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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required)
For the fiscal year ended June 30, 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.
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(Name of Small Business Issuer in Its Charter)
TEXAS 75-2631373
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 NORTH PEARL STREET, SUITE 2170, DALLAS, TEXAS 75201
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(Address of Principal Executive Offices) (Zip Code)
214/922-8100
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
$.01 PAR VALUE COMMON STOCK BOSTON STOCK EXCHANGE
REDEEMABLE COMMON STOCK WARRANTS BOSTON STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
$0.01 PAR VALUE COMMON STOCK
- -------------------------------------------------------------------------------
(Title of Class)
REDEEMABLE COMMON STOCK WARRANTS
- -------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB .
State issuer's revenues for its most recent fiscal year. $18,244,000
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) $3,824,000 at close on October 10, 1998
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.
3,296,601 shares of Common Stock were outstanding as of October 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders scheduled to be held on November 20, 1998 are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Aviation Group, Inc., a Texas corporation (the "Company"), is a
provider of services and products to airline companies and other aviation firms.
Although its primary market is the United States, the Company ultimately aspires
to compete in the global marketplace. In addition to growth of its existing
businesses, the Company seeks to grow via the acquisition of other aviation
service businesses that complement and strengthen the Company's existing
operations.
The Company was organized in December 1995 to consolidate the ownership
of TriStar Aircraft Services, Inc. ("TriStar Paint"), TriStar Airline
Services, Inc. ("Airline Services") and Pride Aviation, Inc. 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 Purchase Warrants (the "Warrants") which resulted in net proceeds to the
Company of $5,180,000. 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
134,068 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. 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
manufactures and sells aircraft scales and other aviation components used by the
aviation maintenance and transportation industries.
The Company is currently organized into four divisions devoted to the
Company's primary lines of business. These business segments are as follows:
o Overhaul Services Division: This division comprises Aircraft Paint
Services and Component Overhaul Services. Aircraft Paint Services,
through Pride Aviation Inc. and Pride Aviation Portland, Inc.
(collectively "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. The Company's TriStar
Paint location in Dallas, Texas was combined with Pride during 1998. In
March 1998, the Company established Component Overhaul Services by
acquiring Aero Design which, manufactures and repairs batteries for
the aviation industry. On August 28, 1998, this division was expanded
through the acquisition of GEC.
o Ground Handling & Services Division: Through Airline Services, the
Ground Handling & Services Division provides aircraft ground handling
and cleaning services to a variety of passenger and freight airlines
such as United Parcel Service, Champion Airlines, United Airlines,
Inc., Federal Express and Northwest Airlines, among others, primarily
at DFW International in Texas. During the year, unprofitable or
marginal locations located at Los Angeles International and Oakland
International, Ft. Lauderdale, Florida, and Kansas City International
were discontinued.
o FBO Operations & Airport Management Division: In July 1996, the
Company began to operate its FBO Division, and acquired CAS in August
1997. This fixed base operation, located at Natrona County
International Airport in Casper, Wyoming, provides fuel and light
maintenance services to general aviation, corporate and light
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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. 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.
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. 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 SERVICES DIVISION
Paint Services. Pride 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.
The Overhaul Services Division's operations include aircraft stripping and
painting services, light aircraft maintenance, and corrosion preventive
cleaning programs.
The type and quality of paint and other supplies utilized by the
Company is generally dictated to the Company by its customers, subject to FAA
and EPA guidelines. In most cases, the Company's customers arrange for the
sources of paint supplies that it utilizes. The Company believes that there are
available numerous sources for the paint and other supplies utilized by the
Company.
Pride's administrative offices, along with its primary aircraft
painting facilities, are located in New Iberia, Louisiana. In September 1990,
Pride obtained its first certificate from the Federal Aviation Administration
("FAA") to operate an approved repair station at its facilities in New Iberia,
Louisiana. Since that time, the certificate has been expanded to permit Pride
to conduct certain FAA classes of inspections and light maintenance for a
variety of jet aircraft. Pride is also certified to perform structural repairs
on certain equipment in a variety of jet aircraft. Pride's painting facilities
located in New Iberia, Louisiana can house all narrow-bodied jets. Of a total
of three hangars, one hangar has been built to accommodate wide-bodied jets
such as the Boeing 767 and McDonnell Douglas DC-10 aircraft.
The Company's primary customer, United, accounted for approximately 90%
of the Overhaul Services Division revenues for the year ended June 30, 1997 and
51% for the year ended June 30, 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
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in June 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. 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 767 and McDonnell Douglas DC-10 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 Aviation Portland, Inc.,
was awarded a contract to paint newly manufactured wide-body aircraft for Boeing
Commercial Airplane Group ("Boeing"). The contract was for seven aircraft, and
was completed in February 1998. Pride leased a hangar facility in Portland,
Oregon in which it performed this work for Boeing. In May 1998, Pride was
awarded a three-year contract to paint aircraft for Federal Express at its
Portland facility.
Overhaul Services. In March 1998, the Company established 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 and battery temperature sensors for the aviation
industry. Aero Design manufactures and sells its products under approvals from
the FAA into the replacement market directly to airlines and other aircraft
owners and through aviation product distributors.
On August 28, 1998, the Company acquired GEC, a 43-year old specialty
manufacturer of aircraft and transportation equipment scales and other aviation
components based in Arlington, Texas. GEC markets its products directly to
airlines and maintenance operators worldwide.
GROUND HANDLING & SERVICE DIVISION
Airline Services. Through Airline Services, the Company engages in the
cleaning and handling of aircraft. Airline Services provides its customers with
a variety of support services including baggage handling, aircraft interior
cleaning, exterior washes and lavatory/water services. Airline Services
presently operates at the Dallas-Fort Worth International Airport. Marginal
operations located at Oakland International, Kansas City International, and Ft.
Lauderdale, Florida were terminated during the year. Airline Services currently
provides some or all of these services for United Airlines, United Parcel
Service, American Trans Air, Champion Air, Northwest Airlines, Federal Express
and other customers.
Interior cleaning is performed between flights at the airport. This
involves cleaning the inside of the cockpit, cabin and galleys, servicing the
lavatories, fresh water facilities and stocking the aircraft with magazines, air
sickness bags and emergency cards. All pricing for this service is based on
airline specifications. Exterior cleaning involves cleaning the exterior of the
aircraft during nighttime layovers. Typically, an aircraft's exterior will be
cleaned once during a two or three week cycle. Airline Services uses specially
designed equipment and pressure sprayers to clean the exteriors of the aircraft.
Similar to interior cleaning, all pricing for this service is based on airline
specifications.
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, and aircraft sales. CAS has been a Cessna dealer since 1969. Upon
its purchase by the Company, the aircraft charter business has been discontinued
and the remaining related aircraft are held for resale.
The aircraft line services offered by CAS include aircraft refueling,
de-icing, cleaning and heating, and weather
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information, refreshments, lounge areas and ground transportation for pilots and
passengers. CAS's FAA certified service department provides maintenance and
overhaul services for (i) both piston and turbo-charged aircraft engines,
including Pratt & Whitney, Gulfstream Aerospace Commander, Bell Helicopter 206
Series, Garrett AiResearch, Piper and Cessna engines, (ii) propellers, including
those made by McCauley, Hartzell, Dowdy, Sensanich and Kelvan, (iii)
accessories, including aircraft alternators, starters, turbo controllers, waste
gates and magnetos, and (iv) avionics systems. The engine maintenance operation
began in 1965, while the propeller, accessory and avionics overhaul operations
were commenced in 1980, 1988 and 1993, respectively.
The parts department of CAS sells to customers located outside the
United States and outside the Rocky Mountain region as well as in connection
with its service operations. CAS 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, including certain acquisition opportunities of aviation companies
that specialize in the overhaul and service of replacement and after-market
parts. These parts, called "rotable parts," are removed by airlines and major
overhaul companies and subsequently rebuilt and refurbished in accordance with
FAA guidelines for future use. No commitments or binding agreements have been
entered into to date.
ADVERTISING AND MARKETING
To date, the Company has generated most of its revenues from direct
sales and customer referrals. The Company also utilizes direct mailings and
trade journal advertisements as a secondary source of advertising and public
relations. The Company has full-time marketing representatives who contact
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
Pride provides stripping and painting services to major carriers in the
airline industry. Pride's past and current customers include United Airlines,
Continental Airlines, Boeing Commercial Aircraft Group, Federal Express, United
Parcel Service, Delta, Northwest Airlines and Piedmont Airlines. For the twelve
months ended June 30, 1998, United accounted for approximately 34% of the total
revenues of the Company.
Airline Services performs ground handling services and light catering
at several airports in the United States. Its primary customers consist of
United Airlines, Champion Airlines, American Trans Air, Northwest Airlines,
UPS, and Federal Express. For the twelve months ended June 30, 1998, ground
handling services and light catering accounted for approximately 8% 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.
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Federal and state environmental laws include statutes intended to
allocate the cost of remedying past contamination among specifically identified
parties. The Comprehensive Environmental Response, Compensation and Liability
Act as amended ("CERCLA" or "Superfund"), 42 U.S.C. 9601 et. seq., imposes
strict and joint and several liability upon owners or operators of facilities
at, from, or to which a release of hazardous substances has occurred, upon
parties who generated hazardous substances that were released at such
facilities, and upon parties who arranged for the transportation or disposal of
hazardous substances to applicable facilities.
The day-to-day operations of the Company are also subject to regulation
under the Clean Air Act, as amended ("CAA"). In particular, the EPA and state
agencies have promulgated, or are required to promulgate, regulations which
affect or will affect the operations of the Company. These regulations include
New Source Performance Standards ("NSPS") and National Emission Standards for
Hazardous Air Pollutants ("NESHAPs"). NSPS and NESHAP rules may require
additional controls on emissions of certain listed hazardous air pollutants
("HAPs"). The CAA identifies chemicals that the Company uses and/or processes,
such as methylene chloride, phenol and methyl ethyl ketone, as HAPs for purposes
of regulation. The CAA may also require the Company to maintain operating
permits for its facilities' air emissions. The EPA has announced plans to impose
more stringent standards for ozone and particulate matter. Regulations
promulgated to achieve these standards may require additional controls on
emissions of particulate matter and volatile organic compounds.
The Company must comply with RCRA, CERCLA, CAA and other federal, state
and local environmental protection laws, and the regulations promulgated
thereunder, in its operations and facilities. These laws and regulations are
particularly applicable to the paints and paint stripping chemicals and solvents
used by the Company in its operations. The Company could be held liable as a
current or former operator for releases of hazardous substances at its
facilities. The Company could also incur liability for cleanup costs at off-site
facilities to which the Company shipped hazardous substances for treatment,
handling, storage, or disposal. Management of the Company believes that the
Company's operations and facilities are in material compliance with all federal,
state and local environmental laws and regulations and that the Company's
hazardous waste management practices minimize the potential for release of
hazardous substances into the environment. The Company has not experienced any
significant environmental regulatory problems in the past, and to date, the
Company has not been subject to any significant fines, penalties or other
liabilities under these laws and regulations. However, no assurance can be given
that such laws, regulations or interpretations thereof will not necessitate
significant expenditures by the Company or otherwise have a material adverse
impact on the Company's operations or financial condition in the future.
Aviation Regulation. The FAA regulates all aspects of the airline and
aircraft industries. The Company's subsidiaries have certifications from the FAA
to operate aircraft repair stations. Such certifications are limited as to the
kinds of repair and maintenance activities that may be performed by the
Company's subsidiaries at their certified facilities. The FAA regularly inspects
these facilities for compliance with FAA regulations and guidelines. Failure to
comply with FAA regulations and guidelines could result in a loss of
certification. A loss of certification for a particular facility would prevent
that facility from performing any aircraft repair or maintenance operations. The
Company believes that its subsidiaries are in compliance in all material
respects with the FAA's regulations and guidelines. Nevertheless, no assurance
can be given that such regulations and guidelines or any FAA enforcement actions
may not have a material adverse effect on the Company's operations and financial
condition in the future.
COMPETITION
The airlines services industry is highly competitive. Each of the
Company's subsidiaries is in direct competition with other companies. 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 larger competitors, including AMR Services, a
division of AMR Corp., Pedus, Intex and World Aviation Services. These
competitors provide interior and exterior aircraft cleaning services and light
catering services similar to those provided by the Company.
The Company's FBO & Airport Management Division 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
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significant consolidation and elimination of FBO operations over the last 20
years. The Company has a number of large, well-capitalized competitors who own
or operate multiple FBO locations, including AMR Combs, Signature Flight Support
and Raytheon. The major competitors of CAS in the sale of parts include Aviall,
Inc., Aviation Service Corporation, Cooper Aviation Industries, Inc. and many of
the parts manufacturers themselves. In its propeller, accessory, avionics and
engine maintenance and overhaul business, CAS has significant competitors,
including AeroPropeller in Denver, Colorado and Weststar Aircraft in Grand
Junction, Colorado. CAS believes that the primary competitive factors in this
marketplace are price, quality, engineering and customer service. CAS's remote
location in Casper, Wyoming in some cases constitutes a competitive
disadvantage.
EMPLOYEES
Pride generally employs approximately 250 employees, depending upon
seasonality. At August 31, 1998, Airline Services has an aggregate of
approximately 60 employees. CAS had a total of 43 employees as of August 31,
1998, Aero Design had seven, and GEC had 40. Corporate management has seven
employees, and management believes its employee relations to be good. No
employees are covered by collective bargaining agreements. The Company
anticipates that it will hire additional employees in the next 12 months as
revenues permit and as its operations expand.
TRAINING
The Company provides formal classroom training to its employees with
respect to the safe handling of hazardous substances, occupational safety and
health, aircraft maintenance procedures and other safety and operational
procedures that are fundamental to its operations. On-the-job training is also
emphasized to ensure that classroom knowledge is transformed to operational
skills. Much of the Company's training program is mandated by the FAA and OSHA.
INSURANCE
The Company carries $200,000,000 of insurance for general aviation
liability and $200,000,000 of hangarkeeper insurance, as required by its
customers, and customary coverage for other business insurance. While the
Company believes its insurance is adequate, there can be no assurance that such
coverage will fully protect it against all losses which it might sustain.
Moreover, the Company's insurance for aircraft liability carries a deductible
requiring the Company to pay $20,000 of any loss or damage. The Company is the
beneficiary of a $1,000,000 key man life insurance policy on Mr. Sanders and Mr.
Lubomirski.
RISK FACTORS
DEPENDENCE ON CERTAIN CUSTOMERS. Pride's contract with United Airlines,
Inc. ("United") to provide aircraft stripping and painting services accounted
for approximately 34% of the Company's revenues for the year ended June 30,
1998. The contract with United expires in June 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 condition 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.
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YEAR 2000 COMPLIANCE AND BUSINESS DISRUPTION RISKS. The Company's
customers and vendors comprise major commercial passenger and freight airlines
and related maintenance and service customers that serve the airline and
aviation maintenance industry. Additionally, these airlines utilize aircraft and
other flight and computer equipment in the ongoing management of their
businesses. The industry in general is regulated by and overseen by the Federal
Aviation Administration, which itself operates flight maintenance, regulation,
and control functions for the industry at large. The Company is presently
working with its major customers and vendors to define and implement Year-2000
safeguards and systems management procedures. The nature and severity of such
issues is difficult to detect and measure, however, and significant business
interruptions from Year-2000 system breakdowns within the aviation industry may
occur whose impact on the Company may be material in scope and amount.
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 $1,337,000 for the year ended June 30, 1997 and year
ended June 30, 1998, respectively. This loss was primarily due to goodwill and
amortization from the Pride and CAS acquisitions, restructuring costs in the
Company's FBO division, indirect administrative and interest costs of the
Company's initial public offering and increased corporate overhead incurred to
support anticipated future growth. While these costs are non-recurring in
nature, 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. Acquisitions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company, all of which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
RISKS OF AVIATION REPAIR BUSINESS. The Company'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. The Company 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, the Company 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 manage effectively 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
9
<PAGE> 10
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.
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 approximately 35% of the
Company's outstanding Common Stock. The successful implementation of the
Company's business strategies depends on the hiring and retention of additional
management and other personnel. There can be no assurance that the Company will
be able to identify and attract additional qualified management and other
personnel when needed or that the Company will be successful in retaining such
additional management and personnel if added. Moreover, there can be no
assurance that the additional costs associated with the hiring of additional
personnel will not adversely affect the Company's results of operations. The
Company is the beneficiary of a $1,000,000 key man life insurance policy on Mr.
Sanders.
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.
COMPETITION. The airline services industry is highly competitive. Each
of the Company's subsidiaries is in direct competition with other companies. In
ground handling and light catering services and resales of aircraft parts, the
Company has numerous competitors. Because many of the Company's competitors have
greater resources than the Company, no guarantee or assurance can be given that
the Company will be able to compete successfully in providing its services at a
competitive but profitable price.
ENVIRONMENTAL REGULATION AND 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.
FAA REGULATION. 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 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 require FAA's certificates. Loss of any necessary FAA
certifications could have a material adverse effect on the Company's operations
and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE. There can be no assurance that the
market price of the Company's Common Stock and Warrants will not decline. The
securities of many emerging companies have experienced significant price and
10
<PAGE> 11
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 and Warrants.
EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK. The Company's
Articles of Incorporation authorize the Board of Directors of the Company to
issue "blank check" preferred stock, the relative rights, powers, preferences,
limitations, and restrictions of which may be fixed or altered from time to time
by the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power and other rights of the holders of Common Stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying, or preventing a change in control of the Company that
shareholders might consider to be in the Company's best interests. Although the
Company has no present intention of issuing any shares of preferred stock, there
can be no assurance that the Company will not do so in the future.
NO DIVIDENDS. Since its capitalization, the Company has paid no
dividends on its Common Stock. The Company does not presently intend to pay any
dividends on its Common Stock. Dividend payments in the future may only be made
out of legally available funds, and, if the Company experiences substantial
losses, such funds may not be available.
LISTING AND MAINTENANCE CRITERIA FOR SECURITIES. 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 holders likely would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock and Warrants.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Report contains
forward-looking statements including statements regarding, among other items,
the Company's business strategies, continued growth in the Company's markets,
and anticipated trends in the Company's business and the industry in which it
operates. The words "believe," "expect," "anticipate," "intends," "forecast,"
"project," and similar expressions identify forward-looking statements. Such
forward-looking statements are based upon the Company's expectations and are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from such
forward-looking statements, as a result of the factors described under this
"Risk Factors" section and elsewhere herein, including among others, regulatory
or economic influences. In light of these risks and uncertainties, there can be
no assurance that any forward-looking information contained in this Report will
in fact transpire or prove to be accurate. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
ITEM 2. DESCRIPTION OF PROPERTY
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,
11
<PAGE> 12
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 is in negotiations 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 fall 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.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceeding
other than ordinary routine litigation considered to be incidental to its
business.
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<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 19, 1997, the Company closed an initial public offering (the
"IPO") of its $.01 par value Common Stock (symbol: AVGP) and Redeemable Common
Stock Purchase Warrants (symbol: AVGPW). The Company sold 1,150,000 shares of
Common Stock and 1,150,000 Common Stock Purchase Warrants. These securities have
been listed with and trade on the Nasdaq SmallCap Market and the Boston Stock
Exchange since completion of the IPO. There was no public trading market for the
Company's securities prior to that time.
The following table summarizes the high and low closing sales prices
for the Common Stock for each quarter since the completion of the IPO, based on
information published by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
Common Stock Trading Price
--------------------------
Calendar Year High Low
------------- ---- ---
<S> <C> <C>
1997
Third Quarter (since 8/13/97)....................... $10.375 $8.125
Fourth Quarter...................................... 9.125 7.500
1998
First Quarter....................................... 8.375 3.375
Second Quarter...................................... 4.375 3.000
Third Quarter....................................... 3.875 2.250
Fourth Quarter (through 10/12/98)................... 2.313 1.625
</TABLE>
As of October 12, 1998, there were 74 holders of record of the
Company's Common Stock, and 9 holders of record of the Company's Redeemable
Common Stock Purchase Warrants.
During the last two fiscal years, the Company has not paid any Common
Stock dividends. The Company does not anticipate payment of any dividends on its
Common Stock in the near future because the Company intends to retain earnings
to fund growth of its operations.
During the fiscal year ended June 30, 1998, the Company issued the
following unregistered securities whose issuance has not previously been
reported:
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
134,068 shares of Common Stock with a value of approximately $547,000. 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. The sale by the Company of its
shares of Common Stock to the shareholders of Aero Design and GEC were made in
reliance on the exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act") provided by Section 4(2) thereof. The recipients
of these shares received adequate written disclosures regarding the Company and
were represented by legal counsel as part of arms length, negotiated
acquisitions. The recipients were sophisticated and knowledgeable in investment
and business matters in general.
The Company has reported in prior quarters the issuance of a total of
91,238 shares of Common Stock pursuant to the exercise or surrender of a total
of 101,265 warrants for the year ended June 30, 1998. In addition to these
shares, during the fiscal year ended June 30, 1998, the Company issued a total
of 37,874 shares of Common Stock pursuant to the exercise of outstanding
warrants and 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, on a cashless basis, in exchange
for the exercise and surrender of a total of 43,490 warrants. The warrants were
exercisable at $1.00 per share.
In March 1998, one holder of the Company's Convertible Notes exercised
his right to convert the principal and interest installment payable by the
Company on April 1, 1998 into 975 shares of the Company's Common Stock, at a
conversion price of $3.00 per share. The same holder made a similar conversion
election in June 1998 with respect to the installment due July 1, 1998, and 975
shares were issued in July 1998 to that holder. In June 1998, five holders of
the Company's Convertible Notes exercised their rights of conversion with
respect to principal and interest payments due on July 1, 1998. A total of
16,933 shares of Common Stock were issued in July 1998, at a conversion price of
$4.50 per share, pursuant to the exercise of these conversion rights. In
connection with the conversion, the Company guaranteed that the holders would be
able to resell their shares of Common Stock at no less than $4.50 per share
within 90 days. Under this guaranty, the Company repurchased all of the shares
at $4.50 per share on September 30, 1998. The shares described in this paragraph
were issued in reliance upon the exemption from registration under the
Securities Act provided by Section 3(9) thereof.
In April 1998, the Company agreed to issue warrants to a public
relations firm. The warrants constitute a part of the consideration payable by
the Company for shareholder and public relations and direct marketing services
to be provided by that firm. If and when issued, the warrants will expire on
April 30, 2000 and will permit the purchase of up to 100,000 shares of Common
Stock, at an exercise price of $5.00 per share for 20,000 shares, $6.00 per
share for 20,000 shares, $7.00 per share for 20,000 shares, $8.00 per share for
20,000 shares, and $9.00 per share for 20,000. In agreeing to issue the warrant,
the Company has relied upon the exemption from registration under the Securities
Act provided by Section 4(2) thereof.
In April 1998, the Company granted options and warrants to certain of
its employees, executive officers and directors. The Company granted incentive
stock options to purchase a total of 78,000 shares, of which options to purchase
59,000 shares were issued in replacement for previously granted options that had
higher exercise prices. These options are exercisable at $3.50 per share, except
for options to purchase 50,000 shares which are exercisable at $3.85 per share.
The Company also issued warrants to purchase a total of 397,000 shares of Common
Stock exercisable at $3.50 per share. Of these, warrants to purchase 52,000
shares of Common Stock were granted as a replacement for previously issued
nonqualified stock options to purchase 50,000 shares at higher exercise prices
and a previously issued warrant to purchase 2,000 shares at a higher exercise
price. The options and warrants were issued in reliance upon the exemption from
registration under the Securities Act provided by Section 4(2) thereof.
In August 1997, the Company issued 3,000 shares of Common Stock to
induce the holders of $433,000 of the Company's nonprepayable debt to permit the
Company to prepay the debt. These shares were issued in reliance upon the
exemption from registration under the Securities Act provided by Section 4(2)
thereof.
The Company completed its IPO on August 19, 1997. The IPO commenced on
August 13, 1997, which was the effective date of the Form SB-2 Registration
Statement (File No. 333-22727) for the IPO. The following table shows the final
use of net offering proceeds to the Company for each of the purposes listed
below through June 30, 1998:
<TABLE>
<CAPTION>
Payments to Payments to
Insiders & Affiliates Others
--------------------- ------------
<S> <C> <C>
Purchase of machinery and equipment $ 244,500
Acquisition of businesses $ 80,000 2,324,000
Debt repayments 83,000 1,092,000
Working capital -- 1,356,500
---------- -----------
$ 163,000 $ 5,017,000
========== ===========
</TABLE>
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<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company, through its three operating divisions, offers a broad
range of services to the aviation industry. The Company ultimately plans to
capture a larger market share of the services being outsourced by the airline
and corporate aircraft industry, including but not limited to, painting airline
and corporate aircraft, corrosion cleaning, ground handling services, light
catering, fueling, airport security and passenger service. The Company plans
to grow through mergers, acquisitions and internal growth.
SEASONALITY AND VARIABILITY OF RESULTS
The Company's Overhaul Services 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 Services
Division. Management, therefore, is required to plan cash flow accordingly.
During the year ended June 30, 1998, the Company completed its initial
public offering of 1,150,000 shares of Common Stock and 1,150,000 Common Stock
Warrants, resulting in net proceeds to the Company of $5,180,000. Nonrecurring
payments of Bridge Note interest and certain administrative costs approximating
$139,000 were incurred and recognized during the fiscal 1998 year. The IPO
funds were used to acquire CAS and Aero Design and to fund internal growth.
Additionally, the Company undertook internally to maximize income and operating
results from existing operations by combining marginal paint operations with
other areas of the Company and eliminating unprofitable ground service
operations. These activities were completed and losses and charges from these
activities totaled approximately $561,000 for the year ended June 30, 1998.
RESULTS OF OPERATIONS
The following table sets forth a summary of changes in the major
categories, presented by division, of revenues, costs of goods sold and
operating expenses from each of the previous period's results. These historical
results are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
Year Year
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
OVERHAUL SERVICES DIVISION:
Net revenues $10,536,000 $8,096,000
Cost of revenue (7,900,000) (6,289,000)
Operating and other expenses, net (2,222,000) (1,549,000)
Interest income 3,000 2,000
Interest expense (40,000) (62,000)
----------- ------------
Pre-tax income $ 377,000 $ 198,000
=========== ============
GROUND HANDLING & SERVICES
DIVISION:
Net revenues $ 1,462,000 $1,070,000
Cost of revenue (1,049,000) (609,000)
Operating and other expenses, net (450,000) (310,000)
Interest income - -
Interest expense (8,000) (3,000)
----------- ----------
Pre-tax income (loss) $ (45,000) $ 148,000
=========== ==========
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Year Year
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
FBO OPERATIONS(1):
Net revenues $ 6,246,000 $ 552,000
Cost of revenue (5,669,000) (512,000)
Operating and other expenses, net (1,185,000) (120,000)
Interest income 46,000 --
Interest expense (109,000) --
----------- ----------
Pre-tax income (loss) $ (671,000) $ (80,000)
=========== ==========
AVIATION GROUP - CORPORATE
OVERHEAD(3):
Operating and other expenses, net
Interest income $(1,496,000) $ (482,000)
Interest expense 67,000 --
(229,000) (312,000)
----------- ----------
Pre-tax income (loss) $(1,658,000) $ (794,000)
=========== ==========
TOTAL COMPANY:
Net revenues
Cost of revenue $18,244,000 $9,718,000
Operating and other expenses, net(2) (14,618,000) (7,410,000)
Interest income (5,353,000) (2,461,000)
Interest expense 116,000 2,000
(386,000) (377,000)
----------- ----------
Pre-tax income (loss) $(1,997,000) $ (528,000)
=========== ==========
</TABLE>
- ------------
(1) CAS was acquired in August 1997, and its operations are included for
the fiscal year ended June 30, 1998 only.
(2) Includes goodwill and other related amortization and depreciation
expenses of $694,000 and $413,000 for the year ended June 30, 1998 and
the year ended June 30, 1997, respectively. Also includes Bridge Note
interest and certain non-recurring administrative costs totaling
approximately $139,000 for the year ended June 30, 1998.
(3) Includes operating expenses of the executive officers of the Company
and other indirect expenses not directly attributable to the operations
of the divisions.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1997
The Company's net revenue increased by $8,526,000, or 88%, for the year
ended June 30, 1998 compared to the year ended June 30, 1997. This increase in
revenue resulted primarily from FBO Operations, which contributed net revenue
totaling $6,246,000 for 1998 compared to $552,000 for 1997 and growth in the
Company's Overhaul Services revenues, which grew $2,440,000 or 30% during fiscal
1998 to $10,536,000 from $8,096,000 for fiscal 1997. Most of these increases
were from the Company's acquisition of CAS and the opening of the paint
operations in its Portland location.
Revenues from Ground Handling for the year ending June 30, 1998
increased 37% to $1,462,000 from $1,070,000 for the year ended June 30, 1997.
Gross margins decreased during the period to 28% in fiscal 1998 from 43% in
fiscal 1997, reflecting the results experienced at certain FBO locations which
the Company eliminated during the year.
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<PAGE> 17
The Company's cost of revenues increased by $7,208,000 to $14,618,000
for the year ended June 30, 1998 from $7,410,000 for the year ended June 30,
1997. This increase in cost of revenues resulted primarily from the acquisition
of CAS and opening of the Portland paint facility. Cost of revenues also
increased as a percentage, relative to net revenue, to 80%, for the fiscal year
ended June 30, 1998 from 76% for the year ended June 30, 1997. This increase is
the result of increases in FBO Operations activities, which generate lower gross
margins than the Company's other operations. FBO Operations constituted a larger
portion of total activities in fiscal 1998 versus fiscal 1997.
The Company's operating expenses increased by $2,905,000 to $5,366,000
for the year ended June 30, 1998 from $2,461,000 for the year ended June 30,
1997. This increase in operating expenses resulted primarily from CAS operating
expenses of $912,000, goodwill and depreciation increases of $281,000, expenses
from marginal FBO and Ground Service locations terminated during the year of
$413,000, and certain nonrecurring corporate overhead expenses of approximately
$75,000.
For income tax purposes, the Company has available at June 30, 1998,
unused federal net operating loss carryforwards of approximately $2,700,000,
which may be applied against future taxable income of the Company, expiring in
various years from 2005 to 2018. Net operating losses related to businesses
acquired are subject to certain annual limitations on their usage. The Company
believes it is more likely than not that substantially all net operating loss
carryforwards will be utilized in the future. A valuation allowance totaling
$383,000 has been recorded principally related to the CAS acquisition.
FINANCIAL CONDITION AND LIQUIDITY
Prior to January 1996, the Company financed its operations and capital
expenditures from a combination of cash generated from operations, bank loans,
leases and invested capital from the sole shareholder. In January 1996, the
Company commenced a private placement, generating net proceeds approximating
$1.2 million, to acquire the stock of Pride and for general working capital
purposes.
The Company made capital expenditures during the year ended June 30,
1998 and June 30, 1997 of $776,000 and $414,000, respectively. The majority of
capital expenditures incurred during the aforementioned periods relates to
equipment purchased to enhance the existing operating facilities and
computerized systems. The Company anticipates capital expenditures during the
forthcoming year at or below the level incurred in the current fiscal year in
connection with projects at existing paint and ground service locations.
In February 1997, the Company completed a private offering of $500,000
of its 10% Bridge Notes. The proceeds of this offering were used to fund the
costs of the Company's initial public offering, and for general working capital
and operating purposes.
The Company realized approximately $5.2 million of net proceeds from
the IPO in August 1997. The proceeds have been used to repay the 10% Bridge
Notes, fund the cash portions of the CAS and Aero Design acquisitions, repay
bank and other indebtedness, purchase machinery and equipment, and for general
working capital for operations and other corporate purposes. The Company's
capital structure has improved significantly as a result of completing the IPO,
and it has been successful in funding acquisitions via the issuance of Common
Stock.
In August 1998 the Company entered into a $3,000,000, three-year
working capital financing arrangement with The CIT Group/Credit Finance, Inc.
The Company believes that funds available under this credit line and other debt
financing, together with cash generated from operations will be adequate for its
anticipated cash needs. Accelerated growth from current levels or additional
acquisitions may require additional debt or equity financing from external
funding sources. At October 12, 1998, the outstanding balance was $1,097,000,
which was substantially related to the repayment of the $855,000 in short term
borrowings outstanding at June 30, 1998.
As part of its growth strategy, the Company intends to pursue
acquisitions of related aviation businesses. Management believes financing for
such acquisitions will be provided from operations, bank financing and through
additional security offerings.
YEAR 2000 COMPLIANCE ISSUES
The Company's customers and vendors comprise major commercial passenger
and freight airlines and related maintenance and service businesses that serve
the airline and aviation maintenance industry. Additionally, these airlines
utilize aircraft and other flight and computer equipment in the ongoing
management of their businesses. The industry in general is regulated by and
overseen by the Federal Aviation Administration, which itself operates flight
maintenance, regulation, and control functions for the industry at large.
The Company is presently working with its major customers and vendors
to define and implement Year-2000 safeguards and systems management procedures.
The nature and severity of such issues is difficult to detect and measure,
however, and significant business interruptions from Year-2000 system breakdowns
within the aviation industry may occur, the impact of which may be material in
scope and amount. There can be no assurance that all Year-2000 issues will be
properly identified, assessed, and that related remediation and testing will be
effected in a timely manner, resulting in no material adverse effect on the
Company's results of operations or an adverse effect on its relationships with
customers, suppliers and others.
17
<PAGE> 18
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year-2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such analysis and contingency
planning during the forthcoming fiscal year.
The costs of the Company's Year-2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year-2000 issues, the ability to identify assess, remediate
and test all relevant computer codes and embedded technology, and similar
uncertainties.
Following is a summary of the principle areas of Year-2000 exposure and the
status of Company efforts to monitor, measure, and implement protective
measures:
a) Accounting and financial record-keeping: CAS is presently utilizing a
mainframe-based system that the Company intends to replace during
fiscal 1999 with a PC-based system. All systems presently under
consideration by CAS are represented by vendors to be Year-2000
compliant. The costs of these upgrades and installation is expected to
be less than $50,000, and should be completed during fiscal 1999. The
Company's other subsidiaries utilize off-the-shelf accounting and
payroll software, operated on standard personal computer servers and
hardware. These systems have been or will shortly be upgraded in
accordance with vendor upgrade packages represented to be Year-2000
compliant, and the Company does not expect any material cost or
exposure with respect to these systems. Management intends to continue
internal testing of this and other related systems, including the
future use of third-party verification tests where appropriate.
b) Automated transfer of receipts and deposits with lenders and bank
depositories: The Company utilizes automated transfer
telecommunications and PC-based software to transfer monies between
divisions and their respective banks and lenders. The Company has
endeavored to confirm that such institutions have installed sufficient
Year-2000 compliant systems and procedures to ensure routine
operations, and believes that business disruption risk from this area
is presently minimal.
c) Parts suppliers' database access capabilities: Through CAS, the
Company is a parts distributor for Cessna and other manufacturers of
aircraft replacement parts. CAS utilizes proprietary software provided
by certain of these suppliers in making and processing parts orders,
inventory pricing, and sales management. This software is accessed by
the Company using standard computer modems, which the Company believes
to be Year-2000 compliant. The Company is communicating with Cessna
and other key vendors to determine their specific areas of potential
Year-2000 exposure. According to these vendors, such systems are
either Year-2000 compliant or they have in place plans to upgrade such
systems before the end of 1999.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION GROUP, INC. AND SUBSIDIARIES
<S> <C>
Report of Independent Accountants dated October 12, 1998 by
PricewaterhouseCoopers LLP F-1
Consolidated balance sheets as of June 30, 1998 and June 30, 1997 F-2
Consolidated statements of operations for the year ended June 30, 1998
and the year ended June 30, 1997 F-3
Consolidated statements of changes in shareholders' equity for the year
ended June 30, 1998 and for the year ended June 30, 1997 F-4
Consolidated statements of cash flows for the year ended June 30, 1998
and for the year ended June 30, 1997 F-5
Notes to consolidated financial statements F-6
</TABLE>
19
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Aviation Group, Inc.
In our opinion, the accompanying consolidated balance sheets 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 12, 1998
F-1
<PAGE> 21
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 509,000 $ 188,000
Restricted time deposit 200,000 --
Accounts receivable, net 2,020,000 796,000
Inventory, net 1,513,000 240,000
Deferred income taxes 88,000 40,000
Prepaid expenses and other 129,000 710,000
------------ ------------
Total Current Assets 4,459,000 1,974,000
------------ ------------
Property and equipment 4,812,000 2,903,000
Less: accumulated depreciation (1,099,000) (583,000)
------------ ------------
3,713,000 2,320,000
------------ ------------
Goodwill, net 3,135,000 752,000
Deferred income taxes 112,000 --
Other 181,000 65,000
------------ ------------
3,428,000 817,000
------------ ------------
Total Assets $ 11,600,000 $ 5,111,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 625,000 $ 488,000
Current portion of capital lease obligations 71,000 14,000
Bridge notes payable -- 436,000
Other short-term borrowings 855,000 256,000
Accounts payable 1,424,000 769,000
Accrued interest 44,000 24,000
Income taxes payable 25,000 20,000
Accrued and other liabilities 1,023,000 483,000
------------ ------------
Total Current Liabilities 4,067,000 2,490,000
------------ ------------
Long-Term Liabilities
Long-term debt, net of current maturities 723,000 1,211,000
Capital lease obligations, net of current maturities 181,000 66,000
Loan from shareholder 15,000 15,000
Deferred income taxes -- 100,000
------------ ------------
Total Long-Term Liabilities 919,000 1,392,000
------------ ------------
Total Liabilities 4,986,000 3,882,000
------------ ------------
Commitments and Contingencies (Note K)
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none outstanding -- --
Common Stock, $.01 par value, 10,000,000
shares authorized, 3,296,601 and 1,600,250 shares
issued and outstanding, respectively 33,000 16,000
Additional paid-in capital 8,957,000 1,951,000
Retained deficit (2,376,000) (738,000)
------------ ------------
Total Shareholders' Equity 6,614,000 1,229,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 11,600,000 $ 5,111,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 22
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Revenue $ 18,244,000 $ 9,718,000
Cost of Revenue 14,618,000 7,410,000
------------ ------------
Gross Profit 3,626,000 2,308,000
------------ ------------
General and Administrative Expenses 4,672,000 2,048,000
Depreciation and Amortization 694,000 413,000
------------ ------------
5,366,000 2,461,000
------------ ------------
Loss From Operations (1,740,000) (153,000)
------------ ------------
Other Income (Expenses)
Interest Income 116,000 2,000
Other, net 13,000 --
Interest Expense (386,000) (377,000)
------------ ------------
(257,000) (375,000)
------------ ------------
Loss Before Provision for Income Taxes (1,997,000) (528,000)
Provision (Benefit) for Income Taxes (359,000) (52,000)
------------ ------------
Net Loss $ (1,638,000) $ (476,000)
============ ============
Loss per common and
common equivalent share-Basic and Diluted $ (0.54) $ (0.27)
============ ============
Weighted average common and
common equivalent shares outstanding-Basic and Diluted 3,059,632 1,759,707
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 23
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
---------------------- Paid In Earnings
Shares Amount Capital (Deficit) Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 1,600,250 $ 16,000 $ 1,701,000 $ (262,000) $ 1,455,000
Bridge Notes Warrants (Note G) -- -- 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
Issuance of shares and warrants in
connection with initial public offering 1,150,000 11,500 5,168,500 -- 5,180,000
Issuance of shares in connection
with acquisition of Casper Air
Service, Inc. 153,565 1,600 881,400 -- 883,000
Stock warrants issued in connection
with acquisitions -- -- 26,000 -- 26,000
Issuance of shares in connection
with acquisition of Aero Design, Inc.
and Battery Shop, LLC 134,068 1,400 545,600 -- 547,000
Issuance of shares in connection with
Bridge Notes Warrants 43,478 400 (400) -- --
Issuance of shares in connection with
conversion of LEDC convertible note 82,153 800 367,200 -- 368,000
Issuance of shares in connection with
conversion of 10% convertible note 975 -- 3,000 -- 3,000
Stock warrants exercised 129,112 1,300 (300) -- 1,000
Issuance of shares in connection with
payment of note payable 3,000 -- 15,000 -- 15,000
Net Loss -- -- -- (1,638,000) (1,337,000)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 3,296,601 $ 33,000 $ 8,957,000 $(2,376,000) $ 6,915,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 24
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(1,638,000) $ (476,000)
Adjustments to Reconcile Net Loss
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 694,000 413,000
Accredited interest 64,000 186,000
Deferred income taxes (359,000) (72,000)
(Increase) decrease in accounts receivable (587,000) (152,000)
(Increase) decrease in inventories 567,000 (97,000)
(Increase) decrease in prepaids and other current assets 70,000 (4,000)
Increase (decrease)in accounts payable 275,000 195,000
Increase (decrease) in income taxes payable (4,000) 20,000
Increase (decrease) in interest payable 20,000 (12,000)
Increase (decrease) in accrued and other liabilities 394,000 124,000
Other 73,000 (25,000)
----------- -----------
Net Cash Provided (Used) by Operating Activities (431,000) 100,000
----------- -----------
Cash Flows From Investing Activities:
Cash paid for acquisitions (2,235,000) (119,000)
Payments for hangar facility costs (35,000) (91,000)
Advances (to) from related parties 29,000 (38,000)
Purchase of certificate of deposit (200,000) --
Proceeds from redemption of certificate of deposit 100,000 --
Proceeds from sale of marketable securities 113,000 --
Payments for property and equipment additions (776,000) (414,000)
----------- -----------
Net Cash Used by Investing Activities (3,004,000) (662,000)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 720,000 102,000
Repayments of short-term borrowings (606,000) (69,000)
Proceeds from issuance of Bridge Notes and Warrants -- 500,000
Repayment of Bridge Notes (500,000) --
Proceeds from issuance of long-term debt 225,000 283,000
Principal payments on long-term debt (1,647,000) (128,000)
Payment of Initial Public Offering costs -- (384,000)
Proceeds from issuance of common stock 5,564,000 --
Deferred financing costs -- (11,000)
----------- -----------
Net Cash Provided by Financing Activities 3,756,000 293,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 321,000 (269,000)
Cash and Cash Equivalents at Beginning of Year 188,000 457,000
----------- -----------
Cash and Cash Equivalents at End of Year $ 509,000 $ 188,000
=========== ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 287,000 $ 203,000
Cash paid for income taxes 4,000 --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock and warrants in
connection with acquisitions $ 1,456,000 $ --
Machinery and equipment acquired under capital leases 183,000 80,000
Conversion of Notes Payable to Common Stock 371,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 25
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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 was 100% owned
by Lee Sanders, Chairman 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. 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. 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
(collectively, "Aero Design"), two sister companies involved in the
manufacturing and overhaul of replacement batteries for the aviation industry
(See Note C).
In August 1997, the Company completed an initial public offering ("IPO") of its
common stock (See Note M).
The Company is currently organized into three business segments: overhaul
services, ground handling and services, and fixed base operation ("FBO") and
airport management. The overhaul services division provides painting and paint
stripping services for commercial and freight aircraft at the Company's FAA
approved repair stations in New Iberia, Louisiana and Portland, Oregon. The
ground handling and services division provides aircraft ground handling and
light catering services to a variety of passenger and freight airlines at DFW
airport in the Texas. The FBO and airport management division provides fuel and
light maintenance services to general aviation, corporate and light freight
aircraft customers at airports in Casper, Wyoming.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements present the consolidated
results of the Company and its majority owned subsidiaries. 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.
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.
F-6
<PAGE> 26
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
Restricted Time Deposit
- -----------------------
The Company's restricted time deposit consists of a bank certificate of deposit
which matures in October 1998. The certificate of deposit collateralizes an open
letter of credit (See Note K) and is restricted as to withdrawal as long as the
associated letter of credit is outstanding.
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 years ended June 30,
1998 and 1997 was $130,000 and $6,000, respectively. The allowance for doubtful
accounts was $75,000 and $19,000 at June 30, 1998 and 1997, respectively.
Inventory
- ---------
Aircraft held for resale are valued at the lower of cost or market, with cost
determined by the specific identification method. Parts and supplies inventories
are stated at the lower of cost or market, with cost determined by the average
costing method. Provision is made for estimated excess and obsolete inventories.
Goodwill
- --------
Goodwill represents the cost in excess of fair value of the net assets
(including tax attributes) acquired in acquisitions. Goodwill is being amortized
on a straight-line basis over periods ranging from 20 to 25 years. Amortization
expense for the years ended June 30, 1998 and 1997 was $99,000 and $50,000,
respectively. Accumulated amortization totaled $166,000 and $67,000 at June 30,
1998 and 1997, respectively. During 1997, goodwill was reduced by $173,000 as a
result of the determination of certain tax attributes related to the Pride
acquisition.
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.
Long-Lived Assets
- -----------------
It is the Company's policy to periodically review the net realizable value of
its long-lived assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. In the event that assets are
found to be carried at amounts which are in excess of estimated gross future
cash flows, then the assets will be adjusted for impairment to a level
commensurate with a discounted cash flow analysis of the underlying assets.
Based upon its most recent analysis, the company believes no impairment of
long-lived assets exists at June 30, 1998.
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.
F-7
<PAGE> 27
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
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 Company has adopted SFAS No. 128 in fiscal 1998.
In accordance with SFAS 128, 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 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 years ended
June 30, 1998 and 1997, shares used in the calculation of basic and diluted EPS
were equivalent. Debt and equity instruments, convertible into 1,973,922 and
450,266 shares of stock at June 30, 1998 and 1997, respectively, were excluded
from the computation of diluted EPS because their inclusion would have been
antidilutive.
During fiscal periods preceding the year ended June 30, 1997, 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 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.
New Pronouncements
- ------------------
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 R for business segment information.
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.
Reclassifications
- -----------------
Certain reclassifications have been made to prior period amounts to conform to
the current year presentation.
NOTE C - ACQUISITIONS
Casper Air Service, Inc.
- ------------------------
Concurrent with the IPO in August 1997, the Company acquired all of the
outstanding common stock of CAS, a full-service FBO in Casper, Wyoming. CAS
offers aircraft line services, aircraft repair and maintenance, parts
distribution and aircraft sales. The purchase price of $2,400,000 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 transaction was closed on
August 19, 1997 and the results of CAS are included in the accompanying
financial statements beginning August 20, 1997. The excess of the purchase price
over the fair value of the net assets acquired (including tax attributes) of
F-8
<PAGE> 28
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
$1,041,000 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.
Aero Design, Inc. and Battery Shop, LLC
- ---------------------------------------
In March 1998, the Company acquired all of the outstanding common stock and
ownership interests of Aero Design. Aero Design is involved in the manufacturing
and overhaul of replacement batteries for the aviation industry. The purchase
price of $1,550,000 included $753,000 in cash and 134,068 shares of Common Stock
valued at approximately $547,000 and transaction costs. The terms of the
acquisition agreement provide for additional consideration to be paid if Aero
Design's results of operations exceed certain targeted levels. The Company also
agreed to protect the sellers from losses (up to $450,000) realized upon the
resale of the Company's stock for a period of 540 days from closing of the
acquisition. 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 transaction was closed on March 23, 1998 and the
results of Aero Design are included in the accompanying financial statements
beginning March 24, 1998. The excess of the purchase price over the fair value
of the net assets acquired (including tax attributes) of $1,442,000 has been
recorded as goodwill and is being amortized using the straight-line method over
25 years.
Aero Design, Inc. and Battery Shop, LLC are located outside Nashville,
Tennessee.
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, 1998 as if the CAS and Aero Design
acquisitions had occurred as of the beginning of the Company's fiscal years
(July 1, 1997 and 1996, respectively). 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>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues $ 19,838,000 $ 18,445,000
Net income (loss) $ (1,572,000) $ (227,000)
Net income (loss) per share (basic and diluted) $ (0.50) $ (0.11)
</TABLE>
Adjustments made in arriving at pro forma unaudited results of operations
included adjustments related to discontinued charter operations, additional
depreciation expense, amortization of goodwill and related tax adjustments.
NOTE D - INVENTORIES
Inventories consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Aircraft held for sale $ 434,000 $ --
Parts and supplies 1,079,000 240,000
------------ ------------
$ 1,513,000 $ 240,000
============ ============
</TABLE>
F-9
<PAGE> 29
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
NOTE E - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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 9,000 38,000
Prepaid expenses and other 120,000 43,000
------------ ------------
$ 129,000 $ 710,000
============ ============
</TABLE>
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Machinery and equipment $ 2,754,000 $ 1,965,000
Buildings and leasehold improvements 971,000 577,000
Furniture, fixtures and office equipment 377,000 163,000
Aircraft and vehicles 710,000 198,000
------------ ------------
4,812,000 2,903,000
Less: accumulated depreciation (1,099,000) (583,000)
------------ ------------
$ 3,713,000 $ 2,320,000
============ ============
</TABLE>
Depreciation expense charged to operations for the years ended June 30, 1998 and
1997 was $595,000 and $363,000, respectively.
NOTE G - 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 was
amortized over the period through the effective date of the IPO. Discount
accretion charged to interest expense totaled approximately $64,000 and $186,000
for the periods ended June 30, 1998 and 1997, respectively. Costs associated
with the issuance of the notes were amortized to interest
F-10
<PAGE> 30
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
expense using the effective rate method. The notes were repaid in full in August
1997 after completion of the IPO.
Other Short Term Borrowings
- ---------------------------
Other short-term borrowings consisted of the following at June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
$250,000 line of credit facility with a Bank and guaranteed
by the U.S. Small Business Administration. The line of
credit bears interest at a rate of prime plus 2% (10.50% at
June 30, 1997). The line of credit was repaid in full in
August 1997 using proceeds from the IPO. $ -- $ 248,000
Note payable to a bank, bearing interest at a rate of prime plus 1.0%
(9.5% at June 30, 1998), entire principal payable at maturity in
May, 1998. This note was repaid in full in September 1998
using proceeds from the line of credit discussed in Note S. 700,000 --
$250,000 line of credit facility with a Bank bearing interest at a
rate of prime plus 0.5% (9.0% at June 30, 1998) and maturing in
September 1998. The line of credit was repaid in full in September
1998 using proceeds from the line of credit discussed in Note S. 155,000 --
Other -- 8,000
---------- ---------
Total other short-term borrowings $ 855,000 $ 256,000
========== =========
</TABLE>
NOTE H - ACCRUED LIABILITIES
Accrued and other liabilities consisted of the following at June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued warranty claims $ 266,000 $ 171,000
Accrued wages payable 179,000 127,000
Accrued rent 60,000 --
Deferred revenues 66,000 --
Other 452,000 185,000
------------ ------------
$ 1,023,000 $ 483,000
============ ============
</TABLE>
F-11
<PAGE> 31
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
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 $115,000
and $85,000 for the years ended June 30, 1998 and 1997, respectively.
NOTE I - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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. $ 811,000 $ 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. The note was converted into 82,153
shares of common stock of the Company at a price of $4.50 per share
in August 1997. -- 372,000
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 below.
-- 283,000
Various notes payable to a bank, payable on demand, or if no demand
is made in monthly installments totaling $2,621, including interest
at rates ranging from 9.5% to 10.0% maturing October 1999 to December
2002, secured by certain aircraft and equipment. 79,000 --
Various notes payable to aircraft finance company, payable in varying
installments, including interest at prime plus 2.0% (10.5% at June
30, 1998), maturing December 1998 to June 2003, secured by certain
aircraft and equipment. 311,000 --
</TABLE>
F-12
<PAGE> 32
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Various notes payable to vehicle finance companies, payable in
varying installments, including interest at rates ranging from 2.9%
to 14.0%, maturing through April 2002 and secured by certain
vehicles. 47,000 47,000
Other 100,000 113,000
---------- ----------
Total 1,348,000 1,699,000
Less: Current maturities of long-term debt (625,000) (488,000)
---------- ----------
Total long-term debt $ 723,000 $1,211,000
========== ==========
</TABLE>
Notes payable with due on demand provisions have been classified as a current
liability in the accompanying balance sheets.
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. On July 9, 1997 the Company
borrowed an additional $144,000 from Jerry Webb 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. One of the Company's directors owned a participation interest in a
portion of the debt owed to Mr. Webb by the Company. (See Note N)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999 $ 625,000
2000 354,000
2001 280,000
2002 58,000
2003 31,000
------------
1,348,000
============
</TABLE>
NOTE J - LEASES
Capital Leases
- --------------
The Company leases certain machinery and equipment under arrangements classified
as capital leases. Machinery and equipment recorded under capital leases totaled
$263,000 at June 30, 1998 and $80,000 at June 30, 1997. Amortization expense
associated with assets held under capital leases is included in depreciation and
amortization expense for the years ended June 30, 1998 and 1997.
F-13
<PAGE> 33
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
Future minimum lease payments at June 30, 1998, together with the present value
of the minimum lease payments are:
<TABLE>
<S> <C>
1999 $ 104,000
2000 102,000
2001 89,000
2002 15,000
2003 10,000
Thereafter --
------------
Total minimum lease payments 320,000
Less: amount representing interest (68,000)
-------------
Total present value of minimum lease payments 252,000
Less: current portion (71,000)
------------
Long-term obligation $ 181,000
============
</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 years ended June 30, 1998 and 1997 were
$1,466,000 and $699,000, respectively.
Minimum future lease payments for non-cancelable operating leases for the next 5
years and thereafter are as follows:
<TABLE>
<S> <C>
1999 $ 500,000
2000 440,000
2001 252,000
2002 204,000
2003 194,000
Thereafter 4,500,000
------------
$ 6,090,000
============
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENCIES
In connection with the acquisition of Aero Design discussed in Note C, the
Company entered into a royalty agreement which provides that the Company will
pay the former owners of Aero Design a royalty of 2.5% of net revenues
associated with new product license agreements developed during the 7 year
period beginning with the acquisition date.
The Company entered into an agreement with a third party firm to provide
financial advisory and consulting services to the Company. The terms of the
agreements provide that the Company will pay the firm $125,000 in the event of a
successful acquisition, capital infusion, financing or similar transaction. The
agreement remains effective until canceled by either party.
F-14
<PAGE> 34
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
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 $29,000 and $10,000 as of June 30, 1998 and 1997
respectively, and is included in accrued liabilities in the accompanying balance
sheet.
Certain of the Company's subsidiaries are 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 specific limits per covered individual.
The Company was required to post an irrevocable $200,000 letter of credit in
connection with a parts supplies agreement with Cessna Aircraft Company. The
letter of credit expires in October 1998.
The Company is not involved in any pending legal proceedings which it believes
will have a material effect on its results of operations, cash flow or financial
position.
NOTE L - 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.
In April 1998, the Company's Board of Directors approved the issuance of 78,000
incentive stock options. Of these, 59,000 were issued in replacement for and
cancellation of previously issued options. The exercise price on all the options
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.
Warrant Issuances
- -----------------
In connection with a private placement of stock 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. 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
F-15
<PAGE> 35
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
"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. During the
fiscal year ended June 30, 1998, holders of the $1.00 warrants surrendered
144,755 warrants to purchase 129,112 shares of common stock.
The Company issued 1,150,000 redeemable common stock purchase warrants in
connection with its IPO discussed in Note M. These warrants entitle the holders
to purchase, anytime after two years from the effective date of the offering,
1.058 shares of common stock per each warrant for $6.52. 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.
In April 1998, the Board of Directors elected to grant 345,000 warrants to
officers, directors and consultants of the Company. In addition, the Board
approved the issuance of 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 52,000 shares of Common Stock. The exercise price on
all the warrants granted was the market price at the date of grant.
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
outstanding stock purchase warrants and employee stock options under the fair
value method of that statement. The fair value of each warrant and option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield none none
Risk free interest rate 5.74% 6.44%
Expected volatility 0.30 0.28
Expected lives (years) 5.5 7.0
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period, while the estimated fair value
of the warrants is expensed on the grant date. The Company's pro forma net loss
and earnings per share were as follows for the years ending June 30, 1998 and
1997:
F-16
<PAGE> 36
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Loss
As reported $ (1,638,000) $ (476,000)
============ ============
Pro forma $ (2,103,000) $ (480,000)
============ ============
Earnings per share-Basic and Diluted
As reported $ (0.54) $ (0.27)
============ ============
Pro forma $ (0.69) $ (0.27)
============ ============
</TABLE>
A summary of stock purchase warrant transaction and stock option transactions
under the Option Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
------ --------
<S> <C> <C>
Outstanding at June 30, 1996 -- $ --
Granted 60,500 5.54
Exercised -- --
Forfeited/Canceled (4,000) 5.75
------- --------
Outstanding at June 30, 1997 56,500 5.53
Granted 513,000 3.96
Exercised -- --
Forfeited/Canceled (99,500) 6.86
------- --------
Outstanding at June 30, 1998 470,000 $ 3.54
======= ========
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
------ --------
<S> <C> <C>
Exercisable Warrants and Options-
June 30, 1997 19,300 $ 5.10
======= ========
June 30, 1998 396,600 $ 3.50
======= ========
Weighted average fair value of
warrants and options granted
during the years ended-
June 30, 1997 $ 1.85
========
June 30, 1998 $ 1.57
========
</TABLE>
F-17
<PAGE> 37
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
The following table summarizes information about the stock purchase warrants
and the fixed price stock options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Warrants and Options Outstanding Warrants and Options Exercisable
------------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Outstanding at Remaining Average Average
at June 30, Contractual Exercise Exercisable at Exercise
Exercise Prices 1998 Life (years) Price June 30, 1998 Price
- --------------- -------------- ------------ ------- -------------- --------
<S> <C> <C> <C> <C> <C>
$3.50 420,000 5.22 $3.50 396,000 $3.50
$3.85 50,000 6.17 $3.85 -- $ --
</TABLE>
NOTE M - SHAREHOLDERS' EQUITY
Initial Public Offering
- -----------------------
On August 19, 1997, the Company closed an initial public offering of its common
stock and redeemable common stock purchase warrants. 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 $5,180,000, net of approximately $1,548,000 of associated
underwriting discounts and offering expenses, including $384,000 of expenses
incurred through June 30, 1997.
Conversion of Convertible Notes Payable
- ---------------------------------------
In August 1997, the Louisiana Economic Development Corporation ("LEDC")
exercised their conversion rights under the convertible note discussed in Note
I. In connection therewith, the Company issued 82,153 shares of common stock to
the LEDC.
In April 1998, approximately $2,250 in principal amount of the Company's 10%
convertible notes and associated accrued interest were converted into 975 shares
of common stock at a price of $3.00 per share.
NOTE N - RELATED PARTY TRANSACTIONS
The Company has a consulting arrangement with a member of the Board of
Directors. The consulting arrangement provides for monthly fees of $4,000 and
reimbursement of certain expenses. The term of the current agreement extends
through February 2000. Fees paid under this arrangement totaled $59,200 and
$50,250 for the years ended June 30, 1998 and 1997, respectively.
The director above also owned a participation interest in $83,000 of the debt
owed to Jerry R. Webb (See Note I).
In connection with the acquisition of Aero Design, the Company paid $25,000 in
fees and issued 20,000 common stock warrants to RAS Securities, a company
affiliated with a member of the Company's Board of Directors.
F-18
<PAGE> 38
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
As of June 30, 1998 and 1997, the Company had amounts due from Sanders totaling
$9,000 and $38,000, respectively. Such amounts are reflected as "Other current
assets" in the accompanying balance sheets.
NOTE O - PROVISION FOR INCOME TAXES
The provision/(benefit) for income taxes consist of the following components:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current provision (benefit) $ -- $ 20,000
Deferred taxes (359,000) (72,000)
------------- ------------
Provision/(benefit) for income taxes $ (359,000) $ (52,000)
============= =============
</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>
1998 1997
---- ----
<S> <C> <C>
Tax provision (benefit) computed by
applying federal statutory rate $ (679,000) $ (179,000)
State income taxes, net of federal effects (35,000) 44,000
Expenses not deductible for tax purposes (a) 71,000 88,000
Other (17,000) (5,000)
Valuation Allowance 301,000 --
------------- ------------
Provision/(benefit) for income taxes $ (359,000) $ (52,000)
============= ============
</TABLE>
-----------------
(a) Principally goodwill amortization and the effect of Bridge
Note interest accretion.
The net deferred tax amounts at June 30, 1998 and 1997 are presented on the
balance sheet as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current deferred tax asset $ 88,000 $ 40,000
Long-term deferred tax assets (liabilities) 112,000 (100,000)
------------ ------------
$ 200,000 $ (60,000)
============ ============
</TABLE>
Deferred tax assets and liabilities consisted of the following at June 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets
Net operating loss carryforward $ 984,000 $ 383,000
Investment tax credits 81,000 --
Other 88,000 67,000
------------ ------------
1,153,000 450,000
Less: valuation allowance (382,000) --
------------- -----------
Total deferred tax assets 771,000 450,000
------------ ------------
Liabilities
Property and equipment (571,000) (483,000)
Other -- (27,000)
------------ ------------
Total deferred tax liabilities (571,000) (510,000)
------------- ------------
Net deferred tax assets $ 200,000 $ (60,000)
============ ============
</TABLE>
F-19
<PAGE> 39
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
For income tax purposes, the Company has available at June 30, 1998, unused
federal net operating loss carryforwards of approximately $2,700,000, which may
be applied against future taxable income of the Company, expiring in various
years from 2005 to 2018. Net operating losses related to businesses acquired are
subject to certain annual limitations on their usage. The Company believes it is
more likely than not that substantially all net operating loss carryforwards
will be utilized in the future. A valuation allowance has been recorded,
principally related to the CAS acquisition. 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 P - EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution ("401(k)") employee benefit plan,
which is open to all employees meeting certain age and length of service
requirements. Employees may contribute up to 15% of their compensation to the
plan subject to statutory limits. Employer contributions to the plan are
discretionary and no employer contributions have been made to date.
NOTE Q - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Substantially all of the Company's accounts receivable at June 30, 1998,
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, 1998, the Company derived approximately 34% and
13%, of its revenues from United Airlines and Boeing, respectively, customers of
its overhaul services division. During the years ended June 30, 1997, the
Company derived approximately 75% of its revenues from United Airlines.
Receivables due from United Airlines totaled approximately $205,000 and $92,000
at June 30,1998 and 1997, respectively.
NOTE R - BUSINESS SEGMENT INFORMATION
The following table summarizes financial information by the Company's three
business segments and corporate for fiscal years 1998 and 1997:
F-20
<PAGE> 40
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net revenues:
Overhaul and service $ 10,536,000 $ 8,096,000
Ground handling and services 1,462,000 1,070,000
FBO and airport management 6,246,000 552,000
Corporate -- --
------------ ------------
Total $ 18,244,000 $ 9,718,000
============ ============
Operating income (loss):
Overhaul and service $ 402,000 $ 258,000
Ground handling and services (29,000) 151,000
FBO and airport management (607,000) (80,000)
Corporate (1,506,000) (482,000)
------------- ------------
Total $ (1,740,000) $ (153,000)
============= ============
Total assets:
Overhaul and service $ 6,124,000 $ 4,006,000
Ground handling and services 782,000 463,000
FBO and airport management 4,015,000 100,000
Corporate 980,000 542,000
------------ ------------
Total $ 11,901,000 $ 5,111,000
============ ============
Depreciation and amortization:
Overhaul and service $ 457,000 $ 401,000
Ground handling and services 49,000 11,000
FBO and airport management 181,000 --
Corporate 7,000 1,000
------------ ------------
Total $ 694,000 $ 413,000
============ ============
Capital expenditures (including capital leases):
Overhaul and service $ 291,000 $ 336,000
Ground handling and services 361,000 105,000
FBO and airport management 241,000 40,000
Corporate 66,000 13,000
------------ ------------
Total $ 959,000 $ 494,000
============ ============
</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-21
<PAGE> 41
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
NOTE S - SUBSEQUENT EVENTS
Acquisition of General Electrodynamics Corporation
- --------------------------------------------------
In August 1998, the Company acquired all of the outstanding common stock of
General Electrodynamics Corporation (a Texas corporation) ("GEC") and settled
indebtedness to a former GEC Shareholder for consideration of 112,029 shares of
common stock valued at approximately $340,000. Included in the next assets
acquired was approximately $982,000 of bank debt. In addition, the Company
agreed to remit to the former shareholder of GEC up to $300,000 of any
collections from certain government contracts, net of direct expenses, received
by GEC after the acquisition. GEC is an FAA approved repair station for
aircraft weight and balance located in Arlington, Texas which manufactures,
repairs and sells precision weight measurement devices for the aviation and
transportation industries. 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.
Line of Credit Facility
- -----------------------
In August 1998, the Company's operating subsidiaries (other than GEC) obtained
a $3,000,000 line of credit facility with The CIT Group/Credit Finance, Inc.
for working capital management purposes. The line of credit bears interest at
prime plus 1.5% and extends through August 2001. Amounts available for
borrowings are based on the level and composition of the Company's accounts
receivable and inventory. Amounts borrowed are repayable from lock box
collections of the Company's accounts receivable. The line of credit is secured
by a guarantee by the Company and liens on substantially all of the assets of
the Company's operating subsidiaries (other than GEC). At October 12, 1998,
the balance outstanding is $1,097,000 which was substantially used to repay the
$855,000 of short term borrowings on the balance sheet at June 30, 1998.
F-22
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required by this item with respect to the change in the
Company's principal independent accountants from Arsement, Redd & Morella,
L.L.C. to PricewaterhouseCoopers LLP, effective September 3, 1997, has been
previously reported in the Company's Form 8-K Current Report dated September 3,
1997.
21
<PAGE> 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The discussions under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the
Annual Meeting of Shareholders of the Company scheduled to be held on November
20, 1998 (the "Proxy Statement") are incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The discussion under the caption "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under the caption "Principal Holders of Common Stock" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents are included as exhibits to this Form 10-KSB
Annual Report and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by asterisks.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated April 18, 1997 by and among
the Company, Casper Air Service and all of the stockholders
of Casper Air Service (exhibits and schedules not included
but will be provided supplementally to the Commission upon
request)*
3.1 Articles of Incorporation of the Company filed with the
Texas Secretary of State, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Articles of Incorporation of the Company (filed as Exhibit
3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement dated August 13, 1997 between the
Company, Continental Stock Transfer & Trust Co., Inc., and
Duke & Co., Inc.*
4.4 Form of Warrant Certificate (attached as Exhibit A to Form
of Warrant Agreement filed as Exhibit 4.3)*
</TABLE>
22
<PAGE> 44
<TABLE>
<S> <C>
4.5 Form of 10% Convertible Note of the Company maturing March
1, 2001*
4.6 Form of Underwriter's Warrant Agreement dated August 13,
1997 by and between Company and Duke & Co., Inc.*
10.1 Aviation Group, Inc. 1997 Stock Option Plan*
10.2 First Amended and Restated Employment Agreement between
Company and Lee Sanders*
10.3 Employment Agreement dated March 1, 1996, by and between the
Company and Paul Lubomirski*
10.4 Consulting Agreement dated March 1, 1996, by and between the
Company and Charles E. Weed*
10.5 Form of Warrant Agreement for warrants granted as of April
28, 1998 and table listing directors or executive officers
who received warrants and related information.
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 Loan and Security Agreement dated August 21, 1998 between
The CIT Group/Credit Finance, Inc. and Tri-Star Airline
Services, Inc., Pride Aviation, Inc., Casper Air Service,
Aero Design, Inc., and Pride Aviation Portland, Inc.
10.11 Guaranty dated August 21, 1998 from the Company in favor of
The CIT Group/Credit Finance, Inc.
10.12 Employment Agreement dated August 1, 1998 between Thomas J.
Smith and the Company.
10.13 Employment Agreement dated June 1, 1998 between Richard L.
Morgan and the Company.
10.14 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")*
10.15 Pledge Agreement dated March 1, 1996 from the Company in
favor of LEDC*
10.16 Exchange Agreement dated March 1, 1996 between the Company
and LEDC*
10.17 Form of 10% Convertible Note (included as Exhibit 4.5)*
10.18 Form of Pledge Agreement from the Company in favor of
holders of 10% Convertible Notes*
10.19 Stock Purchase Agreement dated February 21, 1996, by and
among the Company, Pride, Sunbelt Business Capital
Incorporated ("Sunbelt"), Sunbelt Business Capital L.L.C.,
and all the stockholders of Pride and Sunbelt (exhibits and
schedules not included but will be provided supplementally
to the Commission upon request)*
10.20 Employment Agreement between Company and John Arcari*
</TABLE>
23
<PAGE> 45
<TABLE>
<S> <C>
10.21 First Amendment to Consulting Agreement between Company and
Charles Weed*
10.22 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*
10.23 Agency Agreement dated January 19, 1996 between Company and
RAS Securities Corp.*
10.24 Letter agreement dated May 9, 1997 between Company and RAS
Securities Corp. terminating part of Agency Agreement*
10.25 First Amendment to Employment Agreement between the Company
and Paul Lubomirski dated August 18, 1997*
10.26 First Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated August
18, 1997*
10.27 Second Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated August
28, 1998
10.28 Warrant Agreement dated as of June 30, 1996 between Company
and Richard L. Morgan, together with Warrant Certificate.*
10.29 Warrant Agreement dated March 1, 1996 between Company and
RAS Securities Corp., together with form of warrant
certificate.*
10.30 Aircraft Paint Services Agreement dated April 24, 1998
between Federal Express Corporation and Pride Aviation,
Inc.**
10.31 Stock Purchase Agreement dated as of August 28, 1998 among
Aviation Group, Inc., General Electrodynamics Corporation,
Omega Management Corporation and Thomas J.
Smith.***
11.1 Statement regarding computation of per share earnings
21.1 List of Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Forms of Lock-Up Agreements executed by certain of the
Company's securityholders*
</TABLE>
===============================================================================
* Incorporated herein by reference to the Form SB-2 Registration Statement of
the Company (File No. 333-22727).
** Incorporated herein by reference to the Form 10-QSB Quarterly Report for the
quarter ended March 31, 1998.
*** Incorporated by reference to the Form 8-K Current Report dated August 28,
1998.
24
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 13, 1998.
AVIATION GROUP, INC.
By: /s/ RICHARD L. MORGAN
------------------------------------
Richard L. Morgan, Vice President & Chief
Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LEE SANDERS Chairman of the Board and Chief October 13, 1998
------------------------------- Executive Officer
Lee Sanders
/s/ TOM SMITH President & Director October 13, 1998
-------------------------------
Tom Smith
/s/ RICHARD L. MORGAN
------------------------------- Director, VP &CFO October 13, 1998
Richard L. Morgan
/s/ CHARLES WEED
------------------------------- Director October 13, 1998
Charles Weed
/s/ GORDON WHITENER
------------------------------- Director October 13, 1998
Gordon Whitener
------------------------------- Director October __, 1998
Robert A. Schneider
</TABLE>
25
<PAGE> 47
EXHIBIT
INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated April 18, 1997 by and among
the Company, Casper Air Service and all of the stockholders
of Casper Air Service (exhibits and schedules not included
but will be provided supplementally to the Commission upon
request)*
3.1 Articles of Incorporation of the Company filed with the
Texas Secretary of State, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Articles of Incorporation of the Company (filed as Exhibit
3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement dated August 13, 1997 between the
Company, Continental Stock Transfer & Trust Co., Inc., and
Duke & Co., Inc.*
4.4 Form of Warrant Certificate (attached as Exhibit A to Form
of Warrant Agreement filed as Exhibit 4.3)*
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
4.5 Form of 10% Convertible Note of the Company maturing March
1, 2001*
4.6 Form of Underwriter's Warrant Agreement dated August 13,
1997 by and between Company and Duke & Co., Inc.*
10.1 Aviation Group, Inc. 1997 Stock Option Plan*
10.2 First Amended and Restated Employment Agreement between
Company and Lee Sanders*
10.3 Employment Agreement dated March 1, 1996, by and between the
Company and Paul Lubomirski*
10.4 Consulting Agreement dated March 1, 1996, by and between the
Company and Charles E. Weed*
10.5 Form of Warrant Agreement for warrants granted as of April
28, 1998 and table listing directors or executive officers
who received warrants and related information.
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 Loan and Security Agreement dated August 21, 1998 between
The CIT Group/Credit Finance, Inc. and Tri-Star Airline
Services, Inc., Pride Aviation, Inc., Casper Air Service,
Aero Design, Inc., and Pride Aviation Portland, Inc.
10.11 Guaranty dated August 21, 1998 from the Company in favor of
The CIT Group/Credit Finance, Inc.
10.12 Employment Agreement dated August 1, 1998 between Thomas J.
Smith and the Company.
10.13 Employment Agreement dated June 1, 1998 between Richard L.
Morgan and the Company.
10.14 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")*
10.15 Pledge Agreement dated March 1, 1996 from the Company in
favor of LEDC*
10.16 Exchange Agreement dated March 1, 1996 between the Company
and LEDC*
10.17 Form of 10% Convertible Note (included as Exhibit 4.5)*
10.18 Form of Pledge Agreement from the Company in favor of
holders of 10% Convertible Notes*
10.19 Stock Purchase Agreement dated February 21, 1996, by and
among the Company, Pride, Sunbelt Business Capital
Incorporated ("Sunbelt"), Sunbelt Business Capital L.L.C.,
and all the stockholders of Pride and Sunbelt (exhibits and
schedules not included but will be provided supplementally
to the Commission upon request)*
10.20 Employment Agreement between Company and John Arcari*
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
10.21 First Amendment to Consulting Agreement between Company and
Charles Weed*
10.22 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*
10.23 Agency Agreement dated January 19, 1996 between Company and
RAS Securities Corp.*
10.24 Letter agreement dated May 9, 1997 between Company and RAS
Securities Corp. terminating part of Agency Agreement*
10.25 First Amendment to Employment Agreement between the Company
and Paul Lubomirski dated August 18, 1997*
10.26 First Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated August
18, 1997*
10.27 Second Amendment to First Amended and Restated Employment
Agreement between the Company and Lee Sanders dated
August 28, 1998
10.28 Warrant Agreement dated as of June 30, 1996 between Company
and Richard L. Morgan, together with Warrant Certificate.*
10.29 Warrant Agreement dated March 1, 1996 between Company and
RAS Securities Corp., together with form of warrant
certificate.*
10.30 Aircraft Paint Services Agreement dated April 24, 1998
between Federal Express Corporation and Pride Aviation,
Inc.**
10.31 Stock Purchase Agreement dated as of August 28, 1998 among
Aviation Group, Inc., General Electrodynamics Corporation,
Omega Management Corporation and Thomas J.
Smith.***
11.1 Statement regarding computation of per share earnings
21.1 List of Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Forms of Lock-Up Agreements executed by certain of the
Company's securityholders*
</TABLE>
===============================================================================
* Incorporated herein by reference to the Form SB-2 Registration Statement of
the Company (File No. 333-22727).
** Incorporated herein by reference to the Form 10-QSB Quarterly Report for the
quarter ended March 31, 1998.
*** Incorporated by reference to the Form 8-K Current Report dated August 28,
1998.
<PAGE> 1
EXHIBIT 10.5
AVIATION GROUP, INC.
AND
-----------------------
--------------
WARRANT AGREEMENT
DATED AS OF ___________
<PAGE> 2
WARRANT AGREEMENT
This WARRANT AGREEMENT (the "AGREEMENT") is dated as of _______________
between AVIATION GROUP, INC., a Texas corporation (the "COMPANY"), and
____________________, a Texas resident, his heirs, personal representatives and
assigns (collectively, "________").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to _______ warrants ("WARRANTS")
to purchase up to an aggregate of _________ shares of Common Stock (as defined
in Section 8.5), $.01 par value, of the Company.
NOW, THEREFORE, in consideration of the premises, the agreements set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. Effective herewith, _________ is hereby granted the right to
purchase, at any time prior to 5:00 p.m., Dallas, Texas time on _______________,
_________ shares of Common Stock (the "SHARES"). One share of Common Stock is
hereinafter referred to as a "Warranty Security" and more than one collectively
referred to as the "Warrant Securities." The exercise price of each Warrant
shall equal (subject to adjustment as provided in Section 8) $______ per Warrant
Security subject to the terms and conditions of this Agreement.
2. Warrant Certificates. The warrant certificates (the "WARRANT
CERTIFICATES") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in EXHIBIT A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as
provided in Section 8 hereof) per Warrant Security set forth in Section
6 hereof payable by certified or official bank check, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Securities purchased at the Company's
principal offices (presently located at 700 North Pearl, Suite 2170,
Dallas, Texas 75201) the registered holder of a Warrant Certificate
("HOLDER" or "HOLDERS") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase
rights represented by each Warrant Certificate are exercisable at the
option of the Holders thereof, in whole or part (but not as to
fractional shares of the Common Stock). In the case of the purchase of
less than all Warrant Securities purchasable under any Warrant
Certificate, the Company shall cancel said Warrant
1
<PAGE> 3
Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Warrant
Securities purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash
payment required thereunder, the Holder(s) of the Warrants shall have
the right at any time and from time to time to exercise the Warrants in
full or in part by surrendering the Warrant Certificate in the manner
specified in Section 3.1. The number of shares of Common Stock to be
issued pursuant to this Section 3.2 shall be equal to the difference
between (a) the number of shares of Common Stock in respect of which
the Warrants are exercised and (b) a fraction, the numerator of which
shall be the number of shares of Common Stock in respect of which the
Warrants are exercised multiplied by the Exercise Price (as hereinafter
defined) and the denominator of which shall be the Market Price (as
defined in Section 3.3).
3.3 Definition of Market Price. As used herein, the phrase
"MARKET PRICE" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the
average of the last reported sale prices for the last three (3) trading
days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or
by The Nasdaq Stock Market's National Market or Smallcap Market
("NASDAQ"), or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted by Nasdaq, the
average closing bid price as furnished by the National Association of
Securities Dealers, Inc. ("NASD") through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted by the NASD or such similar
organization, the fair market value of a share of Common Stock as
determined in good faith by resolution of the Board of Directors of the
Company, based on the best information available to it. Notwithstanding
the foregoing, for purposes of Section 8, the Market Price of a share
of Common Stock shall be determined by reference to the relevant
information set forth above during the thirty (30) trading days
immediately preceding the date of the event requiring the determination
of the Market Price (except that, in the event of a public offering of
shares of Common Stock, the Market Price of a share of Common Stock
shall be determined by reference to the trading day immediately
preceding the effective date of the public offering and not such thirty
(30) trading day period).
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have
2
<PAGE> 4
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
(and/or other securities, property or rights issuable upon the exercise of the
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then present Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or Assistant Secretary of the Company. Warrant Certificates
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof. This Agreement is binding upon any Holder(s) of a Warrant Certificate
and their respective heirs, successors, and permitted assigns. The Holder may
assign interests granted by this Agreement, subject to the any other limitations
in the Agreement, provided that the transferee agrees to be bound by the terms
of this Agreement as if such transferee were a Holder and, provided further,
that the assignment is made pursuant to an effective registration statement
under the Securities Act or a valid exemption from registration under the
Securities Act of 1933, as amended (the "Securities Act"). If requested by the
Company, the Holder shall have furnished to the Company an opinion of counsel
reasonably satisfactory to the Company to such effect.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each
Warrant shall be $______ per Warrant Security. The adjusted exercise
price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof.
6.2 Exercise Price. The term "EXERCISE PRICE" herein shall
mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
7.1 Piggyback Registration.
(a) If, at any time prior to the seventh anniversary
of the date of this Agreement, the Company proposes to
register any of its securities under the Securities Act of
1933, as amended (the "ACT"), either for its own account or
the account of any other security holder or holders of the
Company possessing registration rights ("OTHER STOCKHOLDERS")
(other than pursuant to Form S-4, Form S-8 or comparable
registration statement), it shall give written notice, at
least
3
<PAGE> 5
thirty (30) days prior to the filing of each such registration
statement, to any Holder(s) of Registrable Securities (as
hereinafter defined), of its intention to do so. If such
Holder(s) notify the Company within twenty-one (21) days after
the receipt of any such notice of its or their desire to
include any Registrable Securities in such proposed
registration statement, the Company shall afford such
Holder(s) of such Registrable Securities the opportunity to
have any such Registrable Securities registered for resale by
the Holder(s) under such registration statement. The term
"REGISTRABLE SECURITIES" means (i) all shares of Common Stock
owned by a Holder as a result of the exercise of a Warrant,
and (ii) all shares of Common Stock which a Holder has an
option to purchase under a Warrant, until, in the case of any
such security described by (i) or (ii), (a) such security is
disposed of in accordance with an effective registration
statement under the Securities Act, (b) such security is
saleable by the Holder pursuant to Rule 144(k), (c) such
security is saleable by the Holder pursuant to Rule 144
without regard to any volume limitations, or (d) such security
is distributed to the public pursuant to Rule 144.
(b) If the registration of which the Company gives
notice is for a registered public offering involving an
underwriting, the Company shall so advise any Holder(s) as
part of the written notice given pursuant to Section 7.1(a)
hereof. The right of any such Holder(s) to registration
pursuant to this Section 7.1 shall be conditioned upon their
participation in such underwriting and the inclusion of their
Registrable Securities in the underwriting to the extent
hereinafter provided. All Holders proposing to distribute
their securities through such underwriting shall (together
with the Company and any officers, directors or Other
Stockholders distributing their securities through such
underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or
underwriters selected by the Company. Notwithstanding any
other provision of this Section 7.1, if the representative of
the underwriter or underwriters advises the Company in writing
that marketing factors require a limitation or elimination of
the number of shares of Common Stock or other securities to be
underwritten, the representative may limit the number of
shares of Common Stock or other securities to be included in
the registration and underwriting. The Company shall so advise
all Holders of Registrable Securities requesting registration,
and the number of shares of Common Stock or other securities
that are entitled to be included in the registration and
underwriting shall be allocated among the Holders requesting
registration, in each case, in proportion, as nearly as
practicable, to the respective amounts of securities which
they had requested to be included in such registration at the
time of filing the registration statement.
(c) Notwithstanding the provisions of this Section
7.1, the Company shall have the right at any time after it
shall have given written notice pursuant to Section 7.1(a)
hereof (irrespective of whether a written request for
inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or
to withdraw the same after the filing but prior to the
effective date thereof.
4
<PAGE> 6
7.2 Covenants of the Company with Respect to
Registration. In connection with any registration under Section 7.1
hereof, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to have
any registration statements declared effective at the earliest
practicable time and shall furnish each Holder desiring to
sell Registrable Securities such number of prospectuses as
shall reasonably be requested.
(b) The Company shall pay all costs, expenses and
fees (excluding fees and expenses of Holder(s)' counsel and
any underwriting or selling commissions), in connection with
all registration statements filed pursuant to Section 7.1
hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and
expenses. If the Company shall fail to comply with the
provisions of Section 7.2(a), the Company shall, in addition
to any other equitable or other relief available to the
Holder(s), extend the exercise period of the Warrants by such
number of days as shall equal the delay caused by the
Company's failure.
(c) The Company will take all necessary action which
may be required in qualifying or registering the Registrable
Securities included in a registration statement for offering
and sale under the securities or blue sky laws of such states
as reasonably are requested by the Holder(s); provided that,
the Company shall not be obligated to execute or file any
general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such
jurisdiction.
(d) The Company shall indemnify the Holder(s) of the
Registrable Securities to be sold pursuant to any registration
statement and each person, if any, who controls such Holders
within the meaning of Section 15 of the Act or Section 20(a)
of the Securities Exchange Act of 1934, as amended ("EXCHANGE
ACT"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act
or otherwise, arising from such registration statement except
for matters for which the Company is indemnified under
subsection 7.2(e) hereof.
(e) The Holder(s) of the Registrable Securities to be
sold pursuant to a registration statement, and their
successors and assigns, shall severally, and not jointly,
indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act,
against all loss, claim, damage or expense or liability
(including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf
of such Holders, or their successors or assigns, for specific
inclusion in such registration statement.
5
<PAGE> 7
(f) For a period of ninety (90) days after the
effectiveness of any registration statement filed pursuant to
Section 7.1 hereof, the Company shall not permit any other
registration statement (other than (1) a registration
statement relating to the securities for which the Company has
made available to the Holder(s) of the Registrable Securities
piggyback registration rights hereunder and (2) a registration
statement filed on Forms S-4 or S-8 or a shelf registration on
Form S-3) to be or remain effective during the effectiveness
of a registration statement or a shelf registration on Form
S-3 filed pursuant to Section 7.1 hereof, without the prior
written consent of the Holders of the Registrable Securities
representing a majority of such securities.
(g) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any,
a signed counterpart, addressed to such Holder or underwriter,
of (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, an
opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who
have issued a report on the Company's financial statements
included in such registration statement, in each case covering
substantially the same matters with respect to such
registration statement (and the prospectus included therein)
and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(h) The Company shall as soon as practicable after
the effective date of any registration statement filed
pursuant to Section 7.1 hereof, and in any event within
fifteen (15) months thereafter, make "generally available to
its security holders" (within the meaning of Rule 158 under
the Act) an earnings statement (which need not be audited)
complying with Section 11(a) of the act and covering a period
of at least twelve (12) consecutive months beginning after the
effective date of the registration statement.
(i) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence
and memoranda described below and to the managing
underwriters, copies of all written correspondence between the
Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit
each Holder and underwriters to do such investigation, upon
reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it
deems reasonably necessary to comply with applicable
securities laws or rules of the NASD. Such investigation shall
include
6
<PAGE> 8
access to books, records and properties and opportunities to
discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder or
underwriter shall reasonably request.
(j) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their
Warrants prior to the initial filing of any registration
statement or the effectiveness thereof.
7.3 Restrictive Legends. The Warrant Certificates, any
certificates representing the Shares underlying the Warrants and any of
the other securities issuable upon exercise of the Warrants shall bear
the following restrictive legend:
The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended ("Act"), and may not be offered or sold
except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent
applicable, Rule 144 under the Act (or any similar
rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such
opinion shall be reasonably satisfactory to counsel
to the issuer, that an exemption from registration
under such Act is available.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price. Except as
hereinafter provided, in the event the Company shall at any time after
the date hereof issue or sell any shares of Common Stock including
shares held in the Company's treasury (other than (i) the issuances or
sales referred to in Section 8.7 hereof, (ii) shares of Common Stock
issued upon the exercise of any options, rights or warrants to
subscribe for shares of Common Stock, or (iii) shares of Common Stock
issued upon the direct or indirect conversion or exchange of securities
for shares of Common Stock), for a consideration per share less than
the Market Price in effect immediately prior to the issuance or sale of
such shares, or without consideration, then forthwith upon such
issuance or sale, the Exercise Price shall (until another such issuance
or sale) be reduced to the price (calculated to the nearest full cent)
equal to the quotient derived by dividing (i) an amount equal to the
sum of (a) the total number of shares of Common Stock outstanding
immediately prior to the issuance or sale of such shares, multiplied by
the Exercise Price in effect immediately prior to such issuance or
sale, and (b) the aggregate of the amount of all consideration, if any,
received by the Company upon such issuance or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such
issuance or sale; provided, however, that in no event shall the
Exercise Price be adjusted pursuant to this computation to an amount in
excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares
of Common Stock, as provided by Section 8.3 hereof.
7
<PAGE> 9
For the purposes of this Section 8 the term Exercise Price
shall mean the Exercise Price per share of Common Stock set forth in
Section 6 hereof, as adjusted from time to time pursuant to the
provisions of this Section 8.
For the purposes of any computation to be made in accordance
with this Section 8.1, the following provisions shall be applicable:
(a) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be
cash, the amount of the cash consideration therefor shall be
deemed to be the amount of cash received by the Company for
such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if
either of such securities shall be sold to underwriters or
dealers for public offering without a subscription offering,
the initial public offering price) before deducting therefrom
any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or
others performing similar services, or any expenses incurred
in connection therewith.
(b) In case of the issuance or sale (other than as a
dividend or other distribution on any stock of the Company) of
shares of Common Stock for a consideration part or all of
which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by
the Board of Directors of the Company and shall include any
amounts payable to security holders or any affiliates thereof
including, without limitation, pursuant to any employment
agreement, royalty, consulting agreement, covenant not to
compete, earnout or contingent payment right or similar
arrangement, agreement or understanding, whether oral or
written; all such amounts being valued for the purposes hereof
at the aggregate amount payable thereunder, whether such
payments are absolute or contingent, and irrespective of the
period or uncertainty of payment, the rate of interest, if
any, or the contingent nature thereof; provided, however, that
if any Holder(s) does not agree with such evaluation, a
mutually acceptable independent appraiser shall make such
evaluation, the cost of which shall be borne by the Company.
(c) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the
opening of business on the day following the record date for
the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have
been issued without consideration.
(d) The reclassification of securities of the Company
other than shares of Common Stock into securities including
shares of Common Stock shall be deemed to involve the issuance
of such shares of Common Stock for a consideration other than
cash immediately prior to the close of business on the date
8
<PAGE> 10
fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration
allocable to such shares of Common Stock shall be determined
as provided in subsection (ii) of this Section 8.1.
(e) The number of shares of Common Stock at any one
time outstanding shall include the aggregate number of shares
issued or issuable (subject to readjustment upon the actual
issuance thereof) upon the exercise of options, rights,
warrants and upon the conversion or exchange of convertible or
exchangeable securities.
8.2 Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after
the date hereof issue options, rights or warrants to subscribe for
shares of Common Stock, or issue any securities convertible into or
exchangeable for shares of Common Stock, for a consideration per share
less than the Market Price in effect immediately prior to the issuance
of such options, rights or warrants, or such convertible or
exchangeable securities, or without consideration, the Exercise Price
in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation
in accordance with the provisions of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under such options, rights
or warrants shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, and for
a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time
of issuance, plus the consideration (determined in the same
manner as consideration received on the issue or sale of
shares in accordance with the terms of the Warrants), if any,
received by the Company for such options, rights or warrants.
(b) The aggregate maximum number of shares of Common
Stock issuable upon conversion or exchange of any convertible
or exchangeable securities shall be deemed to be issued and
outstanding at the time of issuance of such securities, and
for a consideration equal to the consideration (determined in
the same manner as consideration received on the issue or sale
of shares of Common Stock in accordance with the terms of the
Warrants) received by the Company for such securities, plus
the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof.
(c) If any change shall occur in the price per share
provided for in any of the options, rights or warrants
referred to in subsection (a) of this Section 8.2, or in the
price per share at which the securities referred to in
subsection (b) of this Section 8.2 are convertible or
exchangeable, such options, rights or warrants or conversion
or exchange rights, as the case may be, shall be deemed to
have expired or terminated on the date when such price change
became effective in respect of
9
<PAGE> 11
shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be
deemed to have issued upon such date new options, rights or
warrants or convertible or exchangeable securities at the new
price in respect of the number of shares issuable upon the
exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
8.3 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock,
the Exercise Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the
number of Warrant Securities issuable upon the exercise at the adjusted
exercise price of each Warrant shall be adjusted to the nearest full
amount by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant
Securities issuable upon exercise of the Warrants immediately prior to
such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.5 Definition of Common Stock. For the purpose of this
Agreement, the term "COMMON STOCK" shall mean (i) the class of stock
designated as Common Stock in the Articles of Incorporation of the
Company as amended as of the date hereof, or (ii) any other class of
stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event
that the Company shall after the date hereof issue securities with
greater or superior voting rights than the shares of Common Stock
outstanding as of the date hereof, the Holder, at its option, may
receive upon exercise of any Warrant either shares of Common Stock or a
like number of such securities with greater or superior voting rights.
8.6 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change of the
outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until
the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities
and property receivable upon such consolidation or merger, by a holder
of the number of shares of Common Stock of the Company for which such
Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant
agreement shall provide for adjustments which shall be identical to the
adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or
mergers.
10
<PAGE> 12
8.7 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or
the shares of Common Stock issuable upon the exercise of the
Warrants; or
(b) If the amount of such adjustment shall be less
than two cents ($.02) per Warrant Security, provided, however,
that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be
made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents ($.02) per Warrant
Security; or
(c) If the Exercise Price would be less than the par
value per share of Common Stock.
8.8 Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise of all Warrants
declare a dividend (other than a dividend consisting solely of shares
of Common Stock) or otherwise distribute to its stockholders any
assets, property, rights, evidences of indebtedness, securities (other
than shares of Common Stock), whether issued by the Company or by
another, or any other thing of value, the Holders of the unexercised
Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the
exercise thereof, to receive, upon the exercise of such Warrants, the
same property, assets, rights, evidences of indebtedness, securities or
any other thing of value that they would have been entitled to receive
at the time of such dividend or distribution as if the Warrants had
been exercised immediately prior to such dividend or distribution. At
the time of any such dividend or distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions
of this Section 8.8.
8.9 Statement on Warrant Certificate. Irrespective of any
adjustments in the Exercise Price or the number or kind of shares
purchasable upon the exercise of the Warrants, the Warrant Certificate
or certificates theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in
the Warrants initially issuable pursuant to this Agreement.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designed by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all
11
<PAGE> 13
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue fractional shares of Common Stock upon the exercise of
Warrants. Warrants may only be exercised in such multiples as are required to
permit the issuance by the Company of one or more whole shares of Common Stock.
If one or more Warrants shall be presented for exercise in full at the same time
by the same Holder, the number of whole shares of Common Stock which shall be
issuable upon such exercise thereof shall be computed on the basis of the
aggregate number of shares of Common Stock purchasable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock would, except
for the provisions provided herein, be issuable on the exercise of any Warrant
(or specified portion thereof), the Company shall pay an amount in cash equal to
such fraction multiplied by the then current Market Price of a share of Common
Stock, determined in accordance with Section 3.3 hereof.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other Securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable other than in cash, or a cash dividend
or distribution payable other than out of current or retained earnings,
as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
12
<PAGE> 14
then, in any one or more of such events, the Company shall give written notice
of such event to the Holders at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer book, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made and sent when delivered, or mailed by registered or certified mail,
return receipt requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may designate
by notice to the Holders.
14. Supplements and Amendments. The Company and _________ may from
time to time supplement or amend this Agreement without the approval of any
Holders of the Warrant Certificates in order to cure any ambiguity, to correct
or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and _________
may deem necessary or desirable and which the Company and _________ deem shall
not adversely affect the interests of the Holders of the Warrant Certificates.
If _________ no longer owns any Warrants, then this Agreement may be amended by
the Company and the Holders of a majority of the then outstanding Warrants.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Governing Law; Submission to Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of Texas and for all purposes shall be construed in
accordance with the laws of such State without giving effect to the rules of
such State governing the conflicts of laws.
The Company, _________ and any other registered Holders hereby agree
that any action, proceeding or claim against it arising out of, or relating in
any way to, this Agreement shall be brought and enforced in the courts of the
State of Texas or of the United States of America for the Northern District of
Texas, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, _________ and any other registered Holders hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum. Any such process or
13
<PAGE> 15
summons to be served upon any of the Company, _________ and the Holders (at the
option of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
13 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim. The
Company, _________ and any other registered Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
17. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
18. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor shall they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and
_________ and any other registered Holder(s) of the Warrant Certificates or
Warrants Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
_________ and any other registered Holders of Warrant Certificates or Warrant
Securities.
21. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
AVIATION GROUP, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
14
<PAGE> 16
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., DALLAS, TEXAS TIME, ________________
No. W-________ Warrants to Purchase
________ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that ______________________, or
registered assigns, is the registered holder of _______________ Warrants to
purchase initially, at any time from _______________ until 5:00 p.m. Dallas,
Texas time on ________________ ("Expiration Date"), up to _______________
fully-paid and non-assessable shares of common stock, $.01 par value ("Common
Stock") of AVIATION GROUP, INC., a Texas corporation (the "Company"), at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $______ per share of Common Stock upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of _______________ between the Company and _________ (the
"Warrant Agreement"). Payment of the Exercise Price shall be made by certified
or official bank check payable to the order of the Company or by surrender of
this Warrant Certificate.
No Warrant may be exercised after 5:00 p.m., Dallas, Texas time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the
1
<PAGE> 17
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such numbered unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of .
------------------------
AVIATION GROUP, INC.
[SEAL] By:
-------------------------------------
Name:
-----------------------------------
Attest: Title:
----------------------------------
- ------------------------------------
Name:
-------------------------------
Title:
------------------------------
2
<PAGE> 18
WARRANT GRANTS TO
EXECUTIVE OFFICERS AND DIRECTORS
The following described warrants were granted to executive officers or
directors on April 28, 1998 and issued in substantially the same form as the
attached form of Warrant Agreement and Warrant Certificate attached thereto. In
some cases, as indicated below, the warrants were replacements for previously
issued warrants or stock options that had higher exercise prices.
<TABLE>
<CAPTION>
No. of Shares
Name of Executive Purchasable Exercise Expiration Replacement of Prior
Officer/Director Under Warrants Price Date Warrant/Option
- ----------------- -------------- -------- ---------- --------------------
<S> <C> <C> <C> <C>
Richard L. Morgan 15,000 $3.50 8/22/04 Yes
Robert A Schneider 10,000 3.50 8/27/04 Yes
Gordon Whitener 10,000 3.50 2/25/04 Yes
Charles E. Weed 15,000 3.50 8/22/04 Yes
Lee Sanders 200,000 3.50 4/28/03 No
Gordon Whitener 5,000 3.50 4/28/03 No
Richard Morgan 100,000 3.50 4/28/03 No
Charles E. Weed 5,000 3.50 4/28/03 No
Robert A. Schneider 5,000 3.50 4/28/03 No
RAS Securities Corp.(1) 20,000 3.50 4/28/03 No
</TABLE>
- -------------------
(1) Affiliate of Mr. Schneider at the time of issuance of the Warrant.
<PAGE> 1
EXHIBIT 10.10
LOAN AND SECURITY AGREEMENT
This Agreement is between the undersigned Borrower and the undersigned
Lender concerning loans and other credit accommodations to be made by Lender to
Borrower.
SECTION 1. PARTIES
1.1 The "BORROWER" is identified in Section 10.5(c) and its
successors and assigns. If more than one Borrower is specified in Section
10.5(c), all references to Borrower shall mean each of them, jointly and
severally, individually and collectively, and the successors and assigns of
each.
1.2 The "LENDER" is THE CIT GROUP/CREDIT FINANCE, INC. and its
agents, designees, representatives, successors and assigns.
SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS
2.1 Revolving Loans. Lender shall, subject to the terms and
conditions contained herein, make revolving loans to Borrower ("REVOLVING
LOANS") in amounts requested by Borrower from time to time, but not in excess of
the Net Availability existing immediately prior to the making of the requested
loan and provided the requested loan would not cause the outstanding Obligations
to exceed the Maximum Credit.
(a) The "MAXIMUM CREDIT" is set forth in Section 10.1(a).
(b) The "GROSS AVAILABILITY" is at any time (i) the product of the
outstanding amount of Eligible Accounts, multiplied by the Eligible Accounts
Percentage set forth in Section 10.1(b), plus: (ii) the product(s) obtained by
multiplying the applicable Eligible Inventory Percentage(s), if any, set forth
in Section 10.1(b) by the values (based on the lower of cost, market or
appraised value) of Eligible Inventory, but the amount so added shall not
exceed any sublimits set forth in Section 10.1(c).
(c) The "NET AVAILABILITY" shall be calculated at any time as an
amount equal to the Gross Availability minus the aggregate amount of all
then-outstanding Obligations to Lender other than the then outstanding
principal balance of the Term Loan, if any.
(d) "ELIGIBLE ACCOUNTS" are accounts created by Borrower in the
ordinary course of its business which are and remain acceptable to Lender for
lending purposes. General criteria for Eligible Accounts are set forth below
but may be revised from time to time by Lender, in its sole judgment, on
fifteen (15) days' prior written notice to Borrower. Lender shall, in general,
deem and continue to deem accounts to be Eligible Accounts if: (1) such
accounts arise from bona fide completed transactions and have not remained
unpaid for more than the number of days after the invoice date set forth in
Section 10.1(d); (2) the amounts of the accounts reported to Lender are
absolutely owing to Borrower and payment is not conditional or contingent,
(such as consignments, guaranteed sales or right of return or other similar
terms); (3) the account debtor's chief executive office or principal place of
business is located in the United States; (4) such accounts do not arise from
progress billings, retainages or bill and hold sales; (5) there are no contra
relationships, setoffs, counterclaims or disputes existing with respect thereto
and there are no other facts existing or threatened which would impair or delay
the collectibility of all or any portion thereof; (6) the goods giving rise
thereto were not at the time of the sale subject to any
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liens except those permitted in this Agreement; (7) such accounts are not
accounts with respect to which the account debtor or any officer or employee
thereof is an officer, employee or agent of or is affiliated with Borrower,
directly or indirectly, whether by virtue of family membership, ownership,
control, management or otherwise; (8) there has been compliance with the
Assignment of Claims Act or similar State or local law, if applicable, if the
account debtor is the United States or any domestic governmental unit; (9)
Borrower has delivered to Lender such documents as Lender may have requested
pursuant to Section 5.9 hereof in connection with such accounts and Lender shall
have received verifications of such accounts, satisfactory to it, if sent to the
account debtors or any other obligors or any bailees pursuant to Section 5.5
hereof; (10) there are no facts existing or threatened which might result in any
adverse change in the account debtor's financial condition; (11) accounts owed
by an account debtor and its affiliates do not represent more than twenty
percent (20%) of all otherwise Eligible Accounts (the amount exceeding twenty
percent (20%) shall not be eligible);(12) not more than fifty percent (50%) of
the accounts of an account debtor or its affiliates owed to Borrower are more
than the number of days set forth in Section 10.1(d); (13) such accounts are
owed by account debtors whose total indebtedness to Borrower does not exceed the
amount of any customer credit limits as established from time to time on notice
to Borrower (the amount exceeding the credit limit shall not be eligible); and
such accounts are owed by account debtors deemed creditworthy at all times by
Lender in its reasonable credit judgment.
(e) "ELIGIBLE INVENTORY" is inventory owned by Borrower which is
and remains acceptable to Lender for lending purposes and is located at one of
the addresses set forth in Section 10.5(e).
(f) Lender shall have a continuing right to reduce the Gross
Availability by implementing Reserves ("RESERVES"), and to increase and
decrease such Reserves from time to time, if and to the extent that, in
Lender's reasonable credit judgment, such Reserves are necessary to protect
Lender against any state of facts which does, or would, with notice or passage
of time or both, constitute an Event of Default or have an adverse effect on
any Collateral.
(g) If a voluntary or involuntary petition under the Bankruptcy
Code is filed against the Borrower, then Lender need not make loans.
(h) Revolving Loans will not at any time exceed the Gross
Availability unless Lender has consented.
2.2 Term Loan. Lender shall make Term Loans to Borrower on the
terms and conditions set forth in Section 10.2 ("TERM LOAN"). The Term Loan
balance shall automatically be accelerated and become due and payable upon
termination of this Agreement.
2.3 Accommodations. Lender may, in its sole discretion, issue or
cause to be issued, from time to time at Borrower's request and on terms and
conditions and for purposes satisfactory to Lender, credit accommodations
consisting of letters of credit, bankers' acceptances, merchandise purchase
guaranties or other guaranties or indemnities for Borrower's account
("ACCOMMODATIONS"). Borrower shall execute and perform additional agreements
relating to the Accommodations in form and substance acceptable to Lender and
the issuer of any Accommodations, all of which shall supplement the rights and
remedies granted herein. Any payments made by Lender or any affiliate of Lender
in connection with the Accommodations shall constitute additional Revolving
Loans to Borrower.
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SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Interest on the Revolving Loans and Term Loans shall be
payable by Borrower on the first day of each month, calculated upon the closing
daily balances in the loan account of Borrower for each day during the
immediately preceding month, at the per annum rate set forth as the Interest
Rate in Section 10.3(a). The Interest Rate shall increase or decrease by an
amount equal to each increase or decrease, respectively, in the Prime Rate (as
defined below), effective as of the date of each such change. On and after any
Event of Default or termination or non-renewal hereof, interest on all unpaid
Obligations shall accrue at a rate equal to two percent (2%) per annum in
excess of the Interest Rate otherwise payable until such time as all
Obligations are indefeasibly paid in full (notwithstanding entry of any
judgment against Borrower or the exercise of any other right or remedy by
Lender), and all such interest shall be payable on demand. Interest shall in no
month be less than the Interest Rate multiplied by the Minimum Borrowing set
forth in Section 10.1(e). In no event shall charges constituting interest
exceed the rate permitted under any applicable law or regulation, and if any
provision of this Agreement is in contravention of any such law or regulation,
such provision shall be deemed amended to conform thereto.
(b) The "PRIME RATE" is the rate of interest publicly announced by
The Chase Manhattan Bank in New York, New York, or its successors and assigns
from time to time as its prime rate.
3.2 Fees. Borrower shall pay to Lender:
(a) Closing Fee. At closing a Closing Fee in the amount set forth
in SECTION 10.3(c).
(b) Facility Fee. A Facility Fee (fully earned at closing or the
beginning of any renewal term) in installments at each anniversary of closing
or renewal term as set forth in Section 10.3(d).
(c) Account Servicing Fee. Monthly, on the first day of each month
during the initial and each renewal Term an Account Servicing Fee for the
immediately preceding month (or part thereof) in the amount set forth in
Section 10.3(e).
(d) Unused Line Fee. Monthly, on the first day of each month, in
arrears, an Unused Line Fee for each month during the initial and each renewal
Term at the rate per annum set forth in Section 10.3(f), calculated upon the
amount, if any, by which the Maximum Credit exceeds the greater of the Minimum
Borrowing or the average outstanding daily principal balance during the
preceding month of all Revolving Loans, Accommodations and any Term Loan.
SECTION 4. GRANT OF SECURITY INTEREST
4.1 Grant of Security Interest. To secure the payment and
performance in full of all Obligations, Borrower hereby grants to Lender a
continuing security interest in and lien upon, and a right of setoff against,
and Borrower hereby assigns and pledges to Lender, all of the Collateral,
including any Collateral not deemed eligible for lending purposes.
4.2 "OBLIGATIONS" shall mean any and all Revolving Loans, Term
Loans, Accommodations and all other indebtedness, liabilities and obligations
of every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees and expenses, however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether arising under this Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or after the initial or any
renewal Term or after the commencement of any case with respect to Borrower
under the United States Bankruptcy Code or any similar statute, whether direct
or indirect, absolute or contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, secured or
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unsecured, original, renewed or extended and whether arising directly or
howsoever acquired by Lender including from any other entity outright,
conditionally or as collateral security, by assignment, merger with any other
entity, participations or interests of Lender in the obligations of Borrower to
others, assumption, operation of law, subrogation or otherwise and shall also
include all amounts chargeable to Borrower under this Agreement or in
connection with any of the foregoing.
4.3 "COLLATERAL" shall mean all of the following property of
Borrower:
(a) All now owned and hereafter acquired right, title and
interest of Borrower in, to and in respect of all: accounts, interests in goods
represented by accounts, returned, reclaimed or repossessed goods with respect
thereto and rights as an unpaid vendor; contract rights; chattel paper;
investment property; general intangibles (including, but not limited to, tax
and duty refunds, registered and unregistered patents, trademarks, service
marks, copyrights, trade names, applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer lists, licenses, whether as
licensor or licensee, choses in action and other claims, and existing and
future leasehold interests in equipment and fixtures); documents; instruments;
letters of credit, bankers' acceptances or guaranties; cash moneys, deposits,
securities, bank accounts, deposit accounts, credits and other property now or
hereafter held in any capacity by Lender, its affiliates or any entity which,
at any time, participates in Lender's financing of Borrower or at any other
depository or other institution; agreements or property securing or relating to
any of the items referred to above;
(b) All now owned and hereafter acquired right, title and interest
of Borrower in, to and in respect of goods, including, but not limited to:
(i) All inventory, wherever located, whether now owned or
hereafter acquired, of whatever kind, nature or description, including all raw
materials, work-in-process, finished goods, and materials to be used or
consumed in Borrower's business; and all names or marks affixed to or to be
affixed thereto for purposes of selling same by the seller, manufacturer,
lessor or licensor thereof; and
(ii) All equipment and fixtures, wherever located, whether
now owned or hereafter acquired, including, without limitation, all machinery,
equipment, motor vehicles, furniture and fixtures, and any and all additions,
substitutions, replacements (including spare parts), and accessions thereof and
thereto;
(c) All now owned and hereafter acquired right, title and
interests of Borrower in, to and in respect of any personal property in or upon
which Borrower has or may hereafter have a security interest, lien or right of
setoff;
(d) All present and future books and records relating to any of
the above including, without limitation, all computer programs, printed output
and computer readable data in the possession or control of the Borrower, any
computer service bureau or other third party; and
(e) All products and proceeds of the foregoing in whatever form
and wherever located, including, without limitation, all insurance proceeds and
all claims against third parties for loss or destruction of or damage to any of
the foregoing.
SECTION 5. COLLECTION AND ADMINISTRATION
5.1 Collections. Borrower will, at its expense as Lender requests,
direct that all remittances and all other proceeds of accounts and other
Collateral be sent to a lock box designated by Lender, and
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deposited into a bank account selected by Lender with arrangements with the
bank providing that all funds deposited in the bank account are to be
transferred solely to Lender. Borrower shall bear all risk of loss of any funds
deposited into such account. In connection therewith, Borrower shall execute
such lock box and bank account agreements as Lender shall specify with banks
acceptable to Borrower and reasonably acceptable to Lender. Any collections or
other proceeds received by Borrower shall be held in trust for Lender and
immediately remitted to Lender in kind.
5.2 Charges to Loan Account. At Lender's option, all payments of
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement, or in any other agreement now or hereafter existing between
Lender and Borrower, may be charged on the date when due, as principal to any
loan account of Borrower maintained by Lender. Interest, fees for
Accommodations, the Unused Line Fee and any other amounts payable by Borrower
to Lender based on a per annum rate shall be calculated on the basis of actual
days elapsed over a 360-day year.
5.3 Payments. All Obligations shall be payable at Lender's Office
set forth in Section 10.5(a) or at Lender's bank designated in Section 10.5(b)
or at such other bank or place as Lender may expressly designate from time to
time for purposes of this Section. Lender shall apply all proceeds of accounts
or other Collateral received by Lender and all other payments in respect of the
Obligations to the Revolving Loans or to any other Obligations then due, in
whatever order or manner Lender shall determine. For purposes of determining
Gross Availability and Net Availability and for the calculation of the Minimum
Borrowing, remittances and other payments will be treated as credited to the
loan account of Borrower maintained by Lender and Collateral balances to which
they relate, upon the date of Lender's receipt of advice from Lender's bank
that such remittances or other payments have been credited to Lender's account
or in the case of remittances or other payments received directly in kind by
Lender, upon the date of Lender's deposit thereof at Lender's bank, subject to
final payment and collection. In computing interest charges, the loan account
of Borrower will be credited with remittances and other payments for the number
of days set forth in Section 10.3(b) after the day Lender has received
remittances in Lender's account at Lender's Bank. For purposes of this
Agreement, "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or
any other day on which Lender or banks located in states where Lender has its
offices, are authorized to close.
5.4 Loan Account Statements. Lender shall render to Borrower
monthly a loan account statement. Each statement shall be considered correct
and binding upon Borrower as an account stated, except to the extent that
Lender receives, within sixty (60) days after the mailing of such statement,
written notice from Borrower of any specific exceptions by Borrower to that
statement.
5.5 Direct Collections. Lender may, at any time, (a) notify any
account debtor that the accounts and other Collateral which includes a monetary
obligation have been assigned to Lender by Borrower and that payment thereof is
to be made to the order of and directly to Lender, (b) send, or cause to be
sent by its designee, requests (which may identify the sender by a pseudonym)
for verification by telephone, in writing or otherwise of accounts and other
Collateral directly to any account debtor or any other obligor or any bailee
with respect thereto, (c) demand, collect or enforce payment of any accounts or
such other Collateral, but without any duty to do so, and Lender shall not be
liable for any failure to collect or enforce payment thereof, (d) take or
bring, in the name of Lender or Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or
other realization upon the accounts and other Collateral, (e) after an Event of
Default, change the address for delivery of mail to Borrower and to receive and
open mail addressed to Borrower, and (f) after an Event of Default, extend the
time of payment of, compromise or settle for cash, credit, return of
merchandise, and upon any terms or conditions, any and all accounts or other
Collateral which includes a monetary obligation and discharge or release the
account debtor or other obligor, without affecting any of the Obligations. At
Lender's request, all invoices and statements sent to any account debtor, other
obligor or
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bailee, shall state that the accounts and such other Collateral have been
assigned to Lender and are payable directly and only to Lender.
5.6 Attorney-in-Fact. Borrower hereby irrevocably appoints Lender
as Borrower's attorney-in-fact and authorizes Lender at Borrower's sole
expense, to exercise at any times in Lender's discretion all or any of the
powers necessary for Lender to obtain information about the Collateral or to
enforce Lender's rights.
5.7 Liability. Borrower hereby releases and exculpates Lender, its
officers and employees from any liability arising from any acts under this
Agreement or in furtherance thereof, except for gross negligence or willful
misconduct. Lender will not have any liability to Borrower for lost profits or
other special or consequential damages.
5.8 Administration of Accounts. After written notice by Lender to
Borrower or without notice after an Event of Default, Borrower shall not, (a)
amend, modify, settle or compromise any of the accounts or any other Collateral
which includes a monetary obligation, (b) release in whole or in part any
account debtor or other person liable for the payment of any of the accounts or
any such other Collateral, or (c) grant any credits, discounts, allowances,
deductions, return authorizations or the like with respect to any of the
accounts or any such other Collateral.
5.9 Documents. Borrower shall deliver to Lender, as Lender may
request, all documents, schedules, invoices, proofs of delivery, purchase
orders, statements, contracts and all other information evidencing or relating
to the Collateral, in form and substance satisfactory to Lender and duly
executed by Borrower. Without limiting the provisions of Section 5.5,
Borrower's granting of credits, discounts, allowances, deductions, return
authorizations or the like will be promptly reported to Lender in writing. In
no event shall any schedule or confirmatory assignment (or the absence thereof
or omission of any of the accounts or other Collateral therefrom) limit or in
any way be construed as a waiver, limitation or modification of the security
interests or rights of Lender or the warranties, representations and covenants
of Borrower under this Agreement. Any documents, schedules, invoices or other
paper delivered to Lender by Borrower may be destroyed or otherwise disposed of
by Lender six (6) months after receipt by Lender, unless Borrower requests
their return in writing in advance and makes prior arrangements for their
return at Borrower's expense.
5.10 Access. Lender shall have access, prior to an Event of Default
during reasonable business hours and on or after an Event of Default at any
time, to all of the premises where Collateral is located for the purposes of
inspecting or copying the Collateral, and all Borrower's books and records.
Lender, at no charge, may use such of Borrower's personnel, equipment,
including computer equipment, programs, printed output and computer readable
media, supplies and premises for the collection of accounts and realization on
other Collateral as Lender, in its sole discretion, deems appropriate. Borrower
hereby irrevocably authorizes all accountants and third parties to disclose and
deliver to Lender at Borrower's expense all financial information, books and
records, work papers, management reports and other information in their
possession regarding Borrower.
SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Borrower hereby represents, warrants and covenants to Lender the
following, the truth and accuracy of which, and compliance with which, shall be
continuing conditions of the making of loans or other credit accommodations by
Lender to Borrower:
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6.1 Financial and Other Reports. Borrower shall keep and maintain
its books and records in accordance with generally accepted accounting
principles, consistently applied. Borrower shall, at its expense on or before
Wednesday of every other week, deliver to Lender true and complete inventory
reports relating to the prior two weeks. Borrower shall, at its expense on or
before the fifteenth (15th) day of each month, deliver to Lender: (a) true and
complete monthly agings of its accounts receivable and accounts payable; (b)
monthly inventory reports; and (c) internally prepared interim financial
statements. Annually, Borrower shall deliver reviewed financial statements of
Borrower accompanied by the report and opinion thereon of independent certified
public accountants acceptable to Lender, as soon as available, but in no event
later than ninety (90) days after the end of Borrower's fiscal year. Borrower
to provide cash flow projections in a format reasonably acceptable to Lender.
All of the foregoing shall be in such form and together with such information
with respect to the business of Borrower or any guarantor, as Lender may in
each case reasonably request.
6.2 Trade Names. Borrower may from time to time render invoices
under its trade names set forth in Section 10.5(g) and, Borrower represents
that: (a) each trade name does not refer to another corporation or other legal
entity, (b) all accounts and proceeds thereof (including any returned
merchandise) invoiced under any such trade names are owned exclusively by
Borrower and (c) Lender may receive, endorse and deposit to any loan account of
Borrower maintained by Lender all checks or other remittances made payable to
any trade name of Borrower representing payment with respect to such sales or
services.
6.3 Losses. Borrower shall promptly notify Lender in writing of
any loss, damage, investigation, action, suit, proceeding or claim relating to
a material portion of the Collateral or which may result in any material
adverse change in Borrower's business, assets, liabilities or condition,
financial or otherwise.
6.4 Books and Records. Borrower's books and records concerning
accounts and its chief executive office are and shall be maintained only at the
address set forth in Section 10.5(d). Borrower's only other places of business
and the only other locations of Collateral, if any, are and shall be the
addresses set forth in Section 10.5(f) hereof, except Borrower may change such
locations or open a new place of business after thirty (30) days prior written
notice to Lender. Borrower shall execute and deliver or cause to be executed
and delivered to Lender such financing statements, amendments, financing
documents and security and other agreements as Lender may reasonably require.
6.5 Title. Borrower has and at all times will continue to have
good and marketable title to all of the Collateral, free and clear of all
liens, security interests, claims or encumbrances of any kind except in favor
of Lender and except, if any, those set forth on Schedule A hereto; and
provided that Lender agrees to subordinate its lien on equipment to another
lender in the event that (a) Borrower is not in default under the Financing
Agreements, (b) Borrower has requested that Lender make loans to the Borrower
secured by the equipment, and (c) Lender is not willing to make loans to
Borrower in an amount equal to or greater than 80% of the forced sale value of
the equipment as determined by an appraiser acceptable to Lender, which
appraisal shall be conducted at Borrower's sole expense.
6.6 Disposition of Assets. Borrower shall not directly or
indirectly: (a) sell, lease, transfer, assign, abandon or otherwise dispose of
any part of the Collateral or any material portion of its other assets (other
than sales of inventory to buyers in the ordinary course of business and
disposals of equipment which are replaced with equipment of at least a
substantially equal value to that disposed of) or (b) consolidate with or merge
with or into any other entity, or permit any other entity to consolidate with
or merge with or into Borrower or (c) form or acquire any interest in any firm,
corporation or other entity.
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6.7 Insurance. Borrower shall at all times maintain, with
financially sound and reputable insurers, adequate insurance (including,
without limitation, at the option of Lender, earthquake and flood insurance)
with respect to the Collateral and other assets. All such insurance policies
shall be in such form, substance, amounts and coverage as may be reasonably
satisfactory to Lender and shall provide for thirty (30) days' prior written
notice to Lender of cancellation or reduction of coverage. Lender may obtain at
Borrower's expense, any such insurance should Borrower fail to do so and adjust
or settle any claim or other matter under or arising pursuant to such insurance
or to amend or cancel such insurance. Borrower shall provide evidence of such
insurance and a lender's loss payable endorsement satisfactory to Lender.
Borrower shall deliver to Lender, in kind, all instruments representing
proceeds of insurance received by Borrower. Lender may apply any insurance
proceeds received at any time to the cost of repairs to or replacement of any
portion of the Collateral and/or, at Lender's option, to payment of or as
security for any of the Obligations in any order or manner as Lender
determines.
6.8 Compliance With Laws. Borrower is and at all times will
continue to be in compliance with the requirements of all material laws, rules,
regulations and orders of any governmental authority relating to its business
(including laws, rules, regulations and orders relating to income, withholding,
excise, property and social security taxes, minimum wages, employee retirement
and welfare benefits, employee health and safety, or environmental matters) and
all material agreements or other instruments binding on Borrower or its
property. Borrower shall pay and discharge all taxes, assessments and
governmental charges against Borrower or any Collateral when due, unless the
same are being contested in good faith. Lender may establish Reserves for the
amount contested and penalties which may accrue thereon.
6.9 Accounts. With respect to each account deemed an Eligible
Account, except as reported in writing to Lender, Borrower has no knowledge
that any of the criteria for eligibility are not or are no longer satisfied and
the Eligibility criteria will continue to be satisfied. All statements made and
all unpaid balances and other information appearing in the invoices,
agreements, proofs of rendition of services and delivery of goods and other
documentation relating to the accounts, and all confirmatory assignments,
schedules, statements of account and books and records with respect thereto,
are true and correct and in all respects what they purport to be.
6.10 Equipment. With respect to Borrower's equipment, Borrower
shall keep the equipment in good order and repair, and in running and
marketable condition, ordinary wear and tear excepted.
6.11 Financial Covenants. Borrower shall at all times maintain
working capital and net worth (each as determined in accordance with generally
accepted accounting principles, in effect on the date hereof, consistently
applied) in the amounts set forth in Section 10.4(a) and (b) respectively and
Borrower shall not, directly or indirectly, expend or commit to expend, for
fixed or capital assets (including capital lease obligations) an amount in
excess of the capital expenditure limit set forth in Section 10.4(c) in any
fiscal year of Borrower.
6.12 Affiliated Transactions. Borrower will not, directly or
indirectly: (a) lend or advance money or property to, guarantee or assume
indebtedness of, or invest (by capital contribution or otherwise) in any
person, firm, corporation or other entity, except so long as an Event of
Default does not exist, Borrower may lend money to its parent; or (b) declare,
pay or make any dividend, redemption or other distribution on account of any
shares of any class of stock of Borrower now or hereafter outstanding, except
so long as an Event of Default does not exist, Borrower may pay dividends to
its parent; or (c) make any payment of the principal amount of or interest on
any indebtedness owing to any officer, director, shareholder, or affiliate of
Borrower, except so long as an Event of Default does not exist, Borrower may
make such payments to its parent; or (d) make any loans or advances to any
officer, director, employee shareholder or affiliate of Borrower; except so
long as an Event of Default does not
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exist, Borrower may make loans to its parent; (e) enter into any sale, lease or
other transaction with any officer, director, employee, shareholder or
affiliate of Borrower on terms that are less favorable to Borrower than those
which might be obtained at the time from persons who are not an officer,
director, employee, shareholder or affiliate of Borrower.
6.13 Fees and Expenses. Borrower shall pay, on Lender's demand, all
costs, expenses, filing fees and taxes payable in connection with the
preparation, execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of the Obligations, Lender's rights in the
Collateral, this Agreement and all other existing and future agreements or
documents contemplated herein or related hereto, including any amendments,
waivers, supplements or consents which may hereafter be made or entered into in
respect hereof, or in any way involving claims or defense asserted by Lender or
claims or defense against Lender asserted by Borrower, any guarantor or any
third party directly or indirectly arising out of or related to the
relationship between Borrower and Lender or any guarantor and Lender,
including, but not limited to the following, whether incurred before, during or
after the initial or any renewal Term or after the commencement of any case
with respect to Borrower or any guarantor under the United States Bankruptcy
Code or any similar statute: (a) all costs and expenses of filing or recording
(including Uniform Commercial Code financing statement filing taxes and fees,
documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable); (b) all insurance premiums, appraisal fees and search fees; (c)
all fees as then in effect relating to the wire transfer of loan proceeds and
other funds and fees then in effect for returned checks and credit reports; (d)
all reasonable expenses and costs, unless previously paid by Borrower, from
time to time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations including field
examiner travel, food and lodging, plus a per diem charge at the rate set forth
in Section 10.3(g) for Lender's examiners in the field and office; and (e) the
reasonable costs, disbursements and fees of in-house and outside counsel to
Lender, including but not limited to such fees and disbursements incurred as a
result of a workout, restructuring, reorganization, liquidation, insolvency
proceeding or litigation between the parties hereto, any third party and in any
appeals arising therefrom.
6.14 Further Assurances. At the request of Lender, at any time and
from time to time, at Borrower's sole expense, Borrower shall execute and
deliver or cause to be executed and delivered to Lender, such agreements,
documents and instruments, including waivers, consents and subordination
agreements from mortgagees or other holders of security interests or liens,
landlords or bailees, and do or cause to be done such further acts as Lender,
in its discretion, deems necessary or desirable to create, preserve, perfect or
validate any security interest of Lender in the Collateral and otherwise to
effectuate the provisions and purposes of this Agreement. Borrower hereby
authorizes Lender to file financing statements or amendments against Borrower
in favor of Lender with respect to the Collateral, without Borrower's signature
and to file as financing statements any carbon, photographic or other
reproductions of this Agreement or any financing statements signed by Borrower.
6.1 Environmental Condition. None of Borrower's properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower. Borrower has not received a summons, citation, notice, or directive
from the Environmental Protection Agency or any other federal or state
governmental agency any action or omission by Borrower resulting in the
releasing, or otherwise exposing of hazardous waste or hazardous substances
into the environment. Borrower is and will continue to be in compliance (in all
material respects) with all statutes, regulations, ordinances and other legal
requirements pertaining to the production, storage, handling, treatment,
release, transportation or disposal of any hazardous waste or hazardous
substance.
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<PAGE> 10
6.16 State of Incorporation. If Borrower is a corporation, it is
duly organized, existing and in good standing under the laws of the state set
forth in Section 10.5(h).
SECTION 7. EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. All Obligations shall be immediately due
and payable, without notice or demand, and any provisions of this Agreement as
to future loans and credit accommodations by Lender shall terminate
automatically, upon the termination or non-renewal of this Agreement or, at
Lender's option, upon or at any time after the occurrence or existence of any
one or more of the following "EVENTS OF DEFAULT":
(a) Borrower fails to pay when due any of the Obligations or fails
to perform any of the terms of this Agreement or any other existing or future
financing, security or other agreement between Borrower and Lender or any
affiliate of Lender, except that with respect to any defaults under Section 6.1
hereof, Borrower shall have forty-eight (48) hours after receipt of written
notice of such default in accordance with Section 9.4 of the Loan Agreement, to
cure such default;
(b) Any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement or any other agreement, schedule,
confirmatory assignment or otherwise, or to any affiliate of Lender, shall
prove inaccurate or misleading in any material respect;
(c) Any guarantor revokes, terminates or fails to perform any of
the terms of any guaranty, endorsement or other agreement of such party in
favor of Lender or any affiliate of Lender;
(d) Any judgment or judgments aggregating in excess of the amount
set forth in Section 10.5(i) or any injunction or attachment is obtained
against Borrower or any guarantor, which remains unstayed for a period of ten
(10) days or is enforced;
(e) Borrower or any guarantor dies or ceases to exist or the usual
business of Borrower or any guarantor ceases or is suspended;
(f) Any change in the chief executive officer, chief operating
officer, chief financial officer or controlling ownership of Borrower;
(g) Borrower or any guarantor becomes insolvent, makes an
assignment for the benefit of creditors, makes or sends notice of a bulk
transfer or calls a general meeting of its creditors or principal creditors;
(h) Any petition or application for any relief under the
bankruptcy laws of the United States now or hereafter in effect or under any
insolvency, reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at law or in equity) is filed by or against Borrower or any guarantor;
(i) The indictment or threatened indictment of Borrower or any
guarantor under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against Borrower or any
guarantor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of Borrower or
such guarantor which Lender believes may have a material adverse effect on the
Collateral or Borrower's business; or
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<PAGE> 11
(j) Any default or event of default occurs on the part of Borrower
under any material agreement, document or instrument to which Borrower is a
party or by which Borrower or any of its property is bound and continues beyond
any applicable cure period.
7.2 Remedies. Upon the occurrence of an Event of Default and at
any time thereafter, Lender shall have all rights and remedies provided in this
Agreement, any other agreements between Borrower and Lender, the Uniform
Commercial Code and other applicable law, all of which rights and remedies may
be exercised without notice to Borrower, all such notices being hereby waived,
except such notice as is expressly provided for hereunder or is not waivable
under applicable law. All rights and remedies of Lender are cumulative and not
exclusive and are enforceable, in Lender's discretion, alternatively,
successively, or concurrently on any one or more occasions and in any order
Lender may determine. Without limiting the foregoing, Lender may (a) accelerate
the payment of all Obligations and demand immediate payment thereof to Lender,
(b) with or without judicial process or the aid or assistance of others, enter
upon any premises on or in which any of the Collateral may be located and take
possession of the Collateral or complete processing, manufacturing and repair
of all or any portion of the Collateral, (c) require Borrower, at Borrower's
expense, to assemble and make available to Lender any part or all of the
Collateral at any place and time designated by Lender, (d) collect, foreclose,
receive, appropriate, setoff and realize upon any and all Collateral, (e) sell,
lease, transfer, assign, deliver or otherwise dispose of any and all Collateral
(including, without limitation, entering into contracts with respect thereto,
by public or private sales at any exchange, broker's board, any office of
Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for
cash, upon credit or for future delivery, with the Lender having the right to
purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall not be reduced as a result
thereof until payment therefor is finally collected by Lender. If notice of
disposition of Collateral is required by law, ten (10) days prior notice by
Lender to Borrower designating the time and place of any public sale or the
time after which any private sale or other intended disposition of Collateral
is to be made, shall be deemed to be reasonable notice thereof and Borrower
waives any other notice. In the event Lender institutes an action to recover
any Collateral or seeks recovery of any Collateral by way of prejudgment
remedy, Borrower waives the posting of any bond which might otherwise be
required.
7.3 Application of Proceeds. Lender may apply the cash proceeds of
Collateral from any sale, lease, foreclosure or other disposition of the
Collateral to payment of any of the Obligations, in whole or in part and in
such order as Lender may elect, whether or not then due. Borrower shall remain
liable to Lender for the payment of any deficiency together with interest at
the highest rate provided for herein and all costs and expenses of collection
or enforcement, including reasonable attorneys' fees and legal expenses.
7.4 Lender's Cure of Third Party Agreement Default. Lender may, at
its option, cure any default by Borrower under any agreement with a third party
or pay or bond on appeal any judgment entered against Borrower, discharge
taxes, liens, security interests or other encumbrances at any time levied on or
existing with respect to the Collateral and pay any amount, incur any expense
or perform any act which, in Lender's sole judgment, is necessary or
appropriate to preserve, protect, insure, maintain, or realize upon the
Collateral. Lender may charge Borrower's loan account for any amounts so
expended, such amounts to be repayable by Borrower on demand. Lender shall be
under no obligation to effect such cure, payment, bonding or discharge, and
shall not, by doing so, be deemed to have assumed any obligation or liability
of Borrower.
11
<PAGE> 12
SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS
8.1 JURY TRIAL WAIVER. BORROWER AND LENDER EACH WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM
AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE
OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR
LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR
LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
8.2 Counterclaims. Borrower waives all rights to interpose any
claims, deductions, setoffs or counterclaims of any kind, nature or description
in any action or proceeding instituted by Lender with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating thereto, except compulsory counterclaims.
8.3 Jurisdiction. Borrower hereby irrevocably submits and consents
to the nonexclusive jurisdiction of the State and Federal Courts located in the
State in which the office of Lender designated in Section 10.5(a) is located
and any other State where any Collateral is located with respect to any action
or proceeding arising out of this Agreement, the Obligations, the Collateral or
any matter arising therefrom or relating thereto. In any such action or
proceeding, Borrower waives personal service of the summons and complaint or
other process and papers therein and agrees that the service thereof may be
made by mail directed to Borrower at its chief executive office set forth
herein or other address thereof of which Lender has received notice as provided
herein, service to be deemed complete five (5) days after mailing, or as
permitted under the rules of either of said Courts. Any such action or
proceeding commenced by Borrower against Lender will be litigated only in a
Federal Court located in the district, or a State Court in the State and
County, in which the office of Lender designated in Section 10.5(a) is located
and Borrower waives any objection based on FORUM NON CONVENIENS and any
objection to venue in connection therewith.
8.4 No Waiver by Lender. Lender shall not, by any act, delay,
omission or otherwise be deemed to have expressly or impliedly waived any of
its rights or remedies unless such waiver shall be in writing and signed by an
authorized officer of Lender. A waiver by Lender of any right or remedy on any
one occasion shall not be construed as a bar to or waiver of any such right or
remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS
9.1 Term. This Agreement shall only become effective upon
execution and delivery by Borrower and Lender and shall continue in full force
and effect for a term set forth in Section 10.6 from the date hereof and shall
be deemed automatically renewed, based upon all of the terms and provisions of
this Agreement, for successive terms of equal duration thereafter unless
terminated as of the end of the initial or any renewal term (each a "TERM") by
either party giving the other written notice at least sixty (60) days prior to
the end of the then current Term.
9.2 Early Termination. Borrower may also terminate this Agreement
by giving Lender at least thirty (30) days prior written notice and payment in
full of all of the Obligations as provided herein, including the Early
Termination Fee, unpaid Facility Fee and any other fees. Thirty days after
receipt of such early termination notice, Lender need not make any further
loans or accommodations. Lender shall also have the right to terminate this
Agreement at any time upon or after the occurrence of an Event of Default. If
Lender terminates this Agreement upon or after the occurrence of an Event of
Default,
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<PAGE> 13
Borrower shall pay Lender forthwith, in full, all Obligations, including Early
Termination Fee, Facility Fee and any other fees. In view of the impracticality
and extreme difficulty of ascertaining actual damages and by mutual agreement
of the parties as to a reasonable calculation of Lender's lost profits, the
Early Termination Fee shall be the percentage of the Maximum Credit set forth
in Section 10.3(h).
9.3 Termination Indemnity Deposit. Upon termination of this
Agreement by Borrower, as permitted herein, in addition to payment of all
Obligations which are not contingent, Borrower shall deposit such amount of
cash collateral as Lender determines is necessary to secure Lender from loss,
cost, damage or expense, including reasonable attorneys' fees, in connection
with any open Accommodations or remittance items or other payments
provisionally credited to the Obligations and/or to which Lender has not yet
received final and indefeasible payment.
9.4 Notices. Except as otherwise provided, all notices, requests
and demands hereunder shall be (a) made to Lender at its address set forth in
Section 10.5(a) and to Borrower at its chief executive office set forth in
Section 10.5(d), or to such other address as either party may designate by
written notice to the other in accordance with this provision, and (b) deemed
to have been given or made: if by hand, immediately upon delivery; if by telex,
telegram or telecopy (fax), immediately upon receipt; if by overnight delivery
service, one day after dispatch; and if by first class or certified mail, three
(3) days after mailing.
9.5 Severability. If any provision of this Agreement is held to be
invalid or unenforceable, such provision shall not affect this Agreement as a
whole, but this Agreement shall be construed as though it did not contain the
particular provision held to be invalid or unenforceable.
9.6 Entire Agreement; Amendments; Assignments. This Agreement
contains the entire agreement of the parties as to the subject matter hereof,
all prior commitments, proposals and negotiations concerning the subject matter
hereof being merged herein. Neither this Agreement nor any provision hereof
shall be amended, modified or discharged orally or by course of conduct, but
only by a written agreement signed by an authorized officer of Lender. This
Agreement shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and assigns, except that any obligation
of Lender under this Agreement shall not be assignable nor inure to the
successors and assigns of Borrower.
9.7 Discharge of Borrower. No termination of this Agreement shall
relieve or discharge Borrower of its Obligations, grants of Collateral, duties
and covenants hereunder or otherwise until such time as all Obligations to
Lender have been indefeasibly paid and satisfied in full, including, without
limitation, the continuation and survival in full force and effect of all
security interests and liens of Lender in and upon all then existing and
thereafter-arising or acquired Collateral and all warranties and waivers of
Borrower.
9.8 Usage. All terms used herein which are defined in the Uniform
Commercial Code shall have the meanings given therein unless otherwise defined
in this Agreement and all references to the singular or plural herein shall
also mean the plural or singular, respectively.
9.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State in which the office of
Lender set forth in Section 10.5(a) below is located.
SECTION 10. ADDITIONAL DEFINITIONS AND TERMS
10.1 (a) Maximum Credit: $3,000,000
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<TABLE>
<S> <C>
(b) Gross Availability Formulas:
Eligible Accounts Percentage: 85% provided that the Dilution Percentage does not exceed 4%.
The Dilution Percentage is the sum of Borrower's credits, allowances, discounts, write-offs,
contra-accounts and offsets and deductions which reduce the value of accounts receivable
divided by gross invoices. The Dilution Percentage shall be calculated on a rolling 90 day
average. If the Dilution Percentage exceeds 4% then Lender may reduce the Eligible Accounts
Percentage to a lower rate in its reasonable credit judgment.
Eligible Inventory Percentages:
Finished Goods 40%
Raw Materials 40%
(c) Inventory Sublimit(s): $500,000
(d) Maximum days after Invoice
Date for Eligible Accounts: 90 Days
(e) Minimum Borrowing: $750,000 determined on a monthly basis
10.2 Term Loan:
(a) amount N/A
(b) monthly amortization N/A
(c) maturity date N/A
10.3 Interest, Fees & Charges:
(a) Interest Rate: Prime Rate plus 1.5% per annum
(b) Clearance: 2 Business Days
(c) Closing Fee: $15,000, earned and payable at Closing
(d)(1) Facility Fee for Initial Term:
First Anniversary: 1.0% of the Maximum Credit
Second Anniversary: 1.0% of the Maximum Credit
(2) Facility Fee for Renewal Term:
Renewal Date: 1.0% of the Maximum Credit
First Anniversary: 1.0% of the Maximum Credit
Second Anniversary: 1.0% of the Maximum Credit
provided, however, that Lender shall waive the Facility Fee to the extent not paid in the event
that (i) Borrower is not in default under the Financing Agreements and (ii) the Obligations are
paid with proceeds from new financing provided to Borrower by Chase Manhattan Bank or one of
its affiliates.
(e) Account Servicing Fee: $0
(f) Unused Line Fee: per annum $0
(g) Field Examination per diem charge per examiner $650 plus out of
pocket expenses
(h) Early Termination Fee:
First year: 2% of the Maximum Credit
Second year and thereafter: 1% of the Maximum Credit
</TABLE>
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<TABLE>
<S> <C>
provided, however, that Lender shall waive the Early Termination Fee in the event that (i) the
termination occurs after the first anniversary of the Closing, (ii) Borrower is not in default under
the Financing Agreements and (iii) the Obligations are paid with proceeds from new financing provided
to the Borrower by Chase Manhattan Bank or one of its affiliates.
10.4 Financial Covenants:
(a) Working Capital: N/A
(b) Net Worth: N/A
(c) Capital Expenditures: per fiscal year N/A
10.5 (a) Lender's Office: 10 South LaSalle
Chicago, Illinois, 60603
(b) Lender's Bank: Bank of America, Illinois
231 South LaSalle Street
Chicago, IL 60697
(c) Borrower: Tri-Star Airline Services, Inc.
Pride Aviation, Inc.
Casper Air Service
Aero Design, Inc.
Pride Aviation Portland, Inc.
(d) Borrower's Chief Executive Office: Tri-Star Airline Services, Inc.
700 N. Pearl Street
Suite 2170
Dallas, TX 75201
Pride Aviation, Inc.
1218 Hangar Drive
New Iberia, LA 70560
Casper Air Service
7956 Fuller
Casper, WY 82604
Aero Design, Inc.
181 Due West Drive
Mt. Juliet, TN 37122
Pride Aviation Portland, Inc.
1218 Hangar Drive
New Iberia, LA 70560
(e) Locations of Eligible Inventory
Collateral: Tri-Star Airline
Services, Inc. - P.O. Box 610929
DFW Airport
Dallas, Texas 75261
</TABLE>
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<TABLE>
<S> <C>
Pride Aviation, Inc. 4635 N.E. Cornfoot Rd.
Portland, Oregon 97218
1218 Hangar Drive
New Iberia, LA 70560
Casper Air Service - 7956 Fuller
Casper, WY 82604
Aero Design, Inc. - 181 Due West Drive
Mt. Juliet, TN 37122
Pride Aviation
Portland, Inc. 4635 N.E. Cornfoot Rd.
Portland, Oregon 97218
1218 Hangar Drive
New Iberia, LA 70560
(f) Borrower's Other Offices and Locations of
Collateral: None
(g) Borrower's Trade Names for Invoicing: None
(h) Borrower's State of Incorporation:
Tri-Star Airline Services, Inc. Texas
Pride Aviation, Inc. - Oklahoma
Casper Air Service - Wyoming
Aero Design, Inc. - Tennessee
Pride Aviation Portland, Inc. Oregon
(i) Judgment Amount $25,000
</TABLE>
10.6 Term: 3 Years
10.7 Multiple Borrowers: The "Borrower" as defined in Section 1.1 and
identified in Section 10.5(c) consists of five "Borrowers". A request for a
Revolving Loan shall be made by a particular Borrower, with all relevant
determinations with respect to such request to be based on such Borrower's
individual criteria, such as the amount of its Eligible Accounts, Eligible
Inventory and Net Availability. Notwithstanding the foregoing, the maximum
aggregate amount outstanding for all Borrowers shall at no time exceed
$3,000,000. Except as provided in this Section 10.7 and as otherwise
specifically provided, "Borrower" shall be defined as set forth in Section 1.1
hereof.
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<PAGE> 17
IN WITNESS WHEREOF, Borrower and Lender have duly executed this
Agreement this 21st day of August, 1998.
LENDER BORROWER:
THE CIT GROUP/CREDIT TRI-STAR AIRLINE
FINANCE, INC. SERVICES, INC.
By: By: /s/ LEE SANDERS
------------------------ ----------------------------
Title: Title: President
--------------------- -------------------------
PRIDE AVIATION, INC.
By: /s/ LEE SANDERS
----------------------------
Title: Chairman of the Board
-------------------------
CASPER AIR SERVICE
By: /s/ LEE SANDERS
----------------------------
Title: Chairman of the Board
-------------------------
AERO DESIGN, INC.
By: /s/ LEE SANDERS
----------------------------
Title: Chairman of the Board
-------------------------
PRIDE AVIATION
PORTLAND, INC.
By: /s/ LEE SANDERS
----------------------------
Title: Chairman of the Board
-------------------------
17
<PAGE> 1
EXHIBIT 10.11
GUARANTY
August 21, 1998
The CIT Group/Credit Finance, Inc.
10 South LaSalle Street
Chicago, Illinois 60603
Re: Tri-Star Airline Services, Inc., Pride Aviation, Inc., Casper
Air Service, Inc., Aero Design, Inc. and Pride Aviation
Portland, Inc. (collectively, "Borrower")
Ladies and Gentlemen:
Reference is made to the financing arrangements between The CIT
Group/Credit Finance, Inc. ("Lender") located at 10 South La Salle Street,
Chicago, Illinois 60603 and Borrower, pursuant to which Lender may extend
loans, advances and other financial accommodations to Borrower as set forth in
the Loan and Security Agreement of even date herewith between Borrower and
Lender, and various other agreements, documents and instruments now or at any
time executed and/or delivered in connection therewith or otherwise related
thereto, including, but not limited to, this Guaranty (all of the foregoing, as
the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, being collectively referred to herein
as the "Financing Agreements").
Because of the close business and financial relationships between
Borrower and the undersigned ("Guarantor"), in consideration of the benefits
which will accrue to Guarantor, and as an inducement for and in consideration
of Lender at any time providing or extending loans, advances and other
financial accommodations to Borrower, whether pursuant to the Financing
Agreements or otherwise, Guarantor hereby, irrevocably and unconditionally, (a)
guarantees and agrees to be liable for the prompt indefeasible and full payment
and performance of all revolving loans, term loans, letters of credit, bankers'
acceptances, merchandise purchase guaranties or other guaranties or indemnities
for Borrower's accounts and all other obligations, liabilities and indebtedness
of every kind, nature or description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees and expenses, however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether arising under any of the Financing Agreements or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of the Financing Agreements or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute, whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, original, renewed or extended, and
whether arising directly or howsoever acquired by Lender including from any
other entity outright, conditionally or as collateral
<PAGE> 2
security, by assignment, merger with any other entity, participation or
interests of Lender in the obligations of Borrower to others, assumption,
operation of law, subrogation or otherwise and (b) agrees to pay to Lender on
demand the amount of all expenses (including, without limitation, attorneys'
fees and legal expenses) incurred by Lender in connection with the preparation,
execution, delivery, recording, administration, collection, liquidation,
enforcement and defense of Borrower's obligations, liabilities and indebtedness
as aforesaid to Lender, Lender's rights in any collateral or under this
Guaranty and all other Financing Agreements or in any way involving claims by
or against Lender directly or indirectly arising out of or related to the
relationship between Borrower and Lender, Guarantor and Lender, or any other
Obligor (as hereinafter defined) and Lender, whether such expenses are incurred
before, during or after the initial or any renewal term of the Financing
Agreements or after the commencement of any case with respect to Borrower,
Guarantor or any other Obligor under the United States Bankruptcy Code or any
similar statute (all of which being collectively referred to herein as the
"Guaranteed Obligations").
Notice of acceptance of this Guaranty, the making of loans, advances
and extensions of credit or other financial accommodations to, and the
incurring of any expenses by or in respect of, Borrower, and presentment,
demand, protest, notice of protest, notice of nonpayment or default and all
other notices to which Borrower or Guarantor are or may be entitled are hereby
waived. Guarantor also waives notice of, and hereby consents to, (i) any
amendment, modification, supplement, renewal, restatement or extensions of time
of payment of or increase or decrease in the amount of any of the Guaranteed
Obligations or to the Financing Agreements and any collateral, and the
guarantee made herein shall apply to the Guaranteed Obligations as so amended,
modified, supplemented, renewed, restated or extended, increased or decreased,
(ii) the taking, exchange, surrender and releasing of collateral or guarantees
now or at any time held by or available to Lender for the obligations of
Borrower or any other party at any time liable for or in respect of the
Guaranteed Obligations (individually and collectively, the "Obligors"), (iii)
the exercise of, or refraining from the exercise of any rights against
Borrower, Guarantor or any other Obligor or any collateral, and (iv) the
settlement, compromise or release of, or the waiver of any default with respect
to, any Guaranteed Obligations. Guarantor agrees that the amount of the
Guaranteed Obligations shall not be diminished and the liability of Guarantor
hereunder shall not be otherwise impaired or affected by any of the foregoing.
This Guaranty is a guaranty of payment and not of collection.
Guarantor agrees that Lender need not attempt to collect any Guaranteed
Obligations from Borrower or any other Obligor or to realize upon any
collateral, but may require Guarantor to make immediate payment of the
Guaranteed Obligations to Lender when due or at any time thereafter. Lender may
apply any amounts received in respect of the Guaranteed Obligations to any of
the Guaranteed Obligations, in whole or in part (including attorneys' fees and
legal expenses incurred by Lender with respect thereto or otherwise chargeable
to Borrower or Guarantor) and in such order as Lender may elect, whether or not
then due.
No invalidity, irregularity or unenforceability of all or any part of
the Guaranteed Obligations or Financing Agreements shall affect, impair or be a
defense to this Guaranty, nor shall any other circumstance which might
otherwise constitute a defense available to, or legal
-2-
<PAGE> 3
or equitable discharge of Borrower in respect of any of the Guaranteed
Obligations or Guarantor in respect of this Guaranty, affect, impair or be a
defense to this Guaranty. Without limitation of the foregoing, the liability of
Guarantor hereunder shall not be discharged or impaired in any respect by
reason of any failure by Lender to perfect or continue perfection of any lien
or security interest in any collateral for the Guaranteed Obligations or any
delay by Lender in perfecting any such lien or security interest.
This Guaranty is absolute, unconditional and continuing. Payment by
Guarantor shall be made to Lender at its office from time to time on demand as
Guaranteed Obligations become due. One or more successive or concurrent
actions may be brought hereon against Guarantor either in the same action in
which Borrower or any other Obligor is sued or in separate actions.
Upon the Guarantor acquiring a majority interest in any entity,
Guarantor agrees that such entity will become a guarantor of all the
obligations thereunder, and will grant to Lender a first priority security
interest in collateral of the type pledged by Borrower, all pursuant to
instruments, documents and agreements satisfactory in form and substance to
Lender.
Payment of all amounts now or hereafter owed to Guarantor by Borrower
or any other Obligor is hereby subordinated in right of payment to the
indefeasible payment in full to Lender of the Guaranteed Obligations and is
hereby assigned to Lender as security therefor. Guarantor hereby irrevocably
and unconditionally waives and relinquishes all statutory, contractual, common
law, equitable and all other claims against Borrower, any collateral for the
Guaranteed Obligations or other assets of Borrower or any other Obligor, for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect of sums paid or payable to Lender by Guarantor
hereunder and Guarantor hereby further irrevocably and unconditionally waives
and relinquishes any and all other benefits which Guarantor might otherwise
directly or indirectly receive or be entitled to receive by reason of any
amounts paid by or collected or due from Guarantor, Borrower or any other
Obligor upon the Guaranteed Obligations or realized from their property.
All sums at any time owed by Lender to Guarantor or to the credit of
Guarantor and any property of Guarantor on which Lender at any time has a lien
or security interest or of which Lender at any time has possession, shall
secure payment and performance of all Guaranteed Obligations and all other
obligations of Guarantor to Lender however arising.
In case proceedings are instituted by or against Borrower or Guarantor
or any other Obligor, in bankruptcy or insolvency, or for reorganization,
arrangement, receivership, or the like, or if Borrower or Guarantor or any
other Obligor calls a meeting of creditors or makes any assignment for the
benefit of creditors, or upon the occurrence of any event which constitutes a
default or event of default under the Financing Agreements, the liability of
Guarantor for the entire Guaranteed Obligations shall mature, even if the
liability of Borrower or any other Obligor therefor does not.
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<PAGE> 4
Upon an Event of Default (as defined in the Loan Agreement) under the
Loan Agreement, Guarantor shall be bound by the negative covenants thereunder
to the same extent as if Guarantor were a party to the Loan Agreement.
Guarantor shall continue to be liable hereunder until one of Lender's
officers actually receives a written termination notice by certified mail, but
the giving of such notice shall not relieve Guarantor from liability for any
Guaranteed Obligations incurred before termination or for post-termination
collection expenses and interest pertaining to any Guaranteed Obligations
arising before termination.
Guarantor agrees that this Guaranty shall remain in full force and
effect or be reinstated, as the case may be, if at any time payment of any of
the Guaranteed Obligations is rescinded or otherwise restored by Lender to
Borrower or to any other person who made such payment, or to the creditors or
creditors' representative of Borrower or such other person.
Lender's books and records showing the accounts between Lender and
Borrower shall be admissible in evidence in any action or proceeding as prima
facie proof of the items therein set forth, and any written statements rendered
by Lender to Borrower, to the extent to which no written objection is made
within sixty (60) days after the date thereof, shall be considered correct and
be binding on Guarantor as an account stated for purposes of this Guaranty.
No delay on Lender's part in exercising any rights hereunder or
failure to exercise the same shall constitute a waiver of such rights. No
notice to, or demand on, Guarantor shall be deemed to be a waiver of the
obligation of Guarantor to take further action without notice or demand as
provided herein. No waiver of any of Lender's rights hereunder, and no
modification or amendment of this Guaranty, shall be deemed to be made by
Lender unless the same shall be in writing, duly signed on Lender's behalf, and
each such waiver, if any, shall apply only with respect to the specific
instance involved and shall in no way impair Lender's rights or the obligations
of Guarantor to Lender in any other respect at any other time.
This Guaranty is binding upon Guarantor, its successors and assigns
and shall benefit Lender and its successors, endorsees, transferees and
assigns. All references to Borrower and Lender herein shall include their
respective successors and assigns. This instrument shall be governed by, and
construed and interpreted in accordance with, the laws of the state in which
the office of Lender set forth above is located.
Guarantor and Lender waive all rights to trial by jury in any action
or proceeding instituted by either of them against the other which pertains
directly or indirectly to this Guaranty, any alleged tortious conduct by
Guarantor or Lender, or, in any way, directly or indirectly, arising out of or
related to the relationship between Guarantor and Lender or Borrower and
Lender. In no event will Lender be liable for lost profits or other special or
consequential damages.
Guarantor waives all rights to interpose any claims, deductions,
setoffs or counterclaims of any kind, nature or description in any action or
proceeding instituted by Lender with respect
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<PAGE> 5
to this Guaranty or any matter arising herefrom or relating hereto, except
compulsory counterclaims.
Guarantor hereby irrevocably submits and consents to the non-exclusive
jurisdiction of the state and federal courts located in the state in which the
office of Lender designated above is located with respect to any action or
proceeding arising out of this Guaranty or any matter arising herefrom or
relating hereto. Any such action or proceeding commenced by Guarantor against
Lender will be litigated only in a federal court located in the district, or a
state court in the state and county, in which the office of Lender set forth
above is located.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the day and year first above written.
AVIATION GROUP, INC.
By: /s/ LEE SANDERS
------------------------------------
Name: Lee Sanders
----------------------------------
Title: Chairman of the Board
---------------------------------
Address:
700 N. Pearl St., Suite 2170
---------------------------------------
Dallas, Texas 75201
---------------------------------------
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<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
by and between Aviation Group, Inc., a Texas corporation (the "Company"), and
Thomas J. Smith, an individual ("Employee"), as of August 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 President and Chief Operating Officer to perform
such duties as the Chief Executive Officer of the Company and the Board of
Directors shall from time to time prescribe.
1.2 Employee's Resources. Employee shall devote substantially all of
his time, energy and capabilities to the performance of such duties and shall
not devote any material portion of his time or abilities to the planning,
organization, promotion, direction, management or conduct of any other business
activity, whether or not such other business activity is pursued for the gain,
profit or pecuniary advantage of Employee, without having first obtained the
consent of the Company. Employee further agrees that, without the prior consent
of the Company, Employee shall not during the term of this Agreement directly or
indirectly (i) invest in any business which is competitive with that of the
Company, (ii) attempt to influence customers or other business associates not to
do business with or not to continue to do business with the Company, or (iii)
take any other action inconsistent with the fiduciary responsibility of an
employee to his employer.
ARTICLE II
TERM OF EMPLOYMENT
2.1 Term. Subject to earlier termination as hereinafter provided, the
initial term of employment of Employee hereunder shall commence on the Effective
Date and shall end on the third anniversary of the Effective Date. At the end of
the initial term, the Agreement will automatically extend for an additional year
and for an additional year each year thereafter, unless either party notifies
the other party in writing at least 90 days prior to the end of the Term of
Employment (as hereinafter defined) that the Agreement will terminate at the end
of the term. As used herein, the phrase "Term of Employment" shall mean said
initial term of employment as well as any renewal terms thereof.
<PAGE> 2
2.2 Termination. This Agreement may be terminated at any time during
the Term of Employment only by reason of and in accordance with the following:
(a) Death. If Employee dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically terminate
as of the date of Employee's death; and the Company shall have no further
obligation to Employee or his estate, except to pay to the estate of Employee
(i) any accrued, but unpaid, Salary (as hereinafter defined) and any vacation or
sick leave benefits which have accrued as of the date of death but were then
unpaid or unused, and (ii) any declared, accrued Bonus Compensation (as
hereinafter defined), if any.
(b) Disability. If, during the term of this Agreement, Employee
shall be prevented from performing his duties hereunder by reason of becoming
totally disabled, then the Company, on thirty (30) days' prior notice to
Employee, may terminate this Agreement. For purposes of this Agreement, Employee
shall be deemed to have become totally disabled when (i) he receives "total
disability benefits" under the Company's disability plan (whether funded with
insurance or self-funded by the Company), or (ii) the Board, upon the written
report of a qualified physician (after complete examination of Employee)
designated by the Board, shall have determined that Employee has become
physically and/or mentally incapable of performing his duties under this
Agreement on a permanent basis. In the event of termination pursuant to this
Section, the Company shall be relieved of all of its obligations under this
Agreement, except to pay Employee any accrued, but unpaid Salary, any vacation
or sick leave benefits which have accrued as of the date on which such permanent
disability is determined, but then remain unpaid, and any declared Bonus
Compensation. The provisions of the preceding sentence shall not affect
Employee's rights to receive payments under the Company's disability insurance
plan, if any.
(c) Termination by the Company for Cause. Prior to the expiration
of the term of this Agreement, the Company may discharge Employee for cause and
terminate this Agreement without any further liability hereunder to Employee or
his estate, except to pay any accrued, but unpaid, Salary, any declared Bonus
Compensation, and any vacation benefits and sick leave 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) Gross mismanagement or willful neglect of Employee's
duties as determined solely by the Board; 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
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<PAGE> 3
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 and sick
leave.
(e) Severance. Severance will be paid to Employee, only if employee
is terminated under terms listed above in Article II, Section 2.2, Subsection
(c) (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 (c) (ii). If employee is terminated for any other reasons with cause
(other than the reasons listed in Article II, Section 2.2, Subsection (c) (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 August 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, consistent with Board policy.
3.2 Collections. Group shall remit promptly from time to time after the
closing (the "Closing") of the transactions contemplated in the Stock Purchase
Agreement between Aviation Group, Inc., General Electrodynamics Corporation
("GEC"), Omega Management Corporation and Employee (the "Stock Purchase
Agreement") to Employee up to $300,000 of any collections, net of direct
expenses, received by GEC pursuant to any of the Government Contracts (as
defined in the Stock Purchase Agreement) after the Closing, on a when earned/as
collected basis. If Group or GEC is required pursuant to a final judgment to
remit payments to Dick Davis pursuant to the Non- Competition Agreement, as
amended, by and between Dick Davis and GEC (the "Non-Competition Agreement") on
an accelerated basis, Employee agrees to accept payments owed to Employee under
this Section according to the payment schedule set forth in the Non-Competition
Agreement.
3.3 Employment Benefits. In addition to the Salary and Bonus
Compensation payable to Employee hereunder, Employee shall be entitled to the
following benefits (which shall be comparable to those benefits to which
Employee was entitled as an employee of General Electrodynamics Corporation)
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
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<PAGE> 4
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 August 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.
(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.
3.4 Reimbursement of Employee Expenses. Employee is authorized to incur
ordinary, necessary and reasonable expenses in connection with the performance
of his duties and responsibilities under this Agreement and for the promotion of
the business and activities of the 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.
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<PAGE> 5
ARTICLE IV
RESTRICTIVE COVENANTS
4.1 Trade Secrets, Propriety and Confidential Information. Employee
recognizes and acknowledges that Employee will acquire during his employment
hereunder access to certain trade secrets and confidential and proprietary
information of the Company (including, but not limited to, financial data,
marketing and sales plans, customer and supplier lists, and technical and
commercial information relating to the Company's properties, customers and
suppliers). Employee acknowledges that the information he obtains through his
employment hereunder constitutes valuable, special, and unique property of the
Company and that the Company would suffer great loss and damage if he should
violate the covenants set forth in this Agreement. Employee acknowledges that
such covenants and conditions are reasonable and necessary for the protection of
the Company's business.
4.2 Solicitation of Employees. Employee agrees that during the Term of
Employment and until three years after the termination or expiration of the Term
of Employment, he will not, directly or indirectly, or by act in concert with
others, employ or attempt to employ or solicit for employment to any business
which is competitive with the Company, any of the Company's employees, or seek
to influence any employees of the Company to leave their employment with the
Company.
4.3 Nondisclosure of Trade Secrets, Propriety and Confidential
Information. Employee agrees that without the prior written approval of the
Company, Employee shall not during the Term of Employment or following the
cessation of the Term of Employment for any reason disclose any of the Company's
trade secrets or confidential or proprietary information to any person or firm,
company, association, or other entity (except for authorized personnel of the
Company) for any reason or purpose whatsoever; provided, however, that this
Section shall not apply to the extent that Employee shall be required to provide
information pursuant to a valid, lawful subpoena or court order so long as
Employee shall have made his best efforts in good faith to cause the court of
relevant jurisdiction, to the greatest extent possible, to limit the scope of
such subpoena or order and protect the confidentiality of the information so
disclosed.
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
aviation business segment 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
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<PAGE> 6
agreements independent of any other provision of this Agreement and the
allegation or existence of any claim or cause of action of Employee against the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by the Company of the covenants contained herein.
4.7 Remedies. In the event of breach or threatened breach by Employee
of any provision of this Article IV, the Company shall be entitled to relief by
temporary restraining order, temporary injunction, permanent injunction, or
otherwise in addition to other legal and equitable relief to which it may be
entitled, including any and all monetary damages which the Company may incur as
a result of said breach, violation or threatened breach or violation. The
Company may pursue any remedy available to it concurrently or consecutively in
any order as to any breach, violation, or threatened breach or violation, and
the pursuit of one of such remedies at any time will not be deemed an election
of remedies or waiver of the right to pursue any other of such remedies as to
such breach, violation, or threatened breach or violation, or as to any other
breach, violation, or threatened breach or violation.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Notices. Whenever, in connection with this Agreement, any notice is
required to be given or any other act or event is to be done or occur on or by a
particular number of days, and the date thus particularized should be a
Saturday, Sunday, or bank holiday in the City of Dallas, Texas, such date shall
be postponed to the next day which shall not be a Saturday, Sunday, or bank
holiday in the City of Dallas, Texas. In the event a notice or other document is
required to be given hereunder to the Company or Employee, such notice or other
document shall either be personally delivered or be mailed to the party entitled
to receive the same by certified mail, return receipt requested, at the
appropriate address set forth below or at such other address as such party shall
designate in a written notice given in accordance with this Section:
Company: Employee:
Aviation Group, Inc. Thomas J. Smith
700 North Pearl Street, Suite 2170 4828 Lakeside Drive
Dallas, Texas 75201 Colleyville, Texas 76034
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
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<PAGE> 7
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.
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: Chairman of the Board
---------------------------
EMPLOYEE:
/s/ THOMAS J. SMITH
---------------------------------
Thomas J. Smith
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<PAGE> 8
GEC BENEFITS FOR THOMAS J. SMITH
o Harris HMO Health Insurance
o United Dental Plan
o VSP Vision plan
o Company paid:
Auto Lease:- Including insurance, gasoline and upkeep
UNUM disability insurance
Farmers Life Insurance
o Business expenses reimbursed
o 401K Program
<PAGE> 1
EXHIBIT 10.13
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.
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<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.
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<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
5
<PAGE> 6
in the City of Dallas, Texas, such date shall be postponed to the next day
which shall not be a Saturday, Sunday, or bank holiday in the City of Dallas,
Texas. In the event a notice or other document is required to be given
hereunder to the Company or Employee, such notice or other document shall
either be personally delivered or be mailed to the party entitled to receive
the same by certified mail, return receipt requested, at the appropriate
address set forth below or at such other address as such party shall designate
in a written notice given in accordance with this Section:
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
-------------------------------------
EMPLOYEE:
/s/ RICHARD L. MORGAN
-------------------------------------------
Richard L. Morgan
7
<PAGE> 1
EXHIBIT 10.27
SECOND AMENDMENT
TO FIRST AMENDED AND
RESTATED EMPLOYMENT AGREEMENT
This Second Amendment to First Amended and Restated Employment
Agreement (the "Amendment") is made and entered into between Aviation Group,
Inc., a Texas corporation (the "Company"), and Lee Sanders ("Employee"), as of
August 28, 1998.
WHEREAS, Employee and the Company have entered into that First Amended
and Restated Employment Agreement dated as of April 15, 1997 (the "Employment
Agreement");
WHEREAS, the Board of Directors of the Company has appointed Thomas J.
Smith as President of the Company, with the consent and approval of Employee;
WHEREAS, the Company and Employee desire to amend the Employment
Agreement to clarify its intent in light of this development.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants herein set forth, the parties hereto agree to amend the Employment
Agreement by replacing the word "President" where it appears in Sections 1.1,
3.5(a) and 3.5(e) of the Employment Agreement with the word "Chairman".
EXECUTED as of the date first above written.
AVIATION GROUP, INC.
By: /s/ RICHARD MORGAN
--------------------------------------
Name: Richard Morgan
------------------------------------
Title: CFO, DIRECTOR
-----------------------------------
/s/ LEE SANDERS
-----------------------------------------
Lee Sanders
<PAGE> 1
EXHIBIT 11.1
AVIATION GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1998 1997
------------ -----------
<S> <C> <C>
Common shares outstanding at
beginning of period 1,600,250 1,600,250
Weighted average effect of:
Initial public offering 1,006,250
Acquisition of Casper Air Service 134,369
Conversion of notes payable 72,128
Acquisition of Aero Design 36,310
Exercise of bridge notes warrants 38,043
Settlement of prepaid debt 2,500
Exercise of stock warrants 56,366
Assumed exercise of warrants and
options in accordance with SEC
requirements 113,416 159,457
------------ -----------
Weighted average shares outstanding 3,059,632 1,759,707
============ ===========
Net (loss) $ (1,638,000) $ (476,000)
============ ===========
Computation of net loss per common share:
Net (loss) divided by weighted average
shares outstanding $ (0.54) $ (0.27)
============ ===========
</TABLE>
<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
Pride Aviation Portland, Inc. Oregon corporation
Casper Flying Service Wyoming corporation (Inactive
subsidiary of Casper Air
Service)
Redbird Airport Management Company Texas corporation (Inactive)
TriStar Airport Management Company Texas corporation (Inactive)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR ITS 1998 FISCAL YEAR.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 709,000
<SECURITIES> 0
<RECEIVABLES> 2,020,000
<ALLOWANCES> 0
<INVENTORY> 1,513,000
<CURRENT-ASSETS> 4,459,000
<PP&E> 4,812,000
<DEPRECIATION> 1,099,000
<TOTAL-ASSETS> 11,901,000
<CURRENT-LIABILITIES> 4,067,000
<BONDS> 919,000
0
0
<COMMON> 33,000
<OTHER-SE> 6,882,000
<TOTAL-LIABILITY-AND-EQUITY> 11,901,000
<SALES> 18,244,000
<TOTAL-REVENUES> 18,244,000
<CGS> 14,618,000
<TOTAL-COSTS> 14,618,000
<OTHER-EXPENSES> 5,366,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386,000
<INCOME-PRETAX> (1,997,000)
<INCOME-TAX> 660,000
<INCOME-CONTINUING> (1,740,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,337,000)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
