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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended June 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from _________________ to ____________
Commission file number : 0-10124
AVIATION GROUP, INC.
(Name of Small Business Issuer in Its Charter)
TEXAS 75-2631373
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 NORTH PEARL STREET, SUITE 2170, DALLAS, TEXAS 75201
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(Address of Principal Executive Offices) (Zip Code)
214/922-8100
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
$.01 PAR VALUE COMMON STOCK BOSTON STOCK EXCHANGE
REDEEMABLE COMMON STOCK WARRANTS BOSTON STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
$0.01 PAR VALUE COMMON STOCK
- --------------------------------------------------------------------------------
(Title of Class)
REDEEMABLE COMMON STOCK WARRANTS
- --------------------------------------------------------------------------------
(Title of Class)
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.
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Yes No X
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form 10-KSB [X].
State issuer's revenues for its most recent fiscal year. $9,718,000
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. (See definition of affiliate in Rule 12b-2 of the
Exchange Act.) $16,310,982 at close on September 15, 1997
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
2,947,293 shares of Common Stock were outstanding as of September 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders scheduled to be held on November 13, 1997 are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Aviation Group, Inc., a Texas corporation (the "Company"), is a
provider of services and products to airline companies and other aviation
firms. Although its primary market is the United States, the Company ultimately
aspires to compete in the global marketplace. In addition to growth of its
existing businesses, the Company seeks to grow via the acquisition of other
aviation service businesses that complement and strengthen the Company's
existing operations. On August 19, 1997, the Company closed an initial public
offering of its Common Stock and Redeemable Common Stock Purchase Warrants,
which resulted in net proceeds of $5,283,000.
The Company was organized in December 1995 to consolidate the
ownership of Tri-Star Aircraft Services, Inc. ("TriStar Paint") and Tri-Star
Airline Services, Inc. ("Airline Services") in December 1995, and Pride
Aviation, Inc. ("Pride") in March 1996. On August 13, 1997, the Company
acquired Casper Air Service, a Wyoming corporation ("CAS").
The Company is currently organized into three divisions devoted to the
Company's primary lines of business. These business segments are as follows:
o Painting & Paint Stripping Services: The Overhaul & Service Division,
through TriStar Paint and Pride, provides painting and paint stripping
services for commercial and freight aircraft at their facilities
located in Dallas, Texas and New Iberia, Louisiana. Pride's primary
customer is United Airlines, Inc. TriStar Paint provides paint
services on a plane-by-plane bid basis to a variety of customers. In
September 1997, the Company contracted to provide wide-body aircraft
paint services to Boeing Commercial Aircraft Group ("Boeing") at a
newly-leased facility in Portland, Oregon, beginning November 1997.
o Ground Handling & Services: Through Airline Services, the Ground
Handling & Services Division provides aircraft ground handling and
light catering services to a variety of passenger and freight airlines
at various airports, including DFW International, Los Angeles
International and San Francisco International, for customers such as
United Parcel Service, Southwest Airlines, United Airlines, Federal
Express and Northwest Airlines, among others.
o FBO Operations & Airport Management: In July 1996, the Company began
to operate its FBO Division. The Company's fixed base operations,
located at Redbird Airport in Dallas, Texas and Natrona County
International Airport in Casper, Wyoming, provide fuel and light
maintenance services to general aviation, corporate and light freight
aircraft customers. There are presently over 1,700 operators of fixed
base operating stations ("FBO's") serving the United States. The
Company believes that acquiring or otherwise operating such businesses
in smaller, second-tier airports across the United States provides a
significant opportunity.
The Company believes that airlines will increase the outsourcing of
their maintenance and service requirements to third party vendors in the
future. The Company believes there are approximately 10,000 maintenance and
service vendors worldwide in the aviation industry, and accordingly the
aviation service industry is highly fragmented. The Company also believes that
its existing operations, enhanced by additional growth and acquisitions of
complementary businesses, will enable it to provide quality customer service
with financial, insurance, and other operating economies-of-scale that major
customers increasingly require. The Company does not presently intend to
operate as a commercial airline or as a provider of commercial jet engine or
airframe overhaul services.
INDUSTRY OVERVIEW
The airline industry is currently experiencing revenue growth along
with increased profitability. Several new airlines have commenced operation in
this expanding market. These airlines constitute potential customers for the
Company's services. Aviation activity is expected to increase significantly
over the next ten years. According to the 1997 Boeing Current Market Outlook,
global commercial air travel is expected to increase 75% through the year 2006,
while the number of passenger and cargo aircraft deliveries is expected to
increase by 48%. According to the FAA, U.S. turbine powered general and
business aviation will increase 28% by the year 2006. Production of general
aviation aircraft rose by
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10% in the first half of 1996, after a 16% increase in 1995. The Company
believes that the growth in aviation activity will increase the demand for
maintenance, repair, painting, ground handling and other services provided by
the Company.
Because of the high internal overheads and unionization of airline
labor forces, many airlines have found that it is more cost efficient to engage
independent contractors to perform maintenance, painting and ground handling
services. According to U.S. Department of Transportation statistics, the nine
major U.S. airlines expended 20% of their maintenance budget with outsourcing
vendors in 1994. Management expects the trend toward outsourcing these services
to continue in the airline industry.
The Company additionally believes that the aviation fixed base
operation industry is highly fragmented. There are presently over 1,700
operators of fixed base operating stations ("FBO's") serving the United States.
The Company intends to continue its efforts to acquire additional fixed base
operations entities in the future as market and financial conditions permit.
OVERHAUL & SERVICE DIVISION
The Overhaul & Service Division, which includes Pride and TriStar
Paint, provides painting, paint stripping, and other aircraft coating services
to major passenger and freight airlines. The Company paints few corporate
aircraft and at present has no military aircraft contracts. This division's
operations include aircraft stripping and painting services, light aircraft
maintenance, and corrosion preventive cleaning programs.
The type and quality of paint and other supplies utilized by the
Company is generally dictated to the Company by its customers, subject to FAA
and EPA guidelines. In most cases, the Company's customers arrange for the
sources of paint supplies that it utilizes. The Company believes that there are
available numerous sources for the paint and other supplies utilized by the
Company.
The Company utilizes electrostatic paint equipment in its aircraft
painting activities and is a leader in the development of techniques for high
solids painting and non-methylene chloride stripping. Any research costs
incurred by the Company relating to these new techniques have been borne by the
Company's customers. Pride conducted a high solids paint test program for
Continental Airlines in February 1992 with most major aviation paint
manufacturers participating. Since 1993, most of the Company's painting has
been performed with high solids compliant coatings.
Beginning in late 1993, most stripping performed for major airlines by
the Company was with compliant non-methylene chloride material. Testing of a
non-acid stripper is ongoing for United Airlines for use on its aircraft.
Currently, the Company is capable of providing stripping and painting services
for most narrow-bodied aircraft in its Dallas, Texas facilities, including, but
not limited to, Boeing 727s, Boeing 737s and McDonnell Douglas DC-9s and
MD-80s. The three New Iberia, Louisiana hangar facilities are capable of
housing most aircraft types except Boeing 747s.
Pride. Pride was incorporated in the State of Oklahoma in 1990. The
administrative offices along with its aircraft painting facilities are located
in New Iberia, Louisiana. In September 1990, Pride obtained its first
certificate from the Federal Aviation Administration ("FAA") to operate an
approved repair station at its facilities in New Iberia, Louisiana. Since that
time, the certificate has been expanded to permit Pride to conduct certain FAA
classes of inspections and light maintenance for a variety of jet aircraft.
Pride is also certified to perform structural repairs on certain equipment in a
variety of jet aircraft. Pride's painting facilities located in New Iberia,
Louisiana can house all narrow-bodied jets. Of a total of three hangars, one
hangar has been built to accommodate wide-bodied jets such as the Boeing 767
and McDonnell Douglas DC-10 aircraft.
The Company's primary customer, United Airlines, Inc. ("United"),
accounted for approximately 90% of the Overhaul & Service Division revenues for
the twelve months ended June 30, 1997. In 1994, Pride entered into a five-year
Services Agreement (the "Services Agreement") with United which has been
amended several times and currently will expire in 1999 but is cancelable prior
to that date by United upon 90 days written notice. Under the Services
Agreement, Pride provides paint stripping and painting services for jet
aircraft owned or operated by United. United provides the specifications,
designs, stencils, decals and marks for the painting. The Services Agreement
contains a warranty by Pride to United that its services meet United's
specifications and are free from defects in workmanship. Pride must reimburse
United for costs of repair and certain expenses in connection with this
warranty. Pride must perform its services for United at its New Iberia,
Louisiana facilities. United schedules the jet aircraft to be painted by Pride
each calendar year by
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December 31 of the prior year. In addition to painting, upon request from
United, Pride will repair parts and components identified by Pride as needing
repair.
The Services Agreement contains fixed prices for each type of aircraft
painted by Pride. The prices are adjusted annually based on the Consumer Price
Index. The Services Agreement currently provides that Pride will paint Boeing
727, Boeing 737, Boeing 757, Boeing 767 and McDonnell Douglas DC-10 aircraft. A
total of 588 aircraft are scheduled to be painted under the Services Agreement.
Through June 30, 1997, Pride has completed 257 of the aircraft.
The Company, through Pride, has discussed with United the painting of
United's Boeing 747 commercial aircraft fleet. To date, these negotiations are
incomplete. If it obtains a contract, the Company may construct a new aircraft
hangar at its New Iberia, Louisiana facilities.
The Company, through Pride, was awarded in September 1997 a contract
to paint newly manufactured wide-body aircraft for Boeing Commercial Airplane
Group ("Boeing"). The initial phase of the contract is for seven aircraft,
beginning November 1997 and continuing through January 1998. The Company has
leased a hangar facility in Portland, Oregon in which to perform this work for
Boeing.
TriStar Paint. TriStar Paint's business began in March 1990. The
Company acquired all of the stock in TriStar Paint in December 1995. TriStar
Paint is in the business of providing stripping and painting services for
airlines, aircraft lessors, and aircraft brokers. TriStar Paint's painting
facilities located at Redbird Airport in Dallas, Texas can house most
narrow-bodied jets including, but not limited to, Boeing 727s and 737s and
McDonnell Douglas DC-9s and MD 80s.
TriStar Paint received its initial certificate from the FAA to operate
an approved repair station in February 1995. The certificate was subsequently
expanded to permit TriStar Paint to provide stripping and painting services to
a variety of aircraft and to provide certain FAA classes of inspections and
light maintenance on two types of aircraft.
TriStar Paint provides its painting and other services on a
plane-by-plane basis to its customers, versus Pride's long-term contract
arrangement with United. The Company believes that this arrangement gives it
flexibility to meet customer needs. TriStar Paint has provided stripping and
painting services, on a plane-by-plane bid basis, to Dee Howard Company,
Southwest Airlines, Northwest Airlines, TransWorld Airlines, Emery Air Freight,
Roadway Global Air and Zantop International Airlines. In addition, Dee Howard
Company and Zantop International Airlines provide heavy maintenance services to
airline companies, and TriStar Paint acts as a subcontractor in providing its
services to these customers.
TriStar Paint is also capable and qualified to perform certain
structural cleaning and anticorrosive maintenance programs, which involve
cleaning inside the skin of the aircraft. Years of particle accumulation are
removed and a preventative spray is applied to reduce the amount of future
corrosion and particle accumulation. Such services have historically been
provided on a subcontract basis to airline customers of major maintenance
facilities.
TriStar Paint bids against its competitors in providing painting and
cleaning services to its maintenance and airline customers. In addition to
providing stripping and painting services at its Redbird Airport facilities,
TriStar Paint will send its equipment and personnel to provide onsite services
at the facilities of maintenance companies. These subcontract services have
been provided at airport facilities in San Antonio, Texas, Macon, Georgia and
Alexandria, Louisiana.
GROUND HANDLING & SERVICE DIVISION
Airline Services. Through Airline Services, the Company engages in the
cleaning, handling, and light catering of aircraft in various airports located
within the continental United States. Airline Services' predecessor operations
began in December 1986. It was incorporated in the State of Texas in August
1994. The Company acquired all of the stock of Airline Services in December
1995.
Airline Services provides its customers with a variety of support
services including aircraft interior cleaning, exterior washes, lavatory/water
services and light catering. Airline Services presently operates at the
following airports: Dallas-Fort Worth International, Dallas Love Field, Oakland
International, San Francisco International, Kansas City International, Los
Angeles International Airport, Ft. Lauderdale, Florida and Gulfport-Biloxi
Regional. Airline Services currently provides some or all of these services at
different locations for United Airlines, United Parcel Service, Aviation
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Services International, Inc. on behalf of Allegro Airlines, World Technology
Services, Reno Air, Northwest Airlines, Federal Express and other customers.
Interior cleaning is performed between flights at the airport. This
involves cleaning the inside of the cockpit, cabin and galleys, servicing the
lavatories, fresh water facilities and stocking the aircraft with magazines,
air sickness bags and emergency cards. All pricing for this service is based on
airline specifications. Exterior cleaning involves cleaning the exterior of the
aircraft during nighttime layovers. Typically, an aircraft's exterior will be
cleaned once during a two or three week cycle. Airline Services uses specially
designed equipment and pressure sprayers to clean the exteriors of the
aircraft. Similar to interior cleaning, all pricing for this service is based
on airline specifications. Airline Services presently has light catering
operations in Gulfport, Mississippi. Light catering consists of stocking soft
drinks, peanuts, pretzels, coffee, tea, beer, wine, liquor, cold sandwiches and
serving supplies on the aircraft. Pricing will depend on the type and quantity
of the products supplied.
General. The Company believes that its flexible workforce provides
customers with a quality, price competitive outsourcing service. The Company
obtains its contracts with its customers generally by competitive bid. The
Ground Handling & Service Division actively pursues new customers and
additional work from existing customers at those airports where it already has
a presence. In addition, the Company pursues work opportunities at other
airports, and with other airline customers, as such opportunities arise.
FBO & AIRPORT MANAGEMENT DIVISION
In July 1996, the Company began to operate a third business segment,
its FBO & Airport Management Division. The Company's first fixed-base
operation, located at Redbird Airport in Dallas, Texas, sells fuel and provides
light maintenance services, including for example fluid, tire and control
inspections, to general aviation and corporate aircraft at this location. In
August 1997 the Company acquired CAS, a fifty year old full-service FBO located
in Casper, Wyoming.
The Company believes that this division, which serves corporate and
other general aviation customers, may offset its current dependence on major
airlines for its painting, ground handling, and other services. The Company's
fixed base operation in Dallas, Texas is located at a general service airport
located within a ten minute drive of the Dallas, Texas central business
district. There are over 500 acres of land adjacent to this airport for
aviation, industrial, and distribution development, and the Company believes
that, as such development progresses, its Redbird FBO operation will benefit
from this growth by gaining additional aviation fuel and light service
customers.
CAS is a full service FBO located at Natrona County International
Airport in Casper, Wyoming and has been in business continuously since 1946.
CAS offers aircraft line services, aircraft repair and maintenance, parts
distribution, aircraft charter flights and aircraft sales. CAS has been a
Cessna dealer since 1969. Far fewer new aircraft are being manufactured in the
1990's than in prior decades. Consequently, new aircraft sales in general and
by CAS have been depressed.
The aircraft line services offered by CAS include aircraft refueling,
de-icing, cleaning and heating, and weather information, refreshments, lounge
areas and ground transportation for pilots and passengers. CAS's FAA certified
service department provides maintenance and overhaul services for (i) both
piston and turbo-charged aircraft engines, including Pratt & Whitney,
Gulfstream Aerospace Commander, Bell Helicopter 206 Series, Garrett AiResearch,
Piper and Cessna engines, (ii) propellers, including those made by McCauley,
Hartzell, Dowdy, Sensanich and Kelvan, (iii) accessories, including aircraft
alternators, starters, turbo controllers, waste gates and magnetos, and (iv)
avionics systems. The engine maintenance operation began in 1965, while the
propeller, accessory and avionics overhaul operations were commenced in 1980,
1988 and 1993, respectively.
CAS has offered charter flights since its inception in 1946. After not
having a fatal air crash between 1952 and 1992, CAS had two fatal crashes and
two non-fatal crashes between December 1992 and June 1997 of its charter
aircraft. The National Transportation Safety Board, in its inspections, found
no fault with CAS. The Company has determined to discontinue the charter
operations of CAS following the acquisition. Charter revenues declined from
$2,696,000 in the year ended April 30, 1992 to $983,000 for the year ended
April 30, 1996.
The parts department of CAS sells to customers located outside the
United States and outside the Rocky Mountain region as well as in connection
with its service operations. CAS is the fourth largest wholesaler of Cessna
parts in the United
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States. CAS tracks all orders, parts, inventory and shipments through its
automated inventory management system. Manufacturers of the parts sold by the
Company include Cessna, Gulfstream, Piper and Garrett AiResearch, and these
manufacturers regularly audit CAS's inventory to make sure it has the parts
needed to be designated as a service center for the manufacturer's products.
ACQUISITIONS OF COMPLEMENTARY BUSINESSES
A key element of the Company's strategy involves growth through
acquisitions of other companies, assets or product or service lines that would
complement or expand the Company's existing businesses. There are over 10,000
maintenance and service vendors worldwide in the aviation industry, and the
Company believes that the aviation service industry is highly fragmented. The
Company believes that acquisitions will enable it to leverage its fixed costs
of operations and further expand the products and services that it can offer to
its customers.
The Company is currently evaluating a number of acquisition
opportunities. The Company desires to expand its existing aircraft parts,
ground service and FBO operations by acquiring similar businesses with whom it
currently competes or who provide services at locations not presently served by
the Company. Additionally, the Company has reviewed certain acquisition
opportunities of aviation companies that specialize in the overhaul and service
of replacement and after-market parts. These parts, called "rotable parts," are
removed by airlines and major overhaul companies and subsequently rebuilt and
refurbished in accordance with FAA guidelines for future use. No commitments or
binding agreements have been entered into to date.
ADVERTISING AND MARKETING
To date, the Company has generated most of its revenues from direct
sales and customer referrals. In the future, the Company also intends to
utilize direct mailings, direct sales contacts and trade journal advertisements
as a secondary source of advertising and public relations. In March 1997, the
Company hired a full-time marketing representative who contacts directly the
maintenance and service executives of airlines and other aviation customers to
generate business for the Company. Additionally, the Company has recently begun
to market jointly its ground service capabilities along with the marketing
efforts of certain nonaffiliated equipment and product suppliers. The focus of
the effort is to obtain "turnkey" contracts for a combination of products and
services to be provided to airline customers jointly by the Company and these
product suppliers. Notwithstanding the highly competitive nature of the
industry, management of the Company believes that additional customers may be
obtained by the Company.
CUSTOMERS
TriStar Paint and Pride provide stripping and painting services to
major carriers in the airline industry. Pride's past and current customers
include United Airlines, Continental Airlines, Northwest Airlines and Piedmont
Airlines. TriStar Paint's past and current customers include Express One,
Roadway Global Air, Southwest Airlines and TransWorld Airlines. For the twelve
months ended June 30, 1997, United accounted for approximately 75% of the total
revenues of the Company.
The Company has also performed stripping and painting services and
corrosion preventive cleaning programs as a subcontractor in major heavy
maintenance facilities at several locations in the United States. Customers
include Dee Howard Company in San Antonio, Texas, and Zantop International
Airlines, Inc. in Macon, Georgia.
Airline Services performs ground handling services and light catering
at several airports in the United States. Its primary customers consist of
United Airlines, Emery Air Freight, Sunjet, Northwest Airlines, Allegro
Airlines, Airborne Express, Southwest Airlines, UPS, Federal Express and
Aviation Service International, Inc. For the twelve months ended June 30, 1997,
ground handling services and light catering accounted for approximately 11% of
the total revenues of the Company.
REGULATION
Environmental Regulation. The Resource Conservation and Recovery Act
of 1976, as amended ("RCRA"), is a federal statute providing a comprehensive
program for regulating the generation, treatment, storage and disposal of
hazardous waste. Federal regulations adopted by the United States Environmental
Protection Agency ("EPA") pursuant to RCRA govern waste handling activities
involving substances that are either listed as hazardous or have certain
specified
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hazardous characteristics (e.g., corrosive, ignitable). Under RCRA, liability
and stringent operating requirements are imposed on businesses that generate
hazardous waste.
Federal and state environmental laws include statutes intended to
allocate the cost of remedying past contamination among specifically identified
parties. The Comprehensive Environmental Response, Compensation and Liability
Act as amended ("CERCLA" or "Superfund"), 42 U.S.C. 9601 et. seq., imposes
strict and joint and several liability upon owners or operators of facilities
at, from, or to which a release of hazardous substances has occurred, upon
parties who generated hazardous substances that were released at such
facilities, and upon parties who arranged for the transportation or disposal of
hazardous substances to applicable facilities.
The day-to-day operations of the Company are also subject to
regulation under the Clean Air Act, as amended ("CAA"). In particular, the EPA
and state agencies have promulgated, or are required to promulgate, regulations
which affect or will affect the operations of the Company. These regulations
include New Source Performance Standards ("NSPS") and National Emission
Standards for Hazardous Air Pollutants ("NESHAPs"). NSPS and NESHAP rules may
require additional controls on emissions of certain listed hazardous air
pollutants ("HAPs"). The CAA identifies chemicals that the Company uses and/or
processes, such as methylene chloride, phenol and methyl ethyl ketone, as HAPs
for purposes of regulation. The CAA may also require the Company to maintain
operating permits for its facilities' air emissions. The EPA has announced
plans to impose more stringent standards for ozone and particulate matter.
Regulations promulgated to achieve these standards may require additional
controls on emissions of particulate matter and volatile organic compounds.
The Company must comply with RCRA, CERCLA, CAA and other federal,
state and local environmental protection laws, and the regulations promulgated
thereunder, in its operations and facilities. These laws and regulations are
particularly applicable to the paints and paint stripping chemicals and
solvents used by the Company in its operations. The Company could be held
liable as a current or former operator for releases of hazardous substances at
its facilities. The Company could also incur liability for cleanup costs at
off-site facilities to which the Company shipped hazardous substances for
treatment, handling, storage, or disposal. Management of the Company believes
that the Company's operations and facilities are in material compliance with
all federal, state and local environmental laws and regulations and that the
Company's hazardous waste management practices minimize the potential for
release of hazardous substances into the environment. The Company has not
experienced any significant environmental regulatory problems in the past, and
to date, the Company has not been subject to any significant fines, penalties
or other liabilities under these laws and regulations. However, no assurance
can be given that such laws, regulations or interpretations thereof will not
necessitate significant expenditures by the Company or otherwise have a
material adverse impact on the Company's operations or financial condition in
the future.
Aviation Regulation. The FAA regulates all aspects of the airline and
aircraft industries. The Company's subsidiaries have certifications from the
FAA to operate aircraft repair stations. Such certifications are limited as to
the kinds of repair and maintenance activities that may be performed by the
Company's subsidiaries at their certified facilities. The FAA regularly
inspects these facilities for compliance with FAA regulations and guidelines.
Failure to comply with FAA regulations and guidelines could result in a loss of
certification. A loss of certification for a particular facility would prevent
that facility from performing any aircraft repair or maintenance operations.
The Company believes that its subsidiaries are in compliance in all material
respects with the FAA's regulations and guidelines. Nevertheless, no assurance
can be given that such regulations and guidelines or any FAA enforcement
actions may not have a material adverse effect on the Company's operations and
financial condition in the future.
COMPETITION
The airlines services industry is highly competitive. Each of the
Company's subsidiaries is in direct competition with other companies. Although
Leading Edge Corporation of Greenville, South Carolina is the Company's primary
competitor as a standalone aircraft paint contractor, many of the major airline
companies paint their own aircraft. In addition, although TriStar Paint also
serves as a subcontractor to several heavy maintenance facilities for aircraft,
many heavy maintenance facilities perform aircraft stripping and painting
services as an adjunct to their maintenance operations and, consequently,
directly compete with the Company. The owners of these heavy maintenance
facilities include Dee Howard Company, Pemco, Tramco, Inc. and Raytheon. The
Company's Ground Handling & Service Division has several competitors at each
major airport at which Airline Services provides services. There are many other
companies that provide similar services at numerous locations to airlines and
compete directly with the Company. Some of the Company's larger competitors
include AMR Services, a division of AMR Corp., Pedus, Intex and World Aviation
Services. These competitors
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provide interior and exterior aircraft cleaning services and light catering
services similar to those provided by the Company.
The Company's FBO & Airport Management Division currently has no
competitors at Redbird Airport in Dallas, Texas for the FBO services that it
provides. Although the Company has only one smaller competitor in the sale of
fuel and no competition in any of its other services at Natrona County
International Airport in Casper, Wyoming, it competes with many firms in the
repair, maintenance and sale of aircraft and distribution of parts. Competition
in the parts distribution market is generally based on price, availability of
product and quality, including traceability. The FBO industry has experienced
significant consolidation and elimination of FBO operations over the last 20
years. The Company has a number of large, well-capitalized competitors who own
or operate multiple FBO locations, including AMR Combs, Signature Flight
Support and Raytheon. The major competitors of CAS in the sale of parts include
Aviall, Inc., Aviation Service Corporation, Cooper Aviation Industries, Inc.
and many of the parts manufacturers themselves. In its propeller, accessory,
avionics and engine maintenance and overhaul business, CAS has significant
competitors, including AeroPropeller in Denver, Colorado and Weststar Aircraft
in Grand Junction, Colorado. CAS believes that the primary competitive factors
in this marketplace are price, quality, engineering and customer service. CAS's
remote location in Casper, Wyoming in some cases constitutes a competitive
disadvantage.
EMPLOYEES
Pride generally employs between 160 and 200 employees. At August 31,
1997, Airline Services and TriStar Paint have an aggregate of approximately 120
employees, of which seven are employed in the Dallas Redbird FBO Operations &
Airport Management Division. CAS had a total of 43 employees as of August 31,
1997. Management believes its employee relations to be good. No employees are
covered by collective bargaining agreements. The Company anticipates that it
will hire additional employees in the next 12 months as revenues permit and as
its operations expand.
TRAINING
The Company provides formal classroom training to its employees with
respect to the safe handling of hazardous substances, occupational safety and
health, aircraft maintenance procedures and other safety and operational
procedures that are fundamental to its operations. On-the-job training is also
emphasized to ensure that classroom knowledge is transformed to operational
skills. Much of the Company's training program is mandated by the FAA and OSHA.
INSURANCE
The Company carries $200,000,000 of insurance for general aviation
liability and $200,000,000 of hangarkeeper insurance, as required by its
customers, and customary coverage for other business insurance. While the
Company believes its insurance is adequate, there can be no assurance that such
coverage will fully protect it against all losses which it might sustain.
Moreover, the Company's insurance for aircraft liability carries a deductible
requiring the Company to pay $20,000 of any loss or damage. The Company is the
beneficiary of a $1,000,000 key man life insurance policy on each of Messrs.
Sanders, Lubomirski and Ramsaroop.
RISK FACTORS
Dependence on One Customer
Pride's contract with United Airlines, Inc. ("United") to provide
aircraft stripping and painting services accounted for approximately 75% of the
Company's revenues for the twelve months ended June 30, 1997. On a pro forma
basis including CAS, the contract with United would have accounted for 41% of
the Company's revenues for the year ended June 30, 1997. The contract with
United expires in 1999, but is cancelable prior to that date by United upon 90
days prior written notice. The Company is negotiating with United to extend the
contract for an additional five years, but there can be no assurance that such
extension can be obtained on reasonable terms. During the high travel seasons
of the summer months and the Thanksgiving and Christmas holiday seasons, United
curtails its aircraft deliveries to Pride. Although Pride reduces its overhead
to some extent during these periods, it experiences losses during these
periods. If United expands these curtailments, the Company's results of
operations may be materially adversely affected. Although Pride is attempting
to locate additional customers for these slack periods, there can be no
assurance that Pride will be able to obtain these customers. While the
Company's business strategy calls for it to broaden its customer base so that
it can become less dependent on United, any termination of the contract or
material curtailment of plane deliveries by United, including reductions as a
result of economic or competitive pressures on United, would adversely affect
the Company's business, financial conditions and results of operation. There
can be no assurance that United will continue to use Pride's stripping
9
<PAGE> 10
and painting services.
General Customer Risks Related to the Airline Industry
The airline industry is significantly affected by general economic
conditions. Because a substantial portion of business and personal airline
travel is discretionary, the industry tends to experience adverse financial
results during general economic downturns. Economic and competitive conditions
since deregulation of the airline industry in 1978 have contributed to a number
of bankruptcies and liquidations among airlines. A worsening of current
economic conditions, or an extended period of recession nationally or
regionally, could have a material adverse effect on the Company's operations.
The Company will not have any control over these general economic conditions.
Seasonality
The Company's painting business is seasonal, which can adversely
affect the Company's results of operations from quarter to quarter. Typically,
customers will have fewer aircraft painted during the summer months and the
holiday season from approximately November 15 through January 1 of each year.
Risk of Future Losses from Operations
Although the Company earned net income of $34,000 for the nine months
ended June 30, 1996, the Company experienced a net loss of $476,000 for the
twelve months ended June 30, 1997, not including the operations of CAS, which
earned a profit of $262,000 for the twelve months ended June 30, 1997. This
loss was primarily due to increases in goodwill amortization from the Pride
acquisition, start up costs in the Company's FBO division, increased corporate
overhead incurred to support anticipated future growth and increased interest
expense on additional borrowing. There can be no assurance that the Company
will be profitable or that the Company's businesses will be successful in the
future.
No Assurance of Successful Acquisitions; Unspecified Acquisitions
The Company intends to consider acquisitions of other companies that
could complement the Company's existing business, including acquisitions of
complementary service and product lines. The Company intends to employ
significant amounts of the net proceeds of its recent initial public offering
for acquisitions that have not yet been identified. There can be no assurance
that suitable acquisition candidates can be identified, or that, if identified,
adequate and acceptable financing sources will be available to the Company that
would enable it to consummate these transactions. The Company is currently
evaluating a number of acquisition opportunities. No commitments or binding
agreements have been entered into to date and accordingly no assurance can be
given that any of the acquisitions currently being considered will be
consummated. There can be no assurance that the Company will be able to
integrate successfully any acquired companies or service or product lines into
its existing operations, which could increase the Company's operating expenses
in the short-term and materially and adversely affect the Company's results of
operations. Moreover, any acquisition by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of
which could adversely affect the Company's profitability. Acquisitions involve
numerous risks, such as the diversion of the attention of the Company's
management from other business concerns, the entrance of the Company into
markets in which it has had no or only limited experience, and the potential
loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Risks of CAS's Business
CAS's business exposes it to possible claims for personal injury,
death or property damage which may result from the failure or malfunction of
propellers, avionics systems, accessories and engines serviced by CAS, aircraft
chartered by CAS or aircraft parts sold by CAS. CAS currently has in force
aviation products, premises and hangarkeepers insurance which the Company
believes provides coverage in amounts and on terms that are generally
consistent with industry practice. During the last five years, CAS has not
experienced any material product liability claims related to its products.
CAS's inventory consists principally of new and remanufactured
aircraft parts held for sale to domestic and international customers. Before
any part may be installed in an aircraft, the part must meet certain standards
of condition established by the FAA or the equivalent regulatory agencies in
other countries. Parts must also be traceable to sources deemed acceptable by
such agencies. While the Company believes that all such regulations have been
met in the past, parts owned or acquired by CAS may not meet standards as they
change in the future, causing parts in CAS's inventory to be scrapped or
modified. Aircraft manufacturers may also develop new parts to be used in lieu
of parts already contained in CAS's inventory. As a consequence of these
factors, parts in CAS's inventory may fall in value.
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<PAGE> 11
Dependence on Ability to Manage Growth
The Company's ability to produce and market its services competitively
to the airline industry depends on its ability to implement and continually
expand its operational and financial systems, recruit sufficient qualified
employees and train, manage and motivate both current and new employees.
Failure to effectively manage the growth of the Company would have a material
adverse effect on the business of the Company.
Additional Financing or Offerings
There can be no assurance that the proceeds from the Company's IPO and
cash flow from operations will be sufficient to enable the Company to implement
fully its business strategies. As a result, the Company may need to raise
additional funds through equity or debt financings. No assurance can be given
that such additional financings will be available on terms acceptable to the
Company, if at all. Further, any such financings may result in further dilution
to the Company's stock and higher interest expense and may not be on terms that
are favorable to the Company. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence on Key Personnel
The Company's future success depends, in large part, on the efforts
and abilities of its management team, including Lee Sanders, Paul Lubomirski
and Tony Ramsaroop. The loss of the services of any of these managers could
have a material adverse affect on the business of the Company. The Company has
employment agreements with Messrs. Sanders, Lubomirski and Ramsaroop. The
successful implementation of the Company's business strategies depends on the
hiring and retention of additional management and other personnel. There can be
no assurance that the Company will be able to identify and attract additional
qualified management and other personnel when needed or that the Company will
be successful in retaining such additional management and personnel if added.
Moreover, there can be no assurance that the additional costs associated with
the hiring of additional personnel will not adversely affect the Company's
results of operations. The Company is the beneficiary of a $1,000,000 key man
life insurance policy on each of Messrs. Sanders, Lubomirski, and Ramsaroop.
Employee Costs
Although the Company believes that it will operate with lower
personnel costs than many established airline service providers, principally
due to lower base salaries and greater flexibility in the utilization of
personnel, there can be no assurance that the Company will continue to realize
these advantages for any extended period of time. None of the Company's
employees are represented by a labor union. If unionization of the Company's
employees occurs, the Company's costs could materially increase.
Control by Existing Shareholders and Certain Transactions
The directors, officers, and principal shareholders of the Company
beneficially own a substantial portion of the Company's outstanding Common
Stock. As a result, these persons will have a significant influence on the
affairs and management of the Company, as well as on all matters requiring
shareholder approval, including electing and removing members of the Company's
Board of Directors, causing the Company to engage in transactions with
affiliated entities, causing or restricting the sale or merger of the Company,
and changing the Company's dividend policy. Such concentration of ownership and
control could have the effect of delaying, deferring, or preventing a change in
control of the Company, even when such a change of control would be in the best
interest of the Company's other shareholders.
The Company currently has an employment agreement with Lee Sanders,
the Company's President and Chief Executive Officer, and consulting
arrangements with two of its directors, Richard Morgan and Charles Weed. These
arrangements with the directors were entered into through arms-length
negotiations prior to their appointment as directors. The employment agreement
with Mr. Sanders was not negotiated on an arms-length basis but was entered
into by the Company when he was the sole beneficial owner of the Company. The
Company believes that the terms of each of the foregoing agreements are no less
favorable to the Company than those available from unaffiliated third parties.
Although any future amendments to these employment or consulting arrangements
may involve conflicts of interest, the Company intends to minimize them through
requiring the approval of the disinterested directors for any amendment.
Competition
The airline services industry is highly competitive. Each of the
Company's subsidiaries is in direct competition with other companies. Although
Tri-Star Paint also serves as a subcontractor to several heavy maintenance
facilities for aircraft, most of these heavy maintenance facilities perform
aircraft stripping and painting services as an adjunct to their maintenance
operations and, consequently, directly compete with the Company. In ground
handling and light catering services, the Company has numerous competitors. At
each major airport at which Airline Services provides such services,
11
<PAGE> 12
there are numerous other companies providing similar services to other airlines
and competing directly with the Company. Because many of the Company's
competitors have greater resources than the Company, no guarantee or assurance
can be given that the Company will be able to compete successfully in providing
its services at a competitive but profitable price.
Environmental Regulation; Hazardous Materials
The Company's operations are subject to a substantial amount of
government regulation. In particular, the Environmental Protection Agency
("EPA") and state and local regulatory authorities regulate, among other
things, emissions to air, discharges to water and the generation, use, storage,
transportation, treatment and disposal of the substances employed by the
Company in its aircraft stripping and painting operations. The Company's
facilities may require operating permits that are subject to revocation,
modification and renewal, violations of which may provide for substantial fines
and civil or criminal sanctions. The operation of any facility that handles
chemical substances entails risk of adverse environmental impact, including
exposure to such substances, and there can be no assurance that material costs
or liabilities will not be incurred to rectify any such damage. In addition,
potentially significant expenditures could be required in order to comply with
environmental, health and safety laws and regulations that may be adopted or
imposed in the future. See "Business--Regulation."
FAA Regulations
The Federal Aviation Administration (the "FAA") regulates most of the
Company's business operations. The Company's stripping and painting business is
dependent upon continued compliance with the requirements of the FAA and
maintenance of the FAA's certifications of the Company's subsidiaries. These
certifications allow the Company's subsidiaries to perform their aircraft
stripping and painting services as well as other repair and maintenance
services at their facilities. CAS's operation, including charter aircraft,
parts sales and repair and maintenance operations, are subject to regulation by
the FAA and requires FAA's certificates. Loss of any necessary FAA
certifications could have a material adverse effect on the Company's operations
and financial condition. See "Business--Regulation."
Possible Volatility of Stock Price
There can be no assurance that the market price of the Common Stock
will not decline. The securities of many emerging companies have experienced
significant price and volume fluctuations that are, at times, unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations may be the result of changes in conditions affecting the economy
in general, analysts' reports, general trends in the industry, and other events
or factors beyond the Company's control. These conditions may have a material
adverse effect on the market price of the Common Stock.
Effect of Preferred Stock on Rights of Common Stock
The Company's Articles of Incorporation authorize the Board of
Directors of the Company to issue "blank check" Preferred Stock, the relative
rights, powers, preferences, limitations, and restrictions of which may be
fixed or altered from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting, or other rights
that could adversely affect the voting power and other rights of the holders of
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying, or preventing a change in
control of the Company that shareholders might consider to be in the Company's
best interests. Although the Company has no present intention of issuing any
shares of Preferred Stock, there can be no assurance that the Company will not
do so in the future.
No Dividends
Since its capitalization, the Company has paid no dividends on its
Common Stock. The Company does not presently intend to pay any dividends on its
Common Stock. Dividend payments in the future may only be made out of legally
available funds, and, if the Company experiences substantial losses, such funds
may not be available.
Listing and Maintenance Criteria for Securities; Penny Stock Rules
The Company's Common Stock and Warrants are presently listed on the
Nasdaq Stock Market's SmallCap Market ("Nasdaq") and the Boston Stock Exchange
(the "BSE"). If the Common Stock or the Warrants fail to maintain such
listings, the market value of the Common Stock and Warrant likely would decline
and holders likely would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock and Warrants.
Forward-Looking Statements and Associated Risks
This report contains forward-looking statements including statements
regarding, among other items, the Company's
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<PAGE> 13
business strategies, continued growth in the Company's markets, and anticipated
trends in the Company's business and the industry in which it operates. The
words "believe," "expect," "anticipate," "intends," "forecast," "project," and
similar expressions identify forward-looking statements. Such forward-looking
statements are based upon the Company's expectations and are subject to a
number of risks and uncertainties, many of which are beyond the Company's
control. Actual results could differ materially from such forward-looking
statements, as a result of the factors described under this "Risk Factors"
section and elsewhere herein, including among others, regulatory or economic
influences. In light of these risks and uncertainties, there can be no
assurance that any forward-looking information contained in this report will in
fact transpire or prove to be accurate. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
ITEM 2. DESCRIPTION OF PROPERTY
Dallas Facilities. TriStar Paint leases an aircraft maintenance hangar
at Redbird Airport in Dallas, Texas at an annual rental rate of $42,000. This
single bay, narrow body hangar measures 160 feet by 140 feet and allows a tail
clearance of 38 feet. It has additional office space.
The Company's Redbird FBO facility consists of approximately 4,000
square feet of space for pilots and other customers and adjacent ramp space for
the temporary parking and fueling of aircraft by Company personnel.
The facility is presently under lease for $32,000 per year until 2006.
The Redbird Airport has two runways, one approximately 6,450 feet by
150 feet and the other 3,800 feet by 150 feet. The long runway is load rated
for narrow body, military and commercial aircraft. Normal hours of operation
are 8:00 a.m. to 7:00 p.m., seven days a week.
New Iberia Facilities. Pride leases from the Iberia Parish Airport
Authority (the "Authority") four aircraft hangars and office space at Acadiana
Regional Airport in New Iberia, Louisiana. The Acadiana Regional Airport has a
200 foot by 8002 foot runway, load rated for all military and commercial
aircraft. Normal hours of operation for the tower are from 7:00 a.m. to 9:00
p.m., seven days a week, with call out service available from 9:00 p.m. to 7:00
a.m.
Pride leases aircraft maintenance Hangar 88 together with adjoining
corporate offices for an annual rental of $110,000. The initial term of this
lease expires on August 1, 2000. These facilities were constructed prior to
1960. This lease also covers a 3.369 acre automobile parking area. Hangar 88 is
160 feet wide by 185 feet deep with 40 foot hangar doors on both the east and
west side. A taxiway leading to both sides of the hangar allows this building
to house two narrow body aircraft at one time.
On land adjacent to the Hangar 88 complex, construction of a new
aircraft maintenance Hangar 88-C was completed in 1995 using $2,900,000 of bond
funds provided by the State of Louisiana. It is 185 feet wide by 223 feet deep,
with 40 foot hangar doors and a tail door which is an additional 20 feet in
height, and is capable of housing wide-bodied McDonnell Douglas DC-10 aircraft.
Hangar 88-C is leased by Pride for an initial term expiring October 1, 2023 at
an annual rental of $158,000. The Hangar 88 and 88-C complex constitute Pride's
major facilities at the Acadiana Regional Airport.
Pride also leases a smaller aircraft maintenance hangar for an annual
rental of $60,000. The initial term of the lease expires on February 1, 2001.
This hangar is used by Pride to paint Boeing 737 aircraft, which may be
completely enclosed within the hangar while being painted.
Finally, Pride leases another small aircraft maintenance hangar for
annual rental of $19,000. The initial term of this lease expires on February 1,
2003. Pride uses this hangar for painting of commuter airplanes and other small
aircraft.
Each of the four leases allows the Authority and Pride to agree to
extensions and requires rental escalations of 10% every five years. The leases
also require Pride to pay fuel fees of 16% of Pride's cost for aircraft fuel
and lubricating oils. Pride is usually able to charge these fuel fees to its
customers.
Pride has commenced discussions with the Authority for purposes of
obtaining funds from the State of Louisiana to build a larger hangar for the
housing and maintenance of Boeing 747 aircraft. The Iberia Parish is interested
in expanding
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<PAGE> 14
the current facilities at the airport to create additional employment in the
Parish. There are numerous site locations available on the airport grounds for
future expansion. The State of Louisiana has appropriated $4.2 million to pay
part of the cost of construction of a hangar at Acadiana Regional Airport if
Company management elects to proceed with this project. The estimated total
cost of the hangar is $8,500,000. The Company does not presently intend to
pursue this project unless it obtains a contract from United to paint United's
747 aircraft fleet.
Portland Facilities. The Company leases two hangars and office space
at the Airtrans Center at Portland International Airport. Portland
International Airport has a 11,011 foot by 150 foot runway load rated for all
commercial and military aircraft.
The paint hangar consists of a 112,000 square foot maintenance hanger
and a two story 65,000 square foot shop and office area. The hangar is 320 feet
by 350 feet with 50.5 foot hangar doors, with an additional tail door 19 feet
high. The lease expires January 31, 1998 and calls for payment of 25% of gross
revenues of any painting activities occurring therein.
Dallas Office Space. The Company also occupies 5,900 square feet of
office space at 700 North Pearl Street, Suite 2170, Dallas, Texas, pursuant to
a sublease that expires November 1998. The Company pays a monthly rental of
$4,400.
Casper Facilities. In connection with the acquisition of CAS in August
1997, the Company acquired certain real property and leases related to the
operations of CAS. The Company leases from the Natrona County International
Airport Authority the land underlying its main hangar and office building and
three groups of hangars for the storage of aircraft.
The lease of the land underlying CAS's main hangar and office building
expires December 31, 2004 and requires a monthly rental of $215 per month. This
lease also requires that the building and improvements on the leased property
vest to the Natrona County International Airport Authority at the expiration of
the lease term.
The Company also leases land underlying the three storage hangars.
These leases require a monthly payment totaling the greater of $479 per month
or 7% of the sublease rentals received. These leases expire from January 31,
2002 to August 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceeding
other than ordinary routine litigation considered to be incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 19, 1997, the Company closed an initial public offering (the
"IPO") of its $.01 par value Common Stock (symbol: AVGP) and Redeemable Common
Stock Purchase Warrants (symbol: AVGPW). The Company sold, through Duke & Co.,
the underwriter, 1,150,000 shares of Common Stock, and 1,150,000 Common Stock
Purchase Warrants. These securities have been listed with and trade on the
Nasdaq SmallCap Market and the Boston Stock Exchange since completion of the
IPO. There was no public trading market for the Company's securities prior to
that time.
As of September 15, 1997, there were 70 holders of record of the
Company's Common Stock.
During the last two fiscal years, the Company has not paid any Common
Stock dividends. The Company does not anticipate payment of any dividends on
its Common Stock in the near future because the Company intends to retain
earnings to fund growth of its operations.
Since July 1, 1996, the Company has sold the following unregistered
securities:
o In February 1997, the Company completed a private offering of
$500,000 in aggregate principal amount of its 10% Bridge Notes.
The total offering price was $500,000. The placement agents, RAS
Securities Corp. and First London Securities Corporation,
received total sales commissions of $50,000. Because the Company
successfully completed the IPO by September 30, 1997, the terms
of the Bridge Notes required the Company to repay in full the
Bridge Notes within five days after the funding of the IPO and
to issue, as additional compensation to the holders of the
Bridge Notes, that number of shares of Common Stock which equals
$250,000 divided by the initial public offering price per share
for the Common Stock. Accordingly, the Company issued 43,478
shares of Common Stock to the holders of the Bridge Notes in
connection with the full payment of the Bridge Notes. The Bridge
Notes were sold by the Company in reliance upon the exemption
from registration provided by Rules 505 and 506 of Regulation D
promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). The shares of Common Stock were issued to the
holders of the Bridge Notes in reliance on the exemption from
registration provided by Section 3(a)(9) of the Securities Act.
o Effective April 18, 1997, the Company entered into an agreement
to acquire all of the outstanding stock of Casper Air Service, a
Wyoming corporation ("CAS"). The Company consummated this
transaction concurrently with the closing of its IPO, at which
time the Company issued to two of CAS's shareholders 153,565
shares of Common Stock. The sale by the Company of its shares of
Common Stock to the two shareholders of CAS was made in reliance
on the exemption from registration under the Securities Act
provided by Section 4(2) thereof. The recipients receiving
Common Stock received adequate written disclosures regarding the
Company and were represented by legal counsel as part of an arms
length, negotiated acquisition. The recipients were an
individual and a trust, for whom the same individual served as
trustee. The individual is sophisticated and knowledgeable in
investment and business matters in general.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company, through its three operating divisions, offers a broad
range of services to the aviation industry. The Company ultimately plans to
capture a larger market share of the services being outsourced by the airline
and corporate aircraft industry, including but not limited to, painting airline
and corporate aircraft, corrosion cleaning, ground handling services, light
catering, fueling, airport security and passenger service.
The Company plans to grow through mergers, acquisitions and internal growth.
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<PAGE> 16
On March 1, 1996, in connection with the Company's acquisition of
Pride, the Company paid $486,000 in cash and issued $857,000 in 10% five-year
Convertible Notes and 44,250 shares of Common Stock. Because the transaction
was accounted for as a purchase, the results of operations of Pride are
included in the accompanying financial statements beginning on the March 1,
1996 acquisition date. In August 1997, the Company acquired CAS, a fifty-year
old fixed base operation located in Casper, Wyoming.
SEASONALITY AND VARIABILITY OF RESULTS
The Company's Overhaul and Service Division experiences significant
seasonality and quarter-to-quarter variability in its stripping and painting
operations. The annual operating cycle generally reflects escalating strip and
paint revenues in the Company's third and fourth fiscal quarters and slower
sales in the Company's first and second fiscal quarters. The Company's painting
revenues are adversely affected during the airlines' peak traffic seasons of
the summer months and the November and December holidays. Currently, a
significant percentage of the Company's revenue is generated by the Overhaul
and Service Division. Management, therefore, is required to plan cash flow
accordingly.
RESULTS OF OPERATIONS
The following table sets forth a summary of changes in the major
categories, presented by division, of revenues, costs of goods sold and
operating expenses from each of the previous period's results. These historical
results are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, 1997 June 30, 1996
------------ ------------
<S> <C> <C>
OVERHAUL & SERVICE DIVISION(1):
Net revenues $ 8,096,000 $ 3,395,000
Cost of revenue (6,289,000) (2,479,000)
Operating and other expenses, net(4) (1,549,000) (622,000)
Interest income 2,000 2,000
Interest expense (62,000) (39,000)
------------ -----------
Pre-tax income $ 198,000 $ 257,000
============ ===========
GROUND HANDLING & SERVICES DIVISION(2):
Net revenues $ 1,070,000 $ 486,000
Cost of revenue (609,000) (359,000)
Operating and other expenses, net (310,000) (141,000)
Interest income -- --
Interest expense (3,000) (1,000)
------------ -----------
Pre-tax income (loss) $ 148,000 $ (15,000)
============ ===========
FBO OPERATIONS & AIRPORT MANAGEMENT(3):
Net revenues $ 552,000 See (3) below
Cost of revenue (512,000)
Operating and other expenses, net (120,000)
Interest income --
Interest expense --
-----------
Pre-tax income (loss) $ (80,000)
============
</TABLE>
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<PAGE> 17
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, 1997 June 30, 1996
------------ -----------
<S> <C> <C>
AVIATION GROUP - CORPORATE OVERHEAD(5):
Operating and other expenses, net $ (482,000) $ (143,000)
Interest expense (312,000) (31,000)
----------- -----------
Pre-tax income (loss) $ (794,000) $ (174,000)
=========== ===========
TOTAL COMPANY:
Net revenues $ 9,718,000 $ 3,881,000
Cost of revenue (7,410,000) (2,838,000)
Operating and other expenses, net (2,461,000) (906,000)
Interest income 2,000 2,000
Interest expense (377,000) (71,000)
----------- ------------
Pre-tax income (loss) $ (528,000) $ 68,000
=========== ============
</TABLE>
=============================================
(1) Overhaul & Service Division includes the operating results of
Tri-Star Paint and Pride for the year ended June 30, 1997 and the nine
months ended June 30, 1996. (Pride was acquired March 1996)
(2) Ground Handling & Services Division represent the operating results
for all periods summarized of Airline Services, the Company's sole
existing subsidiary in this division.
(3) The Company's FBO Operations & Airport Management division was started
and began operations in July 1996. Accordingly, operating results for
this division are included herein for the year ended June 30, 1997
only. The results do not include the operations of CAS, which was
purchased in August 1997.
(4) Includes goodwill and other related amortization expenses associated
with the acquisition of Pride of $278,000 and $85,000 for the year
ended June 30, 1997 and the nine months ended June 30, 1996,
respectively.
(5) Includes operating expenses of the executive officers of the Company
and other indirect expenses not directly attributable to the
operations of the divisions.
Overhaul & Service Division
Net revenues consist primarily of gross revenues from stripping and
painting and other aircraft coating services to major passenger and freight
airlines and corporate aircraft. The Company also contracts with various heavy
maintenance bases throughout the United States to provide corrosion prevention
programs and light maintenance for aircraft undergoing heavy maintenance work
at these bases. Costs of revenues consist largely of direct and indirect labor,
direct material and supplies, insurance and other indirect costs applicable to
the completion of each contract. Operating expenses consist of all general and
administrative and operating costs not included in costs of sales, including
but not limited to facilities rent, indirect labor and other overhaul costs.
This division of the Company has two locations, one at Acadiana
Regional Airport in New Iberia, Louisiana (Pride) and a second facility at
Redbird Airport in Dallas, Texas (TriStar Paint).
Ground Handling & Service Division
Net revenues consist primarily of gross revenues from a variety of
support services including aircraft interior cleaning, exterior washes,
lavatory and water services and light catering. Costs of revenues consist
largely of direct and indirect labor, direct material and supplies, and other
indirect costs. Operating expenses consist of all general and administrative
and operating costs not included in costs of sales.
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<PAGE> 18
Airline Services has had operations at Dallas-Fort Worth International
Airport since 1990, Dallas Love Field airport since 1986, San Francisco
International Airport since 1995 and Gulfport Biloxi Regional Airport since
1994. Additionally, the Company has recently executed new ground service
contracts with customers under which it has established operations in the Los
Angeles International Airport, Oakland Airport, and Kansas City Airport.
FBO Operations & Airport Management
The Company commenced its FBO operations in July 1996, upon the
commencement of business at its initial FBO site located at Redbird Airport in
Dallas, Texas. This division generates revenues from the sale of aviation fuel
and other services provided to general aviation customers located at the
Redbird Airport facility. Costs associated with this activity include primarily
fuel, facility rent, and direct labor. The Company initiated these operations
at its existing Dallas location with the intent to profitably operate the
business, but also to allow it to assemble its financial and managerial
resources to begin its acquisition activities in this division. In August 1997,
the Company acquired CAS, which operates an FBO in Casper, Wyoming. The
financial statements of the Company as of and for the year ended June 30, 1997
do not include any of the operations of CAS.
Aviation Group - Corporate Overhead
Operating expenses consist of all general and administrative and
operating costs to provide management to the Company's divisions, to support
expected growth, and to seek acquisition targets, not directly attributable to
the divisions' operations.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTH FISCAL YEAR ENDED
JUNE 30, 1996
The Company changed its fiscal year end from September 30 to June 30
during 1996.
The Company's net revenue increased by $5,837,000, or 150%, for the
year ended June 30, 1997 compared to the nine months ended June 30, 1996. This
increase in revenue resulted primarily from paint activities, which contributed
net revenue totaling $8,096,000 for 1997 compared to $3,395,000 for 1996.
Revenues from Ground Handling for the year ending June 30, 1997
increased 120% to $1,070,000 from $486,000 for the nine month period ending
June 30, 1996. Gross margins increased during the period to 43% in fiscal 1997
from 27% in fiscal 1996.
The Company's costs of revenues increased by $4,572,000, to $7,410,000
for the year ended June 30, 1997 from $2,838,000 for the nine months ended June
30, 1996. This increase in costs of revenues resulted primarily from the
acquisition of Pride. Cost of revenues also increased as a percentage, relative
to net revenue, to 76%, for the fiscal year ended June 30, 1997 from 73% for
the nine months ended June 30, 1996.
The Company's operating expenses increased by $1,574,000 to $2,480,000
for the year ended June 30, 1997 from $906,000 for the nine months ended June
30, 1996. This increase in operating expenses resulted primarily from the
acquisition of Pride, startup FBO expenses of $104,000 and corporate overhead
increases of $339,000. Corporate overhead for the nine month period ended June
30, 1996 includes only four months of expense.
The Company's interest expense has increased primarily from debt
related to the Pride transaction and $186,000 in non-cash interest from the
Bridge Notes in 1997.
FINANCIAL CONDITION AND LIQUIDITY
Prior to January 1996, the Company financed its operations and capital
expenditures from a combination of cash generated from operations, bank loans,
leases and invested capital from the sole shareholder. In January 1996, the
Company commenced a private placement, generating net proceeds of approximately
$1.2 million, to acquire the stock of Pride and for general working capital
purposes.
18
<PAGE> 19
Exclusive of the Pride acquisition, the Company made capital
expenditures during the year ended June 30, 1997 and nine months ended June 30,
1996 of $414,000 and $12,000, respectively. The majority of capital
expenditures incurred during the aforementioned periods relate to equipment
purchases to enhance the existing operating facilities and computerized
systems.
As part of its growth strategy, the Company intends to pursue
acquisitions of related aviation businesses. Management believes financing for
such acquisitions will be provided from operations, bank financing and through
additional security offerings.
In February 1997, the Company completed a private offering of $500,000
of its 10% Bridge Notes. The proceeds of this offering were used to fund the
costs of the Company's initial public offering, and for general working capital
and operating purposes. Upon the successful completion of the IPO in August
1997, the terms of these notes required the Company to issue to the holders
that number of shares of Common Stock that equals $250,000 divided by the
initial public offering price. Accordingly, $250,000 of the proceeds has been
allocated to equity and credited to paid in capital and the notes payable were
recorded at a discounted amount of $250,000. The discount was amortized to
interest expense over the period from the completion of the Bridge Note
offering until August 19, 1997, which was the consummation date of the IPO.
Unamortized discount at June 30, 1997 totaled $64,000.
The Company realized approximately $5.3 million in net proceeds from
the IPO in August 1997. The proceeds have been used to repay the 10% Bridge
Notes of $500,000, fund the cash portion of the CAS acquisition of $1,167,000,
and to repay approximately $700,000 of bank and other indebtedness, and will be
used in the future to fund capital expenditures for existing operations,
facilities improvements, acquisition of other aviation services companies and
general working capital for operations and other corporate purposes. The
Company's capital structure has improved significantly as a result of
completing the IPO.
Pursuant to the existing United Airlines contract, the Company
has a commitment for a total of $16 million of scheduled aircraft painting and
stripping work through 1999. This commitment is subject to the risks outlined
in "Item 1. Description of Business-Risk Factors--Dependence on One Customer."
The Company believes that funds available under its existing credit
line and bank financing, together with cash generated from operations will be
adequate for its anticipated cash needs. Management feels the proceeds from the
IPO will allow it to experience accelerated growth both internally and through
well-planned acquisitions of aviation services companies.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Accountants dated September 29, 1997 by Price Waterhouse LLP F-1
Independent Auditors' Report dated October 7, 1996 by Arsement, Redd & Morella, L.L.C. F-2
Consolidated balance sheets as of June 30, 1997 and June 30, 1996 F-3
Consolidated statements of operations for the year ended June 30, 1997
and the nine months ended June 30, 1996 F-4
Consolidated statements of changes in shareholders' equity for the year ended June 30, 1997
and for the nine month period ended June 30, 1996 F-5
Consolidated statements of cash flows for the year ended June 30, 1997
and for the nine month period ended June 30, 1996 F-6
Notes to consolidated financial statements F-7
</TABLE>
20
<PAGE> 21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required by this item with respect to the change in the
Company's principal independent accountants from Arsement, Redd & Morella,
L.L.C. to Price Waterhouse LLP, effective September 3, 1997, has been
previously reported in the Company's Form 8-K Current Report dated September 3,
1997.
21
<PAGE> 22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The discussions under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement for the Annual Meeting of Shareholders of the Company scheduled to be
held on November 13, 1997 (the "Proxy Statement") are incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The discussion under the caption "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under the caption "Principal Holders of Common Stock"
in the Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents are included as exhibits to this Form 10-KSB
Annual Report and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by asterisks.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated April 18, 1997 by and among
the Company, Casper Air Service and all of the stockholders
of Casper Air Service (exhibits and schedules not included
but will be provided supplementally to the Commission upon
request)*
3.1 Articles of Incorporation of the Company filed with the
Texas Secretary of State, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Articles of Incorporation of the Company (filed as Exhibit
3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement*
4.4 Form of Warrant Certificate (attached as Exhibit A to
Form of Warrant Agreement filed as Exhibit 4.3)*
4.5 Form of 10% Convertible Note of the Company maturing March
1, 2001*
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
4.6 Warrant Agreement dated as of June 30, 1996 between
Company and Richard L. Morgan, together with Warrant
Certificate*
4.7 Warrant Agreement dated March 1, 1996 between Company and
RAS Securities Corp., together with form of warrant
certificate*
4.8 Form of Representative's Warrant Agreement by and between
Company and Duke & Co., Inc.*
10.1 Aviation Group, Inc. 1997 Stock Option Plan*
10.2 First Amended and Restated Employment Agreement between
Company and Lee Sanders*
10.3 Employment Agreement dated March 1, 1996, by and
between the Company and Paul Lubomirski*
10.4 Consulting Agreement dated March 1, 1996, by and
between the Company and Charles E. Weed*
10.5 Employment Agreement dated February 1, 1997, between the
Company and Tony Ramsaroop*
10.6 Services Agreement dated June 10, 1994, by and between
Pride and United Air Lines, Inc., as extended by letter
dated February 7, 1997*
10.7 Lease Agreement dated September 18, 1996, effective
as of August 1, 1996, by and between Redbird Development,
Inc., a Texas corporation, and Tri-Star Aircraft Services,
Inc.*
10.8 Lease and Operating Agreement between Pride Aviation,
Inc. and Iberia Parish Airport Authority, dated December
28, 1994, relating to Hangar No. 88-C*
10.9 Lease and Operating Agreement between Iberia Parish
Airport Authority and Pride Aviation, Inc., dated July
23, 1991, relating to Hangar No. 88, as amended by that
certain Agreement dated December 10, 1992*
10.10 Lease and Operating Agreement dated October 2, 1991*
10.11 Revolving Credit Note dated September 30, 1995 from The
Sanders Companies, Inc. payable to the order of Equitable
Bank (now Compass Bank) in the amount of $250,000, and SBA
Loan Agreement, dated August 22, 1994, by and between The
Sanders Companies, Inc. and Equitable Bank (now Compass
Bank) relating to a revolving line of credit loan*
10.12 Amended and Restated Promissory Note dated March 1,
1996 in the original principal amount of $407,689.77
executed by Pride in favor of Louisiana Economic
Development Corporation ("LEDC")*
10.13 Pledge Agreement dated March 1, 1996 from the Company in
favor of LEDC*
10.14 Exchange Agreement dated March 1, 1996 between the Company
and LEDC*
10.15 Form of 10% Convertible Note (included as Exhibit 4.5)*
10.16 Form of Pledge Agreement from the Company in favor of
holders of 10% Convertible Notes*
10.17 Stock Purchase Agreement dated February 21, 1996, by and
among the Company, Pride, Sunbelt Business Capital
Incorporated ("Sunbelt"), Sunbelt Business Capital L.L.C.,
and all the stockholders of Pride and Sunbelt (exhibits and
schedules not included but will be provided supplementally
to the Commission upon request)*
10.18 Employment Agreement between Company and John Arcari*
10.19 First Amendment to Consulting Agreement between Company and
Charles Weed*
10.20 Second Amended and Restated Note dated May 13, 1997 made
by Pride payable to Jerry R. Webb in the original
principal amount of $282,925.47*
10.21 Agency Agreement dated January 19, 1996 between Company and
RAS Securities Corp.*
10.22 Letter agreement dated May 9, 1997 between Company and RAS
Securities Corp. terminating part of Agency Agreement*
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.23 First Amendment to Employment Agreement between the
Company and Paul Lubomirski dated August 18, 1997
10.24 First Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated August
18, 1997
10.25 First Amendment to Employment Agreement between the
Company and Tony Ramsaroop dated August 18, 1997
10.26 Employment Agreement dated September 29, 1997 between the
Company and Stuart A. Walker
10.27 Agreement between The Boeing Company and the Company dated
as of September 15, 1997
10.28 Temporary Use License Agreement dated September __,
1997 between the Company and the Oregon Public Employees'
Retirement Fund
11.1 Statement regarding computation of per share earnings
21.1 List of Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Forms of Lock-Up Agreements executed by certain of the
Company's securityholders*
</TABLE>
- --------------------------
* Incorporated herein by reference to the Form SB-2 Registration
Statement of the Company (File No. 333-22727).
24
<PAGE> 25
(b) Reports on Form 8-K
The Company has filed a Form 8-K Current Report dated September 3,
1997 in which it reported (i) the resignation of Arsement, Redd & Morella, LLC
as its principal independent accountants, and the appointment of Price
Waterhouse LLP as the Company's new principal independent accountants, and (ii)
the consummation of the acquisition of CAS as of August 19, 1997.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aviation Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Aviation Group, Inc. and its subsidiaries at June 30, 1997, and the results
of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Dallas, Texas
September 29, 1997
F-1
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
To Aviation Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Aviation Group,
Inc. (a Texas corporation) and subsidiaries as of June 30, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the nine months then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aviation Group, Inc. and
subsidiaries as of June 30, 1996, and the results of their operations and cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
/s/ ARSEMENT, REDD & MORELLA, L.L.C.
Arsement, Redd & Morella, L.L.C.
October 7, 1996
Lafayette, Louisiana
F-2
<PAGE> 28
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 188,000 $ 457,000
Accounts receivable, net 796,000 644,000
Inventory 240,000 143,000
Deferred income taxes 40,000 11,000
Prepaid expenses and other 710,000 22,000
----------- -----------
Total Current Assets 1,974,000 1,277,000
----------- -----------
Property and equipment 2,903,000 2,409,000
Less: accumulated depreciation (583,000) (220,000)
----------- -----------
2,320,000 2,189,000
----------- -----------
Goodwill, net 752,000 975,000
Other 65,000 83,000
----------- -----------
817,000 1,058,000
----------- -----------
Total Assets $ 5,111,000 $ 4,524,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 502,000 $ 209,000
Bridge notes 436,000 --
Other short-term borrowings 256,000 223,000
Accounts payable 769,000 574,000
Accrued interest 24,000 36,000
Income tax payable 20,000 --
Due to shareholder -- 2,000
Accrued liabilities 483,000 359,000
----------- -----------
Total Current Liabilities 2,490,000 1,403,000
----------- -----------
Long-Term Liabilities
Long-term debt, net of current maturities 1,211,000 1,350,000
Capitalized leases, net of current maturities 66,000 --
Loan from shareholder 15,000 --
Deferred income taxes 100,000 316,000
----------- -----------
Total Long-Term Liabilities 1,392,000 1,666,000
----------- -----------
Total Liabilities 3,882,000 3,069,000
----------- -----------
Commitments and Contingencies (Note J)
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none outstanding -- --
Common Stock, $.01 per value, 10,000,000
shares authorized, 1,600,250 shares issued
and outstanding 16,000 16,000
Additional paid-in capital 1,951,000 1,701,000
Retained earnings (deficit) (738,000) (262,000)
----------- -----------
Total Shareholders' Equity 1,229,000 1,455,000
----------- -----------
Total Liabilities and Shareholders' Equity $ 5,111,000 $ 4,524,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 29
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months
June 30, Ended June 30,
1997 1996
---- ----
<S> <C>> <C>
Revenue $ 9,718,000 $ 3,881,000
Cost of Revenue 7,410,000 2,838,000
----------- -----------
Gross Profit 2,308,000 1,043,000
----------- -----------
General and Administrative Expenses 2,048,000 752,000
Depreciation and Amortization 413,000 154,000
----------- -----------
2,461,000 906,000
----------- -----------
Income (Loss) From Operations (153,000) 137,000
----------- -----------
Other Income (Expenses)
Interest Income 2,000 2,000
Interest Expense (377,000) (71,000)
----------- -----------
(375,000) (69,000)
----------- -----------
Income (Loss) Before Provision for Income Taxes (528,000) 68,000
Provision (Benefit) for Income Taxes (52,000) 34,000
----------- -----------
Net Income (Loss) $ (476,000) $ 34,000
=========== ===========
Earnings (loss) per common and
common equivalent share $ (0.27) $ 0.02
=========== ===========
Weighted average common and
common equivalent shares outstanding 1,759,707 1,497,511
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 30
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid In Earnings
Shares Amount Capital (Deficit) Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Predecessor combined balances at
September 30, 1995 (a) $ 1,000 $ 201,000 $ (283,000) $ (81,000)
Restatement to reflect combination
of entities under common control
(Note A) 1,000,000 9,000 (9,000) -- --
--------- --------- ----------- ---------- -----------
Balance, September 30, 1995,
as restated 1,000,000 10,000 192,000 (283,000) (81,000)
Dividend to The Sanders
Companies, Inc. -- -- -- (13,000) (13,000)
Issuance of shares in connection with
private offering 500,000 5,000 1,209,000 -- 1,214,000
Issuance of shares in connection
with acquisition of Pride Aviation, Inc. 44,250 500 132,500 -- 133,000
Issuance of shares in connection
with settlement of long-term debt 56,000 500 167,500 -- 168,000
Net Income -- -- -- 34,000 34,000
--------- --------- ----------- ---------- -----------
Balance, June 30, 1996 1,600,250 16,000 1,701,000 (262,000) 1,455,000
Bridge Notes Warrants (Note F) -- -- 250,000 -- 250,000
Net loss -- -- -- (476,000) (476,000)
--------- --------- ----------- ---------- -----------
Balance, June 30, 1997 1,600,250 $ 16,000 $ 1,951,000 $ (738,000) $ 1,229,000
========= ========= =========== ========== ===========
</TABLE>
(a) The Predecessor entities, Tri-Star Aircraft Services, Inc. and Tri-Star
Airline Services, Inc. had 10,000 and 1,000 shares of common stock
outstanding, respectively, at September 30, 1995.
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 31
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $(476,000) $ 34,000
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 413,000 154,000
Accreted interest 186,000 --
Deferred income taxes (72,000) 47,000
(Increase) decrease in accounts receivable (152,000) (123,000)
(Increase) decrease in inventories (97,000) (42,000)
(Increase) decrease in prepaids and other current assets (4,000) 29,000
Increase(decrease)in accounts payable 195,000 (214,000)
Increase(decrease) in income taxes payable 20,000 --
Increase (decrease) in interest payable (12,000) 36,000
Increase (decrease) in accrued liabilities 124,000 (20,000)
Other (25,000) (14,000)
--------- -----------
Total Adjustments 576,000 (147,000)
--------- -----------
Net Cash Provided (Used) by Operating Activities 100,000 (113,000)
--------- -----------
Cash Flows From Investing Activities:
Cash paid for acquisition of Pride Aviation. Inc. -- (506,000)
Payments for hangar facility costs (91,000) --
Cost related to Casper Air Service acquisition (119,000) --
Advances to related parties (38,000) --
Payments for property and equipment additions (414,000) (12,000)
--------- -----------
Net Cash Used by Investing Activities (662,000) (518,000)
--------- -----------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 102,000 80,000
Repayments of short-term borrowings (69,000) (27,000)
Proceeds from issuance of Bridge Notes and Warrants 500,000 --
Proceeds from issuance of long-term debt 283,000 --
Principal payments on long-term debt (128,000) (179,000)
Payment of Initial Public Offering costs (384,000) --
Proceeds from issuance of common stock -- 1,214,000
Deferred financing costs (11,000) --
--------- -----------
Net Cash Provided by Financing Activities 293,000 1,088,000
--------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (269,000) 457,000
Cash and Cash Equivalents at Beginning of Period 457,000 --
--------- -----------
Cash and Cash Equivalents at End of Period $ 188,000 $ 457,000
========= ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 203,000 $ 35,000
Cash paid for income taxes -- --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock in connection with
the acquisition of Pride Aviation, Inc. -- $ 133,000
Issuance of long-term debt in connection with the
the acquisition of Pride Aviation, Inc. -- $ 857,000
Common stock issued to retire long-term debt -- $ 168,000
Machinery and equipment acquired under capital lease $ 80,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 32
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Aviation Group, Inc. (the "Company") (a Texas corporation) was
formed on December 4, 1995 for the purposes of combining certain aircraft
service operations formerly owned by The Sanders Companies, Inc. ("Sanders")
and to acquire additional aircraft servicing related businesses. Sanders is
100% owned by Lee Sanders, president and chief executive officer of the
Company. On February 21, 1996, the Company acquired Pride Aviation, Inc.
("Pride") in a business combination accounted for as a purchase. Pride operates
a Federal Aviation Administration ("FAA") approved repair station and provides
aircraft painting and maintenance services (See Note C). In August 1997, the
Company acquired Casper Air Service, Inc. ("CAS"). CAS is a full service fixed
base operation ("FBO") located at Natrona County International Airport in
Casper, Wyoming and offers aircraft line services, repair and maintenance and
parts distribution. (See Note R - Acquisition of Casper Air Service)
On December 20, 1995, the Company entered into an Exchange Agreement
(the "Exchange") whereby Sanders contributed all of the outstanding common
stock of Tri-Star Airline Services, Inc. ("Airline") and Tri-Star Aircraft
Services, Inc. ("Aircraft") (collectively the "Tri-Star Companies" or
"Predecessor") to the Company in exchange for 100% of the common stock
(1,000,000 shares) of the Company. The Exchange was accounted for similar to a
pooling of interest with no change in historical basis of assets and
liabilities as Sanders controlled 100% of the stock of the companies prior to
and subsequent to the transaction. Prior to the Exchange, the Tri-Star
Companies were operated as members of a controlled group with other operations
of Sanders. For periods prior to the Exchange, the continuing operations of the
Tri-Star Companies have been separated from the controlled group.
In August 1997, the Company completed an initial public offering
("IPO") of its common stock. The Company sold 1,150,000 shares of common stock
at a price of $5.75 per share and 1,150,000 common stock purchase warrants at a
price of $0.10 per warrant. Proceeds from the stock offering totaled
$5,283,000, net of approximately $1,444,000 of associated underwriting
discounts and offering expenses.
The Company's primary business includes the operation of FAA approved
repair stations in New Iberia, Louisiana and Dallas, Texas which provide
painting and paint stripping services to the commercial airline and corporate
and private aircraft industry. The Company also provides refueling services and
light maintenance services in Dallas, Texas and snack catering and aircraft
cleaning services at various commercial airports in the United States.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements present the
consolidated results of the Company and its subsidiaries for the year
ended June 30, 1997 and the combined results of the Predecessor
through December 31, 1995 together with the consolidated results of
the Company and its subsidiaries for the remainder of the nine months
ended June 30, 1996, including the results of Pride from the date of
acquisition. The Company changed its fiscal year end during 1996 from
September 30 to June 30. All intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of 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.
F-7
<PAGE> 33
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
Revenue Recognition
Revenues are recognized as services are performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company uses the allowance method in accounting for losses on
billed and unbilled accounts receivable. Provision for losses on trade
receivables is made in amounts estimated to be adequate to cover
anticipated bad debts. Accounts receivable are charged against the
allowance when it is determined by management that payment will not be
received. Any subsequent receipts are credited to the allowance. Bad
debt expense charged to operations for the year ended June 30, 1997
and the nine months ended June 30, 1996 was $6,000 and $16,000,
respectively. The allowance for doubtful accounts was $19,000 and
$30,000 at June 30, 1997 and 1996, respectively.
Inventory
Inventories are stated at the lower of cost or market, with cost
determined by the average costing method.
Goodwill
Goodwill represents the cost in excess of fair value of the net assets
(including tax attributes) acquired in the Pride acquisition. Goodwill
is being amortized on a straight-line basis over a 20 year period.
Amortization expense for the year ended June 30, 1997 and the nine
months ended June 30, 1996 was $50,000 and $17,000, respectively.
Accumulated amortization totaled $67,000 and $17,000 at June 30, 1997
and 1996, respectively. During 1997, goodwill was reduced by $173,000
as a result of the determination of certain tax attributes related to
the Pride acquisition. The Company analyzes the net book value of
goodwill periodically for any potential impairment and believes that
the asset is realizable at June 30, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation has been
provided using straight line and double declining balance methods over
the estimated useful lives of the assets which range from 5 to 30
years.
Income Taxes
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No.109 requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income.
Earnings (Loss) Per Common Share
Earnings (loss) per common and common equivalent share ("EPS") is
computed based on the weighted average number of common shares
outstanding and gives effect to certain adjustments described below.
During the fiscal period ended June 30, 1996, the Company issued
common stock and warrants with issuance and exercise prices below that
of the price of the Company's IPO common stock offering. Pursuant to
Securities and Exchange Commission requirements, the dilutive effect
of these securities has been included in the EPS calculation as if
they were outstanding as of the beginning of the period with the
dilutive effect measured using the treasury stock method. Similarly,
for the year ended June 30, 1997, the EPS calculation reflects an
increase in common equivalent shares for the assumed exercise of the
warrants for the nine months
F-8
<PAGE> 34
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
through March 31, 1997 (the period presented in the IPO document). No
adjustment was made for the assumed exercise of the warrants for the
three months ended June 30, 1997 since the effect would be
antidilutive. Also, no adjustment was made for the assumed conversion
of the Company's convertible debt for either period presented since
the effect would be antidilutive.
The Company's historical capital structure prior to fiscal 1996 is not
comparable to its current structure due to the Exchange discussed in
Note A and the issuance of common stock, warrants and convertible debt
during the fiscal period ended June 30, 1996 in connection with a
private placement of the Company's common stock and the acquisition of
Pride. Accordingly, historical net income (loss) per common share is
not considered meaningful and has not been presented herein.
New Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
effective for financial statements issued for periods ending after
December 15, 1997, which establishes standards for computing and
presenting earnings per share (EPS). The statement requires dual
presentation of basic and diluted EPS on the face of the income
statement for entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue common stock
were exercised, converted into, or resulted in the issuance of common
stock that then shared in the earnings of the entity. For the periods
ended June 30, 1997 and 1996, the basic and diluted EPS amounts
calculated assuming adoption of this statement would be the same as
the amounts presented on the consolidated statement of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which are effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 is not
expected to have a significant impact to the Company. See Note Q for
business segment information.
Reclassifications
Certain reclassifications have been made to prior period amounts to
conform to the current year presentation.
NOTE C - ACQUISITION OF PRIDE AVIATION, INC.
On February 21, 1996, the Company entered into an agreement to acquire
99% of the outstanding common stock of Pride for cash of $486,000, issuance of
$857,000 of 10% Convertible Notes and the issuance of 44,250 shares of the
Company's common stock valued at approximately $133,000. At the closing of the
acquisition, Pride had approximately $906,000 of long-term debt and $947,000 of
other liabilities. The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values. The transaction was closed in early March 1996
and the results of operations of Pride are included in the accompanying
financial statements beginning March 1, 1996. The excess of the purchase price
over the fair value of the net assets acquired (including tax attributes) has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
Supplemental Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents the consolidated
results of operations for the nine months ended June 30,1996 as if the Pride
acquisition had occurred as of the beginning of the Company's fiscal year
(October 1,1995). The summarized information does not purport to be indicative
of what would have occurred had the acquisition actually been made as of such
date or of results which may occur in the future.
F-9
<PAGE> 35
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
Revenues $ 6,755,000
Net income $ 72,000
Net income per common share $ 0.05
Adjustments made in arriving at pro forma unaudited results of
operations included increased interest expense on acquisition debt, additional
depreciation expense, amortization of goodwill and related tax adjustments.
NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Other current assets consisted of the following at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred IPO costs $ 384,000 $ --
Capitalized costs related to Casper Air Service acquisition 119,000 --
Capitalized facility acquisition costs 115,000 --
Deferred debt issue costs 11,000 --
Due from affiliates 38,000 --
Prepaid expenses and other 43,000 22,000
----------- -----------
$ 710,000 $ 22,000
=========== ===========
</TABLE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $ 1,965,000 $ 1,659,000
Leasehold improvements 577,000 530,000
Furniture, fixtures and office equipment 163,000 114,000
Vehicles 198,000 106,000
----------- -----------
2,903,000 2,409,000
Less: accumulated depreciation (583,000) (220,000)
----------- -----------
$ 2,320,000 $ 2,189,000
=========== ===========
</TABLE>
Depreciation expense charged to operations for the year ended June 30,
1997 and the nine months ended June 30, 1996 was $363,000 and $137,000,
respectively.
NOTE F - SHORT-TERM BORROWINGS
10% Unsecured Bridge Notes
In February 1997, the Company issued $500,000 of 10% unsecured
subordinated bridge notes. The proceeds from these notes were used to fund the
cost of the Company's IPO and for general working capital purposes. As required
by the terms of the notes, the Company issued $250,000 of common stock at the
IPO price (43,478 shares) because the IPO was successfully completed prior to
September 30, 1997. Accordingly, $250,000 of the proceeds from the issuance of
the notes was allocated to equity and credited to paid in capital, and the
notes payable were recorded at a corresponding discounted
F-10
<PAGE> 36
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
amount of $250,000. The discount is being amortized over the period through the
effective date of the IPO. Discount accretion charged to interest expense
totaled approximately $186,000 for the period ended June 30, 1997 and
unamortized discount at June 30, 1997 totaled $64,000. Costs associated with
the issuance of the notes are being amortized to interest expense using the
effective rate method. The notes were repaid in full in August 1997 after
completion of the IPO.
Other Short Term Borrowings
Other short-term borrowings consisted of the following at June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Bank line of credit $248,000 $223,000
Other 8,000 --
-------- --------
$256,000 $223,000
======== ========
</TABLE>
At June 30, 1997 and 1996, the Company had a $250,000 line of credit
facility with Compass Bank ("Line of Credit") which was guaranteed by the U. S.
Small Business Administration. The Line of Credit was effectively assumed by
Tri-Star Aircraft Services, Inc. with the transfer of assets and liabilities in
connection with the Exchange discussed in Note A. The Line of Credit bears
interest at a rate of prime plus 2% (10.50% and 10.75% at June 30, 1997 and
1996, respectively). The Line of Credit was repaid in full in August 1997 using
proceeds from the IPO.
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Provision for warranty claims $171,000 $101,000
Accrued wages payable 127,000 131,000
Other 185,000 127,000
-------- --------
$483,000 $359,000
======== ========
</TABLE>
The Company generally warrants its products and services against
defects in material and workmanship based on contract terms with customers. The
Company records an estimated liability for warranty claims, based on actual
claims experience, at the time the products and services are provided and
revenue is recognized. Warranty claims, which are netted against revenue,
totaled $85,000 and $38,000 for the year ended June 30, 1997 and the period
ended June 30, 1996, respectively.
F-11
<PAGE> 37
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
NOTE H - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Convertible notes payable, payable in quarterly installments
totaling $72,000 beginning April 1, 1998, bearing interest at
10%, maturing March 1, 2001 and secured by the Company's
shares of common stock of Pride Aviation, Inc. The notes are
convertible into shares of common stock of the Company at
conversion prices ranging from $3.00 to $4.50 per share,
subject to adjustment for certain equity transactions. $ 884,000 $ 884,000
Convertible notes payable to Louisiana Economic Development
Corporation dated March 1, 1996, payable in 60 monthly installments
of $3,800, including interest at 7.38% and one final installment of
the remaining unpaid balance on March 1, 2001. The note is secured
by pledge of certain shares of common stock, accounts receivable,
inventory and equipment of Pride Aviation, Inc. The note is
convertible into shares of common stock of the Company at a price of
$4.50 per share, subject to adjustment for certain equity
transactions. (See Note R) 372,000 386,000
Note payable to Sunbelt Business Capital, L.L.C., payable in monthly
installments of $6,400, including interest at 12%, refinanced in May
1997. - 135,000
Note payable to Jerry R. Webb, payable in full on May 13, 1998,
bearing interest at 18.0% payable monthly. The note is secured by
pledge of certain shares of common stock, accounts receivable,
inventory and equipment of Pride. (See Note R) 283,000 -
Various notes payable to Ford Motor Credit Corp., payable in monthly
installments totaling $1,700 including interest at rates ranging
from 13.75% to 14.00% maturing from November 2000 to April 2002,
secured by certain vehicles. 47,000 -
Note payable to Schwing Insurance Agency, payable currently,
with interest at 7.5% on the unpaid balance. 72,000 72,000
Note payable to Fidelity Bank, payable in monthly installments with
interest at prime plus 2.5% maturing August 1997 and secured by
certain machinery and equipment. 5,000 20,000
Note payable to Compass Bank, payable in monthly installments with
interest at prime plus 2.25%, maturing September 1997 and secured by
accounts receivable, equipment, key man life insurance policy, and
personal guaranty and pledge of stock of The Sanders Companies, Inc.
by Lee Sanders. 8,000 27,000
</TABLE>
F-12
<PAGE> 38
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Various notes payable to finance companies,
due in monthly installments totaling $3,000,
including interest at rates ranging from 9.5%
to 13.25%, maturing through March 1998
and secured by certain vehicles. 28,000 35,000
---------- ----------
Total 1,699,000 1,559,000
Less: Current maturities of long-term debt (488,000) (209,000)
---------- ----------
Total long-term debt $1,211,000 $1,350,000
========== ==========
</TABLE>
On May 15, 1997, when the outstanding principal balance of the
Company's note to Sunbelt Business Capital, L.L.C. was $83,000, Sunbelt
Business Capital, L.L.C. sold the Note to Jerry R. Webb, who at the same time
loaned an additional $200,000 to the Company. The entire $283,000 debt to Mr.
Webb was restructured and restated in the form of a new note payable. One of
the Company's directors owns a participation interest in a portion of the debt
owed to Mr. Webb by the Company (See Notes M and R).
The Company's notes payable to Fidelity Bank and Compass Bank and the
notes payable to finance companies were originally made by Sanders. This debt
was effectively assumed by the Tri-Star Companies with the transfer of assets
and liabilities in connection with the Exchange discussed in Note A. Sanders
remains liable under the note agreements as the primary maker.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $488,000
1999 328,000
2000 332,000
2001 542,000
2002 9,000
</TABLE>
F-13
<PAGE> 39
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
NOTE I - LEASES
Capital Leases
The Company leases certain machinery and equipment under arrangements
classified as capital leases. Machinery and equipment recorded under capital
leases totaled $80,000 at June 30, 1997 and $0 at June 30, 1996. Future minimum
lease payments at June 30, 1997, together with the present value of the minimum
lease payments are:
<TABLE>
<S> <C>
1998 $ 31,000
1999 31,000
2000 31,000
2001 27,000
2002 5,000
Thereafter --
----------
Total minimum lease payments 125,000
Less: amount representing interest (45,000)
----------
Total present value of minimum lease payments 80,000
Less: current portion (14,000)
----------
Long-term obligation $ 66,000
==========
</TABLE>
Operating Leases
The Company leases various equipment and office and hanger facilities
under cancelable and noncancelable rental arrangements. Rental expenses from
operating leases and monthly rentals for the year ended June 30, 1997 and the
nine months ended June 30, 1996 were $699,000 and $252,000, respectively.
Minimum future lease payments for non-cancelable operating leases for
the next 5 years and thereafter are as follows:
<TABLE>
<S> <C>
1998 $ 379,000
1999 391,000
2000 395,000
2001 222,000
2002 195,000
Thereafter 4,669,000
-----------
$ 6,251,000
===========
</TABLE>
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company, in connection with the production of revenue, produces
chemical waste, which is temporarily stored on the Company's premises. Costs
for disposal are expensed by the Company as waste is produced. The provision
for disposal of waste on hand totaled $10,000 and $16,000 as of June 30, 1997
and 1996 respectively, and is included in accrued liabilities in the
accompanying balance sheet.
One of the Company's subsidiaries is partially self-insured for
employee medical claims. Insurance with independent insurance carriers is
maintained to cover medical claims in excess of self-insured limits. The
Company's self-insured limits vary by month and policy year and are based on
various factors including the number of employees and dependents covered and
certain experience factors. In addition to aggregate annual and monthly
limitations, the Company's exposure is further limited to $15,000 per employee
per year.
F-14
<PAGE> 40
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
The Company is not involved in any pending legal proceedings which it
believes will have a material effect on its results of operations, cash flow or
financial position.
NOTE K - STOCK OPTIONS AND WARRANTS
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted
by the Company's Board of Directors and shareholders in February 1997. The
purpose of the Option Plan is to provide increased incentives to key employees
and directors of the Company to render services and exert maximum effort for
the business success of the Company. The Company has reserved 150,000 shares of
Common Stock for issuance upon exercise of such options.
The Board of Directors or its Compensation Committee has the authority
to select key employees and directors to whom stock options are granted as well
as determining vesting schedules and other terms. The options vest ratably over
five years and can have a term of up to ten years. The aggregate fair market
value of the stock with respect to which incentive stock options are first
exercisable in any calendar year may not exceed $100,000 per incident. The
exercise price of incentive stock options must not be less than the fair market
value of the Common Stock on the date of grant.
Warrant Issuances
In 1996, the Company issued 280,000 warrants to investment advisors
and other parties. 200,000 warrants were issued with an exercise price of $1.00
per share and 80,000 with an exercise price of $2.50 per share. These warrants
are exercisable currently and expire February 28, 1999. See Note L.
SFAS No. 123 Information
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997; no dividend yield,
expected volatility of 0.28, risk free interest rates of 6.44% and expected
lives of 7.0 years. The estimated fair value of the options is amortized to
expense over the options' vesting period.
The application of SFAS No. 123 would have decreased net income by
$4,000 and would not have changed earnings per share as it was reported on the
consolidated statement of operations for the year ended June 30, 1997. No
options were outstanding for the period ended June 30, 1996.
A summary of stock option transactions under the Option Plan is as follows:
<TABLE>
<CAPTION>
1997
----
Weighted-Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 60,500 $ 5.54
Exercised -- --
Forfeited (4,000) 5.75
------
Outstanding at end of year 56,500 5.53
======
Exercisable at end of year 19,300 $ 5.10
====== ======
Weighted-average fair value of options
granted during the year $ 1.85
======
</TABLE>
F-15
<PAGE> 41
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
The following table summarizes information about the fixed price stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Outstanding at Contractual Average Exercisable at Average
Exercise Prices June 30, 1997 Life (years) Exercise Price June 30, 1997 Exercise Price
- --------------- -------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$4.50 10,000 6.7 $4.50 10,000 $4.50
$5.75 46,500 6.8 $5.75 9,300 $5.75
</TABLE>
NOTE L - SHAREHOLDERS' EQUITY
Private Offering
In March 1996, the Company issued 500,000 shares of common stock at a
price of $3.00 per share in a private offering and raised approximately $
1,214,000, net of sales commissions and offering costs totaling $286,000. In
connection with the private offering, the Company issued warrants to the
placement agent to purchase 200,000 shares of the Company's common stock at a
price equal to $1.00 per share, expiring February 28, 1999. The Company also
issued warrants to an investment banking advisor, for services provided in
connection with the offering, to purchase 80,000 shares of the Company's common
stock at a price equal to $2.50 per share expiring February 28, 1999. The
exercise price and number of shares issuable under the warrants are subject to
adjustment for certain equity transactions and other circumstances. The
warrants also contain a "cashless" exercise feature whereby the warrants may be
surrendered in exchange for a number of shares to be determined based on the
difference between the exercise price and the market price for the Company's
common stock.
Debt Retirement
In connection with the acquisition of Pride during March 1996, the
Company issued 56,000 shares of common stock to retire $168,000 of the
outstanding principal amount of indebtedness owed to Sunbelt Business Capital,
L.L.C.
NOTE M - RELATED PARTY TRANSACTIONS
For periods through March 1, 1996, Sanders provided services and
allocated certain general and administrative expenses to the companies
operating under the controlled group, including the Tri-Star Companies. Such
charges were allocated to the members of the controlled group based upon the
level of management and supervision time required, services provided and
certain other factors. Management of the Company believes that such allocations
are reasonable. These charges are included in general and administrative
expenses and totaled $0 and $77,000 for the year ended June 30, 1997 and the
period ended June 30,1996, respectively.
In connection with the Pride acquisition, on March 1, 1996, the
Company entered into consulting agreements with two former shareholders of
Pride. The consulting agreements provide for the payment of monthly fees and
reimbursement of certain expenses with terms ranging from 12 to 24 months. Fees
paid under these arrangements totaled $52,000 and $40,000 for the year ended
June 30, 1997 and the nine months ended June 30, 1996, respectively. Total
future payments over the remaining terms of these arrangements are $24,000 for
the year ending June 30, 1998.
F-16
<PAGE> 42
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
As of June 30, 1997, the Company had amounts due from Sanders totaling
$38,000 and at June 30,1996, the Company owed $2,000 to Sanders for net
payments made by Sanders on behalf of the Company. Such amounts are reflected
as "Other current assets" and "Due to shareholder", respectively, in the
accompanying balance sheets.
One of the Company's directors owns a participation interest in
$83,000 of the debt owed to Jerry R. Webb.
NOTE N - PROVISION FOR INCOME TAXES
The Company's Tri-Star Companies subsidiaries were included in the
consolidated tax return of Sanders for the periods prior to and through the
date of the Exchange. Sanders did not require its subsidiaries to pay for their
share of the consolidated tax expense or reimburse the subsidiaries for tax
benefits generated. Accordingly, for periods prior to the Exchange, the tax
expense or benefits for the Tri-Star Companies was computed as if it were a
separate taxpayer and the resulting amount treated as an equity transaction
with Sanders, which is presented as a dividend of $13,000.
The provision/(benefit) for income taxes consist of the following
components:
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, 1997 June 30, l996
------------- -------------
<S> <C> <C>
Current provision (benefit) $ 20,000 $ (13,000)
Deferred taxes (72,000) 47,000
--------- ---------
Provision/(benefit) for income taxes $ (52,000) $ 34,000
========= =========
</TABLE>
The following is a reconciliation of taxes computed at the federal
statutory rate to the provision for income taxes included in the financial
statements:
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30,1997 June 30,1996
------------ ------------
<S> <C> <C>
Tax provision (benefit) computed by
applying federal statutory rate $ (179,000) $ 23,000
State income taxes, net of federal benefits 44,000 15,000
Expenses not deductible for tax purposes (a) 88,000 6,000
Effect of graduated tax rates and other (5,000) (10,000)
---------- ----------
Provision/(benefit) for income taxes $ (52,000) $ 34,000
========== ==========
</TABLE>
(a) Principally the effect of Bridge Note interest accretion for the
year ended June 30, 1997.
The net deferred tax amounts are presented on the balance sheet as
follows:
<TABLE>
<S> <C> <C>
Current deferred tax asset $ 40,000 $ l1,000
Long-term deferred tax liabilities (100,000) (316,000)
---------- ----------
$ (60,000) $ (305,000)
========== ==========
</TABLE>
F-17
<PAGE> 43
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
Deferred tax assets and liabilities consisted of the following at June 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
Net operating loss carryforward $ 383,000 $ 257,000
Other 67,000 --
--------- ---------
Total deferred tax assets 450,000 257,000
--------- ---------
Liabilities
Property and equipment (483,000) (536,000)
Other (27,000) (26,000)
--------- ---------
Total deferred tax liabilities (510,000) (562,000)
--------- ---------
Net deferred tax liabilities $ (60,000) $(305,000)
========= =========
</TABLE>
For income tax purposes, the Company has available at June 30, 1997,
unused federal net operating loss carryforwards of approximately $983,000,
which may be applied against future taxable income of the Company's subsidiary
(Pride), subject to certain annual limitations, expiring in various years from
2005 to 2009. The Company believes it is more likely than not that the net
operating loss carryforwards will be utilized in the future. Accordingly, no
valuation allowance has been recorded. During 1997, the net operating loss
carryforward asset was increased, and goodwill reduced, by $173,000 as a result
of the determination of certain tax attributes related to the Pride
acquisition. Under the Internal Revenue Code, the utilization of net operating
loss carryforwards could be limited if certain changes in ownership of the
Company's common stock were to occur.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash
equivalents, accounts receivable, short-term borrowings and accounts payable,
the carrying amounts approximate fair value due to their short maturities.
The carrying amount reported for long-term debt approximates fair
value based on current interest rates for debt with similar terms and
maturities.
NOTE P - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Substantially all of the Company's accounts receivable at June 30,
1997, resulted from sales to third party companies in the airline industry.
This concentration of customers may impact the Company's overall credit risk
either positively or negatively, in that these entities may be similarly
affected by changes in economic or other conditions. The Company believes that
the risk is mitigated by the size, reputation and nature of its customers.
Although the Company generally does not require collateral or other security to
support customer receivables, it may have certain rights, such as the ability
to place liens on aircraft serviced, in the event of nonpayment by its
customers.
During the year ended June 30, 1997 and the nine months ended June 30,
1996, the Company derived approximately 75% and 62%, respectively, of its
revenues from United Airlines. Receivables due from United Airlines totaled
approximately $92,000 and $202,000 at June 30,1997 and 1996, respectively.
F-18
<PAGE> 44
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
NOTE Q - BUSINESS SEGMENT INFORMATION
The Company is currently organized into three business segments:
overhaul and service, ground handling and services, and beginning July 1, 1996,
FBO and airport management. The overhaul and service division provides painting
and paint stripping services for commercial and freight aircraft. The ground
handling and services division provides aircraft ground handling and light
catering services to a variety of passenger and freight airlines at various
airports. The FBO and airport management division provides fuel and light
maintenance services to general aviation, corporate and light freight aircraft
customers. Summarized financial information by business segment for fiscal
years 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Net revenues:
Overhaul and service $ 8,096,000 $ 3,395,000
Ground handling and services 1,070,000 486,000
FBO and airport management 552,000 --
Corporate -- --
----------- -----------
Total $ 9,718,000 $ 3,881,000
=========== ===========
Operating income (loss):
Overhaul and service $ 258,000 $ 294,000
Ground handling and services 151,000 (14,000)
FBO and airport management (80,000) --
Corporate (482,000) (143,000)
----------- -----------
Total $ (153,000) $ 137,000
=========== ===========
Total assets:
Overhaul and service $ 4,006,000 $ 3,901,000
Ground handling and services 463,000 165,000
FBO and airport management 100,000 --
Corporate 542,000 458,000
----------- -----------
Total $ 5,111,000 $ 4,524,000
=========== ===========
Depreciation and amortization:
Overhaul and service $ 401,000 $ 140,000
Ground handling and services 11,000 14,000
FBO and airport management -- --
Corporate 1,000 --
----------- -----------
Total $ 413,000 $ 154,000
=========== ===========
Capital expenditures (including capital leases):
Overhaul and service $ 336,000 $ 12,000
Ground handling and services 105,000 --
FBO and airport management 40,000 --
Corporate 13,000 --
----------- -----------
Total $ 494,000 $ 12,000
=========== ===========
</TABLE>
There were no significant intersegment sales or transfers for either
period. Operating income by business
F-19
<PAGE> 45
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
segment excludes interest and other miscellaneous income and interest expense.
Corporate assets consist primarily of cash and cash equivalents and prepaid
expenses.
NOTE R - SUBSEQUENT EVENTS
Acquisition of Casper Air Service
Concurrent with the IPO in August 1997, the Company acquired all of
the outstanding common stock of Casper Air Service, a Wyoming corporation for
cash of $1,167,000 and the issuance of 153,565 shares of common stock valued at
approximately $883,000. The acquisition will be accounted for using the
purchase method and the purchase price will be allocated to the net assets
acquired based on their estimated fair values. A final determination of the
required purchase accounting adjustments and the fair values of the assets and
liabilities acquired or assumed has not yet been made. Accordingly, the
purchase adjustments made in connection with the preparation of the unaudited
pro forma financial information below reflects the Company's best estimate
using currently available information.
Supplemental Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents the consolidated results of
operations for the year ended June 30, 1997 as if the CAS acquisition had
occurred as of the beginning of the Company's fiscal year (July 1, 1996). The
summarized information does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
Revenues $17,896,000
Net income (loss) $(187,000)
Net income (loss) per common share $(0.10)
Adjustments made in arriving at pro forma unaudited results of
operations included adjustment related to discontinued charter operations,
additional depreciation expense, amortization of goodwill and related tax
adjustments.
Stock Warrants
The Company issued 1,150,000 common stock purchase warrants in
connection with its IPO in August 1997. These warrants entitle the holders to
purchase, anytime after two years from the effective date of the offering, one
share of common stock for $6.90. The warrants expire five years from the
effective date of the IPO and are redeemable at a price of $0.10 per Warrant,
with consent of the underwriter, upon 30 days written notice, provided that the
average closing bid quotations or sales prices of the common stock equal or
exceed $9.49 for 20 consecutive trading days ending on the tenth day prior to
the date on which the Company gives notice of redemption.
The Company also sold 100,000 warrants (the "Underwriter's Warrants")
to the Underwriters of its public offering, for $0.001 per warrant. Each
warrant entitles the holder to purchase a share of common stock at $9.49 and
also to receive an Underlying Warrant whose term is identical to the warrants
described above except that the exercise price is $11.38. The Underwriter's
Warrants are exercisable for four years beginning one year after the effective
date of the IPO.
Conversion of Convertible Note Payable
In August 1997, the Louisiana Economic Development Corporation
("LEDC") exercised their conversion rights under the convertible note discussed
in Note H. In connection therewith, the Company issued 82,153 shares of common
F-20
<PAGE> 46
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30,1996
stock to the LEDC.
Financing
On July 9, 1997 the Company borrowed an additional $144,000 from Jerry
Webb (See Note H) to fund IPO costs and for general working capital purposes
and agreed to repay Mr. Webb $150,000 on August 1, 1997. The maturity date of
the note was extended and this note, together with the existing note to Mr.
Webb for $283,000 at June 30, 1997, was repaid in late August 1997. The notes
restricted the prepayment of the principal. Mr. Webb allowed the notes to be
prepaid in exchange for issuance of 3,000 shares of common stock.
F-21
<PAGE> 47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: October 2, 1997.
AVIATION GROUP, INC.
By: /s/ LEE SANDERS
---------------------------------------
Lee Sanders, Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Lee Sanders Chairman of the Board and Chief October 2, 1997
- ------------------------------- Executive Officer
Lee Sanders
/s/ Richard L. Morgan Director October 2, 1997
- -------------------------------
Richard L. Morgan
/s/ Bradley T. Peterson Chief Accounting Officer October 2, 1997
- -------------------------------
Bradley Peterson
/s/ Charles Weed Director October 2, 1997
- -------------------------------
Charles Weed
/s/ Gordon Whitener Director October 2, 1997
- -------------------------------
Gordon Whitener
/s/ Robert A. Schneider Director October 2, 1997
- -------------------------------
Robert A. Schneider
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
-----------------
Exhibit Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated April 18, 1997 by and among
the Company, Casper Air Service and all of the stockholders
of Casper Air Service (exhibits and schedules not included
but will be provided supplementally to the Commission upon
request)*
3.1 Articles of Incorporation of the Company filed with the
Texas Secretary of State, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Articles of Incorporation of the Company (filed as Exhibit
3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement*
4.4 Form of Warrant Certificate (attached as Exhibit A to
Form of Warrant Agreement filed as Exhibit 4.3)*
4.5 Form of 10% Convertible Note of the Company maturing March
1, 2001*
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
4.6 Warrant Agreement dated as of June 30, 1996 between
Company and Richard L. Morgan, together with Warrant
Certificate*
4.7 Warrant Agreement dated March 1, 1996 between Company and
RAS Securities Corp., together with form of warrant
certificate*
4.8 Form of Representative's Warrant Agreement by and between
Company and Duke & Co., Inc.*
10.1 Aviation Group, Inc. 1997 Stock Option Plan*
10.2 First Amended and Restated Employment Agreement between
Company and Lee Sanders*
10.3 Employment Agreement dated March 1, 1996, by and
between the Company and Paul Lubomirski*
10.4 Consulting Agreement dated March 1, 1996, by and
between the Company and Charles E. Weed*
10.5 Employment Agreement dated February 1, 1997, between the
Company and Tony Ramsaroop*
10.6 Services Agreement dated June 10, 1994, by and between
Pride and United Air Lines, Inc., as extended by letter
dated February 7, 1997*
10.7 Lease Agreement dated September 18, 1996, effective
as of August 1, 1996, by and between Redbird Development,
Inc., a Texas corporation, and Tri-Star Aircraft Services,
Inc.*
10.8 Lease and Operating Agreement between Pride Aviation,
Inc. and Iberia Parish Airport Authority, dated December
28, 1994, relating to Hangar No. 88-C*
10.9 Lease and Operating Agreement between Iberia Parish
Airport Authority and Pride Aviation, Inc., dated July
23, 1991, relating to Hangar No. 88, as amended by that
certain Agreement dated December 10, 1992*
10.10 Lease and Operating Agreement dated October 2, 1991*
10.11 Revolving Credit Note dated September 30, 1995 from The
Sanders Companies, Inc. payable to the order of Equitable
Bank (now Compass Bank) in the amount of $250,000, and SBA
Loan Agreement, dated August 22, 1994, by and between The
Sanders Companies, Inc. and Equitable Bank (now Compass
Bank) relating to a revolving line of credit loan*
10.12 Amended and Restated Promissory Note dated March 1,
1996 in the original principal amount of $407,689.77
executed by Pride in favor of Louisiana Economic
Development Corporation ("LEDC")*
10.13 Pledge Agreement dated March 1, 1996 from the Company in
favor of LEDC*
10.14 Exchange Agreement dated March 1, 1996 between the Company
and LEDC*
10.15 Form of 10% Convertible Note (included as Exhibit 4.5)*
10.16 Form of Pledge Agreement from the Company in favor of
holders of 10% Convertible Notes*
10.17 Stock Purchase Agreement dated February 21, 1996, by and
among the Company, Pride, Sunbelt Business Capital
Incorporated ("Sunbelt"), Sunbelt Business Capital L.L.C.,
and all the stockholders of Pride and Sunbelt (exhibits and
schedules not included but will be provided supplementally
to the Commission upon request)*
10.18 Employment Agreement between Company and John Arcari*
10.19 First Amendment to Consulting Agreement between Company and
Charles Weed*
10.20 Second Amended and Restated Note dated May 13, 1997 made
by Pride payable to Jerry R. Webb in the original
principal amount of $282,925.47*
10.21 Agency Agreement dated January 19, 1996 between Company and
RAS Securities Corp.*
10.22 Letter agreement dated May 9, 1997 between Company and RAS
Securities Corp. terminating part of Agency Agreement*
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
10.23 First Amendment to Employment Agreement between the
Company and Paul Lubomirski dated August 18, 1997
10.24 First Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated August
18, 1997
10.25 First Amendment to Employment Agreement between the
Company and Tony Ramsaroop dated August 18, 1997
10.26 Employment Agreement dated September 29, 1997 between the
Company and Stuart A. Walker
10.27 Agreement between The Boeing Company and the Company dated
as of September 15, 1997
10.28 Temporary Use License Agreement dated September __,
1997 between the Company and the Oregon Public Employees'
Retirement Fund
11.1 Statement regarding computation of income (loss) per Common
Share
21.1 List of Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Forms of Lock-Up Agreements executed by certain of the
Company's securityholders*
</TABLE>
- --------------------------
* Incorporated herein by reference to the Form SB-2 Registration
Statement of the Company (File No. 333-22727).
<PAGE> 1
EXHIBIT 10.23
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (this "Amendment") is
made this 18th day of August 1997, by and between Aviation Group, Inc., a Texas
corporation (the "Company"), and Paul Lubomirski, an individual resident of the
State of Louisiana ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee have heretofore entered into that
certain Employment Agreement (the "Agreement"), dated as of March 1, 1996,
pursuant to which the Company employed Employee as its President; and
WHEREAS, the Company and Employee have mutually agreed to modify and
amend the Agreement as hereinafter set forth to extend the term thereof;
NOW, THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars ($10.00) paid by each party to the other, the receipt and sufficiency
of which are hereby acknowledged, the Company and Employee do hereby agree that
the Agreement shall be, and the same hereby is, amended and modified as
follows:
1. Section 1.1 of the Agreement is hereby amended to read in its
entirety as follows: "For the term of employment as stated below, the Company
hereby employs Employee as the President of its subsidiary, Pride Aviation,
Inc., an Oklahoma corporation, to perform such duties as the Board of Directors
of the Company (the "Board") shall from time to time prescribe."
2. The first sentence of Section 2.1 of the Agreement shall be
amended to read in its entirety as follows: "Subject to earlier termination as
hereafter provided, the initial term of employment of Employee hereunder shall
commence on the Effective Date and shall end on August 13, 2000."
3. The Company and Employee hereby agree that all of the terms and
conditions of the Agreement not expressly modified or amended by the terms of
this Amendment are and will remain binding upon, and enforceable against, the
parties hereto.
EXECUTED as of the date first written above.
AVIATION GROUP, INC.,
a Texas corporation
By: /s/ LEE SANDERS
---------------------------------
Name: Lee Sanders
-------------------------------
Title: Chairman and CEO
------------------------------
/s/ PAUL LUBOMIRSKI
------------------------------------
Paul Lubomirski, Individually
<PAGE> 1
EXHIBIT 10.24
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This First Amendment to First Amended and Restated Employment
Agreement (this "Amendment") is made this 18th day of August 1997, by and
between Aviation Group, Inc., a Texas corporation (the "Company"), and Lee
Sanders, an individual resident of the State of Texas ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee have heretofore entered into that
certain First Amended and Restated Employment Agreement (the "Agreement"),
dated as of April 15, 1997, pursuant to which the Company has employed Employee
as its President and Chief Executive Officer; and
WHEREAS, the Company and Employee have mutually agreed to modify and
amend the Agreement as hereinafter set forth to extend the term thereof;
NOW, THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars ($10.00) paid by each party to the other, the receipt and sufficiency
of which are hereby acknowledged, the Company and Employee do hereby agree that
the Agreement shall be, and the same hereby is, amended and modified as
follows:
1. The term "Termination Date" as defined in Section 2.1 of the
Agreement shall be amended to be August 13, 2000, unless extended in accordance
with the terms of the Agreement.
2. The Company and Employee hereby agree that all of the terms and
conditions of the Agreement not expressly modified or amended by the terms of
this Amendment are and will remain binding upon, and enforceable against, the
parties hereto.
EXECUTED as of the date first written above.
AVIATION GROUP, INC.,
a Texas corporation
By: /s/ GARY N. COOPER
---------------------------------
Name: Gary N. Cooper
-------------------------------
Title: CFO
------------------------------
/s/ LEE SANDERS
------------------------------------
Lee Sanders, Individually
<PAGE> 1
EXHIBIT 10.25
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (this "Amendment") is
made this 18th day of August 1997, by and between Aviation Group, Inc., a Texas
corporation (the "Company"), and Tony Ramsaroop, an individual resident of the
State of Texas ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee have heretofore entered into that
certain Employment Agreement (the "Agreement"), dated as of February 1, 1997,
pursuant to which the Company has employed Employee as its Vice-President of
its Ground Handling & Service Division; and
WHEREAS, the Company and Employee have mutually agreed to modify and
amend the Agreement as hereinafter set forth to extend the term thereof;
NOW, THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars ($10.00) paid by each party to the other, the receipt and sufficiency
of which are hereby acknowledged, the Company and Employee do hereby agree that
the Agreement shall be, and the same hereby is, amended and modified as
follows:
1. The first sentence of Section 2.1 of the Agreement shall be
amended to read in its entirety as follows: "Subject to earlier termination as
hereafter provided, the initial term of employment of Employee hereunder shall
commence on the Effective Date and shall end on August 13, 2000."
2. The Company and Employee hereby agree that all of the terms and
conditions of the Agreement not expressly modified or amended by the terms of
this Amendment are and will remain binding upon, and enforceable against, the
parties hereto.
EXECUTED as of the date first written above.
AVIATION GROUP, INC.,
a Texas corporation
By: /s/ LEE SANDERS
---------------------------------
Name: Lee Sanders
-------------------------------
Title: Chairman and CEO
------------------------------
/s/ TONY RAMSAROOP
------------------------------------
Tony Ramsaroop, Individually
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is made and entered into by
and between Aviation Group, Inc., a Texas corporation (the "COMPANY"), and
Stuart A. Walker, an individual ("EMPLOYEE"), as of SEPTEMBER 29, 1997(the
"EFFECTIVE DATE").
W I T N E S S E T H:
In consideration of the mutual covenants herein contained, the
employment of Employee upon the terms, conditions and covenants set forth
herein and each act performed pursuant hereto, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT AND DUTIES
1.1 Employment. For the term of employment as below stated, the
Company hereby employs Employee as its Vice-President - Chief Financial Officer
to perform such duties as the Chief Executive Officer of the Company shall from
time to time prescribe.
1.2 Employee's Resources. Employee shall devote substantially all of
his time, energy and capabilities to the performance of such duties and shall
not devote any material portion of his time or abilities to the planning,
organization, promotion, direction, management or conduct of any other business
activity, whether or not such other business activity is pursued for the gain,
profit or pecuniary advantage of Employee, without having first obtained the
consent of the Company. Employee further agrees that, without the prior consent
of the Company, Employee shall not during the term of this Agreement directly
or indirectly (i) invest in any business which is competitive with that of the
Company, (ii) attempt to influence customers or other business associates not
to do business with or not to continue to do business with the Company, or
(iii) take any other action inconsistent with the fiduciary responsibility of
an employee to his employer.
ARTICLE II
TERM OF EMPLOYMENT
2.1 Term. Subject to earlier termination as hereinafter provided, the
initial term of employment of Employee hereunder shall commence on the
Effective Date and shall end on the third anniversary of the Effective Date. As
used herein, the phrase "Term of Employment" shall mean said initial term of
employment as well as any renewal terms thereof.
1
<PAGE> 2
2.2 Termination. This Agreement may be terminated at any time during
the Term of Employment only by reason of and in accordance with the following:
(a) Death. If Employee dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically
terminate as of the date of Employee's death; and the Company shall have no
further obligation to Employee or his estate, except to pay to the estate of
Employee (i) any accrued, but unpaid, Salary (as hereinafter defined) and any
vacation or sick leave benefits which have accrued as of the date of death but
were then unpaid or unused, and (ii) any declared, accrued Bonus Compensation
(as hereinafter defined), if any.
(b) Disability. If, during the term of this Agreement, Employee shall
be prevented from performing his duties hereunder by reason of becoming totally
disabled, then the Company, on thirty (30) days' prior notice to Employee, may
terminate this Agreement. For purposes of this Agreement, Employee shall be
deemed to have become totally disabled when (i) he receives "total disability
benefits" under the Company's disability plan (whether funded with insurance or
self-funded by the Company), or (ii) the Board, upon the written report of a
qualified physician (after complete examination of Employee) designated by the
Board, shall have determined that Employee has become physically and/or
mentally incapable of performing his duties under this Agreement on a permanent
basis. In the event of termination pursuant to this Section, the Company shall
be relieved of all of its obligations under this Agreement, except to pay
Employee any accrued, but unpaid Salary, any vacation or sick leave benefits
which have accrued as of the date on which such permanent disability is
determined, but then remain unpaid, and any declared Bonus Compensation. The
provisions of the preceding sentence shall not affect Employee's rights to
receive payments under the Company's disability insurance plan, if any.
(c) Termination by the Company for Cause. Prior to the expiration of
the term of this Agreement, the Company may discharge Employee for cause and
terminate this Agreement without any further liability hereunder to Employee or
his estate, except to pay any accrued, but unpaid, Salary, any declared Bonus
Compensation, and any vacation benefits due to him. For purposes of this
Agreement, a "discharge for cause" shall mean termination of Employee upon
written notification to Employee limited, however, to one or more of the
following reasons:
(i) Fraud, misappropriation or embezzlement by Employee in connection
with the Company as determined by the affirmative vote of at least a majority
of the Board; or
(ii) Mismanagement, lack of performance, or neglect of Employee's
duties as determined solely by the Chief Executive Officer of Aviation Group,
Inc.; or
2
<PAGE> 3
(iii) Willful and unauthorized disclosure of information proprietary
or confidential to the Company; or
(iv) Employee's breach of any material term or provision of this
Agreement, after notice to Employee of the particular details thereof and a
period of thirty (30) days thereafter within which to cure such breach, if any,
and the failure of Employee to cure such breach within such thirty (30) day
period.
(d) Termination by Employee with Notice. Employee may terminate this
Agreement at any time upon thirty (30) days' notice to the Company, in which
event Employee shall be paid his then prevailing Salary prorated to the date of
termination, plus any accrued, but unused, vacation benefits.
(e) Severance. Severance will be paid to Employee, only if employee is
terminated under terms listed above in Article II, Section 2.2, Subsection
(ii). Employee shall receive severance pay equal to 90 days of regular pay if
employee is terminated for reasons listed in Article II, Section 2.2,
subsection (ii). If employee is terminated for any other reasons with cause
(other than the reasons listed in Article II, Section 2.2, Subsection (ii)),
then Employee is due no severance pay whatsoever.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 Salary and Bonus. As compensation for the Employee's services to
the Company, and other duties and responsibilities herein contemplated,
Employee shall receive from the Company a salary, commencing on SEPTEMBER 29,
1997, and payable in equal monthly installments, equivalent to $90,000.00 per
year. Employee may also be entitled to receive from time to time bonuses and
additional compensation ("BONUS COMPENSATION") when, as, and if determined by
the Board.
3.2 Company hereby grants Employee an option to purchase fifteen
thousand (15,000) shares of the Company's common stock at a purchase price
equal to eighty five (85) per cent of the closing price of the Company's common
stock on the day that this employment agreement is executed by the Employee.
The full details of this offer shall be in accordance with applicable IRS
regulations regarding Employee Stock Options and, additionally, in accordance
with such policies regarding employee stock option grants which may be
established, modified, or revoked by the Company's Board of Directors.
3.3 Employment Benefits. In addition to the Salary and Bonus
Compensation payable to Employee hereunder, Employee shall be entitled to the
following benefits upon satisfaction by Employee of the eligibility
requirements therefor, subject to the following limitations:
3
<PAGE> 4
(a) Sick Leave Benefits and Disability Insurance. Unless this
Agreement is terminated pursuant to the provisions of Section 2.2(b) hereof,
Employee shall be paid sick leave benefits at his then prevailing Salary rate
during his absence due to illness or other incapacity, reduced by the amount,
if any, of worker's compensation, social security entitlements or disability
benefits, if any, under the Company's group disability insurance plan. The
Company, at its own expense, shall provide Employee with the maximum amount of
disability insurance benefits allowed for one in the position of Employee with
the Company under and consistent with any group disability insurance plan which
the Company, at its election, may adopt. Notwithstanding anything herein to the
contrary, Employee's sick leave days shall not exceed the number of sick leave
days provided to employees of similar tenure and position in the Company as
provided in the Company's policy manual, if any.
(b) Hospitalization. Accident. Major Medical and Dental Insurance. The
Company shall provide Employee with group hospitalization, group accident,
major medical, and dental insurance in amounts of coverage comparable to the
coverage, if any, provided other employees in similar positions with the
Company. Coverage will commence on employment date of SEPTEMBER 29, 1997.
(d) Vacations. Employee shall be entitled to a reasonable paid
vacation each year during the term of this Agreement as determined by the
Board, exclusive of holidays and weekends, which vacation shall be taken by
Employee in accordance with the business requirements of the Company at the
time and its personnel policies then in effect relative to this subject.
(e) Working Facilities. The Company shall provide, at its expense,
adequate facilities, equipment, supplies and personnel (including professional,
clerical, support and other personnel) for Employee's use in performing his
duties and responsibilities under this Agreement.
(f) Other Employment Benefits. As an employee of the Company, Employee
shall participate in and receive such other fringe benefits as may be in effect
from time to time for employees of similar tenure and position in the Company,
whether or not specifically enumerated herein and whether or not through any
written plan or arrangement, upon satisfaction by Employee of the eligibility
requirements therefor.
3.4 Reimbursement of Employee Expenses. Employee is authorized to incur
ordinary, necessary and reasonable expenses in connection with the performance
of his duties and responsibilities under this Agreement and for the promotion
of the business and activities of the
4
<PAGE> 5
Company during the term hereof, including, without limitation, expenses for
necessary travel and entertainment and other items of expenses required in the
normal and routine course of Employee's employment hereunder. The Company will
reimburse Employee from time to time for all such business expenses incurred
pursuant to and in conformity with the provisions of this Section provided that
Employee presents to the Company documentary evidence of such expenses
necessary to satisfy the reporting requirements of the Internal Revenue Code of
1986, as amended.
ARTICLE IV
RESTRICTIVE COVENANTS
4.1 Trade Secrets. Propriety and Confidential Information. Employee
recognizes and acknowledges that Employee will acquire during his employment
hereunder access to certain trade secrets and confidential and proprietary
information of the Company (including, but not limited to, financial data,
marketing and sales plans, customer and supplier lists, and technical and
commercial information relating to the Company's properties, customers and
suppliers). Employee acknowledges that the information he obtains through his
employment hereunder constitutes valuable, special, and unique property of the
Company and that the Company would suffer great loss and damage if he should
violate the covenants set forth in this Agreement. Employee acknowledges that
such covenants and conditions are reasonable and necessary for the protection
of the Company's business.
4.2 Solicitation of Employees. Employee agrees that during the Term of
Employment and until three years after the termination or expiration of the
Term of Employment, he will not, directly or indirectly, or by act in concert
with others, employ or attempt to employ or solicit for employment to any
business which is competitive with the Company, any of the Company's employees,
or seek to influence any employees of the Company to leave their employment
with the Company.
4.3 Nondisclosure of Trade Secrets Propriety and Confidential
Information. Employee agrees that without the prior written approval of the
Company, Employee shall not during the Term of Employment or following the
cessation of the Term of Employment for any reason disclose any of the
Company's trade secrets or confidential or proprietary information to any
person or firm, company, association, or other entity (except for authorized
personnel of the Company) for any reason or purpose whatsoever; provided,
however, that this Section shall not apply to the extent that Employee shall be
required to provide information pursuant to a valid, lawful subpoena or court
order so long as Employee shall have made his best efforts in good faith to
cause the court of relevant jurisdiction, to the greatest extent possible, to
limit the scope of such subpoena or order and protect the confidentiality of
the information so disclosed.
5
<PAGE> 6
4.4 Noncompetition Agreement. Employee covenants and agrees to refrain
for three years after any termination or expiration of his employment with the
Company from engaging in, or being employed by or performing consulting
services for any company or firm engaged in, the business of providing painting
and/or paint stripping services for aircraft, aircraft cleaning services,
ground handling services and/or light catering to the airline industry or any
other business in which the Company may be engaged at the time of such
employment termination or expiration.
4.5 Solicitation of Business of Company. Employee covenants and agrees
that during the Term of Employment Employee will not attempt to influence
customers, suppliers, and other business associates not to do business with or
not to continue to do business with the Company or its affiliates.
4.6 Survival of Covenants. Sections 4.2, 4.3 and 4.4 hereof shall
survive any expiration or termination of this Agreement and shall continue to
bind the parties hereto in accordance with the terms hereof. The covenants
contained in this Article IV shall be construed as covenants or agreements
independent of any other provision of this Agreement and the allegation or
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of the covenants contained herein.
4.7 Remedies. In the event of breach or threatened breach by Employee of any
provision of this Article IV, the Company shall be entitled to relief by
temporary restraining order, temporary injunction, permanent injunction, or
otherwise in addition to other legal and equitable relief to which it may be
entitled, including any and all monetary damages which the Company may incur as
a result of said breach, violation or threatened breach or violation. The
Company may pursue any remedy available to it concurrently or consecutively in
any order as to any breach, violation, or threatened breach or violation, and
the pursuit of one of such remedies at any time will not be deemed an election
of remedies or waiver of the right to pursue any other of such remedies as to
such breach, violation, or threatened breach or violation, or as to any other
breach, violation, or threatened breach or violation.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Notices. Whenever, in connection with this Agreement, any notice is
required to be given or any other act or event is to be done or occur on or by
a particular number of days, and the date thus particularized should be a
Saturday, Sunday, or bank holiday in the City of Dallas, Texas, such date shall
be postponed to the next day which shall not be a Saturday, Sunday, or bank
holiday in the City of Dallas, Texas. In the event a notice or other document
is required to be given hereunder to the Company or Employee, such notice or
other document shall either be personally delivered or be mailed to the party
entitled to receive the same by certified mail, return receipt requested, at
the appropriate address set forth below or at such other address as such party
shall designate in a written notice given in accordance with this Section:
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Company: Employee:
Aviation Group, Inc. Stuart A. Walker
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
Notice shall be deemed given on the date of actual delivery, if delivered in
person, or, if mailed, then on the date noted on the return receipt.
5.2 Binding Effect. The rights and obligations of the parties shall
inure to the benefit of and shall be binding upon their heirs, representatives,
successors and assigns as the case may be.
5.3 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had
not been contained herein.
5.4 Waiver. Modification and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning employment and
supersedes all prior and contemporaneous representations, understandings and
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by the Company and all such prior or
contemporaneous representations, understandings and agreements, both oral and
written, are hereby terminated. This Agreement may not be modified, altered or
amended except by written agreement of all the parties hereto.
5.5 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND ACTIONS HEREON SHALL BE
BROUGHT IN DALLAS COUNTY, TEXAS.
5.6 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
5.7 Captions. The captions herein are inserted for convenience only
and shall not affect the construction of this Agreement.
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IN WITNESS WHEREOF, this Agreement is executed as of the date first set forth
above.
COMPANY:
AVIATION GROUP, INC., a Texas corporation
By: /s/ LEE SANDERS
---------------------------------------
Name: Lee Sanders
-------------------------------------
Title: President & CEO
------------------------------------
EMPLOYEE:
/s/ STUART A. WALKER
------------------------------------------
Stuart A. Walker
August 29, 1997
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EXHIBIT 10.27
AGREEMENT
6-5675-JKH-97002
between
THE BOEING COMPANY
and
PRIDE AVIATION, INC.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION TITLE
- ------- -----
<S> <C>
1.0 DEFINITIONS
2.0 ISSUANCE OF PURCHASE ORDER
AND APPLICABLE TERMS
2.1 Issuance of Purchase Order
2.2 Acceptance of Purchase Order
2.3 Written Authorization to Proceed
3.0 TITLE AND RISK OF LOSS
4.0 DELIVERY
4.1 Aircraft Arrival
4.2 Requirements
4.3 Delay
4.4 Notice of Labor Disputes
5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES
5.1 Review
5.2 Resident Representatives
6.0 QUALITY ASSURANCE, INSPECTION, REJECTION, AND
ACCEPTANCE
6.1 Seller's Inspection
6.1.1 Seller's Disclosure
6.2 Boeing's Inspection and Rejection
6.3 Federal Aviation Administration or Equivalent Government Agency
Inspection
6.4 Retention of Records
6.5 Language for Technical Information
7.0 EXAMINATION OF RECORDS
8.0 CHANGES
8.1 General
</TABLE>
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<TABLE>
<CAPTION>
SECTION TITLE
- ------- -----
<S> <C>
9.0 PRODUCT ASSURANCE
10.0 TERMINATION FOR CONVENIENCE
10.1 Basis for Termination
10.2 Termination Instructions
10.3 Seller's Claim
10.4 Failure to Submit a Claim
10.5 Partial Termination
10.6 Price
10.7 Deductions
10.8 Partial Payment/Payment
10.9 Seller's Accounting Practices
10.10 Records
11.0 EVENTS OF DEFAULT AND REMEDIES
11.1 Events of Default
11.2 Remedies
12.0 EXCUSABLE DELAY
13.0 SUSPENSION OF WORK
14.0 TERMINATION OR CANCELLATION: INDEMNITY
AGAINST SUBCONTRACTOR'S CLAIMS
15.0 ASSURANCE OF PERFORMANCE
16.0 RESPONSIBILITY FOR PROPERTY
17.0 PROPRIETARY INFORMATION AND ITEMS
18.0 COMPLIANCE WITH LAWS
18.1 Seller's Obligation
18.2 Government Requirements
19.0 INTEGRITY IN PROCUREMENT
20.0 INFRINGEMENT
</TABLE>
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<TABLE>
<CAPTION>
SECTION TITLE
- ------- -----
<S> <C>
21.0 NOTICES
21.1 Addresses
21.2 Effective Date
21.3 Approval or Consent
22.0 PUBLICITY
23.0 INDEMNIFICATION AND INSURANCE
24.0 NOTICE OF DAMAGE
25.0 RESPONSIBILITY FOR PERFORMANCE
25.1 Subcontracting
25.2 Reliance
25.3 Assignment
26.0 WARRANTY
27.0 NON-WAIVER
28.0 HEADINGS
29.0 PARTIAL INVALIDITY
30.0 APPLICABLE LAW; JURISDICTION
31.0 AMENDMENT
32.0 TAXES
32.1 Inclusion of Taxes in Price
32.2 Litigation
32.3 Rebates
33.0 PLACARDS
34.0 PRICES
34.1 Product Pricing
34.2 Option Pricing
34.3 Exercise of Option
35.0 PAYMENT
36.0 ENTIRE AGREEMENT
</TABLE>
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This Agreement ("Agreement") is entered into as of September 15, 1997,
by and between Pride Aviation, Inc., an Oklahoma corporation with its
principal office in New Iberia, Louisiana ("Seller"), and The Boeing Company, a
Delaware corporation with its principal office in Seattle, Washington, acting
by and through its division the Boeing Commercial Airplane Group ("Boeing").
RECITALS
A. Boeing produces commercial airplanes.
B. Seller provides certain goods and services relating to the painting of
such aircraft.
C. Seller desires to sell and Boeing desires to purchase certain of
Seller's goods and services in accordance with the terms set forth in
this Agreement.
Now, therefore, in consideration of the mutual covenants set forth
herein, the parties agree as follows:
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AGREEMENTS
1.0 DEFINITIONS
The definitions set forth below shall apply to the following terms as
they are used in this Agreement or the Order. Words importing the
singular number shall also include the plural number and vice versa.
(a) "Aircraft" means the Boeing aircraft listed in ATTACHMENT B,
Aircraft Delivery Schedule, which is incorporated herein by this
reference.
(b) "Correction" means repair, correction or provision of the
Services to bring defective Services into compliance with all
requirements of the warranty, or at Seller's option, replacement
of such Services that meets all requirements of the warranty.
(c) "Customer" means any owner, operator or user of the Aircraft and
any other individual, partnership, corporation or entity which
has or acquires any interest in the Aircraft from, through or
under Boeing.
(d) "Drawing" means an automated or manual depiction of graphics or
technical information, including the parts list and
specifications relating thereto.
(e) "FAA" means the United States Federal Aviation Administration or
any successor agency thereto.
(f) "FAR" means the Federal Acquisition Regulations in effect on the
date of this Agreement.
(g) "Materiel Representative" means the individual designated from
time to time by Boeing as being primarily responsible for
interacting with Seller regarding this Agreement and the Order.
(h) "Order" means the purchase order issued by Boeing and accepted
by Seller under the terms of this Agreement. The Order is a
contract between Boeing and Seller.
(i) "Services" means the services and goods provided by Seller in
connection with the exterior painting of the Aircraft in
accordance with the Statement of Work.
(j) "Statement of Work" means the ATTACHMENT A Statement of Work,
Exterior Decorative Paint of Boeing Aircraft, which is
incorporated herein by this reference.
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2.0 ISSUANCE OF ORDER AND APPLICABLE TERMS
2.1 Issuance of Purchase Order
Boeing may issue purchase orders to Seller from time to time. Each
purchase order shall contain a description of the Services ordered, a
reference to the applicable specifications and Drawings, the quantities
and prices, the delivery schedule, the terms and place of delivery and
any special conditions.
Each Order which incorporates this Agreement shall be governed by and be
deemed to include the provisions of this Agreement. Purchase Order Terms
and Conditions, Form D1-4100-4045, Form P252T and any other purchase
order terms and conditions which may conflict with this Agreement, do
not apply to the Order.
2.2 Acceptance of Purchase Order
Each purchase order is Boeing's offer to Seller and acceptance is
strictly limited to its terms. Boeing will not be bound by and
specifically objects to any term or condition which is different from or
in addition to the provisions of the purchase order, whether or not such
term or condition will materially alter the purchase order. Seller's
commencement of performance or acceptance of the purchase order in any
manner shall conclusively evidence Seller's acceptance of the purchase
order as written. Boeing may revoke any purchase order prior to
Boeing's receipt of Seller's written acceptance or Seller's
commencement of performance.
2.3 Written Authorization to Proceed
Boeing's Material Representative may give written authorization to
Seller to commence performance before Boeing issues a purchase order.
If Boeing in its written authorization specifies that a purchase order
will be issued, Boeing and Seller shall proceed as if a purchase order
had been issued. This Agreement and the terms stated in the written
authorization shall be deemed to be a part of Boeing's offer and the
parties shall promptly agree on any open purchase order terms. If
Boeing does not specify in its written authorization that a purchase
order shall be issued, Boeing's obligation is strictly limited to the
terms of the written authorization. For purposes of this Section 2.3
only, written authorization includes electronic transmission chosen by
Boeing.
If Seller commences performance before a purchase order is issued or
without receiving Boeing's prior written authorization to proceed, such
performance shall be at Seller's expense.
3.0 TITLE AND RISK OF LOSS
Title to and risk of any loss or damage to the Aircraft shall remain
at all times in Boeing during the period of time in which the Aircraft
is in the possession of or under the care, custody or control of Seller,
except for loss or damage thereto resulting from Seller's fault or
negligence.
4.0 DELIVERY
4.1 Aircraft Arrival
Boeing shall specify in the ATTACHMENT B Aircraft Delivery Schedule an
estimated arrival date of each Aircraft at Seller's facility. Seller
acknowledges that such date is only Boeing's best estimate and Boeing
shall not be responsible for or deemed to be in default under the Order
if an arrival date is changed. In the event the arrival date of the
Aircraft is different from the one set forth in the Order, the parties
shall negotiate a revised delivery and Order completion date.
Notwithstanding the provision for an equitable adjustment included in
Section 8.0, any change in the arrival date shall not entitle Seller to
an equitable adjustment in the Order price or in the total time required
to complete the Services.
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4.2 Requirements
The Services shall be provided in strict accordance with the schedule
and other requirements specified in the Order.
4.3 Delay
Seller shall notify Boeing immediately of any circumstances that may
cause a delay in completion of the performance of the Services, stating
the estimated period of delay and the reasons therefor. If requested by
Boeing, Seller shall use additional effort, including premium effort, to
avoid or minimize delay to the maximum extent possible. All additional
costs resulting from such premium effort shall be borne by Seller with
the exception of such costs attributable to delays caused directly by
Boeing. Nothing herein shall prejudice any of the rights or remedies
provided to Boeing in the Order or by law.
4.4 Notice of Labor Disputes
Seller shall immediately notify Boeing of any actual or potential labor
dispute that may disrupt the timely performance of the Order. Seller
shall include the substance of this Section 4.4, including this
sentence, in any subcontract relating to the Order if a labor dispute
involving the subcontractor would have the potential to delay the timely
performance of the Order. Each subcontractor, however, shall only be
required to give the necessary notice and information to its next
higher-tier subcontractor.
5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES
5.1 Review
At Boeing's request, Seller shall provide at Seller's facility or at a
place designated by Boeing, a review explaining the status of the Order,
actions taken or planned relating to the Order and any other relevant
information. Nothing herein may be construed as a waiver of Boeing's
rights to proceed against Seller because of any delinquency.
Boeing and Customer representatives may enter Seller's plant at all
reasonable times to conduct preliminary inspections and tests of the
work-in-process. Seller shall include in its subcontracts issued in
connection with the Order a like provision giving Boeing and Customer
the right to enter the premises of Seller's subcontractors. When
requested by Boeing, Seller shall accompany Boeing and Customer to
Seller's subcontractors.
5.2 Resident Representatives
Boeing and Customer may at their discretion and for such periods as they
deem necessary assign resident personnel at Seller's facilities. Seller
shall furnish, free of charge, all office space, secretarial service and
other facilities and assistance reasonably required by the
representatives of Boeing and Customer at Seller's plant. The resident
team will function under the guidance of Boeing's manager. The
resident team will provide communication and coordination to ensure
timely performance of the Order. The resident team shall be allowed
access to all work areas, Order status reports and management review
necessary to assure timely performance and conformance with the
requirements of the Order. Notwithstanding such assistance, Seller
remains solely responsible for performing in accordance with the Order.
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6.0 QUALITY ASSURANCE INSPECTION, REJECTION, & ACCEPTANCE
6.1 Seller's Inspection
Seller shall inspect or otherwise verify that all Services and
components thereof, including those procured from or furnished by
subcontractors or Boeing, comply with the requirements of the Order.
Seller shall be responsible for all tests and inspections of the
work-in-process and any component thereof during Seller's performance
of the Services and final inspection. Seller shall provide a
certification stating that the Services comply with the requirements of
the Order.
6.1.1 Seller's Disclosure
Seller will immediately notify Boeing when discrepancies in Seller's
processes or the Services are discovered or suspected for the Services
Seller has provided.
6.2 Boeing's Inspection and Rejection
Unless otherwise specified in the Order, all Services shall be subject
to final inspection and acceptance by Boeing at Seller's plant,
notwithstanding any payment or prior inspection. Boeing may reject any
Services which do not strictly conform to the requirements of the
Order. Boeing shall by notice, rejection tag or other communication
notify Seller of such rejection. Whenever possible, Boeing may
coordinate with Seller prior to disposition of the rejected Services,
however, Boeing shall retain final disposition authority with respect
to all rejections. At Seller's risk and expense, all rejected Services
shall be immediately corrected, repaired, or replaced by Seller;
provided however, at Seller's risk and expense, Boeing may elect to
correct, repair, or replace the rejected Services with such assistance
from Seller as Boeing may require. All repair, replacement and other
corrections and redelivery shall be completed within such time as
Boeing may require. All costs and expenses, loss of value and any other
damages incurred as a result of or in connection with nonconformance
and repair, replacement or other correction may be recovered from
Seller by an equitable price reduction, set-off or credit against any
amounts that may be owed to Seller under the Order or otherwise.
6.3 Federal Aviation Administration or Equivalent
Government Agency Inspection
Representatives of Boeing, the FAA or any equivalent government agency
may inspect and evaluate Seller's plant including, but not limited to,
Seller's and subcontractor's facilities, systems, data, equipment,
inventory holding areas, procedures, personnel, testing, and all
work-in-process and completed Services. For purposes of this Section
6.3, equivalent government agency shall mean those governmental
agencies so designated by the FAA or those agencies within individual
countries which maintain responsibility for assuring aircraft
airworthiness.
6.4 Retention of Records
Quality assurance records shall be maintained on file at Seller's
facility and available to Boeing's authorized representatives. Seller
shall retain such records for a period of not less than seven (7) years
from the date of final payment under the Order.
6.5 Language for Technical Information
All reports, drawings and other technical information submitted to
Boeing for review or approval shall be in English and shall employ the
units of measure customarily used by Boeing in the U.S.A.
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7.0 EXAMINATION OF RECORDS
Seller shall maintain complete and accurate records regarding all
Services provided under the Order. Such records shall support all
Services performed, allowances claimed and costs incurred by Seller in
the performance of the Order, including but not limited to those
factors which comprise or affect direct labor hours, direct labor
rates, material costs, burden rates and subcontracts. Such records and
other data shall be capable of verification through audit and analysis
by Boeing and be available to Boeing at Seller's facility for Boeing's
examination and audit at all reasonable times from the date of the
Order until three (3) years after final payment under the Order. Seller
shall provide assistance to interpret such data if requested by Boeing.
Such examination shall provide Boeing with complete information
regarding Seller's performance for use in price negotiations with
Seller relating to the Order or any future orders, including but not
limited to negotiation of equitable adjustments for changes and
termination/obsolescence claims pursuant to Section 8.0. Boeing shall
treat all information disclosed under this Section as confidential.
8.0 CHANGES
8.1 General.
Boeing's Materiel Representative may at any time by written change
order make changes within the general scope of the Order in any one or
more of the following: drawings, designs, specifications, shipping,
packing, place of inspection, place of delivery, place of acceptance,
adjustments in delivery schedules, or the amount of Boeing furnished
material. Seller shall proceed immediately to perform the Order as
changed. If any such change causes an increase or decrease in the
cost of or the time required for the performance of any part of the
Services, whether changed or not changed by the change order, an
equitable adjustment shall be made in the price of or the delivery
schedule for those Services affected, and the Order shall be modified
in writing accordingly. Any claim by Seller for adjustment under this
Section 8.1 must be received by Boeing in writing no later than sixty
(60) days from the date of receipt by Seller of the written change
order or within such further time as the parties may agree in writing
or such claim shall be deemed waived. Nothing in this Section 8.1
shall excuse Seller from proceeding with the Order as changed,
including failure of the parties to agree on any adjustment to be made
under this Section 8.1.
If Seller considers that the conduct of any of Boeing's employees has
constituted a change hereunder, Seller shall immediately notify
Boeing's Materiel Representative in writing as to the nature of such
conduct and its effect on Seller's performance. Pending direction from
Boeing's Materiel Representative, Seller shall take no action to
implement any such change.
9.0 PRODUCT ASSURANCE
Boeing's acceptance of the completed Services does not alter or affect
the obligations of Seller or the rights of Boeing and Customer as
provided by law.
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10.0 TERMINATION FOR CONVENIENCE
10.1 Basis for Termination: Notice
Boeing may, from time to time and at Boeing's sole discretion, terminate
all or part of the Order issued hereunder, by written notice to Seller.
Any such written notice of termination shall specify the effective date
and the extent of any such termination.
10.2 Termination Instructions
On receipt of a written notice of termination pursuant to Section 10.1,
unless otherwise directed by Boeing, Seller shall:
A. Immediately stop work as specified in the notice;
B. Immediately terminate its subcontracts and purchase orders
relating to the Services terminated;
C. Settle any termination claims made by its subcontractors or
suppliers; provided, that Boeing shall have approved the amount
of such termination claims prior to such settlement;
D. Preserve and protect all terminated inventory.
E. At Boeing's request, transfer title (to the extent not
previously transferred) and deliver to Boeing or Boeing's
designee all supplies and materials, work-in-process, tooling
and manufacturing drawings and data produced or acquired by
Seller for the performance of the Order, all in accordance with
the terms of such request;
F. Take all reasonable steps required to return, or at Boeing's
option and with prior written approval to destroy, all Boeing
proprietary information and items in the possession, custody or
control of Seller;
G. Take such other action as, in Boeing's reasonable opinion, may
be necessary, and as Boeing shall direct in writing, to
facilitate termination of the Order; and
H. Complete performance of the Services not terminated.
10.3 Seller's Claim
If Boeing terminates the Order in whole or in part pursuant to Section
10.1 above, Seller shall have the right to submit a written termination
claim to Boeing in accordance with the terms of this Section 10.3. Such
termination claim shall be submitted to Boeing not later than six (6)
months after Seller's receipt of the termination notice and shall be in
the form prescribed by Boeing. Such claim must contain sufficient detail
to explain the amount claimed, including detailed inventory schedules
and a detailed breakdown of all costs claimed separated into categories
(e.g., materials, purchased parts, finished components, labor, burden,
general and administrative), and to explain the basis for allocation of
all other costs. Seller shall be entitled to be compensated in
accordance with and to the extent allowed under the terms of FAR
52-249-2(e)-(m) excluding (i), which is incorporated herein by this
reference except "Government" and "Contracting Officer" shall mean
Boeing, "Contractor" shall mean Seller and "Contract" shall mean Order.
11
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10.4 Failure to Submit a Claim
Notwithstanding any other provision of this Section 10.0, if Seller
fails to submit a termination claim within the time period set forth
above, Seller shall be barred from submitting a claim and Boeing shall
have no obligation for payment to Seller under this Section 10.0 except
for those Services previously delivered and accepted by Boeing.
10.5 Partial Termination
Any partial termination of the Order shall not alter or affect the terms
and conditions of the Order with respect to the Services not terminated.
10.6 Price
Termination under any of the above paragraphs shall not result in any
change to the price for the Services not terminated.
10.7 Deductions
The following items shall be deducted from any claim submitted by
Seller:
A. All unliquidated advances or other payments made by Boeing to
Seller pursuant to a terminated Order;
B. Any claim which Boeing has against Seller.
10.8 Partial Payment/Payment
Payment, if any, to be paid under this Section 10.0 shall be made thirty
(30) days after settlement between the parties or as otherwise agreed to
between the parties. Boeing may make partial payments and payments
against costs incurred by Seller for the terminated portion of the
Order, if the total of such payments does not exceed the amount to which
Seller would be otherwise entitled. If the total payments exceed the
final amount determined to be due, Seller shall repay the excess to
Boeing upon demand.
10.9 Seller's Accounting Practices
Boeing and Seller agree that Seller's "normal accounting practices" used
in developing the price of the Services shall also be used in
determining the allocable costs at termination. For purposes of this
Section 10.9, Seller's "normal accounting practices" refers to Seller's
method of charging costs as either a direct charge, overhead expense,
general administrative expense, etc.
10.10 Records
Unless otherwise provided in this Agreement or by law, Seller shall
maintain all records and documents relating to the terminated portion
of the Order for three (3) years after final settlement of Seller's
termination claim.
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11.0 EVENTS OF DEFAULT AND REMEDIES
11.1 Events of Default
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
A. Any failure by Seller to deliver, when and as required by this
Agreement or the Order, any Services, except as provided in
Section 12.0; or
B. Any failure by Seller to provide an acceptable Assurance of
Performance within the time specified in Section 15.0, or
otherwise in accordance with applicable law; or,
C. Any failure by Seller to perform or comply with any obligation
set forth in Section 18.0; or
D. Seller is or has participated in the sale, purchase or
manufacture of airplane parts without the required approval of
the FAA.
E. Any failure by Seller to perform or comply with any obligation
(other than as described in the foregoing Sections 11.1.A,
11.1.B, 11.1.C and 11.1.D) set forth in this Agreement or the
Order and such failure shall continue unremedied for a period
of thirty (30) days or more following receipt by Seller of
notice from Boeing specifying such failure; or
F. (a) the suspension, dissolution or winding-up of Seller's
business, (b) Seller's insolvency, or its inability to pay
debts, or its nonpayment of debts, as they become due, (c) the
institution of reorganization, liquidation or other such
proceedings by or against Seller or the appointment of a
custodian, trustee, receiver or similar person for Seller's
properties or business, (d) an assignment by Seller for the
benefit of its creditors, or (e) any action of Seller for the
purpose of effecting or facilitating any of the foregoing.
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11.2 Remedies
If any Event of Default shall occur:
A. Cancellation
Boeing may, by giving written notice to Seller, immediately
cancel the Order, in whole or in part, and Boeing shall not be
required after such notice to accept the tender by Seller of any
Services with respect to which Boeing has elected to cancel the
Order.
B. Cover
Boeing may produce or provide, or may engage any other persons
to produce or provide, any services in substitution for the
Services to be delivered or provided by Seller hereunder with
respect to which the Order has been canceled and, in addition to
any other remedies or damages available to Boeing hereunder or
at law or in equity, Boeing may recover from Seller the
difference between the price for such Services and the aggregate
expense, including, without limitation, administrative and other
indirect costs, paid or incurred by Boeing to produce or
provide, or engage other persons to produce or provide, any
Services.
C. Setoff
Boeing shall, at its option, have the right to set off against
and apply to the payment or performance of any obligation, sum
or amount owing at any time to Boeing under the Order, all
deposits, amounts or balances held by Boeing for the account of
Seller and any amounts owed by Boeing to Seller, regardless of
whether any such deposit, amount, balance or other amount or
payment is then due and owing.
D. Transfer of Materials
As compensation for the additional costs which Boeing will incur
as a result of the actual physical transfer of production
capabilities from Seller to Boeing or Boeing's designee, Seller
shall upon the request of Boeing, transfer and deliver to Boeing
or Boeing's designee title to any or all (i) Boeing-furnished
material, (ii) raw materials, work-in-process, and all other
Services either complete or incomplete, (iii) Proprietary
Information and Materials of Boeing including without limitation
planning data, drawings and other Proprietary Information and
Materials relating to the Services in the possession or under
the effective control of Seller or any of its subcontractors, in
each case free and clear of all liens, claims or other rights of
any person.
Seller shall be entitled to receive from Boeing reasonable
compensation for any item accepted by Boeing which has been
transferred to Boeing pursuant to this Section 11.2.D (except
for any item the price of which shall have been paid to Seller
prior to such transfer); provided, however, that such
compensation shall not be paid directly to Seller, but shall be
accounted for as a setoff against any damages payable by Seller
to Boeing as a result of any Event of Default.
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E. Remedies Generally
No Failure on the part of Boeing in exercising any right or
remedy hereunder, or as provided by law or in equity, shall
impair, prejudice or constitute a waiver of any such right or
remedy, or shall be construed as a waiver of any Event of
Default or as an acquiescence therein. No single or partial
exercise of any such right or remedy shall preclude any other
or further exercise thereof or the exercise of any other right
or remedy. No acceptance of partial payment or performance of
any of Seller's obligations hereunder shall constitute a waiver
of any Event of Default or a waiver or release of payment or
performance in full by Seller of any such obligation. All
rights and remedies of Boeing hereunder and at law and in
equity shall be cumulative and not mutually exclusive and the
exercise of one shall not be deemed a waiver of the right to
exercise any other. Nothing contained in this Agreement shall
be construed to limit any right or remedy of Boeing now or
hereafter existing at law or in equity.
12.0 EXCUSABLE DELAY
If completion of any Services is delayed by unforeseeable circumstances
beyond the control and without the fault or negligence of Seller or of
its suppliers or subcontractors (any such delay being hereinafter
referred to as "Excusable Delay"), the completion of such Services
shall be extended for a period to be determined by Boeing after an
assessment by Boeing of alternate work methods. Excusable Delays may
include, but are not limited to, acts of God, war, riots, any act of
government unless such act is due to Seller's noncompliance with a law
or other governmental requirement, rule, regulation, or order
promulgated by any governmental agency including but not limited to
those with respect to environmental protection, fires, floods,
epidemics, quarantine restrictions, freight embargoes, strikes or
unusually severe weather. However, the above notwithstanding, Boeing
expects Seller to continue production, recover lost time and support
all schedules as established under the Order. Therefore, it is
understood and agreed that (i) delays of less than two (2) days
duration shall not be considered to be Excusable Delays unless such
delays shall occur within three (6) days preceding the scheduled
completion date of any Services and (ii) if delay in completion of any
Services is caused by the default of any of Seller's subcontractors or
suppliers, such delay shall not be considered an Excusable Delay unless
the supplies or services to be provided by such subcontractor or
supplier are not obtainable from other sources in sufficient time to
permit Seller to meet the applicable completion schedules. If
completion of any Services is delayed by any Excusable Delay for more
than seven (7) days, Boeing may, without any additional extension,
cancel all or part of the Order with respect to the delayed Services,
and exercise any of its remedies in accordance with Section 11.2
provided however, that Boeing shall not be entitled to monetary damages
or specific performance to the extent Seller's breach is the result of
an Excusable Delay.
13.0 SUSPENSION OF WORK
Boeing may at any time, by written order to Seller, require Seller to
stop performance of all or any part of the Services called for by the
Order hereafter referred to as a "Stop Work Order" issued pursuant to
this Section 13.0. On receipt of a Stop Work Order, Seller shall
promptly comply with its terms and take all reasonable steps to
minimize the occurrence of costs arising from the work covered by the
Stop Work Order during the period of work stoppage. Within the period
covered by the Stop Work Order (including any extension thereof) Boeing
shall either (i) cancel the Stop Work Order or (ii) terminate or cancel
the Services covered by the Stop Work Order in accordance with the
provisions of Section 10.0 or 11.0. In the event the Stop Work Order is
canceled by Boeing or the period of the Stop Work Order (including any
extension thereof) expires, Seller shall promptly resume work in
accordance with the terms of the Order.
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14.0 TERMINATION OR CANCELLATION AND INDEMNITY AGAINST SUBCONTRACTOR CLAIMS
Boeing shall not be liable for any loss or damage resulting from any
termination pursuant to Section 10.1, except as expressly provided in
Section 10.3 or any cancellation under Section 12.0 except to the extent
that such cancellation shall have been determined by Boeing and Seller
to have been wrongful, in which case such wrongful cancellation shall be
deemed a termination pursuant to Section 10.1 and therefore shall be
limited to the payment to Seller of the amount or amounts identified in
Section 10.3. As subcontractor claims are included in Seller's
termination claim pursuant to Section 10.3, Seller shall indemnify
Boeing and hold Boeing harmless from and against (i) any and all claims,
suits and proceedings against Boeing by any subcontractor or supplier of
Seller in respect of any such termination and (ii) any and all costs,
expenses, losses and damages incurred by Boeing in connection with any
such claim, suit or proceeding.
15.0 ASSURANCE OF PERFORMANCE
A. Seller of Provide Assurance
If Boeing determines, at any time or from time to time, that it
is not sufficiently assured of Seller's full, timely and
continuing performance hereunder, or if for any other reason
Boeing has reasonable grounds for insecurity, Boeing may
request, by notice to Seller, written assurance (hereafter an
"Assurance of Performance") with respect to any specific matters
affecting Seller's performance hereunder, that Seller is able to
perform all of its respective obligations under the Order when
and as specified herein. Each Assurance of Performance shall be
delivered by Seller to Boeing as promptly as possible, but in
any event no later than three (3) calendar days following
Boeing's request therefor and each Assurance of Performance
shall be accompanied by any information, reports or other
materials, prepared by Seller, as Boeing may reasonably request.
Boeing may suspend all or any part of Boeing's performance
hereunder until Boeing receives an Assurance of Performance from
Seller satisfactory in form and substance to Boeing.
B. Meetings and Information
Boeing may request one or more meetings with senior management
or other employees of Seller for the purpose of discussing any
request by Boeing for Assurance of Performance or any Assurance
of Performance provided by Seller. Seller shall make such
persons available to meet with representatives of Boeing as soon
as may be practicable following a request for any such meeting
by Boeing and Seller shall make available to Boeing any
additional information, reports or other materials in connection
therewith as Boeing may reasonably request.
16.0 RESPONSIBILITY FOR PROPERTY
On delivery to Seller or manufacture or acquisition by it of any
materials, parts, tooling or other property, title to any of which is in
Boeing, excluding the Aircraft, Seller shall assume the risk of and
shall be responsible for any loss thereof or damage thereto. In
accordance with the provisions of the Order, but in any event on
completion thereof, Seller shall return such property to Boeing in the
condition in which it was received except for reasonable wear and tear
and except to the extent that such property has been incorporated in
Services delivered under the Order or has been consumed in the normal
performance of the Services under the Order. Notwithstanding the
foregoing, hazardous materials shall be returned to Boeing only if such
materials are unopened and in the original packaging; Seller shall take
ownership of and responsibility for any hazardous materials not in such
condition at the completion of the Order.
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17.0 PROPRIETARY INFORMATION AND ITEMS
Boeing and Seller shall each keep confidential and protect from
disclosure all (a) confidential, proprietary, and/or trade secret
information; (b) tangible items containing, conveying, or embodying such
information; and (c) tooling obtained from and/or belonging to the other
in connection with the Order (collectively referred to as "Proprietary
Information and Materials"). Boeing and Seller shall each use
Proprietary Information and Materials of the other only in the
performance of and for the purpose of the Order. Provided, however, that
despite any other obligations or restrictions imposed by this Section
17.0, Boeing shall have the right to use and disclose Seller's
Proprietary Information and Materials for the purposes of testing,
certification, use, sale, or support of any item delivered under the
Order, or any airplane including such an item; and any such disclosure
by Boeing shall, whenever appropriate, include a restrictive legend
suitable to the particular circumstances. The restrictions on disclosure
or use of Proprietary Information and Materials by Seller shall apply to
all materials derived by Seller or others from Boeing's Proprietary
Information and Materials. Upon Boeing's request at any time, and in any
event upon the completion, termination or cancellation of the Order,
Seller shall return all of Boeing's Proprietary Information and
Materials, and all materials derived from Boeing's Proprietary
Information and Materials to Boeing unless specifically directed
otherwise in writing by Boeing. Seller shall not, without the prior
written authorization of Boeing, sell or otherwise dispose of (as scrap
or otherwise) any parts or other materials containing, conveying,
embodying, or made in accordance with or by reference to any Proprietary
Information and Materials of Boeing. Prior to disposing of such parts or
materials as scrap, Seller shall render them unusable. Boeing shall have
the right to audit Seller's compliance with this Section 17.0. Seller
may disclose Proprietary Information and Materials of Boeing to its
subcontractors as required for the performance of the Order, provided
that each such subcontractor first assumes, by written agreement, the
same obligations imposed upon Seller under this Section 17.0 relating to
Proprietary Informations and Materials; and Seller shall be liable to
Boeing for any breach of such obligation by such subcontractor. The
provisions of this Section 17.0 are effective in lieu of, and will apply
notwithstanding the absence of, any restrictive legends or notices
applied to Proprietary Informations and Materials; and the provisions of
this Section 17.0 shall survive the performance, completion, termination
or cancellation of the Order. This Section 17.0 supersedes and replaces
any and all other prior agreements or understandings between the parties
to the extent that such agreements or understandings relate to Boeing's
obligations relative to confidential, proprietary, and/or trade secret
information, or tangible items containing, conveying, or embodying such
information, obtained from Seller and related to any Services,
regardless of whether disclosed to the receiving party before or after
the effective date of this Agreement.
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18.0 COMPLIANCE WITH LAWS
18.1 Seller's Obligation
Seller shall be responsible for complying with all laws, including, but
not limited to, any statute, rule, regulation, judgment, decree, order,
or permit applicable to its performance under this Agreement. Seller
further agrees (1) to notify Boeing of any obligation under this
Agreement which is prohibited under applicable environmental law, at the
earliest opportunity but in all events sufficiently in advance of
Seller's performance of such obligation so as to enable the
identification of alternative methods of performance, and (2) to notify
Boeing at the earliest possible opportunity of any aspect of its
performance which become subject to additional environmental regulation
or which Seller reasonably believes will become subject to additional
regulation which may affect Seller's ability to perform this Agreement
according to its terms.
18.2 Government Requirements
If any of the work to be performed under this Agreement is performed in
the United States, Seller shall, via invoice or other form satisfactory
to Boeing, certify that the Services covered by the Order were provided
in compliance with Sections 6, 7, and 12 of the Fair Labor Standards Act
(29 U. S. C. 201-291), as amended, and the regulations and orders of the
U. S. Department of Labor issued thereunder. In addition, the following
Federal Acquisition Regulations are incorporated herein by this
reference except "Contractor" shall mean "Seller":
FAR 52.222-26 "Equal Opportunity"
FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam
Era Veterans"
FAR 52.222-36 "Affirmative Action for Handicapped Workers".
19.0 INTEGRITY IN PROCUREMENT
Boeing's policy is to maintain high standards of integrity in
procurement. Boeing's employees must ensure that no favorable treatment
compromises their impartiality in the procurement process. Accordingly,
Boeing's employees must strictly refrain from soliciting or accepting
any payment, gift, favor or thing of value which could improperly
influence their judgement with respect to either issuing or
administering the Order. Consistent with this policy, Seller agrees not
to provide or offer to provide any employees of Boeing any payment,
gift, favor or thing of value for the purposes of improperly obtaining
or rewarding favorable treatment in connection with the Order or this
Agreement. Seller shall conduct its own procurement practices and shall
ensure that its suppliers conduct their procurement practices consistent
with these standards. If Seller has reasonable grounds to believe that
this policy may have been violated, Seller shall immediately report such
possible violation to the appropriate Director of Materiel or Ethics
Advisor of Boeing.
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20.0 INFRINGEMENT
Seller shall indemnify, defend, and save Boeing and Customer harmless
from all claims, suits, actions, awards (including but not limited to
awards based on intentional infringement of patents known to Seller at
the time of such infringement, exceeding actual damages, and/or
including attorneys' fees and/or costs), liabilities, damages, costs
and attorneys' fees related to the actual or alleged infringement of
any United States or foreign intellectual property right (including
but not limited to any right in a patent, copyright, industrial
design or semiconductor mask work, or based on misappropriation or
wrongful use of information or documents) and arising out of the
manufacture, sale or use of the Services by Boeing or Customer.
Boeing and/or Customer shall duly notify Seller of any such claim,
suit or action; and Seller shall, at its own expense, fully defend
such claim, suit or action on behalf of Boeing and/or Customer.
Seller shall have no obligation under this Section 20.0 with regard to
any infringement arising from: (i) Seller's compliance with formal
specifications issued by Boeing where infringement could not be
avoided in complying with such specifications or (ii) use or sale of
the Services in combination with other items when such infringement
would not have occurred from the use or sale of those Services solely
or the purpose for which they were designed or sold by Seller. For
purposes of this Section 20.0 only, the term Boeing shall include The
Boeing Company (Boeing) and all Boeing subsidiaries and all officers,
agents, and employees of Boeing or any Boeing subsidiary.
21.0 NOTICES
21.1 Addresses
Notices and other communications shall be given in writing by personal
delivery, mail, telex, teletype, telegram, facsimile, cable or other
electronic transmission addressed to the respective party as set forth
below:
To Boeing:
BOEING COMMERCIAL AIRPLANE GROUP
MATERIEL DIVISION
P.O. Box 3707
Seattle, Washington 98124-2207
Attention: Jeffrey K. Hanley
Mail Stop: 20-03
To Seller:
PRIDE AVIATION, INC.
1218 Hangar Drive
New Iberia, Louisiana 70560
Attention: Paul Lubomirski
President
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21.2 Effective Date
The date on which any such communication is received by the addressee
is the effective date of such communication.
21.3 Approval or Consent
With respect to all matters subject to the approval or consent of
either party,such approval or consent shall be requested in writing and
is not effective until given in writing. With respect to Boeing,
authority to grant approval or consent is limited to Boeing's Materiel
Representative.
22.0 PUBLICITY
Seller will not, and will require that its subcontractors and suppliers
of any tier will not, (i) cause or permit to be released any publicity,
advertisement, news release, public announcement, or denial or
confirmation of the same, in whatever form, regarding this Agreement,
the Order or the Services, or the program to which they may pertain, or
(ii) use, or cause or permit to be used, the Boeing name or any Boeing
trademark in any form of promotion or publicity without Boeing's prior
written approval.
23.0 INDEMNIFICATION AND INSURANCE
Seller agrees to indemnify and hold harmless Boeing, Customer, and their
assignees, directors, officers, agents, and employees from and against
all claims, liabilities, losses or damages, including costs and expenses
(including attorneys' fees) incident thereto or incident to successfully
establishing the right to indemnification, for injury to or death of any
person or persons, including employees of Seller and Customer but not to
employees of Boeing, or for loss of or damage to any property, including
the Aircraft while it is on Seller's premises, arising out of or in any
way connected with Seller's negligent performance of the Services
pursuant to this Agreement.
Seller warrants and represents to Boeing that it shall maintain in full
force and effect for the inclusive period that the Aircraft will be on
Seller's premises and or Seller's representatives may be working on the
Aircraft, Hangarkeepers Legal Liability Insurance with a combined single
limit in an amount not less that $200,000,000. Seller shall provide
Boeing with a certificate of insurance evidencing such coverage and
naming Boeing as an additional insured.
24.0 NOTICE OF DAMAGE
Seller shall give prompt written notice to Boeing's Materiel
Representative of the occurrence of any damage or loss to any property
required to be insured herein.
25.0 RESPONSIBILITY FOR PERFORMANCE
Seller shall be responsible for the requirements of this Agreement and
the Order. Seller shall bear all risks of providing adequate facilities
and equipment to perform the Order in accordance with the terms thereof.
Seller shall include as part of its subcontracts those elements of the
Agreement which protect Boeing's rights including but not limited to
right of entry provisions, proprietary information and rights provisions
and quality control provisions. In addition, Seller shall provide to its
subcontractors sufficient information to clearly document that the work
being performed by Seller's subcontractor is to facilitate performance
under this Agreement or the Order. Sufficient information may include
but is not limited to Order number, Agreement number or the name of
Boeing's Materiel Representative. No subcontracting by Seller shall
relieve Seller of its obligation under the Order.
Seller represents that it has the requisite expertise and governmental
authorization to perform its responsibilities under this Agreement in
accordance with the terms of the Agreement and all applicable laws.
Original
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25.1 Subcontracting
Seller may not procure any Services from a third party in a completed
or a substantially completed from without Boeing's prior written
consent.
Where required by the requirements of the Order, no raw material and/or
material process may be incorporated in the Services unless: (a) Seller
uses an approved source or (b) Boeing has surveyed and qualified
Seller's receiving inspection personnel and laboratories to test the
specified raw materials an/or material process. No waiver of survey and
qualification requirements will be effective unless granted by Boeing's
Engineering and Quality Control Departments. Utilization of a Boeing-
approved raw material source does not constitute a waiver of Seller's
responsibility to meet all specification requirements.
25.2 Reliance
Boeing's entering into this Agreement is in part based upon Boeing's
reliance on Seller's ability, expertise and awareness of the intended
use of the Services. Seller agrees that Boeing and Customer may rely on
Seller as an expert, and Seller will not deny any responsibility or
obligation hereunder to Boeing or Customer on the grounds that Boeing
or Customer provided recommendations or assistance in any phase of the
work involved in performing or supporting the Services, including but
not limited to Boeing's acceptance of specifications, test data or the
completed Services.
25.3 Assignment
The Order shall inure to the benefit of and be binding on each of the
parties hereto and their respective successors and assigns, provided
however, that no assignment of any rights or delegation of any duties
under the Order is binding on Boeing unless Boeing's written consent
has first been obtained. Notwithstanding the above, Seller may assign
claims for monies due or to become due under the Order provided that
Boeing may recoup or setoff any amounts covered by any such assignment
against any indebtedness of Seller to Boeing, whether arising before
or after the date of the assignment or the date of this Agreement, and
whether arising out of the Order or any other agreement between the
parties.
Boeing may settle all claims arising out of the Order, including
termination claims, directly with Seller. Boeing may unilaterally
assign any rights or title to property under the Order to any
wholly-owned subsidiary of The Boeing Company.
Original
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26.0 WARRANTY
26.1 Seller's Warranties
Seller warrants each Service and Correction of any Service will:
A. be free from defects in materials and workmanship,
B. conform to the requirements of the Order, including, but not
limited to, the applicable descriptions, specifications and
drawings, and,
C. to the extent not manufactured pursuant to detailed design
furnished by Boeing, be free from all defects in design and be
fit for the intended purpose.
26.2 Warranty Periods and Remedies
If, prior to delivery of any Service to Customer, or within thirty-six
(36) months following delivery of any Boeing model 747 or 767 Aircraft,
or within forty-eight (48) months following delivery of any Boeing
model 777 Aircraft, the Service fails to comply in any respect with the
warranty set forth in Section 26.1, Seller will, at Boeing's direction,
A. make all Corrections necessary to provide Boeing or Customer
with a Service which complies with the warranty or
B. reimburse Boeing or Customer for material and direct labor
costs incurred by or for which Boeing or Customer is obligated
to pay with respect to such Corrections. Such Corrections may
be performed at Boeing's or Customer's facility or other
designated facility provided:
(i) Boeing submits in writing to Seller, reasonable
evidence that a defect exists, including a statement
of work required to accomplish a Correction, and
(ii) the total reimbursement for Boeing's or Customer's
material and direct labor costs does not exceed
Seller's reasonable estimate of the then current cost
for Correction. In no event will the reimbursement for
material and direct labor costs exceed the then current
Seller's estimate of the cost of the original Service.
The hourly rate for direct labor for a Correction made by Boeing or
Customer to be used in determining costs for a Correction will be the
warranty labor rate in existence between Boeing and Customer at the
time of the Correction or 150% of the Customer's average direct labor
rate, whichever is greater. The warranty labor rate in existence
between Boeing and its Customers for 1997 is $42.50 per hour.
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26.3 Warranty of Corrections
26.3.1 As to a Correction of a defect in material or workmanship or failure to
conform to the requirements of the Order, Seller's warranty obligation
will be for the remainder of the initial warranty period specified in
Section 26.2.
26.3.2 As to a defect in the Seller's design, Seller's warranty obligation
will be for the remainder of the initial warranty period specified in
Section 26.2 or within eighteen (18) months after the Correction,
whichever is later.
26.3.3 Boeing's remedies for Corrections will be the same as those established
in Section 26.2.
26.4 Limitations of Warranty obligations
The warranties provided in Section 26.1 shall not apply if:
A. Seller does not receive written notice of a defect within (3)
three months after the expiration of the applicable warranty
period set forth in Sections 26.2, 26.3.1 and 26.3.2.
B. The Services delivered have not been maintained in conformity
with Boeing's applicable manuals, service bulletins or written
instructions.
C. A Correction is improperly performed by Boeing or Customer.
27.0 NON-WAIVER
Boeing's failure at any time to enforce any provision of the Order does
not constitute a waiver of such provision or prejudice Boeing's right to
enforce such provision at any subsequent time.
28.0 HEADINGS
Section headings used in this Agreement are for convenient reference
only and do not affect the interpretation of the Agreement.
29.0 PARTIAL INVALIDITY
If any provision of the Order is or becomes void or unenforceable by
force or operation of law, the other provisions shall remain valid and
enforceable.
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30.0 APPLICABLE LAW: JURISDICTION
The Order, including all matters of construction, validity and
performance, shall in all respects be governed by, and construed and
enforced in accordance only with the law of the State of Washington as
applicable to contracts entered into and to be performed wholly within
such State between citizens of such State, without reference to any
rules governing conflicts of law. Seller hereby irrevocably consents to
and submits itself exclusively to the jurisdiction of the Superior Court
for King County, State of Washington and to the jurisdiction of the
United States District Court for the Western District of Washington for
the purpose of any suit, action or other judicial proceeding arising out
of or connected with the Order or the performance or subject matter
thereof. Seller hereby waives and agrees not to assert by way of motion,
as a defense, or otherwise, in any such suit, action or proceeding, any
claim that (a) Seller is not personally subject to the jurisdiction of
the above-named courts, (b) the suit, action or proceeding is brought in
an inconvenient forum or (c) the venue of the suit, action or proceeding
is improper.
31.0 AMENDMENT
Oral statements and understandings are not valid or binding. Except as
otherwise provided in Section 8.0, the Order may not be changed or
modified except by a writing signed by Seller and Boeing's Materiel
Representative.
32.0 TAXES
32.1 Inclusion of Taxes in Price
All taxes, including but not limited to federal, state and local income
taxes, value added taxes, gross receipt taxes, property taxes, and
custom duties taxes are deemed to be included in the Order price, except
where applicable sales or use taxes on sales to Boeing ("Sales Taxes")
for which Boeing has not supplied a valid exemption certificate or un-
less otherwise indicated in the Order.
32.2 Litigation
In the event that any taxing authority has claimed or does claim payment
for Sales Taxes, Seller shall promptly notify Boeing, and Seller shall
take such action as Boeing may direct to pay or protest such taxes or to
defend against such claim. The actual and direct expenses, without the
addition of profit and overhead, of such defense and the amount of such
taxes as ultimately determined as due and payable shall be paid directly
by Boeing or reimbursed to Seller. If Seller or Boeing is successful in
defending such claim, the amount of such taxes recovered by Seller,
which had previously been paid by Seller and reimbursed by Boeing or
paid directly by Boeing, shall be immediately refunded to Boeing.
32.3 Rebates
If any taxes paid by Boeing are subject to rebate or reimbursement,
Seller shall take the necessary actions to secure such rebates or
reimbursement and shall promptly refund to Boeing any amount recovered.
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33.0 PLACARDS
At the time of delivery of the Aircraft by Boeing to Seller, Seller
shall install placards on the control yokes and engine nacelles of the
Aircraft. Such placards shall remain in place until the Aircraft is
redelivered by Seller to Boeing, be prominent, and state as follows:
The Boeing model XXXXXX Aircraft bearing manufacturer's serial
number XXXXXX is the property of The Boeing Company. While this
Aircraft is temporarily in the possession of Pride Aviation,
Inc., it is the sole property of The Boeing Company which
retains all right, title, and interest in it.
34.0 PRICES
34.1 Product Pricing
The pricing of Services are listed in the ATTACHMENT C Pricing
Schedule. All prices are firm fixed prices in United States dollars.
34.2 Option Pricing
Seller irrevocably grants to Boeing the option to purchase additional
Services under the terms and conditions set forth in ATTACHMENT C of
this Agreement, increased or decreased by any equitable adjustments
required of Boeing under Section 8 (Changes).
34.3 Exercise of Option
Boeing may exercise such option by written notice to Seller at any time
prior to completion of the Services; provided however, that such option
must be exercised in sufficient time to permit Seller to support Boeing
required Aircraft delivery schedule. Seller agrees to provide Boeing
with written notice at least sixty (60) days prior to the date when,
in Seller's opinion, the option must be exercised. Boeing may extend
the option exercise date by purchasing long lead materials or services,
or authorizing Seller to purchase such materials or services on terms
acceptable to Boeing, if such purchase would have the effect of
extending the date for assuring production continuity.
Boeing reserves the right to (a) not exercise the option and commence
new negotiations with Seller for additional quantities of Services; or
(b) purchase such additional quantities of Services from third parties.
The purchase of such additional quantities of Services from third
parties shall not abrogate any of Seller's obligations to Boeing
pursuant to the Agreement.
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35.0 PAYMENT
Unless otherwise provided under the applicable Order, payment shall be
net thirty (30) calendar days as computed from (a) the completion of the
Services, (b) the date of receipt of a correct invoice or (c) the
scheduled Aircraft completion date, whichever is last. All payments are
subject to adjustment for credits and rejections.
36.0 ENTIRE AGREEMENT
The Order sets forth the entire agreement, and supersedes any and all
other prior agreements understandings and communications between Boeing
and Seller related to the subject matter of the Order. The rights and
remedies afforded to Boeing or Customer pursuant to any provisions of
the Order are in addition to any other rights and remedies afforded by
any other provisions of the Order, by law or otherwise.
EXECUTED in duplicate as of the date and year first written above by the duly
authorized representatives of the parties.
THE BOEING COMPANY PRIDE AVIATION, INC.
by and through its division
Boeing Commercial Airplane Group
/s/ JEFFREY K. HANLEY /s/ PAUL LUBOMIRSKI
- --------------------------------- --------------------------------
Name: Jeffrey K. Hanley Name: Paul Lubomirski
Title: Buyer Title: President
Date: 9/17/97 Date: 9/17/97
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Attachment A
STATEMENT OF WORK
EXTERIOR DECORATIVE PAINT OF BOEING AIRCRAFT
GENERAL
Seller shall apply exterior decorative paint to the Aircraft at their facilities
in accordance with the following:
1. Apply exterior markings and decals per applicable Boeing decorative
paint Drawings, Boeing paint document D6-1816, and control panel 175
Q&IR paper.
2. All work is to be accomplished in accordance with Boeing Drawings,
documents, and planning.
3. Boeing will provide on-site quality control to perform those functions
necessary to assure the product quality and support the Quality
Assurance system.
4. Boeing will provide manufacturing technical assistance.
5. Seller will assist in any process inspection conducted by Boeing
Quality Assurance or Customer personnel.
MATERIAL
1. Seller will provide all bulk material (i.e. Alkosol 27, Alodine, 1000,
Pace B82 Soap, etc.) required per the Drawings.
2. Seller will provide all consumables (i.e. sandpaper, tapes, solvents,
paper, etc.) required per the Drawings.
3. Seller will receive store an control materials per the requirements of
the Drawings.
4. Boeing will provide primers, paints, paint templates, premast, decals,
stencels, and window mask per the Drawings.
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Attachment A
TRAINING
Seller shall provide training to Boeing employees for all applicable systems
and equipment of Seller and its subcontractors that such employees will be
using at Seller's facilities, including but not limited to hazard communication
and other safety requirements and procedures.
WASTE AND EMERGENCY RESPONSE
Seller will be responsible for the management of all wastes, including wastes
produced by Boeing activities on-site. Seller will also be responsible for
providing or arranging for emergency response to spills of hazardous materials
and petroleum, including spill control, cleanup and required reporting, and will
provide and arrange for all emergency response equipment and personnel. Seller
will provide instruction to on-site Boeing personnel regarding any procedures
to be utilized for spill prevention and notification of emergency response
personnel. In support of activities such as defueling and fueling of the
Aircraft, Seller will take measures as necessary to prevent spills of fuel from
being released to the storm sewers.
RECEIVE AND DEFUEL
1. Boeing crews will receive and oversee the defueling of the Aircraft
upon arrival at Seller's facilities.
2. Seller, or Seller's approved subcontractor, will conduct the Aircraft
defueling, fuel storage, and refueling of the Aircraft.
3. Seller will assist with ground support to move the Aircraft into the
paint facility.
4. Boeing Quality Assurance personnel will conduct the Aircraft receipt
inspection in accordance with applicable Boeing requirements.
PRE-FLIGHT AND DISPATCH
1. Boeing will oversee the refueling of the Aircraft by Seller or Seller's
approved subcontractor.
2. Boeing will conduct the pre-flight and dispatch of the Aircraft.
3. Seller will assist with ground support to move the Aircraft to the
flight line.
2
<PAGE> 29
6-5675-JKH-97002
Attachment A
PREPARATION FOR REMOVAL OF THE TEMPORARY PROTECTIVE COATING
1. Do not paint previously painted flight control surfaces (i.e. rudder,
flaps, elevators, etc.).
2. Seller will repaint any repairs on previously painted surfaces per
Drawings.
3. Seller will mask the Aircraft for removal of the TPC per Drawings (i.e.
windows, landing gear, etc.)
4. Seller will sand all previously primed surfaces per Drawings (i.e.
lower and upper wings, wing to body fairings, stabilizers, etc.).
REMOVAL OF THE TEMPORARY PROTECTIVE COATING (TPC)
1. Seller to remove the TPC per Drawings (Alkosol 27).
PREPARATION OF ALL SURFACES TO BE PAINTED
1. Seller will solvent clean all areas per document D6-1816.
2. Seller will wash all previously painted surfaces with Pace B-82 Soap
per Drawings.
WATER SCRATCH ALL SURFACES TO BE PAINTED
1. Seller will water scratch all metal surfaces to be painted and attain a
water break free surface per document D6-1816.
2. Boeing Quality Assurance and Customer representatives will inspect all
areas for acceptance.
3
<PAGE> 30
6-5675-JKH-97002
Attachment A
ALODINE 1000 PREPARATION
1. Seller will mask all high strength steel aircraft components prior to
Alodine 1000 application per document D6-1816.
2. Seller will apply Alodine 1000 per document D6-1816 to all bare metal
areas to be painted.
3. Boeing Quality Assurance will monitor the Alodine 10000 application per
document D6-1816.
MASKING THE AIRCRAFT FOR PRIMER APPLICATION
1. Seller will mask all required areas per Drawings.
2. Boeing Quality Assurance will monitor the masking process.
ACCEPTANCE OF THE SURFACES TO BE PAINTED
1. Boeing Quality Assurance and Customer Representatives will inspect all
areas for acceptance prior to primer application.
MIXING AND APPLYING PRIMER
1. Seller will mix and apply primer to all surfaces to be painted per
Drawings and the requirements of document D6-1816.
2. Boeing Quality Assurance will monitor the mixing and application of the
primer.
INSPECTION OF THE PRIMER APPLICATION
1. Boeing Quality Assurance will inspect the primer application per the
requirements of document D6-1816.
4
<PAGE> 31
6-5675-JKH-97002
Attachment A
MASKING FOR THE TOPCOATS AND DECORATIVE PAINT APPLICATION
1. Seller will mask all areas per Drawings.
2. Boeing Quality Assurance will monitor the masking application and
authorize the application of topcoat and decorative paint.
MIXING OF TOPCOATS AND DECORATIVE PAINTS
1. Seller will mix all paint in accordance with document D6-1816.
2. Boeing Quality Assurance will monitor all application processes.
APPLYING TOPCOAT AND DECORATIVE PAINT
1. Seller will apply all topcoats and decorative paint per Drawings and
document D6-1816.
2. Boeing Quality Assurance will monitor all application processes.
MAINTENANCE AND EMERGENCY STENCILING
1. Seller will apply all markings per Drawings.
2. Boeing Quality Assurance will monitor the stenciling process.
FINAL INSPECTION
1. Seller will assist in the final inspection process.
2. Boeing Manufacturing and Quality Assurance personnel will inspect the
Aircraft for acceptance to the requirements of the Drawings.
3. Seller will rework any and all rejected areas and obtain Boeing
acceptance prior to the Customer inspection process.
4. Customer will inspect the Aircraft for final acceptance.
5. Seller will rework any and all rejected areas and obtain Customer
acceptance prior to pre-flight operations.
5
<PAGE> 32
6-5653-JKH-XXX
Attachment B
BOEING PROPRIETARY
AIRCRAFT DELIVERY SCHEDULE
PHASE 1
<TABLE>
<CAPTION>
Aircraft Line # Boeing Drawing Arrival Date Customer
- -------- ------ -------------- ------------ --------
<S> <C> <C> <C> <C>
777-200 105 444W1001 11/1/97 UAL
777-200 108 444W1001 11/13/97 UAL
777-200 110 444W1005 11/25/97 GUN
777-200 113 444W1007 12/6/97 TII
777-200 116 444W1001 1/6/98 UAL
777-200 119 444W1015 1/15/98 SVA (Exotic)
777-200 122 444W1013 1/23/98 SIA
</TABLE>
PHASE 2 - OPTION
Aircraft Line # Boeing Drawing Arrival Date Completion Date
- -------- ------ -------------- ------------ ---------------
* Estimate three (3) Aircraft per month, February-March 1998, for a total of six
(6) Aircraft. [Probably two 767 A/Ps, plus one 777 or 747 per month]
PHASE 3 - OPTION
Aircraft Line # Boeing Drawing Arrival Date Completion Date
- -------- ------ -------------- ------------ ---------------
* Estimate two (2) 777-200 Aircraft per month, September 1998 through September
1999, for a total of 26 Aircraft.
09/15/97
<PAGE> 1
EXHIBIT 10.28
TEMPORARY USE LICENSE AGREEMENT
DATE: September __, 1997
BETWEEN: State of Oregon ("PERF")
acting by and through its
STATE TREASURER
on behalf of the Oregon
PUBLIC EMPLOYES' RETIREMENT FUND
Oregon State Treasury
Investment Division
350 Winter Street, N.E., #100
Salem, Oregon 97310
AND: AVIATION GROUP, INC., ("Licensee")
a Texas corporation
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
Recitals:
PERF is the lessee, as successor to Barclay Pacific Corporation, under
a facility lease, as amended and an Amended and Restated Hangar Facility and
Ground Lease, as amended, with the Port of Portland, as Lessor (collectively,
the "Ground Leases"). The land and improvements described in the Ground Leases
are referred to in this Temporary Use License Agreement (the "Agreement") as
the "Project." Licensee desires to use the hangar facility specifically
described on the attached Exhibit A, which is part of the Project (the
"Licensed Space"), for a period of four months. In order to facilitate a
possible future sublease of the Project, PERF is willing to allow Licensee to
use the Licensed Space in accordance with the terms and conditions set forth
below.
Agreements:
NOW, THEREFORE, in consideration of the mutual promises of the parties
set forth in this Agreement and for other valuable consideration, the receipt
and sufficiency of which are acknowledged, PERF and Licensee agree as
follows:
1. Licensed Space. PERF grants to Licensee a revocable license
(the "License") for the sole use and purpose of painting seven (7) airplanes in
the Licensed Space, subject to the terms and conditions set forth in this
Agreement.
2. Term. The Term of the License shall commence on October 15,
1997 (the "Commencement Date"). The term of the License shall terminate on
January 31, 1998 ("Expiration Date"). This License may only be exercised for
the purpose specified in Section 1 above, and any attempt to exercise this
License for any other purpose shall render this License immediately void. At
the expiration or sooner termination of this Agreement, Licensee shall
1
<PAGE> 2
surrender the Licensed Space in a neat and broom clean condition and in the
condition it was in on October 14, 1997.
3. Fee. In consideration of the grant of this License, Licensee
shall pay to PERF a license fee ("License Fee") equal to twenty-five percent
(25%) of the gross contract price charged by Licensee under its contract for
airplane painting ("Painting Contract"), including any preparatory or other
work performed outside of the Licensed Space (the "Contract Price"). Licensee
estimates that the total Contract Price for the term of this License will be
$2,100,000, but PERF acknowledges that the actual Contract Price may be less.
After Licensee has signed the Painting Contract establishing the Contract
Price, and before entering the Licensed Space, Licensee shall deliver to PERF a
copy of the Painting Contract establishing the Contract Price. Licensee also
shall deliver to PERF a copy of its final invoice to the owner, indicating any
adjustments to the Contract Price. The License Fee shall be due and payable,
with respect to each airplane painted, no later than ten days after that
airplane is painted. If Licensee fails timely to pay the License Fee, then in
addition to PERF's other remedies, PERF may impose a late fee of five percent
(5%) of the License Fee (which Licensee acknowledges is a reasonable estimate of
the administrative time expended by PERF in processing the delinquent account),
and the unpaid amount shall bear interest at the rate of one and one-half
percent (1.5%) per month.
4. Extensions. PERF will consider granting to Licensee extensions
to the Term of this License for two consecutive periods, the first ("First
Extension") being from approximately February 1, 1998, continuing on a
month-to-month basis up to July 31, 1998, and the second ("Second Extension")
being from September 1, 1998 through August 30, 1999, subject to all of the
following contingencies and caveats:
4.1 Licensee shall not be in default of this License, and there
shall be in existence no event giving rise to a right to terminate under Section
16.
4.2 No later than sixty days prior to the expiration of the
original Term (as to the First Extension) or the first Extension (as to the
Second Extension), Licensee shall have requested in writing that PERF grant the
Extension, including with such request a fully executed copy of a Qualified
Painting Contract for such Extension period. A Qualified Painting Contract shall
mean a contract for Licensee to paint at least 3 Boeing airplanes per month
(for the First Extension) and at least 26 Boeing airplanes (for the Second
Extension), conditioned only upon Licensee's procurement of use of the License
Space for such Extension.
4.3 The minimum fee for Licensee's use of the License space for
such Extension shall be the License Fee applicable to airplanes painted during
such period. PERF may require a higher fee if PERF deems it appropriate.
4.4 The parties shall have agreed to any additional or
different terms for the period of the Extension, including without limitation
any alterations, additions or modifications to the License Space necessary for
Licensee's use, Licensee's payment of the cost therefor, and the terms for any
removal or restoration of the same upon termination of this License.
2
<PAGE> 3
4.5 Until and unless an amendment to this Agreement is executed
by PERF and Licensee extending this License for the Extension at issue, and
setting forth the terms for such extension, PERF reserves the right, in its
sole and unfettered discretion, to decline to extend the term of this License,
or to lease or grant use of the License Space to third parties for the
Extension periods on such terms as PERF may deem fit. However, unless
considered confidential by PERF, PERF shall notify Licensee of the terms of any
third party offer to use the License Space received by PERF during the Term for
the Extension period at issue, and shall consider any offer by Licensee to meet
or beat the terms of such offer. PERF shall have no obligation to accept such
offer by Licensee.
5. No Alterations. Licensee shall not alter, improve or modify the
Licensed Space in any manner without PERF's prior written consent, which consent
may be withheld in PERF's sole discretion. PERF may require that Licensee
restore any alterations or modifications to the Licensed Space at the end of
the Term, such as putting any relocated fans back to their original positions.
6. Compliance. Licensee, at its sole cost and expense, will comply
with all laws, rules, orders, ordinances, regulations, statutes, directives,
and other governmental requirements (collectively, "Laws") applicable to the
Licensed Space and/or the use of the Licensed Space, including, without
limitation, all OSHA rules, orders and regulations. Licensee shall not do or
permit anything in the Licensed Space which will in any way increase the
premium for any insurance for the Licensed Space. Prior to the Commencement
Date, Licensee shall provide evidence to PERF sufficient to satisfy PERF and
its advisors that Licensee's use of the Licensed Space shall be in compliance
with all Laws and, specifically, that the City of Portland and the Oregon
Department of Environmental Quality have approved Licensee's use of the
Licensed Space. In addition, Licensee shall comply with all rules, regulations
and requirements of the Port of Portland (the "Port"). Licensee shall not cause
or permit its agents, employees, contractors, invitees, visitors, or others to
whom Licensee grants access to the Licensed Space to cause any breach of the
Ground Lease.
7. Restrictions on Use. The airplanes to be painted in the
Licensed Space shall be stripped of all paint, and defueled, if required by
PERF or its representatives, prior to entry onto the Licensed Space or any
portion of the Project. No gas, fuel, or paint removal products shall be used,
stored, deposited, transported or released in, on, or under the Licensed Space.
No waste water or paint shall be released into the environment in any respect;
Licensee shall collect all waste water and paint, remove it from the Project,
and dispose of it in accordance with all applicable Laws. Licensee shall not do
or permit anything to be done which may damage the Licensed Space or overload
the surface of the Licensed Space or any building systems or equipment which is
part of the Licensed Space.
8. Hazardous Substances.
8.1 Restriction; Indemnity. Licensee hereby discloses to
PERF that Licensee intends to store and use the following substances on the
Licensed Space: Paint, Primer, Chromic Acid, B-55 Acid, Methyl Ethyl Ketone
(MEK), Super Bee 210, Alkasol 27, Pace 82, MEK/Toluene, and Acetone. Licensee
shall store and use such substances in conformance with
3
<PAGE> 4
all applicable Laws. Licensee shall not store or use any other environmentally
hazardous or toxic substances, materials, wastes, pollutants, oils, or
contaminants, as defined by any Law (collectively, "Hazardous Substances") nor
shall Licensee generate, release or deposit in, on or under the Licensed Space
any Hazardous Substances. Licensee shall indemnify and hold harmless PERF, the
Port, and their respective employees, representatives, advisors, agents,
affiliates, successors and assigns (the "Indemnitees") from and against any and
all claims, losses, damages, response costs and expenses of any nature
whatsoever arising out of or in any way related to the use, generation,
release, storage, or deposit of Hazardous Substances on the Licensed Space by
Licensee or any other person or entity other than PERF including, but not
limited to: (a) claims of third parties, including governmental agencies, for
damages, response costs, injunctive or other relief; (b) the cost, expense or
loss to any of the Indemnitees of any injunctive relief, including preliminary
or temporary injunctive relief, applicable to any of the Indemnitees or the
Licensed Space; (c) the expense, including fees of attorneys, engineers,
paralegals and experts, or reporting the existence of hazardous substances or
hazardous waste to any agency of the State or Oregon or the United States as
required by applicable Laws; and (d) any and all costs, fees, expenses or
obligations, including attorneys' fees, incurred at, before, and after any
trial or appeal therefrom, all of which shall be paid by Licensee promptly
after the applicable Indemnitee incurs the obligation to pay such amounts.
8.2 Clean-up. On the earlier of (a) completion of painting
the airplanes, or (b) upon written notice from PERF, Licensee shall remove
from the Licensed Space (including without limitation the soil or water table
thereof) all Hazardous Substances, and shall restore the Licensed Space to a
clean, safe, good, and serviceable condition. Any such clean-up shall be in
conformance with all applicable Laws.
9. Permits. Licensee shall procure, maintain and pay for all fees,
permits and governmental agency licenses required in connection with use of the
Licensed Space. Licensee shall provide PERF with copies of all such permits and
licensee prior to June 2, 1997.
10. Utilities and Operating Expenses. PERF shall pay for up to
$70,000 of utilities consumed by Licensee, and for continuation of current
security services, during the initial License term. Except for such payment by
PERF and continuation of current security services, Licensee shall arrange and
pay for (or reimburse PERF for) all utilities and series provided to the
Licensed Space during the term of this Agreement, when and as due, including
without limitation janitorial services, additional security, and waste removal.
Consumption of utilities and services, additional security, and waste removal.
Consumption of utilities and services shall be allocated to Licensee on a basis
reasonably determined by PERF.
11. Assignment or Sublicense. Licensee shall not assign this
Agreement or grant a sublicense to any person or entity without the prior
written consent of PERF, which consent may be withheld in PERF's sole and
absolute discretion.
12. Condition of Licensed Space. PERF makes no representations or
warranties whatsoever with respect to the condition of the Licensed Space, or
the fitness or suitability of the Licensed Space. The Licensed Space shall be
delivered to Licensee "as is" with all flaws and faults, and Licensee hereby
acknowledges that it has inspected the Licensed Space and agrees to accept the
Licensed Space in its present condition. Licensee shall not perform any act or
practice
4
<PAGE> 5
which might injure or cause any damage to the Project or disturb any occupants
of the Project. If any damage is suffered by the Project in connection with
Licensee's use thereof, PERF shall have the right, but not the obligation, to
repair such damage, in which event Licensee shall reimburse PERF for the cost
of such repairs immediately upon demand.
13. Indemnity. Licensee shall indemnify, protect, defend and hold
harmless PERF, the Port, and their respective direct and indirect partners,
officers, directors, representatives, affiliates, shareholders, agents and
employees from and against all claims, damages, losses and expenses, including,
without limitation, attorneys' fees, directly or indirectly arising out of or
resulting from Licensee's breach of this Agreement or any use of the Licensed
Space by Licensee or its contractors, agents, employees, invitees or visitors.
Licensee releases and waives any and all claims Licensee may have with respect
to any injury or damage Licensee may suffer with respect to the use of the
Licensed Space. The indemnity provisions contained in this Section shall
survive the termination of this Agreement.
14. Insurance. During the entire term of this Agreement, Licensee
shall carry workers' compensation insurance in full compliance with Law and
Licensee shall maintain comprehensive general liability insurance, including,
without limitation, premises operations, independent contractors, broad form
property damage, personal injury and blanket contractual liability, with limits
of liability for bodily injury and property damage of not less than Twenty
Million Dollars ($20,000,000) combined single limit. Licensee shall also
maintain any other insurance reasonably required by PERF. PERF, the Port,
LaSalle Advisors Limited, and Altos Associated shall be named as additional
insureds. The insurance may not eliminate cross-liability and shall contain a
severability of interest provision. Upon execution of this Agreement, Licensee
shall deliver to PERF a certificate evidencing such insurance coverage.
15. Remedies for Default. Upon any default by Licensee under this
License, or upon the insolvency or filing of any bankruptcy action by or
against Licensee, or upon any early termination of the Painting Contract, PERF
shall have the right to the following remedies. These remedies are intended to
be cumulative and in addition to any other remedies, including but not limited
to the rights of the PERF, provided in this Agreement or under applicable law,
and may be exercised concurrently or sequentially.
15.1 Terminate this License, without waiving PERF's claim
for damages for Licensee's default.
15.2 Remove Licensee from use or possession of the Licensed
Space, by self-help or pursuant to proceedings at law, and allow others use or
occupancy of the License Space. No such action shall be construed as an
acceptance or a surrender of Licensee's interest. PERF shall have the right to
retain or dispose of any airplanes at the Licensed Space as the owner of the
airplane may direct.
15.3 Make any payment or perform any obligation required of
Licensee, in which case PERF shall be entitled to recover all amounts so
expended from Licensee, plus interest from the date of the expenditure at the
rate of ten percent (10%) per annum.
5
<PAGE> 6
16. Termination. Perf also shall have the right and option to
terminate this Agreement by ten day's prior written notice to Licensee in the
following circumstances:
16.1 Licensee fails to deliver to PERF a copy of the Painting
Contract prior to the Commencement Date.
16.2 The Painting Contract is terminated, or the other party
to the Painting Contract for any reason declines to deliver further airplanes
for painting pursuant to the Painting Contract.
16.3 Licensee does not substantially comply with the airplane
painting schedule previously provided to PERF, for reasons other than those
outside of Licensee's reasonable control.
Upon any such termination, the termination date shall be treated as the
Expiration Date of the License for all purposes, and Licensee shall have no
further rights under this Agreement.
17. No Waiver. No waiver by PERF of any term, condition, or
requirement of this Agreement shall constitute a waiver of any other term,
condition of requirement hereof, or constitute a waiver of the same term,
condition, or requirement in any other instance.
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Oregon. Any claim,
action, or suit that arises out of or relates to this Agreement shall be
brought and conducted solely and exclusively within the Circuit Court of Marion
County for the State of Oregon.
19. Notices. All notices, requests, demands and other
communications shall be in writing and shall be deemed given if personally
delivered or mailed, certified mail, return receipt requested, or sent by
overnight courier to the following address or such other address as designated
by Licensee or PERF:
If to Licensee: AVIATION GROUP, INC.
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
If to PERF: Oregon Public Employees' Retirement
Fund
Oregon State Treasury
Investment Division
350 Winter Street, N.E. #100
Salem, Oregon 97310
Attn: Mr. W. Dan Smith, Director
6
<PAGE> 7
With a copy to: LaSalle Advisors Limited
888 SW Fifth Avenue, Suite 1280
Portland, Oregon 97204
Attn: Diane R. McMahon
20. No Leasehold Interest. This Agreement is not to be construed
as in any way granting to Licensee any leasehold or other real property interest
in the Licensed Space, it being intended that this Agreement merely grants to
Licensee a license to enter upon and use the Licensed Space during the term in
accordance with the terms and conditions set forth in this Agreement. This
Agreement shall not be recorded.
21. Entire Agreement. This Agreement constitutes the entire
Agreement of the parties, and shall supersede any other agreements that may
exist between the parties as of the date hereof. This Agreement may not be
amended or modified except by a writing duly executed by the parties hereto.
Any past, present, or future promises or representations not contained in this
Agreement or in a duly executed written amendment thereto are and will be null
and void and may not now or in the future be relied upon by any party.
22. Severability. If any provision of this Agreement shall be held
to be invalid or unenforceable, the remaining provisions of this Agreement
shall be valid and enforceable to the fullest extent permitted by law.
23. Authorization. Licensee represents and warrants that Licensee
is a corporation organized under the laws of the State of Texas and that the
corporation is authorized and qualified to do business under the laws of the
State of Oregon. The person signing this Agreement represents and warrants
that he or she has been duly authorized by the Board of Directors of Licensee
to execute and deliver this Agreement to PERF, which Agreement shall be binding
on Licensee.
24. Time. Time is of the essence with respect to Licensee's
obligations under this Agreement.
25. Attorneys' Fees. In the event a suit, action, or other
proceeding of any nature is instituted to interpret or enforce any provision of
this Agreement or with respect to any dispute under this Agreement, the
prevailing party shall be entitled to recover from the losing party the
prevailing party's attorney's, paralegals', accountants', and other experts'
fees and all other fees, costs and expenses actually incurred in connection
therewith. The amount thereof shall be determined by the judge, shall include
costs, fees, and expense incurred at trail, on appeal and on review, and shall
be in addition to all other amounts provided by Law.
26. Limitation on Obligations. All obligations of PERF are not
obligations of the State of Oregon or of PERF employees or employees of the
State of Oregon, and only PERF is liable under the terms of this Agreement.
27. Port Consent. The effectiveness of this Agreement is
conditioned on the prior written consent to this Agreement as evidenced by the
Port's signature on the attached form.
7
<PAGE> 8
28. No Partnership Created. PERF is not a partner or joint
venturer with Licensee in connection with the business carried on under this
License and PERF shall have no obligation with respect to Licensee's debts or
other liabilities.
29. Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original, and all of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, PERF and Licensee have executed this Agreement as
of the date first written above.
PERF: STATE OF OREGON, acting by and through its
STATE TREASURER, on behalf of the OREGON
PUBLIC EMPLOYEES' RETIREMENT FUND
By: LaSalle Advisors Limited
Its Advisor and Duly Authorized Agent
By: /s/ DIANE R. MCMAHON
----------------------------------
Diane R. McMahon
Its: Vice President
By: /s/ WILLIAM W. BARENDRICK, JR.
----------------------------------
William W. Barendrick, Jr.
Its: Principal
Approved as to legal sufficiency by counsel for
PERF:
By: OREGON DEPARTMENT OF JUSTICE
By:
----------------------------------
Christopher M. Walters
Special Assistant Attorney General
LICENSEE: THE AVIATION GROUP, INC., a Texas corporation
By: /s/ PAUL LUBOMIRSKI
----------------------------------------
Its: President Pride Aviation
----------------------------------------
Attached: Consent by the Port
8
<PAGE> 1
EXHIBIT 11.1
AVIATION GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -----------------
<S> <C> <C>
Weighted average shares outstanding:
Common shares outstanding at
beginning of period 1,600,250 1,000,000
Private placement offering -- 239,130
Acquisition of Pride Aviation -- 21,163
Settlement of long-term debt -- 26,783
Common equivalent shares arising from:
Assumed exercise of options 1,631 --
Assumed exercise of warrants 157,826 210,435
---------- -----------
Weighted average shares outstanding 1,759,707 1,497,511
========== ===========
Net income (loss) $ (476,000) $ 34,000
========== ===========
Computation of net income (loss) per common
share:
Net income (loss) divided by weighted
average shares outstanding $ (0.27) $ 0.02
========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF AVIATION GROUP, INC.
<TABLE>
<CAPTION>
Company State of Incorporation Ownership Percentage
- ---------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Tristar Airline Services, Inc. Texas 100%
Tristar Aircraft Services, Inc. Texas 100%
Pride Aviation, Inc. Oklahoma 99%
Casper Air Service Wyoming 100%
Casper Flying Service Wyoming 100%
Pride Aviation Portland, Inc. Oregon 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB ANNUAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 188,000
<SECURITIES> 0
<RECEIVABLES> 796,000
<ALLOWANCES> 19,000
<INVENTORY> 240,000
<CURRENT-ASSETS> 1,974,000
<PP&E> 2,320,000
<DEPRECIATION> 583,000
<TOTAL-ASSETS> 5,111,000
<CURRENT-LIABILITIES> 2,490,000
<BONDS> 1,277,000
0
0
<COMMON> 16,000
<OTHER-SE> 1,213,000
<TOTAL-LIABILITY-AND-EQUITY> 5,111,000
<SALES> 0
<TOTAL-REVENUES> 9,718,000
<CGS> 0
<TOTAL-COSTS> 7,410,000
<OTHER-EXPENSES> 2,461,000
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 377,000
<INCOME-PRETAX> (528,000)
<INCOME-TAX> (52,000)
<INCOME-CONTINUING> (476,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (476,000)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
