<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from ____________ to ____________
Commission file number: 0-10124
AVIATION GROUP, INC.
(Exact name of Small Business Issuer as specified in its charter)
TEXAS 75-2631373
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 NORTH PEARL STREET
SUITE 2170
DALLAS, TEXAS 75201
(Address of Principal Executive Offices)
214/922-8100
(Issuer's Telephone Number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,465,673 shares of Common Stock were outstanding as of October 10, 1998.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 127,000 $ 509,000
Restricted time deposit 200,000 200,000
Accounts receivable, net 2,644,000 2,020,000
Inventory 2,542,000 1,513,000
Deferred income taxes 88,000 88,000
Prepaid expenses and other 192,000 129,000
------------ ------------
Total Current Assets 5,793,000 4,459,000
------------ ------------
Property and equipment 5,760,000 4,812,000
Less: accumulated depreciation (1,250,000) (1,099,000)
------------ ------------
4,510,000 3,713,000
------------ ------------
Goodwill, net 3,252,000 3,135,000
Deferred income taxes 112,000 112,000
Other 530,000 181,000
------------ ------------
3,894,000 3,428,000
------------ ------------
Total Assets $ 14,197,000 $ 11,600,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 940,000 $ 625,000
Current portion of capital lease obligations 71,000
Other short-term borrowings 1,648,000 855,000
Accounts payable 1,797,000 1,424,000
Accrued interest 20,000 44,000
Income tax payable 39,000 25,000
Accrued liabilities 1,158,000 1,023,000
------------ ------------
Total Current Liabilities 5,602,000 4,067,000
------------ ------------
Long-Term Liabilities
Long-term debt, net of current maturities 1,656,000 723,000
Capitalized leases, net of current maturities -- 181,000
Loan from shareholder 15,000 15,000
------------ ------------
Total Long-Term Liabilities 1,671,000 919,000
------------ ------------
Total Liabilities 7,273,000 4,986,000
------------ ------------
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, 3,460,456 and 1,600,250 shares
issued and outstanding 34,000 33,000
Additional paid-in capital 9,248,000 8,957,000
Retained earnings (deficit) (2,358,000) (2,376,000)
------------ ------------
Total Shareholders' Equity 6,924,000 6,614,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 14,197,000 $ 11,600,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-1-
<PAGE> 3
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenue $ 5,624,000 $ 3,116,000
Cost of Revenue 3,453,000 2,609,000
----------- -----------
Gross Profit 2,171,000 507,000
----------- -----------
General and Administrative Expenses 1,872,000 1,125,000
Depreciation and Amortization 209,000 139,000
----------- -----------
2,081,000 1,264,000
Income (Loss) From Operations 90,000 (757,000)
----------- -----------
Other Income (Expenses)
Interest Income 4,000 20,000
Interest Expense (62,000) (164,000)
----------- -----------
(58,000) (144,000)
Income (Loss) Before Provision for Income Taxes 32,000 (901,000)
Provision (Benefit) for Income Taxes 14,000 (279,000)
----------- -----------
Net Income (Loss) $ 18,000 $ (622,000)
=========== ===========
Earnings (loss) per common and
common equivalent share $ 0.01 $ (0.27)
=========== ===========
Weighted average common and
common equivalent shares outstanding- Basic and Diluted 3,362,169 2,278,286
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE> 4
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 18,000 $ (622,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 209,000 139,000
Deferred income taxes (111,000) (257,000)
(Increase) decrease in accounts receivable (380,000) (126,000)
(Increase) decrease in inventories 11,000 (13,000)
(Increase) decrease in prepaids and other current assets (58,000) (51,000)
Increase(decrease)in accounts payable (18,000) 187,000
Increase (decrease) in interest payable (24,000) 11,000
Increase (decrease) in accrued liabilities (137,000) 53,000
Other (23,000) (40,000)
----------- -----------
Total Adjustments (531,000) (97,000)
----------- -----------
Net Cash Provided (Used) by Operating Activities (513,000) (719,000)
----------- -----------
Cash Flows From Investing Activities:
Cash paid in acquisition of Casper Air Service,
net of cash acquired -- (1,145,000)
Payments for property and equipment additions (124,000) (149,000)
----------- -----------
Net Cash Used by Investing Activities (124,000) (1,294,000)
----------- -----------
Cash Flows From Financing Activities:
Advances (repayments) of short-term borrowings, net 393,000 (163,000)
Repayment of Bridge Notes -- (500,000)
Principal borrowings (payments) on long-term debt (179,000) (246,000)
Proceeds from issuance of common stock -- 5,668,000
----------- -----------
Net Cash Provided (Used) by Financing Activities 214,000 4,759,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (423,000) 2,746,000
Cash and Cash Equivalents at Beginning of Period 509,000 188,000
----------- -----------
Cash and Cash Equivalents at End of Period $ 86,000 $ 2,934,000
=========== ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 62,000 $ 89,000
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
Conversion of LEDC note to Common Stock -- 370,000
Supplemental Disclosure of Non-cash Investment in
General Electrodynamics Corporation
Cash $ 41,000 --
Other current assets 1,289,000 --
Long-term assets 1,121,000 --
Current liabilities (1,078,000) --
Long-term debt (1,175,000) --
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 5
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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
and financial statements and notes thereto included in the Company's Form 10-KSB
for the year ended June 30, 1998.
NOTE B - ACQUISITION OF GENERAL ELECTRODYNAMICS CORPORATION
On August 28, 1998, the Company acquired 100% of the common stock of
General Electrodynamics Corporation ("GEC") in exchange for 112,029 shares of
Common Stock with a value of approximately $340,000. GEC is a 42-year old
Texas-based company that manufactures and sells aircraft scales and other
aviation components used by the aviation maintenance and transportation
industries.
The following unaudited pro forma consolidated results of operations for
the three months ended September 30, 1998 assumes the GEC acquisition occurred
as of July 1, 1998. The 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 $6,231,000
Net income (loss) (5,000)
Net income (loss) per share (basic and diluted) --
</TABLE>
NOTE C - 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 September 30, 1998 and 1997, the basic and diluted EPS amounts
calculated assuming adoption of this statement are the same as the amounts
presented on the consolidated statement of operations.
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 has
adopted FAS 130 and FAS 131. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for such disclosures.
-4-
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements, including those
described below. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The Company, through its three operating divisions, offers a 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, airline and corporate
aircraft painting, corrosion cleaning, ground handling services, light catering,
fueling, airport security and passenger service.
The Company plans to grow through mergers, acquisitions and internal growth.
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>
Three Months Three Months
Ended Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
OVERHAUL SERVICES DIVISION:
Net revenues $ 3,661,000 $ 1,273,000
Cost of revenue (2,105,000) (1,029,000)
Operating and other expenses, net (1,114,000) (582,000)
Interest income 1,000 1,000
Interest expense (29,000) (13,000)
------------ ------------
Pre-tax income $ 414,000 $ (350,000)
============ ============
Segment assets $ 9,650,000 $ 3,610,000
============ ============
GROUND HANDLING & SERVICES
DIVISION:
Net revenues $ 439,000 $ 359,000
Cost of revenue (262,000) (287,000)
Operating and other expenses, net (140,000) (130,000)
Interest income 3,000 --
Interest expense (2,000) (2,000)
------------ ------------
Pre-tax income (loss) $ 38,000 $ (60,000)
============ ============
Segment assets $ 474,000 $ 316,000
============ ============
FBO OPERATIONS:
Net revenues $ 1,524,000 $ 1,484,000
Cost of revenue (1,115,000) (1,293,000)
</TABLE>
-5-
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Operating and other expenses, net (435,000) (242,000)
Interest income -- --
Interest expense (11,000) (12,000)
------------ ------------
Pre-tax income (loss) $ (37,000) $ (63,000)
============ ============
Segment assets $ 3,998,000 $ 4,916,000
============ ============
AVIATION GROUP - CORPORATE
OVERHEAD:
Operating and other expenses, net $ (363,000) $ (310,000)
Interest income -- 19,000
Interest expense (20,000) (137,000)
------------ ------------
Pre-tax income (loss) $ (383,000) $ (428,000)
============ ============
Segment assets $ 75,000 $ 3,802,000
============ ============
TOTAL COMPANY:
Net revenues $ 5,624,000 $ 3,116,000
Cost of revenue (3,454,000) (2,609,000)
Operating and other expenses, net (2,080,000) (1,264,000)
Interest income 4,000 20,000
Interest expense (62,000) (164,000)
------------ ------------
Pre-tax income (loss) $ 32,000 $ (901,000)
============ ============
Total assets $ 14,197,000 $ 12,644,000
============ ============
</TABLE>
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 and aviation related companies. The Company also
contracts with various heavy maintenance bases throughout the United States to
provide corrosion prevention programs and light maintenance for aircraft
undergoing heavy maintenance work at these bases. Costs of revenues consist
largely of direct and indirect labor, direct material and supplies, insurance
and other indirect costs applicable to the completion of each contract.
Operating expenses consist of all general and administrative and operating costs
not included in costs of sales, including but not limited to facilities rent,
indirect labor and other overhaul costs.
This division of the Company now consists of four locations. In
addition to Acadiana Regional Airport in New Iberia, Louisiana (Pride) and a
second facility at Portland Airport in Portland, Oregon, recent acquisitions
have added the complementary operations of Aero Design, Inc. in Mt. Juliet,
Tennessee, and General Electrodynamics Corporation of Arlington, Texas to this
division. During the quarter ended September 30, 1998, the paint division
performed services for two customers whose sales represented 33% (16% each) of
total revenues of the Company. For the three months ended September 30, 1997,
the paint division performed services for customer whose sales represented 37%
of total revenues for the Company. Beginning January 1, 1999 the Company will
begin to operate an additional paint facility in Greenville, Mississippi. This
facility will be operated under a ten year lease and consists of two commercial
jet hangar paint facilities, with an additional paint hangar available subject
to certain operating and construction requirements.
-6-
<PAGE> 8
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. Tri Star Airline Services
operating at Dallas-Fort Worth International Airport since 1990, provides
airline ground services to a variety of passenger and freight airlines and
provides selective additional service at the Alliance Fort Worth airport
complex.
FBO Operations & Airport Management
In August 1997, the Company acquired CAS, which operates a fixed-base
operation in Casper, Wyoming.
Aviation Group - Corporate Overhead
Operating expenses consist of all general and administrative and
operating costs to provide management to the Company's divisions, to support
expected growth, and to seek acquisition targets, not directly attributable to
the divisions' operations.
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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's net revenue increased by $2,508,000, or 80%, for the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997. In the Company's three month period ended September 30,
1998, gross profit increased by $1,667,000, from $507,000, for the comparable
three months ended September 30, 1997 .
Revenues associated with the Overhaul Services Division increased by
$2,117,000, or 246%. Gross profit from the Company's Overhaul Services Division
increased by $1,365,000. These increases are due primarily to increased
activity at the Company's Pride Aviation painting facility in Portland, Oregon
and the addition of operating results at Aero Design and GEC. Additionally, the
Company was successful in acquiring significant paint contracts during the
summer, normally a seasonally slow period for paint operations.
Revenues from the Company's Ground Services Division increased $80,000
or 22% due primarily to the expansion during fiscal 1998 at the Company's
Dallas-Ft. Worth International Airport location. Gross profit from the Ground
Services Division increased $132,000 or 84% as compared to the same period in
the prior year. This improvement is due to the growth at DFW and the shutdown of
less efficient ground service locations during the fourth quarter last year.
Revenues from the Company's FBO and Airport Management division
increased $251,000 or 20% due primarily to the inclusion of a full quarter of
operations of Casper Air Service, which was acquired in August 1997. Gross
profit related to the FBO division increased $218,000, or 214%, due also to the
acquisition of Casper Air Service, plus the elimination of the Company's Dallas
Redbird Airport operations in fiscal 1998
The Company's corporate general and administrative expenses increased
$53,000 or 17% over the three months ended September 30, 1997, primarily from
indirect overhead and travel costs. Interest expense decreased $117,000 or 84%
during the quarter. In the September 30, 1997 quarter, the company paid Bridge
Note interest of $116,000 relating to the Company's initial public offering
expenses, which were not incurred in the current quarter. Growth in
non-executive general and administrative expense relates to growth in paint
operations at Portland, Oregon and from the acquisition of Aero Design and GEC.
-7-
<PAGE> 9
FINANCIAL CONDITION AND LIQUIDITY
The Company financed its operations and capital expenditures from a
combination of cash generated from its operations, revolving loans from a
credit facility, leases and invested capital.
The Company realized approximately $5.3 million in net proceeds from
the IPO in August 1997. In August, 1998, the Company executed a three-year,
$3,000,000 revolving line of credit with CIT Finance. The line is secured by
substantially all the Company's current assets. These loan proceeds have been
and will be used in the future to fund expenditures including, but not limited
to, 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 believes that funds available under its existing credit
facilities, together with cash generated from operations will be adequate for
its anticipated operating needs. As part of its growth strategy, the Company
intends to pursue acquisitions of related aviation businesses. Management
expects that future acquisitions will require additional debt or equity
financings.
-8-
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceeding
other than ordinary routine litigation considered to be incidental to its
business.
ITEM 2. CHANGES IN SECURITIES.
(c) On August 28, 1998, the Company acquired 100% of the common stock
of General Electrodynamics Corporation ("GEC") in exchange for
112,029 shares of Common Stock with a value of approximately
$340,000. GEC is a 42-year old Texas-based company that
manufactures and sells aircraft scales and other aviation
components used by the aviation maintenance and transportation
industries. The Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents are included as exhibits to this Form 10-QSB
and are filed herewith unless otherwise indicated.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company has filed a Form 8-K Current Report dated August 28, 1998
in which it reported the acquisition of General Electrodynamics Corporation
("GEC"). The Company has also filed a Form 8-K/A (Amendment No. 1) Current
Report dated August 28, 1998 that contained audited financial statements of GEC
for the years ended August 31, 1997 and 1998 and pro forma financial statements
for the Company for the year ended June 30, 1998, as adjusted to reflect the
GEC acquisition.
-9-
<PAGE> 11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 1998.
AVIATION GROUP, INC.
By: /s/ Richard L. Morgan
------------------------------------------
Richard L. Morgan, Executive Vice
President and Chief Financial Officer
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 127,000
<SECURITIES> 200,000
<RECEIVABLES> 2,644,000
<ALLOWANCES> 0
<INVENTORY> 2,542,000
<CURRENT-ASSETS> 5,793,000
<PP&E> 5,760,000
<DEPRECIATION> 1,250,000
<TOTAL-ASSETS> 14,197,000
<CURRENT-LIABILITIES> 5,602,000
<BONDS> 1,656,000
0
0
<COMMON> 34,000
<OTHER-SE> 6,890,000
<TOTAL-LIABILITY-AND-EQUITY> 14,197,000
<SALES> 5,624,000
<TOTAL-REVENUES> 5,624,000
<CGS> 3,453,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,081,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,000
<INCOME-PRETAX> 32,000
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 18,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
