<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[_] 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
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AVIATION GROUP, INC.
(Exact name of Small Business Issuer as specified in its charter)
TEXAS 75-2631373
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 NORTH PEARL STREET
SUITE 2170
DALLAS, TEXAS 75201
(Address of Principal Executive Offices)
214/922-8100
(Issuer's Telephone Number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
---
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,582,450 shares of Common Stock were outstanding as of May 12, 1999.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
---
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIal STATEMENTS.
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 640,000 $ 509,000
Restricted time deposit 200,000 200,000
Accounts receivable, net 2,536,000 2,020,000
Inventory 2,146,000 1,513,000
Deferred income taxes 88,000 88,000
Prepaid expenses and other 139,000 129,000
----------- -----------
Total Current Assets 5,749,000 4,459,000
----------- -----------
Property and equipment 6,416,000 4,812,000
Less: accumulated depreciation (1,589,000) (1,099,000)
----------- -----------
4,827,000 3,713,000
----------- -----------
Goodwill, net 3,317,000 3,135,000
Deferred income taxes 282,000 112,000
Other 482,000 181,000
----------- -----------
4,081,000 3,428,000
----------- -----------
Total Assets $14,657,000 $11,600,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations 867,000 $ 625,000
Current portion of capital lease obligations -- 71,000
Other short-term borrowings 2,049,000 855,000
Accounts payable 2,327,000 1,424,000
Accrued interest 29,000 44,000
Income tax payable 25,000 25,000
Accrued liabilities 1,203,000 1,023,000
Deferred revenue 239,000 --
----------- -----------
Total Current Liabilities 6,739,000 4,067,000
----------- -----------
Long-Term Liabilities
Long-term debt, net of current maturities 1,144,000 723,000
Capitalized leases, net of current maturities 322,000 181,000
Loan from shareholder 15,000 15,000
----------- -----------
Total Long-Term Liabilities 1,481,000 919,000
----------- -----------
Total Liabilities 8,220,000 4,986,000
----------- -----------
Shareholders' Equity
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none outstanding -- --
Common Stock, $.01 par value, 10,000,000 shares
authorized, 3,465,673 and 3,296,601 shares
issued and outstanding 36,000 33,000
Additional paid-in capital 9,451,000 8,957,000
Retained earnings (deficit) (3,050,000) (2,376,000)
----------- -----------
Total Shareholders' Equity 6,437,000 6,614,000
----------- -----------
Total Liabilities and Shareholders' Equity $14,657,000 $11,600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-1-
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $5,544,000 $4,928,000 $17,613,000 $14,150,000
Cost of Revenue 3,991,000 3,542,000 12,733,000 10,785,000
---------- ---------- ----------- -----------
Gross Profit 1,553,000 1,386,000 4,880,000 3,365,000
---------- ---------- ----------- -----------
General and Administrative Expenses 1,379,000 826,000 3,080,000 2,375,000
Corporate Overhead Expenses 442,000 280,000 1,275,000 890,000
Nonrecurring Operating Costs Incurred 346,000 30,000 361,000 146,000
Depreciation and Amortization 234,000 201,000 712,000 531,000
---------- ---------- ----------- -----------
2,401,000 1,337,000 5,428,000 3,942,000
---------- ---------- ----------- -----------
Income (Loss) From Operations (848,000) 49,000 (548,000) (577,000)
---------- ---------- ----------- -----------
Other Income (Expenses)
Other Income(Expense) - 4,000 2,000 19,000
Interest Expense, net (101,000) (37,000) (298,000) (227,000)
---------- ---------- ----------- -----------
(101,000) (33,000) (296,000) (208,000)
---------- ---------- ----------- -----------
Income (Loss) Before Provision for Income Taxes (949,000) 16,000 (844,000) (785,000)
Provision (Benefit) for Income Taxes (195,000) 14,000 (170,000) (228,000)
---------- ---------- ----------- -----------
Net Income (Loss) $ (754,000) $ 2,000 $ (674,000) $ (557,000)
========== ========== =========== ===========
Earnings (loss) per common share
Basic and diluted $ (.21) $ 0.00 $ (.20) $ (0.18)
========== ========== =========== ===========
Weighted average shares outstanding (Note C)
Basic 3,524,062 3,191,265 3,409,469 3,014,757
========== ========== =========== ===========
Diluted 3,524,062 3,191,265 3,409,469 3,058,261
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended March 31,
-------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ (674,000) $ (557,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 712,000 531,000
Deferred income taxes (170,000) (208,000)
(Increase) decrease in accounts receivable (271,000) 171,000
(Increase) decrease in inventories 406,000 (365,000)
(Increase) decrease in prepaids and other current assets (5,000) (149,000)
Increase (decrease) in accounts payable 512,000 (116,000)
Increase (decrease) in accreted interest 64,000
Increase (decrease) in accrued interest (15,000)
Increase (decrease) in accrued liabilities 99,000 516,000
Other (59,000) (250,000)
----------- -----------
Total Adjustments 1,209,000 194,000
----------- -----------
Net Cash Provided (Used) by Operating Activities 535,000 (363,000)
----------- -----------
Cash Flows From Investing Activities:
Net cash paid in acquisition of Casper Air Service -- (1,145,000)
Net cash paid in acquisition of Aero Design, Inc. -- (723,000)
Proceeds of sale of property and equipment -- 748,000
Payments for property and equipment additions (755,000) (677,000)
----------- -----------
Net Cash Used by Investing Activities (755,000) (1,797,000)
----------- -----------
Cash Flows From Financing Activities:
Net repayments of short-term borrowings, net 794,000 (112,000)
Repayment of Bridge Notes -- (500,000)
Net principal payments on long-term debt (443,000) (765,000)
Proceeds from exercise of warrants -- 1,000
Proceeds from issuance of common stock -- 5,572,000
----------- -----------
Net Cash Provided (Used) by Financing Activities 351,000 4,196,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 131,000 2,036,000
Cash and Cash Equivalents at Beginning of Period 509,000 188,000
----------- -----------
Cash and Cash Equivalents at End of Period $ 640,000 $ 2,224,000
=========== ===========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 298,000 $ 202,000
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock in connection with
the acquisition of Casper Air Service. $ -- $ 883,000
Issuance of common stock in connection with
the acquisition of Aero Design, Inc. 547,000
Conversion of LEDC note to Common Stock -- 370,000
Issuance of common stock in connection with
the acquisition of General Electrodynamics, Inc. 340,000
Supplemental Disclosure of Non-cash Investment in GEC
Cash $ 41,000 --
Other current assets 1,289,000 --
Long-term assets 1,121,000 --
Current Liabilities (1,078,000) --
Long-term debt (1,175,000) --
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation in conformity with generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Examples include provisions for warranty claims and bad debts and
the length of assets' useful lives. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. The information in this Form 10-QSB should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended June 30, 1998.
NOTE B - ACQUISITION OF GENERAL ELECTRODYNAMICS CORPORATION
On August 28, 1998, the Company acquired 100% of the common stock of
General Electrodynamics Corporation ("GEC") in exchange for 112,029 shares of
Common Stock with a value of approximately $340,000. GEC is a 42-year old Texas-
based company that manufactures and sells aircraft scales and other aviation
components used by the aviation maintenance and transportation industries.
The following unaudited pro-forma consolidated results of operations for
the nine months ended March 31, 1999 assumes the GEC acquisition occurred as of
July 1, 1998. The information does not purport to be indicative of what would
have occurred had the acquisition actually been made as of such date or of
results which may occur in the future.
<TABLE>
<S> <C>
Revenues $18,220,000
Net income (loss) (711,000)
Net income (loss) per share (basic and diluted) $ (.20)
</TABLE>
NOTE C - NEW PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
effective for financial statements issued for periods ending after December 15,
1997, which establishes standards for computing and presenting earnings per
share (EPS). The statement requires dual presentation of basic and diluted EPS
on the face of the income statement for entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into, or resulted in
the issuance of common stock that then shared in the earnings of the entity. For
the three and nine month periods ended March 31, 1999 and 1998, the basic and
diluted EPS amounts calculated assuming adoption of this statement are the same
as the amounts presented on the consolidated statement of operations.
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are forward-
looking statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements, including those described
below. Investors are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly any revisions to these forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company, organized in three operating divisions, offers a range of
services, products and support to aviation industry customers. Management's plan
is to ultimately capture a larger market share of the services being outsourced
by the airline and corporate aircraft industry, including but not limited to
aircraft component overhaul and repair, generic aircraft part manufacturing,
airline and corporate aircraft painting, and ground handling services. Mergers,
acquisitions and internal growth are evaluated on an ongoing basis by management
for favorable opportunities.
Management continues its efforts to reduce overhead costs, and expects
additional improvements in future periods, principally from reductions in
Aviation Group corporate overhead, insurance cost reductions, and reductions in
accounting, legal, and other indirect expenses. Reductions in non-essential
division operating expenses, along with elimination of marginal products and
services that do not provide future growth or near-term profits will also be
pursued. Management presently believes that these actions, combined with the
future operating performance of the divisions will result in sufficient future
earnings necessary to fully utilize existing deferred tax assets
Overhead costs and corporate expense levels during the past two years were
instituted and incurred by management in anticipation of supporting the
acquisition of other aviation service companies in accordance with the Company's
growth strategy. While the Company continues to pursue growth via the
acquisition of such entities on a selected basis, such activity is subject to
the Company's ability to attract financing for such transactions. There can
presently be no assurance that such financing will be available in amounts and
at prices beneficial to existing shareholders and operations, and the absence of
such financing could have a materially negative effect on the Company's
operations. Therefore, management has also begun during fiscal 1999 to reduce
costs, manage the Company with a greater focus on current operating and
financial performance, and consider strategic joint ventures and/or combination
with other aviation service companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED 000'S) (UNAUDITED 000'S)
----------------- -----------------
TOTAL COMPANY 1999 1998 1999 1998
- ------------- ------ ------ ---- ----
<S> <C> <C> <C> <C>
Revenues $ 5,544 $ 4,928 $ 17,613 $ 14,150
Cost of revenue (3,991) (3,542) (12,733) (10,785)
Operating and other expenses (1,379) (826) (3,080) (2,375)
------- ------- -------- ---------
Operating division income 174 560 1,800 990
------- ------- -------- ---------
Corporate Overhead (342) (260) (1,135) (800)
Depreciation and amortization (234) (201) (712) (531)
Non-recurring costs incurred (346) (30) (361) (146)
Acquisition activity costs incurred (100) (20) (140) (90)
Interest income -- 4 2 19
Interest expense (101) (37) (298) (227)
------- ------- -------- ---------
</TABLE>
-5-
<PAGE>
Pre-tax income (loss) $ (949) $ 16 $ (844) $ (785)
======= ===== ======= ========
The following discussions and tables set forth a summary of results in the
major categories, presented by operating division, of revenues, costs of
revenues 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.
OVERHAUL & SERVICE DIVISION
- ---------------------------
Revenues consist primarily of gross revenues from stripping and painting
and other aircraft coating services to major passenger and freight airlines and
corporate aircraft and aviation related companies. Beginning January 1, 1999,
the Company officially changed the name of its painting operations from Pride
Aviation to Aviation Exteriors ("Avex") for each of the locations. This name
change coincides the Company's enhanced marketing efforts in this division, and
management believes that such efforts will result in enhanced market awareness
and reputation for its painting businesses.
The Company's Aero Design battery manufacturing subsidiary is positioning
for significant growth, and along with General Electrodynamics Corporation
(acquired in August, 1998) comprises the remaining operating activities of this
division. Costs of revenues consist largely of direct and indirect labor,
direct material and supplies, insurance and other indirect costs applicable to
the completion of each contract or order. Operating expenses consist of all
general and administrative and operating costs not included in costs of sales,
including but not limited to facilities rent, indirect labor and other overhaul
costs.
This division of the Company now consists of four locations. In addition to
the Avex paint locations at Acadiana Regional Airport in New Iberia, Louisiana
and a second facility at Portland Airport in Portland, Oregon, recent
acquisitions have added the complementary operations of Aero Design, Inc. in Mt.
Juliet, Tennessee, and General Electrodynamics Corporation of Arlington, Texas
to this division. During the nine months ended March 31, 1999, the paint
division performed services for two customers whose sales represented 68% of
total revenues of this division. For the nine months ended March 31, 1998, the
paint division performed services for one customer whose sales represented 41%
of total revenues for the Company. Operating costs for the quarter ended March
31, 1999 rose while the Company transitioned out of its multi-year contract with
United Airlines into work for other customers. Before the end of fiscal 1999 the
Company plans to begin operations at an additional paint facility in Greenville,
Mississippi.
This facility will be operated under a ten year lease and consists of two
commercial jet hangar paint facilities, with an additional paint hangar
available subject to certain operating and construction requirements. Non-
recurring start up costs of $137,000 were incurred at this location during the
quarter ended March 31, 1999. Such costs incurred during the three and nine
month periods ended March 31, 1998 for the opening of the company's Portland
paint facility were $0 and $81,000, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED 000'S) (UNAUDITED 000'S)
----------------- -----------------
OVERHAUL SERVICES 1999 1998 1999 1998
- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,586 $ 2,731 $11,941 $ 7,745
Cost of revenue (2,298) (1,911) (8,569) (5,701)
Operating and other expenses (1,055) (408) (1,729) (1,150)
------- -------- ------- -------
Recurring division income 233 412 1,643 894
------- -------- ------- -------
Depreciation and amortization (188) (116) (525) (353)
Non-recurring start up costs (137) -- (137) (81)
Interest income -- 4 -- --
Interest expense (9) (6) (113) (25)
------- -------- ------- -------
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pre-tax income (loss) $ (101) $ 294 $ 868 $ 435
======= ======== ======= =======
Segment assets at end of period $10,024 $ 6,006 $10,024 $ 6,006
======= ======== ======= =======
</TABLE>
GROUND HANDLING & SERVICE DIVISION
- ----------------------------------
Revenues are derived primarily by providing commercial airlines with a
variety of support services including aircraft interior cleaning, exterior
washes, lavatory and water services and ramp services and baggage handling.
Costs of revenues consist largely of direct and indirect labor, direct material
and supplies, and other indirect costs. Operating expenses consist of all
general and administrative and operating costs not included in costs of sales.
This division operates principally at Dallas-Fort Worth International Airport
(since 1990), and provides selective additional service at the Alliance Fort
Worth airport complex.
Certain marginal non-DFW operating locations have been eliminated during
the past twelve months. During the three and nine month periods ended March 31,
1999, the Company recognized $20,000 and $35,000 in non-recurring costs
associated with these shutdowns. Such costs for the three and nine months ended
March 31, 1998 were $30,000 and $65,000, respectively. This division has a
significant revenue concentration with a particular customer and loss of
business from this customer could have a material adverse affect on this
division's business, results of operations and financial condition. Management's
marketing efforts recognize this risk.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED 000'S) (UNAUDITED 000'S)
----------------- -----------------
GROUND HANDLING & SERVICES 1999 1998 1999 1998
- -------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $ 367 $ 342 $1,124 $1,056
Cost of revenue (189) (220) (590) (796)
Operating and other expenses (117) (47) (354) (205)
----- ------ ------ ------
Recurring division income 61 75 180 55
----- ------ ------ ------
Depreciation and amortization (27) (14) (84) (41)
Non-recurring facility shutdown costs (20) (30) (35) (65)
Interest income -- -- 1 --
Interest expense (15) -- (18) (4)
----- ------ ------ ------
Pre-tax income $ (1) $ 31 $ 44 $ (55)
===== ====== ====== ======
Segment assets at end of period $ 599 $ 235 $ 599 $ 235
===== ====== ====== ======
</TABLE>
FBO OPERATIONS & AIRPORT MANAGEMENT
- -----------------------------------
In August 1997, the Company acquired Casper Air Service, Inc. ("CAS"),
which operates a fixed-base operation in Casper, Wyoming. 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 freight aircraft customers. It also is a distributor of Cessna and other
parts to the general aviation community. During the past twelve months, the
Company has eliminated certain marginal lines of business and operations at CAS,
including the charter flight department and certain parts inventories. Certain
lower margin parts sales volume reduced gross margin in the quarter ended March
31, 1999. Non-recurring charges associated with these eliminations totaled
$189,000 for the three and nine months ended March 31, 1999. Such activities
resulted in no material costs during the three and nine month periods ended
March 31, 1998.
-7-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED 000'S) (UNAUDITED 000'S)
----------------- -----------------
FBO OPERATIONS 1999 1998 1999 1998
- -------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 1,591 $ 1,855 $ 4,548 $ 5,349
Cost of revenue (1,504) (1,411) (3,574) (4,288)
Operating and other expenses (207) (371) (997) (1,020)
------- ------- ------- -------
Recurring division income (loss) (120) 73 (23) 41
Depreciation and amortization (13) (65) (87) (125)
Non-recurring asset sales and write-downs (189) -- (189) --
Interest income - -- 1 --
Interest expense (34) (26) (59) (57)
------- ------- ------- -------
Pre-tax income $ (356) $ (18) $ (357) $ (141)
======= ======= ======= =======
Segment assets at end of period $ 3,537 $ 5,091 $ 3,537 $ 5,091
======= ======= ======= =======
</TABLE>
AVIATION GROUP - CORPORATE OVERHEAD
- -----------------------------------
Operating expenses consist of all general and administrative and operating
costs to provide management to the Company's divisions, to support expected
growth, and to seek acquisition targets, not directly attributable to the
divisions' operations. These charges include legal, accounting, travel and other
related overhead. During the three and nine months ended March 31, 1999, the
Company incurred $100,000 and $140,000 in non-amortizable acquisition related
costs. For the three and nine months ended March 31, 1998, the Company incurred
$20,000 and $90,000 in such charges. Direct costs associated with the Company's
status as a public company, along with increases in travel and corporate
marketing and operations accounted for the rise is overhead in fiscal 1999.
Management continues its efforts to reduce overhead costs, and expects
additional improvements in future periods, principally from reductions in
Aviation Group management overhead, insurance cost reductions, and reductions in
accounting, legal, and other indirect expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED 000'S) (UNAUDITED 000'S)
---------------- ----------------
AVIATION GROUP- CORPORATE 1999 1998 1999 1998
- ------------------------- ----- ---- ---- ----
<S> <C> <C> <C> <C>
Operating and other expenses $(342) $ (260) $(1,135) $ (800)
Depreciation and amortization (6) (6) (16) (12)
Acquisition activity costs (100) (20) (140) (90)
Interest income - - -- 19
Interest expense (43) (5) (108) (141)
----- ------ ------- -------
Total Corporate Expenses $(491) $ (291) $(1,399) $(1,024)
===== ====== ======= =======
Segment assets at end of period $ 495 $1,770 $ 495 $ 1,770
===== ====== ======= =======
</TABLE>
SEASONALITY AND VARIABILITY OF RESULTS
The Company's Overhaul Services Division can experience significant
seasonality and quarter-to-quarter variability in its stripping and painting
operations. The Company's painting revenues can be adversely affected during the
airlines' peak traffic seasons of the summer months and the November and
December holidays. The Company's paint
-8-
<PAGE>
contract with United Airlines concluded during the Company's fiscal quarter
ended March 31, 1999, and marketing activities are presently underway to replace
this volume. The Company has made significant progress in this area, with the
addition of contracts with United Parcel Service, Piedmont Airlines, and Federal
Express. Management works continuously to add additional customers.
YEAR 2000 COMPLIANCE ISSUES
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 continues to work 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.
The Company has an ongoing 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
by December 31, 1999.
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. The Company is presently in the
process of this conversion, and expects to complete this project
before the end of fiscal 1999. This new system is represented by
vendors to be Year-2000 compliant. The cost of these upgrades and
installations is expected to be less than $50,000, and should be
installed, tested and completed during the fourth quarter of 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
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<PAGE>
sufficient Year 2000 compliant systems and procedures to insure 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 certain 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.
d) General passenger airline and airport disruption: The Company's customer
base is dominated by major passenger and freight airlines operating
principally in the United States. Major disruptions in air traffic control
and communications, airline ticketing, scheduling and flight operations, or
related activities caused by Year-2000 disruptions, if prolonged, could
have an indirect though material effect on the Company's operations. While
the Company is not presently aware of any such actual problems, the general
risk of such disruptions is an industry-wide concern that the Company and
other service providers continually monitor.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
REVENUES
--------
The Company's revenue for the three months ended March 31, 1999 increased
$616,000, to $5,544,000. The increase is due primarily to an increase of
$855,000 in revenue for the Overhaul and Service division offset by a decrease
of $264,000 in the FBO Operations division. The increase in revenue for the
Overhaul and Service division is due primarily to the acquisition of Aero-Design
and General Electrodynamics Corporation. The decrease in revenue for the FBO
Operations division is primarily due to the termination of marginal business
lines and products.
COST OF REVENUES & EXPENSES
---------------------------
The cost of revenue for the three months ended March 31, 1999, increased by
$449,000, to $3,991,000. This increase is due primarily to the acquisition of
Aero-Design and General Electrodynamics Corporation as well. Cost of revenue as
a percentage of revenue remained steady at 72%.
The Company's divisional G&A expenses for the three months ended March 31,
1999, increased by $553,000 to $1,379,000, excluding non-recurring divisional
charges of $346,000. The non-recurring divisional charges are described in the
respective sections on the operating divisions. The dollar increase is
primarily due to the acquisition of Aero-Design and General Electrodynamics
Corporation. This increase also includes $100,000 in corporate acquisition
activity costs in the quarter ended March 31, 1999 versus $20,000 for the
quarter ended March 31, 1998. Management continues its efforts to reduce
overhead levels, and expects continued improvements in future periods.
The Company's interest expense increased by $64,000, to $101,000. This increase
is due primarily to lower fiscal 1998 debt and related interest expenses.
During the same period in fiscal 1999 the Company has increased its debt to
acquire Aero-Design, General Electrodynamics Corporation, and fund its ongoing
growth and operations.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1998
REVENUES
--------
The Company's net revenue increased by $3,463,000, or 24%, for the nine
months ended March 31, 1999. This increase in revenue resulted from an
increase of $4,196,000, in the Overhaul and Service division, which was offset
by an $804,000 decrease in revenue associated with the elimination of charter
operations from the FBO Operations division. The increase in the Overhaul and
Service division is due primarily to the acquisition of Aero-Design Inc., and
General
-10-
<PAGE>
Electrodynamics Corporation, as well as increased painting revenue.
COST OF REVENUES & EXPENSES
---------------------------
The Company's cost of revenue for the nine months ended March 31, 1999
increased by 18%, to $12,733,000 over the same period last year. This increase
is due mainly to the acquisition of Aero-Design, and General Electrodynamics
Corporation. However, cost of revenue as a percentage of revenue decreased by
4%, from 76% in 1998, to 72% in 1999. The decrease as a percentage of revenue
is primarily due to growth in the higher-margin Overhaul Service division and
improvements in the Company's ground handling operations relating to the
termination of marginal facilities outside the Dallas-Fort Worth area.
The Company's divisional G&A and corporate overhead expenses for the nine
months ended March 31, 1999, increased by $1,305,000 to $4,716,000, including
non-recurring divisional charges of $361,000. The dollar increase is primarily
due to the acquisition of Aero-Design and General Electrodynamics Corporation.
This increase also includes $140,000 in corporate acquisition activity costs in
the quarter ended March 31, 1999 versus $90,000 for the quarter ended March 31,
1998.
The Company's interest expense increased by $71,000, to $298,000. This
increase is due primarily to lower fiscal 1998 debt and related interest
expenses. During the same period in fiscal 1999 the Company has increased its
debt to acquire Aero-Design, General Electrodynamics Corporation, and fund its
ongoing growth and operations.
Depreciation and Amortization expenses increased by $181,000, to $712,000.
This increase is primarily due to the acquisition of Aero-Design and General
Electrodynamics Corporation.
FINANCIAL CONDITION AND LIQUIDITY
The Company has financed its operations and capital expenditures from a
combination of cash generated from its 1997 initial public offering, ongoing
operations, revolving loans credit facility, leases and invested capital.
The Company realized approximately $5.3 million in net proceeds from the
IPO in August 1997. In August, 1998, the Company executed a three-year,
$3,000,000 revolving line of credit with CIT Finance. The line is secured by
substantially all the Company's current assets. These loan proceeds have been
and will be used in the future to fund expenditures including, but not limited
to, capital expenditures for existing operations, facilities improvements,
acquisition of other aviation services companies and general working capital for
operations and other corporate purposes.
Management continues its efforts to reduce overhead costs, and expects
additional improvements in future periods, principally from reductions in
Aviation Group corporate overhead, insurance cost reductions, and reductions in
accounting, legal, and other indirect expenses. Reductions in non-essential
division operating expenses, along with elimination of marginal products and
services that do not provide future growth or near-term profits will also be
pursued.
Overhead costs and corporate expense levels during the past two years were
instituted and incurred by management in anticipation of supporting the
acquisition of other aviation service companies in accordance with the Company's
growth strategy. While the Company continues to pursue growth via the
acquisition of such entities on a selected basis, such activity is subject to
the Company's ability to attract financing for such transactions. There can
presently be no assurance that such financing will be available in amounts and
at prices beneficial to existing shareholders and operations, and the absence of
such financing could have a materially negative effect on the Company's
operations. Therefore, management has also begun during fiscal 1999 to reduce
costs, manage the Company with a greater focus on current operating and
financial performance, and consider strategic joint ventures and/or combination
with other aviation service companies.
Company funds available under existing credit facilities, together with
cash generated from operations have been adequate for anticipated operating
needs. Significant internal growth, or conversely significant disruptions in
existing operating activities, would require the Company to pursue additional
operating capital to fund its ongoing businesses. Management measures such
needs and pursues such financing as needed.
-11-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain pending legal proceedings and other
ordinary routine litigation considered to be incidental to its business. Such
litigation is not currently believed to have a material financial or operating
impact on the Company's business.
ITEM 2. CHANGES IN SECURITIES.
(a) Not Applicable
(b) Not Applicable
(c) On August 28, 1998, the Company acquired 100% of the common stock of
General Electrodynamics Corporation ("GEC") in exchange for 112,029
shares of Common Stock with a value of approximately $340,000. GEC is a
42-year old Texas-based company that manufactures and sells aircraft
scales and other aviation components used by the aviation maintenance and
transportation industries. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents are included as exhibits to this Form 10-QSB and
are filed herewith unless otherwise indicated.
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company has filed a Form 8-K Current Report dated August 28, 1998 in
which it reported the acquisition of General Electrodynamics Corporation. The
Company has also filed a Form 8-K/A (Amendment No. 1) Current Report dated
August 28, 1998 that contains audited financial statements of GEC for the year
ended August 31, 1997 and 1998 and pro-forma financial statements for the
Company for the year ended June 30, 1998, as adjusted to reflect the GEC
acquisition.
The Company has filed a From 8-K Current Report dated April 19,1999 in
which it reported the appointment of Hein + Associates LLP as its new
independent accountants, and its dismissal of PricewaterhouseCoopersLLP. There
were no Reportable Events or disagreements relating thereto.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 13, 1999.
AVIATION GROUP, INC.
By: /s/ Richard L. Morgan
----------------------------
Richard L. Morgan, Chief Financial
Officer, Executive Vice President, and
Director
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