<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 December 31, 1998
[_] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from ____________ to ____________
Commission file number : 0-10124
-------
Aviation Group, Inc.
(Exact name of Small Business Issuer as specified in its charter)
Texas 75-2631373
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
(Address of Principal Executive Offices)
214/922-8100
(Issuer's Telephone Number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,465,673 shares of Common Stock were outstanding as of February 1, 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)
December 31, June 30,
1998 1998
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ - $ 509,000
Restricted time deposit 200,000 200,000
Accounts receivable, net 2,231,000 2,020,000
Inventory 2,487,000 1,513,000
Deferred income taxes 88,000 88,000
Prepaid expenses and other 278,000 129,000
----------- -----------
Total Current Assets 5,284,000 4,459,000
----------- -----------
Property and equipment 6,112,000 4,812,000
Less: accumulated depreciation (1,439,000) (1,099,000)
----------- -----------
4,673,000 3,713,000
----------- -----------
Goodwill, net 3,354,000 3,135,000
Deferred income taxes 112,000 112,000
Other 432,000 181,000
----------- -----------
3,898,000 3,428,000
----------- -----------
Total Assets $13,855,000 $11,600,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term
obligations $ 1,092,000 $ 625,000
Current portion of capital lease
obligations -- 71,000
Other short-term borrowings 1,158,000 855,000
Accounts payable 1,858,000 1,424,000
Accrued interest 21,000 44,000
Income tax payable 49,000 25,000
Accrued liabilities 894,000 1,023,000
Deferred revenue 205,000 --
----------- -----------
Total Current Liabilities 5,277,000 4,067,000
----------- -----------
Long-Term Liabilities
Long-term debt, net of current
maturities 1,571,000 723,000
Capitalized leases, net of current
maturities 181,000
Loan from shareholder 15,000 15,000
----------- -----------
Total Long-Term Liabilities 1,586,000 919,000
----------- -----------
Total Liabilities 6,863,000 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 35,000 33,000
Additional paid-in capital 9,248,000 8,957,000
Retained earnings (deficit) (2,291,000) (2,376,000)
----------- -----------
Total Shareholders' Equity 6,992,000 6,614,000
----------- -----------
Total Liabilities and Shareholders'
Equity $13,855,000 $11,600,000
=========== ===========
The accompanying notes are an integral part of these statements.
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AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue $6,445,000 $6,106,000 $12,069,000 $9,222,000
Cost of Revenue 4,332,000 4,231,000 8,742,000 6,839,000
---------- ---------- ----------- ----------
Gross Profit 2,113,000 1,875,000 3,327,000 2,383,000
---------- ---------- ----------- ----------
General and Administrative
Expenses 1,632,000 1,554,000 2,549,000 2,680,000
Depreciation and
Amortization 269,000 191,000 478,000 330,000
---------- ---------- ----------- ----------
1,901,000 1,745,000 3,027,000 3,010,000
---------- ---------- ----------- ----------
Income (Loss) From
Operations 212,000 130,000 300,000 (627,000)
---------- ---------- ----------- ----------
Other Income (Expenses)
Other Income(Expense) 1,000 (5,000) 6,000 15,000
Interest Expense, net (136,000) (25,000) (197,000) (189,000)
---------- ---------- ----------- ----------
(135,000) (30,000) (191,000) (174,000)
---------- ---------- ----------- ----------
Income (Loss) Before
Provision for Income
Taxes 77,000 100,000 109,000 (801,000)
Provision (Benefit) for
Income Taxes 10,000 37,000 24,000 (242,000)
---------- ---------- ----------- ----------
Net Income (Loss) $ 67,000 $ 63,000 $ 85,000 $ (559,000)
========== ========== =========== ==========
Earnings (loss) per
common share
Basic and diluted $0.02 $0.02 $0.03 $(0.19)
===== ===== ===== ======
Weighted average shares
outstanding (Note C)
Basic and diluted 3,465,970 3,266,050 3,407,613 2,889,499
========= ========= ========= =========
Diluted 3,465,970 3,469,678 3,407,613 2,889,499
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
-------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 85,000 $ (559,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 478,000 330,000
Deferred income taxes -- (221,000)
(Increase) decrease in accounts receivable 34,000 (1,035,000)
(Increase) decrease in inventories 65,000 39,000
(Increase) decrease in prepaids and other current
assets (144,000) (125,000)
Increase (decrease) in accounts payable 53,000 (198,000)
Increase (decrease) in accrued rent 300,000
Increase (decrease) in accrued interest (23,000)
Increase (decrease) in accrued liabilities (196,000) 189,000
Other (242,000) (155,000)
--------- -----------
Total Adjustments 25,000 (876,000)
--------- -----------
Net Cash Provided (Used) by Operating Activities 110,000 (1,435,000)
--------- -----------
Cash Flows From Investing Activities:
Cash paid in acquisition of Casper Air Service,
net of cash acquired -- (1,145,000)
Cash acquired through acquisitions 41,000 --
Proceeds of sale of property and equipment -- 748,000
Payments for property and equipment additions (451,000) (537,000)
--------- -----------
Net Cash Used by Investing Activities (410,000) (934,000)
--------- -----------
Cash Flows From Financing Activities:
Repayments of short-term borrowings, net (97,000) (333,000)
Repayment of Bridge Notes -- (500,000)
Principal payments on long-term debt (292,000) (469,000)
Proceeds from long-term debt 180,000
Proceeds from exercise of warrants -- 1,000
Proceeds from issuance of common stock -- 5,572,000
--------- -----------
Net Cash Provided (Used) by Financing Activities (209,000) 4,271,000
--------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (509,000) 1,902,000
Cash and Cash Equivalents at Beginning of Period 509,000 188,000
--------- -----------
Cash and Cash Equivalents at End of Period $ -- $ 2,090,000
========= ===========
Supplemental Disclosure of Cash Paid for Interest
and Income Taxes:
Cash paid for interest $ 197,000 $ 156,000
Cash paid for income taxes -- --
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Issuance of common stock in connection with
the acquisition of Casper Air Service $ -- $ 883,000
Conversion of LEDC note to Common Stock -- 370,000
Issuance of common stock in connection with
the acquisition of General
Electrodynamics, Inc. 324,000
Supplemental Disclosure of Non-cash Investment in
General Electrodynamics Corporation
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.
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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 six months ended December 31, 1998 assumes the GEC acquisition occurred as
of July 1, 1998. The information does not purport to be indicative of what
would have occurred had the acquisition actually been made as of such date or of
results which may occur in the future.
Revenues $12,676,000
Net income (loss) 58,000
Net income (loss) per share (basic and diluted) $ .02
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 six month periods ended December 31, 1998 and 1997, the basic
and diluted EPS amounts calculated assuming adoption of this statement are the
same as the amounts presented on the consolidated statement of operations.
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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.
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 constantly evaluated
by management for favorable opportunities.
Results of Operations
The following discussions and tables set forth a summary of changes in the
major categories, presented by 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.
Three months ended Six months ended
December 31, December 31,
(Unaudited 000's) (Unaudited 000's)
----------------- -----------------
Total Company 1998 1997 1998 1997
- ------------- ---- ---- ---- ----
Revenues $ 6,445 $ 6,106 $12,069 $ 9,222
Cost of revenue (4,332) (4,231) (8,742) (6,839)
Operating and other expenses (1,901) (1,750) (3,027) (3,010)
Interest income 1 -- 6 15
Interest expense (136) (25) (197) (189)
------- ------ ------- --------
Pre-tax income $ 77 $ 100 $ 109 $ (801)
======= ======= ======= ========
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. The Company's Aero Design
battery manufacturing subsidiary is positioning for significant growth, and
along with General Electrodynamics Corporation (acquired in August, 1998)
comprise 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
Acadiana Regional Airport in New Iberia, Louisiana and a second facility at
Portland Airport in Portland, Oregon (aircraft paint), 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 six months ended December 31, 1998, the paint division
performed services
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for two customers whose sales represented 72% (36% each) of total revenues of
this division. For the six months ended December 31, 1997, the paint division
performed services for one customer whose sales represented 37% of total
revenues for the Company. 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.
Three months ended Six months ended
December 31, December 31,
(Unaudited 000's) (Unaudited 000's)
----------------- -----------------
Overhaul Services 1998 1997 1998 1997
- ----------------- ---- ----
Revenues $ 4,695 $ 3,905 $ 8,355 $ 5,388
Cost of revenue (3,212) (2,563) (5,865) (3,832)
Operating and other expenses (860) (935) (1,414) (1,615)
Interest income 1 -- 2 1
Interest expense (76) (7) (104) (24)
------- ------- ------- -------
Pre-tax income $ 548 $ 400 $ 974 $ (82)
======= ======= ======= =======
Segment Assets $ 8,472 $ 3,129 $ 8,472 $ 3,129
======= ======= ======= =======
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. 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.
Three months ended Six months ended
December 31, December 31,
(Unaudited 000's) (Unaudited 000's)
------------------ -----------------
Ground Handling & Services 1998 1997 1998 1997
- -------------------------- ---- ---- ---- ----
Revenues $ 318 $ 355 $ 757 $ 714
Cost of revenue (167) (289) (401) (576)
Operating and other expenses (142) (90) (309) (221)
Interest income (1) -- 2 --
Interest expense (1) (1) (3) (3)
----- ----- ----- -----
Pre-tax income $ 7 $ (25) $ 46 $ (86)
===== ===== ===== =====
Segment Assets $ 463 $ 207 $ 463 $ 207
===== ===== ===== =====
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
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distributor of Cessna and other parts to the general aviation community. There
are presently over 1,700 such operators of FBO's serving the United States.
Three months ended Six months ended
December 31, December 31,
(Unaudited 000's) (Unaudited 000's)
----------------- -----------------
FBO Operations 1998 1997 1998 1997
- -------------- ---- ---- ---- ----
Revenues $ 1,432 $1,846 $ 2,957 $ 3,120
Cost of revenue (953) (1,379) (2,476) (2,435)
Operating and other expenses (429) (387) (459) (527)
Interest income 1 -- 1 --
Interest expense (14) (15) (25) (27)
------- ------- ------- -------
Pre-tax income $ 37 $ 65 $ (2) $ 131
======= ======= ======= =======
Segment Assets $ 4,030 $ 4,996 $ 4,030 $ 4,996
======= ======= ======= =======
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.
Three months ended Six months ended
December 31, December 31,
(Unaudited 000's) (Unaudited 000's)
----------------- -----------------
Aviation Group-Corporate 1998 1997 1998 1997
- ------------------------- ---- ---- ---- ----
Revenues $ -- $ -- $ -- $ --
Cost of revenue -- -- -- --
Operating and other expenses (470) (338) (845) (648)
Interest income -- -- 1 19
Interest expense (45) (2) (65) (135)
-------- ------ ------- -------
Pre-tax income $ (515) $ (340) $ (909) $ (764)
======== ====== ======= =======
Segment Assets $ 890 $3,959 $ 890 $ 3,959
======== ====== ======= =======
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 contract with United Airlines is
concluding during the Company's fiscal 1999 year, 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, Peidmont Airlines, Federal Express, and. Management works continuously
to add additional customers.
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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 sufficient Year 2000 compliant systems
and procedures to insure routine operations, and believes that business
disruption risk from this area is presently minimal.
-8-
<PAGE>
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 December 31, 1998 Compared to the Three Months Ended December
31, 1997
The Company's revenue for the three months ended December 31, 1998
increased $339,000, to $6,445,000. The increase is due primarily to an increase
of $790,000 in revenue for the Overhaul and Service division offset by a
decrease of $413,000 in the FBO and Airport Management 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 and Airport Management division is primarily due
to the termination of marginal locations.
The cost of revenue for the three months ended December 31, 1998, increased
by $101,000, to $4,332,000. This increase is due primarily to the acquisition
of Aero-Design and General Electrodynamics Corporation. Cost of revenue as a
percentage of revenue decreased by 2%, from 69% in 1997, to 67% in 1998. The
decrease as a percentage of revenue is primarily due to the FBO Operations and
Airport Management division. In 1997 cost of revenue as a percentage of
revenue, for this division was 81%, and in 1998 the percentage was 44%. This
improvement was primarily due to the termination of marginal facilities outside
the Dallas-Fort Worth area.
The Company's G&A expenses for the three months ended December 31, 1998,
increased by $78,000, but did not increase as a percentage of revenue. The
dollar increase is primarily due to the acquisition of Aero-Design and General
Electrodynamics Corporation.
The Company's interest expense increased by $111,000, to $136,000. This
increase is due primarily to the Company having used the proceeds of the initial
public offering to pay down debt in 1997. During the same period in 1998 the
Company has increased its debt to acquire Aero-Design and General
Electrodynamics Corporation.
Six Months Ended December 31, 1998 Compared to the Six Months Ended June 30,
1997
The Company's net revenue increased by $2,847,000, or 31%, for the six
months ended December 31, 1998. This increase in revenue resulted from an
increase of $2,967,000, in the Overhaul and Service division, which was offset
by a decrease in revenue from the FBO Operations and Airport Management
division. The increase in the Overhaul and Service division is due primarily to
the acquisition of Aero-Design Inc., and General Electrodynamics Corporation, as
well as increased painting revenue.
The Company's cost of revenue, for the six months ended December 31, 1998,
increased by 27%, to $944,000. 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 2%, from 74% in 1997, to 72% in
1998. The decrease as a percentage of revenue is primarily due to the FBO
Operations and Airport Management division. In 1997 cost of revenue as a
percentage of revenue, for this division was 80%, and in 1998 the percentage was
53%. This improvement was primarily
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due to the termination of marginal facilities outside the Dallas-Fort Worth
area.
The Company's G&A expenses decreased by $131,000 to $2,549,000 for the six
months ended December 31, 1998. This decrease in operating expenses resulted
primarily from not having corporate overhead expenses related to the Company's
initial public offering, and the termination of marginal FBO and Airport
Management locations.
Depreciation and Amortization expenses increased by $148,000, to $478,000.
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
the substantially all the Company's current assets. These loan proceeds have
been and will be used in the future to fund expenditures including, but not
limited to, capital expenditures for existing operations, facilities
improvements, acquisition of other aviation services companies and general
working capital for operations and other corporate purposes.
The Company believes that funds available under expanded credit facilities,
together with cash generated from operations are adequate for its anticipated
operating needs. Significant internal growth, or conversely significant
disruptions in existing operating activities, could require the Company to
pursue additional operating capital to fund its ongoing businesses.
Additionally, the Company intends to pursue acquisitions of related aviation
businesses. Management expects that these activities could require additional
debt or equity financings. While the Company believes that such financing is
available, there can be no assurance that such financing will be available in
amounts or under terms acceptable to the Company, and the absence of such
financing could have a materially negative effect on the Company's operations.
-10-
<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.
The Annual Meeting of the stockholders of the Company was held on December
1, 1998 pursuant to a proxy statement dated November 4, 1998. The various
matters voted upon as well as the results of such voting are as follows:
(a) Election of two Directors to serve for a term of three years:
Thomas J. Smith Gordon Whitener
--------------- ---------------
Votes in favor 2,875,962 2,875,962
Abstentions 6,774 6,774
--------- ---------
Total 2,882,736 2,882,736
========= =========
(b) Ratify and approve the grant of warrants to purchase, at $3.50 per share,
an aggregate of 385,000 shares of the Company's Common Stock as required by
Nasdaq rules:
Votes in favor 1,450,228
Votes against 8,348
Abstentions 60
---------
Total 1,458,636
=========
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.
-11-
<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: February 13, 1999.
AVIATION GROUP, INC.
By: /s/ Richard L. Morgan
----------------------------
Richard L. Morgan, Chief Financial
Officer, Executive Vice President, and
Director
-12-
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