX
PART I - Financial Information Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
June 30, 1999 (unaudited) 2
Consolidated Statement of Earnings
three months and nine months ended June 30, 1999
and 1998 (unaudited) 3
Condensed Consolidated Statement of Cash Flows
nine months ended June 30, 1999 and 1998
(unaudited) 4
Notes to Condensed Consolidated Financial Statements
(unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 8
PART II - Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 11
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED: DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash $ 30
Customers receivables, less allowance for
doubtful accounts of $31 97
Escrow funds 3,046
Notes receivable - affiliate 1,801
Inventories 50
Prepaid expenses and other current assets 145
Sinking fund 476
TOTAL CURRENT ASSETS 5,645
PROPERTY AND EQUIPMENT, NET 1,307
OTHER ASSETS
Investments 9,875
Other 499
TOTAL ASSETS $17,326
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 11
Current maturities of long term debt-affiliate 8,124
Current maturities of long term debt-other 46
Accounts payable-trade 668
Accrued expenses
Property, payroll, and other taxes 1,700
Other 503
Affiliate 3,483
Property taxes - Chicago 3,099
TOTAL CURRENT LIABILITIES 17,634
LONG-TERM DEBT, less current maturities
Affiliate 7,667
Other 218
TOTAL LONG-TERM DEBT 7,885
OTHER LONG TERM LIABILITIES 212
REDEEMABLE PREFERRED STOCK 3,624
STOCKHOLDERS' DEFICIT
Common stock 10,400
Additional paid-in capital 4,724
Accumulated deficit (26,916)
(11,792)
Less: Common stock in treasury 237
TOTAL STOCKHOLDERS' DEFICIT (12,029)
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $17,326
See Notes to Condensed Consolidated Financial Statements.
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF EARNINGS
(UNAUDITED: DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
1999 1998 1999 1998
NET SALES $ 579 $ 3,167 $ 5,722 $ 8,470
COST AND EXPENSE
Cost of sales 271 1,311 2,136 3,519
Departmental costs 506 1,191 2,809 3,226
Administrative costs 499 308 1,283 813
Interest expense - other 24 35 256 129
Interest expense - affiliate 328 409 996 1,159
(1,049) (87) (1,758) (376)
Gain on sale of certain FBO
operations - - 17,070 -
Other income, net 67 22 583 63
Income (loss) before taxes (982) (65) 15,895 (313)
Income tax expense - - 5,000 -
NET INCOME (LOSS) (982) (65) 10,895 (313)
Preferred dividends (34) (65) (104) (194)
Accretion of preferred stock (11) (8) (32) $ (24)
Net income (loss) applicable
to common shareholders (1,027) $ (138) $ 10,759 $ (531)
Net income (loss) per share
Basic $ (0.13) $ (0.02) $ 1.40 $ (0.08)
Dilutive $ (0.11) $ (0.02) $ 1.31 $ (0.08)
Weighted average shares
outstanding:
Basic 7,998,052 6,998,052 7,712,388 6,998,052
Dilutive 8,574,792 6,998,052 8,289,078 6,998,052
See Notes to Condensed Consolidated Financial Statements.
AERO SERVICES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED: DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $10,895 $(313)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 226 296
Provision for losses on accounts receivable 6 7
Provision for obsolete inventory 4 3
Gain on sale of certain FBO operations (17,138) -
Change in assets and liabilities:
(Increase) decrease in accounts receivable 290 (231)
Increase in escrow funds (3,046) -
Decrease in notes receivable 500 -
Increase in notes receivable - affiliate (1,703) -
Increase in inventory (17) (24)
(Increase) decrease in other current assets 126 (80)
Decrease in assets held for sale 1,452 -
Increase in sinking fund (146) -
Decrease in deferred taxes 5,000 -
Increase in investments (9,875) -
Increase in other assets (389) (137)
Increase in accounts payable 119 9
Increase (decrease) in property,
payroll, and other taxes (59) 210
Decrease in other current liabilities (775) (100)
Increase in other liabilities - affiliate 816 712
Increase in property taxes - Chicago 79 -
Decrease in other long term liabilities - (20)
Other (108) (5)
Total adjustments (24,638) 640
Net cash (used in) provided by operating activities (13,743) 327
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of certain FBO operations 17,750 -
Purchases of property and equipment (520) (167)
Net cash (used in) provided by investing activities 17,230 (167)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds form issuance of notes payable-affiliate 234 100
Proceeds from issuance of notes payable 1,215 75
Principal payments of notes payable-affiliate (467) (234)
Principal payments of long-term debt (4,680) (20)
Net cash used in financing activities (3,698) (79)
Net increase (decrease) in cash & cash equivalents (211) 81
Cash and cash equivalents at beginning of year 241 131
Cash and cash equivalents at end of third fiscal
quarter $ 30 $ 212
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 456 $ 547
Income taxes - -
See Notes to Condensed Consolidated Financial Statements.
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999, consolidated
statement of earnings for the nine month and three month periods ended June
30, 1999 and 1998, and the condensed consolidated statement of cash flows for
the nine month periods then ended were prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 1999 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's September 30, 1998
annual report on Form 10-KSB. The results of operations for the periods ended
June 30, 1999 and 1998 are not necessarily indicative of the operating
results for the full year.
NOTE 2: CASH AND SHORT-TERM SECURITIES
The Company considers cash on hand and deposits in banks as cash and cash
equivalents. All items in this category have maturities of less than three
months.
NOTE 3: INVENTORIES
Inventories are classified as follows:
JUNE 30
1999
Aircraft parts and accessories, oil and
supplies less provisions for obsolete
and slow-moving, and excess quantity
of $20 $12
Fuel 38
$50
NOTE 4: ESCROW FUNDS
On March 11, 1999 the Company sold its FBO at Chicago's Midway Airport for
$17,750. From the proceeds of the sale, $3,511 was held in escrow for the
payment of the industrial revenue bond, including interest. The bond was paid
in full on April 15. Another $3,020 was held in escrow for the payment of
real estate taxes in arrears. These taxes are in dispute. The balance of
$3,046 includes interest earned through June 30.
NOTE 5: NOTES RECEIVABLE - AFFILIATE
$1,744 of this category is the outstanding balance against a $1,800 line-
of-
credit given to Brant Motor Sports, Inc., whose principals include R. Ted
Brant and Bobby Adkins, both members of the Company's Board of Directors and
Company employees. The interest rate on this loan is prime less 1%. The
remainder of the balance is accrued interest on the debt.
NOTE 6: SINKING FUND
The sinking fund was established pursuant to an agreement with PHH
Corporation (PHH), a guarantor of the letter-of-credit supporting the
industrial revenue bond with Cook County, Illinois, whereby the Company would
make certain agreed-to monthly payments into the fund. The purpose of the
fund was to provide for payment of the $3,500 bond due in 2014. However, with
the sale of the Chicago FBO, the $3,500 bond was paid in full on April 15,
1999. Under the agreement with PHH, however, the Company continued to make
monthly payments into the fund for three months after the bonds were paid.
The balance of the fund was returned to the Company on July 20.
NOTE 7: INVESTMENTS
This amount represents the Company's investment in a limited liability
company named RTB/AS, L.L.C. The other investor in this company is R. Ted
Brant, Jr., the Company's President and Chairman of the Board of Directors.
The express purpose of RTB/AS, L.L.C. is to invest in the auto racing
industry.
NOTE 8: ACCRUED EXPENSES
The major component of the $1,700 accrued for property, payroll, and other
taxes is an accrual of $1,668 for a New York motor fuels tax assessment which
has been appealed.
Of the $3,483 of accrued expenses - affiliate, $3,427 is interest on the
notes due Transtech Holding Company.
NOTE 9: FINANCING ARRANGEMENTS
Long Term Debt-Affiliate
Included in this category are $7,981 of various demand loans due to Transtech
Holding Company, (Transtech), the Company's principle shareholder. These
notes, classified as current maturities of long term debt, provide for
interest at 2% above the prime rate. Also included is a note due Transtech
in the amount of $6,910, bearing a prime interest rate. The note is
collateralized by a first priority interest on the fixed assets, inventory,
and accounts receivable of the Company. Also, this category includes $757,
the balance due on the purchase of an airplane in July 1996 from R. Ted
Brant, the Chairman of the Board and Chief Executive Officer of the Company.
The note is due Cessna Corporation but remains in the name of Mr. Brant. The
Company makes payments directly to Cessna.
Long Term Debt-Other
In October 1998, the Company entered into a fuel supply agreement with Avfuel
Corporation (Avfuel) whereby Avfuel will be the exclusive fuel provider at
the Company's FBOs for a period of seven years. In addition, the Company
borrowed $1,000 from Avfuel. Under the terms of the note, Aero must make
monthly payments equal to $0.045 per gallon for each gallon of jet aviation
fuel delivered by Avfuel to Aero under the fuel supply agreement during the
preceding month. Each of the monthly payments shall be funded by means of a
financing rebate issued by Avfuel at the rate of $0.045 per gallon of jet
aviation fuel delivered to Aero during the previous month. The note carries
an interest rate of prime plus 1.75% and has a maturity date of September 15,
2006. In March 1999, the buyer of the Company's Chicago FBO assumed $750 of
this debt. At June 30, 1999 the outstanding balance of $216, less the current
portion of $45, is included in long term debt.
NOTE 10: INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share includes no dilution and is calculated by
dividing net income by the weighted average number of common shares
outstanding for the period. Dilutive net income (loss) per share reflects the
potential dilution of securities that could share in the net income of the
Company through the exercise of stock options and the conversion of preferred
stock.
NOTE 11: RELATED PARTIES TRANSACTIONS
The Company is indebted to its major shareholder Transtech (holder of 50.4%
of common stock and 71.8% of preferred) in the amount of $14,891. Relative
to this debt, the Company had accrued interest of $3,427 at June 30. During
the nine months ended June 30, 1999 the Company paid $157 of interest and $9
of principal to Transtech. In December 1998 the Company issued 500,000 shares
of common stock to Transtech in exchange for $315 of debt forgiveness.
The Company periodically uses an aircraft owned by Valley Air Services, Inc.
(Valley Air) for travel by its employees, primarily management. Valley Air
bills the Company an hourly rate based on flight time. The President and
Chief Executive Officer of Valley Air is R. Ted Brant. During the nine months
ended June 30, 1999 the Company was billed $72 for use of the aircraft.
During fiscal year 1998, the Company's Board of Directors approved a $500
line-of-credit, later increased to $1,500 in March 1999, and to $1,800 in May
1999, for a company called Brant Motor Sports, Inc. (See Note 5 for details.)
NOTE 12: CONTINGENT LIABILITIES
A. Environmental Matters
The Company's business involves the storage, handling and sale of fuel, and
the provision of mechanical maintenance and refurbishing services which
involve the use of hazardous chemicals. Accordingly, the Company is required
to comply with federal, state and local provisions which have been enacted
to regulate the discharge of material into the environment or otherwise
relate to the protection of the environment.
The Company is presently responsible for ongoing remediation of underground
contamination at one previously owned location in Milwaukee, Wisconsin. At
another previously owned location on the Raleigh-Durham Airport in North
Carolina, the Company is one of several former operators of fuel tanks at the
facility responsible for sharing remediation costs. The Company reached a
settlement agreement with the airport authority there during fiscal year 1996
which limits the Company's liability to $85 with payments to the authority
not to exceed $20 in any calendar year. The Company has been billed and paid
$38 since reaching the settlement.
At June 30, 1999 the Company has included in its financial statements an
accrual for environmental remediation of $342. Based on estimates by the
engineering firms conducting the remediation projects, the Company has
sufficient reserves should any additional problems arise during remediation.
The Company, in addition, is reimbursed by the Wisconsin Petroleum
Environmental Cleanup Fund in excess of 95% of remediation expenses. The
accrual of $342 has not been reduced by any expected future reimbursements
from Wisconsin.
B. Litigation
Please refer to Part II, Item 1 on page 10 for a discussion of current
litigation matters.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLAR AMOUNTS IN THOUSANDS)
Results of Operations:
The following table presents as a percentage of total sales certain selected
financial data for the Company for the periods indicated.
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 46.8 41.4 37.3 41.5
Departmental costs 87.4 37.6 49.1 38.1
Administrative costs 86.2 9.7 22.4 9.6
Interest expense (Net) 60.8 14.0 21.9 15.2
Other income 11.6 0.7 308.5 0.7
Income tax - - 87.4 -
Net income (loss) (169.6) (2.0) 190.4 (3.7)
Sales for the nine month period ended June 30, 1999 decreased $2,748 (32%)
as compared to the same period in 1998. This decrease resulted from the sale
of the Chicago FBO on March 11. During the three months ended June 30, 1999
sales decreased $2,620 as compared to the same period in 1998, again
resulting from the sale of the Chicago FBO.
Cost of sales for the nine month period in 1999 has been reduced by 4.2% of
sales to 37.3% as compared to 41.5% in 1998. This decrease is due to a change
in sales mix and an increase in fuel margins. Cost of sales for the three
month period increased by 5.4% of sales to 46.8%. This change is also a
result of the sale of Chicago.
Departmental costs decreased by $417 (13%) during the nine month period but
when Chicago is excluded from the comparison, these costs increased by $256,
with the major increase of $120 in payroll and related costs. For the third
quarter alone, departmental costs are up $67 (16%) after adjusting for the
sale of Chicago.
Administrative costs increased by $470 (58%) during the nine month period
with the major increases in legal expense ($278) and professional fees
($198), both resulting from tax and investment planning that was required by
the sale of Chicago. During the three month period ended June 30, these costs
increased by $191.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLAR AMOUNTS IN THOUSANDS)
LIQUIDITY AND CAPITAL RESOURCES
Working capital deficiency at June 30, 1999 decreased by $1,107 to ($11,989)
from September 30, 1998. Current assets decreased by $2,677, with the major
changes being increases in escrow funds of $3,046 and notes receivable-
affiliate of $1,703, being reduced by decreases in deferred taxes of $5,000,
assets held for sale of $1,452 and notes receivable of $500. Current
liabilities decreased by $3,784 to $17,634 with the majority of the decrease
($3,500) from the payment of the Chicago Industrial Revenue Bond.
Operations during the nine months ended June 30, 1999 used $13,743 of cash.
Cash of $19,199 was provided by the sale of the Chicago FBO ($17,750) and the
issuance of notes payable ($1,449). Cash of $520 was used to purchase fixed
assets and $5,147 was used to reduce the principal amount of notes payable.
In January 1999, the Company and R. Ted Brant formed a limited liability
company named RTB/AS, L.L.C. to invest in the auto racing industry. The
Company's total investment in RTB/AS, L.L.C. to date is approximately $10
million and could eventually be approximately $12.5 million. The Company
continues to explore other business opportunities not related to the aviation
industry. One such opportunity under consideration is a joint venture for the
construction and operation of an indoor motor speedway and exhibition center.
Management is continuing to search for business opportunities that could
produce profits whereby the approximately $34 million of net operating loss
carry forward could be utilized to produce cash flow. However, there can be
no assurance that the Company can be returned to profitability or maintained
as a going concern.
The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
PART II - OTHER INFORMATION
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLAR AMOUNTS IN THOUSANDS)
ITEM 1. - LEGAL PROCEEDINGS
The Company is subject to several complaints filed over the last several
years in different courts or administrative agencies on a variety of grounds.
These claims are encountered in the ordinary course of business, and in the
opinion of management, the resolution of these matters, either individually
or in the aggregate, will not have a material adverse effect on the Company's
financial position, cash flow, and operations in excess of accruals already
recorded. Management believes that it has established adequate reserves for
all of these claims. Management also believes it has strong defenses and
intends to vigorously defend its position.
The Company is also exposed to a number of asserted and unasserted potential
claims encountered in the normal course of business. In the opinion of
management, the resolution of these matters, as well as those discussed above
or referenced elsewhere in this report, will not have a material adverse
effect on the Company's financial position in excess of what has already been
recorded. Management believes that it has established adequate reserves for
all of these claims.
ITEM 5. - OTHER INFORMATION
The Company has reviewed the potential impact of Year 2000 issues on its
business operations and has determined the following:
The main computers used by Aero and the software operated on the computer
require only minor corrections to become year 2000 compliant. Aero is
considering changing its computer operations to a PC based system using new
software that is year 2000 compliant. If Aero elects not to pursue the PC
based and year 2000 compliant software, Aero will cause its present system
to be year 2000 compliant by the Fall of 1999.
Aero has contacted its principal insurers and suppliers, especially the
supplier of aviation fuel to ascertain that those suppliers will be able to
deliver product in a timely fashion. The Company has received written
confirmation from the majority of its insurers and fuel suppliers that they
are year 2000 compliant.
Aero has also been in contact with the managers of the airports where it
operates FBOs to determine that they will be able to continue to operate and
will be year 2000 compliant. The Company has not yet received written
confirmation.
The Company's main banks and its utility companies have confirmed in writing
of their compliance and or compliance status. At the time of the filing of
this report, the Company has no contingency plan relating to potential year
2000 issues. Aero does not expect to incur any significant expense in
becoming year 2000 compliant, except the expense of converting its computer
system if in fact it determines that it should convert that system to a PC
based system.
PART II - OTHER INFORMATION
AERO SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLAR AMOUNTS IN THOUSANDS)
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AERO SERVICES INTERNATIONAL, INC.
(Registrant)
____________________________________
(Signature)
Paul R. Slack
Chief Accounting Officer
and Controller
_____________________________________
(Signature)
R. Ted Brant
Chairman of the Board
Date: August 17, 1999
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