<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
REGISTRATION NO. 333-22727
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AVIATION GROUP, INC.
(Name of small business issuer in its charter)
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TEXAS 4581 75-2631373
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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)
---------------
Copy to:
DARYL B. ROBERTSON, ESQ.
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
(214) 855-4500
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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.
================================================================================
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NOTE:
THE CHANGES FROM THE FINAL SB-2 REGISTRATION STATEMENT FILED IN AUGUST 1997, AS
CONTAINED IN THIS POST-EFFECTIVE AMENDMENT NO. 1, WERE VERY EXTENSIVE. A MARKED
VERSION WOULD NOT BE MEANINGFUL TO SHOW REVISED LANGUAGE.
<PAGE> 3
AVIATION GROUP, INC.
2,667,639 SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale by Aviation Group, Inc.
(the "Company") of up to (i) 1,216,700 shares of its common stock, $.01 par
value per share (the "Common Stock"), pursuant to outstanding Redeemable Common
Stock Purchase Warrants (the "Warrants"), (ii) 100,000 shares of Common Stock
and 100,000 Warrants (the "Underlying Warrants") pursuant to outstanding
Underwriters' Warrants (the "Underwriters' Warrants"), and (iii) 105,800 shares
of Common Stock pursuant to the Underlying Warrants. The Warrants and Underlying
Warrants are exercisable between August 13, 1999 and August 13, 2002. Each
Warrant and Underlying Warrant entitles its holder to purchase 1.058 shares of
Common Stock at an exercise price of $6.52 per share. The Warrants may be
redeemed by the Company after August 13, 1999 upon 30 days' written notice at
$0.10 per Warrant, if the closing bid quotations or sales prices of the Common
Stock have averaged at least $9.4875 for a period of any 20 consecutive trading
days ending on the 10th day prior to the day on which the Company gives notice.
The holders of the Underwriters' Warrants may purchase, at any time after August
13, 1998 until August 13, 2002, up to 100,000 shares of Common Stock at $9.4875
per share and up to 100,000 Underlying Warrants at $11.38 per Warrant.
This Prospectus also relates to the offer and sale by certain selling
securityholders ("Selling Shareholders") named herein under "Selling
Shareholders" of up to (i) 927,624 shares of Common Stock,(ii) a maximum of
135,245 shares of Common Stock that may be issued upon exercise of outstanding
warrants, and (iii) a maximum of 182,870 shares of Common Stock that may be
issued upon conversion of outstanding convertible notes.
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. The
outstanding shares of Common Stock held by the Selling Shareholders were
originally issued by the Company in private transactions. See "Selling
Shareholders."
The Common Stock and the Warrants are traded on The Nasdaq SmallCap
Market ("Nasdaq") and the Boston Stock Exchange ("BSE"). On July 6, 1998, the
closing trading prices for the Common Stock and Warrants were $35/8 and $1 1/4,
respectively. The Selling Shareholders may from time to time sell all or a
portion of their shares of Common Stock on the Nasdaq or BSE or 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.
SEE "RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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 is July 10, 1998.
<PAGE> 4
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 currently outstanding options or
warrants. 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 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"). 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. On August 19, 1997, the Company closed an initial public offering
(the "IPO") of 1,150,000 shares of its Common Stock and 1,150,000 Redeemable
Common Stock Purchase Warrants (the "Warrants"), which resulted in net proceeds
to the Company of $5,283,000. On August 19, 1997, the Company acquired all of
the outstanding stock of Casper Air Service, a Wyoming corporation ("CAS") in
exchange for the payment of approximately $1,167,000 in cash and the issuance of
153,565 shares of Common Stock with a value of approximately $883,000. CAS is a
full-service, fixed-base operating station ("FBO") located in Casper, Wyoming
and has been in business continuously since 1946. On March 23, 1998, the Company
acquired all of the outstanding equity interests in Aero Design, Inc. and
Battery Shop, L.L.C. (collectively, "Aero Design") in exchange for the payment
of $753,000 in cash and the issuance of 134,398 shares of Common Stock with a
value of approximately $547,000. Aero Design manufactures, sells and repairs
aircraft batteries at its facilities near Nashville, Tennessee.
The Company is currently organized into three divisions devoted to the
Company's primary lines of business. These business segments are as follows:
o Overhaul & Service Division: 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
Portland, Oregon and New Iberia, Louisiana. Pride's primary customers are
United Airlines, Inc. and Federal Express. TriStar Paint provides paint
services on a plane-by-plane bid basis to a variety of customers.
In March 1998, the Company expanded the scope of this division by
acquiring Aero Design, Inc., a Tennessee-based manufacturer of aircraft
batteries for the commercial airline industry, and Battery Shop, L.L.C.,
a sister company that repairs batteries for the aviation industry.
o Ground Handling & Services Division: 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, Oakland International and
Kansas City International, for customers such as United Parcel Service,
Southwest Airlines, United Airlines, Inc., Champion Air and Northwest
Airlines, among others.
o FBO Operations & Airport Management Division: In July 1996, the Company
began to operate its FBO Division. The Company's fixed base operation,
located at Natrona County International Airport in Casper, Wyoming
provides fuel and light maintenance services to general aviation,
corporate and light freight aircraft customers. There are presently over
1,700 operators of FBO's serving the United States.
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 FBO 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.
2
<PAGE> 5
THE OFFERING
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Common Stock Offered by the 1,422,500 shares total, consisting of (i) a maximum of
Company................................ 1,216,700 shares that may be issued upon exercise of
outstanding Warrants at $6.52 per share, (ii) a maximum of
100,000 shares that may be issued upon exercise of
outstanding Underwriter's Warrants at $9.4875 per share,
and (iii) a maximum of 105,800 shares that may be issued
upon exercise of the Underlying Warrants at $6.52 per
share.
Common Stock Offered by 1,245,739 shares total, consisting of (i) 927,624 outstanding
Selling Securityholders................ shares, (ii) a maximum of 135,245 shares that may be issued
upon exercise of outstanding warrants, and (iii) a maximum
of 182,870 shares that may be issued upon conversion of
outstanding convertible notes.
Underlying Warrants Offered by Up to 100,000 Underlying Warrants that may be issued upon the
the Company............................ exercise of outstanding Underwriters' Warrants at $11.38 per
Underlying Warrant.
Warrants and Underlying Warrants
Exercise Terms................ Each Warrant and Underlying Warrant entitles the holder to
purchase, anytime after August 13, 1999, 1.058 shares of Common
Stock at an exercise price of $6.52 per share.
Expiration Date............... August 13, 2002.
Redemption.................... Subject to redemption after August 13, 1999, with the prior
consent of the underwriter of the Company's IPO, at a
price of $0.10 per Warrant or Underlying Warrant upon 30
days written notice, provided that the average closing bid
quotations or sales prices of the Common Stock equal or
exceed $9.4875 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."
Common Stock Outstanding(1)............... 3,257,992 shares.
Warrants Outstanding...................... 1,150,000 Warrants to purchase 1,216,700 shares of Common Stock.
Use of Proceeds by the Company............ Because the timing of receipt is unpredictable, the Company
expects to use the net proceeds of any sales by the Company for
working capital and general corporate purposes. The Company
receives no proceeds from any sales of Common Stock by the Selling
Securityholders.
Risk Factors.............................. The Securities involve a high degree of risk. See "Risk Factors."
Nasdaq Symbols:
Common Stock...... AVGP
Warrants.......... AVGPW
Boston Stock Exchange Symbols:
Common Stock...... AVG
Warrants.......... AVGW
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(1) Excludes approximately 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 1,150,000 outstanding Warrants, (ii) the
Underwriter's Warrants and the Underlying Warrants, (iii) outstanding
warrants to purchase up to 632,245 shares of Common Stock, and (iv)
outstanding promissory notes totaling $810,543, as of June 30, 1998, that
were convertible for up to 182,870 shares of Common Stock.
(2) After deducting underwriting discounts and other expenses of this
Offering, including the Underwriter's non-accountable expense allowance,
but excluding any exercise of the Underwriter's over-allotment option.
3
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from (i) the
consolidated financial statements of the Company and its predecessors TriStar
Paint and Airline Services for the nine months ended June 30, 1996 and the notes
thereto, (ii) the consolidated financial statements for the Company as of and
for the year ended June 30, 1997, and the notes thereto, and (iii) the unaudited
condensed consolidated financial statements as of and for the nine months ended
March 31, 1998 and 1997, all 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." Interim results, in
the opinion of management of the Company, include all adjustments (consisting
solely of normal recruiting adjustments) necessary to present fairly the
financial information for such periods; however, such results are not
necessarily indicative of the results that may be expected for any other
interim period or for a full year. 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 CAS acquisition actually occurred as of July 1, 1996.
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<CAPTION>
Pro Forma
Nine Months Pro Forma Nine Months
Ended Year Ended Year Ended Ended Nine Months Ended
June 30, June 30, June 30, March 31, March 31,
1996 1997 1997(1) 1998(1) 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
STATEMENTS OF OPERATIONS DATA:
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Revenue .............................. $ 3,881,000 $ 9,718,000 $ 16,463,000 $ 14,848,000 $ 14,150,000 $ 6,664,000
Gross profit ......................... 1,043,000 2,308,000 3,410,000 3,495,000 3,365,000 1,369,000
General and administrative
and depreciation and
amortization expenses .............. 906,000 2,461,000 3,402,000 4,042,000 3,942,000 1,713,000
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from operations ........ 137,000 (153,000) 8,000 (547,000) (577,000) (344,000)
Interest expense and other, net ...... 69,000 375,000 453,000 219,000 208,000 153,000
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes..... 68,000 (528,000) (445,000) (766,000) (785,000) (497,000)
Provision (benefit) for income taxes.. 34,000 (52,000) (149,000) (221,000) (228,000) (164,000)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) .................... $ 34,000 $ (476,000) $ (296,000) (545,000) $ (557,000) $ (333,000)
============ ============ ============ ============ ============ ============
Net income (loss) per common
and common equivalent share
- basic and diluted (2) ............ $ 0.02 $ (0.27) $ (0.15) $ (0.18) $ ( 0.18) $ ( 0.18)
============ ============ ============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding (2) .................... 1,497,511 1,759,707 1,913,342 3,014,757 3,058,261 1,812,859
============ ============ ============ ============ ============ ============
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<CAPTION>
June 30, March 31,
1997 1998
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BALANCE SHEET DATA:
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Working capital (deficit)................................ $ (516,000) $ 1,422,000
Total assets............................................. 5,111,000 13,102,000
Long-term debt, net of current portion................... 1,292,000 1,115,000
Total liabilities........................................ 3,882,000 5,440,000
Shareholders' equity .................................... 1,229,000 7,662,000
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(1) Represents the historical statements of operations for the year ended
June 30, 1997 and the nine month period ended March 31, 1998, 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. See "Unaudited Pro Forma Combined Financial Information."
(2) See Note B "Summary of Significant Accounting Policies--Earnings (Loss)
Per Common Share" in the Notes to Consolidated Financial Statements for
the Company for the year ended June 30, 1997.
4
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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 35% of the
Company's revenues for the nine months ended March 31, 1998. On a pro forma
basis including CAS, the contract with United would have accounted for 32% of
the Company's revenues for the nine months ended March 31, 1998. 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 has historically experienced
losses during these periods. If United expands these curtailments, the Company's
results of operations may be materially adversely affected. Although Pride has
located additional customers for these slack periods, there can be no assurance
that Pride will be able to retain these customers. While the Company has
broadened its customer base so that it has 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
The Company experienced net losses of $476,000 and $557,000 for the year
ended June 30, 1997 and nine months ended March 31, 1998, respectively. This
loss was primarily due to increases in goodwill and amortization from the Pride
and CAS acquisitions, start up costs in the Company's FBO division, indirect
costs of the Company's initial public offering and increased corporate overhead
incurred to support anticipated future growth. 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. There can be no assurance that suitable
acquisition candidates can be identified, or that, if identified, adequate and
acceptable financing sources will be available to the Company that would enable
it to consummate these transactions. The Company is currently evaluating a
number of acquisition opportunities. No commitments or binding agreements have
been entered into to date, and accordingly no assurance can be given that any of
the acquisitions currently being considered will be consummated. There can be no
assurance that the Company will be able to integrate successfully any acquired
companies or service or product lines into its existing operations, which could
increase the Company's operating expenses in the short-term and materially and
adversely affect the Company's results of operations. Moreover, any acquisition
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, and amortization of expenses
related to goodwill and intangible assets, all of which could adversely affect
the Company's profitability.
5
<PAGE> 8
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, or
aircraft parts sold by CAS. CAS currently has in force aviation products,
premises and hangarkeepers insurance which the Company believes provides
coverage in amounts and on terms that are generally consistent with industry
practice. During the last five years, CAS has not experienced any material
product liability claims related to its products.
CAS's inventory consists principally of new and remanufactured aircraft
parts held for sale to domestic and international customers. Before any part may
be installed in an aircraft, the part must meet certain standards of condition
established by the FAA or the equivalent regulatory agencies in other countries.
Parts must also be traceable to sources deemed acceptable by such agencies.
While the Company believes that all such regulations have been met in the past,
parts owned or acquired by CAS may not meet standards as they change in the
future, causing parts in CAS's inventory to be scrapped or modified. Aircraft
manufacturers may also develop new parts to be used in lieu of parts already
contained in CAS's inventory. As a consequence of these factors, parts in CAS's
inventory may fall in value.
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 Company's current capital resources
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."
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. 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 Mr. Sanders
and certain other members of its management team. Mr. Sanders is currently the
beneficial owner of 35% of the Company's outstanding Common Stock. 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 Mr.
Sanders.
6
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EMPLOYEE COSTS
Although the Company believes that it will operate with lower personnel
costs than many established airline service providers, principally due to lower
base salaries and greater flexibility in the utilization of personnel, there can
be no assurance that the Company will continue to realize these advantages for
any extended period of time. None of the Company's employees are represented by
a labor union. If unionization of the Company's employees occurs, the Company's
costs could materially increase.
CONTROL BY EXISTING SHAREHOLDERS AND CERTAIN TRANSACTIONS
The directors, officers, and principal shareholders of the Company
beneficially own a substantial portion of the Company's outstanding Common
Stock. As a result, these persons will have a significant influence on the
affairs and management of the Company, as well as on all matters requiring
shareholder approval, including electing and removing members of the Company's
Board of Directors, causing the Company to engage in transactions with
affiliated entities, causing or restricting the sale or merger of the Company,
and changing the Company's dividend policy. Such concentration of ownership and
control could have the effect of delaying, deferring, or preventing a change in
control of the Company, even when such a change of control would be in the best
interest of the Company's other shareholders. 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 a consulting arrangement
with one of its directors, Charles Weed. See "Management--Employment and
Consulting Agreements." 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."
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
operations and, consequently, directly compete with the Company. In ground
handling and light catering services and resales of aircraft parts, 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 painting business and battery
manufacturing and repair 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
7
<PAGE> 10
certifications allow the Company's subsidiaries to perform their services as
well as other repair and maintenance services at their facilities. CAS's
operations, including charter aircraft, parts sales and repair and maintenance
operations, are subject to regulation by the FAA and requires FAA's
certificates. Loss of any necessary FAA certifications could have a material
adverse effect on the Company's operations and financial condition. See
"Business--Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE
There can be no assurance that the market price of the Common Stock will
not decline. The securities of many emerging companies have experienced
significant price and volume fluctuations that are, at times, unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations may be the result of changes in conditions affecting the economy in
general, analysts' reports, general trends in the industry, role of market
makers, and other events or factors beyond the company's control. These
conditions may have a material adverse effect on the market price of the Common
Stock.
EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK
The Company's Articles of Incorporation authorize the Board of Directors
of the Company to issue "blank check" preferred stock, the relative rights,
powers, preferences, limitations, and restrictions of which may be fixed or
altered from time to time by the Board of Directors. Accordingly, the Board of
Directors is empowered, without shareholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting, or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock. The preferred stock could be utilized, under certain circumstances, as a
method of discouraging, delaying, or preventing a change in control of the
Company that shareholders might consider to be in the Company's best interests.
Although the Company has no present intention of issuing any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
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."
LISTING AND MAINTENANCE CRITERIA FOR SECURITIES; PENNY STOCK RULES
The Company's Common Stock and Warrants are presently listed on The
Nasdaq SmallCap Market ("Nasdaq") and the Boston Stock Exchange (the "BSE"). If
the Common Stock or the Warrants fail to maintain such listings, the market
value of the Common Stock and Warrants 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.
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.
8
<PAGE> 11
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.
The Company is restricted from paying dividends on its Common Stock by
certain covenants in its loan agreements.
MARKET FOR COMMON STOCK
The Common Stock and the Warrants are listed for trading on the Nasdaq
and BSE. The Nasdaq trading symbols for the Common Stock and Warrants are "AVGP"
and "AVGPW" respectively. The trading symbols for the Common Stock and Warrants
on the BSE are "AVG" and "AVGW", respectively. Prior to the Company's IPO on
August 19, 1997, there was no public trading market for the Company's
securities.
The following table lists the high and low closing sales prices for each
quarter since the Company's IPO.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
August 19, 1997 - September 30, 1997 $11.375 $7.875
October 1, 1997 - December 31, 1997 9.625 7.250
January 1, 1998 - March 31, 1998 8.375 2.750
April 1, 1998 - June 30, 1998 4.375 3.000
</TABLE>
On July 6, 1998, the Common Stock trading price closed at $3 5/8 per
share, and the Warrant trading price closed at $1 1/4 per Warrant.
As of June 30, 1998, there were approximately 800 holders of record of
the Company's Common Stock.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, through its 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 August 19, 1997, in connection with the Company's acquisition of CAS,
the Company paid $1,167,000 in cash and issued 153,565 shares of Common Stock.
Because the transaction was accounted for as a purchase, the results of
operations of CAS are included in the accompanying financial statements
beginning on the August 19, 1997 acquisition date. (See "Unaudited Pro Forma
Combined Financial Information" for summary pro forma financial results assuming
CAS were part of the Company's operations beginning July 1, 1996.)
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
Year Nine Months March 31,
Ended Ended ----------------------------
June 30, 1997 June 30, 1996 1998 1997
------------- ------------- ----------- -----------
(Fiscal Year) (Unaudited)
<S> <C> <C> <C> <C>
OVERHAUL & SERVICE DIVISION(1):
Net revenues $ 8,096,000 $ 3,395,000 $ 7,800,000 $ 5,576,000
Cost of revenue (6,289,000) (2,479,000) (5,821,000) (4,545,000)
Operating and other expenses, net(4) (1,549,000) (622,000) (1,700,000) (1,084,000)
Interest income 2,000 2,000 -- --
Interest expense (62,000) (39,000) (29,000) (50,000)
----------- ----------- ----------- -----------
Pre-tax income (loss) $ 198,000 $ 257,000 250,000 $ (103,000)
=========== =========== =========== ===========
GROUND HANDLING & SERVICES
DIVISION(2):
Net revenues $ 1,070,000 $ 486,000 1,056,000 $ 726,000
Cost of revenue (609,000) (359,000) (796,000) (379,000)
Operating and other expenses, net (310,000) (141,000) (311,000) (213,000)
Interest income -- -- -- --
Interest expense (3,000) (1,000) (4,000) --
----------- ----------- ----------- -----------
Pre-tax income (loss) $ 148,000 $ (15,000) (55,000) $ 134,000
=========== =========== =========== ===========
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Nine Months Ended
Year Nine Months March 31,
Ended Ended ----------------------------
June 30, 1997 June 30, 1996 1998 1997
------------- ------------- ----------- -----------
(Fiscal Year) (Unaudited)
<S> <C> <C> <C> <C>
FBO OPERATIONS & AIRPORT
MANAGEMENT(3):
Net revenues $ 552,000 -- $ 5,294,000 $ 362,000
Cost of revenue (512,000) -- (4,168,000) (371,000)
Operating and other expenses, net (120,000) -- (1,029,000) (95,000)
Interest income -- -- -- --
Interest expense (loss) -- -- (53,000) --
----------- ----------- ----------- -----------
Pre-tax income (loss) $ (80,000) $ -- $ 44,000 $ (104,000)
=========== =========== =========== ===========
AVIATION GROUP - CORPORATE
OVERHEAD(5):
Operating and other expenses, net $ (482,000) $ (143,000) $ (902,000) $ (321,000)
Interest income -- -- 19,000 --
Interest expense (312,000) (31,000) (141,000) (103,000)
----------- ----------- ----------- -----------
Pre-tax income (loss) $ (794,000) $ (174,000) $(1,024,000) $ (424,000)
=========== =========== =========== ===========
TOTAL COMPANY:
Net revenues $ 9,718,000 $ 3,881,000 $14,150,000 $ 6,664,000
Cost of revenue (7,410,000) (2,838,000) (10,785,000) (5,295,000)
Operating and other expenses, net (2,461,000) (906,000) (3,942,000) (1,713,000)
Interest income 2,000 2,000 19,000 --
Interest expense (377,000) (71,000) (227,000) (153,000)
----------- ----------- ----------- -----------
Pre-tax income (loss) $ (528,000) $ 68,000 $ (785,000) $ (497,000)
=========== =========== =========== ===========
</TABLE>
- --------------
(1) 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).
(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 operations for this division commenced in July 1996. Accordingly,
operating results for this division are included herein for periods
commencing after June 30, 1996. CAS was acquired in August 1997.
(4) Includes goodwill and other related amortization expenses of $85,000,
$189,000 and $184,000 associated with the acquisition of Pride for the
nine months ended June 30, 1996, the year ended June 30, 1997 and the
nine months ended March 31, 1998, 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.
11
<PAGE> 14
Aero Design, Inc., a Tennessee-based aviation battery manufacturing and
repair company, was acquired by the Company in late March 1998, and its earnings
had negligible current period impact.
This division of the Company has two painting locations, one at Acadiana
Regional Airport in New Iberia, Louisiana and a second facility at Portland
International Airport in Portland, Oregon.
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 entered into new ground service contracts with
customers in 1997 under which it established operations at the Los Angeles
International Airport, Oakland International Airport, and Kansas City
International Airport. During the third quarter of fiscal 1998, the Company
closed its stations at San Francisco International Airport, Los Angeles
International Airport and Fort Lauderdale International 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. Costs associated with
this activity include primarily fuel, facility rent, and direct labor. In August
1997, the Company acquired CAS, which operates an FBO in Casper, Wyoming. The
Company sold its Redbird Airport FBO in February 1998. The financial statements
of the Company include the operations of CAS from the date of its acquisition.
See "Business--FBO & Airport Management Division."
Aviation Group--Corporate Overhead
The Company's corporate overhead includes operating expenses of the
Company's executive offices and other indirect expenses not directly
attributable to the divisions' operations.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Net revenues for the nine month period ended March 31, 1998 increased
$7,486,000 or 112% from the nine month period ended March 31, 1997.
Revenues for the Overhaul Services Division increased $2,224,000 or 40%
for the nine months ended March 31, 1998 over the comparable period in the prior
year. This increase is due primarily to the contract with Boeing Aircraft to
paint seven Boeing 777 aircraft, which began in November 1997 and ran through
February 1998. The second phase of this contract was awarded to another vendor.
Billings during the third quarter of 1998 on the Boeing contract totaled
approximately $959,000. In April 1998, the Company entered into a three year
agreement with Federal Express to provide exterior aircraft painting services at
the Company's facilities in Portland, Oregon and New Iberia, Louisiana.
Revenues for the Ground Services Division increased by $330,000 or 45%
for the nine month period ended March 31, 1998 over the comparable period in the
prior year. This increase is related primarily to increased activity at new
stations opened during fiscal 1997, which include Kansas City International
Airport, Los Angeles International Airport and Oakland International Airport.
Additional revenues were generated on an increased level of activity at Dallas
Fort Worth, Oakland and Alliance Airports.
Revenues for the FBO and Airport Management Division increased by
$4,932,000 or 1,362% for the nine months ended March 31, 1998 over the
comparable period in the prior year. This increase is due principally to the
acquisition of CAS in August 1997. CAS contributed $4,798,000 to revenues for
the nine months ended March 31, 1998.
Aero Design, Inc., a Tennessee-based aviation battery manufacturing and
repair company, was acquired by Aviation Group in late March 1998, and its
earnings had negligible current period impact.
12
<PAGE> 15
Gross profit for the nine month period ended March 31, 1998 increased
$1,996,000 or 146% from the nine month period ended March 31, 1997.
Gross profit for the Overhaul Services Division increased $948,000 or 92%
for the nine months ended March 31, 1998 over the comparable period in the prior
year. The increase in gross profit year to date is related primarily to the
gross profit obtained on the Boeing contract mentioned earlier.
Gross profit for the Ground Services Division decreased by $87,000 or 25%
for the nine months ended March 31, 1998 over the comparable period in the prior
year. This decrease is related primarily to the expansion during fiscal 1997
into new stations at Kansas City International Airport, Los Angeles
International Airport, Oakland International Airport and Fort Lauderdale
International Airport during fiscal 1997 and in the first quarter of 1998 and
the "start up" losses generated by these new locations. These losses resulted
from the investment in personnel and resources needed to initiate and expand new
services at these new airport locations.
Gross profit for the FBO and Airport Management division increased by
$1,135,000 for the nine months ended March 31, 1998 over the comparable period
in the prior year. This increase is related primarily to the acquisition of CAS
in August 1997. CAS contributed $1,070,000 to gross profit for the company
during the nine months ended March 31, 1998.
The Company's general and administrative expenses increased $1,989,000 or
140% for the nine months ended March 31, 1998 over the comparable prior year
period. This increase is due to several factors. Corporate overhead accounted
for $569,000 of the increase for the nine months ended March 31, 1998. This
increase relates primarily to additions in management infrastructure, higher
legal and accounting costs of operating a publicly traded company and additional
costs of managing the Company's growth. The addition of CAS in August 1997
increased general and administrative expenses by $812,000 for the nine months
ended March 31, 1998.
The Company's depreciation and amortization expense increased by $240,000
or 82% for the nine months ended March 31, 1998 from the comparable period in
the prior year. This increase is related primarily to the acquisition of CAS and
the associated depreciation of fixed assets and amortization of goodwill
acquired.
The Company's interest expense increased $55,000 or 36% for the nine
months ended March 31, 1998 over the comparable period in the prior year. The
increase is due principally to $64,000 of interest expense accreted to the
Bridge Notes during the first quarter of 1998 as a result of the Common Stock
issued to the Bridge Note holders upon completion of the IPO. Interest expense
in presented net of interest income of $60,000 for the nine months ended March
31, 1998.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTH FISCAL YEAR ENDED
JUNE 30, 1996
The Company changed its fiscal year end from September 30 to June 30
during 1996.
The Company's net revenue increased by $5,837,000, or 150%,for the year
ended June 30, 1997 compared to the nine months ended June 30, 1996. This
increase in revenue resulted primarily from paint activities, which contributed
net revenue totaling $8,096,000 for 1997 compared to $3,395,000 for 1996.
Revenues from Ground Handling for the year ending June 30, 1997 increased
120% to $1,070,000 from $486,000 for the nine month period ending June 30, 1996.
Gross margins increased during the period to 43% in fiscal 1997 from 27% in
fiscal 1996.
The Company's costs of revenues increased by $4,572,000, to $7,410,000
for the year ended June 30, 1997 from $2,838,000 for the nine months ended June
30, 1996. This increase in costs of revenues resulted primarily from the
acquisition of Pride. Cost of revenues also increased as a percentage, relative
to net revenue, to 76%, for the fiscal year ended June 30, 1997 from 73% for the
nine months ended June 30, 1996.
The Company's operating expenses increased by $1,574,000 to $2,480,000
for the year ended June 30, 1997 from $906,000 for the nine months ended June
30, 1996. This increase in operating expenses resulted primarily from the
acquisition of Pride, startup FBO expenses of $104,000 and corporate overhead
increases of $339,000. Corporate overhead for the nine month period ended June
30, 1996 includes only four months of expense.
The Company's interest expense has increased primarily from debt related
to the Pride transaction and $186,000 in non-cash interest from $500,000 in
notes that were issued in February 1997 (the "Bridge Notes").
13
<PAGE> 16
FINANCIAL CONDITION AND LIQUIDITY
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 IPO, and for general working capital and operating purposes.
Upon the successful completion of the IPO in August 1997, the terms of these
Bridge Notes required 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 was amortized to interest expense over the
period from the completion of the Bridge Note offering until August 19, 1997,
which was the consummation date of the IPO. Unamortized discount at June 30,
1997 totaled $64,000.
The Company realized approximately $5.3 million in net proceeds from the
IPO in August 1997. The proceeds have been used to repay the 10% Bridge Notes of
$500,000, fund the cash portion of the CAS acquisition of $1,167,000, fund the
cash portion of the Aero Design acquisition of $753,000, and to repay
approximately $700,000 of bank and other indebtedness, and will be used in the
future to fund capital expenditures for existing operations, facilities
improvements, acquisition of other aviation services companies and general
working capital for operations and other corporate purposes. The Company's
capital structure has improved significantly as a result of completing the IPO.
The Company believes that existing funds, together with future credit
lines and bank financing, and cash generated from operations will be adequate
for its anticipated cash needs. Management feels the proceeds from the IPO will
allow it to experience accelerated growth both internally and through well
planned acquisitions of aviation services companies.
14
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following sets forth the Company's Unaudited Pro Forma Consolidated
Statements of Operations for the fiscal year ended June 30, 1997, and the nine
month interim period ended March 31, 1998, in each case giving effect to: (i)
the CAS acquisition in August 1997, and (ii) the IPO and the application of the
net proceeds therefrom. The CAS acquisition was accounted for using the purchase
method of accounting. The Company's Unaudited Pro Forma Consolidated Statements
of Operations present such events as if each had been consummated at the
beginning of the periods presented. CAS was a consolidated subsidiary of the
Company at March 31, 1998, and is accordingly included in the Company's actual
balance sheet for that period. Aero Design, which was acquired by the Company on
March 23, 1998, had minimal operations for the year ended June 30, 1997, and,
accordingly, its operating results are not included herein.
The Unaudited Pro Forma Consolidated Statements of Operations of the
Company are presented for illustrative purposes only and does not purport to
present the results of operations of the Company had the CAS acquisition and the
IPO 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.
15
<PAGE> 18
AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Casper Air Service
Fiscal Year Operations for the Fiscal Year
Ended Year Ended
June 30, 1997 Ended April 30, June 30, 1997
Actual 1997 Adjustments(1) Proforma
-------------- ------------------ -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 9,718,000 $ 6,745,000 $ 16,463,000
Cost of revenue 7,410,000 5,643,000 13,053,000
------------ ------------ ------------ ------------
Gross profit 2,308,000 1,102,000 -- 3,410,000
------------ ------------ ------------ ------------
General and administrative expenses 2,048,000 513,000 -- 2,561,000
Depreciation and amortization (2) 413,000 239,000 189,000 841,000
------------ ------------ ------------ ------------
2,461,000 752,000 189,000 3,402,000
------------ ------------ ------------ ------------
Income (loss) from operations (153,000) 350,000 (189,000) 8,000
Other income (expenses)
Other income -- 64,000 -- 64,000
Interest income 2,000 26,000 -- 28,000
Interest expense (377,000) (168,000) -- (545,000)
------------ ------------ ------------ ------------
(375,000) (78,000) -- (453,000)
------------ ------------ ------------ ------------
Income (loss) before provision (528,000) 272,000 (189,000) (445,000)
for income taxes
Provision (benefit) for income taxes 52,000 97,000 -- 149,000
Loss from discontinued operations, -- (99,000) 99,000 --
net of tax ------------ ------------ ------------ ------------
Net income (loss) $ (476,000) 270,000 (90,000) (296,000)
============ ============ ============ ============
Net income (loss) per
common and common equivalent
share - basic and diluted (unaudited) $ (0.27) (0.15)
============ ============
Weighted average common
and common equivalent shares
outstanding (unaudited) 1,759,707 1,913,342(3)
============ ============
</TABLE>
16
<PAGE> 19
AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Casper Air Service
Nine Months Operations for Nine Months
Ended July 1 to Ended
March 31, 1998 July 31, March 31, 1998
Actual 1997 (4) Proforma
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 14,150,000 $ 698,000 $ 14,848,000
Cost of revenue 10,785,000 568,000 11,353,000
------------ ------------ ------------
Gross Profit $ 3,365,000 130,000 3,495,000
------------ ------------ ------------
General and administrative expenses 3,411,000 79,000 3,490,000
Depreciation and amortization 531,000 21,000 552,000
------------ ------------ ------------
3,942,000 100,000 4,042,000
------------ ------------ ------------
Income (loss) from operations (577,000) 30,000 (547,000)
------------ ------------ ------------
Other income (expenses) 19,000 19,000
Interest expense, net (227,000) (11,000) (238,000)
------------ ------------ ------------
Other, net (208,000) (11,000) (219,000)
------------ ------------ ------------
Income (loss) before provision (785,000) 19,000 (766,000)
for income taxes
Provision (benefit) for income taxes 228,000 (7,000) 221,000
------------ ------------ ------------
Net income (loss) $ (557,000) 12,000 $ (545,000)
============ ============ ============
Net income (loss)
per common and common
equivalent share - basic
and diluted (unaudited) $ (0.18) $ (0.18)
============ ============
Weighted average common 3,014,757 3,014,757(3)
and common equivalent shares ============ ============
outstanding (unaudited)
</TABLE>
17
<PAGE> 20
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Adjustments include the elimination of income and expenses totaling
$99,000 for the year ended June 30, 1997 associated with the aircraft
charter operations of CAS, which the Company did not continue after the
acquisition of CAS.
(2) Includes additional amortization, principally of goodwill (amortized over
a 20-year period), of $189,000 from the CAS acquisition for the pro forma
period ended June 30, 1997.
(3) Includes 153,635 shares of Common Stock (at the initial public offering
price of $5.75 per share) issued to the shareholders of CAS upon the
consummation of the CAS transaction.
(4) CAS was acquired in August 1997. Accordingly, only the operating results
for the month ended July 31, 1997 are included. Results from the CAS
aircraft charter operations for the month ended July 31, 1997 were
minimal and, accordingly, such results are not presented as pro forma
adjustments.
18
<PAGE> 21
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. On August 19, 1997, the Company closed an
initial public offering (the "IPO") of 1,150,000 shares of its Common Stock and
1,150,000 Redeemable Common Stock Purchaser Warrants (the "Warrants") which
resulted in net proceeds to the Company of $5,283,000. On August 19, 1997, the
Company acquired all of the outstanding stock of Casper Air Service, a Wyoming
corporation ("CAS"). CAS is a full-service, fixed-base operating station ("FBO")
located in Casper, Wyoming and has been in business continuously since 1946.
Pursuant to the acquisition of CAS, the Company paid approximately $1,167,000 in
cash and issued 153,565 shares of Common Stock with a value of approximately
$883,000. On March 23, 1998, the Company acquired all of the outstanding equity
interests in Aero Design, Inc. and Battery Shop, L.L.C. (collectively, "Aero
Design") in exchange for the payment of $753,000 in cash and the issuance of
134,398 shares of Common Stock with a value of approximately $547,000. Aero
Design manufactures, sells and repairs aircraft batteries at its facilities near
Nashville, Tennessee.
The Company is currently organized into three divisions devoted to the
Company's primary lines of business. These business segments are as follows:
o Overhaul & Service Division: 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
Portland, Oregon and New Iberia, Louisiana. Pride's primary customers are
United Airlines, Inc. and Federal Express. TriStar Paint provides paint
services on a plane-by-plane bid basis to a variety of customers.
In March 1998, the Company expanded the scope of this division by
acquiring Aero Design, Inc., a Tennessee-based manufacturer of aircraft
batteries for the commercial airline industry, and Battery Shop, LLC, a
sister company that repairs batteries for the aviation industry.
o Ground Handling & Services Division: 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, Inc., Federal Express and
Northwest Airlines, among others.
o FBO Operations & Airport Management Division: In July 1996, the Company
began to operate its FBO Division. The Company's fixed base operation,
located at Natrona County International Airport in Casper, Wyoming
provides fuel and light maintenance services to general aviation,
corporate and light freight aircraft customers. There are presently over
1,700 operators of FBO's serving the United States.
The Company believes that airline companies 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 FBO 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.
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<PAGE> 22
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 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 fixed based operation industry is
highly fragmented. There are presently over 1,700 operators of FBO's serving the
United States. The Company intends to continue its efforts to acquire additional
fixed based operation entities in the future as market and financial conditions
permit.
OVERHAUL & SERVICE DIVISION
The Overhaul & Service Division, which includes Pride and TriStar Paint,
provides painting, paint stripping, and other aircraft coating services to major
passenger and freight airlines. The Company paints few corporate aircraft and at
present has no military aircraft contracts. This division's operations include
aircraft stripping and painting services, light aircraft maintenance, and
corrosion preventive cleaning programs.
In March 1998, the Company expanded the scope of this division by
acquiring Aero Design, Inc., a Tennessee-based manufacturer of aircraft
batteries for the commercial airline industry, and Battery Shop, LLC, a sister
company that repairs batteries for the aviation industry.
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, Inc. ("United") 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
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<PAGE> 23
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, accounted for approximately 90%
of the Overhaul & Service Division revenues for the year ended June 30, 1997 and
71% for the nine month period ended March 31, 1998. In 1994, Pride entered into
a five-year Services Agreement (the "Services Agreement") with United which has
been amended several times and currently will expire in 1999 but is cancelable
prior to that date by United upon 90 days written notice. Under the Services
Agreement, Pride provides paint stripping and painting services for jet aircraft
owned or operated by United. United provides the specifications, designs,
stencils, decals and marks for the painting. The Services Agreement contains a
warranty by Pride to United that its services meet United's specifications and
are free from defects in workmanship. Pride must reimburse United for costs of
repair and certain expenses in connection with this warranty. Pride must perform
its services for United at its New Iberia, Louisiana facilities. United
schedules the jet aircraft to be painted by Pride each calendar year by 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.
The Company, through Pride, is presently completing plans to construct a
new aircraft hangar at its New Iberia, Louisiana facilities. See "--Facilities."
In September 1997, the Company, through Pride, was awarded a contract to
paint newly manufactured widebody aircraft for Boeing Commercial Airplane Group
("Boeing"). The contract was for seven aircraft, and was completed in February
1998. The Company leased a hangar facility in Portland, Oregon in which it
performed this work for Boeing. In May 1998, the Company was awarded a
three-year contract to paint aircraft for Federal Express at its Portland
facility.
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 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 airport facilities, TriStar Paint
will send its equipment and personnel to provide onsite services at the
facilities of maintenance companies. These subcontract services have been
provided at airport facilities in San Antonio, Texas, Macon, Georgia and
Alexandria, Louisiana.
GROUND HANDLING & SERVICE DIVISION
Airline Services. Through Airline Services, the Company engages in the
cleaning, handling, and light catering of aircraft in various airports located
within the continental United States. Airline Services' predecessor operations
began in December 1986. It was incorporated in the State of Texas in August
1994. The Company acquired all of the stock of Airline Services in December
1995.
Airline Services provides its customers with a variety of support
services including aircraft interior cleaning, exterior washes and
lavatory/water services. Airline Services presently operates at the following
airports: Dallas-Fort Worth International, Oakland International and Kansas City
International. Airline Services currently provides some or all of these services
at different locations for United Airlines, United Parcel Service, Aviation
Services International, Inc. on behalf of Allegro Airlines, World Technology
Services, Champion Air, Reno Air, Northwest Airlines, Federal Express and other
customers.
Interior cleaning is performed between flights at the airport. This
involves cleaning the inside of the cockpit, cabin and galleys, servicing the
lavatories, fresh water facilities and stocking the aircraft with magazines, air
sickness bags and emergency cards. All pricing for this service is based on
airline specifications. Exterior cleaning involves cleaning the exterior of the
aircraft during nighttime layovers. Typically, an aircraft's exterior will be
cleaned once
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<PAGE> 24
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.
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. In August 1997, the Company acquired CAS, a
50-year old, full-service FBO located in Casper, Wyoming.
The Company believes that this division, which serves corporate and other
general aviation customers, may offset its current dependence on major airlines
for its painting, ground handling, and other services.
CAS is a full service FBO located at Natrona County International Airport
in Casper, Wyoming and has been in business continuously since 1946. CAS offers
aircraft line services, aircraft repair and maintenance, parts distribution,
aircraft charter flights and aircraft sales. CAS has been a Cessna dealer since
1969. Far fewer new aircraft are being manufactured in the 1990's than in prior
decades. Consequently, new aircraft sales in general and by CAS have been
depressed.
The aircraft line services offered by CAS include aircraft refueling,
de-icing, cleaning and heating, and weather information, refreshments, lounge
areas and ground transportation for pilots and passengers. CAS's FAA certified
service department provides maintenance and overhaul services for (i) both
piston and turbo-charged aircraft engines, including Pratt & Whitney, Gulfstream
Aerospace Commander, Bell Helicopter 206 Series, Garrett AiResearch, Piper and
Cessna engines, (ii) propellers, including those made by McCauley, Hartzell,
Dowdy, Sensanich and Kelvan, (iii) accessories, including aircraft alternators,
starters, turbo controllers, waste gates and magnetos, and (iv) avionics
systems. The engine maintenance operation began in 1965, while the propeller,
accessory and avionics overhaul operations were commenced in 1980, 1988 and
1993, respectively.
CAS 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 discontinued 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.
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.
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 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
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<PAGE> 25
companies and subsequently rebuilt and refurbished in accordance with FAA
guidelines for future use. No commitments or binding agreements have been
entered into to date.
FACILITIES
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 and the U.S.
government have approved grants totaling $4.2 million to pay part of the cost of
construction of a hangar at Acadiana Regional Airport. Iberia Parish will
finance the remaining cost of the hangar construction through a bond issuance.
The Company has elected to proceed with this project, which is targeted for
completion in the summer of 1999. The estimated total cost of the hangar is
$8,500,000.
Portland Facilities. The Company leases two hangars and office space at
the Airtrans Center at Portland International Airport. Portland International
Airport has a 11,011 foot by 150 foot runway load rated for all commercial and
military aircraft. The facility is presently being used for aircraft painting
for the Federal Express contract.
The paint hangar consists of a 112,000 square foot maintenance hangar and
a two-story, 65,000 square foot shop and office area. The hangar is 320 feet by
350 feet with 50.5 foot hangar doors, with an additional tail door 19 feet high.
The lease is a month-to-month lease that requires rent equal to 50% of the net
profits of Pride earned from its Portland painting activities.
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.
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Casper Facilities. In connection with the acquisition of CAS in August
1997, the Company acquired certain real property and leases related to the
operations of CAS. The Company leases from the Natrona County International
Airport Authority the land underlying its main hangar and office building and
three groups of hangars for the storage of aircraft.
The lease of the land underlying CAS's main hangar and office building
expires December 31, 2004 and requires a monthly rental of $215 per month. This
lease also requires that the building and improvements on the leased property
vest to the Natrona County International Airport Authority at the expiration of
the lease term.
The Company also leases land underlying the three storage hangars. These
leases require a monthly payment totaling the greater of $479 per month or 7% of
the sublease rentals received. These leases expire from January 31, 2002 to
August 31, 2006.
Aero Design utilizes approximately 3,000 square feet of manufacturing and
office space in Nashville, Tennessee under a two-year lease at the monthly rate
of $1,500 plus expenses.
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, 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,
1998, United accounted for approximately 35% 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,
Emery Air Freight, Sunjet, Northwest Airlines, Allegro Airlines, Airborne
Express, Southwest Airlines, UPS, Federal Express and Aviation Service
International, Inc. For the twelve months ended June 30, 1997, the ground
handling services and light catering accounted for approximately 11% of the
total revenues of the Company.
REGULATION
Environmental Regulation. The Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), is a federal statute providing a comprehensive
program for regulating the generation, treatment, storage and disposal of
hazardous waste. Federal regulations adopted by the United States Environmental
Protection Agency ("EPA") pursuant to RCRA govern waste handling activities
involving substances that are either listed as hazardous or have certain
specified 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
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liability upon owners or operators of facilities at, from, or to which a release
of hazardous substances has occurred, upon parties who generated hazardous
substances that were released at such facilities, and upon parties who arranged
for the transportation or disposal of hazardous substances to applicable
facilities.
The day-to-day operations of the Company are also subject to regulation
under the Clean Air Act, as amended ("CAA"). In particular, the EPA and state
agencies have promulgated, or are required to promulgate, regulations which
affect or will affect the operations of the Company. These regulations include
New Source Performance Standards ("NSPS") and National Emission Standards for
Hazardous Air Pollutants ("NESHAPs"). NSPS and NESHAP rules may require
additional controls on emissions of certain listed hazardous air pollutants
("HAPs"). The CAA identifies chemicals that the Company uses and/or processes,
such as methylene chloride, phenol and methyl ethyl ketone, as HAPs for purposes
of regulation. The CAA may also require the Company to maintain operating
permits for its facilities' air emissions. The EPA has announced plans to impose
more stringent standards for ozone and particulate matter. Regulations
promulgated to achieve these standards may require additional controls on
emissions of particulate matter and volatile organic compounds.
The Company must comply with RCRA, CERCLA, CAA and other federal, state
and local environmental protection laws, and the regulations promulgated
thereunder, in its operations and facilities. These laws and regulations are
particularly applicable to the paints and paint stripping chemicals and solvents
used by the Company in its operations. The Company could be held liable as a
current or former operator for releases of hazardous substances at its
facilities. The Company could also incur liability for cleanup costs at off-site
facilities to which the Company shipped hazardous substances for treatment,
handling, storage, or disposal. Management of the Company believes that the
Company's operations and facilities are in material compliance with all federal,
state and local environmental laws and regulations and that the Company's
hazardous waste management practices minimize the potential for release of
hazardous substances into the environment. The Company has not experienced any
significant environmental regulatory problems in the past, and to date, the
Company has not been subject to any significant fines, penalties or other
liabilities under these laws and regulations. However, no assurance can be given
that such laws, regulations or interpretations thereof will not necessitate
significant expenditures by the Company or otherwise have a material adverse
impact on the Company's operations or financial condition in the future.
Aviation Regulation. The FAA regulates all aspects of the airline and
aircraft industries. The Company's subsidiaries have certifications from the FAA
to operate aircraft repair stations. Such certifications are limited as to the
kinds of repair and maintenance activities that may be performed by the
Company's subsidiaries at their certified facilities. The FAA regularly inspects
these facilities for compliance with FAA regulations and guidelines. Failure to
comply with FAA regulations and guidelines could result in a loss of
certification. A loss of certification for a particular facility would prevent
that facility from performing any aircraft repair or maintenance operations. The
Company believes that its subsidiaries are in compliance in all material
respects with the FAA's regulations and guidelines. Nevertheless, no assurance
can be given that such regulations and guidelines or any FAA enforcement actions
may not have a material adverse effect on the Company's operations and financial
condition in the future.
COMPETITION
The airlines services industry is highly competitive. Each of the
Company's subsidiaries is in direct competition with other companies. Although
Leading Edge Corporation of Greenville, South Carolina is the Company's primary
competitor as a standalone aircraft paint contractor, many of the major airline
companies paint their own aircraft. In addition, although TriStar Paint also
serves as a subcontractor to several heavy maintenance facilities for aircraft,
many heavy maintenance facilities perform aircraft stripping and painting
services as an adjunct to their maintenance operations and, consequently,
directly compete with the Company. The owners of these heavy maintenance
facilities include Dee Howard Company, Pemco, Tramco, Inc. and Raytheon. The
Company's Ground Handling & Service Division has several competitors at each
major airport at which Airline Services provides services. There are many other
companies that provide similar services at numerous locations to airlines and
compete directly with the Company. Some of the Company's larger competitors
include AMR Services, a division of AMR Corp., Pedus, Intex and World Aviation
Services. These competitors provide interior and exterior aircraft cleaning
services and light catering services similar to those provided by the Company.
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
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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 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 had 171 employees on March 31, 1998. At March 31, 1998, Airline
Services, CAS and Aero Design had an aggregate of approximately 200 employees.
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 each of Messrs.
Sanders and Lubomirski.
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 38 President, Chief Executive Officer and Director
Paul Lubomirski 45 President of Pride
Richard Morgan 40 Executive Vice President, Chief Financial Officer and Director
John Arcari 58 Vice President - Marketing and Development
Charles E. Weed (1) 67 Director
Gordon Whitener (2) 35 Director
Robert A. Schneider (1)(2) 55 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, Sanders and Schneider as directors
expire at the annual meetings of shareholders to be held in 1999, 2000, 1998,
1999 and 2000, respectively. The classification of directors may have the effect
of delaying, deferring or preventing a change in control of the Company.
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.
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.
Robert A. Schneider was appointed a director of the Company in August
1997. He is an investment banker in New York, New York, where he has served as
Chairman and CEO of RAS Securities Corp., a full service securities firm, for
more than the past five years.
Richard Morgan was appointed as a director of the Company in February
1997 and as the Company's Chief Financial Officer and Executive Vice President
in April 1998. He has also served as a consultant to the Company prior to that
time. Mr. Morgan was formerly 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.
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<PAGE> 30
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.
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.
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 of Messrs. Whitener and Schneider.
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 and Schneider. 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 fiscal year ended
June 30, 1997 and nine-month transition period ended June 30, 1996 for the
Company and the fiscal year ended September 30, 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 other
executive officers of the Company or its predecessors had compensation in excess
of $100,000 for the fiscal year ended June 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------
Other Annual
Name and Principal Position Year Salary Compensation
- --------------------------- ---- -------- ------------
<S> <C> <C> <C>
Lee Sanders, President and 1997 $144,000 $ 12,894 (1)
Chief Executive Officer 1996 (3) 73,847 8,676 (1)
1995 (2) 58,846
</TABLE>
- ---------------
(1) Represents aggregate annual lease payments and insurance costs for an
automobile.
(2) Compensation paid by the Company's predecessors.
(3) The compensation shown for 1996 represents compensation for the
nine-month transition period ended June 30, 1996.
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<PAGE> 31
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 2000. The
Company pays Mr. Weed a fee of $4,000 per month.
The Company has an employment agreement with each of Paul Lubomirski and
John Arcari, all of which expire in 2000. Mr. Lubomirski and Mr. Arcari are paid
annual salaries of $90,000 and $80,000 respectively. 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. Arcari is 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.
The Company has an employment agreement with Richard Morgan that expires
in June 1999. Mr. Morgan is paid an annual salary of $120,000. The agreement
contains a non-competition agreement for a period of three years after any
expiration or termination of the agreement. Mr. Morgan is eligible for
additional bonuses as may be determined by the Board of Directors. He is also
entitled to additional benefits in the same manner as Messrs. Arcari and
Lubomirski.
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.
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.
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<PAGE> 32
1997 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.
As of June 30, 1998, the Company had outstanding incentive stock options
to purchase, at an exercise price of $3.50 per share, an aggregate of 25,000
shares of Common Stock. In addition, Mr. Sanders has been granted an incentive
stock option to purchase 50,000 shares of Common Stock at $3.85 per share. These
options expire in 2004 and 2005.
OTHER WARRANTS
The Company has also granted warrants to purchase shares of Common Stock
to certain executive officers and directors and their affiliates in April 1998.
As a consequence, Messrs. Weed, Schneider, Morgan, Whitener and Sanders hold
warrants to purchase, respectively, 20,000, 15,000, 115,000, 15,000 and 200,000
shares of Common Stock at an exercise price of $3.50 per share. In addition, an
affiliate of Mr. Schneider, RAS Securities, Inc., has been issued a warrant to
purchase 20,000 shares of Common Stock at $3.50 per share. These warrants expire
in 2003 and 2004.
30
<PAGE> 33
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. This agreement expired in February 1998, at which time
a new consulting agreement was reached with Mr. Weed. Under the new agreement,
the Company is obligated to pay Mr. Weed a consulting fee of $4,000 per month
until February 2000. 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 June 30, 1998,
Mr. Weed held convertible notes totaling $136,543 in principal amount. Mr. Weed
is also a member and manager of Sunbelt Business Capital, L.L.C. ("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 to Sunbelt
L.L.C. The note required payments of 27 equal monthly installments of $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 was 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, owned 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. The maturity date was
subsequently extended and this note, together with the existing note of
$283,000, was repaid in late August 1997. The notes restricted the prepayment of
principal; however, Mr. Webb allowed prepayment in exchange for the issuance of
3,000 shares of Common Stock of which he transferred 1,000 shares to Mr. Weed
attributable to Mr. Weed's loan participation interest.
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.
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.,
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<PAGE> 34
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.
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
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, 5% stockholders
or affiliates, except for bona fide business purposes.
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<PAGE> 35
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of April 30, 1998,
with respect to the beneficial ownership of the Company's Common Stock 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>
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned (1) Percent of Total (2)
------------------- ---------------------- --------------------
<S> <C> <C>
Lee Sanders 1,210,000 (3) 34.9%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Richard Morgan 215,000 (4) 6.2%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Robert A. Schneider 78,245 (5) 2.3%
Charles E. Weed 64,378 (6) 1.9%
Gordon Whitener 15,000 (7) *
All executive officers and
directors as a group (7 persons) 1,627,673 42.7%
</TABLE>
- --------------
* Less than 1%
(1) This information has been furnished by the Company's transfer agent and
the respective officers and directors. 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 3,257,992 shares
outstanding.
(3) Represents (i) 1,000,000 shares owned of record by Sanders Companies, a
corporation wholly owned by Mr. Sanders, (ii) warrants to purchase
200,000 shares at $3.50 per share expiring 2003 and (iii) options to
purchase 10,000 shares at $3.85 per share expiring 2004, which will vest
in August 1998.
(4) Includes (i) 80,000 shares purchasable at $2.50 per share pursuant to a
warrant expiring February 28, 1999, (ii) 15,000 shares purchasable, at
$3.50 per share, under warrants expiring in 2004 and (iii) 100,000 shares
purchasable, at $3.50 per share, under warrants expiring 2003.
(5) Represents (i) 43,245 shares purchasable, at $1.00 per share, pursuant to
a warrant expiring in February 1999, (ii) 10,000 shares purchasable at
$3.50 per share, under warrants expiring in 2004, (iii) 5,000 shares
purchasable, at $3.50 per share, under warrants expiring in 2003 and (iv)
20,000 shares purchasable, at $3.50 per share, under warrants held by Mr.
Schneider's affiliate RAS Securities, Inc. expiring 2003.
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<PAGE> 36
(6) Includes (i) 24,843 shares issuable, at $4.50 per share, upon the
conversion of convertible notes in the total principal amount of
$111,800, (ii) 8,250 shares issuable, at $3.00 per share, upon the
conversion of a convertible note in the principal amount of $24,750,
(iii) 15,000 shares purchasable at $3.50 per share, under warrants
expiring in 2004, and (iv) 5,000 shares purchasable, at $3.50 per share,
under warrants expiring in 2003.
(7) Represents shares purchasable at $3.50 per share under warrants expiring
in 2003 and 2004.
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 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").
COMMON STOCK
As of June 30, 1998, the Company had approximately 800 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 the IPO, the Company issued 1,150,000 Redeemable
Common Stock Purchase Warrants (the "Warrants"). Upon exercise of the
Underwriters' Warrants, the Company may issue up to 100,000 Underlying Warrants
to the holders of the Underwriters' Warrants. The Underlying Warrants have
identical terms to the Warrants. The following description of the Warranties is
also intended to describe the Underlying 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 1.058 shares of Common Stock
at any time after August 13, 1999 at an exercise price of $6.52 per share,
subject to adjustment in certain circumstances, unless earlier redeemed.
Pursuant to the terms of the Warrant Agreement as a result of the Company's
issuance of certain other warrants having exercise prices of less than $6.90,
the original exercise price of the Warrants was adjusted from $6.90 to $6.52,
and the number of shares for which each Warrant may be exercised was increased
from one share to 1.058 shares.
The Warrants are redeemable in whole and not in part by the Company,
after August 13, 1999, 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 $9.4875 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
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<PAGE> 37
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.
The shares of Common Stock issuable upon exercise of the Warrants and the
securities issuable upon exercise of the Underwriters' 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, however, (i) obtained a listing for the
shares of Common Stock on Nasdaq and the BSE, which provides an exemption from
state securities law registration in many states, and (ii) registered 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.
UNDERWRITERS' WARRANTS
Upon completion of the IPO, the Company sold to its underwriter, for
$0.001 per Warrant, the Underwriters' Warrants (the "Underwriters' Warrants") to
purchase (i) 100,000 shares of Common Stock at an exercise price of $9.4875 per
share and (ii) 100,000 Warrants (the "Underlying Warrants") at an exercise price
of $11.38 per Warrant. The Underwriters' Warrants are exercisable after August
13, 1998 and expire on August 13, 2002. The Underwriters' 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
Underwriters' Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers, or consolidations.
Holders of the Underwriters' Warrants do not possess any rights as shareholders
of the Company prior to exercise. In addition, the Company agreed to provide
certain demand and piggyback registration rights in connection with the
Underwriters' Warrants.
OTHER 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, the holders of the Placement Warrants had exercised
and surrendered 143,755 Placement Warrants to purchase an aggregate of 127,962
shares of Common Stock. The Placement Warrants contain provisions that protect
35
<PAGE> 38
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 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 and Related Party Warrants. See
"Management--Employee Stock Option Plan" for a description of outstanding
options granted under the 1997 Stock Option Plan and "Management--Other
Warrants" for a description of outstanding warrants granted to certain officers,
directors and related parties.
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. As of June 30,
1998, $786,000 in aggregate principal amount of the Convertible Notes remained
outstanding. 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. As of June 30, 1998, this Convertible Note had a principal balance of
$24,750. The conversion rates for all of the Convertible Notes 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.
36
<PAGE> 39
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 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
The Company has engaged Continental Stock Transfer and Trust Company, New
York, New York, to serve as the stock transfer agent and registrar for the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has approximately 3,257,992 shares of Common Stock
outstanding, excluding any exercise of currently outstanding warrants and
convertible or exchangeable notes. The 1,150,000 shares of Common Stock sold in
the IPO are freely transferable without restriction or further registration
under the Securities Act, except that any shares purchased by affiliates of the
Company are subject to the limitations of Rule 144 under the Securities Act. The
1,150,000 Warrants sold in the IPO are also freely transferable without
restriction or further registration under the Securities Act, except that any
Warrants purchased by affiliates of the Company are subject to the limitations
of Rule 144 under the Securities Act. All of the Company's other outstanding
shares of Common Stock, warrants, options and convertible 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, after August 1998, substantially
all of the Company's outstanding "restricted" shares of Common Stock are
eligible for sale under Rule 144, as a result of the one-year holding period.
Certain Company officers, who beneficially own a total of 1,254,450
shares of Common Stock, have signed lock-up agreements under which such holders
have agreed not to sell their shares of Common Stock that might otherwise be
eligible for sale until August 13, 1999 without the prior written consent of the
Company's underwriter for the IPO.
Other Company officers and nonmanagement holders of certain of the
Company's securities have signed lock-up agreements under which such holders
have agreed not to sell any shares of Common Stock that they own or acquire
until August 13, 1998. Additionally, if the Company's underwriter 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 until August 13, 1999.
Holders of the Convertible Notes that are convertible for up to 182,870
shares of Common Stock agreed to lock up their shares until August 13, 1999,
except that such holders may quarterly sell sufficient shares to generate
proceeds that do not exceed the required quarterly principal payments on the
Convertible Notes.
In connection with the consummation of the IPO, the Company issued 43,478
shares of Common Stock upon full payment of the Bridge Notes, which provided
that these shares could not be sold by the holder until August 19, 1998.
37
<PAGE> 40
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.
This Prospectus covers the resale by the Selling Shareholders of 927,624
of the Company's outstanding shares of Common Stock, 135,245 shares of Common
Stock issuable upon exercise of outstanding warrants, and 182,870 shares of
Common Stock issuable upon conversion of the outstanding Convertible Notes. See
"Selling Shareholders." 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.
38
<PAGE> 41
USE OF PROCEEDS
The timing of any receipt by the Company of proceeds from sales of shares
of Common Stock upon exercise of the Warrants, the Underwriters' Warrants or the
Underlying Warrants is unpredictable. The Company expects to employ any such
proceeds for working capital and general corporate purposes.
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 relates to the offer and sale from time to time (i) by
stockholders of the Company of up to 927,624 outstanding shares of Common Stock,
(ii) by the holders of outstanding warrants of a maximum of 135,245 shares of
Common Stock that may be issued upon the exercise of the warrants owned by them,
and (iii) by the holders of outstanding convertible notes of a maximum of
182,870 shares of Common Stock that may be issued upon conversion of the notes
owned by them.
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 Shareholder.
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON SHARES OF COMMON STOCK TO BE OWNED
SELLING SHAREHOLDERS STOCK OWNED (1) STOCK TO BE SOLD AFTER THE OFFERING (11)
-------------------- ---------------- ----------------- -----------------------
<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
John L. Caldwell 20,000 20,000 0
Andrew J. Corbett 5,000 5,000 0
Conrad H. C. Everhard 5,000 5,000 0
Edward Gray 5,000 5,000 0
Alfons Murk 40,000 40,000 0
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
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON SHARES OF COMMON STOCK TO BE OWNED
SELLING SHAREHOLDERS STOCK OWNED (1) STOCK TO BE SOLD AFTER THE OFFERING (11)
-------------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C>
Charles E. Weed 43,627 (3) 43,627 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
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 21,975 (5) 21,975 0
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON SHARES OF COMMON STOCK TO BE OWNED
SELLING SHAREHOLDERS STOCK OWNED (1) STOCK TO BE SOLD AFTER THE OFFERING (11)
-------------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C>
Steven Taub 10,000 (6) 10,000 0
Thomas K. Lin 2,000 (6) 2,000 0
Eric Rainer Bashford Charitable Remainder
Unitrust dated August 3, 1996
EIN 13-7096965 37,634 (5) 37,634 0
Robert A. Schneider 43,245 (6) 43,245 0
Faye Peltz 64,780 (5) 64,780 0
Patricia Ewing Hendrick 19,823 (7) 19,823 0
Gregory A. Despot 62,041 (7) 62,041 0
Judy L. Chidlow 8,480 (7) 8,480 0
John H. Chidlow 33,094 (7) 33,094 0
Stephen R. Herbel 1,413 (7) 1,413 0
Jerry R. Webb 1,413 (7) 1,413 0
Teekell Investments, L.P. 1,414 (7) 1,414 0
Frank Scott Moran 3,392 (7) 3,392 0
Anne S. Couch 3,392 (7) 3,392 0
3650 Investment Corporation, L.C. 1,696 (7) 1,696 0
May H. Chidlow 890 (7) 890 0
Judd H. Chidlow 12,731 (7) 12,731 0
Louisiana Economic Development Corp. 82,153 (8) 82,153 0
Betsy B. Rouse 2,174 (9) 2,174 0
Patrick H. & Lee M. Miller 4,346 (9) 4,346 0
Edward J. Anderson 2,174 (9) 2,174 0
J. Robert Wyatt 4,346 (9) 4,346 0
Priscilla Goodwyn 2,174 (9) 2,174 0
Sagax Fund II, Ltd. 8,698 (9) 8,698 0
John H. & Maria Sultenfuss 2,174 (9) 2,174 0
John S. Lemak 2,174 (9) 2,174 0
Dorothy D. & Rush B. Winchester 2,174 (9) 2,174 0
Robert C. Kohler, III 2,174 (9) 2,174 0
Gary L. Covelli 2,174 (9) 2,174 0
Isabel Maxwell 2,174 (9) 2,174 0
Digital Data Networks, Inc. 2,174 (9) 2,174 0
J. R. Sheldon & Co., Inc. 2,174 (9) 2,174 0
Anthony DeCaprio 2,174 (9) 2,174 0
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF SHARES OF COMMON
SHARES OF COMMON SHARES OF COMMON STOCK TO BE OWNED
SELLING SHAREHOLDERS STOCK OWNED (1) STOCK TO BE SOLD AFTER THE OFFERING (11)
-------------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C>
Fred Werner 54,842 (10) 54,842 0
Casper Air Service Employee Stock
Ownership Plan and Trust 27,323 (10) 27,323 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.
(3) Charles Weed has served as a consultant to the Company since March 1996
and receives a consulting fee of $4,000 per month through February 2000.
Mr. Weed is also a director of the Company. His shares include (i) 7,500
shares purchasable, at $3.00 per share, pursuant to a Convertible Note
(as defined below) and (ii) 22,584 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 the Chief
Financial Officer and a director to the Company.
(5) Represents shares purchased pursuant to the Placement Warrants.
(6) Represents shares purchasable, at $1.00 per share, pursuant to the
Placement Warrants.
(7) Represents shares purchasable, at $4.50 per share, pursuant to the
Convertible Notes.
(8) Represents shares issued pursuant to the Exchangeable Note (as defined
below).
(9) Represents shares issued to the former holders of the Bridge Notes (as
defined below) upon payoff of the Bridge Notes.
(10) Represents shares issued to the owners of CAS upon consummation of the
Casper Acquisition.
(11) Assumes all shares are sold by each Selling Shareholder.
DESCRIPTION OF TRANSACTIONS
Outstanding Common Stock. As of June 30, 1998, the Company had issued and
outstanding 3,257,992 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 Airline Services and TriStar
Paint.
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 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 Charles Weed, who became a director of and consultant to
the Company.
In connection with the Company's acquisition of CAS in August 1997 the
Company issued 153,635 shares of Common Stock to Fred Werner, CAS's former
controlling shareholder and the Casper Air Service Employee Stock Ownership Plan
and Trust (the "ESOP"), one of CAS's former shareholders. Mr. Werner and the
ESOP have sold a total of 71,470 shares in connection with this offering.
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
42
<PAGE> 45
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 June 30, 1998, a total of $2,250 of the
Convertible Notes have been converted into 975 shares of Common Stock.
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 was exchangeable by the LEDC for
newly issued shares of the Company's Common Stock at a rate of $4.50 per share.
In August 1997, the LEDC exchanged the Exchangeable Note for the issuance of
82,153 shares of Common Stock.
Placement Warrants. On March 1, 1996 and June 24, 1996, the Company
issued the Placement Warrants to purchase an aggregate of 200,000 shares of
Common Stock to RAS upon the closings of the private placement of 500,000 shares
of Common Stock by the Company. RAS 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, holders of
the Placement Warrants had purchased an aggregate of 127,962 shares of Common
Stock through the exercise and surrender of a total of 143,755 Placement
Warrants. As of the date of this Prospectus, 55,245 Placement Warrants remained
outstanding. 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 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. Mr. Morgan was appointed a director of the
Company in February 1997 and as Chief Financial Officer in April 1998. 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 were due in full within five days following
the funding of the Company's IPO. Upon successful completion of the Company's
IPO in August 1997, the terms of the Bridge Notes required the Company to issue,
as additional compensation to the holders of the Bridge Notes, that number of
shares of Common Stock which equaled $250,000 divided by the IPO price of $5.75
per share of Common Stock, at the time of repayment in full of the Bridge Notes.
The holders of the Bridge Notes were 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 were held by
four shareholders. One of the shareholders was the ESOP. The closing of this
transaction occurred concurrently with the closing of the IPO. The Company
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 IPO price. The
ESOP and CAS's controlling shareholder, Fred Werner, were issued a total of
153,565 shares of Common Stock. The other two shareholders received only cash.
43
<PAGE> 46
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, owns or may acquire within 60 days up to 44,450 shares, or 1.7% of the
shares covered by this Prospectus. Charles Weed, a director of the Company, owns
or may acquire within 60 days up to 64,378 shares, or 2.5% of the shares covered
by this Prospectus. Richard Morgan, a director and the Chief Financial Officer
of the Company, owns or may acquire within 60 days up to 215,000 shares, or 8.3%
of the shares covered by this Prospectus.
44
<PAGE> 47
PLAN OF DISTRIBUTION
As part of the Company's initial public offering in August 1997, the
Company sold 1,150,000 Warrants at $0.10 per Warrant. Each Warrant entitles the
holder to purchase, between August 13, 1999 and August 13, 2002, 1.058 shares of
Common Stock at an exercise price of $6.52 per share, subject to adjustment in
certain circumstances. See "Description of Securities--Warrants" for information
regarding the terms of the Warrants, including the manner of exercise. This
exercise price exceeds current trading prices for the Common Stock.
In connection with the consummation of the Company's IPO in August 1997,
the Company entered into an Underwriter's Warrant Agreement with the Company's
underwriter in the IPO, Duke & Co., Inc. (the "Underwriter"), pursuant to which
the Underwriters' Warrants were issued. See "Description of Securities--
Underwriter's Warrants" for a description of the terms of the Underwriter's
Warrants. The Underwriter's Warrants may be exercised at any time between August
13, 1998 and August 13, 2002. The holders of the Underwriter's Warrants may
purchase (i) up to 100,000 shares of Common Stock at $9.4875 per share and (ii)
up to 100,000 Underlying Warrants at $11.38 per Warrant, subject to adjustment
in certain circumstances. These exercise prices exceed current trading prices
for the Common Stock and the Warrants. The Underwriter's Warrants to purchase
Common Stock may be exercised in a cashless manner through the surrender and
exchange of Underwriter'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 Underlying Warrants, if issued upon an exercise of the Underwriter's
Warrants, would have terms similar to the outstanding Warrants. See "Description
of Securities--Warrants." The Underlying Warrants may be exercised at any time
between August 13, 1999 and August 13, 2002. Each Underlying Warrant entitles
its holder to purchase 1.058 shares of Common Stock at an exercise price of
$6.52 per share.
The Company has granted to the holders of the Underwriter's Warrants and
the underlying securities certain rights with respect to registration under the
Securities Act of the securities underlying the Underwriter's Warrants. Between
August 13, 1998 and August 13, 2002, the holders of not less than a majority of
the Common Stock issued or issuable upon exercise of the Underwriter's Warrants
and Underlying Warrants may require the Company to effect up to two
registrations under the Securities Act with respect to the Underwriter's
Warrants, the Underlying Warrants and the Common Stock underlying the
Underwriter'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 prior to August 13, 2004, the holders of the
Underwriter's Warrants and the underlying Common Stock are entitled to notice of
such registration and may elect to include the Underwriter's Warrants, the
Underlying Warrants and the Common Stock underlying the Underwriter'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
Underwriter's Warrants and Underlying Warrants will be reimbursed by the holders
whose securities are included in such registration. The registration of
securities pursuant to the registration rights applicable to the Underwriter's
Warrants may impede future financing by the Company.
The holders of the Warrants, Underlying Warrants and Underwriter's
Warrants have an opportunity to profit from a rise in the market price of the
Common Stock, if and to the extent that the market price exceeds the respective
exercise prices of the Warrants, Underlying Warrants and Underwriter's Warrants.
If any such warrants are exercised, the interest of the Company's shareholders
may be diluted. It may be more difficult for the Company to raise additional
capital while such warrants are outstanding, and the holders of such 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 such warrants.
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, (iii) ordinary brokerage transactions and
45
<PAGE> 48
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.
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. The Company is not aware as of the date of this Prospectus 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 MATTERS
The validity of the issuance of the Common Stock and Underlying Warrants
offered hereby have been passed upon for the Company by Jenkens & Gilchrist, a
Professional Corporation, Dallas, Texas.
EXPERTS
The consolidated financial statements of Aviation Group, Inc. and
subsidiaries as of and for the year ended June 30, 1997 included in this
Prospectus have been included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Aviation Group, Inc. and
subsidiaries as of and for the nine months ended June 30, 1996 included in this
Prospectus have been audited by Arsement, Redd & Morella, L.L.C., independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The consolidated financial statements of Casper Air Service and
subsidiary as of April 30, 1997 and for the two years ended April 30, 1996 and
1997, 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.
46
<PAGE> 49
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 is subject to the informational requirements of the Exchange
Act and in accordance therewith files 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 furnishes to its shareholders annual
reports containing financial statements audited by independent accountants
following the end of each fiscal year.
47
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION GROUP, INC. AND SUBSIDIARIES
Report of Independent Accountants dated September 29, 1997 by Price Waterhouse LLP F-1
Independent Auditors' Report dated October 7, 1996 by Arsement, Redd & Morella, L.L.C. F-2
Consolidated balance sheets as of June 30, 1997 and June 30, 1996 F-3
Consolidated statements of operations for the year ended June 30, 1997 and for the nine
month period ended June 30, 1996 F-4
Consolidated statements of changes in shareholders' equity for the year ended June 30, 1997
and for the nine month period ended June 30, 1996 F-5
Consolidated statements of cash flows for the year ended June 30, 1997 and for the nine
month period ended June 30, 1996 F-6
Notes to consolidated financial statements F-7
Condensed consolidated balance sheets dated March 31, 1998 (unaudited) and June 30, 1997 F-22
Condensed consolidated statements of operations for the three month and nine month periods
ended March 31, 1997 and 1998 (unaudited) F-23
Condensed consolidated statements of cash flows for the nine month periods ended March 31, 1997
and 1998 (unaudited) F-24
Notes to unaudited condensed consolidated financial statements for the nine month periods ended
March 31, 1997 and 1998 F-25
CONSOLIDATED FINANCIAL STATEMENTS OF CASPER AIR SERVICE AND SUBSIDIARY
Independent Auditors' Report dated November 14, 1997 by McGladrey & Pullen, LLP C-1
Consolidated balance sheets as of April 30, 1996 and April 30, 1997 C-2
Consolidated statements of operations for the fiscal years ended April 30, 1997 and 1996 C-3
Consolidated statements of stockholders' equity for the fiscal years ended April 30, 1997
and 1996 C-4
Consolidated statements of cash flows for the fiscal years ended April 30, 1997 and 1996 C-6
Notes to consolidated financial statements C-8
</TABLE>
48
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aviation Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aviation Group, Inc. and its subsidiaries at June 30, 1997, and the results of
their operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Dallas, Texas
September 29, 1997
F-1
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
To Aviation Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Aviation Group,
Inc. (a Texas corporation) and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aviation Group, Inc. and
subsidiaries as of June 30, 1996, and the results of their operations and cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
/s/ Arsement, Redd & Morella, L.L.C.
Arsement, Redd & Morella, L.L.C.
October 7, 1996
Lafayette, Louisiana
F-2
<PAGE> 53
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 188,000 $ 457,000
Accounts receivable, net 796,000 644,000
Inventory 240,000 143,000
Deferred income taxes 40,000 11,000
Prepaid expenses and other 710,000 22,000
----------- -----------
Total Current Assets 1,974,000 1,277,000
----------- -----------
Property and equipment 2,903,000 2,409,000
Less: accumulated depreciation (583,000) (220,000)
----------- -----------
2,320,000 2,189,000
----------- -----------
Goodwill, net 752,000 975,000
Other 65,000 83,000
----------- -----------
817,000 1,058,000
----------- -----------
Total Assets $ 5,111,000 $ 4,524,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 502,000 $ 209,000
Bridge notes 436,000 --
Other short-term borrowings 256,000 223,000
Accounts payable 769,000 574,000
Accrued interest 24,000 36,000
Income tax payable 20,000 --
Due to shareholder -- 2,000
Accrued liabilities 483,000 359,000
----------- -----------
Total Current Liabilities 2,490,000 1,403,000
----------- -----------
Long-Term Liabilities
Long-term debt, net of current maturities 1,211,000 1,350,000
Capitalized leases, net of current maturities 66,000 --
Loan from shareholder 15,000 --
Deferred income taxes 100,000 316,000
----------- -----------
Total Long-Term Liabilities 1,392,000 1,666,000
----------- -----------
Total Liabilities 3,882,000 3,069,000
----------- -----------
Commitments and Contingencies (Note J)
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none outstanding -- --
Common Stock, $.01 per value, 10,000,000
shares authorized, 1,600,250 shares issued
and outstanding 16,000 16,000
Additional paid-in capital 1,951,000 1,701,000
Retained earnings (deficit) (738,000) (262,000)
----------- -----------
Total Shareholders' Equity 1,229,000 1,455,000
----------- -----------
Total Liabilities and Shareholders' Equity $ 5,111,000 $ 4,524,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 54
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months
June 30, Ended June 30,
1997 1996
----------- --------------
<S> <C> <C>
Revenue $ 9,718,000 $ 3,881,000
Cost of Revenue 7,410,000 2,838,000
----------- -----------
Gross Profit 2,308,000 1,043,000
----------- -----------
General and Administrative Expenses 2,048,000 752,000
Depreciation and Amortization 413,000 154,000
----------- -----------
2,461,000 906,000
----------- -----------
Income (Loss) From Operations (153,000) 137,000
----------- -----------
Other Income (Expenses)
Interest Income 2,000 2,000
Interest Expense (377,000) (71,000)
----------- -----------
(375,000) (69,000)
----------- -----------
Income (Loss) Before Provision for Income Taxes (528,000) 68,000
Provision (Benefit) for Income Taxes (52,000) 34,000
----------- -----------
Net Income (Loss) $ (476,000) $ 34,000
=========== ===========
Earnings (loss) per common and
common equivalent share-basic and diluted $ (0.27) $ 0.02
=========== ===========
Weighted average common and
common equivalent shares outstanding 1,759,707 1,497,511
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 55
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid In Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Predecessor combined balances at
September 30, 1995 (a) $ 1,000 $ 201,000 $ (283,000) $ (81,000)
Restatement to reflect combination
of entities under common control
(Note A) 1,000,000 9,000 (9,000) -- --
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995,
as restated 1,000,000 10,000 192,000 (283,000) (81,000)
Dividend to The Sanders
Companies, Inc. -- -- -- (13,000) (13,000)
Issuance of shares in connection with
private offering 500,000 5,000 1,209,000 -- 1,214,000
Issuance of shares in connection
with acquisition of Pride Aviation, Inc. 44,250 500 132,500 -- 133,000
Issuance of shares in connection
with settlement of long-term debt 56,000 500 167,500 -- 168,000
Net Income -- -- -- 34,000 34,000
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 1,600,250 16,000 1,701,000 (262,000) 1,455,000
Bridge Notes Warrants (Note F) -- -- 250,000 -- 250,000
Net loss -- -- -- (476,000) (476,000)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 1,600,250 $ 16,000 $ 1,951,000 $ (738,000) $ 1,229,000
=========== =========== =========== =========== ===========
</TABLE>
(a) The Predecessor entities, Tri-Star Aircraft Services, Inc. and Tri-Star
Airline Services, Inc. had 10,000 and 1,000 shares of common stock
outstanding, respectively, at September 30, 1995.
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 56
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ (476,000) $ 34,000
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 413,000 154,000
Accreted interest 186,000 --
Deferred income taxes (72,000) 47,000
(Increase) decrease in accounts receivable (152,000) (123,000)
(Increase) decrease in inventories (97,000) (42,000)
(Increase) decrease in prepaids and other current assets (4,000) 29,000
Increase(decrease)in accounts payable 195,000 (214,000)
Increase(decrease) in income taxes payable 20,000 --
Increase (decrease) in interest payable (12,000) 36,000
Increase (decrease) in accrued liabilities 124,000 (20,000)
Other (25,000) (14,000)
----------- -----------
Total Adjustments 576,000 (147,000)
----------- -----------
Net Cash Provided (Used) by Operating Activities 100,000 (113,000)
----------- -----------
Cash Flows From Investing Activities:
Cash paid for acquisition of Pride Aviation. Inc. -- (506,000)
Payments for hangar facility costs (91,000) --
Cost related to Casper Air Service acquisition (119,000) --
Advances to related parties (38,000) --
Payments for property and equipment additions (414,000) (12,000)
----------- -----------
Net Cash Used by Investing Activities (662,000) (518,000)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 102,000 80,000
Repayments of short-term borrowings (69,000) (27,000)
Proceeds from issuance of Bridge Notes and Warrants 500,000 --
Proceeds from issuance of long-term debt 283,000 --
Principal payments on long-term debt (128,000) (179,000)
Payment of Initial Public Offering costs (384,000) --
Proceeds from issuance of common stock -- 1,214,000
Deferred financing costs (11,000) --
----------- -----------
Net Cash Provided by Financing Activities 293,000 1,088,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (269,000) 457,000
Cash and Cash Equivalents at Beginning of Period 457,000 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 188,000 $ 457,000
=========== ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 203,000 $ 35,000
Cash paid for income taxes -- --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock in connection with
the acquisition of Pride Aviation, Inc. $ -- $ 133,000
Issuance of long-term debt in connection with the
the acquisition of Pride Aviation, Inc. -- 857,000
Common stock issued to retire long-term debt -- 168,000
Machinery and equipment acquired under capital lease 80,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 57
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Aviation Group, Inc. (the "Company") (a Texas corporation) was formed on
December 4, 1995 for the purposes of combining certain aircraft service
operations formerly owned by The Sanders Companies, Inc. ("Sanders") and to
acquire additional aircraft servicing related businesses. Sanders is 100% owned
by Lee Sanders, president and chief executive officer of the Company. On
February 21, 1996, the Company acquired Pride Aviation, Inc. ("Pride") in a
business combination accounted for as a purchase. Pride operates a Federal
Aviation Administration ("FAA") approved repair station and provides aircraft
painting and maintenance services (See Note C). In August 1997, the Company
acquired Casper Air Service, Inc. ("CAS"). CAS is a full service fixed base
operation ("FBO") located at Natrona County International Airport in Casper,
Wyoming and offers aircraft line services, repair and maintenance and parts
distribution. (See Note R - Acquisition of Casper Air Service)
On December 20, 1995, the Company entered into an Exchange Agreement (the
"Exchange") whereby Sanders contributed all of the outstanding common stock of
Tri-Star Airline Services, Inc. ("Airline") and Tri-Star Aircraft Services, Inc.
("Aircraft") (collectively the "Tri-Star Companies" or "Predecessor") to the
Company in exchange for 100% of the common stock (1,000,000 shares) of the
Company. The Exchange was accounted for similar to a pooling of interest with no
change in historical basis of assets and liabilities as Sanders controlled 100%
of the stock of the companies prior to and subsequent to the transaction. Prior
to the Exchange, the Tri-Star Companies were operated as members of a controlled
group with other operations of Sanders. For periods prior to the Exchange, the
continuing operations of the Tri-Star Companies have been separated from the
controlled group.
In August 1997, the Company completed an initial public offering ("IPO") of its
common stock. The Company sold 1,150,000 shares of common stock at a price of
$5.75 per share and 1,150,000 common stock purchase warrants at a price of $0.10
per warrant. Proceeds from the stock offering totaled $5,283,000, net of
approximately $1,444,000 of associated underwriting discounts and offering
expenses.
The Company's primary business includes the operation of FAA approved repair
stations in New Iberia, Louisiana and Dallas, Texas which provide painting and
paint stripping services to the commercial airline and corporate and private
aircraft industry. The Company also provides refueling services and light
maintenance services in Dallas, Texas and snack catering and aircraft cleaning
services at various commercial airports in the United States.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements present the consolidated
results of the Company and its subsidiaries for the year ended June 30, 1997 and
the combined results of the Predecessor through December 31, 1995 together with
the consolidated results of the Company and its subsidiaries for the remainder
of the nine months ended June 30, 1996, including the results of Pride from the
date of acquisition. The Company changed its fiscal year end during 1996 from
September 30 to June 30. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 58
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
Revenue Recognition
Revenues are recognized as services are performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company uses the allowance method in accounting for losses on billed and
unbilled accounts receivable. Provision for losses on trade receivables is made
in amounts estimated to be adequate to cover anticipated bad debts. Accounts
receivable are charged against the allowance when it is determined by management
that payment will not be received. Any subsequent receipts are credited to the
allowance. Bad debt expense charged to operations for the year ended June 30,
1997 and the nine months ended June 30, 1996 was $6,000 and $16,000,
respectively. The allowance for doubtful accounts was $19,000 and $30,000 at
June 30, 1997 and 1996, respectively.
Inventory
Inventories are stated at the lower of cost or market, with cost determined by
the average costing method.
Goodwill
Goodwill represents the cost in excess of fair value of the net assets
(including tax attributes) acquired in the Pride acquisition. Goodwill is being
amortized on a straight-line basis over a 20 year period. Amortization expense
for the year ended June 30, 1997 and the nine months ended June 30, 1996 was
$50,000 and $17,000, respectively. Accumulated amortization totaled $67,000 and
$17,000 at June 30, 1997 and 1996, respectively. During 1997, goodwill was
reduced by $173,000 as a result of the determination of certain tax attributes
related to the Pride acquisition. The Company analyzes the net book value of
goodwill periodically for any potential impairment and believes that the asset
is realizable at June 30, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation has been provided using
straight line and double declining balance methods over the estimated useful
lives of the assets which range from 5 to 30 years.
Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes. " SFAS No.109 requires
an asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.
Earnings (Loss) Per Common Share
Earnings (loss) per common and common equivalent share ("EPS") is computed based
on the weighted average number of common shares outstanding and gives effect to
certain adjustments described below. During the fiscal period ended June 30,
1996, the Company issued common stock and warrants with issuance and exercise
prices below that of the price of the Company's IPO common stock offering.
Pursuant to Securities and Exchange Commission requirements, the dilutive effect
of these securities has been included in the EPS calculation as if they were
outstanding as of the beginning of the period with the dilutive effect measured
using the treasury stock method. Similarly, for the year ended June 30, 1997,
the EPS calculation reflects an increase in common equivalent shares for the
assumed exercise of the warrants for the nine months through March 31, 1997 (the
period presented in the IPO document). No adjustment was made for the assumed
exercise of the warrants for the three months ended June 30, 1997 since the
effect would be antidilutive. Also, no adjustment was made for the assumed
conversion of the Company's convertible debt for either period presented since
the effect would be antidilutive.
F-8
<PAGE> 59
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
The Company's historical capital structure prior to fiscal 1996 is not
comparable to its current structure due to the Exchange discussed in Note A and
the issuance of common stock, warrants and convertible debt during the fiscal
period ended June 30,1996 in connection with a private placement of the
Company's common stock and the acquisition of Pride. Accordingly, historical net
income (loss) per common share is not considered meaningful and has not been
presented herein.
New Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", effective
for financial statements issued for periods ending after December 15, 1997,
which establishes standards for computing and presenting earnings per share
(EPS). The statement requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into, or resulted in
the issuance of common stock that then shared in the earnings of the entity. For
the periods ended June 30, 1997 and 1996, the basic and diluted EPS amounts
calculated assuming adoption of this statement would be the same as the amounts
presented on the consolidated statement of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which are effective for fiscal years beginning after December 15,
1997. The adoption of SFAS 130 is not expected to have a significant impact to
the Company. See Note Q for business segment information.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to
the current year presentation.
NOTE C - ACQUISITION OF PRIDE AVIATION, INC.
On February 21, 1996, the Company entered into an agreement to acquire 99% of
the outstanding common stock of Pride for cash of $486,000, issuance of $857,000
of 10% Convertible Notes and the issuance of 44,250 shares of the Company's
common stock valued at approximately $133,000. At the closing of the
acquisition, Pride had approximately $906,000 of long-term debt and $947,000 of
other liabilities. The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values. The transaction was closed in early March 1996
and the results of operations of Pride are included in the accompanying
financial statements beginning March 1, 1996. The excess of the purchase price
over the fair value of the net assets acquired (including tax attributes) has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
Supplemental Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents the consolidated results of
operations for the nine months ended June 30,1996 as if the Pride acquisition
had occurred as of the beginning of the Company's fiscal year (October 1,1995).
The summarized information does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
<TABLE>
<S> <C>
Revenues $ 6,755,000
Net income $ 72,000
Net income per common share $ 0.05
</TABLE>
F-9
<PAGE> 60
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
Adjustments made in arriving at pro forma unaudited results of operations
included increased interest expense on acquisition debt, additional depreciation
expense, amortization of goodwill and related tax adjustments.
NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Other current assets consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred IPO costs $384,000 $ --
Capitalized costs related to Casper Air Service acquisition 119,000 --
Capitalized facility acquisition costs 115,000 --
Deferred debt issue costs 11,000 --
Due from affiliates 38,000 --
Prepaid expenses and other 43,000 22,000
-------- --------
$710,000 $ 22,000
======== ========
</TABLE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Machinery and equipment $ 1,965,000 $ 1,659,000
Leasehold improvements 577,000 530,000
Furniture, fixtures and office equipment 163,000 114,000
Vehicles 198,000 106,000
----------- -----------
2,903,000 2,409,000
Less: accumulated depreciation (583,000) (220,000)
----------- -----------
$ 2,320,000 $ 2,189,000
=========== ===========
</TABLE>
Depreciation expense charged to operations for the year ended June 30, 1997 and
the nine months ended June 30, 1996 was $363,000 and $137,000, respectively.
NOTE F - SHORT-TERM BORROWINGS
10% Unsecured Bridge Notes
In February 1997, the Company issued $500,000 of 10% unsecured subordinated
bridge notes. The proceeds from these notes were used to fund the cost of the
Company's IPO and for general working capital purposes. As required by the terms
of the notes, the Company issued $250,000 of common stock at the IPO price
(43,478 shares) because the IPO was successfully completed prior to September
30, 1997. Accordingly, $250,000 of the proceeds from the issuance of the notes
was allocated to equity and credited to paid in capital, and the notes payable
were recorded at a corresponding discounted amount of $250,000. The discount is
being amortized over the period through the effective date of the IPO. Discount
accretion charged to interest expense totaled approximately $186,000 for the
period ended June 30, 1997 and unamortized discount at June 30, 1997 totaled
$64,000. Costs associated with the issuance of the notes are being amortized to
interest expense using the effective rate method. The notes were repaid in full
in August 1997 after completion of the IPO.
F-10
<PAGE> 61
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
Other Short Term Borrowings
Other short-term borrowings consisted of the following at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Bank line of credit $248,000 $223,000
Other 8,000 --
-------- --------
$256,000 $223,000
======== ========
</TABLE>
At June 30, 1997 and 1996, the Company had a $250,000 line of credit facility
with Compass Bank ("Line of Credit") which was guaranteed by the U. S. Small
Business Administration. The Line of Credit was effectively assumed by Tri-Star
Aircraft Services, Inc. with the transfer of assets and liabilities in
connection with the Exchange discussed in Note A. The Line of Credit bears
interest at a rate of prime plus 2% (10.50% and 10.75% at June 30, 1997 and
1996, respectively). The Line of Credit was repaid in full in August 1997 using
proceeds from the IPO.
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Provision for warranty claims $171,000 $101,000
Accrued wages payable 127,000 131,000
Other 185,000 127,000
-------- --------
$483,000 $359,000
======== ========
</TABLE>
The Company generally warrants its products and services against defects in
material and workmanship based on contract terms with customers. The Company
records an estimated liability for warranty claims, based on actual claims
experience, at the time the products and services are provided and revenue is
recognized. Warranty claims, which are netted against revenue, totaled $85,000
and $38,000 for the year ended June 30, 1997 and the period ended June 30, 1996,
respectively.
F-11
<PAGE> 62
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE H - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Convertible notes payable, payable in quarterly installments totaling
$72,000 beginning April 1, 1998, bearing interest at 10%, maturing
March 1, 2001 and secured by the Company's shares of common stock of
Pride Aviation, Inc. The notes are convertible into shares of common
stock of the Company at conversion prices ranging from $3.00 to $4.50
per share, subject to adjustment for certain equity transactions. $ 884,000 $ 884,000
Convertible notes payable to Louisiana Economic Development
Corporation dated March 1, 1996, payable in 60 monthly installments
of $3,800, including interest at 7.38% and one final installment of
the remaining unpaid balance on March 1, 2001. The note is secured by
pledge of certain shares of common stock, accounts receivable,
inventory and equipment of Pride Aviation, Inc. The note is
convertible into shares of common stock of the Company at a price of
$4.50 per share, subject to adjustment for certain equity
transactions. (See Note R) 372,000 386,000
Note payable to Sunbelt Business Capital, L.L.C., payable in monthly
installments of $6,400, including interest at 12%,
refinanced in May 1997 -- 135,000
Note payable to Jerry R. Webb, payable in full on May 13, 1998,
bearing interest at 18.0% payable monthly. The note is secured by
pledge of certain shares of common stock, accounts receivable,
inventory and equipment of Pride. (See Note R) 283,000 --
Various notes payable to Ford Motor Credit Corp., payable in monthly
installments totaling $1,700 including interest at rates ranging from
13.75% to 14.00% maturing from November 2000 to April 2002,
secured by certain vehicles 47,000 --
Note payable to Schwing Insurance Agency, payable currently,
with interest at 7.5% on the unpaid balance 72,000 72,000
Note payable to Fidelity Bank, payable in monthly installments with
interest at prime plus 2.5% maturing August 1997 and secured by
certain machinery and equipment. 5,000 20,000
</TABLE>
F-12
<PAGE> 63
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to Compass Bank, payable in monthly installments with
interest at prime plus 2.25%, maturing September 1997 and secured by
accounts receivable, equipment, key man life insurance policy, and
personal guaranty and pledge of stock of The Sanders Companies, Inc.
by Lee Sanders 8,000 27,000
Various notes payable to finance companies, due in monthly
installments totaling $3,000, including interest at rates ranging
from 9.5% to 13.25%, maturing through March 1998 and
secured by certain vehicles 28,000 35,000
----------- -----------
Total 1,699,000 1,559,000
Less: Current maturities of long-term debt (488,000) (209,000)
----------- -----------
Total long-term debt $ 1,211,000 $ 1,350,000
=========== ===========
</TABLE>
On May 15, 1997, when the outstanding principal balance of the Company's note to
Sunbelt Business Capital, L.L.C. was $83,000, Sunbelt Business Capital, L.L.C.
sold the Note to Jerry R. Webb, who at the same time loaned an additional
$200,000 to the Company. The entire $283,000 debt to Mr. Webb was restructured
and restated in the form of a new note payable. One of the Company's directors
owns a participation interest in a portion of the debt owed to Mr. Webb by the
Company. (See Notes M and R)
The Company's notes payable to Fidelity Bank and Compass Bank and the notes
payable to finance companies were originally made by Sanders. This debt was
effectively assumed by the Tri-Star Companies with the transfer of assets and
liabilities in connection with the Exchange discussed in Note A. Sanders remains
liable under the note agreements as the primary maker.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C> <C>
1998 $488,000
1999 328,000
2000 332,000
2001 542,000
2002 9,000
</TABLE>
F-13
<PAGE> 64
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE I - LEASES
Capital Leases
The Company leases certain machinery and equipment under arrangements classified
as capital leases. Machinery and equipment recorded under capital leases totaled
$80,000 at June 30, 1997 and $0 at June 30, 1996. Future minimum lease payments
at June 30, 1997, together with the present value of the minimum lease payments
are:
<TABLE>
<S> <C>
1998 $ 31,000
1999 31,000
2000 31,000
2001 27,000
2002 5,000
Thereafter --
------------
Total minimum lease payments 125,000
Less: amount representing interest (45,000)
------------
Total present value of minimum lease payments 80,000
Less: current portion (14,000)
------------
Long-term obligation $ 66,000
============
</TABLE>
Operating Leases
The Company leases various equipment and office and hanger facilities under
cancelable and noncancelable rental arrangements. Rental expenses from operating
leases and monthly rentals for the year ended June 30, 1997 and the nine months
ended June 30, 1996 were $699,000 and $252,000, respectively.
Minimum future lease payments for non-cancelable operating leases for the next 5
years and thereafter are as follows:
<TABLE>
<S> <C>
1998 $379,000
1999 391,000
2000 395,000
2001 222,000
2002 195,000
Thereafter 4,669,000
----------
$6,251,000
==========
</TABLE>
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company, in connection with the production of revenue, produces chemical
waste, which is temporarily stored on the Company's premises. Costs for disposal
are expensed by the Company as waste is produced. The provision for disposal of
waste on hand totaled $10,000 and $16,000 as of June 30, 1997 and 1996
respectively, and is included in accrued liabilities in the accompanying balance
sheet.
One of the Company's subsidiaries is partially self-insured for employee medical
claims. Insurance with independent insurance carriers is maintained to cover
medical claims in excess of self-insured limits. The Company's self-insured
limits vary by month and policy year and are based on various factors including
the number of employees and dependents covered and certain experience factors.
In addition to aggregate annual and monthly limitations, the Company's exposure
is further limited to $15,000 per employee per year.
The Company is not involved in any pending legal proceedings which it believes
will have a material effect on its results of operations, cash flow or financial
position.
F-14
<PAGE> 65
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE K - STOCK OPTIONS AND WARRANTS
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Company's Board of Directors and shareholders in February 1997. The purpose of
the Option Plan is to provide increased incentives to key EMPLOYEES and
directors of the Company to render services and exert maximum effort for the
business success of the Company. The Company has reserved 150,000 shares of
Common Stock for issuance upon exercise of such options.
The Board of Directors or its Compensation Committee has the authority to select
key employees and directors to whom stock options are granted as well as
determining vesting schedules and other terms. The options vest ratably over
five years and can have a term of up to ten years. The aggregate fair market
value of the stock with respect to which incentive stock options are first
exercisable in any calendar year may not exceed $100,000 per incident. The
exercise price of incentive stock options must not be less than the fair market
value of the Common Stock on the date of grant.
Warrant Issuances
In 1996, the Company issued 280,000 warrants to investment advisors and other
parties. 200,000 warrants were issued with an exercise price of $1.00 per share
and 80,000 with an exercise price of $2.50 per share. These warrants are
exercisable currently and expire February 28, 1999. (See Note L)
SFAS No. 123 Information
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997; no dividend yield, expected volatility of
0.28, risk free interest rates of 6.44% and expected lives of 7.0 years. The
estimated fair value of the options is amortized to expense over the options'
vesting period.
The application of SFAS No. 123 would have decreased net income by $4,000 and
would not have changed earnings per share as it was reported on the consolidated
statement of operations for the year ended June 30, 1997. No options were
outstanding for the period ended June 30, 1996.
A summary of stock option transactions under the Option Plan is as follows:
<TABLE>
<CAPTION>
1997
----
Shares Weighted-Average
------ Exercise Price
--------------
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 60,500 $5.54
Exercised -- --
Forfeited (4,000) 5.75
---------
Outstanding at end of year 56,500 5.53
=========
Exercisable at end of year 19,300 $5.10
========= =====
Weighted-average fair value of options granted during the year $1.85
=====
</TABLE>
F-15
<PAGE> 66
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
The following table summarizes information about the fixed price stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Exercise Prices Shares Weighted-Average Weighted-Average Shares Weighted-Average
- --------------- Outstanding at Remaining Exercise Exercisable at Exercise
June 30, 1997 Contractual -------- June 30, 1997 --------
------------- ----------- Price ------------- Price
Life (years) ----- -----
------------
<S> <C> <C> <C> <C> <C>
$4.50 10,000 6.7 $4.50 10,000 $4.50
$5.75 46,500 6.8 $5.75 9,300 $5.75
</TABLE>
NOTE L - SHAREHOLDERS' EQUITY
Private Offering
In March 1996, the Company issued 500,000 shares of common stock at a price of
$3.00 per share in a private offering and raised approximately $ 1,214,000, net
of sales commissions and offering costs totaling $286,000. In connection with
the private offering, the Company issued warrants to the placement agent to
purchase 200,000 shares of the Company's common stock at a price equal to $1.00
per share, expiring February 28, 1999. The Company also issued warrants to an
investment banking advisor, for services provided in connection with the
offering, to purchase 80,000 shares of the Company's common stock at a price
equal to $2.50 per share expiring February 28, 1999. The exercise price and
number of shares issuable under the warrants are subject to adjustment for
certain equity transactions and other circumstances. The warrants also contain a
"cashless" exercise feature whereby the warrants may be surrendered in exchange
for a number of shares to be determined based on the difference between the
exercise price and the market price for the Company's common stock.
Debt Retirement
In connection with the acquisition of Pride during March 1996, the Company
issued 56,000 shares of common stock to retire $168,000 of the outstanding
principal amount of indebtedness owed to Sunbelt Business Capital, L.L.C.
NOTE M - RELATED PARTY TRANSACTIONS
For periods through March 1, 1996, Sanders provided services and allocated
certain general and administrative expenses to the companies operating under the
controlled group, including the Tri-Star Companies. Such charges were allocated
to the members of the controlled group based upon the level of management and
supervision time required, services provided and certain other factors.
Management of the Company believes that such allocations are reasonable. These
charges are included in general and administrative expenses and totaled $0 and
$77,000 for the year ended June 30, 1997 and the period ended June 30,1996,
respectively.
In connection with the Pride acquisition, on March 1, 1996, the Company entered
into consulting agreements with two former shareholders of Pride. The consulting
agreements provide for the payment of monthly fees and reimbursement of certain
expenses with terms ranging from 12 to 24 months. Fees paid under these
arrangements totaled $52,000 and $40,000 for the year ended June 30, 1997 and
the nine months ended June 30, 1996, respectively. Total future payments over
the remaining terms of these arrangements are $24,000 for the year ending June
30, 1998.
As of June 30, 1997, the Company had amounts due from Sanders totaling $38,000
and at June 30,1996, the Company owed $2,000 to Sanders for net payments made by
Sanders on behalf of the Company. Such amounts are reflected as "Other current
assets" and "Due to shareholder", respectively, in the accompanying balance
sheets.
F-16
<PAGE> 67
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
One of the Company's directors owns a participation interest in $83,000 of the
debt owed to Jerry R. Webb.
NOTE N - PROVISION FOR INCOME TAXES
The Company's Tri-Star Companies subsidiaries were included in the consolidated
tax return of Sanders for the periods prior to and through the date of the
Exchange. Sanders did not require its subsidiaries to pay for their share of the
consolidated tax expense or reimburse the subsidiaries for tax benefits
generated. Accordingly, for periods prior to the Exchange, the tax expense or
benefits for the Tri-Star Companies was computed as if it were a separate
taxpayer and the resulting amount treated as an equity transaction with Sanders,
which is presented as a dividend of $13,000.
The provision/(benefit) for income taxes consist of the following components:
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30, 1997 June 30, l996
------------- -------------
<S> <C> <C>
Current provision (benefit) $ 20,000 $ (13,000)
Deferred taxes (72,000) 47,000
---------- ----------
Provision/(benefit) for income taxes $ (52,000) $ 34,000
========== ==========
</TABLE>
The following is a reconciliation of taxes computed at the federal statutory
rate to the provision for income taxes included in the financial statements:
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
June 30,1997 June 30,1996
----------- ------------
<S> <C> <C>
Tax provision (benefit) computed by
applying federal statutory rate $ (179,000) $ 23,000
State income taxes, net of federal benefits 44,000 15,000
Expenses not deductible for tax purposes (a) 88,000 6,000
Effect of graduated tax rates and other (5,000) (10,000)
----------- ----------
Provision/(benefit) for income taxes $ (52,000) $ 34,000
=========== ==========
</TABLE>
- -----------------
(a) Principally the effect of Bridge Note interest accretion for the
year ended June 30, 1997.
The net deferred tax amounts are presented on the balance sheet as follows:
<TABLE>
<S> <C> <C>
Current deferred tax asset $ 40,000 $ l1,000
Long-term deferred tax liabilities (100,000) (316,000)
------------- -----------
$ (60,000) $ (305,000)
============= ===========
</TABLE>
F-17
<PAGE> 68
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
Deferred tax assets and liabilities consisted of the following at June 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Assets
Net operating loss carryforward $ 383,000 $ 257,000
Other 67,000 --
--------- ---------
Total deferred tax assets 450,000 257,000
--------- ---------
Liabilities
Property and equipment (483,000) (536,000)
Other (27,000) (26,000)
--------- ---------
Total deferred tax liabilities (510,000) (562,000)
--------- ---------
Net deferred tax liabilities $ (60,000) $(305,000)
========= =========
</TABLE>
For income tax purposes, the Company has available at June 30, 1997, unused
federal net operating loss carryforwards of approximately $983,000, which may be
applied against future taxable income of the Company's subsidiary (Pride),
subject to certain annual limitations, expiring in various years from 2005 to
2009. The Company believes it is more likely than not that the net operating
loss carryforwards will be utilized in the future. Accordingly, no valuation
allowance has been recorded. During 1997, the net operating loss carryforward
asset was increased, and goodwill reduced, by $173,000 as a result of the
determination of certain tax attributes related to the Pride acquisition. Under
the Internal Revenue Code, the utilization of net operating loss carryforwards
could be limited if certain changes in ownership of the Company's common stock
were to occur.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash equivalents,
accounts receivable, short-term borrowings and accounts payable, the carrying
amounts approximate fair value due to their short maturities.
The carrying amount reported for long-term debt approximates fair value based on
current interest rates for debt with similar terms and maturities.
NOTE P - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Substantially all of the Company's accounts receivable at June 30, 1997,
resulted from sales to third party companies in the airline industry. This
concentration of customers may impact the Company's overall credit risk either
positively or negatively, in that these entities may be similarly affected by
changes in economic or other conditions. The Company believes that the risk is
mitigated by the size, reputation and nature of its customers. Although the
Company generally does not require collateral or other security to support
customer receivables, it may have certain rights, such as the ability to place
liens on aircraft serviced, in the event of nonpayment by its customers.
During the year ended June 30, 1997 and the nine months ended June 30, 1996, the
Company derived approximately 75% and 62%, respectively, of its revenues from
United Airlines. Receivables due from United Airlines totaled approximately
$92,000 and $202,000 at June 30,1997 and 1996, respectively.
F-18
<PAGE> 69
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE Q - BUSINESS SEGMENT INFORMATION
The Company is currently organized into three business segments: overhaul and
service, ground handling and services, and beginning July 1, 1996, FBO and
airport management. The overhaul and service division provides painting and
paint stripping services for commercial and freight aircraft. The ground
handling and services division provides aircraft ground handling and light
catering services to a variety of passenger and freight airlines at various
airports. The FBO and airport management division provides fuel and light
maintenance services to general aviation, corporate and light freight aircraft
customers. Summarized financial information by business segment for fiscal years
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30, 1997 June 30, 1996
----------- -----------
<S> <C> <C>
Net revenues:
Overhaul and service $ 8,096,000 $ 3,395,000
Ground handling and services 1,070,000 486,000
FBO and airport management 552,000 --
Corporate -- --
----------- -----------
Total $ 9,718,000 $ 3,881,000
=========== ===========
Operating income (loss):
Overhaul and service $ 258,000 $ 294,000
Ground handling and services 151,000 (14,000)
FBO and airport management (80,000) --
Corporate (482,000) (143,000)
----------- -----------
Total $ (153,000) $ 137,000
=========== ===========
Total assets:
Overhaul and service $ 4,006,000 $ 3,901,000
Ground handling and services 463,000 165,000
FBO and airport management 100,000 --
Corporate 542,000 458,000
----------- -----------
Total $ 5,111,000 $ 4,524,000
=========== ===========
Depreciation and amortization:
Overhaul and service $ 401,000 $ 140,000
Ground handling and services 11,000 14,000
FBO and airport management -- --
Corporate 1,000 --
----------- -----------
Total $ 413,000 $ 154,000
=========== ===========
Capital expenditures (including capital leases):
Overhaul and service $ 336,000 $ 12,000
Ground handling and services 105,000 --
FBO and airport management 40,000 --
Corporate 13,000 --
----------- -----------
Total $ 494,000 $ 12,000
=========== ===========
</TABLE>
There were no significant intersegment sales or transfers for either period.
Operating income by business segment excludes interest and other miscellaneous
income and interest expense. Corporate assets consist primarily of cash and cash
equivalents and prepaid expenses.
F-19
<PAGE> 70
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
NOTE R - SUBSEQUENT EVENTS
Acquisition of Casper Air Service
Concurrent with the IPO in August 1997, the Company acquired all of the
outstanding common stock of Casper Air Service, a Wyoming corporation for cash
of $1,167,000 and the issuance of 153,565 shares of common stock valued at
approximately $883,000. The acquisition will be accounted for using the purchase
method and the purchase price will be allocated to the net assets acquired based
on their estimated fair values. A final determination of the required purchase
accounting adjustments and the fair values of the assets and liabilities
acquired or assumed has not yet been made. Accordingly, the purchase adjustments
made in connection with the preparation of the unaudited pro forma financial
information below reflects the Company's best estimate using currently available
information.
Supplemental Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents the consolidated results of
operations for the year ended June 30, 1997 as if the CAS acquisition had
occurred as of the beginning of the Company's fiscal year (July 1, 1996). The
summarized information does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
<TABLE>
<S> <C>
Revenues $ 17,896,000
Net income (loss) $ (187,000)
Net income (loss) per common share $ (0.10)
</TABLE>
Adjustments made in arriving at pro forma unaudited results of operations
included adjustment related to discontinued charter operations, additional
depreciation expense, amortization of goodwill and related tax adjustments.
Stock Warrants
The Company issued 1,150,000 common stock purchase warrants in connection with
its IPO in August 1997. These warrants entitle the holders to purchase, anytime
after two years from the effective date of the offering, one share of common
stock for $6.90. The warrants expire five years from the effective date of the
IPO and are redeemable at a price of $0.10 per Warrant, with consent of the
underwriter, upon 30 days written notice, provided that the average closing bid
quotations or sales prices of the common stock equal or exceed $9.49 for 20
consecutive trading days ending on the tenth day prior to the date on which the
Company gives notice of redemption.
The Company also sold 100,000 warrants (the "Underwriter's Warrants") to the
Underwriters of its public offering, for $0.001 per warrant. Each warrant
entitles the holder to purchase a share of common stock at $9.49 and also to
receive an Underlying Warrant whose term is identical to the warrants described
above except that the exercise price is $11.38. The Underwriter's Warrants are
exercisable for four years beginning one year after the effective date of the
IPO.
Conversion of Convertible Note Payable
In August 1997, the Louisiana Economic Development Corporation ("LEDC")
exercised their conversion rights under the convertible note discussed in Note
H. In connection therewith, the Company issued 82,153 shares of common stock to
the LEDC.
F-20
<PAGE> 71
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and June 30, 1996
Financing
On July 9, 1997 the Company borrowed an additional $144,000 from Jerry Webb (See
Note H) to fund IPO costs and for general working capital purposes and agreed to
repay Mr. Webb $150,000 on August 1, 1997. The maturity date of the note was
extended and this note, together with the existing note to Mr. Webb for $283,000
at June 30, 1997, was repaid in late August 1997. The notes restricted the
prepayment of the principal. Mr. Webb allowed the notes to be prepaid in
exchange for issuance of 3,000 shares of common stock.
F-21
<PAGE> 72
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,224,000 $ 188,000
Accounts receivable, net 1,330,000 796,000
Inventory 1,352,000 240,000
Deferred income taxes 20,000 40,000
Prepaid expenses and other 469,000 710,000
------------ ------------
Total Current Assets 5,395,000 1,974,000
------------ ------------
Property and equipment 5,651,000 2,903,000
Less: accumulated depreciation (1,057,000) (583,000)
------------ ------------
4,594,000 2,320,000
------------ ------------
Goodwill, net 2,798,000 752,000
Other 315,000 65,000
------------ ------------
3,113,000 817,000
------------ ------------
Total Assets $ 13,102,000 $ 5,111,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 587,000 $ 502,000
Bridge notes -- 436,000
Other short-term borrowings 851,000 256,000
Accounts payable 988,000 769,000
Accrued liabilities 1,547,000 527,000
------------ ------------
Total Current Liabilities 3,973,000 2,490,000
------------ ------------
Long-Term Liabilities
Long-term debt, net of current maturities 1,115,000 1,292,000
Deferred income taxes 352,000 100,000
------------ ------------
Total Long-Term Liabilities 1,467,000 1,392,000
------------ ------------
Total Liabilities 5,440,000 3,882,000
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none outstanding -- --
Common Stock, $.01 per value, 10,000,000 shares
authorized, 3,257,992 and 1,600,250 shares
issued and outstanding 33,000 16,000
Additional paid-in capital 8,924,000 1,951,000
Retained earnings (deficit) (1,295,000) (738,000)
------------ ------------
Total Shareholders' Equity 7,662,000 1,229,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 13,102,000 $ 5,111,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE> 73
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 4,928,000 $ 2,437,000 $ 14,150,000 $ 6,664,000
Cost of Revenue 3,542,000 2,299,000 10,785,000 5,295,000
------------ ------------ ------------ ------------
Gross Profit 1,386,000 138,000 3,365,000 1,369,000
------------ ------------ ------------ ------------
General and Administrative Expenses 1,136,000 103,000 3,411,000 1,422,000
Depreciation and Amortization 201,000 100,000 531,000 291,000
------------ ------------ ------------ ------------
1,337,000 203,000 3,942,000 1,713,000
------------ ------------ ------------ ------------
Income (Loss) From Operations 49,000 (65,000) (577,000) (344,000)
------------ ------------ ------------ ------------
Other Income (Expenses)
Other Income (Expense) 4,000 8,000 19,000 --
Interest Expense, net (37,000) (95,000) (227,000) (153,000)
------------ ------------ ------------ ------------
(33,000) (87,000) (208,000) (153,000)
------------ ------------ ------------ ------------
Income (Loss) Before Provision
for Income Taxes 16,000 (152,000) (785,000) (497,000)
Provision (Benefit) for Income Taxes 14,000 (45,000) (228,000) (164,000)
------------ ------------ ------------ ------------
Net Income (Loss) $ 2,000 $ (107,000) $ (557,000) $ (333,000)
============ ============ ============ ============
Earnings (loss) per common share
Basic $ 0.00 $ (0.06) $ (0.18) $ (0.18)
============ ============ ============ ============
Diluted $ 0.00 $ (0.06) $ (0.18) $ (0.18)
============ ============ ============ ============
Weighted average shares outstanding
Basic 3,191,265 1,812,859 3,014,757 1,812,859
============ ============ ============ ============
Diluted 3,191,265 1,812,859 3,058,261 1,812,859
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 74
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended March 31,
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ (557,000) $ (333,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 531,000 291,000
Accreted interest 64,000 40,000
Deferred income taxes (208,000) (163,000)
(Increase) decrease in accounts receivable 171,000 (11,000)
(Increase) decrease in inventories (365,000) (106,000)
(Increase) decrease in prepaids and other current assets (149,000) 6,000
Increase (decrease) in accounts payable (116,000) 37,000
Increase (decrease) in interest payable -- (7,000)
Increase (decrease) in accrued liabilities 516,000 63,000
Other (250,000) (40,000)
----------- -----------
Total Adjustments 194,000 110,000
----------- -----------
Net Cash Provided (Used) by Operating Activities (363,000) (223,000)
----------- -----------
Cash Flows From Investing Activities:
Cash paid in acquisition of Casper Air Service,
net of cash acquired (1,145,000) (78,000)
Cash paid in acquisition of Aero Design et.al.,
net of cash acquired (723,000) --
Proceeds of sale of property and equipment 748,000 --
Payments for property and equipment additions (677,000) (335,000)
----------- -----------
Net Cash Used by Investing Activities (1,797,000) (413,000)
----------- -----------
Cash Flows From Financing Activities:
Bank overdraft -- 130,000
Proceeds from short-term borrowings 700,000 25,000
Repayments of short-term borrowings (812,000) --
Borrowings under / (repayment of) Bridge Notes (500,000) 500,000
Proceeds from issuance of long-term debt 76,000
Principal payments on long-term debt (765,000) (123,000)
Advances to related parties -- (45,000)
Payments of initial public offering costs -- (266,000)
Proceeds from exercise of warrants 1,000 --
Proceeds from issuance of common stock 5,572,000 --
Deferred financing costs -- (36,000)
----------- -----------
Net Cash Provided (Used) by Financing Activities 4,196,000 261,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 2,036,000 (375,000)
Cash and Cash Equivalents at Beginning of Period 188,000 457,000
----------- -----------
Cash and Cash Equivalents at End of Period $ 2,224,000 $ 82,000
=========== ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 202,000 $ 120,000
Cash paid for income taxes -- --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock in connection with
the acquisition of Casper Air Service $ 883,000 --
Issuance of common stock in connection with
the acquisition of Aero Design, Inc and
Battery Shop, LLC 547,000 --
Conversion of LEDC note to Common Stock 370,000 --
</TABLE>
The accompanying notes are an integral part of these statements
F-24
<PAGE> 75
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Examples include
provisions for warranty claims and bad debts and the length of assets' useful
lives. Actual results may differ from these estimates. Interim results are not
necessarily indicative of results for a full year. The information in this Form
10-QSB should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the financial statements
and notes thereto included in the Company's Form 10-KSB for the year ended June
30, 1997.
NOTE B - INITIAL PUBLIC OFFERING
On August 19, 1997, the Company closed an initial public offering (the "IPO") of
its Common Stock and Redeemable Common Stock Purchase Warrants. The Company sold
through its underwriter 1,150,000 shares of Common Stock and 1,150,000 Common
Stock Purchase Warrants, which resulted in net proceeds of $5,189,000, net of
approximately $1,539,000 of associated underwriting discounts and offering
expenses. The proceeds were used to repay the 10% Bridge Notes of $500,000, to
fund the cash portion of the Casper Air Service ("CAS") acquisition of
$1,167,000, and to repay approximately $700,000 of bank and other indebtedness.
NOTE C - ACQUISITION OF CASPER AIR SERVICE
Concurrent with the IPO in August 1997, the Company acquired all of the
outstanding common stock of Casper Air Service, a full-service Fixed Base
Operation ("FBO") in Casper, Wyoming. The purchase price of $2,519,000 included
$1,167,000 in cash, 153,565 shares of Common Stock valued at approximately
$883,000 and transaction costs. The acquisition was accounted for using the
purchase method and the purchase price has been allocated to the net assets
acquired based on their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired (including tax attributes) has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
Casper Air Service is located at the 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 and
aircraft sales.
NOTE D - ACQUISITION OF AERO DESIGN, INC. AND BATTERY SHOP, LLC
In March 1998, the Company acquired all of the outstanding common stock of Aero
Design, Inc. and all of the outstanding ownership interests of Battery Shop,
LLC, two sister companies involved in the manufacturing and overhaul of
replacement batteries for the aviation industry. The purchase price of
$1,300,000 included $753,000 in cash and 134,398 shares of Common Stock valued
at approximately $547,000. The acquisition was accounted for using the purchase
method and the purchase price has been allocated to the net assets acquired
based on their estimated fair values. The excess of the purchase price over the
fair value of the net assets acquired (including tax attributes) of $1,381,000
has been recorded as goodwill and is being amortized using the straight-line
method over 20 years.
Aero Design, Inc. and Battery Shop, LLC are located outside Nashville,
Tennessee.
F-25
<PAGE> 76
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
The following unaudited pro forma consolidated results of operations for the
nine months ended March 31, 1998 assumes the Aero Design acquisition occurred as
of July 1, 1997:
<TABLE>
<S> <C>
Revenues $ 14,762,000
==============
Net Loss (541,000)
==============
Earnings per share -
Basic (0.17)
==============
Diluted (0.17)
==============
</TABLE>
NOTE E - EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", effective
for financial statements issued for periods ending after December 15, 1997,
which establishes standards for computing and presenting earnings per share
("EPS"). The statement requires dual presentation of basic and diluted EPS on
the face of the income statement for entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS computation.
Basic EPS, except as noted below, excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that would occur if
securities are other contracts to issue common stock were exercised, converted
into, or resulted in the issuance of common stock that then shared in the
earnings of the entity. The Company has adopted SFAS 128.
During the fiscal period ended June 30, 1997, the Company issued common stock
warrants with issuance and exercise prices below that of the price of the
Company's IPO common stock offering. Pursuant to Securities and Exchange
Commission requirements, the dilutive effect of these securities has been
included in the basic EPS calculation as if they were outstanding as of the
beginning of the periods presented with the dilutive effect measured using the
treasury stock method. As a result, the basic EPS calculation reflects an
increase in common shares for the assumed exercise of the warrants of 128,188
and 193,860 for the three months and nine months ended March 31, 1998,
respectively, and 212,609 for both the three months and nine months ended March
31, 1997. No adjustment was made for the assumed conversion of the Company's
convertible debt for any period presented since the effect would be
antidilutive.
NOTE F - SUBSEQUENT EVENT
In April 1998, the Board of Directors elected to grant an additional 19,000
incentive stock options to officers and employees of the Company and 345,000
warrants to officers, directors and consultants of the Company. In addition, the
Board approved the issuance of 75,000 incentive stock options and warrants to
purchase 52,000 shares of Common Stock in replacement for and cancellation of
previously issued options and warrants to purchase an aggregate of 137,000
shares of Common Stock. The exercise price on all the options and warrants
granted was the market price at the date of grant except for options for 50,000
shares which were granted at 110% of market price.
F-26
<PAGE> 77
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE G - NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 130, Reporting Comprehensive Income ("FAS 130"), and
Financial Accounting Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131"), which are effective for fiscal
years beginning after December 15, 1997. Effective July 1, 1998, the Company
will adopt FAS 130 and FAS 131.
F-27
<PAGE> 78
[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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. 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, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 9, in August, 1997, the Company was sold. The accompanying
financial statements do not reflect any adjustments as a result of this sale nor
the plans which the new owner may have for the operation for the Company.
/s/ MCGLADREY & PULLEN, LLP
Casper, Wyoming
November 14, 1997
C-1
<PAGE> 79
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (Note 5) 1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 179,000 $ 229,000
Restricted cash 100,000 100,000
Investment in available-for-sale securities (Note 2) 112,000 107,000
Trade receivables 512,000 468,000
Inventories (Note 3) 917,000 2,180,000
Deposits and other assets -- 31,000
Deferred income taxes 97,000 --
Asset of discontinued division, net (Note 9) 279,000 --
----------- -----------
TOTAL CURRENT ASSETS 2,196,000 3,115,000
Property and Equipment, net (Note 4) 1,456,000 1,522,000
Notes Receivable Employees 9,000 13,000
----------- -----------
$ 3,661,000 $ 4,650,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable (Note 5) $ 351,000 $ 443,000
Floor plans payable (Note 5) 138,000 1,315,000
Current maturities of long-term debt (Note 5) 367,000 366,000
Liability applicable to assets of discontinued division (Note 9) 183,000 --
Trade accounts payable 592,000 570,000
Accrued liabilities 126,000 66,000
Fuel, services and other deposits 131,000 98,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,888,000 2,858,000
----------- -----------
Long-Term Debt, less current maturities (Note 5) 944,000 1,234,000
----------- -----------
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 2,556,000 2,697,000
Accumulated deficit (397,000) (667,000)
Unrealized (loss) on investment securities (Note 2) (1,000) (2,000)
----------- -----------
2,177,000 2,047,000
Less: Treasury stock, 1997 33,103 shares,
1996 23,849 shares (710,000) (569,000)
Unearned ESOP shares (Note 7) (638,000) (920,000)
----------- -----------
829,000 558,000
----------- -----------
$ 3,661,000 $ 4,650,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
C-2
<PAGE> 80
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net Sales $ 6,745,000 $ 5,930,000
Cost of Sales 5,643,000 5,045,000
----------- -----------
GROSS PROFIT 1,102,000 885,000
Operating Expenses 752,000 750,000
----------- -----------
OPERATING INCOME 350,000 135,000
----------- -----------
Other Income (Expense)
Interest income 26,000 31,000
Interest expense (168,000) (154,000)
Gain from sale of assets 56,000
Other income (expense) 8,000 (25,000)
----------- -----------
(78,000) (148,000)
----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES (NOTE 9) 272,000 (13,000)
Federal Income Taxes (Credits) (Note 6) (97,000)
Income (Loss) from Discontinued Operations (99,000) (213,000)
----------- -----------
NET INCOME (LOSS) $ 270,000 $ (226,000)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
C-3
<PAGE> 81
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Contributed Accumulated
Stock Capital Deficit
------------- ------------- -------------
<S> <C> <C> <C>
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)
Redemption of ESOP shares - treasury stock -- (141,000) --
Change in unrealized (loss) on available-
for-sale investments -- -- --
Net income -- -- 270,000
------------- ------------- -------------
Balance, April 30, 1997 $ 19,000 $ 2,556,000 $ (397,000)
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
C-4
<PAGE> 82
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Investment Treasury Unearned
Securities Stock ESOP Shares Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, April 30, 1995 $ -- $ (425,000) $ (1,181,000) $ 786,000
Redemption of ESOP shares - treasury stock -- (144,000) 261,000 --
Change in unrealized (loss) on available-
for-sale investments (2,000) -- -- (2,000)
Net (loss) -- -- -- (226,000)
------------- ------------- ------------- -------------
Balance, April 30, 1996 (2,000) (569,000) (920,000) 558,000
Redemption of ESOP shares - treasury stock -- (141,000) 282,000 --
Change in unrealized (loss) on available-
for-sale investments 1,000 -- -- 1,000
Net income -- -- -- 270,000
------------- ------------- ------------- -------------
Balance, April 30, 1997 $ (1,000) $ (710,000) $ (638,000) $ 829,000
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
C-5
<PAGE> 83
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 270,000 $ (226,000)
Adjustments to reconcile net income (loss) to net (used in)
cash provided by (used in) operating activities:
Depreciation 239,000 248,000
(Gain) on sale of assets (56,000) (4,000)
Loss on worthless debenture -- 15,000
Increase (decrease) in cash as a result of operating
changes in operating assets and liabilities:
Deferred income taxes (97,000) --
Trade receivables (44,000) 173,000
Inventories 1,263,000 (1,243,000)
Deposits and other assets 31,000 (24,000)
Accounts payable 22,000 (111,000)
Accrued liabilities 60,000 33,000
Prepaid fuel, services and other deposits 33,000 (51,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
OPERATING ACTIVITIES 1,721,000 (1,190,000)
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of investments 40,000 --
Proceeds from sale of equipment 204,000 28,000
Purchase of property and equipment (604,000) (239,000)
Receipt of cash restricted for letters of credit -- 150,000
Investment in restricted certificate of deposit -- (100,000)
Investment in marketable securities (40,000) (27,000)
Payments received on notes receivable 4,000 17,000
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
INVESTING ACTIVITIES (396,000) (171,000)
----------- -----------
Cash Flows from Financing Activities:
Net increase (decrease) in outstanding checks
in excess of bank balance -- (177,000)
Proceeds from (payments on) flooring
arrangements (1,177,000) 1,315,000
Net change short-term borrowing (92,000) 267,000
Proceeds from issuance of long-term debt and
liabilities applicable to discontinued operations 300,000 213,000
Principal reduction on long-term debt and
liabilities applicable to discontinued operations (406,000) (312,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
FINANCING ACTIVITIES (1,375,000) 1,306,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH EQUIVALENTS (50,000) (55,000)
Cash and cash equivalents, beginning of year 229,000 284,000
----------- -----------
Cash and cash equivalents, end of year $ 179,000 $ 229,000
=========== ===========
</TABLE>
C-6
<PAGE> 84
CASPER AIR SERVICE AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest expense $ 252,000 219,000
Supplemental Disclosure of Noncash Financing Activities:
Shares purchased from ESOP in lieu of contribution $ 282,000 261,000
</TABLE>
See Notes to Consolidated Financial Statements.
C-7
<PAGE> 85
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Casper Air Service 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.
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, Casper Flying Service.
All material intercompany balances and transactions have been eliminated in
consolidation.
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.
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>
C-8
<PAGE> 86
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 during the year ended April 30, 1997, 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.
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.
C-9
<PAGE> 87
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 are carried at market value. The related cost and
unrealized loss on these securities at April 30, 1997 were $113,000 and $1,000,
respectively and at April 30, 1996 were $109,000 and $2,000, respectively.
Marketable securities were sold during the year ended April 30, 1997 for $40,000
with a realized gain of $4,000. The unrealized loss on investment securities
decreased by $1,000 during the year ended April 30, 1997.
NOTE 3. INVENTORIES
The composition of the inventories as of April 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Aircraft held for sale $ 111,000 $ 1,392,000
Parts 782,000 783,000
Other 24,000 5,000
----------- -----------
$ 917,000 $ 2,180,000
=========== ===========
</TABLE>
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.
C-10
<PAGE> 88
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following as of April 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Buildings and improvements $ 1,654,000 $ 1,641,000
Flight charter equipment 1,851,000 2,050,000
Other equipment 907,000 883,000
----------- -----------
4,412,000 4,574,000
Accumulated depreciation (2,956,000) (3,052,000)
----------- -----------
$ 1,456,000 $ 1,522,000
=========== ===========
</TABLE>
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, 1997 are as follows:
<TABLE>
<S> <C>
NOTES PAYABLE:
$400,000 line of credit with a bank, interest at 1.5% over New York prime rate (10%
as of April 30, 1997), interest payable monthly, collateralized by receivables and
and inventories, due October 1997, subsequently renewed through December 1997 $ 261,000
$150,060 line of credit with a bank, interest at 1.5% over bank's prime rate (10%
as of April 30, 1997), interest payable quarterly, collateralized by an airplane,
due May 1997 90,000
-----------
$ 351,000
===========
FLOORING ARRANGEMENTS:
Flooring arrangement with Cessna, interest at 10.5%, due upon sale of aircraft $ 138,000
===========
</TABLE>
C-11
<PAGE> 89
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 majority shareholder $ 525,000
Notes payable to aircraft finance corporations, payable in monthly payments aggregating
$11,584, plus interest at 2% over a banks prime rates (10.5% as of April 30, 1997),
due through May 2002, collateralized by flight charter aircraft 456,000
Notes payable to bank, payable in monthly payments aggregating $2,726, including
interest rates ranging from 7.85% to 10%, due through December 2000, collateralized
by flight charter aircraft and certificate of deposit 170,000
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 62,000
Notes payable due in monthly payments aggregating $1,996 and an annual payment
of $6,802, including interest ranging from 10% to 21.45%, due through January 2000,
collateralized by equipment 48,000
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 (see Note 9) 50,000
-----------
1,311,000
Less current maturities 367,000
-----------
$ 944,000
===========
</TABLE>
Aggregate future maturities of long-term debt as of April 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------
<S> <C> <C>
1998 $ 367,000
1999 228,000
2000 250,000
2001 237,000
2002 123,000
Thereafter 106,000
------------------
$ 1,311,000
==================
</TABLE>
C-12
<PAGE> 90
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES
Current deferred tax assets consist of the following components as of April 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 142,000 $ 183,000
Investment tax credits carryforward 81,000 81,000
Other components 41,000 32,000
----------- -----------
264,000 296,000
Less valuation allowance 167,000 296,000
----------- -----------
$ 97,000 $ --
=========== ===========
</TABLE>
As of April 30, 1997, Casper Air Service has recorded a valuation allowance of
$167,000 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. Net deferred tax assets of $97,000 are expected to be
realizable from fiscal year 1998 operations prior to the sale of the Company.
The income tax benefit (expense) differs from the amounts obtained by applying
the U.S. federal income tax rate to pre tax income (loss) due to the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Computed "expected" tax benefit (expense) $ (61,000) $ 77,000
Increase (decrease) resulting from:
Subsidiary election to be taxed at the
stockholder level -- (13,000)
Other 29,000 (5,000)
Increase in valuation allowance -- (59,000)
Reduction of valuation allowance 129,000 --
----------- -----------
$ 97,000 $ --
=========== ===========
</TABLE>
At April 30, 1997, Casper Air Service has available net operating loss (NOL)
carryforwards of $569,000. The NOL 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 NOL carryforwards when certain ownership
changes occur, measured over a three-year period. The ownership change discussed
in Note 9 is expected to limit the use of the NOL carryforward. The NOL
carryforward and investment tax credits expire as follows:
C-13
<PAGE> 91
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Operating Investment
Year of Expiration Loss Tax Credit
------------------ ------------- ----------
<S> <C> <C>
1998 $ -- $ 6,000
1999 -- 46,000
2000 -- 29,000
2009 444,000 --
2110 7,000 --
2111 118,000 --
------------- ----------
$ 569,000 $ 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
1997, 1996 or 1995, the expense was limited to the interest expense of $76,000,
$98,000 and $118,000 for the years ended April 30, 1997, 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> 92
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 years ended April 30, 1996 and 1997. 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 $43,000. This amount has been
recognized as a liability in the accompanying financial statements. At April 30,
1996, 33,519 shares of the Company's stock, with an aggregate fair market value
of approximately $563,000 have been allocated to ESOP participants based on
independent appraisal as of April 30, 1996. At April 30, 1997, 33,519 shares of
the Company's stock, with an aggregate fair market value of approximately
$511,000 have been allocated to ESOP participants based on the subsequent sales
price of the Company's stock (Note 9).
ESOP shares as of April 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Allocated shares 33,000 33,000
Unallocated shares 21,000 30,000
---------- ----------
54,000 63,000
========== ==========
</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, 1997 and 1996 were $40,000 and $24,000, respectively.
Premiums paid for stop-loss insurance during the years ended April 30, 1997 and
1996 were $30,000 and $37,000, respectively.
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.
C-15
<PAGE> 93
CASPER AIR SERVICE AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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> <C>
1998 $ 35,000
1999 35,000
2000 35,000
2001 35,000
2002 6,000
Thereafter 18,000
------------------
Total minimum annual rentals required $ 164,000
==================
</TABLE>
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,
1997, 1996 and 1995, were $38,000, $48,000 and $67,000, respectively.
NOTE 9. SUBSEQUENT EVENTS AND DISCONTINUED OPERATIONS
In August 1997, Aviation Group Inc. acquired all of the outstanding stock of the
Company. As part of the purchase agreement, the majority stockholder assumed a
related party note payable recorded at approximately $50,000 at April 30, 1997.
The Company's ESOP will also be terminated pursuant to this agreement.
In June 1997, Casper Flying Service had a nonfatal air crash of a plane with a
carrying value of $278,000. In July 1997, it received insurance proceeds of
$324,000, of which approximately $133,000 was used to pay off the note payable
to an aircraft financing company.
Subsequent to April 30, 1997, the operations of the Company's charter flight
service division were ceased. The assets of the division, primarily aircraft,
with a carrying value of $279,000 were sold on October 1, 1997 to an unrelated
party for cash of $500,000. The Company determined that the operations of the
charter flight division represented a separate major class of customers and
should be accounted for as a disposal of a segment of a business. Accordingly,
the Company's previously reported consolidated financial statements have been
adjusted to reclassify the charter flight service operations as discontinued
operations. The net sales from this division which are now reported with "income
(loss) from discontinued operations" were $1,032,000 and $985,000 for the years
ended April 30, 1997 and 1996, respectively.
No gain or loss on the disposal of the business segment has been reflected in
the April 30, 1997 financial statements since the Company expects to generate
operating income from charter operations through the date of disposal.
C-16
<PAGE> 94
======================================================
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 .................................................. 2
Risk Factors......................................................... 5
Dividend Policy...................................................... 9
Market for Common Stock.............................................. 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10
Unaudited Pro Forma Consolidated Financial
Information...................................................... 15
Business............................................................. 19
Management........................................................... 27
Certain Relationships and Related Transactions....................... 31
Principal Shareholders............................................... 33
Description of Securities............................................ 34
Use of Proceeds...................................................... 39
Selling Shareholders................................................. 39
Plan of Distribution................................................. 45
Legal Matters........................................................... 46
Experts.............................................................. 46
Additional Information............................................... 47
Index to Financial Statements........................................ 48
</TABLE>
======================================================
======================================================
AVIATION GROUP, INC.
--------------------------
P R O S P E C T U S
--------------------------
July 10, 1998
======================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant hereby amends its disclosure under Item 26 to add the
following information:
In connection with the consummation of its IPO in August 1997, the
Registrant acquired all of the outstanding stock of Casper Air Service, a
Wyoming corporation ("CAS"). The Registrant paid CAS's four shareholders
approximately $1,167,000 in cash and issued them 153,635 shares 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
armslength, 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.
For the quarter ended December 31, 1997, the Registrant issued a
total of 69,353 shares of Common Stock pursuant to the exercise of outstanding
warrants in unregistered transactions. These shares were issued in reliance upon
the exemption from registration under the Securities Act, provided by Section
4(2) thereof. The Registrant received $1.00 per share in cash for the issuance
of 1,000 of the shares of Common Stock. The remaining 68,353 shares of Common
Stock were issued in exchange for the exercise and surrender of a total of
76,515 warrants, which were exercisable at $1.00 per share.
For the quarter ended March 31, 1998, the Registrant issued a total of
21,975 shares of Common Stock pursuant to the exercise of outstanding warrants
in unregistered transactions. These shares were issued in reliance upon the
exemption from registration under the Securities Act provided by Section 4(2)
thereof. These shares were issued in exchange for the exercise and surrender of
a total of 24,750 warrants, which were exercisable at $1.00 per share.
In March 1998, the Registrant issued at total of 134,398 shares of
Common Stock in connection with the purchase of all of the outstanding common
stock of Aero Design, Inc. and all of the outstanding ownership interests of
Battery Shop, L.L.C. These entities had only two owners who received adequate
written disclosures regarding the Registrant and were represented by legal
counsel as part of an armslength, negotiated acquisition. The owners are
sophisticated and knowledgeable in investment and business matters in general.
In April 1998, the Board of Directors elected to grant an additional
19,000 incentive stock options to officers and employees of the Company and
warrants to purchase 345,000 shares of Common Stock to officers, directors and
consultants. The exercise price on all of the options and warrants was $3.50. In
addition to the new incentive stock options, the Board approved the issuance of
75,000 incentive stock options and warrants to purchase 52,000 shares of Common
Stock in replacement for and cancellation of previously issued options and
warrants to purchase an aggregate of 137,000 shares of Common Stock. These new
options were granted at an exercise price of $3.50 per share, except for options
for 50,000 shares granted to Mr. Lee Sanders at an exercise price of $3.85 per
share. The individuals receiving the options and warrants were sophisticated and
knowledgeable in investment and business matters in general. Due to their
relationship with the Company, the recipients also had available adequate
information regarding the Company. These securities were issued in reliance upon
the exemption from registration under the Securities Act provided by Sections
4(2) and 3(a)(9) thereof.
ITEM 27. EXHIBITS
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.
II-1
<PAGE> 96
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
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 Jenkens & Gilchrist, a Professional Corporation*
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*
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*
</TABLE>
II-2
<PAGE> 97
<TABLE>
<S> <C>
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*
10.24 First Amendment to Employment Agreement between Registrant and Paul
Lubomirski dated August 18, 1977**
10.25 First Amendment to First Amended and Restated Employment Agreement
between Registrant and Lee Sanders dated August 18, 1997**
10.26 Agreement between The Boeing Company and the Registrant dated as of
September 15, 1997**
10.27 Temporary Use License Agreement dated September __, 1997 between
Registrant and the Oregon Public Employees' Retirement Fund**
10.28 Aircraft Painting Services Agreement dated April 24, 1998 between Federal
Express Corporation and Pride Aviation, Inc.***
10.29 Employment Agreement between Registrant and Richard L. Morgan dated as of
June 1, 1998
11.1 Statement regarding computation of per share earnings**,***
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Jenkens & Gilchrist, a Professional Corporation (included in
their opinion filed as Exhibit 5)
23.2 Consent of Arsement, Redd & Morella, L.L.C.
23.3 Consent of PricewaterhouseCoopers LLP
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.
** Incorporated herein by reference to the Registrant's Form 10-K Annual
Report for the year ended June 30, 1997.
*** Incorporated herein by reference to the Registrant's Form 10-Q Quarterly
Report for the quarter ended March 31, 1998
II-3
<PAGE> 98
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
Post-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, in the City of Dallas, State of Texas, on the 8th day
of July, 1998.
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 Post-Effective Amendment No. 1 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 Officer July 8, 1998
- ----------------------------------- and Director
Lee Sanders
/s/ Richard L. Morgan Executive Vice President, Chief July 8, 1998
- ----------------------------------- Financial Officer and Director (Chief
Richard L. Morgan Accounting Officer)
Charles Weed* Director
Gordon Whitener* Director
*By: /s/ Lee Sanders July 8, 1998
-------------------------------
Lee Sanders, Attorney-in-Fact
/s/ Robert A. Schneider Director July 8, 1998
- -----------------------------------
Robert A. Schneider
</TABLE>
II-4
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.29 Employment Agreement between Registrant and Richard L. Morgan dated as of June 1, 1998
21.1 List of Subsidiaries of the Registrant
23.2 Consent of Arsement, Redd & Morella, L.L.C.
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of McGladrey & Pullen, LLP
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
by and between Aviation Group, Inc., a Texas corporation (the "Company"), and
Richard L. Morgan, an individual ("Employee"), as of June 1, 1998 (the
"Effective Date").
W I T N E S S E T H:
In consideration of the mutual covenants herein contained, the
employment of Employee upon the terms, conditions and covenants set forth herein
and each act performed pursuant hereto, the parties hereto agree as follows:
ARTICLE I
EMPLOYMENT AND DUTIES
1.1 Employment. For the term of employment as below stated, the Company
hereby employs Employee as its Executive Vice President and Chief Financial
Officer to perform such duties as the Chief Executive Officer of the Company
shall from time to time prescribe.
1.2 Employee's Resources. Employee shall devote substantially all of
his time, energy and capabilities to the performance of such duties and shall
not devote any material portion of his time or abilities to the planning,
organization, promotion, direction, management or conduct of any other business
activity, whether or not such other business activity is pursued for the gain,
profit or pecuniary advantage of Employee, without having first obtained the
consent of the Company. Employee further agrees that, without the prior consent
of the Company, Employee shall not during the term of this Agreement directly or
indirectly (i) invest in any business which is competitive with that of the
Company, (ii) attempt to influence customers or other business associates not to
do business with or not to continue to do business with the Company, or (iii)
take any other action inconsistent with the fiduciary responsibility of an
employee to his employer.
ARTICLE II
TERM OF EMPLOYMENT
2.1 Term. Subject to earlier termination as hereinafter provided, the
initial term of employment of Employee hereunder shall commence on the Effective
Date and shall end on the first anniversary of the Effective Date. As used
herein, the phrase "Term of Employment" shall mean said initial term of
employment as well as any renewal terms thereof.
2.2 Termination. This Agreement may be terminated at any time during
the Term of Employment only by reason of and in accordance with the following:
(a) Death. If Employee dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically terminate
as of the date of Employee's death; and the Company shall have no further
obligation to Employee or his estate, except to pay to
<PAGE> 2
the estate of Employee (i) any accrued, but unpaid, Salary (as hereinafter
defined) and any vacation or sick leave benefits which have accrued as of the
date of death but were then unpaid or unused, and (ii) any declared, accrued
Bonus Compensation (as hereinafter defined), if any.
(b) Disability. If, during the term of this Agreement, Employee
shall be prevented from performing his duties hereunder by reason of becoming
totally disabled, then the Company, on thirty (30) days' prior notice to
Employee, may terminate this Agreement. For purposes of this Agreement, Employee
shall be deemed to have become totally disabled when (i) he receives "total
disability benefits" under the Company's disability plan (whether funded with
insurance or self-funded by the Company), or (ii) the Board, upon the written
report of a qualified physician (after complete examination of Employee)
designated by the Board, shall have determined that Employee has become
physically and/or mentally incapable of performing his duties under this
Agreement on a permanent basis. In the event of termination pursuant to this
Section, the Company shall be relieved of all of its obligations under this
Agreement, except to pay Employee any accrued, but unpaid Salary, any vacation
or sick leave benefits which have accrued as of the date on which such permanent
disability is determined, but then remain unpaid, and any declared Bonus
Compensation. The provisions of the preceding sentence shall not affect
Employee's rights to receive payments under the Company's disability insurance
plan, if any.
(c) Termination by the Company for Cause. Prior to the expiration
of the term of this Agreement, the Company may discharge Employee for cause and
terminate this Agreement without any further liability hereunder to Employee or
his estate, except to pay any accrued, but unpaid, Salary, any declared Bonus
Compensation, and any vacation benefits due to him. For purposes of this
Agreement, a "discharge for cause" shall mean termination of Employee upon
written notification to Employee limited, however, to one or more of the
following reasons:
(i) Fraud, misappropriation or embezzlement by Employee in
connection with the Company as determined by the affirmative vote of at least a
majority of the Board; or
(ii) Mismanagement, lack of performance, or neglect of
Employee's duties as determined solely by the Chief Executive Officer of
Aviation Group, Inc.; or
(iii) Willful and unauthorized disclosure of information
proprietary or confidential to the Company; or
(iv) Employee's breach of any material term or provision of
this Agreement, after notice to Employee of the particular details thereof and a
period of thirty (30) days thereafter within which to cure such breach, if any,
and the failure of Employee to cure such breach within such thirty (30) day
period.
(d) Termination by Employee with Notice. Employee may terminate
this Agreement at any time upon thirty (30) days' notice to the Company, in
which event Employee shall be paid his then prevailing Salary prorated to the
date of termination, plus any accrued, but unused, vacation benefits.
2
<PAGE> 3
(e) Severance. Severance will be paid to Employee, only if
employee is terminated under terms listed above in Article II, Section 2.2,
Subsection (ii). Employee shall receive severance pay equal to 90 days of
regular pay if employee is terminated for reasons listed in Article II, Section
2.2, subsection (ii). If employee is terminated for any other reasons with cause
(other than the reasons listed in Article II, Section 2.2, Subsection (ii)),
then Employee is due no severance pay whatsoever.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 Salary and Bonus. As compensation for the Employee's services to
the Company and other duties and responsibilities herein contemplated, Employee
shall receive from the Company a salary commencing on June 1, 1998, and payable
in equal monthly installments, equivalent to $120,000.00 per year. Employee may
also be entitled to receive from time to time bonuses and additional
compensation ("Bonus Compensation") when, as, and if determined by the Board.
3.2 Employment Benefits. In addition to the Salary and Bonus
Compensation payable to Employee hereunder, Employee shall be entitled to the
following benefits upon satisfaction by Employee of the eligibility requirements
therefor, subject to the following limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this
Agreement is terminated pursuant to the provisions of Section 2.2(b) hereof,
Employee shall be paid sick leave benefits at his then prevailing Salary rate
during his absence due to illness or other incapacity, reduced by the amount, if
any, of worker's compensation, social security entitlement or disability
benefits, if any, under the Company's group disability insurance plan. The
Company, at its own expense, shall provide Employee with the maximum amount of
disability insurance benefits allowed for one in the position of Employee with
the Company under and consistent with any group disability insurance plan which
the Company, at its election, may adopt. Notwithstanding anything herein to the
contrary, Employee's sick leave days shall not exceed the number of sick leave
days provided to employees of similar tenure and position in the Company as
provided in the Company's policy manual, if any.
(b) Hospitalization, Accident, Major Medical and Dental Insurance.
The Company shall provide Employee with group hospitalization, group accident,
major medical, and dental insurance in amounts of coverage comparable to the
coverage, if any, provided other employees in similar positions with the
Company. Coverage will commence on employment date of June 1, 1998.
(c) Vacations. Employee shall be entitled to a reasonable paid
vacation each year during the term of this Agreement as determined by the Board,
exclusive of holidays and weekends, which vacation shall be taken by Employee in
accordance with the business requirements of the Company at the time and its
personnel policies then in effect relative to this subject.
3
<PAGE> 4
(d) Working Facilities. The Company shall provide, at its expense,
adequate facilities, equipment, supplies and personnel (including professional,
clerical, support and other personnel) for Employee's use in performing his
duties and responsibilities under this Agreement.
(e) Other Employment Benefits. As an employee of the Company,
Employee shall participate in and receive such other fringe benefits as may be
in effect from time to time for employees of similar tenure and position in the
Company, whether or not specifically enumerated herein and whether or not
through any written plan or arrangement, upon satisfaction by Employee of the
eligibility requirements therefor.
3.3 Reimbursement of Employee Expenses. Employee is authorized to incur
ordinary, necessary and reasonable expenses in connection with the performance
of his duties and responsibilities under this Agreement and for the promotion of
the business and activities of the Company during the term hereof, including,
without limitation, expenses for necessary travel and entertainment and other
items of expenses required in the normal and routine course of Employee's
employment hereunder. The Company will reimburse Employee from time to time for
all such business expenses incurred pursuant to and in conformity with the
provisions of this Section provided that Employee presents to the Company
documentary evidence of such expenses necessary to satisfy the reporting
requirements of the Internal Revenue Code of 1986, as amended.
ARTICLE IV
RESTRICTIVE COVENANTS
4.1 Trade Secrets, Propriety and Confidential Information. Employee
recognizes and acknowledges that Employee will acquire during his employment
hereunder access to certain trade secrets and confidential and proprietary
information of the Company (including, but not limited to, financial data,
marketing and sales plans, customer and supplier lists, and technical and
commercial information relating to the Company's properties, customers and
suppliers). Employee acknowledges that the information he obtains through his
employment hereunder constitutes valuable, special, and unique property of the
Company and that the Company would suffer great loss and damage if he should
violate the covenants set forth in this Agreement. Employee acknowledges that
such covenants and conditions are reasonable and necessary for the protection of
the Company's business.
4.2 Solicitation of Employees. Employee agrees that during the Term of
Employment and until three years after the termination or expiration of the Term
of Employment, he will not, directly or indirectly, or by act in concert with
others, employ or attempt to employ or solicit for employment to any business
which is competitive with the Company, any of the Company's employees, or seek
to influence any employees of the Company to leave their employment with the
Company.
4.3 Nondisclosure of Trade Secrets, Propriety and Confidential
Information. Employee agrees that without the prior written approval of the
Company, Employee shall not during the Term of Employment or following the
cessation of the Term of Employment for any reason disclose any of the Company's
trade secrets or confidential or proprietary information to any person or firm,
4
<PAGE> 5
company, association, or other entity (except for authorized personnel of the
Company) for any reason or purpose whatsoever; provided, however, that this
Section shall not apply to the extent that Employee shall be required to provide
information pursuant to a valid, lawful subpoena or court order so long as
Employee shall have made his best efforts in good faith to cause the court of
relevant jurisdiction, to the greatest extent possible, to limit the scope of
such subpoena or order and protect the confidentiality of the information so
disclosed.
4.4 Noncompetition Agreement. Employee covenants and agrees to refrain
for three years after any termination or expiration of his employment with the
Company from engaging in, or being employed by or performing consulting services
for any company or firm engaged in, the business of providing painting and/or
paint stripping services for aircraft, aircraft cleaning services, ground
handling services and/or light catering to the airline industry or any other
business in which the Company may be engaged at the time of such employment
termination or expiration.
4.5 Solicitation of Business of Company. Employee covenants and agrees
that during the Term of Employment Employee will not attempt to influence
customers, suppliers, and other business associates not to do business with or
not to continue to do business with the Company or its affiliates.
4.6 Survival of Covenants. Sections 4.2, 4.3 and 4.4 hereof shall
survive any expiration or termination of this Agreement and shall continue to
bind the parties hereto in accordance with the terms hereof. The covenants
contained in this Article IV shall be construed as covenants or agreements
independent of any other provision of this Agreement and the allegation or
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of the covenants contained herein.
4.7 Remedies. In the event of breach or threatened breach by Employee
of any provision of this Article IV, the Company shall be entitled to relief by
temporary restraining order, temporary injunction, permanent injunction, or
otherwise in addition to other legal and equitable relief to which it may be
entitled, including any and all monetary damages which the Company may incur as
a result of said breach, violation or threatened breach or violation. The
Company may pursue any remedy available to it concurrently or consecutively in
any order as to any breach, violation, or threatened breach or violation, and
the pursuit of one of such remedies at any time will not be deemed an election
of remedies or waiver of the right to pursue any other of such remedies as to
such breach, violation, or threatened breach or violation, or as to any other
breach, violation, or threatened breach or violation.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Notices. Whenever, in connection with this Agreement, any notice is
required to be given or any other act or event is to be done or occur on or by a
particular number of days, and the date thus particularized should be a
Saturday, Sunday, or bank holiday in the City of Dallas, Texas, such date shall
be postponed to the next day which shall not be a Saturday, Sunday, or bank
holiday
5
<PAGE> 6
in the City of Dallas, Texas. In the event a notice or other document is
required to be given hereunder to the Company or Employee, such notice or other
document shall either be personally delivered or be mailed to the party entitled
to receive the same by certified mail, return receipt requested, at the
appropriate address set forth below or at such other address as such party shall
designate in a written notice given in accordance with this Section:
Company: Employee:
Aviation Group, Inc. Richard L. Morgan
700 North Pearl Street, Suite 2170 3832 Centenary Avenue
Dallas, Texas 75201 Dallas, Texas 75225
Notice shall be deemed given on the date of actual delivery, if delivered in
person, or, if mailed, then on the date noted on the return receipt.
5.2 Binding Effect. The rights and obligations of the parties shall
inure to the benefit of and shall be binding upon their heirs, representatives,
successors and assigns as the case may be.
5.3 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
5.4 Waiver, Modification and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning employment and
supersedes all prior and contemporaneous representations, understandings and
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by the Company and all such prior or
contemporaneous representations, understandings and agreements, both oral and
written, are hereby terminated. This Agreement may not be modified, altered or
amended except by written agreement of all the parties hereto.
5.5 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND ACTIONS HEREON SHALL BE
BROUGHT IN DALLAS COUNTY, TEXAS.
5.6 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
5.7 Captions. The captions herein are inserted for convenience only and
shall not affect the construction of this Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, this Agreement is executed as of the date first set
forth above.
COMPANY:
AVIATION GROUP, INC., a Texas corporation
By: /s/ LEE SANDERS
--------------------------------------
Name: Lee Sanders
------------------------------------
Title: President & CEO
-----------------------------------
EMPLOYEE:
/s/ RICHARD L. MORGAN
-----------------------------------------
Richard L. Morgan
7
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
NAME OF SUBSIDIARY STATE OF INCORPORATION
TriStar Airline Services, Inc. Texas corporation
TriStar Aircraft Services, Inc. Texas corporation
Pride Aviation, Inc. Oklahoma corporation
Casper Air Service Wyoming corporation
Aero Design, Inc. Tennessee corporation
Battery Shop, LLC Tennessee limited liability company
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our report dated
October 7, 1996, and to the reference to our firm under the caption "Experts"
included in or made a part of this Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 File No. 333-22727.
/s/ ARSEMENT, REDD & MORELLA, L.L.C.
ARSEMENT, REDD & MORELLA, L.L.C.
July 9, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 1 to Form SB-2 (Registration No. 333-22727) of our
report dated September 29, 1997 relating to the consolidated financial
statements of Aviation Group, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, TX
July 9, 1998
<PAGE> 1
EXHIBIT 23.4
[MCGLADREY & PULLEN, LLP LETTERHEAD]
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report, dated November 14, 1997 relating to the consolidated financial
statements of Casper Air Service and subsidiary. We also consent to the
reference to our Firm under the caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
Cheyenne, Wyoming
July 8, 1998
