<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997
REGISTRATION NO. 333-22727
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AVIATION GROUP, INC.
(Name of small business issuer in its charter)
TEXAS 4581 75-2631373
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
LEE SANDERS, PRESIDENT
700 NORTH PEARL STREET AVIATION GROUP, INC.
SUITE 2170 700 NORTH PEARL STREET, SUITE 2170
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 922-8100 (214) 922-8100
(Address and telephone number of (Name, address and telephone number
principal executive offices) of agent for service)
Copies to:
<TABLE>
<S> <C>
DARYL B. ROBERTSON, ESQ. RICHARD F. DAHLSON, ESQ.
BRACEWELL & PATTERSON, L.L.P. JACKSON & WALKER, L.L.P.
500 NORTH AKARD ST., SUITE 4000 6000 NATIONSBANK PLAZA
DALLAS, TEXAS 75201 901 MAIN STREET, SUITE 6000
(214) 740-4000 DALLAS, TEXAS 75202
(214) 953-5800
</TABLE>
Approximate date of commencement of proposed sale to the public:
IMMEDIATELY FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
__________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______________, 1997)
SUBJECT TO COMPLETION, DATED JULY 21, 1997
AVIATION GROUP, INC.
1,360,463 SHARES OF COMMON STOCK
This Prospectus Supplement relates to the offer and sale by certain
selling securityholders ("Selling Shareholders") named herein under "Selling
Shareholders" of up to (i) 600,250 shares of common stock, $.01 par value per
share ("Common Stock") of Aviation Group, Inc. (the "Company"), (ii) a maximum
of 280,000 shares of Common Stock that may be issued upon exercise of
outstanding warrants, (iii) a maximum of 283,100 shares of Common Stock that
may be issued upon conversion or exchange of outstanding convertible or
exchangeable notes, (iv) a maximum of 43,478 shares of Common Stock that may be
issued upon repayment of outstanding notes, and (v) a maximum of 153,635 shares
of Common Stock that may be issued upon consummation of the Company's
acquisition of Casper Air Service (the "Casper Acquisition").
The Company will receive no part of the proceeds of any sales by the
Selling Shareholders. All expenses of registration incurred in connection with
this offering are being borne by the Company, but all selling and other
expenses incurred by Selling Shareholders will be borne by the Selling
Shareholders. None of the shares of Common Stock have been registered prior to
the filing of the Registration Statement of which this Prospectus is a part.
The outstanding shares of Common Stock were originally issued by the Company in
private transactions. See "Selling Shareholders."
The Selling Shareholders may from time to time sell all or a portion of
their shares of Common Stock in the over-the-counter market or on any national
securities exchange or automated interdealer quotation system on which the
Common Stock may hereafter be listed or traded, in negotiated transactions or
otherwise, at prices then prevailing or related to the then current market
price or at negotiated prices. The shares of Common Stock may be sold directly
or through brokers or dealers or in a distribution by one or more underwriters
on a firm commitment or best efforts basis. One Selling Shareholder, the
Casper Air Service Employee Stock Ownership Plan and Trust (the "ESOP"), may
distribute its shares of Common Stock to its participants. See "Plan of
Distribution." Each Selling Shareholder and any agent or broker-dealer
participating in the distribution of the Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). Any commissions received by and any profit on the resale of
the shares of Common Stock may be deemed to be underwriting commissions or
discounts under the Securities Act.
Brokers or dealers effecting transactions in the shares of Common Stock
on behalf of the Selling Shareholders should confirm the registration thereof
under the securities laws of the states in which such transactions occur or the
existence of an exemption from registration.
The Company has filed an application for listing of trades of the Common
Stock through the Nasdaq Small Cap Market System ("NASDAQ") and has obtained
approval of a listing of the Common Stock on the Boston Stock Exchange. No
assurance can be given that the applications will be approved. There is no
current established trading market for the Common Stock.
SEE "RISK FACTORS" ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS. _______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is ______________, 1997.
<PAGE> 3
USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of any of
the shares of Common Stock by the Selling Shareholders.
SELLING SHAREHOLDERS
This Prospectus Supplement relates to the offer and sale from time to
time (i) by stockholders of the Company of up to 600,250 outstanding shares of
Common Stock, (ii) by the holders of outstanding warrants of a maximum of
280,000 shares of Common Stock that may be issued upon the exercise of the
warrants owned by them, (iii) by the holders of outstanding convertible or
exchangeable notes of a maximum of 283,100 shares of Common Stock that may be
issued upon conversion or exchange of the notes owned by them, (iv) by the
holders of the Company's 10% Bridge Notes of a maximum of 43,478 shares of
Common Stock that may be issued to them upon the repayment of the Bridge Notes,
and (v) by the owners of Casper Air Service, a Wyoming corporation ("CAS"), of
a maximum of 153,635 shares of Common Stock that may be issued to them upon the
consummation of the Casper Acquisition.
TRANSFER RESTRICTIONS
Company officers beneficially owning a total of 1,044,250 shares of
Common Stock, will sign lock-up agreements under which such holders will agree
not to offer, sell, or otherwise dispose of their shares of Common Stock that
might otherwise be eligible for sale for a period of at least 24 months after
the date of this Prospectus without the prior written consent of the
Representative.
Nonmanagement holders of the Company's securities (owning 556,000
shares of Common Stock and outstanding warrants exercisable for 280,000 shares
of Common Stock) will agree with the Representative to lock-up for a period of
12 months the shares of Common Stock that they own or may acquire after the
date of this Prospectus. Additionally, if the Representative consents to an
early release of such shares in an aggregate quantity equal to at least 50% of
such holders' shares, then the lock up period on such remaining shares held by
these holders shall automatically extend to two years from the date of this
Prospectus.
Holders of certain promissory notes totaling $1,260,000 as of March 31,
1997, that are convertible or exchangeable for up to 283,100 shares of Common
Stock have agreed to lock up their shares for two years from the date of this
Prospectus, provided however that such holders may sell shares earlier in
an amount sufficient to offset required Company principal payments, beginning
March 1998. In addition, the approximate 153,635 shares of Common Stock to be
issued to the former stockholders of CAS in the CAS acquisition have been
registered for resale and will not be registered.
The terms of the Bridge Notes provide that the approximate 43,478
shares of Common Stock to be issued upon full payment of the Bridge Notes may
not be sold by the holder for one year after the closing of the Offering. The
Representative may not release or waive the prohibition on sale for the shares
issuable upon payment of the Bridge Notes. Upon the expiration of all lock-up
agreements, these shares will become eligible for sale in the public market
assuming the shares continue to be registered for sale by the selling
securityholders or, if not registered, subject to the provisions of Rule 144
continue to be registered for sale by the selling securityholders or, if not
registered, subject to the provisions of Rule 144.
The recipients of shares of Common Stock in the Casper Acquisition
will not be required to execute any lock-up agreement. The Representative has
no current plans or understandings to waive, shorten or modify the foregoing
lock-up arrangements. The Company will (i) amend this Prospectus Supplement if
these arrangements are waived for 10% or more of the shares of the Selling
Shareholders, and (ii) sticker this Prospectus Supplement if these arrangements
are waived for between 5% and 10% of the shares of the Selling Shareholders.
IDENTITY AND OWNERSHIP OF SELLING SHAREHOLDERS
The following table provides certain information with respect to the
Selling Shareholders, and the number of shares of Common Stock owned, offered
and to be owned after the offering by each Selling Stockholder, subject to
certain transfer restrictions. See "--Transfer Restrictions."
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON STOCK SHARES OF COMMON STOCK STOCK TO BE OWNED
SELLING SHAREHOLDERS OWNED BEFORE OFFERING(1) TO BE SOLD IN THE OFFERING AFTER THE OFFERING(10)
- -------------------- ------------------------ --------------------------- ----------------------
<S> <C> <C> <C>
Paul Lubomirski 44,250(2) 44,250 0
James J. McNamara and
Margarita McNamara 10,000 10,000 0
Anthony DeCaprio 5,000 5,000 0
American & International
Investment, Ltd. 35,000 35,000 0
Charles R. Kemp 20,000 20,000 0
Kelly Kemp 15,000 15,000 0
George L. Riggs IRA 10,000 10,000 0
</TABLE>
-2-
<PAGE> 4
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON STOCK SHARES OF COMMON STOCK STOCK TO BE OWNED
SELLING SHAREHOLDERS OWNED BEFORE OFFERING(1) TO BE SOLD IN THE OFFERING AFTER THE OFFERING(10)
- -------------------- ------------------------ --------------------------- ----------------------
<S> <C> <C> <C>
John L. Caldwell 20,000 20,000 0
Andrew J. Corbett 5,000 5,000 0
Harold W. Fullen 10,000 10,000 0
Conrad H. C. Everhard 5,000 5,000 0
Edward Gray 5,000 5,000 0
Alfons Murk 40,000 40,000 0
Samuel M. Sorkin 5,000 5,000 0
Eugene L. Crance 10,000 10,000 0
Jarred W. Stiemke 10,000 10,000 0
Jackson Chang 10,000 10,000 0
Chung-Ming Lin and
Li-Shiang Lin 10,000 10,000 0
Gerald D. Wollert
Revocable Living Trust dated 4/4/90 10,000 10,000 0
Patricia Ewing Hendrick 15,571 15,571 0
Gregory A. Despot 8,730 8,730 0
Charles E. Weed 44,455(3) 44,455 0
Judy L. Chidlow 6,661 6,661 0
John L. Chidlow 5,995 5,995 0
Jesswalt, Inc. 3,330 3,330 0
Frank Scott Moran 2,664 2,664 0
Anne S. Couch 2,664 2,664 0
3650 Investment Corporation, L.C. 1,332 1,332 0
May H. Chidlow 699 699 0
Richard L. Morgan 100,000(4) 100,000 0
Steven A. Soares 5,000 5,000 0
Mark Osgood 20,000 20,000 0
James P. Leaderer 50,000 50,000 0
Theodore C. Aalbersberg 10,000 10,000 0
Bertram S. Mullan 10,000 10,000 0
Thomas and Mary Ruthven 5,000 5,000 0
Robert Pierot 10,000 10,000 0
</TABLE>
-3-
<PAGE> 5
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON STOCK SHARES OF COMMON STOCK STOCK TO BE OWNED
SELLING SHAREHOLDERS OWNED BEFORE OFFERING(1) TO BE SOLD IN THE OFFERING AFTER THE OFFERING(10)
- -------------------- ------------------------ --------------------------- ----------------------
<S> <C> <C> <C>
Abraham Garfinkel 5,000 5,000 0
Delaware Charter Guarantee &
Trust Company TTEE FBO:
Chester S. Kucinski IRA 30,000 30,000 0
Michael Abdenour 10,000 10,000 0
Grigori Tsoukanov 5,000 5,000 0
Douglas F. Johnston 30,000 30,000 0
Michael and Gail Goldey 5,000 5,000 0
George L. Riggs, III 5,000 5,000 0
Delaware Charter Guarantee &
Trust Company TTEE FBO:
Douglas F. Johnston IRA 10,000 10,000 0
Carl Eric Mayer 5,000 5,000 0
Raymond J. Wiacek 10,000 10,000 0
John B. Mauro 5,000 5,000 0
Paine Webber Incorporated, solely
as custodian of William E. Cassidy IRA 5,000 5,000 0
Paine Webber Incorporated, solely
as custodian of Reata L. Cassidy IRA 5,000 5,000 0
Eugene L. Crance 5,000 5,000 0
Paul Taboada 24,750(5) 24,750 0
Steven Taub 10,000(5) 10,000 0
Kurt Gray 4,000(5) 4,000 0
Howard Vo 1,000(5) 1,000 0
Thomas K. Lin 2,000(5) 2,000 0
Eric Rainer Bashford Charitable Remainder
Unitrust dated August 3, 1996
EIN 13-7096965 42,490(5) 42,490 0
Robert A. Schneider 43,245(5) 43,245 0
Lois Schulman 33,240(5) 33,240 0
Shai Sasson 10,000(5) 10,000 0
Sid Borenstein 27,275(5) 27,275 0
Martha Plaza 2,000(5) 2,000 0
Patricia Ewing Hendrick 21,625(6) 21,625 0
</TABLE>
-4-
<PAGE> 6
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON STOCK SHARES OF COMMON STOCK STOCK TO BE OWNED
SELLING SHAREHOLDERS OWNED BEFORE OFFERING(1) TO BE SOLD IN THE OFFERING AFTER THE OFFERING(10)
- -------------------- ------------------------ --------------------------- ----------------------
<S> <C> <C> <C>
Gregory A. Despot 67,681(6) 67,681 0
Judy L. Chidlow 9,251(6) 9,251 0
John H. Chidlow 36,103(6) 36,103 0
Jesswalt, Inc. 4,625(6) 4,625 0
Frank Scott Moran 3,700(6) 3,700 0
Anne S. Couch 3,700(6) 3,700 0
3650 Investment Corporation, L.C. 1,850(6) 1,850 0
May H. Chidlow 971(6) 971 0
Judd H. Chidlow 13,888(6) 13,888 0
Louisiana Economic Development Corp. 83,658(7) 83,658 0
Betsy B. Rouse 2,174(8) 2,174 0
Patrick H. & Lee M. Miller 4,346(8) 4,346 0
Edward J. Anderson 2,174(8) 2,174 0
J. Robert Wyatt 4,346(8) 4,346 0
Priscilla Goodwyn 2,174(8) 2,174 0
Sagax Fund II, Ltd. 8,698(8) 8,698 0
John H. & Maria Sultenfuss 2,174(8) 2,174 0
John S. Lemak 2,174(8) 2,174 0
Dorothy D. & Rush B. Winchester 2,174(8) 2,174 0
Robert C. Kohler, III 2,174(8) 2,174 0
Gary L. Covelli 2,174(8) 2,174 0
Isabel Maxwell 2,174(8) 2,174 0
Digital Data Networks, Inc. 2,174(8) 2,174 0
J. R. Sheldon & Co., Inc. 2,174(8) 2,174 0
Anthony DeCaprio 2,174(8) 2,174 0
Fred Werner 113,333(9) 113,333 0
Casper Air Service Employee Stock
Ownership Plan and Trust 40,302(9) 40,302 0
</TABLE>
- ---------------------
(1) Includes shares that may be purchased under outstanding warrants or
convertible or exchangeable notes.
(2) Paul Lubomirski serves as President of the Company's subsidiary, Pride
Aviation, Inc.
-5-
<PAGE> 7
(3) Charles Weed has served as a consultant to the Company since March 1996
and receives a consulting fee of $4,100 per month through February
1998. Mr. Weed is also a director of the Company. His shares include
(i) 9,000 shares purchasable, at $3.00 per share, pursuant to a
Convertible Note (as defined below) and (ii) 27,101 shares purchasable,
at $4.50 per share, pursuant to two Convertible Notes.
(4) Includes 80,000 shares purchasable, at $2.50 per share, upon the
exercise of the Morgan Warrants (as defined below). Mr. Morgan serves
as a director and consultant to the Company and receives a consulting
fee of $4,000 per month.
(5) Represents shares purchasable, at $1.00 per share, pursuant to the
Placement Warrants (as defined below).
(6) Represents shares purchasable, at $4.50 per share, pursuant to the
Convertible Notes.
(7) Represents shares purchasable, at $4.50 per share, pursuant to the
Exchangeable Note (as defined below).
(8) Represents shares issuable to the former holders of the Bridge Notes
(as defined below) upon payoff of the Bridge Notes, based on an assumed
initial public offering price for the Company's Common Stock of $5.75
per share.
(9) Represents shares issuable to the owners of CAS upon consummation of
the Casper Acquisition, based on an assumed initial public offering
price for the Company's Common Stock of $5.75 per share.
(10) Assumes all shares are sold by each Selling Shareholder. The
referenced offering is not the underwritten public offering covered by
the accompanying Prospectus.
DESCRIPTION OF TRANSACTIONS
Outstanding Common Stock. As of the date of this Prospectus
Supplement, the Company had issued and outstanding 1,600,250 shares of Common
Stock. In connection with the Company's organization, on December 20, 1995,
the Company issued 1,000,000 shares of Common Stock to The Sanders Companies,
Inc. in exchange for the transfer to the Company of all of the outstanding
capital stock of TriStar Airline Services, Inc. and TriStar Aircraft Services,
Inc.
In a Regulation D offering completed in June 1996, the Company sold
500,000 shares of Common Stock, at $3.00 per share, to a total of 41
accredited and non-accredited investors.
In connection with the Company's acquisition of Pride Aviation Group,
Inc. ("Pride") on March 1, 1996, the Company issued 100,250 shares of Common
Stock to certain of the former beneficial owners of Pride, including Paul
Lubomirski, who remained an executive officer of Pride and is considered one of
the key employees of the Company, and Charles Weed, who became a director of
and consultant to the Company.
Convertible Notes. In connection with its acquisition of Pride, the
Company issued $857,000 in aggregate principal amount of its five-year, 10%
Convertible Notes ("Convertible Notes") to certain of the former beneficial
owners of Pride, including Charles Weed. The Convertible Notes require the
Company to pay quarterly payments of interest at a rate of ten percent (10%)
per annum. Commencing April 1, 1998, the Convertible Notes also require equal
quarterly installments of principal in an amount necessary to fully amortize
the notes by March 1, 2001, when all remaining principal and accrued interest
will be due. Each of the Convertible Notes is convertible at the option of the
holder into shares of Common Stock at a price of $4.50 per share. In addition,
the Company issued to Charles Weed, in consideration for cancellation of
accrued, unpaid consulting fees owed by Pride, a Convertible Note in the amount
of $27,000 that is convertible at $3.00 per share. The conversion rates are
subject to adjustment in the event of any stock dividend, split, combination or
reclassification of the outstanding Common Stock of the Company. The
Convertible Notes require the Company to treat all holders of the Convertible
Notes as pari passu members of the same class. Each of the Convertible Notes
(other than the $27,000 note held by Mr. Weed) is secured by a pledge of the
pro rata portion of outstanding stock of Pride that was owned directly or
beneficially by the holder of the Convertible Note immediately prior to the
Company's acquisition of Pride. Approximately 90% of the outstanding stock in
Pride is pledged by the Company to secure the Convertible Notes, subject to the
Company's prior pledge of approximately 50% of the Pride stock to secure the
Exchangeable Note. If the Company fails to make a required payment of
principal and interest after notice of default, the holder of the Convertible
Note may exercise any of its remedies with respect to the pledged stock. As of
the date of this Prospectus Supplement, none of the Convertible Notes have been
converted.
Exchangeable Note. At the time of its acquisition by the Company,
Pride owed certain debt to the Louisiana Economic Development Corporation (the
"LEDC"). To obtain the LEDC's consent to the Company's acquisition of Pride,
the Company granted to the LEDC the right to exchange the debt owed by Pride to
the LEDC. Pride issued a new promissory note (the "Exchangeable Note") in the
original principal amount of $408,000 that is exchangeable by the LEDC for
newly issued shares of the Company's Common Stock at a rate of $4.50 per share.
The Company also pledged
-6-
<PAGE> 8
approximately 50% of the outstanding stock in Pride to secure the debt. As of
April 1, 1997, the Exchangeable Note had a principal balance of approximately
$376,000 and was exchangeable for 83,600 shares of Common Stock. The
Exchangeable Note requires the payment by Pride of equal monthly installments
of principal and interest of $3,800, and one final installment of all remaining
principal and interest on March 1, 2001. The LEDC has not exercised its exchange
right as of the date of this Prospectus Supplement.
Placement Warrants. On March 1, 1996 and June 24, 1996, the Company
issued warrants to purchase an aggregate of 200,000 shares of Common Stock (the
"Placement Warrants") to RAS Securities Corp. ("RAS") upon the closings of the
private placement of 500,000 shares of Common Stock by the Company. RAS has
subsequently transferred these Placement Warrants to certain of its employees.
Each Placement Warrant entitles the holder to purchase one share of Common
Stock at a price of $1.00 per share, exercisable on or before February 28,
1999. As of the date of this Prospectus Supplement, none of the holders of the
Placement Warrants has exercised his or her Placement Warrants. The Placement
Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price and the number of shares of Common Stock
subject to the Placement Warrants in certain events, such as stock dividends
and distributions, stock splits, recapitalizations, mergers, or consolidations.
Holders of Placement Warrants do not possess any rights as stockholders of the
Company prior to exercise. Holders of Placement Warrants have been granted
certain registration rights.
Morgan Warrant. Effective June 30, 1996, the Company and Richard L.
Morgan, then a consultant to the Company, entered into a Warrant Agreement (the
"Morgan Warrant") pursuant to which Mr. Morgan has the right to purchase 80,000
shares of Common Stock at a price of $2.50 per share. The Warrant Agreement
expires February 28, 1999. Mr. Morgan has not exercised any of his rights
under the Morgan Warrant as of the date of this Prospectus Supplement. Mr.
Morgan was appointed a director of the Company in February 1997. The Morgan
Warrant contains provisions that protect Mr. Morgan against dilution by
adjustment of the exercise price and the number of shares of Common Stock
subject to the Morgan Warrant in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers or consolidations. The
Morgan Warrant does not grant any stockholder rights to the holder thereof
prior to exercise. The Morgan Warrant grants to Mr. Morgan certain
registration rights.
Bridge Notes Shares. In February 1997, the Company completed a
private offering of $500,000 in aggregate principal amount of its 10% Bridge
Notes (the "Bridge Notes"). The Bridge Notes are due in full on June 30, 1998
or within five days following the funding of the initial public offering by the
Company of its Common Stock. If the Company successfully completes an initial
public offering of its Common Stock by September 30, 1997, the terms of the
Bridge Notes require the Company 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, at the time of repayment in full of the Bridge Notes. At an initial
public offering price of $5.75 per share, the holders of the Bridge Notes will
be issued an aggregate of 43,478 shares of Common Stock.
Casper Acquisition. On April 18, 1997, the Company entered into an
agreement to purchase all of the outstanding stock of CAS, which is held by
four shareholders. One of the shareholders is the Casper Air Service Employee
Stock Ownership Plan and Trust (the "ESOP"). The closing of this transaction
is expected to occur concurrently with the closing of the initial public
offering. The Company has agreed to pay or issue to CAS's shareholders
approximately $1,167,000 in cash and approximately $883,000 in value of Common
Stock, based on the initial public offering price. The ESOP and CAS's
controlling shareholder, Fred Werner, will receive their portions of the
purchase price 56% in cash and 44% in Common Stock. The other two shareholders
will receive only cash.
SALES BY AFFILIATES
Certain of the shares of Common Stock to be sold by the Selling
Shareholders are owned, or may be acquired, by executive officers or directors
of the Company. Paul Lubomirski, President of the Company's largest
subsidiary, Pride Aviation, Inc., owns 44,250 shares, or 3.4% of the shares
covered by this Prospectus Supplement. Charles Weed, a director of the
Company, owns or may acquire up to 44,455 shares, or 3.4% of the shares covered
by this Prospectus Supplement. Richard Morgan, a director of the Company, owns
or may acquire up to 100,000 shares, or 7.7% of the shares covered by this
Prospectus Supplement.
PLAN OF DISTRIBUTION
The Selling Shareholders may from time to time sell all or a portion
of their shares of Common Stock in the over-the-counter market or on any
national securities exchange or automated interdealer quotation system on which
the Common Stock may hereafter be listed or traded, in negotiated transactions
or otherwise, at prices then prevailing or related to the then current market
price or at negotiated prices. The shares of Common Stock may be sold directly
or through brokers or dealers or in a distribution by one or more underwriters
on a firm commitment or best efforts basis. The methods by which the shares of
Common Stock may be sold include (i) a block trade (which may involve crosses)
in which the broker or dealer engaged will attempt to sell the shares of Common
Stock as agent but may position and resell a portion of the block as principal
to facilitate the transaction, (ii) purchases by a broker or dealer as
principal and resales by such broker or dealer for its account pursuant to this
Prospectus Supplement and the accompanying Prospectus, (iii) ordinary brokerage
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<PAGE> 9
transactions and transactions in which the broker solicits purchasers or to or
through marketmakers, (iv) transactions in put or call options or other rights
(whether exchange-listed or otherwise) established after the effectiveness of
the Registration Statement of which this Prospectus is a part and (v) privately
negotiated transactions. In addition, any of the shares of Common Stock that
qualify for sale pursuant to Rule 144 under the Securities Act may be sold in
transactions complying with such Rule, rather than pursuant to this Prospectus
Supplement and the accompanying Prospectus. The ESOP may distribute its shares
to the ESOP's participants, based on the number of shares previously allocated
under the terms of the ESOP to the respective accounts of the participants.
In the case of sales of the shares of Common Stock effected to or
through broker-dealers, such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Shareholders or
the purchasers of the shares of Common Stock sold by or through such broker-
dealers, or both. The Company has advised the Selling Shareholders that the
anti-manipulative Regulation M under the Exchange Act may apply to their sales
in the market and has informed them of the need for delivery of copies of this
Prospectus Supplement and the accompanying Prospectus. The Company is not
aware as of the date of this Prospectus Supplement of any agreements between
any of the Selling Shareholders and any broker-dealers with respect to the sale
of the shares of Common Stock. The Selling Shareholders and any broker-dealers
or agents participating in the distribution of the Securities may be deemed to
be "underwriters" within the meaning of the Securities Act and any commissions
received by any such broker-dealers or agents and profit on any resale of
shares of Common Stock may be deemed to be underwriting commissions under the
Securities Act. The commissions received by a broker-dealer or agent may be in
excess of customary compensation. The Company will receive no part of the
proceeds from the sale of any of the shares of Common Stock by the Selling
Shareholders.
The Company will pay all costs and expenses incurred in connection
with the registration under the Securities Act of the shares of Common Stock
offered by the Selling Shareholders, including without limitation all
registration and filing fees, listing fees, printing expenses, fees and
disbursements of counsel and accountants for the Company. Each Selling
Shareholder will pay all brokerage fees and commissions, if any, incurred in
connection with the sale of the shares of Common Stock owned by the Selling
Shareholder. In addition, the Company has agreed to indemnify the Selling
Shareholders, other than the Trust, against certain liabilities, including
liabilities under the Securities Act.
There is no assurance that any of the Selling Shareholders will sell
any or all of the shares of Common Stock offered by them.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Bracewell & Patterson, L.L.P., Dallas, Texas.
-8-
<PAGE> 10
SUBJECT TO COMPLETION, DATED JULY 21, 1997
AVIATION GROUP, INC.
1,000,000 SHARES OF COMMON STOCK
AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Aviation Group, Inc. (the "Company") is hereby offering 1,000,000
shares of its common stock, par value $0.01 per share (the "Common Stock") and
redeemable warrants to purchase an additional 1,000,000 shares of Common Stock
(the "Warrants"). The Common Stock and the Warrants (collectively, the
"Securities") are being offered separately and not as units, and each are
separately transferable. It is currently estimated that the initial public
offering price will be $5.75 per share of Common Stock and $0.10 per Warrant.
Each Warrant is exercisable anytime after two years from the date of this
Prospectus and entitles the registered holder to purchase one share of Common
Stock at an exercise price equal to 120% of the initial public offering price
and expires five years following the date of this Prospectus. The outstanding
Warrants may be redeemed by the Company after two years from the date of this
Prospectus, with the prior consent of the Representative, upon 30 days' written
notice at $0.10 per Warrant, provided that the closing bid quotations or sales
prices of the Common Stock have averaged at least 165% of the initial public
offering price for a period of any 20 consecutive trading days ending on the
tenth day prior to the day on which the Company gives notice. See "Description
of Securities."
Prior to this offering (the "Offering"), there has not been any public
market for the Securities, and there can be no assurance that any such market
will develop or, if developed, that it will be sustained. The initial public
offering prices of the Securities shall be determined by negotiations between
the Company and Duke & Co., Inc., as the representative (the "Representative")
of the participating underwriters (the "Underwriters"). See "Underwriting."
Application has been made for approval of the Common Stock and Warrants for
quotation on the Nasdaq Stock Market's SmallCap Market ("Nasdaq"). The Common
Stock and Warrants have been approved for listing on the Boston Stock Exchange
(the "BSE"). The Securities will not be listed for trading as units. In the
event that the Common Stock or Warrants are not accepted for quotation on
Nasdaq or listing on the BSE, an investor would likely find it difficult to
dispose of the Common Stock or Warrants or to obtain current quotations as to
their value.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS
WELL AS IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION,"
COMMENCING ON PAGES 6 AND 16, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . . . . $ 5.75 $ 0.575 $ 5,175,000
- --------------------------------------------------------------------------------------------------------------------------
Per Warrant . . . . . . . . . . . . . . . . $ 0.10 $ 0.01 $ 90,000
- --------------------------------------------------------------------------------------------------------------------------
Total(3) . . . . . . . . . . . . . . . . . . $ 5.85 $ 0.585 $ 5,265,000
==========================================================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance to the Representative
equal to 3% of the offering proceeds, including proceeds from
over-allotments, and 100,000 warrants (the "Representative's
Warrants") to purchase up to 100,000 shares of Common Stock and
100,000 Warrants (the "Underlying Warrants"). The Underlying Warrants
will be identical to the Warrants offered to the public except that
the exercise price of the Underlying Warrants will be 165% of the
exercise price of the Warrants. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933 as amended, (the "Securities Act").
See "Underwriting."
(2) Before deducting expenses of this offering payable by the Company
estimated at $472,000 including a non-accountable expense allowance of
$176,000.
(3) The Company has granted to the Underwriters the right to purchase,
within 45 days from the date of this Prospectus, up to 150,000
additional shares of Common Stock and 150,000 additional Warrants on
the terms set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public will be
$6,727,500, the total Underwriting Discounts and Commissions will be
$672,750, the total Proceeds to Company, before the expenses of
this offering, will be $6,054,750. See "Underwriting."
The Common Stock and Warrants are being sold by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right to reject any order, in whole or in
part, and subject to certain other conditions. It is expected that delivery of
the Common Stock and Warrants will be made against payment therefor at the
offices of Duke & Co., Inc., New York, New York, on or about ___,
1997.
DUKE & CO., INC.
The date of this Prospectus is __________________, 1997.
<PAGE> 11
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 12
[Inside Front Cover]
AVIATION GROUP, INC.
Paint & Overhaul Services
[Color picture of two men in
protective clothing spray
painting underside of jet
aircraft wing] Professional aircraft painting
services performed by trained
personnel.
[Color picture of two Pride Aviation
plane hangars and two United Airlines
jet aircraft, one newly painted and
one surrounded by scaffolding with
old paint scheme, on ramp in front of
hangars]
The Company's FAA-certified
aircraft paint facility in
New Iberia, Louisiana [Color picture inside hanger
showing United Airlines jet
aircraft in process of being
painted]
The Company performs aircraft paint
services under a long-term contract
with United Airlines.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE> 13
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise indicated, the information
contained in this Prospectus does not assume the exercise of the Warrants, the
Underwriters' over-allotment option, the Representative's Warrants or currently
outstanding options or warrants. This Prospectus assumes an initial price to
public of $8.00 per share. In addition to the other information in this
Prospectus, prospective investors should carefully consider the information set
forth under the heading "Risk Factors."
THE COMPANY
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.
The Company was organized to consolidate the ownership of Tri-Star
Aircraft Services, Inc. ("TriStar Paint"), Tri-Star Airline Services, Inc.
("Airline Services") and Pride Aviation, Inc. ("Pride"). On December 20, 1995,
the Company acquired all the outstanding shares in TriStar Paint and Airline
Services in exchange for the issuance of 1,000,000 shares of Common Stock. On
March 1, 1996, in connection with the Company's acquisition of Pride, the
Company paid $486,000 cash and issued 10%, five-year Convertible Notes in the
aggregate principal amount of $857,000, and 100,250 shares of Common Stock.
The Company is currently organized into three divisions devoted to
Aviation Group'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.
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 first fixed base operation,
located at Redbird Airport in Dallas, Texas provides 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 located near major urban areas 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. According to U.S. Department of Transportation statistics, the nine
major U.S. airlines expended 20% of their maintenance budgets with outsourcing
vendors in 1994. There are over 10,000 aviation maintenance and service vendors
worldwide. The Company believes that the aviation service industry is highly
fragmented. It 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.
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 expects to consummate this transaction
concurrently with the closing of this offering. CAS is a full-service FBO
located in Casper, Wyoming and has been in business continuously since 1946.
For the nine months ended January 31, 1997, CAS had net sales of approximately
$6,570,000 and net income of $271,000.
The principal executive offices of the Company are located at 700
North Pearl Street, Suite 2170, Dallas, Texas 75201, telephone number (214)
922-8100.
3
<PAGE> 14
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered . . . . . 1,000,000 shares
Warrants Offered . . . . . . . 1,000,000 Warrants
Common Stock Outstanding:
Before Offering (1) . . . . 1,600,250 shares
After Offering (1) . . . . 2,600,250 shares
Warrants Offered . . . . . . . 1,000,000 Warrants
Exercise Terms . . . . . . . Each Warrant entitles the holder to purchase,
anytime after two years from the date of this
Prospectus, one share of Common Stock for
120% of the initial public offering price.
Expiration Date . . . . . . Five years from the date of this Prospectus.
Redemption . . . . . . . . . Subject to redemption after two years from
the date of this Prospectus, with the prior
consent of the Representative at a price of
$0.10 per Warrant upon 30 days written
notice, provided that the average closing
bid quotations or sales prices of the Common
Stock equal or exceed 165% of the initial
public offering price for 20 consecutive
trading days ending on the tenth day prior
to the date on which the Company gives
notice of redemption. See "Description of
Securities - Warrants."
Estimated Net Proceeds (2) . . $4,793,000
Use of Proceeds . . . . . . . . Repayment of indebtedness, the cash portion
of the CAS acquisition, capital expenditures
for existing operations, acquisition of other
aviation service companies, facilities
improvements, working capital and other
corporate purposes.
Risk Factors . . . . . . . . . The Securities involve a high degree of risk
and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Nasdaq Symbols:
Common Stock . . . . . . . . AVGP
Warrants . . . . . . . . . . AVGPW
Boston Stock
Exchange Symbols:
Common Stock . . . . . . . . AVGP
Warrants . . . . . . . . . . AVGPW
</TABLE>
- --------------
(1) Excludes approximately 197,113 shares to be issued upon payoff of the
Bridge Notes and consummation of the CAS acquisition, 150,000 shares
of Common Stock reserved for the Company's 1997 Stock Option Plan and
shares of Common Stock issuable upon the exercise of (i) the Warrants
offered hereby; (ii) the Representative's Warrants and the Underlying
Warrants; (iii) outstanding warrants to purchase up to 280,000 shares
of Common Stock; (iv) the Underwriters' over-allotment option; and (v)
outstanding promissory notes totaling $1,260,000, as of March 31,
1997, that are convertible or exchangeable for up to 283,100 shares of
Common Stock.
(2) After deducting underwriting discounts and other expenses of this
Offering, including the Representative's non-accountable expense
allowance, but excluding any exercise of the Underwriters'
over-allotment option.
4
<PAGE> 15
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from (i)
the combining financial statements of TriStar Paint and Airline Services for
the fiscal years ended September 30, 1994 and 1995 and the notes thereto and
(ii) the consolidated financial statements for the Company as of and for the
nine months ended June 30, 1996, and the notes thereto, and the nine months
ended March 31, 1997 and 1996, contained elsewhere in the Prospectus. This
information should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The pro forma
financial information included herein is presented for informational purposes
only and may not reflect the Company's future results of operations and
financial position or what the results of operations and financial position of
the Company would have been had the Pride and CAS acquisitions actually
occurred as of October 1, 1995.
<TABLE>
<CAPTION>
Actual Nine Pro Forma Pro Forma
Year Ended Year Ended Months Ended Nine Months Nine Months Nine Months Ended
September 30 September 30, June 30, Ended June 30 Ended March 31, March 31,
1994(1) 1995(1) 1996 1996(2) 1997(2) 1997 1996
----------- ------------ ------------ ------------- --------------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . $1,770,000 $2,533,000 $3,881,000 $11,290,000 $12,224,000 $6,664,000 $2,123,000
Gross profit . . . . . . . . . 678,000 1,116,000 1,043,000 2,289,000 2,055,000 1,369,000 565,000
General and administrative
and depreciation and
amortization expenses . . . . 466,000 569,000 906,000 1,824,000 2,035,000 1,713,000 526,000
---------- ---------- ---------- ----------- ----------- ---------- ----------
Income (loss) from
operations . . . . . . . . . . 212,000 547,000 137,000 465,000 20,000 (344,000) 39,000
Interest expense and other,
net . . . . . . . . . . . . . 13,000 17,000 69,000 249,000 186,000 153,000 29,000
---------- ---------- ---------- ----------- ----------- ---------- ----------
Income (loss) before income
taxes . . . . . . . . . . . . 199,000 530,000 68,000 216,000 (166,000) (497,000) 10,000
Provision (benefit) for
income taxes . . . . . . . . . 61,000 188,000 34,000 84,000 (35,000) (164,000) 6,000
---------- ---------- ---------- ----------- ----------- ---------- -------
Net income (loss) . . . . . . . $ 138,000 $ 342,000 $ 34,000 $ 132,000 $ (131,000) $ (333,000) $ 4,000
========== ========== ========== =========== =========== ========== ==========
Pro forma net income (loss)
per common and common
equivalent share
(unaudited) (3) . . . . . . . $ 0.02 $ 0.08 $ (0.08) $ $(0.22) $ --
========= =========== =========== ========== ==========
Pro forma weighted average
common and common
equivalent shares
outstanding
(unaudited) (3) . . . . . . . $1,497,511 $1,651,146 $1,651,146 $1,497,511 $1,497,511
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
------------------------------
June 30, Pro Forma
1996 Actual As Adjusted(4)
--------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) . . . . . . . . . . . $ (126,000) $ (729,000) $ 4,128,000
Total assets . . . . . . . . . . . . . . . . . 4,524,000 4,919,000 12,521,000
Long-term debt, net of current portion . . . . 1,350,000 1,303,000 2,286,000
Total liabilities . . . . . . . . . . . . . . . 3,069,000 3,547,000 5,949,000
Shareholders' equity . . . . . . . . . . . . . $1,455,000 $1,372,000 $ 6,572,000
</TABLE>
- ----------------------------
(1) Represents combined statements of operations for the Company's
predecessors, TriStar Paint and Airline Services.
Represents the historical statement of operations for the nine month
periods ended June 30, 1996 and March 31, 1997, as adjusted on a pro
forma basis to give effect to the acquisitions of Pride and CAS as if
they had occurred at the beginning of those respective fiscal periods.
With respect to the CAS acquisition, the earnings per share
computation assumes 153,635 shares (i.e., at an initial public offering
price of $5.75) are issued. See "Unaudited Pro Forma Combined
Financial Information."
(3) See Note B "Summary of Significant Accounting Policies--Unaudited Pro
Forma Net Income (Loss) Per Common Share" in the Notes to Consolidated
Financial Statements for the Company for the period ended June 30,
1996.
(4) Adjusted to give effect to the CAS acquisition and the sale by the
Company of the 1,000,000 shares of Common Stock and the 1,000,000
Warrants offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 16
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating
the Company and its business before purchasing the Securities offered hereby.
DEPENDENCE ON ONE CUSTOMER
Pride's contract with United Airlines, Inc. ("United") to provide
aircraft stripping and painting services accounted for approximately 77% of the
Company's revenues for the nine months ended March 31, 1997. On a pro forma
basis including CAS, the contract with United would have accounted for 42% of
the Company's revenues for the nine months ended March 31, 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 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
TriStar Paint and Airline Services, the Company's predecessors,
together earned net income of $138,000 and $342,000 for the fiscal years ended
September 30, 1994 and 1995, respectively. Pride experienced a net loss of
$81,000 in its fiscal year ended September 30, 1995. Although the Company
earned net income of $34,000 for the nine months ended June 30, 1996, the
Company experienced a net loss of $333,000 for the nine months ended March 31,
1997. This loss was primarily due to increases in goodwill and amortization
from the Pride acquisition, start up costs in the Company's FBO division, and
increased corporate overhead incurred to support anticipated future growth. As
of March 31, 1997, the Company had a negative working capital of $729,000 and
an accumulated earnings deficit of $595,000. 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 up to
$1,143,000, or 24%, of the estimated net proceeds of this 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. Other than the agreement to
acquire CAS, no commitments
6
<PAGE> 17
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. See "Business--Acquisitions of Complimentary
Businesses."
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.
Between December 1992 and June 1997, CAS experienced four crashes of
its charter aircraft, two of which involved fatalities. In three of the
crashes, the National Transportation Safety Board, in its inspections, found no
fault with CAS. The Board has made no finding yet with respect to the last
crash, which occurred in June 1997 and involved no fatalities. The Company
believes that CAS is adequately insured with respect to any losses and
liabilities arising from these crashes. The Company has determined that it will
discontinue CAS's charter operations after the acquisition of CAS, and redirect
the net proceeds from the sale of the charter aircraft to other operations of
CAS and the Company. Nevertheless, in the future, CAS may be subject to
material loss to the extent that a claim is made against CAS which is not
covered in whole or in part by insurance and for which any third party
indemnification is not possible. In addition, there can be no assurance that
insurance coverages will be maintained in the future at an acceptable cost.
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.
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 FINANCINGS OR OFFERINGS
There can be no assurance that the proceeds from this offering 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
7
<PAGE> 18
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. Mr.
Sanders is currently the beneficial owner of 62.5% of the Company's outstanding
Common Stock and will beneficially own 38.5% of the Company's outstanding
Common Stock immediately following the Offering. See "Principal Shareholders."
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. See "Management." The Company is
the beneficiary of a $1,000,000 key man life insurance policy on 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
Upon the completion of this offering, the directors, officers, and
principal shareholders of the Company will beneficially own approximately 44.0%
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. See "Management," "Principal Shareholders" and "Description of
Securities."
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, . See
"Management-- Employment and Consulting Agreements." 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. See
"Management--Executive Officers and Directors."
FUTURE PARTNERSHIP OR JOINT VENTURE LIABILITIES
In the future, the Company or a subsidiary may form partnerships or
joint ventures as a financing vehicle or to develop and/or manage new business
opportunities, including the raising of funds for such businesses. As a general
partner or joint venturer, the Company may be exposed to liability with respect
to claims asserted against such partnerships or ventures against which
liability the partnership or venture may have insufficient assets or insurance.
This liability could have a materially adverse effect on the Company.
COMPETITION
The airline services industry is highly competitive. Each of the
Company's subsidiaries is in direct competition with other companies. Although
TriStar 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
8
<PAGE> 19
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, 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. See "Business--Competition."
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."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
after completion of this offering or, if developed, that it will be sustained.
There can be no assurance that the market price of the Common Stock will not
decline below the initial offering price. 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.
ARBITRARY OFFERING PRICE
The public offering price of the Common Stock and Warrants has been
determined by negotiation between the Company and the Representative. Among the
factors considered in such negotiations were prevailing market conditions, the
history and prospects of the Company, the present state of the Company's
development, the industry in which it competes, an assessment of the Company's
management, the market price for securities of comparable companies at the time
of the offering, and other factors deemed relevant. See "Underwriting."
REPRESENTATIVE'S LIMITED UNDERWRITING EXPERIENCE; PENDING INVESTIGATION
While certain of the officers of the Representative have significant
experience in corporate financing and the underwriting of securities, the
Representative has previously underwritten only four public offerings.
Accordingly, there can be no assurance that the Representative's limited public
offering experience will not affect the Company's offering of the Common Stock
and Warrants and subsequent development of a trading market, if any, in such
securities. In addition, the Representative is aware that the Commission is
investigating certain of the Representative's trading practices and mark-ups in
connection with the securities of an issuer whose 1995 public offering was
underwritten by the Representative. There can be no assurance that this
investigation will not adversely and materially affect this Offering or
subsequent trading in the Common Stock and/or Warrants of the Company. See
"Underwriting."
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,
9
<PAGE> 20
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. See "Description of Capital Stock-- Preferred Stock."
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. See "Dividend Policy."
EFFECT OF REPRESENTATIVE'S WARRANTS
The Company has agreed to sell for nominal consideration to the
Representative or its designee warrants (the "Representative's Warrants") to
purchase (i) 10% of the number of shares of Common Stock sold in this offering
and (ii) warrants to purchase 10% of the number of shares of Common Stock sold
in this offering (the "Underlying Warrants"). The terms and conditions of the
Underlying Warrants are identical to those of the Warrants offered hereby,
except that the exercise price of the Underlying Warrants is 165% of the
exercise price of the Warrants. The Representative's Warrants will be
exercisable for a period of four years commencing one year after the date of
this Prospectus at an exercise price of 165% of the initial public offering
price. The Representative and its designees will have the opportunity to profit
from an increase in the price of the Company's Common Stock during the term of
the Representative's Warrants and are likely to exercise them at a time when
the Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such warrants. In addition, the existence of
such warrants may adversely affect the terms on which the Company can obtain
additional financing. See "Description of Securities" and "Underwriting."
LISTING AND MAINTENANCE CRITERIA FOR SECURITIES; PENNY STOCK RULES
Application has been made for quotation of the Common Stock and
Warrants on the Nasdaq Stock Market's SmallCap Market ("Nasdaq"). The Common
Stock and Warrants have been approved for listing on the Boston Stock Exchange
(the "BSE"). In the event that the Common Stock or Warrants are not accepted
for quotation on Nasdaq or for listing on the BSE, an investor would likely
find it difficult to dispose of the Common Stock or Warrants or to obtain
current quotations as to their value. There can be no assurance that the
Company in the future will meet the requirements for continued listing on the
Nasdaq or the BSE with respect to the Common Stock or Warrants. 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 purchasers in this offering
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.
In addition, if the Company fails to maintain a Nasdaq listing for its
securities, and no other exclusion from the definition of a "penny stock" under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
available, then any broker engaging in a transaction in the Company's
securities would be required to provide any customer with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market values of the Company's
securities held in the customer's accounts. The bid and offer quotation and
compensation information must be provided prior to effecting the transaction
and must be contained on the customer's confirmation. If brokers become subject
to the "penny stock" rules when engaging in transactions in the Securities,
they would become less willing to engage in such transactions, thereby making
it more difficult for purchasers in this offering to dispose of the Securities.
See "Financial Statements."
DILUTION
Purchasers of the Securities will suffer immediate and significant
dilution in net tangible value of the Common Stock. Based on the net tangible
book value of the Company's Common Stock at March 31, 1997, purchasers of the
Securities would have suffered, on a pro forma basis, a per share dilution of
68.7% per share. The exercise of outstanding warrants, options and convertible
or exchangeable notes will also have an additional dilutive effect on the
interests of the purchasers of the Securities. See "Dilution."
10
<PAGE> 21
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this offering or the prospect of such sales could adversely
affect the market price of the Common Stock. Upon completion of this offering,
the CAS acquisition and the payoff of the Bridge Notes, the Company will have
outstanding approximately 2,797,363 shares of Common Stock. Of these shares,
the 1,000,000 shares of Common Stock being offered hereby are immediately
eligible for sale in the public market without restriction, except for shares
purchased at any time by any "affiliate" of the Company, as such term is
defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, the approximate 153,635 shares of Common Stock
to be issued to the former stockholders of CAS in the CAS acquisition have been
registered for resale and will not be restricted.
Company officers beneficially owning a total of 1,044,250 shares of
Common Stock will sign lock-up agreements under which such holders will agree
not to offer, sell, or otherwise dispose of their shares of Common Stock that
might otherwise be eligible for sale for a period of at least 24 months after
the date of this Prospectus without the prior written consent of the
Representative.
Nonmanagement holders of the Company's securities (owning 556,000
shares of Common Stock and outstanding warrants, or options exercisable for
280,000 shares of Common Stock) will agree with the Representative to lock-up
for a period of 12 months the shares of Common Stock that they own or may
acquire after the date of this Prospectus. Additionally, if the Representative
consents to an early release of such shares in an aggregate quantity equal to
at least 50% of such holders' shares, then the lock up period on such remaining
shares held by these holders shall automatically extend to two years from the
date of this Prospectus.
Holders of certain promissory notes totaling $1,260,000 as of March 31,
1997, that are convertible or exchangeable for up to 283,100 shares of Common
Stock have agreed to lock up their shares for two years from the date of this
Prospectus, provided however that such holders may sell shares earlier only in
an amount sufficient to offset required Company principal payments, beginning
March 1998.
The terms of the Bridge Notes provide that the approximate 43,478
shares of Common Stock to be issued upon full payment of the Bridge Notes may
not be sold by the holder for one year after the closing of this Offering. The
Representative may not release or waive the prohibition on sale for the shares
issuable upon payment of the Bridge Notes. Upon the expiration of all lock-up
agreements, these shares will become eligible for sale in the public market
assuming the shares continue to be registered for sale by the selling
securityholders or, if not registered, subject to the provisions of Rule 144.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS
The shares of Common Stock issuable upon exercise of the Warrants and
the securities issuable upon exercise of the Representative's Warrants have
been registered with the Commission. The Company will be required, from time to
time, to file post-effective amendments to its registration statement in order
to maintain a current prospectus covering the issuance of such shares upon
exercise of the Warrants. The Company has undertaken to make such filings and
to use its best efforts to cause such post-effective amendments to become
effective. If for any reason a required post-effective amendment is not filed
or does not become effective or is not maintained, the holders of the Warrants
may be prevented from exercising their Warrants. See "Description of
Securities--Warrants."
STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of the Warrants have the right to exercise the Warrants only
if the underlying shares of Common Stock are qualified, registered or exempt
from registration under applicable securities laws of the states in which the
various holders of the Warrants reside. The Company cannot issue shares of
Common Stock to holders of the Warrants in states where such shares are not
qualified, registered or exempt. The Company has, however, (i) obtained a
listing for the shares of Common Stock on the Boston Stock Exchange which
provides an exemption from state securities law registration in many states and
(ii) undertaken to register the shares of Common Stock in certain states where
this exemption is not available. See "Description of Securities--Warrants."
CALLABLE WARRANTS AND IMPACT ON INVESTORS
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of the
Warrants to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the
then current market price when the holder might otherwise wish to hold the
Warrants for possible additional appreciation, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants in the event of a call for redemption. Holders who do not exercise
their Warrants prior to redemption by the Company will forfeit their right to
purchase the shares of Common Stock underlying the Warrants. The foregoing
notwithstanding, the Company may not call the Warrants at any time that a
current registration statement under the Securities Act of 1933, as amended, is
not then in effect. Any redemption of the Warrants
11
<PAGE> 22
shall require the written consent of the Representative. See "Description of
Securities--Warrants."
BROAD DISCRETION WITH RESPECT TO ALLOCATION OF NET PROCEEDS
The Company expects to use a portion of the net proceeds of the
Offering to make future acquisitions. The Company has not yet identified the
specific uses for such net proceeds and will, therefore, retain broad
discretion as to the allocation of a significant portion of the net proceeds of
the Offering. Pending such uses, the Company intends to invest the net
proceeds in short-term bank deposits or investment-grade securities. See "Use
of Proceeds."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus contains forward-looking statements including
statements regarding, among other items, the Company's 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 Prospectus
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares
of Common Stock and the 1,000,000 Warrants offered hereby are estimated to be
$4,793,000, after deducting underwriting discounts and commissions and
estimated offering expenses. The Company anticipates that the net proceeds of
this offering will be used substantially as follows:
<TABLE>
<CAPTION>
Percent of
Application of Net Proceeds Dollar Amount Net Proceeds
--------------------------- ------------- ------------
<S> <C> <C>
Repay indebtedness (1) $ 750,000 15.6%
Purchase of CAS and Related Costs (2) 1,400,000 29.2
Future acquisitions (3) 1,143,000 23.8
Enhance existing products and services (4) 500,000 10.5
Improve existing facilities (5) 250,000 5.2
Purchase of capital equipment (6) 250,000 5.2
General corporate purposes 500,000 10.5
---------- -----
Total $4,793,000 100.0%
========== =====
- -----------------------------
</TABLE>
The Company intends to use approximately $500,000 of the net proceeds
to repay certain subordinated promissory notes privately issued by the
Company in February 1997 (the "Bridge Notes") and approximately
$250,000 of the net proceeds to repay certain bank indebtedness. The
Bridge Notes are due in full on June 30, 1998 or earlier in certain
circumstances, including within five days following the closing of
this Offering. Subject to successful completion of this Offering, in
connection with the full payment of the Bridge Notes, the Company has
agreed to issue to the holders of the Bridge Notes that number of
shares of Common Stock equal to the quotient of $250,000 divided by
the initial public offering price. The Company used the proceeds from
the issuance of the Bridge Notes for general corporate purposes and to
fund the costs of this Offering. The bank indebtedness is principally
composed of a revolving line of credit maturing in September 1997
having a principal balance of $248,000 as of March 31, 1997 and
bearing interest at prime plus 2%. This bank debt is secured by the
personal guaranty of Lee Sanders, the Company's Chief Executive
Officer, and a pledge of all of the stock, accounts receivable,
equipment and fixtures of TriStar Paint and Airline Services.
(2) These funds represent the cash portion of the purchase price of CAS,
and approximately $300,000 in legal, accounting, and other purchase
expenses. See "Acquisition of Casper Air Service."
(3) A key element of the Company's strategy involves growth through
acquisitions of other companies, assets or product lines that would
complement or expand the Company's existing business similar to the
CAS acquisition. The Company believes that acquisitions will enable
it to leverage its fixed costs of operations and further expand the
products and services which it can offer to its customers. No
commitments or binding agreements have been entered into as of the
date of this Prospectus and accordingly no assurance can be given that
any of the acquisitions currently being considered will be
consummated.
12
<PAGE> 23
(4) The Company intends to utilize approximately $500,000 of the proceeds
of this offering to fund anticipated internal growth in its
businesses, particularly the Ground Handling & Services Division. Such
funds will facilitate the entry into additional airports, the hiring
and training of additional support and operating personnel, and the
creation and implementation of formal national marketing and customer
service programs.
(5) These funds will be used primarily to improve and update existing
hangar facilities where the Company's Overhaul & Service Division
performs its paint services. Additionally, leasehold improvements
associated with expanded office and managerial space for the Ground
Handling & Services Division will also be funded with these proceeds.
(6) These funds will be utilized to purchase ground handling and other
support equipment for the Ground Handling & Services Division, along
with additional paint, scaffolding, environmental, and other support
equipment for the Overhaul & Services Division. Ongoing improvements
and additions to the Company's computerized accounting and management
systems will also be funded with these proceeds.
Pending the uses described herein, the foregoing represent the
Company's present intentions with respect to the allocation of the proceeds of
this offering based upon its present plans and business conditions. However,
changed business conditions and various other factors could result in the
application of the proceeds of this offering in a manner other than as
described in this Prospectus. In this regard, although the Company is not
currently a party to any binding agreement or commitment with respect to any
prospective acquisition, other than the CAS acquisition, the Company intends to
use portions of the net proceeds to finance acquisitions of complementary
businesses, products or technologies, or other assets, if attractive
opportunities arise. See "Risk Factors." Pending such uses, the Company intends
to invest the net proceeds of the offering in short-term bank deposits or
investment-grade securities.
13
<PAGE> 24
ACQUISITION OF CASPER AIR SERVICE, INC.
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 expects to consummate this transaction
concurrently with the closing of this offering. The Company has agreed to pay
or issue to CAS's four shareholders approximately $1,167,000 in cash and
approximately $883,000 in value of Common Stock, based on the initial public
offering price. The recipients of shares of the Common Stock may receive
additional cash consideration to the extent the fair market value of their
shares declines prior to the date their shares are free of transfer
restrictions or, for one shareholder that is CAS's` Employee Stock Ownership
Plan and Trust (the "ESOP"), the date the ESOP receives a qualifying letter
from the Internal Revenue Service, if later. In connection with this offering,
the Company has registered these shares for resale by the recipients, and no
transfer restrictions will be imposed through any lock-up agreement with the
Representative. The controlling stockholder of CAS, Fred Werner, will agree to
serve as a consultant for 12 months for a fee of $6,000 per month for the first
six months and $4,000 per month for the last six months.
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.
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 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.
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 chartered
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 fiscal year ended April 30, 1992 to $983,000 for the fiscal
year ended April 30, 1996.
At and for the fiscal year ended April 30, 1996, CAS had total assets
of $4,650,000, total liabilities of $4,092,000, net sales of $6,915,000 and net
loss of $226,000. At and for the nine months ended January 31, 1997, CAS had
total assets of $3,620,000, total liabilities of $2,788,000, net sales of
$6,570,000 and net income of $271,000. See "Unaudited Pro Forma Combined
Financial Information" for the revenue and income impact of the elimination of
CAS's aircraft charter operations for the twelve months and nine months ended
April 30, 1996 and January 31, 1997, respectively.
RECENT EVENTS
The CAS unaudited financial position at fiscal year ended April 30,
1997 and results of operations for the nine months and fiscal year ended
January 31, 1997 and April 30, 1997, respectively, are as follows:
STATEMENT OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION> Nine Months Three Months Three Month
Ended Ended Ended
January 31, 1997 April 30, 1997 April 30, 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $6,570,000 $2,003,000 $8,573,000
---------- ---------- ----------
Gross profit 941,000 158,000 1,099,000
Operating expenses 580,000 131,000 711,000
---------- ---------- ----------
Operating income 361,000 27,000 388,000
Interest expense and other (net) 90,000 26,000 116,000
---------- ---------- ----------
Income before income taxes 271,000 51,000 272,000
Provision (benefit) for income taxes -- -- --
---------- ---------- ----------
Net income $ 271,000 $ 51,000 $ 272,000
========== ========== ==========
<CAPTION>
April 30, 1997
--------------
BALANCE SHEET DATA (UNAUDITED):
<S> <C>
Working capital $ 178,000
Total assets 3,625,000
Long-term debt, net of current portion 1,132,000
Total liabilities 2,793,000
Shareholders' equity $ 832,000
</TABLE>
14
<PAGE> 25
DILUTION
Dilution is determined by subtracting net tangible book value per
share after the offering from the amount of cash paid by investors for the
shares of Common Stock. Net tangible book value per share represents the book
value of the Company's total tangible assets less total liabilities, divided by
the number of outstanding shares of Common Stock.
The net tangible book value of the Common Stock at March 31, 1997, was
approximately $169,000, or $0.11 per share. After giving effect to the sale of
the 1,000,000 shares of Common Stock offered hereby (at the initial
public offering price of $5.75 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company) and the application of the net proceeds therefrom, and assuming no
other changes in the net tangible book value after March 31, 1997, the
Company's pro forma net tangible book value at March 31, 1997 would have been
approximately $4,751,000, or $1.80 per share. This represents an immediate
increase in pro forma net tangible book value of $1.69 per share to existing
shareholders and an immediate decrease in pro forma net tangible book value to
new investors of $3.95 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share . . . . . . . . . . $5.75
Net tangible book value per share at March 31, 1997 . . . . . . $0.11
Increase per share attributable to new investors . . . . . . . . 1.69
Pro forma net tangible book value per share after this offering . . 1.80
-----
Dilution per share to new investors . . . . . . . . . . . . . . . . $3.95
=====
Percentage dilution . . . . . . . . . . . . . . . . . . . . . . . . 68.7%
=====
</TABLE>
The following table sets forth, as of March 31, 1997, the differences
between the existing shareholders, the investors in this offering, holders of
outstanding warrants or convertible or exchangeable notes and the recipients of
shares in the CAS acquisition with respect to the total consideration paid or
payable and the average price per share paid or payable:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration (6) Average
---------------------- ------------------------ Price
Number Percent Amount Percent Per Share
---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders (1) . . . . . . . . . 1,644,000 48.9% $2,052,000 19.8% $1.25
New investors (2) . . . . . . . . . . . . . 1,000,000 29.8 5,750,000 55.6 5.75
Exercise of outstanding
warrants (3) . . . . . . . . . . . . . . 280,000 8.3 400,000 3.9 1.43
Exercise of outstanding convertible . . .
or exchangeable notes (4) . . . . . . . . 283,000 8.4 1,260,000 12.2 4.45
Issuable in CAS acquisition (5) . . . . . 154,000 4.6 883,000 8.5 5.75
--------- ----- ----------- ----- ------
Total 3,361,000 100.0% $10,345,000 100.0% $ 3.08
========= ===== =========== ===== ======
</TABLE>
- -------------------------
(1) Includes 31,250 shares to be issued to holders of the Bridge Notes,
at the initial public offering price of $5.75 per share.
(2) Assumes that the Warrants offered hereby, the Representative's
Warrants and the Underlying Warrants are not exercised.
(3) Includes (i) 200,000 shares of Common Stock issuable upon exercise of
warrants at an exercise price of $1.00 per share and (ii) 80,000
shares of Common Stock issuable upon exercise of warrants at an
exercise price of $2.50 per share.
(4) Includes (i) 190,500 shares of Common Stock issuable upon conversion
of convertible notes having an aggregate principal balance of $857,000
at a conversion rate of $4.50 per share, (ii) 83,600 shares of Common
Stock issuable upon exchange of an exchangeable note having an
aggregate principal balance of approximately $376,000 at
15
<PAGE> 26
March 31, 1997 at an exchange rate of $4.50 per share and (iii)
9,000 shares of Common Stock issuable upon conversion of a convertible
note having an aggregate principal balance of $27,000 at a conversion
rate of $3.00 per share.
(5) Represents the portion of the CAS purchase price to be delivered in
the form of the Company's Common Stock, assuming an initial public
offering price of $5.75 per share. See "Acquisition of Casper Air
Service."
(6) These amounts reflect total consideration paid by securityholders and
do not reflect net amounts received by the Company.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on the
Common Stock and does not intend to pay cash dividends in the foreseeable
future. It is the current policy of the Company's Board of Directors to retain
any earnings to finance the operations of the Company's business.
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Company at March 31, 1997, and (ii) the pro forma capitalization of the Company
as adjusted to give effect to the CAS acquisition and the sale of the 1,000,000
shares of Common Stock and 1,000,000 Warrants offered hereby (assuming no
exercise of the Underwriter's over-allotment option) based on an assumed
initial public offering price of $5.75 per share and the application of the net
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with information contained under the caption "Unaudited Pro Forma
Combined Financial Information" and the financial statements and notes thereto
of each of the Company and CAS included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997 (Unaudited)
----------------------------------
Pro Forma
Actual as Adjusted
------ -----------
<S> <C> <C>
Short-term debt (line of credit and current portion of
long-term debt) . . . . . . . . . . . . . . . . . . . . . . $ 747,000 $ 1,304,000
========== ===========
Long-term debt, net of current portion . . . . . . . . . . . . . $1,303,000 $ 2,286,000
---------- -----------
Shareholders' equity:
Preferred Stock, $0.01 par value; 5,000,000 shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . -- --
Common Stock, $0.01 par value; 10,000,000 shares authorized;
1,600,250 issued and outstanding, actual; 2,753,885 issued
and outstanding, pro forma, as adjusted (1) . . . . . . . . 16,000 28,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . 1,951,000 7,349,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (595,000) (805,000)
---------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 1,372,000 6,572,000
---------- -----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . $2,675,000 $ 8,858,000
========== ===========
</TABLE>
- -------------------------
(1) Excludes shares issuable upon payoff of the Bridge Notes, 150,000
shares reserved for issuance under the Company's 1997 Stock Option
Plan and shares of Common Stock issuable upon the exercise of
(i) the 1,000,000 Warrants offered hereby; (ii) the Representative's
Warrants and Underlying Warrants; (iii) outstanding warrants to
purchase up to 280,000 shares of Common Stock; (iv) the Underwriters'
over-allotment option; and (v) outstanding promissory notes that are
convertible or exchangeable for up to 283,100 shares of Common Stock,
as of March 31, 1997. See "Description of Securities" and
"Underwriting."
16
<PAGE> 27
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.
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 100,250 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. (See "Unaudited Pro Forma Combined Financial
Information" for summary pro forma financial results assuming Pride and CAS
were part of the Company's operations beginning October 1, 1995.)
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>
Nine Months Ended
Nine Months Year March 31,
Ended Ended --------------------------
June 30, 1996 September 30, 1995 1997 1996
------------- ------------------ ----------- ------------
<S> <C> <C> <C> <C>
OVERHAUL & SERVICE DIVISION(1):
Net revenues $ 3,395,000 $ 1,766,000 $5,576,000 $ 1,671,000
Cost of revenue (2,479,000) (1,061,000) (4,545,000) (1,258,000)
Operating and other expenses, net(4) (622,000) (211,000) (1,084,000) (262,000)
Interest income 2,000 0 0 2,000
Interest expense (39,000) (20,000) (50,000) (24,000)
----------- ----------- ----------- -----------
$ 257,000 $ 474,000 $ (103,000) $ 129,000
=========== =========== =========== ===========
Pre-tax income (loss)
GROUND HANDLING & SERVICES
DIVISION(2):
Net revenues $ 486,000 $ 767,000 $ 726,000 $ 452,000
Cost of revenue (359,000) (356,000) (379,000) (300,000)
Operating and other expenses, net (141,000) (152,000) (213,000) (102,000)
Interest income 0 0 0 0
Interest expense (1,000) 0 0 (1,000)
------------ ----------- ----------- -----------
Pre-tax income (loss) $ (15,000) $ 259,000 $ 134,000 $ 49,000
============ =========== =========== ===========
</TABLE>
17
<PAGE> 28
<TABLE>
<CAPTION>
Nine Months Ended
Nine Months Year March 31,
Ended Ended ----------------------------
June 30, 1996 September 30, 1995 1997 1996
------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
FBO OPERATIONS & AIRPORT
MANAGEMENT(3):
Net revenues See (3) below See (3) below $ 362,000 See (3) below
Cost of revenue (371,000)
Operating and other expenses, net (95,000)
Interest income 0
Interest expense (loss) 0
-----------
Pre-tax income (loss) $ (104,000)
===========
AVIATION GROUP - CORPORATE
OVERHEAD(5):
Operating and other expenses, net $ (143,000) $ (203,000) $ (321,000) $ (160,000)
Interest expense (31,000) 0 (103,000) (8,000)
----------- ----------- ----------- ------------
Pre-tax income (loss) $ (174,000) $ (203,000) $ (424,000) $ (168,000)
=========== =========== =========== ============
TOTAL COMPANY:
Net revenues $ 3,881,000 $ 2,533,000 $ 6,664,000 $ 2,123,000
Cost of revenue (2,838,000) (1,417,000) (5,295,000) (1,558,000)
Operating and other expenses, net (906,000) (566,000) (1,713,000) (524,000)
Interest income 2,000 0 0 2,000
Interest expense (71,000) (20,000) (153,000) (33,000)
----------- ----------- ----------- ------------
Pre-tax income (loss) $ 68,000 $ 530,000 $ (497,000) $ 10,000
=========== =========== =========== ============
</TABLE>
- -----------------------
(1) Overhaul & Service Division includes the operating results of TriStar
Paint only for the year ended September 30, 1995. The Company's
acquisition of Pride occurred on March 1, 1996. Accordingly, both
TriStar Paint and Pride operating results are included for the nine
months ended June 30, 1996 (including Pride operating results from
March 1, 1996 through June 30, 1996), and the nine months ended March
31, 1997.
(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 nine months ended March 31,
1997 only.
(4) Includes goodwill and other related amortization expenses of $85,000
and $184,000 associated with the acquisition of Pride for the nine
months ended June 30, 1996 and the nine months ended March 31, 1997,
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.
18
<PAGE> 29
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.
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. See
"Business--Ground Handling & Service Division."
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. The Company has
also entered into an agreement to acquire CAS, which operates an FBO in Casper,
Wyoming. See "Acquisition of Casper Air Service" and "Business--FBO & Airport
Management Division."
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.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
The Company's net revenue increased by $4,541,000, or 214%, for the
nine months ended March 31, 1997 compared to the nine months ended March 31,
1996. This increase in revenue resulted primarily from the acquisition of
Pride, which contributed net revenue totaling $5,266,000 for 1997 compared to
$767,000 for 1996.
Revenues from the Ground Handling & Services Division increased 61% to
$726,000 from $452,000 for the comparable nine months periods ended March 31,
1997 and 1996. This increase is attributable to increases in business with
existing customers and the addition of additional customers at the airports
served by the Company. No growth during these periods resulted from the
addition of new airport locations.
In July 1996, the Company began its FBO Operations with the opening of
its initial location at the Redbird Airport in Dallas, Texas. This facility
generates its revenues from the sale of aviation fuel and other general
services provided to general aviation customers based at, and flying into, the
Redbird Airport. Since inception, the Company has adjusted its fuel sales
prices to reflect increases and decreases of fuel prices, which represents its
largest operating cost. Competitive factors could, however, limit the Company's
ability to pass on significant fuel price increases, should such increases
occur. This operation continues in the start-up phase, incurring costs
implemented in anticipation of future internal and external growth. Such
expenditures should dissipate in the future.
The Company's costs of sales increased by $3,737,000 to $5,295,000 for
the nine months ended March 31, 1997 from $1,558,000 for the nine months ended
March 31, 1996. This increase in costs of sales resulted primarily from the
acquisition of Pride.
19
<PAGE> 30
The Company's operating expenses increased by $1,189,000 from
$1,713,000 for the nine months ended March 31, 1997 compared to $524,000 for
the nine months ended March 31, 1996. This increase in operating expenses
resulted primarily from the acquisition of Pride and management's merger and
acquisition search program. The Company has postured itself with management,
consultants, and systems to expand internally and through acquisitions. The
operating expenses generated by these efforts are reflected in Corporate
Overhead.
The Company's interest expense has increased primarily from the
acquisition of Pride and the sale of the Bridge Notes. For the nine months
ended March 31, 1997, interest expense increased by $120,000 from debt assumed
from Pride, from convertible notes executed to acquire the Pride stock and from
the Bridge Notes.
The decrease in Company pre-tax income of $507,000 for the
comparable nine month periods ended March 31, 1997 and 1996 resulted largely
from increases in corporate overhead of $161,000, losses associated with the
Company's start-up of its FBO operating division of $104,000, increase in
interest expense of $120,000, and goodwill and other amortization of $184,000
relating to the Company's acquisition of Pride.
NINE MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO THE FISCAL YEAR ENDED
SEPTEMBER 30, 1995
The Company changed its fiscal year end from September 30 to June 30
during 1996.
The Company purchased the stock of Pride on March 1, 1996, in a
transaction accounted for as a purchase. The results of operations of Pride are
included in the accompanying financial statements beginning March 1, 1996, and
accordingly, include only four months of operations for the Company's nine
month period ended June 30, 1996. Therefore, when comparing fiscal years 1996
and 1995, the financial information includes different operating entities.
The Company's net revenue increased by $1,348,000, or 53%, for the
nine months ended June 30, 1996 compared to the year ended September 30, 1995.
This increase in revenue resulted primarily from the acquisition of Pride,
which contributed net revenue totaling $2,520,000 for 1996 compared to $0 for
1995.
Revenues from Ground Handling for the nine month period ending June
30, 1996 are comparable on a pro-rated basis to the twelve month period ending
September 30, 1995. Gross margins decreased during the period, however, to 26%
in fiscal 1996 from 53% in fiscal 1995. This decrease is attributable to the
loss of a significant charter airline customer during the period whose contract
generated significant gross profits for Airline Services during the fiscal 1995
year. No revenue or operating cost changes during these periods were the result
of adding new airport locations.
The Company's costs of revenues increased by $1,421,000, to $2,838,000
for the nine months ended June 30, 1996 from $1,417,000 for the year ended
September 30, 1995. 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 73%, for the fiscal year ended June 30, 1996 from
56% for the fiscal year ended September 30, 1995. Pride, which has a multi-year
paint contract with United Airlines, earns lower gross margins than TriStar
Paint, which performs its services on a higher- margin, less predictable basis.
The Company's operating expenses increased by $340,000 to $906,000 for
the nine months ended June 30, 1996 from $566,000 for the year ended September
30, 1995. This increase in operating expenses resulted primarily from the
acquisition of Pride. The operating expenses generated by Aviation Group are
largely reflective of its acquisition efforts.
The Company's interest expense has increased primarily from the
acquisition of Pride. Interest expense increased by $51,000 from debt assumed
from Pride and from convertible notes executed to acquire the Pride stock.
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 approximating
$1.2 million, to acquire the stock of Pride and for general working capital
purposes.
20
<PAGE> 31
Exclusive of the Pride acquisition, the Company made capital
expenditures during the fiscal nine months ended June 30, 1996 and nine months
ended March 31, 1997 of $12,000 and $335,000, 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. See "Acquisition of Casper Air Service."
In February 1997, the Company completed a private offering of $500,000
of its 10% Bridge Note. 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. If the Company successfully completes this Offering by
September 30, 1997, the terms of these notes requires the Company to issue to
the holders that number of shares of Common Stock which 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 will be
amortized to interest expense over the shorter of the period through September
30, 1997 or the consummation date of the Offering. Unamortized discount at
March 31, 1997 totaled $210,000.
The Company intends to raise net proceeds from this offering
approximating $4.8 million. The proceeds will be used to repay the 10% Bridge
Notes, fund the cash portion of the CAS acquisition, the repayment of certain
indebtedness, 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 will be improved significantly as a result of completing this
offering. See "Use of Proceeds" and "Capitalization."
Pursuant to the existing United Airlines contract, the Company has a
commitment for an estimated total of $18 million of scheduled aircraft painting
and stripping work through 1999. This commitment is subject to the risks
outlined in "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
offering will allow it to experience accelerated growth both internally and
through well planned acquisitions of aviation services companies.
21
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following sets forth the Company's Unaudited Pro Forma
Consolidated Statements of Operations for the fiscal year (nine months) ended
June 30, 1996, and the nine month interim period ended March 31, 1997, and the
Company's Unaudited Pro Forma Consolidated Balance Sheet at March 31, 1997, in
each case giving effect to: (i) the acquisition in March 1996 of Pride, (ii)
the CAS acquisition to be closed concurrently with the closing of this
Offering, and (iii) this Offering and the application of the net proceeds
therefrom. Both the Pride and CAS acquisitions are accounted for using the
purchase method of accounting.
The Company's Unaudited Pro Forma Consolidated Statements of
Operations present such events in each case, as if each had been consummated at
the beginning and operated throughout the periods presented. The Company's
Unaudited Pro Forma Consolidated Balance Sheet presents the CAS acquisition as
if it had been consummated on March 31, 1997. Pride was a consolidated
subsidiary of the Company at March 31, 1997, and is accordingly included in the
Company's actual balance sheet for that period. The pro forma adjustments
relating to the allocation of the purchase price of CAS represent the Company's
preliminary determinations of the purchase accounting and other adjustments and
are based upon available information and certain assumptions the Company
considers reasonable under the circumstances. Final amounts could differ from
those set forth therein.
The Unaudited Pro Forma Consolidated Financial Information of the
Company is presented for illustrative purposes only and does not purport to
present the financial position or results of operations of the Company had the
Pride and CAS acquisitions and the Offering occurred on the dates indicated,
nor are they necessarily indicative of the results of operations which may be
expected to occur in the future.
The following unaudited pro forma consolidated financial information
should be read in connection with the more detailed information, including the
financial statements and notes thereto included elsewhere in this Prospectus.
22
<PAGE> 33
AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS FISCAL YEAR (NINE MONTHS)
ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Pride Aviation
Fiscal Year Operations Casper Air Service Fiscal Year
(Nine Months) Five Months Operations for the (Nine Months)
Ended Ended Nine Months Ended
June 30, 1996 February 29, Ended April 30, Adjust- June 30, 1996
Actual 1996 1996(7) ments(1) Proforma
------------- -------------- ------------------ -------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $3,881,000 $2,874,000 $5,252,000 $(717,000) $11,290,000
Cost of revenue 2,838,000 2,117,000 4,688,000 (642,000) 9,001,000
---------- ---------- ---------- --------- -----------
Gross profit 1,043,000 757,000 564,000 (75,000) 2,289,000
---------- ---------- ---------- --------- -----------
General and administrative expenses 752,000 466,000 368,000 (172,000)(2) 1,414,000
Depreciation and amortization 154,000 60,000 164,000 32,000 (3) 410,000
---------- ---------- ---------- --------- -----------
906,000 526,000 532,000 (140,000) 1,824,000
---------- ---------- ---------- --------- -----------
Income (loss) from operations 137,000 231,000 32,000 65,000 465,000
---------- ---------- ---------- --------- -----------
Other income (expenses)
Interest income 2,000 -- 24,000 -- 26,000
Interest expense (71,000) (58,000) (165,000) 22,000 (4) (272,000)
Other, net -- 22,000 (21,000) (4,000) (3,000)
---------- ---------- ---------- --------- -----------
(69,000) (36,000) (162,000) 18,000 (249,000)
---------- ---------- ---------- --------- -----------
Income (loss) before provision
for income taxes 68,000 195,000 (130,000) 83,000 216,000
Provision for income taxes 34,000 -- -- 50,000 (6) 84,000
---------- ---------- ---------- --------- -----------
Net income (loss) $ 34,000 $ 195,000 $ (130,000) $ 33,000 $ 1,758,791
========== ========== ========== ========= ===========
Pro forma net income (loss) per
common and common equivalent
share (unaudited) $ 0.02 $ 0.08
========== ===========
Pro forma weighted average common
and common equivalent shares
outstanding (unaudited) (5) 1,497,511 1,651,146
========== ===========
</TABLE>
23
<PAGE> 34
AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS NINE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Casper Air Service
Nine Months Operations for the Nine Months
Ended Nine Months Ended
March 31, 1997 Ended March 31, 1997
Actual January 31, 1997 Adjustments (1) Proforma
-------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue $6,664,000 $6,570,000 $(1,010,000) $12,224,000
Cost of revenue 4,597,000 5,629,000 (755,000) 9,471,000
---------- ---------- ---------- -----------
Gross Profit 2,067,000 941,000 (255,000) 2,753,000
---------- ---------- ---------- -----------
General and administrative
expenses 2,120,000 421,000 (154,000) (2) 2,387,000
Depreciation and amortization 291,000 159,000 (104,000) (3) 346,000
---------- ---------- ---------- -----------
2,411,000 580,000 (258,000) 2,733,000
---------- ---------- ---------- -----------
Income (loss) from operations (344,000) 361,000 3,000 20,000
---------- ---------- ---------- -----------
Other income (expenses)
Interest income -- 19,000 -- 19,000
Interest expense (153,000) (169,000) 57,000 (265,000)
Other, net -- 60,000 -- 60,000
---------- ---------- ---------- -----------
(153,000) (90,000) 57,000 (186,000)
---------- ---------- ---------- -----------
Income (loss) before provision
for income taxes (497,000) 271,000 60,000 (166,000)
Provision (benefit) for income taxes (164,000) -- 129,000 (6) (35,000)
---------- ---------- ---------- -----------
Net income (loss) $ (333,000) $ 271,000 $ (69,000) $ (131,000)
========== ========== ========== ===========
Pro forma net income (loss)
per common and common
equivalent share (unaudited) $ (.22) $ (.08)
========== ===========
Pro forma weighted average common
and common equivalent shares
outstanding (unaudited) (5) 1,497,511 1,651,146
========== ===========
</TABLE>
24
<PAGE> 35
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Adjustments include the elimination of income and expenses associated
with the aircraft charter operations of CAS, which the Company does
not intend to continue after the acquisition of CAS. For the nine
months ended April 30, 1996 and January 31, 1997, respectively, the
charter department's operating results (and related adjustments to the
pro forma analysis included herein) were as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
April 30, 1996 January 31,1997
-------------- ---------------
<S> <C> <C>
Revenues $ 717,000 $1,010,000
Cost of revenue (642,000) (755,000)
--------- ----------
Gross Profit 75,000 255,000
--------- ----------
General and administrative expenses (84,000) (71,000)
Depreciation and amortization (88,000) (139,000)
---------- ----------
Income from operations (97,000) 45,000
Other income (expenses)
Interest income -- --
Interest expense (58,000) (57,000)
Other, net 4,000 --
---------- ---------
(54,000) (57,000)
---------- ---------
Income (loss) before provision
for income taxes $ (151,000) $ (12,000)
========== ==========
</TABLE>
(2) Includes $88,000 and $83,000 of non-payroll benefits and other
compensation for the periods ended April 30, 1996 and January 31,
1997, respectively, incurred by CAS for the benefit of its
shareholders and management. These costs will not be incurred by the
Company on an ongoing basis after the closing of the CAS purchase
transaction.
(3) Includes additional amortization of goodwill (amortized over a 20-year
period) and depreciation expense from the Pride and CAS acquisitions
for the pro forma periods ended June 30, 1996 and March 31, 1997,
respectively, in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Interim
(Nine Months) Nine Months
Ended Ended
June 30, 1996 March 31, 1997
------------- --------------
<S> <C> <C>
Pride goodwill amortization and
related depreciation $ 85,000 *
CAS goodwill amortization and
related depreciation 35,000 $35,000
-------- -------
$120,000 $35,000
======== =======
</TABLE>
* Pride goodwill amortization and related depreciation for the
nine months ended March 31, 1997 of $193,000 is included in
actual operating results of the Company for the period then
ended.
(4) Includes additional interest of $36,000 on convertible notes issued in
connection with the Pride acquisition for the pro forma period ended
June 30, 1996.
(5) Includes 153,635 shares of Common Stock (assuming an initial public
offering price of $5.75 per share) issuable to the shareholders of
CAS upon the consummation of the CAS transaction.
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<PAGE> 36
(6) Represents the adjustment to reflect the tax effects of the pro forma
adjustments.
(7) Reflects the nine months ended April 30, 1996. The results of
operations for the three months ended July 31, 1995 were extracted
from CAS's audited income statement for the fiscal year ended April
30, 1996 to provide a nine month period that is comparable to the
Company's nine month fiscal year ended June 30, 1996. The results of
operations for the three months ended July 31, 1995 were as follows:
<TABLE>
<S> <C>
Revenues $1,663,000
Cost of revenue 1,522,000
Gross Profit 141,000
General and administrative expenses 112,000
Depreciation and amortization 84,000
196,000
Income (loss) from operations (55,000)
Other income (expenses), net (41,000)
Income (loss) before provision of income taxes $ (96,000)
</TABLE>
26
<PAGE> 37
AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------- -----------------------------------
Aviation Casper Air
Group, Inc. Service Adjustments As Adjusted
(March 31, 1997) (January 31, 1997) ------------- ------------
---------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 82,000 $ 288,000 $(1,467,000) (1) $ 2,948,000
4,793,000 (4)
(748,000) (5)
Accounts receivable 655,000 614,000 -- 1,269,000
Inventory 249,000 1,311,000 -- 1,560,000
Aircraft held for sale -- -- 1,638,000 (2) 1,638,000
Deferred tax assets 163,000 -- (163,000) (6) --
Prepaid expenses and other 61,000 10,000 -- 71,000
---------- ---------- ----------- -----------
Total current assets 1,210,000 2,223,000 4,053,000 7,486,000
---------- ---------- ----------- -----------
Property and equipment, net 2,281,000 1,386,000 (712,000) (2) 2,955,000
---------- ---------- ----------- -----------
Other assets
Goodwill, net 937,000 -- 907,000 (3)(6) 1,844,000
Investment-CAS -- -- 2,350,000 (1) --
(2,350,000) (3)
Other 491,000 11,000 (266,000) (4) 236,000
---------- ---------- ----------- -----------
1,428,000 11,000 641,000 2,080,000
---------- ---------- ----------- -----------
$4,919,000 $3,620,000 $ 3,982,000 $12,521,000
========== ========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft $ 130,000 $ -- $ -- $ 130,000
Current maturities of 209,000 329,000 -- $ 538,000
long-term debt 248,000 -- (248,000) (5) --
Short-term bank borrowings 290,000 -- 210,000 (5) --
Bridge Notes (500,000) (5)
-- 628,000 -- 628,000
Notes payable -- 138,000 -- 138,000
Floor plans payable 611,000 559,000 -- 1,170,000
Accounts payable 29,000 -- -- 29,000
Accrued interest 422,000 151,000 -- 573,000
Accrued liabilities -- -- 152,000 (6) 152,000
Deferred income taxes ---------- ---------- ----------- -----------
1,939,000 1,805,000 (386,000) 3,358,000
Total current liabilities ---------- ---------- ----------- -----------
Long-term liabilities
Long-term debt, net of 1,303,000 983,000 2,286,000
current maturities 305,000 -- -- 305,000
Deferred income taxes ---------- ---------- ----------- -----------
1,608,000 983,000 -- 2,591,000
---------- ---------- ----------- -----------
Stockholders' Equity
Preferred stock, $.01 par value,
5,000,000 shares authorized, -- -- -- --
none outstanding
Common stock, $.01 par value,
10,000,000 shares authorized,
2,797,363 shares issued and 16,000 19,000 (19,000) (3) 28,000
outstanding 2,000 (1)
10,000 (4)
1,951,000 2,697,000 (2,697,000) (3) 7,349,000
Additional paid-in capital 881,000 (1)
4,783,000 (4)
(266,000) (4)
(595,000) (395,000) 395,000 (3) (805,000)
Retained earnings (deficit) ---------- ---------- (210,000) (5) -----------
-----------
1,372,000 2,321,000 2,879,000 6,572,000
-- (569,000) 569,000 (3) --
Treasury stock -- (920,000) 920,000 (3) --
Unearned ESOP ---------- ---------- ----------- -----------
1,372,000 832,000 4,368,000 6,572,000
---------- ---------- ----------- -----------
$4,919,000 $3,620,000 $ 3,982,000 $12,521,000
========== ========== =========== ===========
</TABLE>
27
<PAGE> 38
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
For purposes of preparing the Unaudited Pro Forma Consolidated Balance
Sheet, the assets and liabilities of CAS to be acquired or assumed by the
Company have been recorded at their estimated fair values. A final
determination of the required purchase price accounting adjustments and of the
fair value of the assets and liabilities acquired or assumed has not yet been
made. Accordingly, the purchase accounting adjustments made in connection with
the development of the unaudited pro forma financial information reflects the
Company's best estimate based upon currently available information.
The following adjustments have been made in connection with the
initial public offering and the CAS acquisition:
(1) Adjustment reflects an estimated purchase price and related
purchase costs for the CAS acquisition of $2,350,000. The
transaction will be funded by cash totaling $1,467,000 and
153,635 shares of the Company's Common Stock ($.01 par value)
at an estimated per share price of $5.75.
(2) Upon purchasing CAS, the charter operations will be
discontinued. The 12 aircraft currently used in CAS's charter
division will be sold or liquidated by the Company. Based on a
third party offer and liquidation proceeds for nine of the
aircraft totaling $1,438,000, and an estimated value of
$200,000 for the remaining three aircraft in inventory,
management estimates the fair value of the 12 aircraft to be
$1,638,000. The adjustment reflects a reclassification of the
assets from property and equipment to "aircraft held for
sale." The aircraft held for sale have a historical net book
value of $712,000. The net book value of the remaining
property and equipment is estimated to approximate fair value.
(3) The adjustment reflects the elimination of the investment
account on the Company's balance sheet, the elimination of the
net equity on the balance sheet of CAS on the acquisition date
and the recording of net goodwill resulting from the
acquisition of approximately $907,000 (including tax
attributes).
(4) Reflects the net proceeds from the initial public offering of
1,000,000 shares of the Company's $0.01 par value Common
Stock.
(5) Upon completion of the initial public offering, management
plans to pay off its line of credit, with a current balance of
$248,000, and the Bridge Notes totaling $500,000.
(6) Reflects the deferred tax effects for differences between the
financial statement and tax bases of the net assets to be
acquired in the CAS acquisition (including the recording of
additional goodwill of $315,000).
28
<PAGE> 39
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.
The Company was organized in December 1995 to consolidate the
ownership of Tri-Star Aircraft Services, Inc. ("TriStar Paint"), Tri-Star
Airline Services, Inc. ("Airline Services") and Pride Aviation, Inc. ("Pride").
At that time, the Company acquired all of the outstanding shares in TriStar
Paint and Airline Services from The Sanders Companies, Inc. ("Sanders
Companies") in exchange for the issuance of 1,000,000 shares of Common Stock to
Sanders Companies. Sanders Companies is wholly owned by the Company's President
and Chief Executive Officer, Lee Sanders. On March 1, 1996, in connection with
the Company's acquisition of Pride, the Company paid $486,000 cash and issued
10%, five-year Convertible Notes in the aggregate principal amount of $857,000
and 100,250 shares of Common Stock.
The Company is currently organized into three divisions devoted to
Aviation Group'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.
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 first fixed base operation,
located at Redbird Airport in Dallas, Texas provides 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 located near major urban areas 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. 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. There are over 10,000 maintenance and service vendors
worldwide in the aviation industry. The Company believes that the aviation
service industry is highly fragmented. It 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.
The principal executive offices of the Company are located at 700
North Pearl Street, Suite 2170, Dallas, Texas 75201, telephone number (214)
922-8100.
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
29
<PAGE> 40
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 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 believes that the aviation service industry is highly
fragmented. There are presently over 1,700 operators of fixed base operating
stations ("FBO's") serving the United States. There are over 10,000 maintenance
and service vendors worldwide in the aviation industry.
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 all aircraft 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 85% of the Overhaul & Service Division revenues for
the nine months ended March 31, 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
30
<PAGE> 41
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 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,
representing an estimated total of 588 aircraft. Through December 31, 1996,
Pride has completed 215 of the aircraft.
The Company, through Pride, has been negotiating a contract with
United for the painting of United's Boeing 747 commercial aircraft fleet. To
date, these negotiations are incomplete. If it obtains the contract, the
Company may construct a new aircraft hangar at its New Iberia, Louisiana
facilities. See "--Facilities."
The Company, through Pride, is currently working to obtain a long-term
contract to paint newly manufactured aircraft for Boeing Commercial Airplane
Group ("Boeing"). Boeing has conducted due diligence regarding Pride's
capabilities and expertise. Subject to the satisfaction of certain conditions,
Boeing has requested Pride to conduct a beta test by painting one of its jet
aircraft in June 1997. If Boeing awards a contract to Pride, the
Company intends to lease a hangar facility in Portland, Oregon in which to
perform this work for Boeing.
TriStar Paint. TriStar Paint's business began in March 1990, and
TriStar Paint was incorporated in the State of Texas during 1994. 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.
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<PAGE> 42
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, San
Francisco International, Kansas City International, Los Angeles International
Airport and Gulfport-Biloxi Regional. Airline Services currently provides some
or all of these services at different locations for United Airlines, United
Parcel Service, Sunjet, Aviation Services International, Inc. on behalf of
Allegro Airlines, World Technology Services, Reno Air, Sun Country Airlines,
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.
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.
The Company believes that there are significant opportunities for
growth, internally and via acquisition, in the FBO & Airport Management
Division. The Company recently hired additional management and executive
personnel with specific expertise in the FBO management and acquisition
business to assist it in the execution of its business strategy in this
division.
The Company has reached an agreement to acquire CAS, which operates an
FBO in Casper, Wyoming. See "Acquisition of Casper Air Service."
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 which 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
32
<PAGE> 43
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. Other than the agreement to
acquire CAS, no commitments or binding agreements have been entered into date
and accordingly no assurance can be given that any of the acquisitions
currently being considered will be consummated.
FACILITIES
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 $37,200 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 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
33
<PAGE> 44
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.
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 in November 1998. The Company pays a monthly rental of
$4,400.
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 nine
months ended March 31, 1997, United accounted for approximately 77% 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 nine months ended March 31,
1997, the ground handling services and light catering accounted for
approximately 10.9% 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 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")
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<PAGE> 45
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 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 CAS 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. CAS and the Company have 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
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<PAGE> 46
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. 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 40 employees as of April 1, 1997.
Management believes its employee relations to be excellent. 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 Messrs. Sanders,
Lubomirski and Ramsaroop.
FINANCING
On March 1, 1996, in connection with the acquisition of Pride, the
Company issued $857,000 in aggregate principal amount of five year, 10%
Convertible Notes to certain of the beneficial owners of Pride. The notes
require quarterly payments of interest and, commencing April 1, 1998, equal
quarterly installments of principal sufficient to amortize the balance of each
note by March 1, 2001. Holders of the notes may elect at any time to convert
the notes into shares of the Company's Common Stock at a conversion price of
$4.50 per share, subject to adjustment upon certain events. The cash portion of
the consideration paid for Pride was financed through the net proceeds from the
Company's sale of 500,000 shares of its Common Stock at $3.00 per share in a
Regulation D private offering. See "Description of Securities--Shares Eligible
for Future Sale."
At the time of its acquisition by the Company, Pride owed to the
Louisiana Economic Development Corporation (the "LEDC") approximately $508,000.
To obtain the LEDC's consent to the Company's acquisition of Pride, Pride
prepaid $100,000 of the debt using an advance from the net proceeds of the
private offering of the Company's Common Stock. The Company granted to the LEDC
the right to exchange the debt for newly issued shares of the Company's Common
Stock at a rate of $4.50 per share and a security interest in 50.15% of the
outstanding shares of Pride's stock to secure the debt. The remaining balance
of the debt to the LEDC is payable by Pride in equal monthly installments of
$3,800 and one final installment due March 1, 2001 in the amount of the unpaid
principal and interest.
The Company's subsidiaries, TriStar Paint and Airline Services, are
guarantors of a $250,000 revolving line of credit owed to Compass Bank (the
"SBA Debt") by The Sanders Companies, Inc. ("Sanders Companies"), the Company's
controlling stockholder. The SBA Debt existed prior to the Company's
organization in December 1995. As of March 31, 1997, a total of $248,000 was
owed on the SBA Debt. Repayment of a portion of the SBA Debt is guaranteed by
the Small Business Administration (the "SBA"). At March 31, 1997, all of the
loan proceeds from the SBA Debt had been used for the benefit of the Company's
subsidiaries. The SBA Debt is secured by a pledge of all of the outstanding
stock of The Sanders Companies, Inc., TriStar Paint and Airline Services and
the personal guaranty of Lee Sanders, the Company's President. Upon
consummation of this Offering, the Company will apply the proceeds from the
Offering to payoff the SBA Debt to the extent the proceeds of the SBA Debt were
used by the Company's subsidiaries. It is expected that the guaranties
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<PAGE> 47
by TriStar Paint, Airline Services and Mr. Sanders and the pledge of the
Company's stock in TriStar Paint and Airline Services will be released and that
any remaining balance of the SBA Debt will be refinanced by Sanders Companies.
In February 1997, the Company sold $500,000 in aggregate principal
amount of its 10% Bridge Notes. The Bridge Notes are unsecured, bear interest
at the rate of 10% per annum payable quarterly beginning December 31, 1997 and
are subordinated in right of payment to all existing indebtedness of the
Company, including trade debt. The Company used the proceeds from the issuance
of the Bridge Notes for general corporate purposes and to fund the costs of
this Offering. The Bridge Notes are due in full on June 30, 1998 or earlier in
certain circumstances, including within five days following the closing of this
Offering. In connection with the full payment of the Bridge Notes after this
Offering, the Company has agreed to issue to the holders of the Bridge Notes
that number of shares of Common Stock equal to the quotient of $250,000 divided
by the initial public offering price.
The shares of Common Stock to be issued upon conversion of the
Convertible Notes, exchange of the LEDC debt or payoff of the Bridge Notes will
be subject to certain restrictions on their transfer. See "Description of
Securities--Shares Eligible for Future Sale."
The Company's hangar facilities are primarily financed on long term
operating leases. The material leases are described above under "Facilities."
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, current ages and positions of the executive officers and
directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lee Sanders (1) 37 President, Chief Executive Officer and Director
Paul Lubomirski 43 President of Pride
Victor Doyle 56 Vice President - Overhaul & Service Division
Tony Ramsaroop 33 Vice President - Ground Handling & Services Division
Wallace Congdon 71 Vice President - FBO & Airport Management Division
John Arcari 57 Vice President - Marketing and Development
Gary Cooper 42 Vice President, Chief Financial Officer and Treasurer
Charles E. Weed (1) 65 Director
Gordon Whitener (1)(2) 34 Director
Richard Morgan 39 Director
</TABLE>
- --------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
The Board of Directors is classified into three classes of directors
pursuant to which the directors serve for staggered three-year terms. The terms
of office of Messrs. Morgan, Weed, Whitener and Sanders as directors expire at
the annual meetings of shareholders to be held in 1999, 1997, 1998 and 1999,
respectively. The classification of directors may have the effect of delaying,
deferring or preventing a change in control of the Company. Under its
agreements with the Company, the Representative has a right to designate a
director to serve on the Board. The directors will appoint another director,
who will not be an employee or consultant of the Company and who has not yet
been identified, within 90 days after the date of this Prospectus. Officers
serve at the discretion of the Board of Directors.
BUSINESS HISTORIES
Lee Sanders has served as the founder, Chief Executive Officer,
President and principal owner of the Company and its predecessors for more than
five years. As a result of his service for the Company and its predecessors,
Mr. Sanders has experience in managing businesses that provide aircraft
painting, aircraft interior modification and airline ground handling services.
He also brings a marketing background from his experiences in starting and
operating private businesses. Mr. Sanders is responsible for overseeing the
Company's marketing efforts, customer relations, production, finance,
acquisitions and overall planning and operations. Mr. Sanders is a graduate of
the University of Tennessee, with a Bachelor of Science in Business
Administration.
Paul Lubomirski was appointed as President of Pride in March 1996 and
has over 20 years of experience with industrial and marine paint applications
and has extensive knowledge of paint systems and electrostatic application
equipment. He has served as an officer and employee of Pride since its
incorporation in 1990. Mr. Lubomirski also brings a solid administrative
background from years of experience in operating private businesses and
organizing and conducting many training seminars. Mr. Lubomirski attended the
University of Hawaii where he majored in mechanical engineering. He directs the
stripping and painting operations of the Company. He has primary responsibility
for the Company's facilities and training programs applicable to the strip and
paint operations.
Victor Doyle was appointed as a Vice President of the Company in
December 1996 and has worked in various technical and managerial positions
within the aviation maintenance industry since 1966. He is currently a
consultant to the Company and will become a full-time employee upon completion
of this Offering. He is a trained aviation mechanic, is FAA licensed in
numerous mechanical and inspection specialties, and has significant expertise
in maintenance planning and production. He attended Parks College, in St.
Louis, Missouri, and has previous work experience with Braniff Airways and
Orion Air, Inc. From 1988 to 1992, he was employed as Regional Maintenance
Director for United Parcel Service. From 1992 to 1994, he was a regional
Director of Maintenance for Lockheed Aeromod Center, Inc. in Greenville, South
Carolina.
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<PAGE> 49
From 1994 until joining the Company in 1996, he was the Director of Marketing
and Customer Service for Dalfort Aviation, a private commercial aircraft
overhaul and maintenance company located in Dallas, Texas.
Tony Ramsaroop was appointed as a Vice President of the Company in
March 1996 and has extensive experience in the aviation industry including
technician, flight crew, inspector, flight instructor and airline station
manager. Mr. Ramsaroop has held management positions with the Company and its
predecessors since 1988. Previously, he was a flight engineer, aircraft
mechanic and Quality Assurance Supervisor with the United States Navy. He
directs the operations of the Company in ground handling and catering services.
He has primary responsibility for the Company's facilities and training
programs applicable to airline ground services and catering operations. He is a
graduate of Le Tourneau University.
Wallace Congdon was appointed as a Vice President of the Company in
February 1997 and has over forty-five years experience in the general aviation
industry, primarily in the management of fixed base operations ("FBO's") across
the United States for various employers. He is currently a consultant to the
Company and will become a full-time employee upon completion of this Offering.
He has specific management knowledge in the areas of fuel, light aircraft
maintenance, airport facilities management and leasing, aircraft sales, and
other FBO-related functions. From 1988 to 1993, he held various senior
management positions within Aero Services International, Inc., a major owner
and operator of FBO's and corporate jet aircraft. Since 1993 and prior to
joining the Company in 1996 to develop and implement its FBO & Airport
Management Division, he performed aviation and FBO management consulting
services for a variety of clients. Prior employers and senior management
positions include Hughes Aviation Services, the Ohio Aviation Company,
TigerAir, Inc., Aviall, Inc. and Western Skyways. He is a veteran of the United
States Navy, and has an undergraduate degree from Le Tourneau University.
Richard Morgan was appointed as a director of the Company on February
26, 1997. He also serves as a consultant to the Company. Mr. Morgan is self
employed, and has conducted business consulting, strategic planning, and
corporate finance services individually and in conjunction with others for
various corporate clients since 1984. Mr. Morgan was additionally Chief
Financial Officer of Search Capital Group, Inc. ("Search") from August 1985
through December 1994, when he voluntarily resigned. After Mr. Morgan's
departure, eight Search subsidiaries conducting business in the sub- prime,
used-automobile finance business filed for protection under Chapter 11 of the
Federal Bankruptcy Code in August 1995. Mr. Morgan holds a graduate degree in
business from Vanderbilt University.
Gary Cooper was appointed Treasurer and Vice President of the Company
on February 12, 1997. For the past five years, Mr. Cooper has owned and
operated his own public accounting firm in Dallas, Texas, and has additionally
taught various accounting and financial courses for certified public
accountants' continuing education programs. Additionally, Mr. Cooper has served
in financial management positions in various public companies prior to 1991.
Mr. Cooper is a Certified Public Accountant in the State of Texas, and holds a
degree in accounting from Middle Tennessee State University.
Charles E. Weed was elected a director of the Company in December 1996
and served as the President of Sunbelt Business Capital Incorporated
("Sunbelt") from August 1992 to February 1996. Mr. Weed is engaged in the
business of making private investments individually and also serves as a
consultant to the Company. Prior to August 1984, Mr. Weed was Chairman and
Chief Executive Officer of Michigan General, a large industrial conglomerate.
Between August 1984 and August 1992, he was retired and engaged in making
private investments.
Gordon Whitener was elected a director of the Company in December 1996
and has been President and Chief Executive Officer of Interface Americas of
LaGrange, Georgia, a subsidiary of Interface Inc. and one of America's largest
manufacturer's of commercial carpet since 1994. He is additionally a member of
Interface Inc.'s board of directors. From 1992 to 1994, Mr. Whitener held
various senior marketing and sales positions in the commercial carpet
manufacturing industry with companies including Interface and Collins & Aikman.
Mr. Whitener is a graduate of the University of Tennessee.
John Arcari was appointed as a Vice President of the Company in April
1997. From 1958 to 1987, he served in numerous line and management positions
with Pan American World Airways. From 1987 to 1990, he was vice president of
maintenance and engineering for Tower Air, a New York-based airline. From 1990
to 1993, he was president of Page Avjet, an aircraft heavy maintenance and
overhaul outsourcing company. From 1994 until his employment with the Company,
he was an independent consultant to aviation maintenance and service
outsourcing companies.
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<PAGE> 50
No family relationships exist among the directors or executive
officers of the Company. None of the directors serve as members of the Board of
Directors of another company which is subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
BOARD COMMITTEES
The Compensation Committee consists solely of Mr. Whitener. The
Compensation Committee recommends compensation for officers other than the
President, administers incentive compensation and benefit plans, including the
Company's 1997 Stock Option Plan, and recommends policies relating to such
plans.
The Audit Committee currently consists of Messrs. Weed, Sanders and
Whitener. The Audit Committee will meet periodically with management and the
Company's independent auditors and will review the results and scope of the
audit and other services provided by the Company's independent auditors, the
Company's accounting procedures, and the adequacy of the Company's internal
controls.
DIRECTORS' COMPENSATION
Directors are reimbursed for certain expenses in connection with
attendance at board and committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth information, for the nine-month
transition period ended June 30, 1996 for the Company and the fiscal years
ended September 30, 1994 and 1995 for the Company's predecessors, TriStar Paint
and Airline Services, regarding the compensation of the Chief Executive Officer
of the Company and its predecessors. No executive officers of the Company or
its predecessors had compensation in excess of $100,000 for the periods
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------
Other Annual
Name and Principal Position Year Salary Compensation
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Lee Sanders, President and 1996 (1) $73,847 $8,676 (2)
Chief Executive Officer 1995 (3) 58,846
1994 (3) 32,354
</TABLE>
- --------------------
(1) The compensation shown for 1996 represents compensation for the
nine-month transition period ended June 30, 1996.
(2) Represents aggregate annual lease payments and insurance costs for an
automobile.
(3) Compensation paid by the Company's predecessors.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company engages Charles Weed as a consultant pursuant to a
consulting agreement between Mr. Weed and the Company which expires in February
1998. The Company pays Mr. Weed a fee of $4,100 per month.
Richard Morgan, Victor Doyle and Wallace Congdon serve as consultants
to the Company on a month-to-month basis. No written agreements exist with
Messrs. Morgan, Doyle and Congdon. Other than Mr. Morgan, the Company intends
to hire these consultants as full-time employees upon the closing of this
Offering. Mr. Morgan receives a fee of $4,000 per month in consideration for
financial, strategic planning and acquisition consulting services provided to
the Company. Mr. Congdon receives a fee of $1,500 per month in consideration
for his management of the Company's FBO & Airport Management Division and
acquisition consulting services relating to the CAS acquisition. Mr. Doyle
receives a fee of $1,200 per week in consideration for ground handling and
maintenance consulting services provided to the Company. All of the consultants
are reimbursed their expenses.
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<PAGE> 51
The Company has an employment agreement with each of Paul Lubomirski,
John Arcari and Tony Ramsaroop, which expire in 1999, 2000 and 2000,
respectively. Immediately prior to the completion of this Offering, the
employment agreements with Messrs. Lubomirski and Ramsaroop will be extended
through at least the third anniversary of the date of this Prospectus. Mr.
Lubomirski and Mr. Arcari are paid annual salaries of $90,000 and $80,000,
respectively, and Mr. Ramsaroop is paid an annual salary of $60,000 until
completion of this Offering when his salary will increase to $70,000. Each
employment agreement contains a non-competition agreement for a period of three
years after any expiration or termination of the agreement. Each employee is
entitled to additional benefits, including disability insurance, life
insurance, and health and dental insurance. Mr. Ramsaroop and Mr Arcari are
eligible for additional bonuses as may be determined by the Board of Directors.
Mr. Lubomirski's employment agreement specifies a formula for bonus payments
that varies between 10% and 70% of his annual salary if Pride's net profit for
any fiscal year exceeds $600,000 during the term of his agreement. The bonus
will be 20%, 40% and 70% of his annual salary if the net profit exceeds
$700,000, $800,000 or $900,000, respectively for a fiscal year. Pursuant to the
Underwriting Agreement, the Company has agreed not to increase the compensation
paid to the five most highly paid employees of the Company in any year without
the consent of the Representative unless permitted by the terms of employment
contracts approved by the Representative.
The Company entered into an employment agreement with Lee Sanders in
March 1996. On April 15, 1997, the employment agreement was amended. The
amended employment agreement requires the Company to pay Mr. Sanders an annual
salary of $144,000 with increases at the end of each calendar year based on the
Consumer Price Index. Mr. Sanders is eligible for a bonus to be determined in
the sole discretion of the Board based on merit, the Company's financial
performance and other relevant criteria. The employment agreement expires on
April 15, 2000 but automatically extends for an additional year on April 15 of
each year unless either party affirmatively elects not to extend the term. The
employment agreement contains a non-competition agreement for three years after
any expiration or termination of the agreement. Mr. Sanders is entitled to
additional benefits, including disability insurance, life insurance, and health
and dental insurance. If the Company terminates Mr. Sanders' employment at any
time or if Mr. Sanders terminates his employment within one year after a change
in ownership or control of the Company, the Company is required to pay him
severance pay equal to the unpaid salary for the remainder of the term of the
agreement plus the total salary and bonus compensation paid to him during the
year period preceding the termination. A change in ownership or control of the
Company includes appointment of any person other than Mr. Sanders as President
or Chief Executive Officer or the removal of him from either of such positions,
any change in a majority of the Board members not approved by him, any transfer
or issuance of shares representing more than 25% of the beneficial ownership of
the Company if not approved in advance by Mr. Sanders, any material change in
his authority or duties and any breach by the Company of the employment
agreement not remedied within ten days after notice from him. Mr. Sanders has
approved the issuance of the shares of Common Stock in connection with this
Offering, the acquisition of CAS and the payoff of the Bridge Notes.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Texas Business Corporation Act (the "Corporation Act") permits the
indemnification of directors, employees, officers and agents of Texas
corporations. The Company's Articles of Incorporation and Bylaws provide that
the Company shall indemnify its directors and officers to the fullest extent
permitted by the Corporation Act. Under the Corporation Act, an officer or
director may be indemnified if he acted in good faith and reasonably believes
that his conduct (i) was in the best interests of the Company if he acted in
his official capacity or (ii) was not opposed to the best interest of the
Company in all other cases. In addition, the indemnitee may not have reasonable
cause to believe his conduct was unlawful in the case of a criminal proceeding.
In any case, he may not be found liable to the Company for improperly receiving
a personal benefit or for willful or intentional misconduct in the performance
of his duty to the Company. The Company must indemnify an officer or director
against reasonable expenses if he is successful, may indemnify for such
reasonable expenses unless he was found liable for willful or intentional
misconduct in the performance of his duty to the Company, and may advance
reasonable defense expenses if he undertakes to reimburse the Company if he is
later found not to satisfy the standard for indemnification of expenses.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
For a discussion of provisions of the underwriting agreement with
regard to the indemnification of the Underwriters, see "Underwriting."
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<PAGE> 52
EMPLOYEE STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Employee Option Plan") was
adopted by the Board of Directors and the Company's shareholders in February
1997. The purpose of the Employee 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. Pursuant to the
Employee Option Plan, the Company may grant incentive and nonstatutory
(nonqualified) stock options to key employees and directors of the Company. A
total of 150,000 shares of Common Stock have been reserved for issuance under
the Employee Option Plan.
The Board or the Compensation Committee has the authority to select
the key employees and directors of the Company to whom stock options are
granted (provided that incentive stock options only be granted to employees of
the Company). Subject to the limitations set forth in the Employee Option Plan,
the Board or the Compensation Committee has the authority to designate the
number of shares to be covered by each option, determine whether an option is
to be an incentive stock option or a nonstatutory option, establish vesting
schedules, specify the type of consideration to be paid to the Company upon
exercise and, subject to certain restrictions, specify other terms of the
options.
The maximum term of options granted under the Employee Option Plan is
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 incidence. Options granted under the Employee Option Plan
are nontransferable and generally expire within three months after the
termination of an optionee's service to the Company. In general, if an optionee
is disabled, dies or retires from his or her service to the Company, such
option may be exercised up to three months following such disability or death
unless the board or Compensation committee determine to allow a longer period
for exercise.
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. The exercise
price of incentive stock options granted to any person who at the time of grant
owns stock possessing more than 10% of the total combined voting power of all
classes of stock must be at least 110% of the fair market value of such stock
on the date of grant, and the term of those options cannot exceed five years.
On February 12, 1997, pursuant to the Employee Option Plan, the Board
authorized the grant of 15,000 options to Tony Ramsaroop, 15,000 options to
Gary Cooper, and 1,000 options to Paul Lubomirski. These options are incentive
stock options exercisable at the initial public offering price. The Board also
authorized the grant to Gordon Whitener of 10,000 non-statutory stock options
exercisable at $4.50 per share of Common Stock.
On April 28, 1997, the Board authorized the grant of a total of 24,500
incentive stock options to 14 of its officers and employees, including 3,000
each to Wallace Congdon, John Arcari and Victor Doyle. These options are
exercisable at the initial public offering price.
OPTION GRANTS
The Company did not grant stock options or stock appreciation rights
during the nine months ended June 30, 1996. The Company will not grant any
options having an exercise price of less than $5.75 per share or 85% of the
fair market value of the Common Stock on the date of grant, whichever is
greater.
See "--Employee Stock Option Plan" for information regarding option
grants made as of February 12, 1997 and April 28, 1997 to certain of the
Company's executive officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective March 1, 1996, in connection with the Company's acquisition
of Pride, the Company entered into a consulting agreement with Charles Weed, a
director of the Company. The Company is obligated to pay Mr. Weed a consulting
fee of $4,100 per month until February 1998. As one of the Sunbelt
shareholders, Mr. Weed was issued a 10% Convertible Note in the principal
amount of $52,000 in connection with the Company's acquisition of Pride. He
subsequently purchased an additional $70,000 of the Company's 10% Convertible
Notes from another holder. Effective March 1, 1996, the Company also issued to
Mr. Weed a convertible note in the principal amount of $27,000 in exchange for
unpaid consulting fees owed to him by Pride. This note has terms similar to the
Company's 10% Convertible Notes except that it is convertible at $3.00 (in lieu
of $4.50) per share. As of March 31, 1997, Mr. Weed held convertible notes
totaling $149,000 in principal amount. Mr. Weed is also a member and manager
of Sunbelt Business Capital, L.L.C.
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<PAGE> 53
("Sunbelt L.L.C."). In connection with the Pride acquisition, Sunbelt spun off
to its shareholders certain of its assets, including debt in the approximate
amount of $323,000 owed by Pride. The Company issued 56,000 shares to these
shareholders (including 8,354 shares to Mr. Weed) in exchange for the
cancellation of $168,000 of debt. The remainder of this debt was contributed by
these shareholders to Sunbelt L.L.C. Pride delivered a new promissory note
dated March 1, 1996 to evidence this debt in the approximate amount of $155,000
Sunbelt L.L.C. The note required payments of 27 equal monthly installments
6,400. On May 13, 1997, when the outstanding principal balance of the note was
$83,000, Sunbelt L.L.C. sold the note to Jerry R. Webb who at the same time
loaned an additional $200,000 to Pride. The entire $283,000 debt to Mr. Webb
was restructured and is evidenced by a new note payable in full on May 13,
1998, bearing interest at 18% per annum. The note requires monthly payments of
interest only. Mr. Weed and one other individual, who is not affiliated with
the Company, own participation interests of $83,000 and $100,000, respectively,
in the debt owed to Mr. Webb by Pride. On July 9, 1997, Jerry Webb advanced an
additional $144,000 against certain receivables, for which the Company promised
to pay Mr. Webb $150,000 on or before August 1, 1997.
Prior to the Company's organization, Lee Sanders, through his wholly
owned subsidiary, The Sanders Companies, Inc. (the "Sanders Companies"), owned
all of the outstanding capital stock of Airline Services and TriStar Paint.
Mr. Sanders is the President and Chief Executive Officer of the Company. Prior
to August 31, 1995, the Sanders Companies was the owner of the property and
equipment reflected on the combining financial statements for these entities
and charged each of these wholly-owned subsidiaries lease rent for the use of
such assets. In 1995, these assets were transferred from the Sanders Companies
at net book value, along with associated debt, to either Airline Services or
TriStar Paint, as appropriate. Lease rent charged by the Sanders Companies to
TriStar Paint and Airline Services for the year ended September 30, 1995
totaled $12,000.
Prior to the Company's organization in December 1995, Airline Services
and TriStar Paint were operated as part of a controlled group of companies with
other operations of the Sanders Companies and with no minority shareholders. As
of September 30, 1995, TriStar Paint had advanced funds to the Sanders
Companies in an amount totaling $165,000. These advances resulted from Airline
Services and TriStar Paint immediately transferring to the Sanders Companies
any payments received from their customers. Each of the subsidiaries of the
Sanders Companies, including TriStar Paint and Airline Services, maintained
zero balance bank accounts. As disbursements would clear each subsidiary's bank
account, cash would immediately be transferred from the bank account of the
Sanders Companies. These advances have ceased and will not occur in the future.
On September 30, 1995, TriStar Paint and Airline Services had
inter-company receivable balances from the Sanders Companies totaling $258,000
and $364,000, respectively. Effective on September 30, 1995, these companies
declared a dividend of these receivable balances to the Sanders Companies.
These balances resulted from transactions executed and recorded between the
Sanders Companies and its wholly-owned subsidiaries, Airline Services and
TriStar Paint, from the sharing of administrative expenses and advances to and
from each of the separate corporations.
In December 1995, the Sanders Companies contributed all of the
outstanding stock of Airline Services and TriStar Paint to the Company as its
initial capitalization in exchange for 1,000,000 shares of Common Stock. For
this purpose, the Company's stock was assigned a value of $3.00 per share,
based primarily on the combined historical earnings of TriStar Paint and
Airline Services, and arms-length negotiations with the principals of Pride
Aviation, Inc., for which an agreement to acquire was reached in January 1996,
and the placement agent for the Company's $1,500,000 private offering of Common
Stock that commenced in January 1996.
Prior to March 1, 1996, the Sanders Companies provided services and
allocated certain general and administrative expenses to the various companies
operating under its control, including the Company, TriStar Paint and Airline
Services. Such charges were allocated to the members of the control 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 general and administrative expenses totaled
$77,000 for the nine months ended June 30, 1996. For the year ended September
30, 1995, these general and administrative expenses allocated to TriStar Paint
and Airline Services totaled $203,000.
The proceeds of this offering will be used to satisfy a $250,000
revolving line of credit with Compass Bank, the balance of which was $248,000
at March 31, 1997. This line of credit is personally guaranteed by Lee Sanders.
See "Business--Financing" for a discussion of the line of credit.
Neither Sanders Companies, the Company, Airline Services nor TriStar
Paint had any minority shareholders prior to March 1, 1996. Since that date,
the Board of Directors of the Company believes that all transactions between
the
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<PAGE> 54
Company and any of its affiliates have been made on terms no less favorable to
the Company than would have been obtained from non-affiliated third parties.
Any future transactions between the Company and any of its affiliates will be
subject to approval by a majority of the independent disinterested members of
the Board of Directors or by a majority of the shareholders of the Company,
other than any interested shareholders, and will be made on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties. The Company will not make any loans to its officers, directors,
post-Offering 5% shareholders or affiliates, except for bonafide business
purposes.
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<PAGE> 55
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 1, 1997 by (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Common Stock, (ii) each of the Company's directors, (iii) the
executive officer named in the Compensation Table, and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
the Company believes that the beneficial owners of the Common Stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
Percent of Total (2)
Name and Address Number of Shares ------------------------------------
of Beneficial Owner Beneficially Owned (1) Before Offering After Offering
- ------------------- ---------------------- --------------- --------------
<S> <C> <C> <C>
Lee Sanders 1,000,000 (3) 62.5% 38.5%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Richard Morgan 100,000 (4) 6.0 3.7
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Paul Lubomirski 44,250 2.8 1.7
Charles E. Weed 44,455 (5) 2.7 1.7
Gordon Whitener 10,000 (6) * *
All executive officers and
directors as a group (9 persons) 1,198,705 69.4 44.0
</TABLE>
- --------------------------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date set forth above through the
exercise of any option, warrant or convertible or exchangeable note.
(2) In calculating percentage ownership, all shares of Common Stock that
the named shareholder has the right to acquire upon exercise of any
option, warrant or convertible or exchangeable note are deemed to be
outstanding for the purpose of computing the percentage of Common
Stock owned by the shareholder, but are not deemed outstanding for the
purpose of computing the percentage of Common Stock owned by any other
shareholders. Percentages of shares beneficially owned are based upon
1,600,250 shares outstanding before this offering. Accordingly,
shares and percentages beneficially owned after the offering are based
on 2,600,250 shares before taking into account any shares issued in
connection with the CAS acquisition and the payoff of the Bridge
Notes.
(3) Represents shares owned of record by The Sanders Companies, Inc., a
corporation wholly owned by Mr. Sanders.
(4) Includes 80,000 shares purchasable at $2.50 per share pursuant to a
warrant expiring February 28, 1999.
(5) Includes 27,101 shares issuable, at $4.50 per share, upon the
conversion of convertible notes in the total principal amount of
$122,000 and 9,000 shares issuable, at $3.00 per share, upon the
conversion of a convertible note in the principal amount of $27,000.
(6) Represents shares purchasable, at $4.50 per share, under non-statutory
options expiring in 2004 granted under the Company's 1997 Stock Option
Plan.
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<PAGE> 56
DESCRIPTION OF SECURITIES
The Company is a Texas corporation and its affairs are governed by its
Articles of Incorporation ("Articles of Incorporation"), its Bylaws ("Bylaws")
and by the Texas Business Corporation Act. The following description of the
Company's capital stock is qualified in all respects by reference to the
Articles of Incorporation and Bylaws, which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
The authorized capital stock of the Company consists of 10,000,000
shares of Common Stock, $0.01 par value, and 5,000,000 shares of preferred
stock, $0.01 par value ("Preferred Stock"). The Common Stock and Warrants are
being offered separately and not as units, and each are separately
transferable.
COMMON STOCK
As of April 1, 1997, the Company had 49 holders of its Common Stock.
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available thereof at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock do not have cumulative voting rights and are entitled to one
vote per share on all matters on which the holders of Common Stock are entitled
to vote. The Common Stock is not entitled to preemptive rights and is not
subject to redemption or conversion. Upon liquidation, dissolution, or
winding-up of the Company, the assets (if any) legally available for
distribution to shareholders are distributable ratably among the holders of the
Common Stock after payment of all debt and liabilities of the Company and the
liquidation preference of any outstanding class or series of Preferred Stock.
All outstanding shares of Common Stock are, and the shares of Common Stock to
be issued pursuant to this offering will be, when issued and delivered, validly
issued, fully paid, and nonassessable. The rights, preferences, and privileges
of holders of Common Stock will be subject to the preferential rights of any
outstanding class or series of Preferred Stock that the Company may issue in
the future.
WARRANTS
In connection with this offering, the Company will issue 1,000,000
Warrants. The Warrants are subject to the terms and conditions of a Warrant
Agreement (the "Warrant Agreement") between the Company and the Company's
transfer agent, as Warrant Agent. The following description of the Warrants is
qualified in all respects by the Warrant Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The shares of Common Stock underlying the Warrants, when issued upon exercise
thereof and payment of the purchase price, will be fully paid and
nonassessable.
Each Warrant entitles the holder to purchase one share of Common Stock
at any time after two years from the date of this Prospectus, until five years
following the date of this Prospectus for 120% of the initial public offering
price, subject to adjustment in certain circumstances, unless earlier redeemed,
at which time the Warrants will expire. The Warrants are redeemable in whole
and not in part by the Company, after two years from the date of this
Prospectus, upon 30 days' notice at a price of $0.10 per Warrant, provided that
the closing bid quotations or sale prices of the Common Stock have averaged at
least 165% of the initial public offering price for a period of any 20
consecutive trading days ending on the tenth day prior to the day on which the
Company mails the notice of redemption to the Warrant holders. In the event the
Company gives notice of its intention to redeem the Warrants, a holder would be
forced to either exercise his Warrant within 30 days of the notice of redemption
or accept the redemption price. The holders of the Warrants will have exercise
rights until the close of business on the date fixed for the redemption thereof.
The number and kind of securities or other property for which the Warrants are
exercisable are subject to adjustment upon the occurrence of certain events,
including mergers, reorganizations, stock dividends, stock splits, and
recapitalizations. Holders of Warrants have no voting, dividend, or other rights
as shareholders of the Company with respect to the shares underlying the
Warrants, unless and until the Warrants are exercised.
The Warrants may be exercised by filling out and signing the
appropriate form on the Warrants and mailing or delivering the Warrants to the
Warrant Agent in time to reach the Warrant Agent by the expiration date,
accompanied by payment in full of the exercise price for the Warrants being
exercised in United States funds (in cash or by check or bank draft payable to
the order of the Company). Common Stock certificates will be issued as soon as
practicable after exercise and payment of the exercise price as described
above.
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<PAGE> 57
The shares of Common Stock issuable upon exercise of the Warrants and
the securities issuable upon exercise of the Representative's Warrants have
been registered with the Commission. The Company will be required, from time to
time, to file post-effective amendments to its registration statement in order
to maintain a current prospectus covering the issuance of such shares upon
exercise of the Warrants. The Company has undertaken to make such filings and
to use its best efforts to cause such post-effective amendments to become
effective. If for any reason a required post-effective amendment is not filed
or does not become effective or is not maintained, the holders of the Warrants
may be prevented from exercising their Warrants.
Holders of the Warrants have the right to exercise the Warrants only
if the underlying shares of Common Stock are qualified, registered or exempt
from registration under applicable securities laws of the states in which the
various holders of the Warrants reside. The Company cannot issue shares of
Common Stock to holders of the Warrants in states where such shares are not
qualified, registered or exempt. The Company has undertaken, however, (i) to
obtain a listing for the shares of Common Stock on Nasdaq and the Boston Stock
Exchange, which provides an exemption from state securities law registration in
many states and (ii) to register the shares of Common Stock in certain states
where this exemption is not available.
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of the
Warrants to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the
then current market price when the holder might otherwise wish to hold the
Warrants for possible additional appreciation, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants in the event of a call for redemption. Holders who do not exercise
their Warrants prior to redemption by the Company will forfeit their right to
purchase the shares of Common Stock underlying the Warrants.
REPRESENTATIVE'S WARRANTS
The Company has agreed, upon completion of this offering, to sell to
the Representative for $0.001 per Warrant, the Representative's Warrants to
purchase (i) 10% of the number of shares of Common Stock sold in this offering
(excluding the Underwriters' over-allotment option) and (ii) Underlying
Warrants to purchase the same number of shares of Common Stock at an exercise
price equal to 165% of the exercise price of the Warrants. The Representative's
Warrants will be exercisable for a period of four years commencing one year
after the date of this Prospectus. In addition, the Company will provide
certain demand and piggyback registration rights in connection with the
Representative's Warrants. See "Underwriting."
EXISTING WARRANTS AND OPTIONS
Placement Warrants. On March 1, 1996 and June 24, 1996, the Company
issued warrants to purchase an aggregate of 200,000 shares of Common Stock (the
"Placement Warrants") to RAS Securities Corp. ("RAS") upon the closings of the
private placement of 500,000 shares of Common Stock by the Company. RAS has
subsequently transferred these Placement Warrants to certain of its employees.
Each Placement Warrant entitles the holder to purchase one share of Common
Stock at a price of $1.00 per share, exercisable on or before February 28,
1999. As of the date of this Prospectus, none of the holders of the Placement
Warrants has exercised his Placement Warrants. The Placement Warrants contain
provisions that protect the holders against dilution by adjustment of the
exercise price and the number of shares of Common Stock subject to the
Placement Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers, or consolidations.
Holders of Placement Warrants do not possess any rights as shareholders of the
Company prior to exercise. Holders of Placement Warrants have been granted
certain registration rights. Any shares to be issued upon exercise of the
Placement Warrants will be subject to certain transfer restrictions. For a
discussion of these restrictions, see "--Shares Eligible For Future Sale"
below.
Morgan Warrant. Effective June 30, 1996, the Company and Richard L.
Morgan entered into a Warrant Agreement (the "Morgan Warrant") pursuant to
which Mr. Morgan has the right to purchase 80,000 shares of Common Stock at a
price of $2.50 per share. The Warrant Agreement expires February 28, 1999. Mr.
Morgan has not exercised any of his rights under the Morgan Warrant as of the
date of this prospectus. The Morgan Warrant contains provisions that
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<PAGE> 58
protect Mr. Morgan against dilution by adjustment of the exercise price and the
number of shares of Common Stock subject to the Morgan Warrant in certain
events, such as stock dividends and distributions, stock splits,
recapitalizations, mergers or consolidations. The Morgan Warrant does not grant
any shareholder rights to the holder thereof prior to exercise. The Morgan
Warrant grants to Mr. Morgan certain registration rights. Any shares to be
issued upon exercise of the Morgan Warrant will be subject to certain transfer
restrictions. For a discussion of these restrictions, see "-- Shares Eligible
for Future Sale" below.
Employee Stock Options. See "Management--Employee Stock Option Plan"
for a description of outstanding options granted under the 1997 Stock Option
Plan.
PREFERRED STOCK
The Board of Directors may, without further action of the shareholders
of the Company, issue shares of Preferred Stock in one or more series and fix
or alter the rights or preferences thereof, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation preferences, conversion rights, and any other
rights, preferences, privileges, and restrictions of any wholly unissued series
of Preferred Stock. The rights of holders of Common Stock will be subject to,
and may be adversely affected by, the rights of holders of any Preferred Stock
that may be issued in the future. No shares of Preferred Stock are outstanding,
and the Company has no present plans to issue any such shares. The issuance of
shares of Preferred Stock could adversely affect the voting power of holders of
Common Stock and could have the effect of delaying, deferring, or preventing a
change in control of the Company or other corporate action.
DEBT SECURITIES
In connection with the acquisition of Pride on March 1, 1996, the
Company issued $857,000 in aggregate principal amount of its five-year, 10%
Convertible Notes ("Convertible Notes") to the former shareholders of Pride as
a portion of the acquisition price payable to them for their shares in Pride.
The Convertible Notes require the Company to pay quarterly payments of interest
at a rate of ten percent (10%) per annum. Commencing April 1, 1998, the
Convertible Notes also require equal quarterly installments of principal in an
amount necessary to fully amortize the notes by March 1, 2001, when all
remaining principal and accrued interest will be due. Each of the Convertible
Notes is convertible at the option of the holder into shares of Common Stock at
a price of $4.50 per share. In addition, the Company issued to Charles Weed, in
consideration for cancellation of accrued, unpaid consulting fees owed by
Pride, a Convertible Note in the amount of $27,000 that is convertible at $3.00
per share. The conversion rates are subject to adjustment in the event of any
stock dividend, split, combination or reclassification of the outstanding
Common Stock of the Company. The Convertible Notes require the Company to treat
all holders of the Convertible Notes as pari passu members of the same class.
Each of the Convertible Notes (other than the $27,000 note held by Mr. Weed) is
secured by a pledge of the pro rata portion of outstanding stock of Pride that
was owned directly or beneficially by the holder of the Convertible Note
immediately prior to the Company's acquisition of Pride. All of the Company's
stock in Pride is pledged to secure the Convertible Notes, subject to the
Company's prior pledge of approximately 50% of the Pride stock to secure
certain of Pride's debt. If the Company fails to make a required payment of
principal and interest within ten (10) days after written notice of default is
received, the holder of the Convertible Note may exercise any of its remedies
with respect to the pledged stock.
In February 1997, the Company sold $500,000 in aggregate principal
amount of its 10% Bridge Notes. The Bridge Notes are unsecured and bear
interest at the rate of 10% per annum payable quarterly beginning December 31,
1997. The Company used the proceeds from the issuance of the Bridge Notes for
general corporate purposes and to fund the costs of this Offering. The Bridge
Notes are due in full on June 30, 1998 or earlier in certain circumstances,
including within five days following the closing of this Offering. Subject to
the closing of this Offering, upon the full payment of the Bridge Notes, the
Company has agreed to issue to the holders of the Bridge Notes that number of
shares of Common Stock equal to the quotient of $250,000 divided by the initial
public offering price.
CERTAIN ARTICLES OF INCORPORATION PROVISIONS
The Articles of Incorporation provides that the Company's directors
will not be personally liable for monetary damages to the Company or its
shareholders for an act or omission in the director's capacity as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its shareholders, (ii) for acts or omissions not in good
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<PAGE> 59
faith or which involved intentional misconduct or a knowing violation of law,
(iii) for any transaction from which the director derived any improper personal
benefit, (iv) for acts or omissions for which the liability of a director is
expressly provided by statute or (v) an act related to an unlawful stock
repurchase or payment of a dividend. This provision in the Articles of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Texas law. This provision also
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
Prior to the completion of this offering, the Company intends to
engage Continental Stock Transfer and Trust Company, New York, New York, to
serve as the stock transfer agent and registrar for the Common Stock. The
Company currently serves as its own stock transfer agent and registrar.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the CAS acquisition and the payoff
of the Bridge Notes, the Company will have approximately 2,797,363 shares of
Common Stock outstanding, excluding any exercise of currently outstanding
warrants and convertible or exchangeable notes. The 1,000,000 shares of Common
Stock to be sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares purchased by affiliates of the Company will be subject to the
limitations of Rule 144 under the Securities Act. The 1,000,000 Warrants to be
sold in this offering will also be freely transferable without restriction or
further registration under the Securities Act, except that any Warrants
purchased by affiliates of the Company will be subject to the limitations of
Rule 144 under the Securities Act. In addition, the approximate 153,635 shares
of Common Stock to be issued to the former shareholders of CAS in the CAS
acquisition have been registered for resale and will not be restricted. All of
the Company's outstanding shares of Common Stock, warrants, options and
convertible or exchangeable notes are "restricted securities" as that term is
defined in Rule 144 under the Securities Act.
In general, under Rule 144 a minimum of one year must elapse between
the later of the date of the acquisition of restricted securities from the
issuer or its affiliates and a resale of the securities under Rule 144. If the
one- year test is met, a person (or persons whose shares are aggregated),
including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three-month period a number of securities that does
not exceed the greater of 1% of the number of shares of Common Stock then
outstanding or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date an order to sell is placed with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the securities proposed to be sold for at
least two years, would be entitled to sell such securities under Rule 144(k)
without regard to the requirements described above. Accordingly, all of the
Company's outstanding shares of Common Stock (except for the approximate
197,113 shares to be issued upon payoff of the 10% Bridge Notes and in the CAS
acquisition), warrants and convertible or exchangeable notes will be eligible
for sale under Rule 144 upon completion of this Offering, or shortly
thereafter, as a result of the one-year holding period.
Company officers beneficially owning a total of 1,044,250 shares of
Common Stock will sign lock-up agreements under which such holders will agree
not to offer, sell, or otherwise dispose of their shares of Common Stock that
might otherwise be eligible for sale for a period of at least 24 months after
the date of this Prospectus without the prior written consent of the
Representative.
Nonmanagement holders of the Company's securities (owning 556,000
shares of Common Stock and outstanding warrants exercisable for 280,000 shares
of Common Stock) will agree with the Representative to lock-up for a period of
12 months the shares of Common Stock that they own or may acquire after the
date of this Prospectus. Additionally, if the Representative consents to an
early release of such shares in an aggregate quantity equal to at least 50% of
such holders' shares, then the lock up period on such remaining shares held by
these shares held by these holders shall automatically extend to two years from
the date of this Prospectus.
Holders of certain promissory notes totaling $1,260,000 as of March
31, 1997, that are convertible or exchangable for up to 283,100 shares of
Common Stock have agreed to lock up their shares for two years from the date of
this Prospectus, provided however that such holders may sell shares earlier
only in an amount sufficient to offset required Company principal payments,
beginning March 1998. In addition, the approximate 153,635 shares of Common
Stock to be issued to the former stockholders of CAS in the CAS acquisition
have been registered for resale and will not be registered.
The terms of the Bridge Notes provide that the approximate 43,478
shares of Common Stock to be issued upon full payment of the Bridge Notes may
not be sold by the holder for one year after the closing of this Offering. The
Representative may not release or waive the prohibition on sale for shares
issuable upon payment of the Bridge Notes. Upon the expiration of all lock-up
agreements, these shares will become eligible for sale in the public market
assuming the shares continue to be registered for sale by the selling
securityholders or, if not registered, subject to the provisions of Rule 144.
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<PAGE> 60
In connection with this offering, the Company has registered all of
the Company's outstanding shares of Common Stock and all shares of Common Stock
issuable upon exercise of outstanding warrants, upon conversion or exchange of
outstanding convertible or exchangeable notes, upon payoff of the Bridge Notes
or upon consummation of the CAS acquisition. The selling shareholders, their
plan of distribution and other required disclosures are set forth in a
supplement to this Prospectus. So long as the Company maintains the
effectiveness of this registration and the selling shareholders comply with
prospectus delivery and other requirements for the public sale of registered
securities, the selling shareholders may resell their shares without
restrictions, except for any applicable lock-up agreement.
Prior to this offering, there has been no public market for the Common
Stock or Warrants. The Company can make no predictions as to the effect, if
any, that sales of shares of Common Stock or Warrants or the availability of
Common Stock or Warrants for sale will have on the market price prevailing from
time to time. Nevertheless, sales of substantial amounts of the Common Stock or
Warrants in the public market could adversely affect the market price of the
Common Stock or Warrants and could impair the Company's future ability to raise
capital through an offering of its equity securities.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representative, Duke & Co., Inc.,
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock and Warrants at the public offering price,
less the underwriting discounts and commissions, set forth on the cover page of
this Prospectus.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Number of Warrants
Underwriter to be Purchased to be Purchased
----------- ----------------- -----------------
<S> <C> <C>
Duke & Co., Inc. . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . 1,000,000 1,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all Securities offered hereby if any are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $__per share of Common Stock and $__
per Warrant. After the initial public offering, the public offering price,
concessions, and other selling terms may be changed by the Representative.
The Company has agreed to pay underwriting discounts and commissions
in the aggregate of 10% of the initial public offering price of the Securities
offered hereby. The Company also has agreed to reimburse the Representative's
expenses on a non-accountable basis in the amount of 3% of the gross proceeds
received from the sale of the Securities, including the over-allotment option.
Any such expenses in excess of the expense allowance will be borne by the
Underwriters. The Company has also agreed to pay to the Representative a
commission of 6% of the exercise price of any Warrants which are exercised in
the future pursuant to a solicitation by the Representative, subject to certain
conditions, including, among other things, that such exercising Warrantholder
designates in writing the Representative to receive such commission.
The Company has granted to the Underwriters an option, exercisable not
later than 45 days after the date of this Prospectus, to purchase (i) up to
150,000 additional shares of Common Stock and (ii) 150,000 additional Warrants
at the public offering price, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriters may exercise
such option only to cover over-allotments, if any. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the
number of Securities to be purchased by it shown in the above table bears to
1,000,000, unless the Underwriters agree otherwise in writing, and the Company
will be obligated, pursuant to the option, to sell such Securities to the
Underwriters. If purchased, the Underwriters will offer for sale such
additional shares of Common Stock and Warrants on the same terms as those on
which the 1,000,000 shares of Common Stock and 1,000,000 Warrants are being
offered.
The Company has agreed, upon completion of this offering, to sell to
the Representative or its designees, for $0.001 per warrant, Representative's
Warrants to purchase (i) 10% of the number of shares of Common Stock sold in
this offering (excluding the over-allotment option) and (ii) Underlying
Warrants to purchase the same number of shares of Common Stock. The terms and
conditions of the Underlying Warrants are identical to those of the Warrants
offered hereby, except that the exercise price of the Underlying Warrants is
165% of the exercise price of the Warrants. The Representative's Warrants will
be exercisable for a four-year term, commencing one year after the date of
this Prospectus, at an exercise price equal to 165% of the initial public
offering price of the Securities offered hereby. The Representative's Warrants
will be restricted for a period of one year from sale, transfer, assignment, or
hypothecation except to the Underwriters and persons who are officers or
partners of the Underwriters. The number of shares of Common Stock and
Underlying Warrants covered by the Representative's Warrants and the exercise
price are subject to adjustment upon certain events to prevent dilution. The
Representative's Warrants to purchase Common Stock may be exercised in a
cashless manner through the surrender and exchange of Representative's Warrants
having a value (based on the market price of the Common Stock that may be
purchased) equal to the total exercise price for the Common Stock being
purchased.
The Representative's Warrants will give the holders an opportunity to
profit from a rise in the market price of the Common Stock to the extent that
the market price exceeds the exercise price of the Representative's Warrants.
Any profit
51
<PAGE> 62
realized by the Underwriters upon the sale of the Representative's Warrants or
the securities issuable thereunder may be deemed to be additional underwriting
compensation. If the Representative's Warrants are exercised, the interest of
the Company's shareholders will be diluted. It may be more difficult for the
Company to raise additional capital while the Representative's Warrants are
outstanding, and the holders of the Representative's Warrants may be expected
to exercise them when the Company, in all likelihood, would be able to obtain
needed additional capital by a new offering of securities on terms more
favorable than those provided for by the Representative's Warrants.
The Company has granted to the holders of the Representative's
Warrants and the underlying securities certain rights with respect to
registration under the Securities Act of the securities underlying the
Representative's Warrants. For a period of four years commencing one year
following the date of this Prospectus, the holders of not less than a majority
of the Common Stock issued or issuable upon exercise of the Representative's
Warrants and Underlying Warrants may require the Company to effect up to two
registrations under the Securities Act with respect to the Representative's
Warrants, the Underlying Warrants and the Common Stock underlying the
Representative's Warrants and the Underlying Warrants, and the Company is
required to use its best efforts to effect such registration. In addition,
subject to certain limitations, in the event the Company proposes to register
any of its securities under the Securities Act during the seven-year period
following the date of this Prospectus, the holders of the Representative's
Warrants and the underlying Common Stock are entitled to notice of such
registration and may elect to include the Representative's Warrants, the
Underlying Warrants and the Common Stock underlying the Representative's
Warrants and Underlying Warrants held by them in such registration. The
Company is obligated to pay the expenses of these registrations, except for
underwriting discounts and commissions and except that the Company's
out-of-pocket expenses associated with the second registration initiated upon
the request of the holders of the Common Stock issued or issuable upon exercise
of the Representative's Warrants and Underlying Warrants will be reimbursed by
the holders whose shares are included in such registration. The registration of
securities pursuant to the registration rights applicable to the
Representative's Warrants may impede future financing.
Company officers beneficially owning a total of 1,044,250 shares of
Common Stock will sign lock-up agreements under which such holders will agree
not to offer, sell, or otherwise dispose of 90% of their shares of Common Stock
(939,825 shares) that might otherwise be eligible for sale for a period of 24
months after the date of this Prospectus without the prior written consent of
the Representative.
Nonmanagement holders of the Company's securities (owning 556,000
shares of Common Stock and outstanding warrants exercisable for 280,000 shares
of Common Stock) will agree with the Representative to lock-up for a period of
12 months the shares of Common Stock that they own or may acquire after the
date of this Prospectus. Additionally, if the Representative consents to an
early release of such shares in an aggregate quantity exceeding 50% of such
holders' shares, then the lock up period on such remaining shares held by these
holders shall automatically extend to two years from the date of this
Prospectus.
Holders of certain promissory notes totaling $1,260,000 as of March 31,
1997, that are convertible or exchangable for up to 283,100 shares of Common
Stock have agreed to lock up their shares for two years from the date of this
Prospectus, provided however that such holders may sell shares earlier in
an amount sufficient to offset required Company principal payments, beginning
March 1998. In addition, the approximate 153,635 shares of Common Stock to be
issued to the former stockholders of CAS in the CAS acquisition have been
registered for resale and will not be registered.
The terms of the Bridge Notes provide that the approximate 43,478
shares of Common Stock to be issued upon full payment of the Bridge Notes may
not be sold by the holder for one year after the closing of this Offering. The
Representative may not release or waive the prohibition on sale for the shares
issuable upon payment of the Bridge Notes. Upon the expiration of all lock-up
agreements, these shares will become eligible for sale in the public market
assuming the shares continue to be registered for sale by the selling
securityholders or, if not registered, subject to the provisions of Rule 144.
Pursuant to the Underwriting Agreement, for a period of five years
from the effective date of the Registration Statement of which this Prospectus
forms a part, the Representative has the right to nominate, and the Company has
agreed to use its best efforts to cause the election of, a person to serve
on the Company's board of directors. In the alternative, the Representative may
appoint a designee to serve as an observer at all meetings of the Company's
board of directors. Such observer shall be paid the same cash compensation and
be entitled to the same reimbursement of expenses as the independent directors
sitting on the Company's board of directors.
Pursuant to the Underwriting Agreement, for a period of five years from
the effective date of the Registration Statement of which this Prospectus forms
a part, the Company has agreed not to change its current independent public
accountants, Arsement, Redd, & Morella, L.L.C., without the Representative's
consent.
Pursuant to the Underwriting Agreement, for a period of five years
from the effective date of the Registration Statement of which this Prospectus
forms a part, the Company has agreed to maintain keyman life insurance in the
amount of $1,000,000 on each of the lives of Messrs. Sanders, Lubomirski and
Ramsaroop.
Pursuant to the Underwriting Agreement, the employment agreements with
Messrs. Sanders, Lubomirski and Ramsaroop will be extended through at least the
third anniversary of the date of this Prospectus and the Company has agreed not
to increase the compensation paid to the five most highly paid employees of the
Company in any year without the consent of the Representative unless permitted
by the terms of employment contracts approved by the Representative.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission ("Commission") such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Representative has advised the Company that the Underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
Prior to this offering, there has been no public market for the
Company's Common Stock or the Warrants. The initial public offering price for
the Securities has been determined by negotiations between the Company and the
Representative. Among the factors considered in such negotiations were
prevailing market conditions, the history and prospects of the Company, the
present state of the Company's development, the industry in which it competes,
an assessment of the
52
<PAGE> 63
Company's management, the market price for securities of comparable companies
at the time of the offering, and other factors deemed relevant.
LEGAL OPINIONS
The validity of the issuance of the Common Stock and Warrants offered
hereby will be passed upon for the Company by Bracewell & Patterson, L.L.P.,
Dallas, Texas. Certain legal matters in connection with the issuance of the
Common Stock and Warrants offered hereby will be passed upon for the
Underwriters by Jackson & Walker, L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of Aviation Group, Inc. and
subsidiaries and the financial statements of Pride Aviation, Inc., included in
this prospectus and elsewhere in the registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arsement, Redd
& Morella, L.L.C., independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The combined financial statements of Tri-Star Aircraft Services, Inc.
and Tri-Star Airline Services, Inc. (Predecessor) for the year ended September
30, 1995, have been included herein and in the registration statement, in
reliance upon the report of James Smith & Company, a Professional Corporation,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Casper Air Service and
subsidiary as of April 30, 1996 and for the two years ended April 30, 1996,
included in this prospectus and in the registration statement, have been
audited by McGladrey & Pullen, LLP, independent certified public accountants,
and are included herein upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under the
Securities Act with respect to the Securities being offered pursuant to this
Prospectus. This Prospectus does not contain all information set forth in the
Registration Statement and exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 25049 and at the regional offices of the Commission
located at 500 West Madison Street, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained at prescribed rates from the Public Reference Room of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 25049. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. Statements
contained in this Prospectus concerning the provisions of any documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company will be subject to the informational requirements of the
Exchange Act and in accordance therewith will file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities of the Commission described above. The Company intends to furnish to
its shareholders annual reports containing financial statements audited by
independent certified public accountants following the end of each fiscal year.
53
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION GROUP, INC. AND SUBSIDIARIES
Independent Auditors' Report dated October 7, 1996 by Arsement, Redd & Morella, L.L.C. A-1
Independent Auditor's Report dated December 22, 1995 by James Smith & Company A-2
Consolidated balance sheets as of June 30, 1996 and March 31, 1997 (unaudited) A-3
Consolidated statements of operations for the nine months ended June 30, 1996, for the year ended
September 30, 1995 (Predecessor) and for the nine month periods ended March 31, 1996
and 1997 (unaudited) A-4
Consolidated statements of changes in shareholders' equity for the nine months ended June 30, 1996,
for the year ended September 30, 1995 (Predecessor) and for the nine month period ended
March 31, 1997 (unaudited) A-5
Consolidated statements of cash flows for the nine months ended June 30, 1996, for the year ended
September 30, 1995 (Predecessor) and for the nine month periods ended March 31, 1996
and 1997 (unaudited) A-6
Notes to consolidated financial statements A-7
FINANCIAL STATEMENTS OF PRIDE AVIATION, INC.
Independent Auditors' Report dated October 7, 1996 by Arsement, Redd & Morella, L.L.C. P-1
Balance sheet as of September 30, 1995 P-2
Statements of operations for the year ended September 30, 1995 and five months ended February 29, 1996 (unaudited) P-3
Statements of changes in shareholders' equity (deficit) for the year ended September 30, 1995 and
five months ended February 29, 1996 (unaudited) P-4
Statements of cash flows for the year ended September 30, 1995 and five months ended February 29, 1996
(unaudited) P-5
Notes to financial statements P-7
CONSOLIDATED FINANCIAL STATEMENTS OF CASPER AIR SERVICE AND SUBSIDIARY
Independent Auditors' Report dated March 27, 1997 by McGladrey & Pullen, LLP C-1
Consolidated balance sheets as of April 30, 1996 and January 31, 1997 (unaudited) C-2
Consolidated statements of income for the fiscal years ended April 30, 1996 and 1995 and the nine months
ended January 31, 1997 and 1996 (unaudited) C-3
Consolidated statements of stockholders' equity for the fiscal years ended April 30, 1996 and 1995 and
the nine months ended January 31, 1997 (unaudited) C-4
Consolidated statements of cash flows for the fiscal years ended April 30, 1996 and 1995 and the nine
months ended January 31, 1997 and 1996 (unaudited) C-6
Notes to consolidated financial statements C-8
</TABLE>
<PAGE> 65
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.
Arsement, Redd & Morella, L.L.C.
October 7, 1996
Lafayette, Louisiana
A-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Tri-Star Aircraft, Inc. and
Tri-Star Airline Services, Inc.
We have audited the accompanying combined statements of income, changes in
shareholders' equity and cash flow of Tri-Star Aircraft, Inc. and Tri-Star
Airline Services, Inc. (Texas corporations) (the Predecessor) for the year
ended September 30, 1995. These financial statements are the responsibility of
the Predecessor's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
Our audit was conducted in accordance with generally accepted audited
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 combined statements of income, changes in shareholder's
equity and cash flow present fairly, in all material respects, the results of
operations of the Predecessor for the year ended September 30, 1995, in
conformity with generally accepted accounting principles.
JAMES SMITH & COMPANY
A Professional Corporation
December 22, 1995
Dallas, Texas
A-2
<PAGE> 67
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 457,000 $ 82,000
Accounts receivable 644,000 655,000
Inventory 143,000 249,000
Deferred tax assets 11,000 163,000
Prepaid expenses and other 22,000 61,000
----------- -----------
Total Current Assets 1,277,000 1,210,000
----------- -----------
Property and Equipment 2,409,000 2,744,000
Less: accumulated depreciation (220,000) (463,000)
----------- -----------
2,189,000 2,281,000
Other Assets
Goodwill, net 975,000 937,000
Other 83,000 491,000
----------- -----------
1,058,000 1,428,000
----------- -----------
$ 4,524,000 $ 4,919,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft $ -- $ 130,000
Current maturities of long-term debt 209,000 209,000
Bridge notes -- 290,000
Short-term bank borrowings 223,000 248,000
Accounts payable 574,000 611,000
Accrued interest 36,000 29,000
Due to affiliates 2,000 --
Accrued liabilities 359,000 422,000
----------- -----------
Total Current Liabilities 1,403,000 1,939,000
----------- -----------
Long-Term Liabilities
Long-term debt, net of current maturities 1,350,000 1,303,000
Deferred income taxes 316,000 305,000
----------- -----------
1,666,000 1,608,000
----------- -----------
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000 -- --
shares authorized, none outstanding
Common Stock, $.01 par value, 10,000,000
shares authorized, 1,600,250 shares issued
and outstanding 16,000 16,000
Additional paid-in capital 1,701,000 1,951,000
Retained earnings (deficit) (262,000) (595,000)
----------- -----------
1,455,000 1,372,000
----------- -----------
$ 4,524,000 $ 4,919,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-3
<PAGE> 68
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31,
June 30, September 30, (unaudited)
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Nine Months) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Revenue $ 3,881,000 $ 2,533,000 $ 6,664,000 $ 2,123,000
Cost of Revenue 2,838,000 1,417,000 5,295,000 1,558,000
----------- ----------- ----------- -----------
Gross Profit 1,043,000 1,116,000 1,369,000 565,000
----------- ----------- ----------- -----------
General and Administrative Expenses 752,000 553,000 1,422,000 469,000
Depreciation and Amortization 154,000 16,000 291,000 57,000
----------- ----------- ----------- -----------
906,000 569,000 1,713,000 526,000
----------- ----------- ----------- -----------
Income (Loss) From Operations 137,000 547,000 (344,000) 39,000
----------- ----------- ----------- -----------
Other Income (Expenses)
Interest Income 2,000 -- -- 2,000
Interest Expense (71,000) (20,000) (153,000) (33,000)
Other, net -- 3,000 -- 2,000
----------- ----------- ----------- -----------
(69,000) (17,000) (153,000) (29,000)
----------- ----------- ----------- -----------
Income (Loss) Before Provision for Income
Taxes 68,000 530,000 (497,000) 10,000
Provision (Benefit) for Income Taxes 34,000 188,000 (164,000) 6,000
----------- ----------- ----------- -----------
Net Income (Loss) $ 34,000 $ 342,000 $ (333,000) $ 4,000
=========== =========== =========== ===========
Pro forma earnings (loss) per common and
common equivalent share (unaudited) $ 0.02 $ (0.22) $ --
=========== =========== ===========
Pro forma weighted average common and
common equivalent shares outstanding
(unaudited) 1,497,511 1,497,511 1,497,511
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-4
<PAGE> 69
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
-------------------------- Paid In Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
Predecessor combined balances at
September 30, 1994 (1) $ 1,000 $ 50,000 $ 162,000 $ 213,000
Net Income -- -- -- 342,000 342,000
Contribution from The Sanders
Companies, Inc. (Note I) -- -- 151,000 -- 151,000
Dividend to The Sanders
Companies, Inc.(Note I) -- -- -- (787,000) (787,000)
----------- ----------- ----------- ----------- -----------
Predecessor combined balances at
September 30, 1995 (1) 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. (Note I) -- -- -- (13,000) (13,000)
Issuance of shares in connection 500,000 5,000 1,209,000 -- 1,214,000
private offering
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 O) -- -- 250,000 -- 250,000
Net Loss (unaudited) -- -- -- (333,000) (333,000)
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 (unaudited) 1,600,250 $ 16,000 $1,951,0000 $ (595,000) $ 1,372,000
=========== =========== =========== =========== ===========
</TABLE>
(1) The Predecessor entities, TriStar Aircraft Services, Inc. and TriStar
Airline Services, Inc. had 10,000 and 1,000 shares of common stock outstanding,
respectively, at both September 30, 1994 and 1995.
The accompanying notes are an integral part of these statements.
A-5
<PAGE> 70
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months Ended
Ended Year Ended March 31,
June 30, September 30, (Unaudited)
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Predecessor)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 34,000 $ 342,000 $ (333,000) $ 4,000
----------- ----------- ----------- -----------
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 154,000 16,000 291,000 57,000
Accreted interest -- -- 40,000 --
Deferred income taxes 47,000 36,000 (163,000) 6,000
(Increase) decrease in accounts receivable (123,000) 147,000 11,000 (230,000)
(Increase) decrease in inventories (42,000) -- (106,000) (39,000)
(Increase) decrease in prepaids and other current assets 29,000 (25,000) 6,000 23,000
Increase (decrease) in accounts payable (214,000) (87,000) 37,000 (43,000)
Increase (decrease) in interest payable 36,000 -- (7,000) 15,000
Increase (decrease) in accrued liabilities (20,000) -- 63,000 44,000
Other (14,000) 11,000 (40,000) (29,000)
----------- ----------- ----------- -----------
Total Adjustments (147,000) 98,000 110,000 (196,000)
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities (113,000) 440,000 (223,000) (192,000)
----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Cash paid for acquisition of Pride Aviation, Inc. (506,000) -- -- (506,000)
Cash paid for acquisition targets -- -- (78,000) --
Cash payments for the purchase of equipment (12,000) (64,000) (335,000) (4,000)
----------- ----------- ----------- -----------
Net Cash Used by Investing Activities (518,000) (64,000) (413,000) (510,000)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Bank overdraft -- 29,000 130,000 48,000
Proceeds from short-term borrowings 80,000 170,000 25,000 80,000
Repayments of short-term borrowings (27,000) -- -- (27,000)
Proceeds from issuance of Bridge Notes and Warrants -- -- 500,000 --
Proceeds from issuance of long-term debt -- 194,000 76,000 --
Advances (to)/from related parties -- (685,000) (45,000) 50,000
Payment of Initial Public Offering costs -- -- (266,000) --
Proceeds from issuance of common stock 1,214,000 -- -- 700,000
Deferred financing costs -- -- (36,000) --
Principal payments on long-term debt (179,000) (84,000) 123,000 (149,000)
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 1,088,000 (376,000) 261,000 702,000
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 457,000 -- (375,000) --
Cash and Cash Equivalents at Beginning of Period -- -- 457,000 --
----------- ----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 457,000 $ -- $ 82,000 $ --
=========== =========== =========== ===========
Supplemental Disclosure of Cash Paid for Interest and
Income Taxes:
Cash paid for interest $ 35,000 $ 20,000 $ 120,000 $ 18,000
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 -- -- $ 133,000
Issuance of long-term debt in connection with the
the acquisition of Pride Aviation, Inc. $ 857,000 -- -- $ 857,000
Common stock issued to retire long-term debt $ 168,000 -- -- --
Contribution from The Sanders Companies, Inc. -- $ 151,000 -- $ 151,000
Dividend - to The Sanders Companies, Inc. -- $ 787,000 -- $ 787,000
</TABLE>
The accompanying notes are an integral part of these statements.
A-6
<PAGE> 71
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
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).
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 Companies have been separated from the controlled group.
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
combined results of the Predecessor for all periods through December
31, 1995, and the consolidated results of the Company and its
subsidiaries subsequent to that date. 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.
Interim Period Financial Statements
The unaudited financial statements as of March 31, 1997 and for the
nine months ended March 31, 1997 and 1996, reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and
results of operations for the respective periods. Operating results
for the interim periods are not necessarily indicative of the results
for full years.
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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
A-7
<PAGE> 72
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Accounts Receivable
The Company uses the allowance method in accounting for losses on
accounts receivable. Provision for losses on trade receivable 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 nine months ended June 30, 1996 and the
year ended September 30, 1995 was $16,000 and $47,000, respectively.
The allowance for doubtful accounts was $30,000 at June 30, 1996.
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 and accumulated amortization totaled $17,000 at
June 30, 1996.
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.
Unaudited Pro Forma Net Income (Loss) Per Common Share
The Company's historical capital structure prior to 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.
Pro forma net income (loss) per common share 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, warrants and
convertible debt with issuance and exercise prices below that of the
expected initial public offering ("IPO") price of the Company's common
stock of $5.75 per share. Pursuant to Securities and Exchange
Commission requirements, the dilutive effect of these securities has
been included in the calculation as if they were outstanding as of the
beginning of the periods presented and the dilutive effect of the
common stock and warrants was measured using the treasury stock
method. No adjustment was made for the assumed conversion of the
Company's convertible debt and the Bridge Notes Warrants since the
effect would be antidilutive for the periods presented.
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, issuance of 44,250
shares of the Company's common stock valued at approximately $133,000.
At the closing of the acquisition, Pride
A-8
<PAGE> 73
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE C - ACQUISITION OF PRIDE AVIATION, INC., continued
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) of $991,000 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.
<TABLE>
<S> <C>
Revenues $ 6,755,000
Net Income $ 72,000
Net income per common share $ .05
</TABLE>
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 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1996:
<TABLE>
<S> <C>
Machinery and equipment $1,659,000
Leasehold improvements 530,000
Furniture, fixtures and office equipment 114,000
Vehicles 106,000
----------
2,409,000
Less: accumulated depreciation (220,000)
----------
$2,189,000
==========
</TABLE>
Depreciation expense charged to operations for the nine months ended
June 30, 1996 and the year ended September 30, 1995 was $137,000 and
$16,000, respectively.
NOTE E - SHORT-TERM BANK BORROWINGS
The Company has a $250,000 line of credit facility with Compass Bank
("Line of Credit") which is 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% (10.75%
at June 30, 1996) and extends through September 30, 1997. Borrowings
under the Line of Credit are determined on a borrowing base formula
which is based on a percentage of qualifying accounts receivable of
the Company and Sanders. Borrowings outstanding under the Line of
Credit totaled $223,000 at June 30, 1996.
The Line of Credit is secured by the accounts receivable, equipment,
furniture and fixtures and capital stock of Sanders and the Tri-Star
Companies. Sanders, as primary maker, remains the liable for
borrowings under the Line of Credit. The Line of Credit is also
secured by the personal guaranty of Lee Sanders.
A-9
<PAGE> 74
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE E - SHORT-TERM BANK BORROWINGS, continued
The Line of Credit Agreement contains restrictive covenants which
among other things prohibits the creation of debt, corporate mergers,
sale of assets and other certain other transactions unless consent is
received from the bank. Management believes the Company and Sanders
were in compliance with the terms of the Line of Credit agreement at
June 30, 1996 and March 31, 1997.
NOTE F - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1996:
<TABLE>
<S> <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
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. 386,000
Note payable to Sunbelt Business Capital, L.L.C., payable in monthly
installments of $6,400, including interest at 12%, due June 1998 and
secured by certain accounts receivable and equipment. 135,000
Note payable to Schwing Insurance Agency, payable currently, with
interest at 7.5% on the unpaid balance. 72,000
Note payable to Fidelity Bank, payable in monthly installments of
$1,000 including interest at prime plus 2.5% (10.75% at June 30,
1996), maturing August 1997 and secured by certain machinery and
equipment. 20,000
Note payable to Compass Bank, payable in monthly installments of
$1,600 including interest at prime plus 2.25% (10.5% at June 30,
1996), maturing September 1997 and secured by accounts receivable,
equipment, keyman life insurance policy, and personal guaranty and
pledge of stock of The Sanders Companies, Inc. by Lee Sanders. 27,000
Various notes payable to finance companies, due in monthly
installments totaling 23,000 $1,300, including interest at rates
ranging from 9.5% to 13.25%, maturing from April 1997 to March 1998
and secured by certain vehicles. 23,000
Other 12,000
-----------
Total long-term debt 1,559,000
Less: current maturities of long-term debt (209,000)
-----------
Net long-term debt $ 1,350,000
===========
</TABLE>
A-10
<PAGE> 75
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE F - LONG TERM DEBT, continued
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 for each of the next five years are as
follows:
<TABLE>
<CAPTION>
June 30,
<S> <C>
1997 $209,000
1998 186,000
1999 315,000
2000 316,000
2001 532,000
</TABLE>
NOTE G - 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 nine months
ended June 30, 1996 and year ended September 30, 1995, were $252,000
and $42,000, respectively.
Minimum future lease payments for non-cancelable operating leases
for the next 5 years and thereafter are as follows:
<TABLE>
<CAPTION>
June 30,
<S> <C> <C>
1997 $ 348,000
1998 322,000
1999 330,000
2000 334,000
2001 215,000
Thereafter 4,865,000
----------
$6,414,000
==========
</TABLE>
NOTE H - 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 $16,000 as of June
30, 1996, 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 dependants covered and certain experience factors. In
addition to aggregate annual and monthly limitations, the Company's
exposure is further limited to $30,000 per employee per year.
NOTE I - 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.
A-11
<PAGE> 76
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE I - SHAREHOLDERS' EQUITY, continued
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.
The holders of the Company's common stock and warrants have certain
registration rights, including the right to require the Company to
file a registration statement to register their securities with the
Securities and Exchange Commission, upon request of a majority of the
holders of the Company's common stock and warrants.
Debt Retirement
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. (See Note F).
Dividend to/Contribution from The Sanders Companies, Inc.
Through September 30, 1995, the Tri-Star Companies had advanced
$787,000 to Sanders. These advances were declared and classified as
dividends since Sanders did not intend to repay the advances.
The Company's Tri-Star Companies subsidiaries were included in the
consolidated tax return of Sanders for the years ended December 31,
1995 and 1994. The contribution from Sanders for the year ended
September 30, 1995 represents the current tax expense generated by the
Tri-Star Companies for that fiscal year. The tax expense was treated
as a contribution from Sanders since Sanders did not intend to require
the Company to pay it for the expense. The dividend to Sanders for the
nine month period ended June 30, 1996 represents the tax benefit
generated by the Tri-Star Companies for the three month period ended
December 31, 1995. The tax benefit was treated as a dividend to
Sanders since Sanders does not intend to pay the Company for the
benefit.
NOTE J - RELATED PARTY TRANSACTIONS
For periods prior to the Exchange and 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 $77,000 and $203,000 for the period ended June
30, 1996 and year ended September 30, 1995, respectively. One of the
subsidiaries of the Sanders controlled group was not profitable for
the year ended September 30, 1995, and subsequently ceased operations.
The amount of corporate overhead allocated to this subsidiary by
Sanders during the year ended September 30, 1995 was $144,000. Had
this subsidiary not operated in the year ended September 30, 1995, the
Company's corporate overhead allocation would have increased by
$97,000.
A-12
<PAGE> 77
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE J - RELATED PARTY TRANSACTIONS, continued
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 $40,000 for the period ended June 30, 1996 with $24,000
capitalized as other assets (See Note O) and $16,000 included in
general and administrative expenses. Minimum future payments over the
remaining terms of these arrangements are $92,000 and $24,000 for the
fiscal years ending June 30, 1997 and 1998, respectively.
As of June 30, 1996, the Company owed $2,000 to Sanders for net
payments made by Sanders on behalf of the Company. Such amount is
reflected as "Due to affiliate" in the accompanying balance sheet.
NOTE K - 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 (benefits) for the
Tri Star Companies were computed as if it were a separate taxpayer and
the resulting amount treated as an equity transaction with Sanders.
(See Note I). The Company will file a separate consolidated tax return
for the period ended June 30, 1996.
The provision for income taxes consist of the following components:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
June 30, 1996 September 30, 1995
------------- ------------------
<S> <C> <C>
Current provision (benefit) (See Note I) $(13,000) $151,000
Deferred taxes 47,000 37,000
-------- --------
Provision for income taxes $ 34,000 $188,000
======== ========
</TABLE>
Deferred taxes are principally due to differences in the basis and
depreciable lives for property and equipment for book and tax purposes
and unused net operating loss carryforwards.
Deferred tax assets and liabilities consisted of the following at June
30, 1996:
<TABLE>
<S> <C>
Assets
Net operating loss carryforward $ 257,000
Liabilities
Property and equipment (536,000)
Other (26,000)
---------
Net deferred tax liability $(305,000)
=========
</TABLE>
The net deferred tax amounts are presented on the balance sheet as
follows:
<TABLE>
<S> <C>
Current deferred tax asset $ 11,000
Long-term deferred tax liability (316,000)
---------
$(305,000)
=========
</TABLE>
A-13
<PAGE> 78
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE K - PROVISION FOR INCOME TAXES, continued
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>
Nine Months Year
Ended Ended
June 30, 1996 September 30, 1995
------------- ------------------
<S> <C> <C>
Taxes computed by applying federal
statutory rate $ 23,000 $ 180,000
State income taxes, net of federal benefits 15,000 -
Expenses not deductible for tax purposes 6,000 8,000
Effect of graduated tax rates and other (10,000) -
-------- ---------
Provision for income taxes $34,000 $ 188,000
======= =========
</TABLE>
For income tax purposes, the Company has available at June 30, 1996,
unused federal and state net operating loss carryforwards of
approximately $823,000 and $135,000, respectively, 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 that it is more likely
than not that the net operating loss carryforwards will be utilized in
the future and accordingly, no valuation allowance has been recorded.
NOTE L - PROVISION FOR WARRANTY CLAIMS
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. The Company's
warranty liability totaled $101,000 as of June 30, 1996, and is
included in accrued liabilities in the accompanying balance sheet.
Warranty claims, which are netted against revenue, totaled $38,000 and
$0 for the period ended June 30, 1996 and year ended September 30,
1995, respectively
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash
equivalents, accounts receivable, short-term bank 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 N - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Substantially all of the Company's accounts receivable at June 30,
1996, result 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 non-payment by
its customers.
During the period ended June 30, 1996, the Company derived
approximately 62% of its revenues from United Airlines. Receivables
due from United Airlines totaled approximately $202,000 at June 30,
1996.
A-14
<PAGE> 79
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE N - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS, continued
Revenues for the year ended September 30, 1995, included $1,627,000,
from major two major customers which represents 64% of total revenues.
NOTE O - SUBSEQUENT EVENTS (unaudited)
Acquisition Agreement
On July 10, 1996, the Company entered into an agreement to acquire
certain aircraft refueling operations from a third party for $170,000.
Under the terms of the agreement, the Company would acquire the
seller's interest in a fuel farm held under an operating lease
arrangement and acquire certain refueling contract rights and
refueling equipment. The Company originally paid $50,000 as a down
payment for the acquisition. As of March 31, 1997, the transaction had
not closed pending certain required regulatory approvals and $40,000
of the Company's down payment had been returned. If such approvals
are not granted, the Company's remaining down payment will be returned
and the agreement canceled.
New Aircraft Hangar and Contract Proposals
The Company has been pursuing efforts to obtain a contract with United
Airlines ("United") for the painting of United's Boeing 747 commercial
aircraft fleet. The Company currently provides painting services for
United's non-747 fleet. Subsequent to June 30, 1996, the Company
submitted a Request For Proposal ("RFP") to United for the painting of
its Boeing 747 fleet. In conjunction with these efforts, the Company
has pursued and obtained commitments for approximately $4,200,000 in
Louisiana state and federal grants toward the construction and
operation of a new aircraft hangar at the Company's New Iberia,
Louisiana location. Approximately $4,300,000 in additional financing
will be required to fund the hangar's $8,500,000 estimated cost. As of
June 30, 1996, the Company has capitalized approximately $24,000 in
costs (See Note J) associated with arranging financing commitments for
the project.
There presently exists no binding agreement between the Company and
United to paint United's 747 fleet. The Company is not obligated to
construct the hangar or fund its $8.5 million cost. There can be no
assurance that if the United 747 paint contract is obtained that
sufficient or suitable financing can ultimately be arranged.
Financing
In February 1997, the Company completed a private offering of $500,000
of its 10% unsecured, subordinated bridge notes. The proceeds of this
offering are being used to fund costs of the Company's initial public
offering ("IPO") and general working capital purposes. If the Company
successfully completes the IPO by September 30, 1997, the terms of
these notes require the Company to issue to the holders that number of
shares of Common Stock which 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
will be amortized to interest expense over the shorter of the period
through September 30, 1997 or the consummation date of the initial
public offering. Unamortized discount at March 31, 1997 totaled
$210,000.
On May 15, 1997, when the outstanding principal balance of the
Company's note to Sunbelt 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 in full on May 13, 1998, bearing interest at 18%
per annum. The note requires monthly payments of interest only. One of
the Company's directors, Mr. Charles Weed, and one other individual,
who is not affiliated with the Company, own participation interests of
$83,000 and $100,000, respectively, in the debt owed to Mr. Webb by
the Company. On July 9, 1997, Jerry Webb advanced an additional
$144,000 against certain receivables, for which the Company promised
to pay Mr. Webb $150,000 on or before August 1, 1997.
A-15
<PAGE> 80
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and September 30, 1995
NOTE O - SUBSEQUENT EVENTS (unaudited), continued
Stock Options
The Company's Board and shareholders approved a 1997 Employee Stock
Option Plan (the "Plan") in February 1997. The Company may grant
options under the Plan to key employees and directors of the Company.
The Board has authorized the grant of options to purchase 26,000
shares of Common Stock exercisable at the initial public offering
price and 10,000 shares of Common Stock exercisable at $4.50 per
share.
Acquisition of Casper Air Service
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 expects to consummate this transaction
concurrently with the closing of its initial public offering. CAS is a
full-service FBO located in Casper, Wyoming and has been in business
continuously since 1946. For the nine months ended January 31, 1997.
CAS had net income of $271,000 and sales of approximately $6,570,000.
The Company has agreed to pay the CAS shareholders approximately
$1,167,000 in cash and approximately $883,000 in value of Common
Stock, based on the initial public offering price.
A-16
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
To Pride Aviation, Inc.
New Iberia, Louisiana
We have audited the accompanying balance sheet of Pride Aviation, Inc. as of
September 30, 1995, and the related statements of operations, changes in
shareholders' equity (deficit) and cash flows for the year 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 Pride Aviation, Inc. as of
September 30, 1995, and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
Arsement, Redd & Morella, L.L.C.
October 7, 1996
Lafayette, Louisiana
P-1
<PAGE> 82
PRIDE AVIATION, INC.
BALANCE SHEET
September 30, 1995
ASSETS
<TABLE>
Current Assets
<S> <C>
Cash and cash equivalents $ 1,000
Accounts receivable 366,000
Inventory 126,000
Note receivable 13,000
Other current assets 39,000
-----------
Total Current Assets 545,000
-----------
Plant and Equipment, net of accumulated
depreciation of $869,000 704,000
-----------
Other Assets
Deposits and other 142,000
-----------
$ 1,391,000
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Bank overdraft $ 74,000
Note payable to shareholder 265,000
Current maturities of long-term debt 315,000
Accounts payable 796,000
Accrued expenses 331,000
-----------
Total Current Liabilities 1,781,000
-----------
Long-term Liabilities
Long-term debt, net of current maturities 685,000
-----------
Shareholders' Equity (Deficit)
Common stock, $1.00 par value 50,000 shares
authorized, 10,000 shares issued and outstanding. 10,000
Additional paid-in capital 1,480,000
Accumulated deficit (2,565,000)
-----------
(1,075,000)
-----------
$ 1,391,000
===========
</TABLE>
P-2
The accompanying notes are an integral part of these statements.
<PAGE> 83
PRIDE AVIATION, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 1995 and Five Months Ended
February 29, 1996
<TABLE>
<Caption
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
------------- -----------
(Unaudited)
<S> <C> <C>
Revenue $ 6,519,000 $ 2,874,000
Cost of Revenue 4,302,000 2,117,000
----------- -----------
Gross Profit 2,217,000 757,000
General and Administrative Expenses 1,957,000 466,000
Depreciation and Amortization 174,000 60,000
----------- -----------
Income From Operations 86,000 231,000
----------- -----------
Other Income (Expenses)
Other income -- 22,000
Interest expense (167,000) (58,000)
----------- -----------
(167,000) (36,000)
----------- -----------
Net Income (Loss) $ (81,000) $ 195,000
=========== ===========
</TABLE>
P-3
The accompanying notes are an integral part of these statements.
<PAGE> 84
PRIDE AVIATION, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended September 30, 1995 and Five Months Ended
February 29, 1996
<TABLE>
<CAPTION>
Common Paid in Accumulated
Stock Capital Deficit
----------- ----------- -----------
<S> <C> <C> <C>
Balance, September 30, 1994 $ 6,000 $ 1,480,000 $(2,484,000)
Net Loss -- -- (81,000)
Issuance of stock 4,000 -- --
----------- ----------- -----------
Balance, September 30, 1995 10,000 1,480,000 (2,565,000)
Net Income (Unaudited) -- -- 195,000
Contribution from shareholder (Unaudited) -- 95,000 --
----------- ----------- -----------
Balance, February 29, 1996 (Unaudited) $ 10,000 $ 1,575,000 $(2,370,000)
=========== =========== ===========
</TABLE>
P-4
The accompanying notes are an integral part of these statements.
<PAGE> 85
PRIDE AVIATION, INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1995 and Five Months Ended
February 29, 1996
<TABLE>
<CAPTION>
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
------------- -----------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (81,000) $ 195,000
----------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation and amortization 184,000 60,000
Interest paid with refinancing 36,000 --
(Increase) decrease in accounts receivable 61,000 (67,000)
(Increase) decrease in inventories (14,000) 8,000
(Increase) decrease in other current assets (36,000) 10,000
Increase (decrease) in accounts payable 200,000 15,000
Increase (decrease) in accrued liabilities 59,000 65,000
Increase (decrease) in interest payable (13,000) 5,000
Other -- 9,000
----------- -----------
Total Adjustments 477,000 105,000
----------- -----------
Net Cash Provided (Used) by Operating Activities 396,000 300,000
----------- -----------
Cash Flows From Investing Activities:
Cash payments for the purchase of equipment (209,000) (41,000)
Collection of notes receivable -- 13,000
----------- -----------
Net Cash Used by Investing Activities (209,000) (28,000)
----------- -----------
Cash Flows From Financing Activities:
Bank overdraft (7,000) (2,000)
Proceeds from short-term borrowings 2,047,000 --
Repayments on short-term borrowings (2,125,000) --
Proceeds from issuance of long-term debt 588,000 --
Principal payments on long-term debt (693,000) (93,000)
Advances to shareholder -- (177,000)
Proceeds from issuance of common stock 4,000 --
----------- -----------
Net Cash Provided (Used) by Financing Activities (186,000) (272,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents -- --
Cash and Cash Equivalents at Beginning of Period 1,000 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 1,000 $ --
=========== ===========
Supplemental Disclosure of Cash Paid for
Interest and Income Taxes:
Cash paid for interest $ 145,000 $ 54,000
Cash paid for income taxes -- --
Supplemental Disclosure of Non-cash
Financing and Investing Activities:
Interest paid with refinancing of long-term debt $ 36,000 $ --
</TABLE>
P-5
The accompanying notes are an integral part of these statements.
<PAGE> 86
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Pride Aviation, Inc. (an Oklahoma corporation) (the "Company"),
located in New Iberia, Louisiana, was established as a F.A.A. repair
station for specialized aircraft maintenance services including paint
stripping and painting operations on certain types of aircraft.
In February 1996, the shareholders sold the company to Aviation Group,
Inc. ("Aviation Group") for cash of $486,000, 44,250 shares of the
Aviation Group, Inc. stock and assumption of the Company's long-term
debt and other liabilities. The accompanying statements include
statements of operations, changes in shareholders' deficit and cash
flows for the five month period through the effective date of the
sale, February 29, 1996. Subsequent to February 29, 1996, the
financial position and results of operations of the Company are
included with the consolidated financial statements of Aviation Group,
Inc. The accompanying financial statements were prepared on the
historical cost basis of accounting and do not reflect any purchase
accounting adjustments arising from the sale to Aviation Group, Inc.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, 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
accounts receivable. Management believes that all accounts receivable
as of September 30, 1995 and February 29, 1996 were fully collectible;
therefore, no allowance for doubtful accounts was recorded. Bad debt
expense charged to operations was $2,000 for the year ended September
30, 1995 and $0 (unaudited) for the five months ended February 29,
1996.
The Company grants credit to customers, many of whom are in the
airline industry.
Inventory
Inventories are stated at the lower of cost, with cost determined by
the average costing method.
Machinery and Equipment
Machinery 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 3 to 40
years.
P-6
The accompanying notes are an integral part of these statements.
<PAGE> 87
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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.
Reclassifications
Certain reclassifications have been made to the prior year statements
to conform to the current year presentation.
NOTE C - PLANT AND EQUIPMENT
Plant and equipment consisted of the following at September 30, 1995:
<TABLE>
<S> <C>
Machinery and equipment $ 869,000
Leasehold improvements 465,000
Furniture, fixtures and office equipment 66,000
Vehicles 16,000
Construction in progress 157,000
-----------
1,573,000
Less: accumulated depreciation (869,000)
-----------
$ 704,000
===========
</TABLE>
NOTE D - NOTE RECEIVABLE
The Company has a note receivable owed from Industrial Helicopters,
Inc. in the original amount of $40,000. The note is non-interest
bearing and is secured by equipment.
P-7
The accompanying notes are an integral part of these statements.
<PAGE> 88
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE E - LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt consisted of the following at September 30, 1995:
Note payable to Louisiana Economic Development Corporation, payable in
60 monthly installments of $11,675, including interest at 7.28%,
secured by pledge of stock and personal guaranty of Frank Rice,
assignment of life insurance, accounts receivable, inventory and
equipment $ 533,000
Note payable to Sunbelt Business Capital, Inc., payable in monthly
installments of $13,285 including interest at 12%, secured by personal
guaranty of the shareholders, accounts receivable, inventory and
equipment 372,000
Note payable to Schwing Insurance Agency, payable in monthly
installments of $3,825 including interest at 7.5%. 72,000
Other 23,000
----------
1,000,000
Less: current maturities of long-term debt (315,000)
----------
Net long-term debt $ 685,000
==========
</TABLE>
Maturities of long-term debt for each of the next five years are as follows:
<TABLE>
<S> <C>
September 30,
1996 $302,000
1997 249,000
1998 235,000
1999 130,000
2000 66,000
</TABLE>
P-8
The accompanying notes are an integral part of these statements.
<PAGE> 89
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE F - 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 were as
follows:
<TABLE>
<CAPTION>
Year Five Months
Ended Ended
September 3 February 29,
1995 1996
----------- --------------
(Unaudited)
<S> <C> <C>
Rent expense $ 401,000 $ 205,000
=========== ===========
</TABLE>
The Company is committed to several operating leases for its hangars
and certain equipment. Minimum future lease payments of all
non-cancelable operating leases for the next five years are as
follows:
<TABLE>
<S> <C>
September 30,
1996 $ 383,000
1997 383,000
1998 384,000
1999 388,000
2000 305,000
Thereafter 5,036,000
----------
$6,879,000
==========
</TABLE>
NOTE G - 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 provisions for disposal of waste on hand was as follows and are
included in other liabilities ccompanying balance sheet.
<TABLE>
<CAPTION>
Year Five Months
Ended Ended
September 3 February 29,
1995 1996
----------- --------------
(Unaudited)
<S> <C> <C>
Provision for waste disposal $ 25,000 $ 18,000
========= =========
</TABLE>
P-9
The accompanying notes are an integral part of these statements.
<PAGE> 90
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE H - RELATED PARTY TRANSACTIONS
Frank Rice
Frank Rice was President of the Company and owned approximately 50.1%
of the Company's common stock prior to the sale to Aviation Group. The
Company had the following transaction with Frank Rice during the
periods ending September 30, 1995 and February 29, 1996.
Note Payable to Shareholder
The Company had notes payable to Frank Rice totaling $265,000 as of
September 30, 1995, payable on demand with interest at 18%. Interest
expense related to this note was $33,000 during the year ended
September 30, 1995. At September 30, 1995, the Company had $9,000 due
to Frank Rice which is included in accounts payable in the
accompanying balance sheet.
Transfer of Alexandria Assets (Unaudited)
Effective after the fiscal year ended September 30, 1995, the Company
transferred its Alexandria, Louisiana operations to Frank Rice. The
agreement provided for among other things, the assignment of all
receivables, payables, fixed assets and leases associated with the
Alexandria location to Frank Rice in exchange for Frank Rice's
forgiveness of the $265,000 note payable above and the Company's
forgiveness of certain advances made to Frank Rice on behalf of the
Alexandria operations. The excess of the amount of note payable
forgiven over the net book value of the assets transferred and the
advances forgiven totaled $95,000 and was recorded as a "Contribution
from shareholder" in the accompanying statement of changes in
shareholders' equity.
Sunbelt Business Capital
Sunbelt Business Capital was a shareholder of the Company prior to the
sale to Aviation Group. Charlie Weed, a consultant to the Company, was
also the President of Sunbelt Business Capital.
Consulting Fees
The amount of consulting fees incurred from Charlie Weed and Sunbelt
Business Capital for the year ended September 30, 1995 and the five
months ended February 29, 1996 was as follows:
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
----------- ------------
(Unaudited)
Charlie Weed $ 74,000 $ 30,000
======== ========
Sunbelt Business Capital $ 7,000 $ --
======== ========
P-10
The accompanying notes are an integral part of these statements.
<PAGE> 91
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE H - RELATED PARTY TRANSACTIONS, continued
Of the total amount of consulting fees for the year ended September
30, 1995, approximately $33,000 was included in accounts payable at
September 30, 1995.
Financing
The Company had a note payable to Sunbelt Business Capital in the
amount of $372,000 as of September 30, 1995. In addition, the Company
had a $300,000 line of credit facility with Sunbelt Business Capital
which bore interest at 18% and expired on May 1, 1995. Interest
expense related to the notes and line of credit was as follows:
<TABLE>
<CAPTION>
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
-------- --------
(unaudited)
<S> <C> <C>
Interest expense $ 77,000 $ 18,000
======== ========
</TABLE>
NOTE I - INCOME TAXES
No provision or benefit for income taxes is recognized in the
financial statements for the year ended September 30, 1995 and the
five months ended February 29, 1996, due to the existence of net
operating losses and unrecognized net operating loss carryforwards.
Deferred tax assets consisted of the following at September 30, 1995:
Net operating losses $ 953,000
Valuation allowance on deferred tax asset (953,000)
------------
Net deferred tax asset $ --
============
For income tax purposes, the Company had available at September 30,
1995, unused operating loss carryforwards of $2,500,000, which were
available to be applied against future taxable income expiring in
various years from 2005 to 2009.
P-11
The accompanying notes are an integral part of these statements.
<PAGE> 92
PRIDE AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 and February 29, 1996 (unaudited)
NOTE J - PROVISION FOR WARRANTY CLAIMS
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. The Company's
warranty liability totaled $74,000 as of September 30, 1995, and is
included in other liabilities in the accompanying balance sheet. The
provision for warranty claims, which is netted against revenue, was as
follows:
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
----------- ------------
Provision for warranty claims $ 68,000 $ 43,000
======== ========
NOTE K - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Substantially all of the Company's accounts receivable at September
30, 1995, result 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. In addition, the Company
generally does not require collateral or other security to support
customer receivables.
The following summarizes the customers which accounted for greater
than 10% of the Company's revenues during the year ended September 30,
1995 and the five months ended February 29, 1996:
Year Five Months
Ended Ended
September 30, February 29,
1995 1996
------------- ------------
(Unaudited)
United Airlines 76% 96%
=== ===
P-12
The accompanying notes are an integral part of these statements.
<PAGE> 93
[MCGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Casper Air Service
Casper, Wyoming
We have audited the accompanying consolidated balance sheets of Casper Air
Service and Subsidiary as of April 30, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended April 30, 1996. These consolidated financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Casper Air Service and Subsidiary, as of April 30, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended April 30, 1996 in conformity with generally accepted accounting
principles.
/s/ MCGLADREY & PULLEN, LLP
Casper, Wyoming
January 24, 1997
C-1
<PAGE> 94
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1996
AND JANUARY 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
April 30, January 31,
ASSETS (Note 6) 1996 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 229,000 $ 78,000
Restricted cash 100,000 100,000
Investment in available-for-sale securities (Note 2) 107,000 110,000
Trade receivables 468,000 614,000
Inventories (Note 3) 2,180,000 1,311,000
Deposits and other assets 31,000 10,000
----------- -----------
TOTAL CURRENT ASSETS 3,115,000 2,223,000
Property and Equipment, net (Note 4) 1,522,000 1,386,000
Notes Receivable Employees 13,000 11,000
----------- -----------
$ 4,650,000 $ 3,620,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable (Note 5) $ 443,000 $ 628,000
Floor plans payable (Note 5) 1,315,000 138,000
Current maturities of long-term debt (Note 5) 366,000 329,000
Trade accounts payable 570,000 559,000
Accrued liabilities 66,000 44,000
Fuel, services and other deposits 98,000 107,000
----------- -----------
Total current liabilities 2,858,000 1,805,000
----------- -----------
Long-Term Debt, less current maturities (Note 5) 1,234,000 983,000
----------- -----------
Commitments and Contingencies (Notes 7 and 8)
Stockholders' Equity
Common stock, no par value, 10,000,000 shares
authorized, 187,146 shares issued 19,000 19,000
Additional contributed capital 2,697,000 2,697,000
Accumulated deficit (667,000) (396,000)
Unrealized gain (loss) on 'investment securities (Note 2) (2,000) 1,000
----------- -----------
2,047,000 2,321,000
Less: Treasury stock, 22,625 shares (569,000) (569,000)
Unearned ESOP shares (Note 7) (920,000) (920,000)
----------- -----------
558,000 832,000
----------- -----------
$ 4,650,000 3,620,000
=========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
C-2
<PAGE> 95
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1996 AND 1995
AND THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
(Unaudited)
April 30, January 31,
-------------------------- --------------------------
1996 1995 1997 1996
- ------------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C>
Net Sales $ 6,915,000 $6,278,000 $ 6,570,000 $ 5,260,000
Cost of Sales 6,210,000 5,659,000 5,629,000 4,628,000
----------- ---------- ----------- -----------
GROSS PROFIT 705,000 619,000 941,000 632,000
Operating Expenses 728,000 901,000 580,000 632,000
----------- ---------- ----------- -----------
OPERATING INCOME
(LOSS) (23,000) (282,000) 361,000 --
----------- ---------- ----------- -----------
Other Income (Expense)
Interest income 31,000 38,000 19,000 23,000
Interest expense (213,000) (228,000) (169,000) (183,000)
Gain from sale of assets 4,000 426,000 53,000 4,000
Other income (expense) (25,000) 4,000 7,000 2,000
----------- ---------- ----------- -----------
(203,000) 240,000 (90,000) (154,000)
----------- ---------- ----------- -----------
NET INCOME (LOSS)
(NOTE 7) $ (226,000) $ (42,000) $ 271,000 $ (154,000)
=========== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
C-3
<PAGE> 96
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended April 30, 1996
and 1995 and the Nine Months Ended January 31, 1997
<TABLE>
<CAPTION>
Additional
Common Contributed Accumulated
Stock Capital Deficit
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, April 30, 1994 $ 19,000 $ 2,913,000 $ (399,000)
Redemption of ESOP shares - treasury stock -- (99,000) --
Purchase of treasury stock - ESOP shares -- -- --
Net (loss) -- -- (42,000)
----------- ----------- -----------
Balance, April 30, 1995 19,000 2,814,000 (441,000)
Redemption of ESOP shares - treasury stock -- (117,000)
Change in unrealized (loss) on available-for-sale
investments -- -- --
Net (loss) -- -- (226,000)
----------- ----------- -----------
Balance, April 30, 1996 19,000 2,697,000 (667,000)
Change in unrealized gain on available-for-sale
investments (unaudited) -- -- --
Net income (unaudited) -- -- 271,000
----------- ----------- -----------
Balance, January 31, 1997 (unaudited) $ 19,000 $ 2,697,000 $ (396,000)
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
C-4
<PAGE> 97
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Investment Treasury Unearned
Securities Stock ESOP Shares Total
- --------------------------------------------------------
<C> <C> <C> <C>
$ -- $ (272,000) $(1,422,000) $ 839,000
-- (142,000) 241,000 --
-- (11,000) -- (11,000)
-- -- -- (42,000)
- ----------- ----------- ----------- -----------
-- (425,000) (1,181,000)
-- (144,000) 261,000 --
(2,000) -- -- (2,000)
-- -- -- (226,000)
- ----------- ----------- ----------- -----------
(2,000) (569,000) (920,000)
3,000 -- -- 3,000
-- -- -- 271,000
- ----------- ----------- ----------- -----------
$ 1,000 $ (569,000) $ (920,000) $ 832,000
=========== =========== =========== ===========
</TABLE>
C-5
<PAGE> 98
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1995
AND THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
(Unaudited)
April 30, January 31,
-------------------------- -------------------------
1996 1995 1997 1996
- ----------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (226,000) $ (42,000) $ 271,000 $ (154,000)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 248,000 349,000 159,000 191,000
(Gain) on sale of assets (4,000) (426,000) (53,000) (4,000)
Loss on worthless debenture 15,000 15,000 -- 15,000
Increase (decrease) in cash as a result of
changes in operating assets and
liabilities:
Trade receivables 173,000 134,000 (146,000) 101,000
Inventories (1,243,000) 152,000 869,000 (350,000)
Deposits and other assets (24,000) 21,000 21,000 (60,000)
Accounts payable (111,000) (99,000) (11,000) (151,000)
Accrued liabilities 33,000 (47,000) (22,000) 4,000
Prepaid fuel, services and other
deposits (51,000) 141,000 9,000 (41,000)
----------- ---------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,190,000) 198,000 1,097,000 (449,000)
----------- ---------- ---------- -----------
Cash Flows from Investing Activities
Proceeds from sale of investments -- 21,000 -- --
Proceeds from sale of equipment 28,000 1,241,000 94,000 28,000
Purchase of property and equipment (239,000) (691,000) (64,000) (168,000)
Receipt of cash restricted for letters of
credit 150,000 3,000 -- 150,000
Investment in certificate of deposit (100,000) -- -- (100,000)
Investment in marketable securities (27,000) (56,000) -- (16,000)
Payments received on notes receivable 17,000 20,000 2,000 --
Advances on notes receivable -- -- -- (68,000)
----------- ---------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (171,000) 538,000 32,000 (174,000)
----------- ---------- ---------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in outstanding
checks in excess of bank balance (177,000) -- -- (177,000)
Proceeds from (payments on) flooring
arrangements 1,315,000 -- (1,177,000) 278,000
Net change in short-term borrowing 267,000 (284,000) 185,000 300,000
Proceeds from issuance of long-term debt 213,000 290,000 -- 213,000
Principal reduction on long-term debt (312,000) (459,000) (288,000) (196,000)
Purchase of treasury stock -- (11,000) -- --
----------- ---------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,306,000 (464,000) (1,280,000) 418,000
----------- ---------- ---------- -----------
</TABLE>
Continued
C-6
<PAGE> 99
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 1996 AND 1995 AND THE NINE MONTHS ENDED
JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
April 30, January 31,
-------------------------- -------------------------
1996 1995 1997 1996
- ----------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (55,000) $ 272,000 $ (151,000) $ (205,000)
Cash and cash equivalents:
Beginning of year 284,000 12,000 229,000 284,000
----------- ---------- ---------- -----------
End of year $ 229,000 $ 284,000 $ 78,000 $ 79,000
=========== ========== ========== ===========
Supplemental Disclosure of Cash Flow
Information
Cash paid for interest expense $ 219,000 $ 223,000 $ 182,000 $ 183,000
Supplemental Disclosure of Noncash
Financing Activities
Shares purchased from ESOP in lieu
of treasury shares 261,000 241,000 -- --
</TABLE>
See Notes to Consolidated Financial Statements.
C-7
<PAGE> 100
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Casper Air Service, the Company, operates a full-service, fixed-base operation
featuring aircraft sales, charter flights, aircraft maintenance, propeller
overhaul, an accessory overhaul shop, parts distribution, line service and
college-level aviation education at the Natrona County International Airport in
Casper, Wyoming. The Company grants credit to customers through the normal
course of business. Casper Air Service's wholly-owned subsidiary, Casper Flying
Service, rents a charter aircraft to Casper Air Service.
Casper Air Service acquired Casper Flying Service subsequent to April 30, 1996.
Casper Flying Service was owned by the majority stockholder of Casper Air
Service. These financial statements have been reinstated to reflect Casper
Flying Service as if it had been acquired April 3, 1994 in a manner similar to
a pooling of interest.
A summary of significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its subsidiary. All material
intercompany balances and transactions have been eliminated in consolidation.
Interim period financial statements: The unaudited financial statements as of
January 31, 1997 and for the nine months ended January 31, 1997 and 1996,
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly state the financial position
and results of operations for the respective periods. Operating results for the
interim periods are not necessarily indicative of the results for full years.
The interim financial statements are not intended to be a complete presentation
in accordance with generally accepted accounting principles.
Cash and cash equivalents: For purposes of the statement of cash flows, the
Companies consider all unrestricted highly-liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Investment in available-for-sale securities: Casper Air Service has
investments in marketable equity securities. Marketable equity securities
consist primarily of common stocks that are traded or listed on national
exchanges.
Financial Accounting Standards Board Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that management determine
the appropriate classification of securities at the date individual investment
securities are acquired, and that the appropriateness of such classification be
reassessed at each balance sheet date. Since the Company neither buys
investment securities in anticipation of short-term fluctuations in market
prices nor can commit to holding debt securities to their maturities, the
investment in marketable equity securities have been classified as
available-for-sale in accordance with Statement No. 115. Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses,
net of the related deferred tax effect, are reported as a separate component of
stockholders' equity. Gains and losses are determined by the specific
identification method.
C-8
<PAGE> 101
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
Inventories: Aircraft inventory held for resale is valued at the lower of cost
(specific-identification method) or market, the parts inventory is valued at
cost (weighted-average method) which is not in excess of market.
Property and equipment: Depreciation is provided for in amounts sufficient to
relate the cost of the depreciable assets to operations over their estimated
service lives on the straight line basis. Depreciation is computed over the
following lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 7-40
Flight charter equipment 5-10
Other equipment 3-10
</TABLE>
Maintenance and repairs of property and equipment are charged to operations and
major improvements prolonging the life of the assets are capitalized.
Income taxes: Casper Air Service provides for deferred taxes on a liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Prior to its acquisition, Casper Flying Service, with the consent of its
shareholder, elected to be taxed under sections of federal income tax law,
which provide that, in lieu of corporate income taxes, the stockholder
separately accounts for its items of income, deductions, losses and credits. As
a result of this election, no income taxes have been recognized in the
accompanying financial statements for Casper Flying Service prior to
acquisition. It is the intent of the Company to file a consolidated tax return
and income taxes are recognized after the acquisition date on a consolidated
basis.
Employee stock ownership plan: Casper Air Service accounts for compensation
expenses for ESOP contributions by a method which determines the expense to be
at least 80% of the amount that would be expensed under the shares allocated
method. Casper Air Service has elected not to implement the provision of
Statement of Position 93-6, Employers Accounting for Employee Stock Ownership
Plans, for stock sold to the ESOP prior to December 31, 1992. However, any
future stock purchases by the ESOP will be subject to the expense recognition
requirements of SOP 93-6.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
C-9
<PAGE> 102
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
Fair value of financial instruments: Financial Accounting Standards Board
("FASB") Statement No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Statement No. 107 excludes certain
financial instruments and all nonfinancial assets and liabilities from its
disclosure requirements. The following methods and assumptions were used to
estimate the fair value of financial instruments:
Cash, cash equivalents and restricted cash: The carrying amount
approximates fair value because of the short maturity of those
instruments.
Investment in available-for-sale securities: Investments are carried
at fair value.
Notes payable and floor plans payable: The carrying amount
approximates fair value because the debt terms are negotiated
annually.
Long-term debt: The fair values of the Companies' long-term debt are
estimated using discounted cash flow analyses, based on the Companies'
current incremental borrowing rates for similar types of borrowing
arrangements. The fair value approximates carrying value.
NOTE 2. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities at April 30, 1996 are carried at market value.
The related cost and unrealized (loss) on these securities at April 30, 1996
were $109,000 and ($2,000), respectively. Marketable securities were sold
during the year ended April 30, 1996 for $25,000 with no realized gain or loss.
The unrealized loss on investment securities increased by $2,000 during the
year ended April 30, 1996.
NOTE 3. INVENTORIES
The composition of the inventories is as follows:
<TABLE>
<CAPTION>
(Unaudited)
April 30, January 31,
1996 1997
------------ -----------
<S> <C> <C>
Aircraft held for sale $ 1,392,000 $ 485,000
Parts 783,000 817,000
Other 5,000 9,000
------------ -----------
$ 2,180,000 $ 1,311,000
============ ===========
</TABLE>
C-10
<PAGE> 103
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
Casper Air Service carries small quantities of a large number of parts for
older model planes still in service. A substantial portion of these parts are
sold to charter services and aircraft maintenance operations throughout the
United States and overseas. Management removes parts from inventory which are
dated or determined to be obsolete by the Federal Aviation Administration and
believe that the remaining parts are salable. However, in accordance with
industry practice, these inventories are included in current assets even
though a substantial portion will not be sold within one year in the normal
course of business.
In July 1996, Casper Air Service sold two of the three aircraft held for sale
as of April 30, 1996 for $1,427,000. The cost of these aircraft at April 30,
1996 was $1,315,000.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following as of April 30, 1996:
<TABLE>
<S> <C>
Buildings and improvements $ 1,641,000
Flight charter equipment 2,050,000
Other equipment 883,000
-----------
4,574,000
Accumulated depreciation (3,052,000)
-----------
$ 1,522,000
===========
</TABLE>
C-11
<PAGE> 104
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE, FLOORING ARRANGEMENTS, LONG-TERM DEBT AND ASSETS
PLEDGED THEREON
The Companies' notes payable, financing arrangements and long-term debt and
assets pledged thereon as of April 30, 1996 are as follows:
<TABLE>
<S> <C>
Notes payable:
$400,000 line of credit with a bank, interest at 1.5% over bank's prime
rate (10.55% as of April 30, 1996), interest payable monthly,
collateralized by receivables and inventories, due October 1996,
subsequently renewed through November 1997 $ 370,000
$150,060 line of credit with a bank, interest at 1.5% over bank's prime
rate (10.5% as of April 30, 1996), interest payable quarterly,
collateralized by an airplane, due June 1996, subsequently renewed
through May 1997 73,000
----------
$ 443,000
==========
Flooring arrangements:
Flooring arrangement with Cessna, interest at 10.25%, paid in full on
sale of aircraft, July 1996 $1,210,000
Flooring arrangement with Cessna, interest at 10.5%, paid in full on sale
of aircraft, July 1996 105,000
----------
$1,315,000
==========
Long-term debt:
Note payable to Small Business Administration, payable in monthly payments
of $9,876, including interest at 10% due February 2003, collateralized
by building improvements, equipment and guarantees of the ESOP and
majority shareholder $ 588,000
Notes payable to aircraft finance corporations, payable in monthly payments
aggregating $12,186, plus interest at 2% over banks' prime rates (10.25%
to 11% as of April 30, 1996), due through April 2001, collateralized
by flight charter aircraft 547,000
Notes payable to bank, payable in monthly payments aggregating $2,737,
including interest rates ranging from 7.85% to 9.75%, due through
December 2000, collateralized by flight charter aircraft and certificate
of deposit 205,000
Note payable to an individual, payable in monthly payments of $5,840,
including interest at 8%, due March 1998, collateralized by an aircraft
and personal guarantee of the majority shareholder 124,000
Notes payable due in monthly payments aggregating $1,446 and an annual
payment of $6,802, including interest ranging from 10% to 21.45%, due
through January 2000, collateralized by equipment 74,000
Note payable to a former stockholder and relative of the majority
stockholder, payable in monthly payments of $3,000, including effective
interest at 31%, due April 2001, collateralized by the assets of
Casper Air Service 62,000
----------
1,600,000
Less current maturities (366,000)
----------
$1,234,000
==========
</TABLE>
C-12
<PAGE> 105
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
Aggregate future maturities of long-term debt as of April 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ended April 30,
- --------------------
<S> <C>
1997 $ 366,000
1998 290,000
1999 237,000
2000 300,000
2001 199,000
Thereafter 208,000
----------
$1,600,000
==========
</TABLE>
NOTE 6. INCOME TAXES
Net deferred tax assets consist of the following components as of April 30,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards $ 183,000
Investment tax credits carryforward 81,000
Other components 32,000
----------
296,000
Less valuation allowance 296,000
----------
$ --
==========
</TABLE>
As of April 30, 1996, Casper Air Service has recorded a valuation allowance of
$296,000 on the deferred tax assets to reduce the total to an amount that is
estimated to be ultimately realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period that
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income.
No income tax benefit was included in operations for the years ended April 30,
1996 and 1995. This differs from the amounts obtained by applying the U.S.
federal income tax rate to pre-tax loss due to the following:
<TABLE>
<CAPTION>
(Unaudited)
January 31,
1996 1995 1997
<S> <C> <C> <C>
Computed "expected" tax benefit $ 77,000 $ 13,000 $ 92,000
Increase (decrease) resulting from:
Subsidiary election to be taxed at the
stockholder level (13,000) (10,000) --
Nondeductible expenses (5,000) -- --
Increase in valuation allowance (59,000) (3,000) --
Reduction of valuation allowance -- -- (92,000)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
C-13
<PAGE> 106
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
At April 30, 1996, Casper Air Service had available net operating loss
carryforwards of $729,000, which includes the effect of the accumulated ESOP
contribution expense of $1,326,000 since the ESOP was adopted in 1989. The net
operating loss carryforward is available to offset future taxable income.
Casper Air Service also has investment tax credits of $81,000 available to
offset future federal income tax. The Internal Revenue Code, Section 382,
limits the utilization of net operating loss carryforwards when certain
ownership changes occur, measured over a three-year period. The net operating
loss carryforward and investment tax credits expire as follows:
<TABLE>
<CAPTION>
Net Operating Investment
Year of Expiration Loss Tax Credit
- ------------------ ------------- ----------
<S> <C> <C>
1997 $ -- $ 6,000
1998 -- 46,000
1999 -- 29,000
2007 48,000 --
2009 580,000 --
2110 7,000 --
2111 94,000 --
--------- ---------
$ 729,000 $ 81,000
========= =========
</TABLE>
NOTE 7. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan and Trust: Casper Air Service sponsors an
Employee Stock Ownership Plan and Trust ("ESOP") which covers substantially all
employees who are not included in a collective bargaining agreement. The ESOP
is designed to enable employees who meet minimum age and length of service
requirements to acquire stock ownership in the Company. The ESOP is
noncontributory and vesting occurs at a rate of 20% per year of accumulated
service, commencing with the third year of service.
The ESOP borrowed $2,500,000 from the Company to purchase 81,887 shares of
common stock in 1989. The loan obligation of the ESOP is considered unearned
employee benefit expense and, as such, is recorded as a reduction of the
Company's stockholders' equity. The ESOP shares which have not been allocated
are pledged as collateral for this debt. As the debt is repaid, shares are
released from collateral based on the proportion of debt service paid in the
year and allocated to active employees. Because no shares were allocated for
1996 or 1995, the expense was limited to the interest expense of $98,000 and
$118,000 for the years ended April 30, 1996 and 1995, respectively, which was
offset against the interest income from the note receivable.
If a terminated participant desires to sell his or her shares of the Company's
stock, or for certain employees who elect to diversify their account balances,
the Company may be required to purchase the shares from the participant at
their fair market value. However, as long as the existing ESOP debt is unpaid,
employees that terminate for reasons other than death or disability may not
receive share distributions from the plan and the Company has no obligation to
repurchase shares allocated to the terminating participant. The debt of the
ESOP is scheduled to be retired in 1999.
C-14
<PAGE> 107
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
During the year ended April 30, 1995, the fair market value of the stock
purchased by the Company from ESOP participants totaled $11,000. Those shares
are included in treasury stock in the accompanying balance sheet. No stock was
purchased from participants during the year ended April 30, 1996. The Company
also guaranteed a minimum return on investment to ten participants who rolled
401(k) balances into the ESOP. The guarantee exceeds the estimated fair
market value of the shares by approximately $37,500. This amount has been
recognized as a liability in the accompanying financial statements. At
April 30, 1996, 34,741 shares of the Company's stock, with an aggregate fair
market value of approximately $584,000 have been allocated to ESOP participants
based on independent appraisal as of April 30, 1996.
The principal portion of the April 30, 1996 and 1995 ESOP debt payments were
transacted through acquisition of 8,545 and 7,890 ESOP shares for an aggregate
amount of $261,000 and $241,000, respectively.
ESOP shares as of April 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Allocated shares 35,000 35,000
Unallocated shares 30,000 47,000
------ ------
65,000 82,000
====== ======
</TABLE>
Employee Benefit Risk Management Program: Casper Air Service provides employee
health care benefits through a risk management program. The Company is insured
under a stop-loss policy for individual claims exceeding $5,000 per year.
Expenses incurred for claims during the years ended April 30, 1996 were
$24,000. Premiums paid for stop-loss insurance were $37,000.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Lease Arrangements: The Companies conduct a portion of their
operations in facilities and on real estate under various operating leases.
These operating leases currently require minimum annual rentals, plus
additional rentals based on five cents per gallon flowage fee for every gallon
of fuel pumped. The leases expire at various dates through August 2006. In
addition to these leases, there is an operating agreement with Natrona County
International Airport which is paid on a month-to-month basis. The following is
a schedule, by years, of minimum annual rentals under the operating leases and
agreement:
<TABLE>
<CAPTION>
Year ended April 30,
- --------------------
<S> <C>
1997 $ 35,000
1998 35,000
1999 35,000
2000 35,000
2001 35,000
Thereafter 24,000
---------
TOTAL MINIMUM ANNUAL RENTALS REQUIRED $ 199,000
=========
</TABLE>
C-15
<PAGE> 108
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO JANUARY 31, 1997 AND 1996 IS UNAUDITED
- -------------------------------------------------------------------------------
The leases provide for the payment of certain taxes and other expenses by the
Companies. Rent expense for operating leases for the years ending April 30,
1996 and 1995 were $48,000 and $67,000, respectively, and $26,000 and $50,000
for the nine month periods end January 31, 1996 and 1997, respectively.
C-16
<PAGE> 109
[INSIDE BACK COVER]
AVIATION GROUP, INC.
GROUND HANDLING SERVICES
[Color picture of Company employee
vacuuming aisle inside aircraft] Interior cleaning services
are currently performed in
six airports nationwide.
[Color picture of Company employee
preparing to empty aircraft laboratory
from outside aircraft into a waste
disposal trailer]
Lavatory, light catering and other
ground services are provided.
[Color picture of Company Exterior aircraft cleaning
employees in protective clothing and polishing in
spray cleaning underbelly of jet accordance with all EPA
aircraft fuselage] requirements.
FBO SERVICES
[Color picture of main The Company's Casper Air Service FBO
hangar and offices of operating facility in Casper, Wyoming.
Casper Air Service with
plane parked in front of
hangar]
Propeller overhaul, engine [Color picture looking downward into
maintenance and other FAA- propeller repair shop at Casper Air
certified services are also Service]
provided by the Company's
FBO & Airport Management
Division.
<PAGE> 110
===============================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THOSE TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS
DATE.
________
TABLE OF CONTENTS
________
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . 13
Acquisition of Casper Air Service . . . . . . . 14
Dilution . . . . . . . . . . . . . . . . . . . 16
Dividend Policy . . . . . . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . . . 17
Management's Discussion and Analysis of
Financial Condition and
Results of Operations. . . . . . . . . . . . . 18
Unaudited Pro Forma Combined Financial
Information . . . . . . . . . . . . . . . . . 23
Business . . . . . . . . . . . . . . . . . . . 30
Management . . . . . . . . . . . . . . . . . . 39
Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . 43
Principal Shareholders . . . . . . . . . . . . 46
Description of Securities . . . . . . . . . . . 47
Underwriting . . . . . . . . . . . . . . . . . 52
Legal Opinions . . . . . . . . . . . . . . . . 54
Experts . . . . . . . . . . . . . . . . . . . . 54
Additional Information . . . . . . . . . . . . 55
</TABLE>
Until __________________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments.
===============================================================================
===============================================================================
AVIATION GROUP, INC.
1,000,000 SHARES OF
COMMON STOCK
AND
1,000,000 WARRANTS
_________
P R O S P E C T U S
_________
DUKE & CO. INC.
____________________, 1997
===============================================================================
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception, the Company has sold the following unregistered
securities:
On December 20, 1995, the Registrant was capitalized through the
issuance of 1,000,000 shares of Common Stock to The Sanders Companies, Inc. in
exchange for the transfer to the Registrant of all of the outstanding capital
stock of TriStar Airline Services, Inc. and TriStar Aircraft Services, Inc. in
a private transaction. The issuance of the stock was made by the Company in
reliance on the exemption from registration under the Securities Act provided
by Section 4(2) thereof. The Sanders Companies, Inc. was owned and controlled
by Lee Sanders, the Chief Executive Officer of the Registrant and its sole
director at that time.
In a private offering completed in June 1996 and exempt under
Regulation D, the Registrant sold 500,000 shares of Common Stock, at $3.00 per
share, to a total of 24 accredited investors and 13 sophisticated, non-
accredited investors. The total offering price was $1,500,000. The placement
agent RAS Securities Corp. received sales commissions of $195,000. As a result
of the successful completion of the Regulation D private offering, the
Registrant also issued to the placement agent and certain of its employees
warrants, expiring February 28, 1999, to purchase an aggregate of 200,000
shares of Common Stock at $1.00 per share. The shares sold by the Registrant
in the private offering were sold in reliance on the exemption from
registration under the Securities Act provided by Rules 505 and 506 thereunder.
The warrants issued to the placement agent and its employees were sold in
reliance on the exemption from registration under the Securities Act provided
by Section 4(2) thereof. As a registered broker/dealer or its sales agents,
the placement agent and its employees who received warrants were sophisticated
investors.
In June 1996, the Registrant and Richard Morgan, then a Consultant to
the Company, entered into a warrant agreement pursuant to which Mr. Morgan may
purchase up to 80,000 shares of Common Stock at $2.50 per share. This agreement
expires on February 28, 1999 and was issued in consideration for services
provided to the Registrant. The Warrant Agreement entered into with Mr. Morgan
was entered into by the Registrant in reliance on the exemption from
registration under the Securities Act provided by Section 4(2) thereof. Mr.
Morgan is a sophisticated investor as a result of his experience in investment
banking.
On March 1, 1996, the Registrant completed the purchase of Pride
Aviation, Inc. in a private transaction. In connection with the acquisition,
the Registrant issued (i) a total of 100,250 shares of Common Stock, and (ii)
10% Convertible Notes having an aggregate original principal balance of
$857,250. These securities were issued in various amounts to two holders of
59% of the outstanding stock of Pride and to the 11 holders of the outstanding
stock of Sunbelt Business Capital, Inc. which owned 40% of the outstanding
Pride stock. The shares of Common Stock and Convertible Notes were issued by
the Registrant in reliance upon the exemption from registration under the
Securities Act provided by Section 4(2) thereof. The recipients were each
"accredited investors," with the exception of one corporation for which the
investment decision was made by a sophisticated officer, and were represented
by legal counsel as part of an arm's-length, negotiated acquistion. All
recipients received adequate written disclosures regarding the Registrant.
In February 1997, the Registrant 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
II-1
<PAGE> 112
Securities Corporation, received total sales commissions of $50,000. If the
Registrant successfully completes an initial public offering of its Common
Stock by September 30, 1997, the terms of the Bridge Notes require the
Registrant to repay in full the Bridge Notes within five days after the funding
of the initial public offering 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. The Bridge Notes were sold by the Registrant in reliance upon the
exemption from registration under the Securities Act provided by Rules 505 and
506 of Regulation D promulgated under the Securities Act.
Effective April 18, 1997, the Registrant entered into an agreement to
acquire all of the outstanding stock of Casper Air Service, a Wyoming
corporation ("CAS"). The Registrant expects to consummate this transaction
concurrently with the closing of this offering. The Registrant has agreed to
pay or issue to CAS's four shareholders approximately $1,167,000 in cash and
approximately $883,000 in value of Common Stock, based on the initial public
offering price. The sale by the Registrant of its shares of Common Stock to the
two shareholders of CAS receiving shares of the Registrant's Common Stock 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 Registrant and were
represented by legal counsel as part of an arm's-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.
Each transaction described above was exempt from registration under
the Securities Act pursuant to Section 4(2) of the Act, or Regulation D of the
Commission promulgated thereunder, as transactions not involving a public
offering. Management of the Registrant believes that all of the recipients of
the Registrant's securities had adequate access, through employment with, other
relationships to or disclosures by the Registrant, to information concerning
the Registrant. The Registrant placed appropriate legends on the certificates
representing the securities issued in such transactions. No public
solicitation or general advertising was employed by the Registrant in
connection with any of the foregoing sales.
ITEM 27. EXHBITS
The following documents are included as exhibits to this Registration
Statement and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement between Registrant and
Duke & Co., Inc.
3.1 Articles of Incorporation of the Registrant filed with the
Texas Secretary of State, as amended*
3.2 Amended and Restated Bylaws of the Registrant*
4.1 Articles of Incorporation of the Registrant (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 Registrant maturing March 1,
2001*
4.6 Warrant Agreement dated as of June 30, 1996 between Registrant
and Richard L. Morgan, together with Warrant Certificate*
4.7 Warrant Agreement dated March 1, 1996 between Registrant and RAS
Securities Corp., together with form of warrant certificate*
4.8 Form of 10% Bridge Note of the Registrant*
4.9 Form of Representative's Warrant Agreement, by and between
Registrant and Duke & Co., Inc.
5.1 Opinion of Bracewell & Patterson, L.L.P. regarding the
legality of the Common Stock and Warrants being registered*
10.1 Aviation Group, Inc. 1997 Stock Option Plan*
10.2 First Amended and Restated Employment Agreement between Registrant
and Lee Sanders*
10.3 Employment Agreement dated March 1, 1996, by and between the
Registrant and Paul Lubomirski*
10.4 Consulting Agreement dated March 1, 1996, by and between
the Registrant and Charles E. Weed*
10.5 Employment Agreement dated February 1, 1997, between the
Registrant and Tony Ramsaroop*
</TABLE>
- --------------------
* Previously filed.
II-2
<PAGE> 113
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<S> <C> <C>
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 Registrant in favor
of LEDC*
10.14 Exchange Agreement dated March 1, 1996 between the Registrant and
LEDC*
10.15 Form of 10% Convertible Note (included as Exhibit 4.5)*
10.16 Form of Pledge Agreement from the Registrant in favor of holders
of 10% Convertible Notes*
10.17 Stock Purchase Agreement dated February 21, 1996, by and among
the Registrant, 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 Registrant and John Arcari*
10.19 Stock Purchase Agreement dated April 18, 1997 by and among the
Registrant, 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)*
10.20 First Amendment to Consulting Agreement between Registrant and
Charles Weed*
10.21 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*
10.22 Agency Agreement dated January 19, 1996 between Registrant and
RAS Securities Corp.*
10.23 Letter agreement dated May 9, 1997 between Registrant and RAS
Securities Corp. terminating part of Agency Agreement*
21.1 List of Subsidiaries of the Registrant*
23.1 Consent of Bracewell & Patterson, L.L.P. (included in their
opinion filed as Exhibit 5)*
23.2 Consent of Arsement, Redd & Morella, L.L.C., independent
certified public accountants
23.3 Consent of James Smith & Company, a Professional
Corporation, as independent certified public accountants
23.4 Consent of McGladrey & Pullen, LLP
24.1 Power of Attorney (included on signature page of Registration
Statement)*
27.1 Financial Data Schedule*
99.1 Forms of Lock-Up Agreements, executed by certain of the
Registrant's securityholders
</TABLE>
- --------------------
* Previously filed.
II-3
<PAGE> 114
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Amendment No. 4 to Registration Statement to be signed on its behalf by the
undersigned, in the City of Dallas, State of Texas, on the 21st day of July,
1997.
AVIATION GROUP, INC.
By: /s/ Lee Sanders
------------------------------------------------------
Lee Sanders, President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this Amendment No. 4 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Lee Sanders President, Chief Executive July 21, 1997
- ---------------------------- Officer and Director
Lee Sanders
/s/ Richard L. Morgan Director July 21, 1997
- ----------------------------
Richard L. Morgan
/s/ Gary Cooper Vice President, Treasurer,
- ---------------------------- Chief Accounting Officer July 21, 1997
Gary Cooper and Chief Financial Officer
Charles Weed* Director
Gordon Whitener* Director
*By: /s/ Lee Sanders July 21, 1997
------------------------
Lee Sanders,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 115
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
1.1 Form of Underwriting Agreement between Registrant and Duke
& Co., Inc.
4.3 Form of Warrant Agreement
4.9 Form of Representative's Warrant Agreement by and between
Registrant and Duke & Co., Inc.
23.2 Consent of Arsement, Redd & Morella, L.L.C., independent
certified public accountants
23.3 Consent of James Smith & Company, a Professional
Corporation, as independent certified public accountants
23.4 Consent of McGladrey & Pullen, LLP
99.1 Forms of Lock-Up Agreements, executed by certain of the
Registrant's securityholders
</TABLE>
II-5
<PAGE> 1
EXHIBIT 1.1
AVIATION GROUP, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
New York, New York
_________, 1997
Duke & Co., Inc.
909 Third Avenue
New York, New York 10022
Gentlemen:
Aviation Group, Inc. (the "Company"), on the basis of the
representations, warranties, covenants and conditions contained herein, hereby
proposes to issue and sell to such Underwriters as named in Schedule A (the
"Underwriters") to this Underwriting Agreement (the "Agreement"), for whom Duke
& Co., Inc. is acting as the representative (the "Representative"), pursuant to
the terms of this Agreement, on a "firm commitment" basis, 1,000,000 shares of
Common Stock (the "Shares") at $____ per Share (the "Initial Public Offering
Price") and 1,000,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") at $____ per Warrant. The Shares and the Warrants are collectively
referred to as the "Securities". Each Warrant is exercisable to purchase one
(1) share of Common Stock (the "Common Stock") at 120% of the Initial Public
Offering Price per share at any time during the period commencing on the second
anniversary of the Effective Date and terminating five (5) years after the
Effective Date. The date upon which the Securities and Exchange Commission
("Commission") shall declare the registration statement of the Company
effective shall be the "Effective Date". The Warrants are subject to
redemption under certain circumstances. In addition, the Company proposes to
grant to the Underwriters (or, at the option of the Representative, to the
Representative, individually) the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 150,000 additional Shares and
150,000 additional Warrants (the "Option Securities"), provided, however, that
the Underwriters or the Representative, as the case may be, shall purchase
equal amounts of Shares and Warrants.
You have advised the Company that you and the other Underwriters desire
to purchase, severally, the Securities, and that you have been authorized by
the Underwriters to execute this Agreement on their behalf. The Company
confirms the agreements made by it with respect to the purchase of the
Securities by the several Underwriters on whose behalf you are signing this
Agreement, as follows:
<PAGE> 2
1. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined) that:
(a) A registration statement (File No. 333-22727) on Form SB-2
relating to the public offering of the Securities, including a preliminary form
of the prospectus, copies of which have heretofore been delivered to you, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Commission thereunder, and has been filed
with the Commission under the Act. The Company has prepared in the same manner
and proposes to file, prior to the Effective Date of such registration
statement, an additional amendment or amendments to such registration
statement, including a final form of Prospectus, copies of which shall be
delivered to you. "Preliminary Prospectus" shall mean each prospectus filed
pursuant to the Rules and Regulations under the Act prior to the Effective
Date. The registration statement (including all financial schedules and
exhibits) as amended at the time it becomes effective and the final prospectus
included therein are respectively referred to as the "Registration Statement"
and the "Prospectus", except that (i) if the prospectus first filed by the
Company pursuant to Rule 424(b) of the Rules and Regulations shall differ from
said prospectus as then amended, the term "Prospectus" shall mean the
prospectus first filed pursuant to Rule 424(b), and (ii) if such registration
statement or prospectus is amended or such prospectus is supplemented, after
the effective date of such registration statement and prior to the Option
Closing Date (as hereinafter defined) , the terms "Registration Statement" and
"Prospectus" shall include such registration statement and prospectus as so
amended, and the term "Prospectus" shall include the prospectus as so
supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to
the Option Closing Date, if any, and during such longer period as the
Prospectus may be required to be delivered in connection with sales by the
Underwriters or Selected Dealers: (i) the Registration Statement and Prospectus
will in all respects conform to the requirements of the Act and the Rules and
Regulations; and (ii) neither the Registration Statement nor the Prospectus
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that the Company makes no representations,
warranties or agreement as to information contained in or omitted from the
Registration Statement or Prospectus in reliance upon, and in conformity with,
written information furnished to the Company by the Underwriters specifically
for use in the preparation thereof. It is understood that the statements set
forth in the Prospectus with respect to stabilization, under the heading
"Underwriting" and regarding the identity of counsel to the Underwriters under
the heading "Legal Matters" constitute the only information furnished in
writing by the Underwriters for inclusion in the Prospectus.
(c) Each of the Company and each subsidiary has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with full power and
authority (corporate and other) to own its properties and conduct its business
as described in the Prospectus and is duly qualified to do business as a
foreign corporation and is in good standing in all other jurisdictions in which
the nature of its business or the character or location of its
2
<PAGE> 3
properties requires such qualification, except where failure to so qualify will
not materially affect the Company's business, properties or financial
condition.
(d) The authorized, issued and outstanding capital stock of the
Company as of the date of the Prospectus is as set forth in the Prospectus
under "Capitalization"; all of the issued and outstanding securities of the
Company have been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respects with applicable
Federal and state securities laws; the holders thereof have no rights of
rescission against the Company with respect thereto, and are not subject to
personal liability by reason of being such holders; none of such securities
were issued in violation of the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
except as set forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or agreements or other
rights to convert any obligation into, any securities of the Company have been
granted or entered into by the Company; and all of the securities of the
Company, issued and to be issued as set forth in the Registration Statement,
conform to all statements relating thereto contained in the Registration
Statement and Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and
paid for pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor
the offering or sale of the Securities as contemplated in this Agreement gives
rise to any rights, other than those which have been waived or satisfied, for
or relating to the registration of any securities of the Company, except as
described in the Registration Statement and Prospectus.
The Warrants have been duly authorized and, when issued, delivered and
paid for pursuant to this Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form filed
as an exhibit to the Registration Statement. The shares of Common Stock
issuable upon exercise of the Warrants have been reserved for issuance and when
issued in accordance with the terms of the Warrants and Warrant Agreement, will
be duly and validly authorized, validly issued, fully paid and non-assessable,
free of preemptive rights and no personal liability will attach to the
ownership thereof.
The Common Stock Representative's Warrants, the Warrant Representative's
Warrants, the Underlying Warrants, the shares of Common Stock issuable upon
exercise of the Common Stock Representative's Warrants, and the shares of
Common Stock issuable upon exercise of the Underlying Warrants (all as defined
in the Representative's Warrant Agreement described in Section 12 herein), have
been duly authorized and, when issued, delivered and paid for, will be validly
issued, fully paid, non-assessable, free of preemptive rights and no personal
liability will attach to the ownership thereof, and will constitute valid and
legally binding obligations of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Representative's Warrant
Agreement.
(f) This Agreement, the Warrant Agreement and the Representative's
Warrant Agreement have been duly and validly authorized, executed and delivered
by the Company, and assuming due
3
<PAGE> 4
execution of this Agreement by the other party hereto, constitute valid and
binding obligations of the Company enforceable against the Company in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the rights of creditors
generally. The Company has full power and lawful authority to authorize, issue
and sell all securities to be sold or issued by it hereunder and pursuant to
the terms of the Representative's Warrant Agreement on the terms and conditions
set forth herein and therein, and no consent, approval, authorization or other
order of any third party or any governmental authority is required in
connection with such authorization, execution and delivery or with the
authorization, issuance and sale of such securities, except such as may be
required under the Act or state securities laws, or as otherwise have been
obtained.
(g) Except as described in the Prospectus, neither the Company nor
any subsidiary is in material violation, breach of or default under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach of, or
constitute a material default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of the
Company or each subsidiary or any of the terms or provisions of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or each subsidiary is a party or by which the Company or each
subsidiary may be bound or to which any of the property or assets of the
Company or each subsidiary is subject, nor will such action result in any
material violation of the provisions of the articles of incorporation or bylaws
as amended of the Company or each subsidiary, or any statute or any order, rule
or regulation applicable to the Company or subsidiary of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or each subsidiary.
(h) Subject to the disclosures stated in the Prospectus, the Company
and each subsidiary have good and marketable title to all properties and assets
described in the Prospectus as owned by each of them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material
leases and subleases under which the Company or each subsidiary is the lessor
or sublessor of properties or assets or under which the Company or each
subsidiary holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, neither the Company nor each subsidiary is in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and no claim has been asserted by anyone, adverse to
rights of the Company or each subsidiary as lessor, sublessor, lessee, or
sublessee under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or each subsidiary to continued possession
of the leased or subleased premises or assets under any such lease or sublease
except as described or referred to in the Prospectus; and the Company and each
subsidiary owns or leases all such properties described in the Prospectus as
are necessary to its operations as now conducted and, except as otherwise
stated in the Prospectus, as proposed to be conducted as set forth in the
Prospectus.
(i) Arsement, Redd & Morella, L.L.C. and McGladrey & Pullen, LLP,
each of whom have given their report on certain financial statements filed and
to be filed with the Commission as part of the Registration Statement, and
which are included in the Prospectus, are with respect to the Company, each
independent public accountants as required by the Act and the Rules and
Regulations.
4
<PAGE> 5
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus and the Registration Statement present
fairly the financial position and results of operations and changes in
financial position of the Company on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements and related notes and schedules have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved. The Company's internal
accounting controls and procedures are sufficient to cause the Company and each
subsidiary to prepare financial statements which comply in all material
respects with generally accepted accounting principles applied on a basis which
is consistent during the periods involved. During the preceding five (5) year
period, nothing has been brought to the attention of the Company's management
that would result in any reportable condition relating to the Company's
internal accounting procedures, weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) neither the Company nor any subsidiary has
incurred and will not have incurred any material liabilities or obligations,
direct or contingent, and has not entered into and will not have entered into
any material transactions other than in the ordinary course of business and/or
as contemplated in the Registration Statement and the Prospectus; (ii) neither
the Company nor any subsidiary has and will not have paid or declared any
dividends or have made any other distribution on its capital stock or other
securities; (iii) there has not been any change in the capital stock of, or any
incurrence of long-term debt by, the Company or any subsidiary; (iv) neither
the Company nor any subsidiary has issued any options, warrants or other rights
to purchase the capital stock of the Company or any subsidiary; (v) neither the
Company nor any subsidiary has or will have redeemed or repurchased any
securities of the Company or its subsidiaries; and (vi) there has not been and
will not have been any material adverse change in the business, financial
condition or results of operations of the Company or any subsidiary, or in the
book value of the assets of the Company or any subsidiary, arising for any
reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company or any subsidiary, threatened, any material
action, suit, proceeding, inquiry, arbitration or investigation against the
Company or any subsidiary, or any of the officers or directors of the Company
or any subsidiary, or any material action, suit, proceeding, inquiry,
arbitration, or investigation, which might result in any material adverse
change in the condition (financial or other), business prospects, net worth, or
properties of the Company or any subsidiary.
(m) Except as disclosed in the Prospectus, each of the Company and
each subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any subsidiary that has not been provided for
in the financial statements.
(n) Except as set forth in the Prospectus, each of the Company and
each subsidiary has material licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property as described in the Prospectus and is in all material
5
<PAGE> 6
respects in compliance therewith and owns or possesses adequate right to use
all material patents, patent applications, inventions, trademarks, service
marks, trade-names, trademark registrations, service mark registrations,
copyrights, and licenses necessary for the conduct of such business and has not
received any notice of conflict or infringement, with the asserted rights of
others in respect thereof and, to the best of the Company's knowledge, is not
infringing with the asserted rights of others in respect thereof. To the best
of the Company's knowledge, none of the activities or business of the Company
or any subsidiary are in violation of, or cause the Company or any subsidiary
to violate, any law, rule, regulation or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company and any
subsidiary.
(o) Neither the Company nor any subsidiary has, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments or contributions required or
allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Securities to the several
Underwriters hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents which are required to be
described in or filed as exhibits to the Registration Statement have been so
described and/or filed.
(r) Except as described in the Registration Statement and Prospectus
or Schedule I attached hereto, no holders of Common Stock or of any other
securities of the Company have the right to include such Common Stock or other
securities in the Registration Statement and Prospectus.
(s) Except as set forth in or contemplated by the Registration
Statement and the Prospectus, neither the Company nor any subsidiary has any
material contingent liabilities.
(t) The Company has no subsidiary corporations except as disclosed in
the Registration Statement and Prospectus, nor has it any equity interest in
any partnership, joint venture, association or other entity except as disclosed
in the Registration Statement or Prospectus. Except as described in the
Registration Statement and Prospectus, the Company owns all of the outstanding
securities of each of its subsidiaries.
(u) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
6
<PAGE> 7
(v) Neither the Company, nor, to the Company's knowledge, any of its
officers, directors, employees or stockholders, have taken or will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any of the securities of the
Company.
(w) Item 26 of Part II of the Registration Statement accurately
discloses all unregistered securities sold by the Company within the three year
period prior to the date as of which information is presented in the
Registration Statement. All of such securities were sold in transactions which
were exempt from the registration provisions of the Act and not in violation of
Section 5 thereof.
(x) Other than as set forth in the Prospectus, the Company has not
entered into any agreement pursuant to which any person is entitled, either
directly or indirectly, to compensation from the Company for services as a
finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Underwriters against any losses, claims,
damages or liabilities, joint or several, which shall include, but not be
limited to, all costs to defend against any such claim, so long as such claim
arises out of agreements made or allegedly made by the Company.
(y) Based upon written representations received by the Company, no
officer, director or five percent (5%) or greater stockholder of the Company or
any subsidiary has any direct or indirect affiliation or association with any
member of the National Association of Securities Dealers, Inc. ("NASD"), except
as disclosed to the Representative in writing, and, to the knowledge of the
Company, no beneficial owner of the Company's unregistered securities has any
direct or indirect affiliation or association with any NASD member except as
disclosed to the Representative in writing and except as set forth in
Underwriters' counsel's response letter to the NASD. The Company will advise
the Representative and the NASD if any five percent (5%) or greater shareholder
of the Company or any subsidiary is or becomes an affiliate or associated
person of an NASD member participating in the distribution.
(z) The Company and each subsidiary is in compliance in all material
respects with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any subsidiary by the U.S. Department
of Labor, or any other governmental agency responsible for the enforcement of
such federal, state or local laws and regulations. There is no unfair labor
practice charge or complaint against the Company or any subsidiary pending
before the National Labor Relations Board or any strike, picketing, boycott,
dispute, slowdown or stoppage pending or to the knowledge of the Company,
threatened against or involving the Company or any subsidiary or any
predecessor entity. No question concerning representation exists respecting
the employees of the Company or any subsidiary and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company
or any subsidiary. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements of the Company or any
subsidiary, if any.
(aa) Except as set forth on Schedule II attached hereto, neither the
Company nor any subsidiary maintains, sponsors nor contributes to, nor is it
required to contribute to, any program or arrangement that is an "employee
pension benefit plan" an "employee welfare benefit plan", or a "multi-employer
plan" as such terms are defined in Sections 3(2), 3(i) and 3(37), respectively,
of the
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<PAGE> 8
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). Neither the Company nor any subsidiary maintained or contributed to a
defined benefit plan, as defined in Section 3(35) of ERISA.
(ab) Based upon written representations received from the officers and
directors of the Company and each subsidiary, except as disclosed in the
Prospectus, during the past five years, none of the officers or directors of
the Company or any subsidiary have been:
(1) Subject of a petition under the Federal bankruptcy
laws or any state insolvency law filed by or against them, or by
a receiver, fiscal agent or similar officer appointed by a court
for their business or property, or any partnership in which
either or them was a general partner at or within two years
before the time of such filing, or any corporation or business
association of which either of them was an executive officer at
or within two years before the time of such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
either of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor, commodity
pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity
Futures Trading Commission, or an associated person of any
of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance
company, or engaging in or continuing any conduct or
practice in connection with any such activity;
(ii) engaging in any type of business practice;
or
(iii) engaging in any activity in connection with
the purchase or sale of any security or commodity or in
connection with any violation of Federal or State
securities law or Federal Commodity laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any Federal or State
authority barring, suspending or otherwise limiting for more than sixty
(60) days either of their right to engage in any activity described in
paragraph (3)(i) above, or be associated with persons engaged in any
such activity;
(5) Found by any court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to have
violated any Federal or State securities
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<PAGE> 9
law, and the judgment in such civil action or finding by the
Commission has not been subsequently reversed, suspended or
vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any Federal Commodities Law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(ac) Each of the officers and directors of the Company has reviewed
the sections in the Prospectus relating to their biographical data and equity
ownership position in the Company, and all information contained therein is
true and accurate.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement and upon
the basis of the representations, warranties and agreements herein contained,
the Company hereby agrees to issue and sell to the Underwriters, and the
Underwriters, severally and not jointly, agree to purchase from the Company, an
aggregate of 1,000,000 Shares at $____ per Share and 1,000,000 Warrants at
$____ per Warrant, (the public offering price less ten percent (10%)), at the
place and time hereinafter specified, in accordance with the number of Shares
and/or Warrants set forth opposite the names of the Underwriters in Schedule A
attached hereto plus any additional Securities which such Underwriters may
become obligated to purchase pursuant to the provisions of Section 9 hereof.
The Securities shall consist of 1,000,000 Shares and 1,000,000 Warrants to be
purchased from the Company, and the price at which the Underwriters shall sell
the Securities to the public shall be $__.00 per Share and $.10 per Warrant.
Delivery of the Securities against payment therefor shall take place at
the offices of Duke & Co., Inc., 909 Third Avenue, New York, New York 10022
(or at such other place as may be designated by the Representative) at 10:00
a.m., Eastern Time, on such date after the Effective Date as the Representative
shall designate, but not later than ten (10) business days (holidays excepted)
following the first date that any of the Securities are released to you, such
time and date of payment and delivery for the Securities being herein called
the "Closing Date".
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants the "Option" to the Underwriters
(or, at the option of the Representative, to the Representative, individually)
to purchase all or any part of an aggregate of an additional 150,000 Shares and
150,000 Warrants at the same price per Share and Warrant as the Underwriters
shall pay for the Securities being sold pursuant to the provisions of
subsection (a) of this Section 2 (such additional Securities being referred to
herein as the "Option Securities"). This Option may be exercised within 45 days
after the Effective Date upon notice by the Underwriters (or the
Representative, individually) to the Company advising as to the amount of
Option Securities as to which the Option is being exercised, the names and
denominations in which the certificates for such Option Securities are to be
registered and the time and date when such certificates are to be delivered,
provided, however, that this Option may be exercised only for equal amounts of
Shares and Warrants. Such time and date shall be determined by the
Underwriters (or the Representative, individually) but shall not be later than
ten
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<PAGE> 10
(10) full business days after the exercise of the Option, nor in any event
prior to the Closing Date, and such time and date is referred to herein as the
"Option Closing Date". Delivery of the Option Securities against payment
therefor shall take place at the offices of the Representative. The Option
granted hereunder may be exercised only to cover over allotments in the sale by
the Underwriters of the Securities referred to in subsection (a) above. In the
event the Company declares or pays a dividend or distribution on its Common
Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the Option Closing Date, such dividend or distribution
shall also be paid on the Option Closing Date.
(c) The Company will make the certificates for the Securities to be
sold hereunder available to you for inspection at least two (2) full business
days prior to the Closing Date and the Option Closing Date at the offices of
the Representative, and such certificates shall be registered in such names and
denominations as you may request. Time shall be of the essence and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices by the several Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company or
by wire transfer in New York Clearing House funds.
In addition, in the event the Underwriters (or the Representative,
individually) exercise the Option to purchase from the Company all or any
portion of the Option Securities pursuant to the provisions of subsection (b)
above, payment for such Securities shall be made payable in New York Clearing
House funds at the offices of the Representative, or by wire transfer, at the
time and date of delivery of such Securities as required by the provisions of
subsection (b) above, against receipt of the certificates for such Securities
by the Representative for the respective accounts of the several Underwriters
registered in such names and in such denominations as the Representative may
request.
It is understood that the Representative, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Securities to be purchased by
such Underwriter or Underwriters. Any such payment by the Representative shall
not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder. It is also understood that the Representative
individually, rather than all of the Underwriters, may (but shall not be
obligated to) purchase the Option Securities referred to in subsection (b) of
this Section 2, but only to cover over allotments.
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement is declared effective by the Commission.
3. Covenants of the Company. The Company covenants and agrees with
the several Underwriters that:
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<PAGE> 11
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to
the later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the
Company will prepare and file with the Commission, promptly upon your request,
any amendments or supplements to the Registration Statement or Prospectus which
may be necessary or advisable in connection with the distribution of the
Securities and as mutually agreed to by the Company and the Representative.
After the Effective Date and as soon as the Company is advised thereof,
the Company will advise you, and confirm the advice in writing, of the receipt
of any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such
purposes, and will use its best efforts to prevent the issuance of any such
order, and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus and Definitive Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters and Selected Dealers to use the Prospectus
in connection with the sale of the Securities for such period as in the opinion
of counsel to the Underwriters the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by the Underwriters or Selected
Dealers, of any event of which the Company has knowledge and which materially
affects the Company or the securities of the Company, or which in the opinion
of counsel for the Company or counsel for the Underwriters, should be set forth
in an amendment to the Registration Statement or a supplement to the
Prospectus, in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to
be delivered to a purchaser of the Securities, or in case it shall be necessary
to amend or supplement the Prospectus to comply with law or with the Act and
the Rules and Regulations, the Company will notify you promptly and forthwith
prepare and furnish to you copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or
supplemented, will not contain any untrue statement of a material fact required
to be stated therein or omit to state any material facts necessary in order to
make the statements in the Prospectus, in the light of the circumstances under
which they are made, not misleading. The preparation and furnishing of any
such amendment or supplement to the Registration Statement or amended
Prospectus or supplement to be attached to the Prospectus shall be without
expense to the Underwriters.
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<PAGE> 12
The Company will comply with the Act, the Rules and Regulations
thereunder, the Securities Exchange Act of 1934 (the "1934 Act"), and the rules
and regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will qualify to register the Securities for sale
under the securities or "blue sky" laws of such jurisdictions as the
Representative may designate and will make such applications and furnish such
information as may be reasonably required for that purpose and to comply with
such laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent to
service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Securities. The Company will, from time to
time, prepare and file such statements and reports as are or may be reasonably
required to continue such qualification in effect for so long a period as the
Underwriters may reasonably request.
(c) If the sale of the Securities provided for herein is not
consummated, the Company shall pay all costs and expenses incident to the
performance of the Company's obligations hereunder, including, but not limited
to, all such expenses itemized in Section 8(a) and 8(c) hereof, and up to
$50,000 of the out-of-pocket expenses of the Representative (less any amounts
previously advanced by the Company to the Representative), if the offering for
any reason is terminated. For the purposes of this sub-paragraph, the
Representative shall be deemed to have assumed such expenses when they are
billed or incurred, regardless of whether such expenses have been paid. The
Representative shall not be responsible for any expenses of the Company or
others, or for any charges or claims relative to the proposed public offering
whether or not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from
time to time until the Effective Date of the Registration Statement, as many
copies of any Preliminary Prospectus filed with the Commission prior to the
Effective Date of the Registration Statement as the Underwriters may reasonably
request. The Company will deliver to the Underwriters on the Effective Date of
the Registration Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as many copies of
the Prospectus, in final form, or as thereafter amended or supplemented as the
several Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either
Section 12 or 15 of the 1934 Act, the Company, at its expense, will furnish to
the Representative during the period ending five (5) years from the Effective
Date, (i) as soon as practicable after the end of each fiscal year, a balance
sheet of the Company and any of its subsidiaries as at the end of such fiscal
year, together with statements of income, surplus and cash flow of the Company
and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as they are available, a copy of all reports
(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all non-confidential documents, including annual reports,
periodic reports and financial statements, furnished to or filed with the
Commission under the Act and the 1934 Act; (iv) copies of each press release,
news item and article
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<PAGE> 13
with respect to the Company's affairs released by the Company; and (v) such
other information as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will make generally available to its stockholders and
to the registered holders of its Warrants and deliver to you as soon as it is
practicable, but in no event later than the first day of the sixteenth full
calendar month following the Effective Date, an earnings statement (which need
not be audited) covering a period of at least twelve consecutive months
beginning with the Effective Date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(h) On the Effective Date, the Company shall have taken the necessary
action to become a reporting company under Section 12 of the 1934 Act, and the
Company will make all filings required to, and will have obtained approval for,
the listing of the Shares and Warrants on The Nasdaq Small Cap Market and a
listing on a national market, and will use its best efforts to maintain such
listings for at least five (5) years from the date of this Agreement.
(i) For such period as the Company's securities are registered under
the 1934 Act, the Company will hold an annual meeting of stockholders for the
election of Directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years, will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption
"Use of Proceeds" in the Prospectus, and will file such reports with the
Commission with respect to the sale of the Securities and the application of
the proceeds therefrom as may be required by Sections 12, 13 and/or 15 of the
1934 Act and pursuant to Rule 463 under the Act.
(k) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action,
which in the reasonable opinion of counsel to the Underwriters and the Company
may be reasonably necessary or advisable in connection with the distribution of
the Securities and will use its best efforts to cause the same to become
effective as promptly as possible.
(l) On the Closing Date the Company shall execute and deliver to you
the Representative's Warrant Agreement. The Representative's Warrant Agreement
and Warrant Certificates will be substantially in the form of the
Representative's Warrant Agreement and Warrant Certificates filed, as an
exhibit to the Registration Statement.
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(m) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued securities which are issuable
upon exercise of the Representative's Warrants outstanding from time to time.
(n) As of the Effective Date, certain beneficial owners of the
Company's securities (including warrants, options and Common Stock of the
Company), shall agree in writing in a form satisfactory to the Representative
and commencing as of the Effective Date, not to sell, transfer or otherwise
dispose of any of such securities or underlying securities (except to a
transferee who agrees to be bound by this provision) without the prior written
consent of the Representative for the following periods (each, a "Lock-Up
Period"): (i) Lee Sanders and Paul Lubomirski for a period of at least twenty-
four (24) months with regard to all Company securities beneficially owned by
each such person; (ii) holders of promissory notes convertible or exchangeable
for up to 283,100 shares of Common Stock (the "Noteholders") for a period of
twenty-four (24) months with regard to all Company securities beneficially
owned by such person, provided, however, that during each three-month period
commencing March 1, 1998, each Noteholder may sell that amount of Common Stock
equal to the number of shares obtainable upon conversion of that amount of
principal payable by the Company during such three-month period pursuant to the
terms of the convertible note held by such Noteholder; (iii) holders of the
Company's 10% Bridge Notes for a period of twelve (12) months with regard to
all securities of the Company held by each beneficial owner; and (iv) all other
beneficial holders of the Company's securities, except Fred Werner and the
Casper Air Service Employee Stock Ownership Plan and Trust, and all future
holders of options to purchase Company securities (the "Remaining
Securityholders") for a period of twelve (12) months, provided, however, that
if the Representative releases any Remaining Securityholder from the provisions
of this paragraph (n) with regard to 50% or more of the Company securities held
by such Remaining Securityholder, the Lock-Up Period applicable to such
Remaining Securityholder shall be extended to twenty-four (24) months from the
Effective Date with regard to all remaining Company securities beneficially
owned by such Remaining Securityholder. Any Company securities subject to a
Lock-Up Period which are originally registered in a name of a original
beneficial owner and are subsequently registered under a different name will
remain subject to the same applicable Lock-Up Period.
(o) The Company shall pay to the Representative upon the exercise the
fee provided in Section 12 of Redeemable Warrant Agreement, which Section may
not be changed without the prior written consent of the Representative.
(p) Prior to the Closing Date, the Company shall at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and
such other manuals as the Representative may designate, such listings to
contain the information required by such manuals and the Uniform Securities
Act. The Company hereby agrees to use its best efforts to maintain such listing
for a period of not less than five (5) years unless the Company's securities
otherwise qualify for a secondary market trading exemption. The Company shall
take such action as may be reasonably requested by the Representative to obtain
a secondary market trading exemption in such states as may be reasonably
requested by the Representative.
(q) During the one hundred eighty (180) day period commencing on the
Closing Date, the Company will not, without the prior written consent of the
Representative, grant options or
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<PAGE> 15
warrants to purchase the Company's Common Stock at a price less than the
initial per share public offering price.
(r) Except for (i) the Securities, (ii) the Option Securities, (iii)
the Representative's Warrants, (iv) the issuance of Common Stock pursuant to
the exercise of warrants, options and convertible or exchangeable debt
heretofore issued and described in the Prospectus, and (v) the issuance to
employees, officers, directors, advisors and consultants of stock options to
purchase a number of shares of Common Stock not to exceed 150,000 shares
pursuant to the Company's 1997 Stock Option Plan (provided that (A) the Company
may not grant options for more than 50,000 of such shares prior to the Closing
Date, (B) any options granted pursuant to this clause (v) shall have an
exercise price equal to the greater of $5.75 per share and the market price per
share of Common Stock on the date of grant and (C) the vesting of such options
shall be subject to the achievement of earnings performance criteria acceptable
to the Representative), the Company will not, from and after the date hereof
until 24 months after the Closing Date, sell or issue any shares of Common
Stock, Preferred Stock or other equity securities of the Company or sell or
grant options, warrants or rights to purchase any shares of equity securities
of the Company, without the Representative's prior written consent, provided
that, in addition, the Company will not, from and after the date hereof until
36 months after the Closing Date, sell or issue any shares of Preferred Stock
without the Representative's consent or authorize any new class or series of
capital stock.
(s) Prior to the Closing Date, neither the Company nor any subsidiary
will issue, directly or indirectly, without your prior consent, any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering of the Securities other than routine
customary advertising of the Company's products and services, and except as
required by any applicable law or the directives of any relevant regulatory
authority in any relevant jurisdiction.
(t) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the
financial statements to be included in any registration statement or similar
disclosure document to be filed by the Company hereunder, or any amendment or
supplement thereto. Except for the Company's anticipated change to Price
Waterhouse LLP, the Company shall not change such independent accountants
without the Representative's prior consent, not to be unreasonably withheld,
for a period of five (5) years from the Closing Date. For a period of five (5)
years from the Closing Date, the Company, at its expense, shall cause its
regularly engaged independent certified public accountants to review (but not
audit) the Company's financial statements for each of the first three (3)
fiscal quarters prior to the announcement of quarterly financial information,
the filing of the Company's quarterly report and the filing of quarterly
financial information to stockholders. For a period of five (5) years from the
Closing Date, the Company shall promptly submit to the Representative copies of
all accountants' management reports and similar correspondence between the
Company and its independent public accountants.
(u) The Company shall retain Continental Stock Transfer & Trust
Company as the transfer agent for the securities of the Company, or such other
transfer agent as you may agree to in writing. In addition, the Company shall
direct such transfer agent to furnish the Representative with weekly transfer
sheets as to each of the Company's securities as prepared by the Company's
transfer agent
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<PAGE> 16
and copies of lists of stockholders and warrantholders as reasonably requested
by the Representative, for a five (5) year period commencing from the Closing
Date.
(v) The Company shall cause the Depository Trust Company, or such
other depository of the Company's securities, to deliver a "special security
position report" to the Representative on a weekly basis at the expense of the
Company, for a five (5) year period from the Effective Date.
(w) Following the Effective Date, the Company shall, at its sole cost
and expense, prepare and file such Blue Sky applications with such
jurisdictions as the Representative shall designate and the Company may
reasonably agree.
(x) On the Effective Date and for a period of three (3) years
thereafter, the Company's Board of Directors shall consist of a minimum of four
(4) persons, two (2) of whom shall be independent and not otherwise affiliated
with the Company or associated with any of the Company's affiliates. In
addition, for the five (5) year period following the Closing Date, the Company
agrees that the Representative shall have the right to nominate, and the
Company shall use its best efforts to cause the election of, one member of the
Company's Board of Directors, who shall be reasonably acceptable to the
Company; alternatively, the Representative may appoint a designee to serve as
an observer at all meetings of the Company's Board of Directors, which observer
would be entitled to the same cash compensation and reimbursement of expenses
as the Company affords its directors who are not also officers or employees of
the Company and to receive all copies of all notices and other documents
distributed to the members of the Company's Board of Directors (including, but
not limited to, any unanimous consents prepared and advance notices of all
proposed Board actions or consents), as if such observer were a member of the
Company's Board of Directors. To the extent permitted by law, the Company
agrees to indemnify and hold the designee and the Representative harmless
against any and all claims, actions, awards and judgments arising out of his
service and in the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, to include such
designee and the Representative as insureds under such policy, unless inclusion
of the observer or the Representative as an insured will cause the Company to
become subject to special insurance underwriting classifications which would
increase the cost of such insurance to the Company. In the event the Company
does not have a liability insurance policy in effect on the Closing Date, the
Company agrees to use its best efforts to obtain, as promptly as practicable
following the Closing Date, such a policy in an amount reasonable and customary
for similarly situated companies, at a premium the Company can reasonably
afford. The rights and benefits of such indemnification and the benefits of
such insurance shall, to the extent possible, extend to the Representative
insofar as it may be, or be alleged to be, responsible for such advisor. The
Company will deliver, on or before the Closing Date, the agreements of each of
its officers, directors and holders of 5% or more of its Common Stock to vote,
during the five year period commencing on the Closing Date, for the election of
the Representative's designee for director, if any.
(y) For such period as any Warrants are outstanding, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement or a new Registration Statement to become effective in
compliance with the Act and without any lapse of time between the effectiveness
of any such post-effective amendments and cause a copy of each Prospectus, as
then amended, to be delivered to each holder of record of a Warrant and to
furnish to each of the Underwriters and each dealer as many copies of each such
Prospectus as such Underwriter or such
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dealer may reasonably request. Such post-effective amendments or new
Registration Statements shall also register the Representative's Warrants and
all the securities underlying the Representative's Warrants. The Company shall
not call for redemption of any of the Warrants unless a Registration Statement
covering the securities underlying the Warrants or Representative's Warrants
has been declared effective by the Commission and remains current at least
until the date fixed for redemption. In addition, the Representative's
Warrants shall not be redeemable during the first year after the Effective Date
without the written consent of the Representative.
(z) Until such time as the securities of the Company are listed or
quoted on either the New York Stock Exchange, Nasdaq National Market or the
American Stock Exchange, the Company shall deliver to the Representative a
written certificate of an officer of the Company detailing those states in
which the Shares and Warrants of the Company may be traded in non-issuer
transactions under the Blue Sky laws of the fifty states ("Secondary Market
Trading Certificate"). The initial Secondary Market Trading Certificate shall
be delivered to the Representative on the Closing Date, and the Company shall
continue to update such opinion and deliver same to the Representative on a
timely basis, but in any event at the beginning of each fiscal year, for a five
(5) year period, if required.
(aa) During the course of the distribution of the Securities, the
Company will not take, directly or indirectly, any action designed to or which
might, in the future, reasonably be expected to cause or result in
stabilization or manipulation of the prices of the Warrants and/or the Common
Stock. During the so-called "quiet period" in which delivery of a prospectus
is required, if applicable, the Company will not issue press releases or
engage in any other publicity without the Representative's prior written
consent.
(ab) The Company will at all times, from the Closing Date until at
least five (5) years from such date, maintain in full force, or cause to be
maintained in full force, from an insurer rated "A" or better (General
Policyholders Rating) in the most recent edition of "Best Life Reports", term
life insurance in the amount of at least $1,000,000 on the lives of each of Lee
Sanders, Paul Lubomirski and Tony Ramsaroop. Each such policy shall be owned
by the Company and all benefits thereunder shall be payable to the Company.
(ac) For a period of two (2) years following the Closing Date, the
Company will not (i) file any registration statement relating to the offer or
sale of any of the Company's securities or (ii) make any offers or sales of the
Company's securities pursuant to Regulation S of the Act, as such Regulation
may be amended from time to time, without the Representative's prior written
consent.
(ad) For a period of two (2) years following the Closing Date, the
Company shall not redeem any of its securities, and shall not pay any dividends
or make any other cash distribution in respect of its securities in excess of
the amount of the Company's current or retained earnings derived after the
Closing Date without obtaining the Representative's prior written consent,
which consent shall not be unreasonably withheld. The Representative shall
either approve or disapprove such contemplated redemption of securities or
dividend payment or distribution within five (5) business days from the date
the Representative receives written notice of the Company's proposal with
respect thereto; a failure of the Representative to respond within the five (5)
business day period shall be deemed approval of the transaction.
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(ae) On or before the Effective Date, each of Lee Sanders, Paul
Lubomirski and Tony Ramsaroop will extend their current employment agreements
with the Company for at least three (3) years in length following the Effective
Date and with such other terms and conditions as are acceptable to the
Representative. The Company will not, for a period of three (3) years from the
Closing Date increase or authorize an increase in the compensation of its five
(5) most highly paid employees in any year without the prior written consent of
the Representative or unless permitted by the terms of employment contracts
satisfactory to the Representative.
(af) For a period of five (5) years from the Closing Date, the Company
shall provide the Representative, on a not less than annual basis, with
internal forecasts setting forth projected results of operations for each
quarterly and annual period in the two (2) fiscal years following the
respective dates of such forecasts. Such forecasts shall be provided to the
Representative more frequently than annually if prepared more frequently by
management, and revised forecasts shall be prepared and provided to the
Representative when required to reflect more current information, revised
assumptions or actual results that differ materially from those set forth in
the forecasts. The Representative agrees to maintain the confidentiality of
such forecasts.
(ag) The Company, for a period of two years after the Effective Date,
will retain a financial public relations firm reasonably acceptable to the
Representative.
(ah) For a period of 24 months after the Closing Date, the Company
will not use any proceeds from the sale of the Securities or any other
available funds of the Company to (i) pay any loans from officers, directors or
greater than 5% shareholders that were outstanding as of the Effective Date,
(ii) pay to any current or former employees or consultants, or any affiliates
thereof, any salaries or bonuses that are accrued as of the Closing Date and
the payment of which had been deferred by the Company beyond their normal
payment periods as of the Closing Date, or (iii) except as set forth in the
"Use of Proceeds" section of the Prospectus, pay off any other outstanding debt
other than (w) current trade payables which arise in the ordinary course of
business, (x) loans and lines of credit after the Effective Date with financial
institutions, (y) the expenses related to this offering and the acquisition of
Casper Air Service and (z) debts secured by the charter aircraft of Casper Air
Service paid in connection with the liquidation by the Company of such aircraft
following the acquisition of Casper Air Service.
(ai) For a period equal to the lesser of (i) seven (7) years from the
date hereof and (ii) the sale to the public of the Representative's Warrant, or
securities issuable pursuant to the Representative's Warrant, the Company will
not take any action or actions which may prevent or disqualify the Company's
use of Form S-1 or Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Warrant, or securities issuable pursuant
to the Representative's Warrant, except for the disqualification of the Company
from the use of Form SB-2 as a result of an increase in the Company's total
revenues or an increase in the Company's public float.
(aj) The Company hereby appoints, effective as of the Closing Date,
the Representative as the Company's exclusive warrant solicitation agent in the
event of any solicitation of the exercise of the Warrants, in connection with a
redemption of the Warrants or otherwise, commencing one year after the
Effective Date, and upon the exercise of any warrant shall pay to the
Representative a
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Warrant Solicitation fee of six percent (6%) of the exercise price of all
solicited Redeemable Warrants, unless the payment of such amount with respect
to such Warrant violates the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the regulations promulgated thereunder or the rules and
regulations of the National Association of Securities Dealers, Inc. ("NASD") or
applicable state securities or "blue sky" laws or regulations. The Company
shall not be obligated to pay any amounts pursuant to this Section 12 during
any week that such amounts payable are less than $1,000 and the Company's
obligation to make such payments shall be suspended until the amounts payable
aggregate to at least $1,000, and provided further, that, in any event, any
such payment (regardless of amount) shall be made not less frequently than
monthly. In addition, the Company shall not be obligated to pay any amounts
pursuant to this Agreement unless the Warrantholder designates in writing that
the Representative is to receive such commission.
(ak) Promptly following the Closing Date the Board of Directors of the
Company shall designate an Audit Committee, at least one of whose members shall
be the director, if any, who is designated by the Representative, and another
of whose members shall be an independent director.
4. Conditions of Underwriters Obligations. The obligations of the
several Underwriters to purchase and pay for the Securities which they have
agreed to purchase hereunder from the Company are subject, as of the date
hereof and as of the Closing Date and the Option Closing Date, to the
continuing accuracy of, and compliance with, the representations and warranties
of the Company herein, to the accuracy of statements of officers of the Company
made pursuant to the provisions hereof, to the performance by the Company of
its obligations hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such
later time or on such later date as you may agree to in writing; (ii) at or
prior to the Closing Date or Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and no proceeding for that purpose shall have been initiated or
pending, or shall be threatened, or to the knowledge of the Company,
contemplated by the Commission; (iii) no stop order suspending the
effectiveness of the qualification or registration of the Securities under the
securities or "blue sky" laws of any jurisdiction (whether or not a
jurisdiction which you shall have specified) shall be threatened or to the
knowledge of the Company contemplated by the authorities of any such
jurisdiction or shall have been issued and in effect; (iv) any request for
additional information on the part of the Commission or any such authorities
shall have been complied with to the satisfaction of the Commission and any
such authorities, and to the satisfaction of counsel to the Underwriters; and
(v) after the date hereof no amendment or supplement to the Registration
Statement or the Prospectus shall have been filed unless a copy thereof was
first submitted to the Underwriters and the Underwriters did not object
thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any subsidiary or any material adverse change in
the long-term debt of the Company or any subsidiary except as set forth in or
contemplated by the Registration Statement, (ii) there shall not have been any
material adverse change in the general
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<PAGE> 20
affairs, business, properties, condition (financial or otherwise), management,
or results of operations of the Company or any subsidiary, whether or not
arising from transactions in the ordinary course of business, in each case
other than as set forth in or contemplated by the Registration Statement or
Prospectus; (iii) neither the Company nor any subsidiary shall have sustained
any material interference with its business or properties from fire, explosion,
flood or other casualty, whether or not covered by insurance, or from any labor
dispute or any court or legislative or other governmental action, order or
decree, which is not set forth in the Registration Statement and Prospectus;
and (iv) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations, and
shall in all material respects conform to the requirements thereof, and neither
the Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstance under which they are made, not
misleading.
(c) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company or any subsidiary, threatened, any material
action, suit, proceeding, inquiry, arbitration or investigation against the
Company or any subsidiary, or any of the officers or directors of the Company
or any subsidiary, or any material action, suit, proceeding, inquiry,
arbitration, or investigation, which might result in any material adverse
change in the condition (financial or other), business prospects, net worth, or
properties of the Company or any subsidiary.
(d) Each of the representations and warranties of the Company
contained herein shall be true and correct as of this date and at the Closing
Date as if made at the Closing Date, and all covenants and agreements herein
contained to be performed on the part of the Company and all conditions herein
contained to be fulfilled or complied with by the Company at or prior to the
Closing Date and Option Closing Date shall have been duly performed, fulfilled
or complied with.
(e) At each Closing Date, you shall have received the opinion,
together with copies of such opinion for each of the other several
Underwriters, dated as of each Closing Date, from Bracewell & Patterson,
L.L.P., counsel for the Company, in form and substance satisfactory to counsel
for the Underwriters, to the effect that:
(i) the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws
of its jurisdiction of incorporation, with all requisite corporate power
and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation and is in
good standing in each other jurisdiction in which the ownership or
leasing of its properties or conduct of its business requires such
qualification except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company and each
subsidiary as a whole;
(ii) the authorized capital stock of the Company; all shares of
the Company's outstanding stock and other securities requiring
authorization for issuance by the Company's Board of Directors have been
duly authorized, validly issued, are fully paid and non-assessable and
conform in all material respects to the description thereof contained in
the Prospectus;
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<PAGE> 21
the outstanding shares of Common Stock of the Company and other
securities have not been issued in violation of the preemptive rights of
any shareholder and the shareholders of the Company do not have any
preemptive rights or, to such counsel's knowledge, except as described
in the Prospectus, other rights to subscribe for or to purchase
securities of the Company, nor, to such counsel's knowledge, are there
any restrictions upon the voting or transfer of any of the securities of
the Company, except as disclosed in the Prospectus; the Common Stock,
the Shares, the Warrants, and the securities issuable pursuant to the
Representative's Warrant Agreement conform in all material respects to
the respective descriptions thereof contained in the Prospectus; the
Common Stock, the Shares, the Warrants, the shares of Common Stock to be
issued upon exercise of the Warrants and the securities issuable
pursuant to the Representative's Warrant Agreement, have been duly
authorized and, when issued, delivered and paid for in accordance with
the terms of the governing instrument or agreement, will be duly
authorized, validly issued, fully paid, non-assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof; to such counsel's knowledge, all prior sales by the Company of
the Company's securities have been made in compliance with or under an
exemption from registration under the Act and applicable state
securities laws and no shareholders of the Company have any rescission
rights against the Company with respect to the Company's securities; a
sufficient number of shares of Common Stock has been reserved for
issuance upon exercise of the Warrants and the Representative's
Warrants, and to such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration rights or
other rights, other than those which have been waived or satisfied or
described in the Registration Statement;
(iii) this Agreement, the Representative's Warrant Agreement and
the Warrant Agreement have been duly and validly authorized, executed
and delivered by the Company and, assuming the due authorization,
execution and delivery of this Agreement and the Representative's
Warrant Agreement by the Representative and of the Warrant Agreement by
the Company's transfer agent, are the valid and legally binding
obligations of the Company, enforceable in accordance with their terms,
except (a) as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws from
time to time in effect which affect creditors' rights generally and
general principles of equity; and (b) no opinion is expressed as to the
enforceability of the indemnity provisions or the contribution
provisions contained in this Agreement, the Representative's Warrant
Agreement or the Warrant Agreement;
(iv) the certificates evidencing the outstanding securities of
the Company, the Shares, the Common Stock and the Warrants are in valid
and proper legal form;
(v) to the best of such counsel's knowledge, except as set
forth in the Prospectus, there is not pending or, to the knowledge of
the Company, threatened, any material action, suit, proceeding, inquiry,
arbitration or investigation against the Company or any subsidiary or
any of the officers or directors of the Company or any subsidiary which
might materially and adversely affect the condition (financial or
otherwise), business prospects, net worth, or properties of the Company
or any subsidiary;
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(vi) the execution and delivery of this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement, and the
incurrence of the obligations herein and therein set forth and the
consummation of the transactions herein or therein contemplated, will
not result in a violation of, or constitute a default under (a) the
Articles of Incorporation, as amended, or By-Laws, as amended, of the
Company and each subsidiary; (b) to such counsel's knowledge, any
material obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness or in any
material contract, indenture, mortgage, loan agreement, lease, joint
venture or other agreement or instrument to which the Company or any
subsidiary is a party or by which it or any of its properties is bound;
or (c) to the best of such counsel's knowledge, any material order,
rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign;
(vii) the Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for that purpose have been instituted or are pending
before, or threatened by, the Commission; the Registration Statement and
the Prospectus (except for the financial statements and other financial
data contained therein, or omitted therefrom, as to which such counsel
need express no opinion) comply as to form in all material respects with
the applicable requirements of the Act and the Rules and Regulations;
and
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or delivery
of the Securities by the Company, in connection with the execution,
delivery and performance of this Agreement by the Company or in
connection with the taking of any action contemplated herein, or the
issuance of the Representative's Warrants or the Securities underlying
the Representative's Warrants, other than registrations or
qualifications of the Securities under applicable state or foreign
securities or Blue Sky laws and registration under the Act.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriters or counsel for the Underwriters shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such
counsel to the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative and they
are justified in relying thereon.
Such counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus and nothing has come to the attention of such counsel to lead
such counsel to believe that the Registration Statement or any amendment
thereto at the time it became effective contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading or that the Prospectus
or any supplement thereto contains any untrue statement of a material fact or
omits to
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state a material fact required to be stated therein or necessary in order to
make statements therein, in light of the circumstances under which they are
made, not misleading (except, in the case of both the Registration Statement
and any amendment thereto and the Prospectus and any supplement thereto, for
the financial statements, notes thereto and other financial information and
statistical data contained therein, as to which such counsel need express no
opinion).
(f) You and the several Underwriters shall have received on each
Closing Date a certificate dated as of each Closing Date, signed by the Chief
Executive Officer and the Chief Financial officer of the Company and such other
officers of the Company as the Underwriters may request, certifying that:
(i) No order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities in effect
and no proceedings for such purpose are pending or are, to their
knowledge, threatened by the Commission;
(ii) To their knowledge there is no litigation instituted or
threatened against the Company or any subsidiary or any officer or
director of the Company or any subsidiary of a character required to be
disclosed in the Registration Statement which is not disclosed therein;
to their knowledge there are no contracts which are required to be
summarized in the Prospectus which are not so summarized; and to their
knowledge there are no material contracts required to be filed as
exhibits to the Registration Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge,
neither the Registration Statement nor the Prospectus nor any amendment
or supplement to either of the foregoing contains an untrue statement of
any material fact or omits to state any material fact required to be
stated therein or necessary to make the statement therein, in light of
the circumstances under which they are made, not misleading; and since
the Effective Date, to the best of their knowledge, there has occurred
no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth;
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in the condition of the Company or any
subsidiary, financial or otherwise, or in the results of its operations,
except as reflected in or contemplated by the Registration Statement and
the Prospectus and except as so reflected or contemplated since such
date, there has not been any material transaction entered into by the
Company or any subsidiary;
(v) The representations and warranties set forth in this
Agreement are true and correct in all material respects and the Company
has complied with all of its agreements herein contained;
(vi) Neither the Company nor any subsidiary is delinquent in
the filing of any federal, state and municipal tax return or the payment
of any federal, state or municipal taxes; they know of no proposed re-
determination or reassessment of taxes, adverse to the Company or any
subsidiary, and the Company and each subsidiary has paid or provided by
adequate
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<PAGE> 24
reserves for all known tax liabilities except such delinquency that will
not have a material adverse affect on the Company;
(vii) They know of no material obligation or liability of the
Company or any subsidiary, contingent or otherwise, not disclosed in the
Registration Statement and Prospectus;
(viii) This Agreement, the Representative's Warrant Agreement and
the Warrant Agreement, the consummation of the transactions herein or
therein contemplated, and the fulfillment of the terms hereof or
thereof, will not result in a breach by the Company of any terms of, or
constitute a default under, its Articles of Incorporation or By-Laws,
any indenture, mortgage, lease, deed or trust, bank loan or credit
agreement or any other material agreement or undertaking of the Company
or any subsidiary including, by way of specification but not by way of
limitation, any agreement or instrument to which the Company or any
subsidiary is now a party or pursuant to which the Company or any
subsidiary has acquired any right and/or obligations by succession or
otherwise;
(ix) The financial statements and schedules filed with and as
part of the Registration Statement present fairly the financial position
of the Company as of the dates thereof all in conformity with generally
accepted principles of accounting applied on a consistent basis
throughout the periods involved. Since the respective dates of such
financial statements, there have been no material adverse change in the
condition or general affairs of the Company, financial or otherwise,
other than as referred to in the Prospectus;
(x) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as may
otherwise be indicated therein, neither the Company nor any subsidiary
has, prior to the Closing Date, either (i) issued any securities or
incurred any material liability or obligation, direct or contingent, for
borrowed money, or (ii) entered into any material transaction other than
in the ordinary course of business. The Company has not declared, paid
or made any dividend or distribution of any kind on its capital stock;
(xi) The officers and directors of the Company and each
subsidiary have reviewed the sections in the Prospectus relating to
their biographical data and equity ownership position in the Company,
and all information contained therein is true and accurate; and
(xii) Based upon written representation from the officers and
directors of the Company, none of the officers and directors of the
Company and each subsidiary, except as disclosed in the Prospectus,
during the past five years, have been:
(1) Subject of a petition under the Federal bankruptcy
laws or any state insolvency law filed by or against them, or by
a receiver, fiscal agent or similar officer appointed by a court
for their business or property, or any partnership in which
either or them was a general partner at or within two years
before the time of such filing, or any corporation or business
association of which either of them was an executive officer at
or within two years before the time of such filing;
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(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
either of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor, commodity
pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity
Futures Trading Commission, or an associated person of any
of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance
company, or engaging in or continuing any conduct or
practice in connection with any such activity;
(ii) engaging in any type of business practice;
or
(iii) engaging in any activity in connection with
the purchase or sale of any security or commodity or in
connection with any violation of Federal or State
securities law or Federal Commodity laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any Federal or
State authority barring, suspending or otherwise limiting for
more than sixty (60) days either of their right to engage in any
activity described in paragraph (3) (i) above, or be associated
with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to have
violated any Federal or State securities law, and the judgment in
such civil action or finding by the Commission has not been
subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any Federal Commodities Law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(g)
(1) The Underwriters shall have received from Arsement, Redd &
Morella, LLC, independent auditors to the Company, certificates or letters, one
dated and delivered on the Effective Date and one dated and delivered on the
Closing Date, in form and substance satisfactory to the Underwriters, stating
with respect to the financial statements and schedules prepared by each such
auditor, that:
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(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) the financial statements and the schedules included in the
Registration Statement and the Prospectus were examined by them and, in
their opinion, comply as to form in all material respects with the
applicable accounting requirements of the Act, the Rules and Regulations
and instructions of the Commission with respect to Registration
Statements on Form SB-2;
(iii) on the basis of inquiries and procedures conducted by them
(not constituting an examination in accordance with generally accepted
auditing standards), including a reading of the latest available
unaudited interim financial statements or other financial information of
the Company (with an indication of the date of the latest available
unaudited interim financial statements), inquiries of officers of the
Company who have responsibility for financial and accounting matters,
review of minutes of all meetings of the shareholders and the Board of
Directors of the Company and other specified inquiries and procedures,
nothing has come to their attention as a result of the foregoing
inquiries and procedures that causes them to believe that:
(a) during the period from (and including) the date of
the financial statements in the Registration Statement and the
Prospectus to a specified date not more than five days prior to
the date of such letters, there has been any change in the Common
Stock, long-term debt or other securities of the Company (except
as specifically contemplated in the Registration Statement and
Prospectus) or any material decreases in net current assets, net
assets, shareholder's equity, working capital or in any other
item appearing in the Company's financial statements as to which
the Underwriters may request advice, in each case as compared
with amounts shown in the balance sheet as of the date of the
financial statement in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses
have occurred or will occur;
(b) during the period from (and including) the date of
the financial statements in the Registration Statement and the
Prospectus to such specified date there was any material decrease
in revenues or in the total or per share amounts of income or
loss before extraordinary items or net income or loss, or any
other material change in such other items appearing in the
Company's financial statements as to which the Underwriters may
request advice, in each case as compared with the corresponding
period in the preceding year, except in each case for increases,
changes or decreases which the Prospectus discloses have occurred
or will occur; and
(iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified
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readings, inquiries and other appropriate procedures (which procedures
do not constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement.
Such letter shall also set forth such other information as may be
requested by counsel for the Underwriters. Any changes, increases or decreases
in the items set forth in such letters which, in the judgment of the several
Underwriters, are materially adverse with respect to the financial position or
results of operations of the Company shall be deemed to constitute a failure of
the Company to comply with the conditions of the obligations to the several
Underwriters hereunder.
(2) The Underwriters shall have received from McGladrey &
Pullen, LLP, independent auditors to Casper Air Service ("CAS"), or Arsement,
Redd & Morella, LLC, independent auditors to the Company, certificates or
letters, one dated and delivered on the Effective Date and one dated and
delivered on the Closing Date, in form and substance satisfactory to the
Underwriters, stating with respect to the financial statements and schedules
prepared by such auditor, that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) the financial statements and the schedules of CAS included
in the Registration Statement and the Prospectus were examined by them
and, in their opinion, comply as to form in all material respects with
the applicable accounting requirements of the Act, the Rules and
Regulations and instructions of the Commission with respect to
Registration Statements on Form SB-2;
(iii) on the basis of inquiries and procedures conducted by them
(not constituting an examination in accordance with generally accepted
auditing standards), including a reading of the latest available
unaudited interim financial statements or other financial information of
CAS (with an indication of the date of the latest available unaudited
interim financial statements), inquiries of officers of the Company who
have responsibility for financial and accounting matters and other
specified inquiries and procedures, nothing has come to their attention
as a result of the foregoing inquiries and procedures that causes them
to believe that:
(a) any material modifications should be made to the financial
statements and schedules described above for them to be in
conformity with generally accepted accounting principles;
(b) the financial statements and schedules described above do
not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
rules and regulations; and
(iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to CAS set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages,
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<PAGE> 28
statements and information may be derived from the general accounting
records, including work sheets, of CAS and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter and found them to be in agreement.
Any changes, increases or decreases in the items set forth in such
letters which, in the judgment of the several Underwriters, are materially
adverse with respect to the financial position or results of operations of the
CAS shall be deemed to constitute a failure of the Company to comply with the
conditions of the obligations to the several Underwriters hereunder.
(h) Upon exercise of the Option provided for in Section 2(b) hereof,
the obligation of the several Underwriters (or, at its option, the
Representative, individually) to purchase and pay for the Option Securities
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall
have been instituted or shall be pending, or, to your knowledge or the
knowledge of the Company, shall be contemplated by the Commission, and
any reasonable request on the part of the Commission for additional
information shall have been complied with to the satisfaction of counsel
to the Underwriters.
(ii) At the Option Closing Date, there shall have been
delivered to you the signed opinion from Bracewell & Patterson, L.L.P.,
counsel for the Company, dated as of the Option Closing Date, in form
and substance satisfactory to counsel to the Underwriters, which opinion
shall be substantially the same in scope and substance as the opinion
furnished to you at the Closing Date pursuant to Section 4 (e) hereof,
except that such opinion, where appropriate, shall cover the Option
Securities.
(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Option Closing Date, in form
and substance satisfactory to counsel to the Underwriters, substantially
the same in scope and substance as the certificate furnished to you at
the Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you from
each of Arsement, Redd & Morella, L.L.C. and McGladrey & Pullen, LLP,
independent auditors to the Company, dated the Option Closing Date and
addressed to the several Underwriters confirming the information in
their letter referred to in Section 4(g) hereof and stating that nothing
has come to their attention during the period from the ending date of
their review referred to in said letter to a date not more than five
business days prior to the Option Closing Date, which would require any
change in said letter if it were required to be dated the Option Closing
Date.
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(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Securities
shall be satisfactory in form and substance to the Underwriters, and the
Underwriters and counsel to the Underwriters shall have been furnished
with all such documents, certificates, and opinions as you may request
in connection with this transaction in order to evidence the accuracy
and completeness of any of the representations, warranties or statements
of the Company or its compliance with any of the covenants or conditions
contained herein.
(i) No action shall have been taken by the Commission or the NASD,
the effect of which would make it improper, at any time prior to the Closing
Date, for members of the NASD to execute transactions (as principal or agent)
in the Common Stock and no proceedings for the taking of such action shall have
been instituted or shall be pending, or, to the knowledge of the several
Underwriters or the Company, shall be contemplated by the Commission or the
NASD. The Company represents that at the date hereof it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD. The
Company shall advise the Representative of any NASD affiliations of any of its
officers, directors, or stockholders or their affiliates in accordance with
paragraph 1(y) of this Agreement.
(j) At the Effective Date, you shall have received from counsel to
the Company, dated as of the Effective Date, in form and substance satisfactory
to counsel for the Underwriter, a written Secondary Market Trading Certificate
detailing those states in which the Shares and Warrants may be traded in non-
issuer transactions under the Blue Sky laws of the fifty (50) states after the
Effective Date, in accordance with paragraph 3(ab) of this Agreement.
(k) The authorization and issuance of the Securities and delivery
thereof, the Registration Statement, the Prospectus, and all corporate
proceedings incident thereto shall be satisfactory in all respects to counsel
for the several Underwriters, and such counsel shall be furnished with such
documents, certificates and opinions as they may reasonably request to enable
them to pass upon the matters referred to in this sub-paragraph.
(l) Prior to the Effective Date, the Representative shall have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Representative, as described in the Registration Statement.
(m) Prior to the Effective Date, the Company shall have obtained
approval for the listing of the Securities on the Boston Stock Exchange and The
Nasdaq Small Cap Market.
(n) If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement and all
obligations of the several Underwriters under this Agreement may be canceled
at, or at any time prior to, the Closing Date and/or the Option Closing Date by
the Representative and/or the Underwriters notifying the Company of such
cancellation in writing or by telegram at or prior to the applicable Closing
Date. Any such cancellation shall be without liability of the several
Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of
the Company to sell and deliver the Securities is subject to the following
conditions:
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<PAGE> 30
(i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or on
such later time or date as the Company and the Representative may agree
in writing; and
(ii) At the Closing Date and the Option Closing Date, no stop
orders suspending the effectiveness of the Registration Statement shall
have been issued under the Act or any proceedings therefore initiated or
threatened by the Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the Closing Date but are not fulfilled after the
Closing Date and prior to the Option Closing Date, then only the obligation of
the Company to sell and deliver the Securities on exercise of the Option
provided for in Section 2(b) hereof shall be affected.
6. Indemnification. (a) The Company indemnifies and holds harmless
each Underwriter and each person, if any, who controls the Underwriter within
the meaning of the Act against any losses, claims, damages or liabilities,
joint or several (which shall, for all purposes of this Agreement, include but
not be limited to, all reasonable costs of defense and investigation and all
attorneys' fees), to which the Underwriter or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in (i) the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, (ii) any blue sky
application or other document executed by the Company specifically for that
purpose or based upon written information furnished by the Company and filed in
any state or other jurisdiction in order to qualify any or all of the
Securities under the securities laws thereof (any such application, document or
information being hereinafter called a "Blue Sky Application"), or arise out of
or are based upon the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, Prospectus, or any amendment or
supplement thereto, or in any Blue Sky Application, a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such cases to the
extent, but only to the extent, that any such losses, claim, damages or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation of the Registration
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such Preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto. Notwithstanding the foregoing, the Company
shall have no liability under this section if such untrue statement or omission
made in a Preliminary Prospectus is cured in the Prospectus and the Prospectus
is not delivered to the person or persons alleging the liability upon which
indemnification is being sought. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter, severally, but not jointly, indemnifies and
holds harmless the Company, each of its directors, each nominee (if any) for
director named in the Prospectus, each of its officers who have signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include, but not
be limited to, all costs of defense and investigation and all attorneys' fees)
to which the Company or any such director, nominee, officer or controlling
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<PAGE> 31
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statements or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by you or by any
Underwriter through you specifically for use in the preparation thereof.
Notwithstanding the foregoing, the Underwriters shall have no liability under
this Section if such untrue statement or omission made in a Preliminary
Prospectus is cured in the Prospectus and the Prospectus is not delivered to
the person or persons alleging the liability upon which indemnification is
being sought through no fault of the Underwriter. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the reasonable judgment of
the Representative, it is advisable for the Representative or such Underwriters
or controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of the Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for all such Underwriters and controlling persons,
which firm shall be designated in writing by you). No settlement of any action
against an indemnified party shall be made without
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the consent of the indemnifying party, which shall not be unreasonably withheld
in light of all factors of importance to such indemnifying party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) each Underwriter makes
claim for indemnification pursuant to Section 6 hereof but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case,
notwithstanding the fact that the express provisions of Section 6 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any Underwriter, then the Company and each person who
controls the Company, in the aggregate, and any such Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (which shall, for all purposes of this Agreement, include,
but not be limited to, all reasonable costs of defense and investigation and
all reasonable attorneys, fees) in either such case (after contribution from
others) in such proportions that all such Underwriters are responsible in the
aggregate for that portion of such losses, claims, damages or liabilities
represented by the percentage that the underwriting discount per Share
appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriter and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be
determined by reference to, among other things, whether in the case of an
untrue statement of a material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company, or
the Underwriter and the parties, relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree (a) that it would not be just
and equitable if the respective obligations of the Company and the Underwriters
to contribute pursuant to this Section 7 were to be determined by pro rata or
per capita allocation of the aggregate damages (even if the Underwriters and
their controlling persons in the aggregate were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the first sentence of this Section; and
(b) that the contribution of each contributing Underwriter shall not be in
excess of its proportionate share (based on the ratio of the number of
Securities purchased by such Underwriter to the number of Securities purchased
by all contributing Underwriters) of the portion of such losses, claims,
damages or liabilities for which the Underwriters are responsible. No person
ultimately determined to be guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who is nor ultimately determined to be guilty of such fraudulent
misrepresentation. As used in this paragraph, the term "Underwriter" includes
any officer, director, or other person who controls the Underwriter within the
meaning of Section 15 of the Act, and the word "Company" includes any officer,
director, or person who controls the Company within the meaning of Section 15
of the Act. If the full amount of the contribution specified in this paragraph
is not permitted by law, then the Underwriter and each person who controls the
Underwriter shall be entitled to contribution from the Company, its officers,
directors and controlling persons to the full extent permitted by law. This
foregoing agreement shall in no way affect the contribution liabilities of any
persons having liability under Section 11 of the Act other than the Company and
the Underwriter. No contribution shall be requested with regard to
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the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. Costs and Expenses. (a) Whether or not this Agreement becomes
effective or the sale of the Securities to the Underwriters is consummated, the
Company will pay all costs and expenses incident to the performance of this
Agreement by the Company including but not limited to the fees and expenses of
the counsel to the Company or of the Company's accountants; the costs and
expenses incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), Preliminary Prospectus and
the Prospectus, as amended or supplemented; the fee of the NASD in connection
with the filing required by the NASD relating to the offering of the Securities
contemplated hereby; all state filing fees, expenses and disbursements and up
to $30,000 of the legal fees of counsel to the Underwriters who are responsible
to assist the Company in connection with the filing of applications to register
the Securities under the state securities or blue sky laws; the cost of
printing or photocopying and furnishing to the several Underwriters copies of
the Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Selected Dealers Agreement, the Agreement Among Underwriters,
Underwriters Questionnaire, Underwriters Power of Attorney and the Blue Sky
Memorandum; the cost of printing the certificates evidencing the Securities;
the cost of preparing and delivering to the Underwriters and its counsel bound
volumes containing copies of all documents and appropriate correspondence filed
with or received from the Commission and the NASD and all closing documents;
the cost of "tombstone" advertisements to be placed in one or more daily or
weekly periodicals as the Representative may request; and the fees and
disbursements of the transfer agent for the Company's securities. The Company
shall pay any and all taxes (including any original issue, transfer, franchise,
capital stock or other tax imposed by any jurisdiction) on sales to the
Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus.
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Representative a non-accountable expense allowance
equal to three percent (3%) of the gross proceeds received from the sale of the
Securities, of which $45,000.00 has been advanced to the Representative and
will be credited to such allowance. In the event the over allotment option is
exercised, the Company shall pay to the Representative at the Option Closing
Date an additional amount equal to three percent (3%) of the gross proceeds
received upon exercise of the over allotment option.
(c) Other than as disclosed in the Registration Statement, no person
is entitled either directly or indirectly to compensation from the Company,
from the Representative or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Representative and the other Underwriters against any losses,
claims, damages or liabilities, joint or several which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys, fees, to which the Representative or such
other Underwriter may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in
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connection with the proposed offering by reason of such person's or entity's
influence or prior contact with the indemnifying party.
9. Substitution of Underwriters. If any of the Underwriters shall
for any reason not permitted hereunder cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
tender of such Securities in accordance with the terms hereof, then:
(a) if the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of Securities, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Securities which such defaulting Underwriter or Underwriters agreed but
failed to purchase.
(b) If any Underwriter or Underwriters so default and the agreed
number of Securities with respect to which such default or defaults occurs is
more than ten percent (10%) of the total number of Securities, the remaining
Underwriters shall have the right to take up and pay for (in such proportion as
may be agreed upon among them) the Securities which the defaulting Underwriter
or Underwriters agreed but failed to purchase. If such remaining Underwriters
do not, at the Closing Date, take up and pay for the Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase, the time
for delivery of the Securities shall be extended to the next business day to
allow the several Underwriters the privilege of substituting within twenty-four
hours (including non-business hours) another Underwriter or Underwriters
satisfactory to the Company. If no such Underwriter or Underwriters shall have
been substituted as aforesaid, within such twenty-four period, the time of
delivery of the Securities may, at the option of the Company, be again extended
to the next following business day, if necessary, to allow the Company the
privilege of finding within twenty-four hours (including non-business hours)
another Underwriter or Underwriters to purchase the Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the Securities of the defaulting Underwriter or Underwriters as
provided in this Section, (i) the Company or the Representative shall have the
right to postpone the time of delivery for a period of not more than seven (7)
business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary; and (ii) the respective numbers of Securities to
be purchased by the remaining Underwriters or substituted Underwriters shall be
taken at the basis of the underwriting obligation for all purposes of this
Agreement.
If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the Securities agreed
to be purchased by the defaulting Underwriters or substitute another
Underwriter or Underwriters as aforesaid, and the Company shall not find or
shall not elect to seek another Underwriter or Underwriters for such Securities
as aforesaid, then this Agreement shall terminate.
If, following exercise of the Option provided in Section 2(b) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option
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Securities at the Option Closing Date, or shall fail to take up and pay for the
number of Option Securities, which they become obligated to purchase at the
Option Closing Date upon tender of such Option Securities in accordance with
the terms hereof, then the remaining Underwriters or substituted Underwriters
may take up and pay for the Option Securities of the defaulting Underwriters in
the manner provided in Section 9(b) hereof. If the remaining Underwriters or
substituted Underwriters shall not take up and pay for all Option Securities,
the Underwriters shall be entitled to purchase the number of Option Securities
for which there is no default or, at their election, the option shall
terminate, the exercise thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of
termination, there shall be no liability on the part of any non-defaulting
Underwriter to the Company, provided that the provisions of this Section 9
shall not in any event affect the liability of any defaulting Underwriter to
the Company arising out of such default.
10. Effective Date. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the
effective date of the Registration Statement, or at such earlier time after the
effective date of the Registration Statement as you in your discretion shall
first commence the public offering by the Underwriters of any of the
Securities. The time of the public offering shall mean the time after the
effectiveness of the Registration Statement when the Securities are first
generally offered by you to the other Underwriters and Selected Dealers. This
Agreement may be terminated by you at any time before it becomes effective as
provided above, except that Sections 3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18
shall remain in effect notwithstanding such termination.
11. Termination. (a) This Agreement, except for Sections 3(c), 6, 7,
8, 13, 14, 15, 16, 17, and 18 hereof, may be terminated at any time prior to
the Closing Date, and the Option referred to in Section 2(b) hereof, if
exercised, may be canceled at any time prior to the Option Closing Date, by you
if in your judgment it is impracticable to offer for sale or to enforce
contracts made by the Underwriters for the resale of the Securities agreed to
be purchased hereunder by reason of: (i) the Company having sustained a
material adverse loss, whether or not insured, by reason of fire, earthquake,
flood, accident or other calamity, or from any labor dispute or court or
government action, order or decree; (ii) trading in securities on the New York
Stock Exchange or the American Stock Exchange having been suspended or limited;
(iii) maximum charges for prices shall have been required on the
over-the-counter market by the NASD; (iv) any other restrictions on
transactions in securities materially affecting the free market for securities
or the payment for such securities, having been established by any of the
aforementioned Exchanges, by the Commission by any other federal or state
agency, by action of the Congress or by Executive Order; (v) material
governmental restrictions having been imposed on trading in securities
generally (not in force and effect on the date hereof); (v) a banking
moratorium having been declared by Federal or New York or Florida state
authorities; (vi) an outbreak of major international hostilities or other
national or international calamity having occurred which is reasonably believed
likely by the Representative to have a material adverse impact on the business,
financial condition or financial statements of the Company or the market for
the securities offered hereby; (vii) the passage by the Congress of the United
States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any
governmental body or any authoritative accounting institute or board, or any
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governmental executive; (viii) any material adverse change in the financial or
securities markets beyond normal market fluctuations having occurred since the
date of this Agreement; (ix)any action having been taken by the Government of
the United States or any department or agency thereof which, in the sole
judgment of the Representative, has had a material adverse effect upon the
general market for securities; (x) any material adverse change having occurred,
since the respective dates as of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business; (xi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could, in the reasonable judgment of the
Representative, materially adversely affect the Company; (xi) the general
market for securities or political, legal or financial conditions having
deteriorated so materially from that in effect on the date of this Agreement
that, in the sole judgment of the Representative it is impracticable for the
Representative to commence or proceed with the public offering of the
Securities and with the payment for or acceptance thereof; (xii) the
Representative determines, in its sole discretion, that any materially adverse
change having occurred, since the date as of which information is given in the
Registration Statement and the Prospectus, in the financial condition,
business, prospects, operations, properties or obligations of the Company;
(xiii) except as contemplated by the Prospectus, the Company is merged or
consolidated into or acquired by another company or group or there exists a
binding legal commitment for the foregoing or any other material change of
ownership or control occurs; or (xiv) the Company shall not have complied in
all material respects with any term, condition or provisions on their part to
be performed, complied with or fulfilled (including but not limited to those
set forth in this Agreement) within the respective times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. Representative's Warrant Agreement. At the Closing Date, the
Company will issue to the Representative and/or persons related to the
Representative, for an aggregate purchase price of $200, and upon the terms and
conditions set forth in the form of Representative's Warrant Agreement annexed
as an exhibit to the Registration Statement, Representative's Warrants to
purchase up to an aggregate of 100,000 Shares and 100,000 Warrants, in such
denominations as the Representative shall designate. In the event of conflict
in the terms of this Agreement and the Representative's Warrant Agreement, the
language of the form of Representative's Warrant Agreement shall control.
13. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and
the Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, the Company or any of its officers or directors or any
controlling person and will survive delivery of and payment for the Securities
and the termination of this Agreement.
14. Notice. All communications hereunder will be in writing and,
except as otherwise expressly provided herein, will be mailed, delivered or
telegraphed and confirmed:
36
<PAGE> 37
If to the Underwriters: Attention: President
Duke & Co., Inc.
909 Third Avenue
New York, New York 10022
Copy to: Richard F. Dahlson, Esq.
Jackson Walker LLP
901 Main Street, Suite 6000
Dallas, Texas 75202
Copy to: James M. Kaplan, Esq.
Zimet, Haines, Friedman & Kaplan
460 Park Avenue
New York, New York 10022
If to the Company: Lee Sanders, President
Aviation Group, Inc.
700 North Pearl Street
Suite 2170
Dallas, TX 75201
Copy to: Daryl B. Robertson
Bracewell & Patterson, L.L.P.
500 North Akard
4000 Lincoln Plaza
Dallas, Texas 75201
15. Parties in Interest. This Agreement herein set forth is made
solely for the benefit of the several Underwriters, the Company and, to the
extent expressed, any person controlling the Company or of the Underwriters,
and directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of the Securities, as
such purchaser, from the several Underwriters. All of the obligations of the
Underwriters hereunder are several and not joint.
16. Applicable Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed entirely within the State of New York. The parties
agree that any action brought by any party against another party in connection
with any rights or obligations arising out of this Agreement shall be
instituted properly in a federal or state court of competent jurisdiction with
venue only in the State District Court of New York County, New York or the
United States District Court for the Southern District of New York. A party to
this Agreement named as a Defendant in any action brought in connection with
this Agreement in any court outside of the above named designated county or
district shall have the right to have the venue of said action changed to the
above designated county or district or, if necessary,
37
<PAGE> 38
have the case dismissed, requiring the other party to re-file such action in an
appropriate court in the above designated county or federal district.
17. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
18. Entire Agreement. This Agreement and the agreements referred to
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreement, understanding, negotiations and discussions,
whether written or oral, of the parties hereto.
19. Representative as Underwriter. In the event the Representative
acts as the sole Underwriter ("Underwriter") in connection with the
underwriting of the securities being offered pursuant to the Registration
Statement, all references to the Representative in this Agreement shall be
replaced by reference to the "Underwriter", and (i) any consents required to be
obtained from the Representative shall be required to be obtained solely from
the Underwriter; (ii) all compensation to be received by the Representative
shall instead be received by the Underwriter; and (iii) the provisions of
section nine (9) of this Agreement shall not apply.
38
<PAGE> 39
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement between the Company and the several Underwriters in
accordance with its terms.
Very truly yours,
Aviation Group, Inc.
BY:
--------------------------------
Lee Sanders, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
Duke & Co., Inc.
BY:
--------------------------------
Authorized Officer
For itself and as
Representative of the several
Underwriters
39
<PAGE> 40
SCHEDULE A
TO THE UNDERWRITING AGREEMENT
<TABLE>
<CAPTION>
UNDERWRITER SHARES
- ----------- ------
<S> <C>
Duke & Co., Inc. ......................................................
1,000,000
</TABLE>
<TABLE>
<CAPTION>
UNDERWRITER WARRANTS
- ----------- --------
<S> <C>
Duke & Co., Inc. ......................................................
</TABLE>
1,000,000
<PAGE> 1
EXHIBIT 4.3
WARRANT AGREEMENT
AGREEMENT, dated as of July __, 1997, by and among AVIATION GROUP,
INC., a Texas corporation (the "Company"), CONTINENTAL STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent (the "Warrant Agent"), and DUKE & CO., INC., a
Florida corporation (the "Underwriter").
W I T N E S S E T H
WHEREAS, pursuant to an underwriting agreement (the "Underwriting
Agreement") dated July __, 1997 between the Company and the Underwriter, in
connection with (i) a public offering pursuant to a Registration Statement on
Form SB-2 (Registration No. 333-22727) (the "Registration Statement") filed
pursuant to the Securities Act of 1933, as amended (the "Act"), and declared
effective by the Securities and Exchange Commission on July __, 1997 of
1,000,000 shares of its Common Stock, par value $0.01 per share (the "Common
Stock") and 1,000,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") (and up to 150,000 additional shares of Common Stock and up to
150,000 additional Warrants covered by an over-allotment option granted by the
Company to the Underwriter), and (ii) the issuance to the Underwriter or its
designees of warrants to purchase up to an aggregate of 100,000 shares of
Common Stock and/or 100,000 Warrants (the "Underwriter's Warrants"), the
Company will issue up to an aggregate of 1,250,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
<PAGE> 2
certificates representing the Warrants and the Warrant Agent, the parties
hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the Common Stock of the Company,
$.01 par value; provided, however, that the shares issuable upon exercise of
the Warrants shall include (i) in the case of any consolidation, merger, sale
or conveyance of the character referred to in Section 9(d) hereof, the stock,
securities, or property provided for in such section or (ii) in the case of any
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination, such shares of Common
Stock as so changed.
(b) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located on the date hereof at 2 Broadway
Street, New York, New York 10004.
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (i) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (ii)
payment in cash, or by official bank or certified check made payable to the
Warrant Agent, of an amount in lawful money of the United States of America
equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean, as to each
Warrant, July __, 1999.
(e) "Market Price" shall mean, if the Common Stock is listed on a
national securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on The Nasdaq Stock Market, the last reported
sale price of the Common Stock on such exchange or The Nasdaq Stock Market, as
the case may be, on the applicable day or, if no such sale is made on such day,
the average of the closing bid and asked prices for such day on such exchange
or The Nasdaq Stock Market, as the case may be.
2
<PAGE> 3
(f) "Purchase Price" shall mean the price to be paid upon exercise
of each Warrant in accordance with the terms hereof, which price shall be $6.90
per share, subject to adjustment from time to time pursuant to the provisions
of Section 9 hereof, and subject to the Company's right to reduce the Purchase
Price upon notice to all Warrant Holders.
(g) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants in accordance with the terms hereof,
which price shall be $.10 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(h) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books maintained
by the Warrant Agent pursuant to Section 6.
(i) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
(j) "Warrant Expiration Date" shall mean, with respect to each
Warrant, 5:00 p.m. (Eastern time) on July __, 2002, or the Redemption Date as
defined in Section 8, whichever is earlier; provided that if such date shall in
the State of New York be a holiday or a day on which banks are authorized to
close, then 5:00 p.m. (Eastern time) on the next following day which in the
State of New York is not a holiday nor a day on which banks are authorized to
close. Upon notice to all Warrant Holders, the Company shall have the right to
extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase one (1) share of
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and
3
<PAGE> 4
delivered to the Warrant Agent. Upon written order of the Company signed by
its President or Chairman or a Vice President and by its Secretary or an
Assistant Secretary, the Warrant Certificates shall be countersigned, issued
and delivered by the Warrant Agent.
(c) From time to time up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 1,250,000 shares
of Common Stock, subject to adjustment as described herein, upon the exercise
of Warrants in accordance with this Agreement.
(d) From time to time up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date upon
the exercise of fewer than all Warrants represented by any Warrant certificate
to evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the
Underwriter's Warrants; and (vi) those issued at the option of the Company, in
such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Purchase Price, the number of shares of Common
Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 9.
(e) Pursuant to the terms of the Underwriter's Warrants, the
Underwriter and its designees may purchase up to an aggregate of 100,000
Warrants.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A, and may have such letters, numbers or other marks
of identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not
4
<PAGE> 5
inconsistent with the provisions of this Agreement or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage. The Warrant Certificates shall be dated the
date of issuance thereof (whether upon initial issuance, transfer, exchange or
in lieu of mutilated, lost, stolen or destroyed Warrant Certificates) and
issued in registered form. Warrants shall be numbered serially with the letter
W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by
its Secretary or an Assistant Secretary, by mutual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates may nevertheless be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company. After countersignature by the Warrant Agent, Warrant Certificates
shall be delivered by the Warrant Agent to the Registered Holder without
further action by the Company, except as otherwise provided by Section 4(a).
SECTION 4. Exercise
(a) Each Warrant may be exercised by the Registered Holder thereof
at any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder upon exercise thereof
as of the close of business on the Exercise Date. As soon as practicable on or
after the Exercise Date, the Warrant Agent shall deposit the cash or check
received from the exercise of a Warrant in an account for the benefit of the
Company and shall notify the Company in writing of the exercise of
5
<PAGE> 6
the Warrants. Promptly following, and in any event within five (5) days after
the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of
the Company, shall cause to be issued and delivered by the Transfer Agent to
the person or persons entitled to receive the same a certificate or
certificates for the securities deliverable upon such exercise (plus a Warrant
Certificate for any remaining unexercised Warrants of the Registered Holder),
provided that the Warrant Agent shall refrain from causing such issuance of
certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant to the Company or as the Company may direct in
writing. Notwithstanding anything in the foregoing to the contrary, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities and Exchange Commission a registration statement under the Act
covering the shares of Common Stock issuable upon exercise of such Warrant and
such shares have been so registered or qualified or deemed to be exempt under
the securities laws of the state of residence of the Registered Holder of such
Warrant. The Company shall use its best efforts to have all shares so
registered or qualified on or before the date on which the Warrants become
exercisable.
(b) If, on the Exercise Date in respect of the exercise of any
Warrant at any time on or after the first anniversary of the date hereof, the
exercise of the Warrant was solicited by the Underwriter at such time as the
Underwriter is a member of the National Association of Securities Dealers, Inc.
("NASD") and the solicitation of the exercise of the Warrant was not in
violation of Securities Exchange Act of 1934, as amended, or any rule
promulgated thereunder which may be in effect as of such time of exercise, the
rules and regulations of the National Association of Securities Dealers, Inc.
or applicable state securities laws or regulations then the Underwriter shall
be entitled to receive, upon exercise of the Warrant(s), a fee of six percent
(6%) of the Purchase Price (the "Solicitation Fee"). Within five days after
the exercise, the Warrant Agent shall send to the Underwriter a copy of the
reverse side of the Warrant certificate relating to each Warrant exercised. In
the event the Underwriter is entitled to a Solicitation Fee with respect to any
such exercise, the Underwriter shall deliver to the Company (i) a copy of the
reverse side of the Warrant(s) and (ii) a certificate, executed by the
6
<PAGE> 7
President or Vice President of the Underwriter, certifying that the conditions
set forth above have been met with respect to such exercise. Within five days
after receipt thereof by the Company, the Company shall remit to the
Underwriter the Solicitation Fees to which the Underwriter is entitled. The
Underwriter shall reimburse the Warrant Agent, upon request, for its reasonable
expenses relating to compliance with this Section 4(b). In addition, the
Underwriter and the Company may, at any time during business hours, examine the
records of the Warrant Agent, including its ledger of original Warrant
certificates returned to the Warrant Agent upon exercise of Warrants. The
provisions of this paragraph may not be modified, amended or deleted without
the prior written consent of the Underwriter and the Company.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company has reserved, and covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon exercise of Warrants, such number of shares of
Common Stock as shall then be issuable upon the exercise of all outstanding
Warrants. The Company covenants that all shares of Common Stock which shall be
issuable upon exercise of the Warrants shall, at the time of delivery, be duly
and validly issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issuance thereof (other than those which the
Company shall promptly pay or discharge) and that upon issuance such shares
shall be listed on each national securities exchange, if any, on which the
other shares of outstanding Common Stock of the Company are then listed or, if
applicable, The Nasdaq Stock Market.
(b) The Company hereby agrees that, so long as any unexpired
Warrants remain outstanding, the Company will file such post-effective
amendments to the Registration Statement as may be necessary to permit it to
deliver to each person exercising a Warrant a prospectus meeting the
requirements of Section 10(a)(3) of the Act and otherwise complying therewith,
and will deliver such a prospectus to each such person.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants or the issuance or
7
<PAGE> 8
delivery of any shares upon exercise of the Warrants; provided, however, that
if the shares of Common Stock are to be delivered in a name other than the name
of the Registered Holder of the Warrant Certificate representing any Warrant
being exercised, then no such delivery shall be made unless the person
requesting the same had paid to the Warrant Agent the amount of transfer taxes
or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants, unless the Warrant Agent
and the Transfer Agent are the same entity.
SECTION 6. Exchange and Registration of Transfer
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and upon satisfaction of all the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing the aggregate number of Warrants so
transferred.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the
8
<PAGE> 9
"Election to Purchase" or "Assignment" form, as appropriate, on the reverse
thereof shall be duly endorsed, or be accompanied by a written instrument or
instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant Agent, duly executed by the Registered Holder or his attorney-
in-fact authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates requested by a
Registered Holder. In addition, the Company may require payment by such
Registered Holder of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as Warrant Agent, or, with the
prior written consent of the Underwriter, disposed of or destroyed, at the
direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants, which are being publicly offered with shares of
Common Stock pursuant to the Underwriting Agreement, may be purchased
separately from the shares and will be immediately transferable separately from
the Common Stock.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the
9
<PAGE> 10
Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for a
substitute Warrant Certificate shall comply with such other reasonable
regulations and pay such other reasonable charges as the Warrant Agent may
prescribe pursuant to Section 6(d) or otherwise.
SECTION 8. Redemption
(a) Commencing July __, 1999, on prior written notice as required
pursuant to the provisions of paragraph (b) of this Section 8 below, the
Warrants may, with the prior consent of the Underwriter, be redeemed by the
Company at the Redemption Price, provided the Market Price of the Company's
Common Stock during the period in which the warrant is exercisable equals or
exceeds $9.4875 per share, subject to adjustment, for 20 consecutive trading
days ending not more than ten days immediately prior to the date on which the
Company gives notice of redemption. All Warrants must be redeemed if any of
the Warrants are redeemed.
(b) In case the Company shall desire to exercise its right to so
redeem the Warrants, it shall request the Warrant Agent, or the Underwriter, to
mail a notice of redemption to each of the Registered Holders of the Warrants
to be redeemed, first class, postage prepaid, not earlier than the forty-fifth
(45th) day before the date fixed for redemption and not later than the
thirtieth (30th) day before the date fixed for redemption, at such Registered
Holder's last address as it shall appear on the records of the Warrant Agent.
Any notice mailed in the manner provided herein shall be conclusively presumed
to have been duly given whether or not the Registered Holder receives such
notice.
(c) The notice of redemption shall specify (i) the Redemption
Price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the Redemption Price paid, (iv) that the
Underwriter will assist each Registered Holder of a Warrant in connection with
the exercise thereof (if the Underwriter has conducted, or caused to be
conducted, the mailing) and (v) that the right to exercise the Warrant shall
terminate at 5:00 p.m. (Eastern time) on the business day immediately preceding
the date fixed for redemption (the "Redemption Date"). No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of the
10
<PAGE> 11
proceedings for such redemption except as to a holder (a) to whom notice was
not mailed or (b) whose notice was defective. An affidavit of the Warrant
Agent or of the Secretary or an Assistant Secretary of the Underwriter or the
Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant that has been called for
redemption shall terminate at 5:00 p.m. (Eastern time) on the Redemption Date.
After the Redemption Date, Holders of the redeemed Warrants shall have no
further rights except to receive, upon surrender of the redeemed Warrant, the
Redemption Price.
(e) From and after the date specified for redemption, the Company
shall, at the place specified in the notice of redemption, upon presentation
and surrender to the Company by or on behalf of the Registered Holder thereof
of one or more Warrants to be redeemed, deliver or cause to be delivered to or
upon the written order of such Holder a sum in cash equal to the Redemption
Price of each such Warrant. From and after the date fixed for redemption and
upon the deposit or setting aside by the Company of a sum sufficient to redeem
all the Warrants called for redemption, such Warrants shall expire and become
void and all rights hereunder and under the Warrant Certificates, except the
right to receive payment of the Redemption Price, shall cease.
SECTION 9. Adjustment of Exercise Price and Number of Shares of
Common Stock or Warrants.
(a) (i) In the event the Company shall, at any time or from time
to time after the date hereof, issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such sale, issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the applicable Purchase Price in effect immediately prior to such Change of
Shares shall be changed to a price (calculated to the nearest cent) determined
by multiplying the Purchase Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to such Change of Shares and the
11
<PAGE> 12
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such Change of Shares.
(ii) Subject to the exceptions referred to in Section 9(h), in the
event that the Company shall at any time or from time to time issue or sell any
shares of its Common Stock for a consideration per share of Common Stock less
than the then applicable Purchase Price, the Purchase Price shall thereupon be
reduced to a price (calculated to the nearest cent) determined by dividing (x)
an amount equal to the sum of (i) the number of shares of Common Stock of the
Company outstanding immediately prior to such issue or sale multiplied by the
then applicable Purchase Price plus (ii) the consideration, if any, received by
the Company upon such issuance or sale by (y) the total number of shares of
Common Stock of the Company outstanding immediately after such issuance or
sale.
(iii) If the Company shall at any time after the date hereof issue or
sell any shares of any other securities convertible into Common Stock or any
options or warrants to purchase Common Stock (except as provided in Section
9(h)), including in connection with retirement of outstanding debt, for a
consideration per share less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then, forthwith upon such issue or
sale, the Purchase Price shall be reduced to the price (calculated to the
nearest cent) determined by dividing (x)an amount equal to the sum of (i) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale multiplied by the Purchase Price at the time plus (ii) the consideration,
if any, received by the Company upon such issue or sale, by (y) the total
number of shares of Common Stock outstanding immediately after such issue or
sale.
(iv) For purposes of this Section 9(a) the consideration in
connection with any such issue or sale shall be the amount of cash received by
the Company (or, in the case of securities sold to underwriters or dealers for
public offering or to the public through underwriters, the public offering
price) for the sale of such shares or other securities, options or warrants,
before deducting therefrom any commissions or other expenses paid or incurred
by the Company in connection with the issue or sale of such securities, options
or warrants plus any additional cash receivable by the Company on conversion or
exercise of such other securities, options or warrants except that, if any
portion of such
12
<PAGE> 13
consideration is a consideration other than cash, the amount of such
consideration other than cash shall be (i) the principal amount thereof, plus
any accrued but unpaid interest thereon and all other amounts payable in
connection with such debt including for expenses and yield maintenance
premiums, in the case of debt forgiven, exchanged or converted, and (ii) the
value of such consideration as determined in good faith by the Board of
Directors of the Company (whose determination shall be conclusive and shall be
evidenced by a resolution of the Company's Board of Directors filed with the
Warrant Agent), in the case of any other non-cash consideration.
(v) If the conversion or exercise price of any securities convertible
into Common Stock or options or warrants to purchase Common Stock is not
specified at the time of the issue or sale of such securities, option or
warrants, the amount thereof, for purposes only of this Section 9(a), shall be
as determined in accordance with Section 9(i).
(vi) In the event of the issuance or sale by the Company of any
securities convertible into Common Stock or any options or warrants to purchase
Common Stock (except as provided in Section 9(h)), the Company shall be deemed
to have issued the maximum number of shares of Common Stock into which such
convertible securities may be converted or the maximum number of shares of
Common Stock deliverable upon the exercise of such options or warrants, as the
case may be, for the minimum consideration payable in respect thereof. On the
expiration of such options or warrants or the termination of the right to
convert such convertible securities, the Purchase Price shall be readjusted
based upon the number of shares of Common Stock actually delivered upon the
exercise of such options or warrants or upon the conversion of such convertible
securities. Except as provided in the next preceding sentence no further
adjustment of the Purchase Price shall be made as a result of the actual
issuance of shares of Common Stock upon the exercise of such options or
warrants or the conversion of such convertible securities.
(b) Upon each adjustment of the applicable Purchase Price pursuant to
Section 9(a), the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
9(c)) be such number of shares (calculated to the nearest tenth) purchasable at
13
<PAGE> 14
the applicable Purchase Price immediately prior to such adjustment multiplied
by a fraction, the numerator of which shall be the applicable Purchase Price in
effect immediately prior to such adjustment and denominator of which shall be
the applicable Purchase Price in effect immediately after such adjustment.
(c) The Company may elect, upon any adjustment of the applicable
Purchase Price, to adjust the number of Warrants outstanding, in lieu of
adjusting the number of shares of Common Stock purchasable upon the exercise of
each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common
Stock. Each Warrant held of record prior to such adjustment of the number of
Warrants shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the applicable Purchase Price in effect immediately prior to such
adjustment and the denominator of which shall be the applicable Purchase Price
in effect immediately after such adjustment. Upon each such adjustment of the
number of Warrants, the Redemption Price in effect immediately prior to such
adjustment also shall be adjusted by multiplying such Redemption Price by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately after such adjustment and the denominator of which shall be the
Purchase Price in effect immediately prior to such adjustment. Upon each
adjustment of the number of Warrants pursuant to this Section 9, the Company
shall, as promptly as practicable, cause to be distributed to each Registered
Holder of Warrant Certificates on the date of such adjustment Warrant
Certificates evidencing, subject to Section 10, the number of additional
Warrants, if any, to which such Holder shall be entitled as a result of such
adjustment or, at the option of the Company, cause to be distributed to such
Holder in substitution and replacement for the Warrant Certificates held by
such Holder prior to the date of adjustment (and upon surrender thereof, if
required by the Company) new Warrant Certificates evidencing the number of
Warrants to which such Holder shall be entitled after such adjustment.
(d) In the case of any consolidation or merger of the Company with or
into another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of
14
<PAGE> 15
Common Stock), or in case of any sale or conveyance to another corporation of
the property of the Company as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Company shall
cause effective provision to be made so that each holder of a Warrant then
outstanding shall have the right thereafter, by exercising such Warrant, to
purchase the kind and number of shares of stock or other securities or property
(including cash) receivable upon such consolidation, merger, sale or conveyance
by a holder of the number of shares of Common Stock that might have been
purchased upon exercise of such Warrant, immediately prior to such
consolidation, merger, sale or conveyance. Any such provision shall include
provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The foregoing
provisions shall similarly apply to successive consolidations, mergers, sales
or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates,
continue to express the applicable Purchase Price per share, the number of
shares purchasable thereunder and the Redemption Price therefor as were
expressed in the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly after the fiscal quarter in which such
adjustment was triggered prepare a certificate signed by the Chairman or
President, and by the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the applicable Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant
after such adjustment, and, if the Company shall have elected to adjust the
number of Warrants, the number of Warrants to which the Registered Holder of
each Warrant shall then be entitled, and the adjustment in Redemption Price
resulting therefrom, and (iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly file such certificate with the
Warrant Agent and cause a brief summary thereof to be sent by ordinary first
class mail to the Underwriter and to each Registered Holder of Warrants at his
or her last address as it shall appear on the
15
<PAGE> 16
registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an
officer of the Warrant Agent or the Secretary or an Assistant Secretary of the
Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(g) For purposes of Section 9(a), 9(b) and 9(c) hereof, the
following provisions (i) and (ii) shall also be applicable.
(i) The number of shares of Common Stock outstanding at
any given time shall include shares of Common Stock owned or held by or for the
account of the Company and the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be considered a Change of
Shares for purposes of said sections.
(ii) No adjustment of the Purchase Price shall be made
unless such adjustment would require an increase or decrease of at least $0.05
in such price; provided that any adjustments which by reason of this clause
(ii) are not required to be made shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment which, together
with any adjustment(s) so carried forward, shall require an increase or
decrease of at least $0.05 in the Purchase Price then in effect hereunder.
(h) No adjustment to the Purchase Price or to the number of shares
of Common Stock purchasable upon the exercise of each Warrant will be made,
however, with respect to the following:
(1) upon the issuance or exercise of any of the Warrants;
(2) upon (i) the issuance or sale of shares of Common
Stock pursuant to options, warrants or convertible or exchangeable securities
outstanding as of the date of this Agreement or (ii) issuance of shares of
Common Stock pursuant to the Company's 1997 Stock Option Plan as it exists on
the date hereof.
16
<PAGE> 17
(3) upon the issuance of any shares of Common Stock in
connection with a consolidation or merger in which the Company or a wholly
owned subsidiary of the Company is the continuing corporation and which does
not result in any reclassification, capital reorganization or other change of
the outstanding Common Stock, or (ii) pursuant to and in connection with the
acquisition by the Company or any wholly owned subsidiary of the Company of all
or substantially all of the assets or stock (or other equity interests, as the
case may be) of another entity.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the
amount of any such adjustment, if required, shall be binding upon the holders
of the Warrants and the Company if made in good faith by the Board of Directors
of the Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each of the then
Registered Holders of the Warrants all of such rights, warrants or options to
which each such holder would have been entitled if, on the date of
determination of stockholders entitled to the rights, warrants or options being
granted by the Company, such holder were the holder of record of the number of
whole shares of Common Stock then issuable upon exercise (assuming, for
purposes of this Section 9(j), that the exercise of Warrants is permissible
during periods prior to the Initial Warrant Exercise Date) of his Warrants.
Such grant by the Company to the holders of the Warrants shall be in lieu of
any adjustment which otherwise might be called for pursuant to this Section 9.
(k) In case the Company shall, at any time prior to the exercise
of a Warrant, make any distribution of its assets to holders of the Common
Stock, then the Registered Holder of such Warrant who exercises his Warrant
after the record date for determination of those Registered Holders of Common
Stock entitled to such distribution of assets shall be entitled to receive,
upon exercise of the Warrant, in addition to Common Stock, the amount of such
distribution which would have been payable to such Registered Holder had he
been the holder of record of the Common Stock
17
<PAGE> 18
receivable upon exercise of such Warrant on the record date for the
determination of those entitled to such distribution.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
shall nevertheless not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on The Nasdaq Stock Market, the current value shall be
the last reported sale price of the Common Stock on The Nasdaq Stock Market or
such exchange on the last business day prior to the date of exercise of the
Warrant, or if no such sale is made on such day, the average of the closing bid
and asked prices for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted to
unlisted trading privileges, the current value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau, Inc.
on the last business day prior to the date of the exercise of the Warrant; or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon
exercise of such Warrants for any purpose whatsoever, nor shall anything
contained herein be construed to confer upon the holder of Warrants, as such,
any of the rights of a stockholder of the Company or any right to vote for
18
<PAGE> 19
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance or reclassification of stock,
change of par value or change of stock to no par value, consolidation, merger
or conveyance or otherwise), or to receive notice of meetings, or to receive
dividends or subscription rights, until such Holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
SECTION 12. Rights of Action. All rights of action with respect to
this Agreement are vested in the respective Registered Holders of the Warrants,
and any Registered Holder of a Warrant, without consent of the Warrant Agent or
of the holder of any other Warrant, may, in his own behalf and for his own
benefit, enforce against the Company his right to exercise his Warrants for the
purchase of shares of Common Stock in the manner provided in the Warrant
Certificates and this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a Warrant,
by his acceptance thereof, consents and agrees with the Company, the Warrant
Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of
the Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Warrant Agent, duly endorsed
or accompanied by a proper instrument of transfer satisfactory to the Warrant
Agent and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by
any notice or knowledge to the contrary, except as otherwise expressly provided
in Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the Company
shall purchase or acquire any Warrant or Warrants, the
19
<PAGE> 20
Warrant Certificate or Warrant Certificates evidencing the same shall thereupon
be delivered to the Warrant Agent and canceled by it and retired.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its
duties shall be determined solely by the provisions of this Agreement. The
Warrant Agent shall not, by issuing and delivering Warrant Certificates or by
any other act hereunder, be deemed to make any representations as to the
validity, value or authorization of the Warrant Certificates or the Warrants
represented thereby or of any securities or other property delivered upon
exercise of any Warrant or whether any stock issued upon exercise of any
Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. The Warrant Agent shall not (i) be liable for any recital or statement
of facts contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed by
it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in any Warrant Certificate, or (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence or
willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company or for the Underwriter) and shall incur
no liability or responsibility for any action taken, suffered or omitted by it
in good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary (unless other
20
<PAGE> 21
evidence in respect thereof is herein specifically prescribed). The Warrant
Agent shall not be liable for any action taken, suffered or omitted by it in
accordance with such notice, statement, instruction, request, direction, order
or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or willful misconduct.
In the event of a dispute under this Agreement between the Company and
the Underwriter regarding proceeds received by the Warrant Agent from the
exercise of the Warrants, the Warrant Agent shall have the right, but not the
obligation, to bring an interpleader action to resolve such dispute.
The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or
any inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for
the appointment of a new warrant agent. Any new warrant agent, whether
appointed by the Company or by such a court shall be a bank or trust company
having a capital and surplus as shown by its last published report to its
stockholders, of not less than Ten Million ($10,000,000.00) Dollars, or a stock
transfer company. After acceptance in writing of such appointment by the new
warrant agent is received by the
21
<PAGE> 22
Company, such new warrant agent shall be vested with the same powers, rights,
duties and responsibilities as if it had been originally named herein as the
Warrant Agent, without any further assurance, conveyance, act or deed; but if
for any reason it shall be necessary or expedient to execute and deliver any
further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or any corporation resulting from any consolidation
to which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions of
Section 4(b), the Warrant Agent and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained or (ii) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified,
22
<PAGE> 23
supplemented or altered in any respect except with the consent in writing of
the Registered Holders of Warrant Certificates representing not less than a
majority of the outstanding Warrants, and provided, further, that no change in
the number of or nature of the securities purchasable upon the exercise of any
Warrant, or the Purchase Price therefor, or the acceleration of the Warrant
Expiration Date, shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are specifically prescribed by this Agreement as originally
executed.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made three days after such is mailed first class registered or certified mail,
postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company, at 700 North Pearl Street,
Suite 2170, Dallas, Texas 75201 Attention: President, or at such other address
as may have been furnished to the Warrant Agent in writing by the Company; if
to the Warrant Agent, at Continental Stock Transfer & Trust Company, 2 Broadway
Street, New York, New York 10004; if to Duke & Co., Inc., at 909 Third Avenue,
7th Floor, New York, New York 10022, Attention: President, with a copies sent
to (i) Jackson Walker LLP, 901 Main Street, Suite 6000, Dallas, Texas 75202,
Attention: Richard F. Dahlson, Esq. and (ii) Zimet, Haines, Friedman & Kaplan,
460 Park Avenue, New York, New York 10022, Attention: James Martin Kaplan,
Esq.
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company, the Warrant Agent and the Underwriter, and
their respective successors and assigns, and the holders from time to time of
the Warrant Certificates. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim, in equity
or at law, or to impose upon any other person any duty, liability or
obligation.
23
<PAGE> 24
SECTION 20. Termination. This Agreement shall terminate at the close
of business on the Warrant Expiration Date of all the Warrants or such earlier
date upon which all Warrants have been exercised and/or redeemed, except that
the Warrant Agent shall account to the Company for cash held by it and the
provisions of Section 15 hereof shall survive such termination.
SECTION 21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this warrant
Agreement to be duly executed as of the date first above written.
AVIATION GROUP, INC.
By:
--------------------------------
Authorized Officer
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By:
--------------------------------
Authorized Officer
DUKE & CO., INC.
By:
--------------------------------
Authorized Officer
24
<PAGE> 25
EXHIBIT A
(FORM OF FACE OF WARRANT CERTIFICATE)
No. Warrants
------------ -------------
VOID AFTER JULY __, 2002
WARRANT CERTIFICATE FOR PURCHASE OF
COMMON STOCK
AVIATION GROUP, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one (1) fully paid and nonassessable share of Common
Stock, $0.01 par value (the "Common Stock"), of AVIATION GROUP, INC., a Texas
corporation (the "Company"), at any time from July __, 1999 (or earlier in
certain circumstances as provided in the Warrant Agreement referred to below)
to the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Election to Purchase Form on the
reverse hereof duly executed, at the corporate office of CONTINENTAL STOCK
TRANSFER & TRUST COMPANY as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $6.90 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to the Warrant Agent.
A-1
<PAGE> 26
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement") dated as of July
__, 1997, by and among the Company, the Warrant Agent and Duke & Co., Inc. (the
"Underwriter").
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustments.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
July __, 2002, or such earlier date as the Warrants shall be redeemed. If such
date shall in the State of New York be a holiday or a day on which the banks
are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New
York time) on the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. This Warrant shall not be exercisable by a Registered Holder in any
state in which it would be unlawful for the Company to deliver the shares of
Common Stock upon exercise of the Warrants represented hereby.
The Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent
A-2
<PAGE> 27
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment of this Warrant Certificate at
such office for registration of transfer, together with any transfer fee and
any tax or other governmental charge imposed in connection with such transfer,
a new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Commencing July __, 1999, this Warrant may, with the prior consent of
the Underwriter, be redeemed at the option of the Company, at a redemption
price of $.10 per Warrant, provided the Market Price (as defined in the Warrant
Agreement) for the securities issuable upon exercise of such Warrant shall
exceed $9.4875 per share (subject to adjustment as set forth in the Warrant
Agreement) for 20 consecutive trading days ending not more than three days
prior to the date on which the Company gives notice of redemption. Notice of
redemption shall be given not later than the thirtieth day, and not earlier
than the forty fifth day, before the date fixed for redemption, all as provided
in the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to this Warrant except to
receive the $.10 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
A-3
<PAGE> 28
The Company has agreed to pay a fee of 6% of the Purchase Price to the
Underwriter upon certain conditions as specified in the Warrant Agreement upon
the exercise of this Warrant.
This Warrant Certificate and each Warrant represented hereby shall be
governed by and construed in accordance with the laws of the State of New York.
A-4
<PAGE> 29
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its
officers thereunto duly authorized, and a facsimile of its corporate seal to be
imprinted hereon.
AVIATION GROUP, INC.
By
-----------------------------------------
Its
By
-----------------------------------------
Its
Date:
----------------------
[Seal]
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By
-------------------------
Its
Authorized Officer
A-5
<PAGE> 30
(FORM OF REVERSE OF WARRANT CERTIFICATE)
ELECTION TO PURCHASE FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ___________________ (____________________) Warrants represented by
this Warrant Certificate, and to purchase the securities issuable upon the
exercise of such Warrants, and requests that certificates for such securities
shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
-------------------------
[please print or type name and address]
and be delivered to
-------------------------
-------------------------
-------------------------
-------------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-6
<PAGE> 31
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
("NASD"). If not solicited by an NASD member, please write "unsolicited" in
the space below.
Please indicate the name of the NASD member firm which solicited the exercise
of the Warrant.
-------------------------------
Name of soliciting NASD Member
Dated:
----------------------- -------------------------------
Signature
-------------------------------
Street Address
-------------------------------
City, State and Zip Code
-------------------------------
Taxpayer ID Number
Signature Guaranteed:
-------------------------------
A-7
<PAGE> 32
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
-------------------------
[please print or type name and address]
____________________ (____________________) of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints
___________________ Attorney to transfer this Warrant Certificate on the books
of the Company, with full power of substitution in the premises.
Dated:
--------------------- ------------------------------
Signature Guaranteed:
------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE ELECTION TO PURCHASE FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A MEDALLION BANK.
A-8
<PAGE> 1
EXHIBIT 4.9
UNDERWRITER'S WARRANT AGREEMENT dated as of July __, 1997
between Aviation Group, Inc., a Texas corporation (the "Company"), and Duke &
Co., Inc. (the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated July __, 1997
between the Underwriter and the Company, to act as the underwriter in
connection with the Company's proposed public offering (the "Public Offering")
of 1,000,000 shares of common stock, par value $0.01 per share ("Common
Stock"), and 1,000,000 redeemable Common Stock purchase warrants ("Redeemable
Warrants"), plus up to an additional 150,000 shares of Common Stock and 150,000
Redeemable Warrants pursuant to the Underwriter's over-allotment option, which
securities are included in a registration statement on Form SB-2 (File No.
333-22727) (hereinafter, the "Public Offering Registration Statement"); and
WHEREAS, the Company proposes to issue to the Under- writer
warrants, one for the purchase of up to 100,000 shares of Common Stock and the
other for the purchase of up to 100,000 Redeemable Warrants; and
WHEREAS, the warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or officers and partners of the
Underwriter and members of the selling group (the "Selling Group") and/or their
officers or partners, in consideration for, and as part of the Underwriter's
compensation in connection with, the Underwriter acting as the underwriter
pursuant to the Underwriting Agreement;
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing premises,
the payment by the Underwriter to the Company of an aggregate of $200.00, the
receipt of which is hereby acknowledged by the Company, the agreements herein
set forth and other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. Subject to the terms and conditions of this
Agreement, the Underwriter, and/or its designees who are officers or partners
of the Underwriter or members of the Selling Group in connection with the
Public Offering, are hereby granted the right to purchase, at any time from
July __, 1998 until 5:00 P.M., New York City time, on July __, 2002 (the
"Warrant Exercise Term"), up to (i) 100,000 shares of Common Stock (the
"Shares") at an initial exercise price (subject to adjustment as provided in
Article 8 hereof) of $9.4875 per Share and (ii) 100,000 Redeemable Warrants at
an initial exercise price of $11.38 per Redeemable Warrant. The right to
purchase Shares as described in (i) above is hereinafter referred to as
"Warrant No. 1" and the right to purchase Redeemable Warrants as described in
(ii) above is hereinafter referred to as "Warrant No. 2". Warrant No. 1 and
Warrant No. 2 are hereinafter referred to collectively as the "Warrants".
Except as specifically otherwise provided herein, the Shares and the Redeemable
Warrants issued pursuant to Warrant No. 1 and Warrant No. 2, respectively,
shall bear the same terms and conditions as described under the caption
"Description of Securities" in the Public Offering Registration Statement. In
addition, the Redeemable Warrants shall be governed by the terms of the Warrant
Agreement dated as of July __, 1997, executed in connection with the Public
Offering (the "Public Warrant Agreement"), and except that the holder shall
have registration rights under the Securities Act of 1933, as amended (the
"Act"), with
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<PAGE> 3
respect to the Warrants, the Shares and the Redeemable Warrants subject thereto
and the shares of Common Stock underlying the Redeemable Warrants issuable upon
exercise of Warrant No. 2, which registration rights are more fully described
in paragraph 7 of this Warrant Agreement. In the event of any adjustments to
the exercise price of and the number of shares of Common Stock purchasable
under the Redeemable Warrants pursuant to the Public Warrant Agreement, the
same changes to the Redeemable Warrants subject to Warrant No. 2 shall be
simultaneously effected.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") for Warrant No. 1 and Warrant No. 2 to be delivered
pursuant to this Agreement shall be in the forms set forth as Exhibit A and
Exhibit B attached hereto, respectively, and made a part hereof, with such
appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrants.
3.1 Cash Exercise. The exercise price of the
respective Warrants shall be payable in cash or by certified or official bank
check to the order of the Company, or any combination of cash or check. Upon
surrender of the applicable Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the applicable
exercise price for the Shares and/or Redeemable Warrants purchased, at the
Company's principal offices, currently located at 700 North Pearl Street, Suite
2170, Dallas, Texas 75201, the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the Shares and/or Redeemable Warrants so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
Shares or fractional Redeemable Warrants). In the
- 3 -
<PAGE> 4
case of the purchase of less than all the Shares or Redeemable Warrants, as the
case may be, purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute
and deliver a new Warrant Certificate of like tenor for the balance of the
Shares or Redeemable Warrants, as the case may be, purchasable thereunder.
3.2 Cashless Exercise for Warrant No. 1. At any
time during the Warrant Exercise Term, the Holder may, at its option, exchange
Warrant No. 1, in whole or in part (a "Warrant Exchange"), into the number of
Shares determined in accordance with this Section 3.2, by surrendering the
Warrant Certificate representing Warrant No. 1 at the principal office of the
Company, accompanied by a notice stating (i) such Holder's intent to effect
such exchange, (ii) the number of Shares subject to Warrant No. 1 as to which
the exchange is to be effected and (iii) the date on which the Holder requests
that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant
Exchange shall take place on the date specified in the Notice of Exchange or if
the date the Notice of Exchange is received by the Company is later than the
date specified in the Notice of Exchange, such later date (the "Exchange
Date"). Certificates for the Shares issuable upon such Warrant Exchange and,
if applicable, a new warrant of like tenor evidencing the balance of the Shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within three (3) business days following the Exchange
Date. In connection with any Warrant Exchange, Warrant No. 1 shall represent
the right to subscribe for and acquire the number of Shares (rounded to the
next highest integer) equal to (i) the number of Shares specified by the Holder
in its Notice of Exchange (the "Total Number") less (ii) the number of Shares
equal to the quotient obtained by dividing (A) the
- 4 -
<PAGE> 5
product of the Total Number and the existing exercise price of Warrant No. 1 by
(B) the market price of a share of Common Stock on the Exchange Date; and, in
the case of any Warrant Exchange for less than all of the Shares purchasable
under Warrant No. 1, the Company shall execute and deliver a new Warrant
Certificate of like tenor for the balance of the Shares purchasable thereunder.
By way of example, if the holder of Warrant No. 1 submits a Notice of Exchange
relating to 50,000 of the 100,000 Shares subject to Warrant No. 1 and the
current market price of a share of Common Stock on the Exchange Date is $10.00,
the holder will be entitled to receive 2,550 shares of Common Stock, along with
a new Warrant Certificate entitling the holder to purchase 50,000 Shares.
4. Issuance of Certificates.
4.1. Issuance. Upon exercise of the Warrants, the
issuance of certificates for the Shares and/or Redeemable Warrants, as
applicable shall be made forthwith (and in any event within three (3) business
days thereafter) without charge to the Holder thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof,
and such certificates shall (subject to the provisions of Article 5 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder,
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall
have paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
- 5 -
<PAGE> 6
4.2. Forms of Certificates. The Warrant Certificates and
certificates representing the Shares and/or Redeemable Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company under its corporate seal reproduced
thereon, attested to by the manual or facsimile signature of the present or any
future Secretary or Assistant Secretary of the Company. Warrant Certificates
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer. The Warrant Certificates and,
upon exercise of the Warrants, in part or in whole, certificates representing
the Shares and/or Redeemable Warrants shall bear a legend substantially similar
to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), and may not be offered or sold except (i) pursuant to
an effective registration statement under the Act, (ii) to the
extent applicable, pursuant to Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the
Company of an opinion of counsel, reasonably satisfactory to
counsel to the Company, stating that an exemption from
registration under such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by acceptance thereof,
covenants and agrees that the Warrant is being acquired as an investment and
not with a view to the distribution thereof, and that the Warrant may not be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, for a period of one (1) year from the date hereof, except to officers
or partners of the Underwriter or to any member of the Selling Group
participating in the distribution to the public of the Common Stock and
Redeemable Warrants, and/or their respective officers or partners.
- 6 -
<PAGE> 7
6. Price.
6.1 Initial and Adjusted Exercise Prices. The
initial exercise price of Warrant No. 1 shall be $9.4875 per Share and the
initial exercise price of Warrant No. 2 shall be $11.38 per Redeemable Warrant.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Article 8 hereof.
6.2 Exercise Price. The term "exercise price"
herein shall mean the initial exercise price of Warrant No. 1 or Warrant No. 2,
as the case may be, or the adjusted exercise price, depending upon the context.
7. Registration Rights.
7.1 Registration Under the Securities Act of
1933. The Warrants, the Shares, the Redeemable Warrants and the Common Stock
issuable upon exercise of the Redeemable Warrants (the "Underlying Shares")
have been registered under the Securities Act of 1933, as amended (the "Act"),
pursuant to the Public Offering Registration Statement. In the event that, for
any reason whatsoever, the Company fails to maintain the effectiveness of the
Public Offering Registration Statement for a period of seven years following
the date of this Agreement, holders of the Registrable Securities shall have,
commencing with the date of such failure to maintain effectiveness, the
registration rights set forth in Sections 7.3 and 7.4.
7.2 Registrable Securities. As used herein the
term "Registrable Securities" means the Warrants, the Shares issuable upon
exercise of Warrant No. 1, the Redeemable Warrants issuable upon exercise of
Warrant No. 2, the Underlying Shares and any securities issued upon any stock
split or stock dividend in respect of any of the foregoing;
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<PAGE> 8
provided, however, any of such securities shall cease to be Registrable
Securities when, as of the date of determination, (i) it has been effectively
registered under the Act and disposed of pursuant thereto, (ii) registration
under the Act is no longer required for the immediate public distribution of
such securities, (iii) it has ceased to be outstanding or (iv) such securities
have been sold pursuant to Rule 144 (or any successor rule) under the Act. In
the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Common Stock, such adjustment
shall be made in the definition of "Registrable Securities" as is appropriate
in order to prevent any dilution or enlargement of the rights granted pursuant
to this Article 7.
7.3 Piggyback Registration. If, at any time
during the seven years following the date of this Agreement, the Company
proposes to prepare and file one or more post-effective amendments to the
Public Offering Registration Statement filed in connection with the Public
Offering or any new registration statement or posteffective amendments thereto
covering equity or debt securities of the Company, or any such securities of
the Company held by its shareholders (other than pursuant to a Form S-4
relating to a merger or acquisition or pursuant to a Form S-8) (for purposes of
this Article 7, collectively, a "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) days prior to the filing of each such Registration Statement, to all
holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) days after receipt of
the Notice, that the Company include any of the Requesting Holder's Registrable
Securities in the proposed Registration Statement, the Company shall, as to
each such Requesting Holder, use its best efforts to effect the registration
under the Act of the Registrable Securities
- 8 -
<PAGE> 9
which it has been so requested to register ("Piggyback Registration"), at the
Company's sole cost and expense and at no cost or expense to the Requesting
Holders (other than underwriting discounts and commissions applicable to the
sale of such Registrable Securities and the fees and disbursements, if any, of
counsel to the Requesting Holders); provided, however, that the Company shall
in any event be entitled to withdraw such Registration Statement prior to its
effectiveness if such Registration Statement is withdrawn as to all securities
proposed to be registered thereunder.
7.4 Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Demand Holder" (as such term is defined in Section 7.4(d) below) of
the Registrable Securities shall have the right (which right is in addition to
the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, at the sole expense of
the Company, a Registration Statement and such other documents, including a
prospectus, as may be necessary (in the opinion of both counsel for the Company
and counsel for such Demand Holder), in order to comply with the provisions of
the Act, so as to permit a public offering and sale of the Registrable
Securities by the holders thereof for nine (9) consecutive months. In the
event a Demand Registration Request is made pursuant to this Section 7.4(a) and
the Registration Statement relating thereto is declared effective, no further
Demand Registration Request can be made by any holder of Registrable
Securities.
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<PAGE> 10
(b) The Company covenants and agrees to give
written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) days from the date of the Company's
receipt of any such Demand Registration Request. After receiving notice from
the Company as provided in this Section 7.4(b), holders of Registrable
Securities may request the Company to include their Registrable Securities in
the Registration Statement to be filed pursuant to Section 7.4(a) hereof by
notifying the Company of their decision to have such securities included within
ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4,
at any time during the Warrant Exercise Term, any Demand Holder (as defined
below in Section 7.4(d)) of Registrable Securities shall have the right,
exercisable by written request to the Company, to have the Company prepare and
file with the Commission, on one occasion in respect of all holders of
Registrable Securities, a Registration Statement so as to permit a public
offering and sale of such Registrable Securities for nine (9) consecutive
months; provided, however, that all costs incident thereto shall be at the
expense of the holders of the Registrable Securities included in such
Registration Statement. If a Demand Holder shall give notice to the Company at
any time of its or their desire to exercise the registration right granted
pursuant to this Section 7.4(c), then within ten (10) days after the Company's
receipt of such notice, the Company shall give notice to the other holders of
Registrable Securities advising them that the Company is proceeding with such
registration and offering to include therein the Registrable Securities of such
holders, provided they furnish the Company with such appropriate information in
connection therewith as the Company shall reasonably request in writing.
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<PAGE> 11
(d) The term "Demand Holder" as used in this
Section 7.4 shall mean any holder or any combination of holders of Registrable
Securities, if included in such holders' Registrable Securities are that
aggregate number of shares of Common Stock (including Shares already issued and
not disposed of in a public offering and/or Shares issuable pursuant to the
exercise of Warrant No. 1 and Underlying Shares already issued and not disposed
of in a public offering and/or Underlying Shares issuable pursuant to the
exercise of Redeemable Warrants issued and not disposed of in a public offering
or issuable pursuant to exercise of Warrant No. 2 (the "Total Common Shares"))
as would constitute 50% or more of the aggregate number of such Total Common
Shares.
7.5 Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration
under Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in no event later than thirty (30) business days
following receipt of any demand therefor (unless delayed by the failure of a
holder of Registrable Securities to promptly furnish such information necessary
to complete such registration statement), shall use its best efforts to have
any such Registration Statement declared effective at the earliest possible
time, and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested; provided, however, if such 30th
business day falls on or after the 45th day following the last day of the
Company's most recently completed fiscal year and prior to the 90th day
following the last day of such fiscal year, unless the then applicable rules
and regulations of the Commission permit the filing of a registration statement
on a form which the Company is then eligible to use in respect of
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<PAGE> 12
the Registrable Securities if the Company has not yet filed audited financial
statements for the most recently completed fiscal year, the Company shall not
be required to file such Registration Statement until the filing of the
Company's audited financial statements in respect of such fiscal year, but in
any event the filing of the Registration Statement shall be made by no later
than the 90th day following the last day of such fiscal year.
(b) The Company shall pay all costs, fees
and expenses in connection with all Registration Statements filed pursuant to
Sections 7.3 and 7.4(a) hereof (excluding any underwriting discounts and
commissions which may be incurred in connection with the sale of any
Registrable Securities and excluding any fees and expenses of counsel for any
Requesting Holder or Demand Holder), including, without limitation, the
Company's legal and accounting fees, printing expenses, and blue sky fees and
expenses. The holders of Registrable Securities included in any Registration
Statement filed pursuant to Section 7.4(c) hereof will pay all costs, fees and
expenses in connection with such Registration Statement, including their own
legal fees and expenses, if any.
(c) The Company will take all reasonably
necessary action which may be required in qualifying or registering the
Registrable Securities included in a Registration Statement for offering and
sale under the securities or blue sky laws of such states as are reasonably
requested by the holders of such securities, provided that the Company shall
not be obligated to execute or file any general consent to service of process
or to qualify as a foreign corporation to do business under the laws of any
such jurisdiction.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and each person, if any, who controls
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<PAGE> 13
such holder within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such Registration Statement to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
the Underwriter contained in Section 6 of the Underwriting Agreement (which
indemnity will not apply to losses, claims, damages, expenses or liabilities
arising from information provided in writing by or on behalf of the holder to
the Company expressly for inclusion in the Registration Statement) and to
provide for just and equitable contribution as set forth in Section 7 of the
Underwriting Agreement.
(e) Each holder of Registrable Securities to
be sold pursuant to a Registration Statement will furnish to the Company such
information as may be reasonably be requested by the Company for inclusion in
the Registration Statement. Any holder of Registrable Securities to be sold
pursuant to a Registration Statement, and its successors and assigns, shall
severally, and not jointly, indemnify, the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished in writing by or on behalf of such holder, or its
successors or assigns, for specific inclusion in such Registration Statement to
the same extent and with the same effect as
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<PAGE> 14
the provisions contained in Section 6 of the Underwriting Agreement pursuant to
which the Underwriter has agreed to indemnify the Company and to provide for
just and equitable contribution as set forth in Section 7 of the Underwriting
Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any Holder to exercise his Warrants prior to
the initial filing of any Registration Statement or the effectiveness thereof.
(g) If the Company shall fail to materially
comply with the provisions of this Article 7, the Company shall, in addition to
any other equitable or other relief available to the holders of Registrable
Securities, be liable for any or all actual damages (but not punitive or
consequential damages) sustained by the holders of Registrable Securities,
requesting registration of their Registrable Securities.
(h) The Company shall not permit the
inclusion of any securities other than the Registrable Securities to be
included in any Registration Statement filed pursuant to Section 7.4 hereof,
or, unless otherwise required by the terms of a contract existing on the date
of this Agreement, permit any other registration statement to be or remain
effective during the ninety (90) day period commencing on the effectiveness of
a Registration Statement filed pursuant to Section 7.4 hereof (except for a
Form S-4 relating to a merger or acquisition or a Form S-8 or successor form),
without the prior written consent of the Demand Holders, which consent shall
not be unreasonably withheld.
(i) The Company shall deliver promptly to
each holder of Registrable Securities whose securities are included in a
Registration Statement copies of all correspondence between the Commission and
the Company, its counsel or auditors and all
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<PAGE> 15
memoranda relating to discussions with the Commission or its staff with respect
to the Registration Statement and permit each holder of Registrable Securities
and underwriters to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the Registration Statement
as it deems reasonably necessary to comply with applicable securities laws or
rules of the National Association of Securities Dealers, Inc. ("NASD");
provided that each such holder of Registrable Securities agrees not to disclose
such information without the prior consent of the Company. Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such holder of Registrable Securities or underwriter shall reasonably request.
(j) If, in connection with a registration
which includes Registrable Securities pursuant to this Article 7, the Company
shall enter into an underwriting agreement with one or more underwriters
selected for such underwriting, such agreement shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the
underwriters. The holders of Registrable Securities shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all the
representations and warranties of the Company to or for the benefit of such
underwriters shall, to the extent that they may be applicable, also be made to
and for the benefit of such holders of Registrable Securities. Such holders of
Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as
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<PAGE> 16
they may relate to such holders of Registrable Securities and their intended
methods of distribution.
8. Adjustments of Exercise Price and Number of Shares.
8.1 Stock Dividend, Split, etc.. In case the
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or
(iii) combine or reclassify its outstanding shares of Common Stock into a
smaller number of shares, the exercise price under Warrant No. 1 in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
exercise price by a fraction, the denominator of which shall be the number of
shares or Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action.
8.2 Rights or Warrants. In the case the Company
shall fix a record date for the issuance of rights or warrants to all holders
of its Common Stock entitling them to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at a price (the
"Subscription Price") (or having a conversion price per share) less than the
current market price of the Common Stock (as defined in Section 8.5 below) on
such record date, the exercise price of Warrant No. 1 shall be adjusted so that
it shall thereafter equal the price determined by multiplying (i) the exercise
price in effect immediately prior to the date of such issuance and (ii) a
fraction, the numerator of which shall be the sum of the number of shares of
- 16 -
<PAGE> 17
Common Stock outstanding on such record date and the number of additional
shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so offered for subscription or purchase (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent
that shares of Common Stock are not delivered (or securities convertible into
Common Stock are not delivered) after the expiration of such rights or warrants
the exercise price shall be readjusted to the exercise price which would then
be in effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into Common Stock) actually delivered.
8.3 Evidences of Indebtedness or Assets. In case
the Company shall hereafter distribute to the holders of its Common Stock
evidences of its indebtedness or assets (excluding cash dividends or
distributions of securities of the type referred to in Section 8.1 above) or
subscription rights or warrants (excluding those referred to in Section 8.2
above), then in each such case the exercise price of Warrant No. 1 in effect
thereafter shall be determined by multiplying (i) the exercise price in effect
immediately prior thereto and (ii) a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied
- 17 -
<PAGE> 18
by the current market price per share of Common Stock (as defined in Section
8.5 below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of
such rights or warrants, and the denominator of which shall be the total number
of shares of Common Stock outstanding multiplied by such current market price
per share of Common Stock. Such adjustment shall be made successively whenever
such a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effectively immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
8.4 Adjustment of Number of Shares. Whenever the
Exercise Price payable upon exercise of Warrant No. 1 is adjusted pursuant to
Sections 8.1, 8.2 or 8.3 above, the number of Shares purchasable upon exercise
of Warrant No. 1 shall simultaneously be adjusted by multiplying the number of
Shares initially issuable upon exercise of Warrant No. 1 by the exercise price
in effect on the date hereof and dividing the product so obtained by the
exercise price, as adjusted.
8.5 Determination of Current Market Price. For
the purpose of any computation under Sections 8.2 and 8.3 above, the current
market price per share of Common Stock at any date shall be deemed to be the
average of the daily closing prices for twenty (20) consecutive business days
before such date. The closing price for each day shall be the last sale price
regular way or, in case no such reported sale takes place on such day, the
average of the last reported bid and asked prices regular way, in either case
on the principal national securities exchange on which the Common Stock is
admitted to trading or listed, or as reported by National Association of
Securities Dealers, Inc. Automatic Quotation System ("NASDAQ") or other
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<PAGE> 19
similar organization if NASDAQ is no longer reporting such information, or if
not so available, the fair market price as determined by the Board of
Directors.
8.6 No Adjustment for De Minimus Adjustment. No
adjustment in the Exercise Price shall be required unless such adjustment would
require an increase or decrease of at least ten cents ($0.10) in such price;
provided, however, that any adjustments which by reason of this Section 8.6 are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment required to be made hereunder. All calculations under
this Article 8 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Article 8 to
the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the exercise price, in addition to those
required by this Article 8, as it shall determine, in its sole discretion, to
be advisable in order that any dividend or distribution in shares of Common
Stock, or any subdivision, reclassification or combination of Common Stock,
hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Redeemable Warrants issuable upon exercise of Warrant No. 2).
8.7 Notice. Whenever an exercise price is
adjusted, as herein provided, the Company shall promptly, but no later than 10
days after any request for such an adjustment by the Holder, cause a notice
setting forth the adjusted exercise price and adjusted number of Shares and/or
Warrants issuable upon exercise of the Warrants and, if requested, information
describing the transactions giving rise to such adjustments, to be mailed to
the Holder, at the address set forth herein, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. The Company may retain a
firm of independent certified public accountants selected by the Board of
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<PAGE> 20
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this Section 8, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
8.8 Other Securities. In the event that at any
time, as a result of any adjustment made pursuant to this Article 8, the Holder
thereafter shall become entitled to receive any securities of the Company other
than Common Stock and Redeemable Warrants, thereafter the number of such other
securities receivable upon exercise of the Warrants shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock and Redeemable
Warrants contained in Sections 8.1 to 8.6, inclusive above.
9. Exchange and Replacement of Warrant Certificates.
9.1 Exchange. Each Warrant Certificate is
exchangeable without expense, upon the surrender hereof by the registered
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Shares or Redeemable Warrants, as the case may be,
in such denominations as shall be designated by the Holder thereof at the time
of such surrender.
9.2 Replacement. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Warrant Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of any Warrants, if mutilated, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
- 20 -
<PAGE> 21
10. Elimination of Fractional Interests. The Company
shall not be required to issue certificates representing fractions of shares of
Common Stock or Redeemable Warrants and shall not be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up
to the nearest whole number of shares of Common Stock or Redeemable Warrants,
as the case may be.
11. Reservation and Listing of Securities. The Company
shall at all times reserve and keep available out of its authorized shares of
Common Stock, solely for the purpose of issuance upon the exercise of Warrant
No. 1 and the exercise of the Redeemable Warrants subject to Warrant No. 2,
such number of shares of Common Stock as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of Warrant No. 1
and payment of the exercise price therefor, all shares of Common Stock issuable
upon such exercise shall be duly and validly issued, fully paid, non-assessable
and not subject to the preemptive rights of any shareholder, and that, upon
exercise of Warrant No. 2 and payment of the exercise price therefor, the
Redeemable Warrants will be valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms. As long as the
Warrants shall be outstanding, the Company shall use its best efforts to cause
all shares of Common Stock and all Redeemable Warrants issuable upon the
exercise of the Warrants, as well as the Underlying Shares, to be listed on or
quoted by NASDAQ or listed on such national securities exchanges as the
Company's Common Stock is then listed.
12. Notices to Warrant Holders. Nothing contained in
this Agreement shall be construed as conferring upon the Holder or Holders the
right to vote or to consent or to receive notice as a shareholder in respect of
any meetings of shareholders for the election of directors or
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<PAGE> 22
any other matter, or as having any rights whatsoever as a shareholder of the
Company. If, however, at any time prior to the expiration of the Warrants and
their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders
of its shares of Common Stock and/or Redeemable Warrants for
the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current
or retained earnings, as indicated by the accounting treatment
of such dividend or distribution on the books of the Company;
or
(b) the Company shall offer to all the holders of
its Common Stock and/or Redeemable Warrants any additional
shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or warrants, or
entitled to vote on such proposed dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of closing of the
transfer books, as the case may be. Failure to give such notice or any
- 22 -
<PAGE> 23
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to a registered Holder of the
Warrants, to the address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to 700 North Pearl
Street, Suite 2170, Dallas, Texas 75201, Attn: President, or to such other
address as the Company may designate by notice to the Holders.
14. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without
the approval of any Holders of Warrant Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Underwriter may deem necessary or desirable and which the
Company and the Underwriter deem not to adversely affect the interests of the
Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company and the Holders inure to the
benefit of their respective successors and assigns hereunder.
- 23 -
<PAGE> 24
16. Termination. This Agreement shall terminate at the
close of business on July __, 2005. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date when all Warrants have been
exercised and all the Shares issuable upon exercise of Warrant No. 1 and all
the Redeemable Warrants issuable upon exercise of Warrant No. 2 (or the
Underlying Shares) have been resold to the public; provided, however, that the
provisions of Section 7.5 shall survive such termination until the close of
business on July __, 2008.
17. Governing Law. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State.
18. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than
the Company and the Underwriter and any other registered holder or holders of
the Warrant Certificates, Warrants or the underlying securities any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and the Underwriter and
any other holder or holders of the Warrant Certificates, Warrants or the
underlying securities.
19. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and such counterparts shall together constitute but
one and the same instrument.
- 24 -
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
AVIATION GROUP, INC.
By:_____________________________________
Name:
Title:
Attest:
_______________________________
Name:
Title
DUKE & CO., INC.
By:_____________________________________
Name:
Title:
Attest:
_______________________________
Name:
Title
- 25 -
<PAGE> 26
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE
DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, JULY __, 2002
No. WW-1 100,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________ or
registered assigns is the registered holder of 100,000 Warrants to purchase, at
any time from July __, 1998 until 5:00 P.M. New York City time on July __, 2002
("Expiration Date"), up to 100,000 shares ("Shares") of fully-paid and
nonassessable preferred stock, par value $.001 per share ("Common Stock"), of
Aviation Group, Inc., a Texas corporation (the "Company"), at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $9.4875 per Share upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of July __,
1997 between the Company and Duke & Co., Inc. (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the
Company, or any combination of cash or check.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby
- 26 -
<PAGE> 27
incorporated by reference in and made a part of this instrument and is hereby
referred to in a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and
for all other purposes, and the Company shall not be affected by any notice to
the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the
Warrant Agreement.
- 27 -
<PAGE> 28
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed as of the date below.
Dated: July __, 1997 AVIATION GROUP, INC.
By:_____________________________________
Name:
Title:
Attest:
___________________________________
Name:
Title
- 28 -
<PAGE> 29
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _______ Shares and
herewith tenders in payment for such Shares cash or a certified or official
bank check payable in New York Clearing House Funds to the order of
__________________ in the amount of $ _________, all in accordance with the
terms hereof. The undersigned requests that a certificate for such Shares be
registered in the name of ____________________, whose address is
____________________ and that such Certificate be delivered to whose address
is___________________.
Dated: Signature:______________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
__________________________________________________________
__________________________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
- 29 -
<PAGE> 30
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________, Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
_______________________________________
(Signature must conform in all respects
to name of holder as specified on
the face of the Warrant Certificate)
_______________________________
_______________________________
(Insert Social Security or Other
Identifying Number of Assignee)
- 30 -
<PAGE> 31
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE
DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, JULY __, 2002
No. WW-2 100,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________ or registered
assigns is the registered holder of 100,000 Warrants to purchase, at any time
from July __, 1998 until 5:00 P.M. New York City time on _____________, 2002
("Expiration Date"), up to 100,000 Redeemable Common Stock Purchase Warrants
("Redeemable Warrants"), of Aviation Group, Inc., a Texas corporation (the
"Company"), at the exercise price (the "Exercise Price"), of $11.38 per
Redeemable Warrant upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of July __,
1997 between the Company and Duke & Co., Inc. (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the
Company, or any combination of cash or check.
No Warrant may be exercised after 5:00 P.M., New York City time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby
- 31 -
<PAGE> 32
incorporated by reference in and made a part of this instrument and is hereby
referred to in a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax, or other governmental
charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
- 32 -
<PAGE> 33
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated: July __, 1997 AVIATION GROUP, INC.
By:_____________________________________
Name:
Title:
Attest:
____________________________________
Name:
Title
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<PAGE> 34
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ Redeemable
Warrants and herewith tenders in payment for such Redeemable Warrants cash or a
certified or official bank check payable in New York Clearing House Funds to
the order of __________________ in the amount of $ __ ______, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such Redeemable Warrants be registered in the name of ____________________,
whose address is ____________________ and that such Certificate be delivered
to whose address is___________________.
Dated: Signature:______________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________________________________
______________________________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
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<PAGE> 35
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED_____________________________________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________, Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_______________________________________
(Signature must conform in all respects
to name of holder as specified on
the face of the Warrant Certificate)
_______________________________
_______________________________
(Insert Social Security or Other
Identifying Number of Assignee)
- 35 -
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our reports and
to the reference to our firm under the caption "Experts" included in or made a
part of this registration statement
/s/ ARSEMENT, REDD & MORELLA, L.L.C.
ARSEMENT, REDD & MORELLA, L.L.C.
July 21, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts,"
under the caption "Summary Combined Historical and Pro Forma Financial
Information" and to the use of our report dated December 22, 1995, in the
Registration Statement (Form SB-2).
/s/ JAMES SMITH & COMPANY
JAMES SMITH & COMPANY
A Professional Corporation
Dallas, Texas
July 21, 1997
<PAGE> 1
EXHIBIT 23.4
[McGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus constituting a part of the
Form SB-2 Registration Statement (File No. 333-22727) of Aviation Group, Inc.
of our report dated January 24, 1997, relating to the financial statements of
Casper Air Service, a Wyoming corporation, as of April 30, 1996 and for each of
the two years then ended, which are contained in that Prospectus and to the
reference to our Firm under the caption "Experts" contained in that Prospectus.
/s/ McGladrey & Pullen, LLP
-------------------------------------
McGLADREY & PULLEN, LLP
Casper, Wyoming
July 21, 1997
<PAGE> 1
EXHIBIT 99.1
July ___, 1997
Duke & Co., Inc.
909 Third Avenue
7th Floor
New York, NY 10022
Gentlemen:
The undersigned understands that Duke & Co., Inc., as representative
(the "Representative") of the several underwriters (the "Underwriters"),
proposes to enter into an Underwriting Agreement (the "Underwriting Agreement")
with Aviation Group, Inc. (The "Company") providing for the purchase by the
Underwriters of shares (the "Shares") of Common Stock, par value $0.01 per
share, of the Company ("Common Stock") and Redeemable Common Stock Purchase
Warrants (the "Warrants"), and that the Underwriters propose to offer the
Shares and Warrants to the public (the "Offering"). Common Stock (other than
the Shares) of which the undersigned is now, or may in the future become, the
beneficial owner (within the meaning of Rule 13d-3 promulgated pursuant to the
Securities Exchange Act of 1934, as amended) shall be referred to herein as the
"Subject Securities".
In consideration of the execution of the Underwriting Agreement by the
Underwriters and the Offering, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the undersigned hereby irrevocably
agrees that:
(i) Without the prior written consent of the
Representative, the undersigned will not offer, pledge, sell contract to sell,
grant any option for the sale of, make a short sale or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any Subject Securities, or otherwise
dispose of (or publicly announce any offer, pledge, sale, grant of an option to
purchase or other disposition), directly or indirectly, any Subject Securities,
during the period from the date of this letter until the 365th day after the
date of the final Prospectus (as defined in the Underwriting Agreement) with
regard to all Subject Securities, provided that in the event the Representative
by a written communication within six (6) months after the date of the final
Prospectus releases the undersigned from the foregoing restrictions with
regards to, together with any previous such releases, an aggregate of 50% or
more of the Subject Securities, then such restrictions with respect to the
remaining Subject Securities shall be extended until the 730th day after the
date of the final Prospectus.
<PAGE> 2
(ii) In addition to the foregoing, the undersigned will
not offer, pledge, sell, contract to sell, grant any option for the sale of,
make a short sale or otherwise dispose of or engage in any hedging or other
transaction that is designed or reasonably expected to lead to a disposition of
any securities convertible into, or exercisable or exchangeable for, the
Subject Securities from the date of this letter until the 365th day or the
730th day, as the case may be, after the date of the final Prospectus unless,
prior to any such disposition, the undersigned delivers to the Representative
an identical copy of this letter, executed by the prospective acquiror of such
securities.
The undersigned further understands that the Company will take steps
as may be reasonably necessary to enforce the foregoing provisions and restrict
the sale or transfer of such Securities as provided herein including, but not
limited to, notification to the Company's transfer agent regarding any such
restrictions; and the undersigned hereby agrees to and authorizes any actions
and acknowledges that the Company and you are relying on this Agreement in
taking any such actions.
If for any reason the foregoing shall be terminated prior to the
Closing Date (as defined in the Underwriting Agreement), the agreement set
forth above shall likewise be terminated.
If the foregoing conforms to your understanding of our agreement,
please so indicate by signing a copy of this Agreement, whereupon it shall
become a binding agreement between and among us.
Very truly yours,
--------------------------------------
Signature
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Printed Name
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Street Address
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City, State and Zip Code
<PAGE> 3
July 9, 1997
Duke & Co., Inc.
909 Third Ave.
7th Floor
New York, NY 10022
Gentlemen:
The undersigned understands that Duke & Co., Inc., as representative
(the "Representative") of the several underwriters (the "Underwriters"),
proposes to enter into an Underwriting Agreement (the "Underwriting Agreement")
with Aviation Group, Inc. (The "Company") providing for the purchase by the
Underwriters of shares (the "Shares") of Common Stock, par value $0.01 per
share, of the Company ("Common Stock") and Redeemable Common Stock Purchase
Warrants (the "Warrants"), and that the Underwriters propose to offer the
Shares and Warrants to the public (the "Offering"). Common Stock (other than
Shares) of which the undersigned is now, or may in the future become, the
beneficial owner (within the meaning of Rule 13d-3 promulgated pursuant to the
Securities Exchange Act of 1934, as amended) shall be referred to herein as the
"Subject Securities".
In consideration of the execution of the Underwriting Agreement by the
Underwriters and the Offering, and for other good and valuable consideration
the receipt of which is hereby acknowledged, the undersigned hereby irrevocably
agrees that:
(i) Without the prior written consent of the Representative, the
undersigned will not offer, pledge, sell, contract to sell,
grant any option for the sale of, make a short sale or otherwise
dispose of or engage in any hedging or other transaction that is
designed or reasonably expected to lead to a disposition of any Subject
Securities, or otherwise dispose of (or publicly announce any offer,
pledge, sale, grant of an option to purchase or other disposition),
directly or indirectly, any Subject Securities, during the period from
the date of this letter until the 730th day after the date of the final
Prospectus (as defined in the Underwriting Agreement) with regard to
all Subject Securities provided, however, that the undersigned holder
of the Company's 10% Convertible Note(s) Due March 1, 2001 (the
"Note(s)") may dispose of during a Payment Period a necessary number of
Subject Securities providing for net proceeds to the undersigned of an
amount not to exceed the quarterly installment of principal due under
the Note(s). As used herein the term Payment Period shall mean the ten
business days proceeding and following the due date of any quarterly
installment of principal under the Note(s).
<PAGE> 4
Duke & Co., Inc.
Page 2
(ii) In addition to the foregoing, the undersigned will not
offer, pledge, sell, contract to sell, grant any option for the sale
of, make a short sale or otherwise dispose of or engage in any hedging
or other transaction that is designed or reasonably expected to lead to
a disposition of any securities convertible into, or exercisable or
exchangeable for, the Subject Securities from the date of this letter
until the 730th day after the date of the final Prospectus unless,
prior to any such disposition, the undersigned delivers to the
Representative an identical copy of this letter, executed by the
prospective acquiror of such securities.
(iii) The Company agrees that during the term of this
agreement, it will not, without the express written permission of the
undersigned, redeem or prepay the Notes prior to their mandatory
payment dates.
The undersigned further understands that the Company will take such
steps as may be reasonable necessary to enforce the foregoing provisions and
restrict the sale or transfer of such Securities as provided herein including,
but not limited to, notification to the Company's transfer agent regarding any
such restrictions, and the undersigned hereby agrees to and authorizes any
actions and acknowledges that the Company and you are relying upon this
Agreement in taking any such actions.
If for any reason the Offering shall be terminated prior to the Closing
Date (as defined in the Underwriting Agreement), the agreement set forth above
shall likewise be terminated.
If the foregoing conforms to your understanding of our agreement,
please so indicate by signing a copy of this Agreement, whereupon it shall
become a binding agreement between and among us.
Very truly yours,
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Signature
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Printed Name
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Street Address
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City, State and Zip Code
