U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000
[ ] 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.
4,956,722 shares of Common Stock were outstanding as of November 10, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements.
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2000 2000
---- ----
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 540,000 $ 432,000
Restricted time deposit 1,801,000 1,957,000
Accounts receivable, net 1,939,000 2,018,000
Note receivable, affiliate 344,000 1,930,000
Inventory 1,216,000 1,049,000
Prepaid expenses and other 679,000 685,000
Prepaid tour costs 2,210,000 1,643,000
----------------- -------------
Total Current Assets 8,729,000 9,714,000
----------------- -------------
Property and equipment, net 2,517,000 2,653,000
Goodwill, net 49,325,000 50,657,000
Other 541,000 720,000
----------------- -------------
49,866,000 51,377,000
----------------- -------------
Total Assets $ 61,112,000 $ 63,744,000
================= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 3,962,000 3,976,000
Current portion of capital lease obligations 150,000 150,000
Revolving and other short-term borrowings 4,156,000 4,162,000
Accounts payable 4,451,000 4,216,000
Customer deposits 3,022,000 3,718,000
Accrued liabilities 3,412,000 3,103,000
----------------- ------------
Total Current Liabilities 19,153,000 19,325,000
----------------- ------------
Long-Term Liabilities
Long-term debt, net of current maturities 426,000 431,000
Capitalized leases, net of current maturities 246,000 264,000
Other 33,000
---------------- -------------
Total Long-Term Liabilities 672,000 728,000
---------------- -------------
Total Liabilities 19,825,000 20,053,000
---------------- -------------
Shareholders' Equity
Series A 9% cumulative convertible Preferred Stock,
$.01 par value $10,000 liquidation preference,
1,650 shares outstanding 2,000 2,000
Series B 12% cumulative Preferred Stock,
$10,000 liquidation preference,
2,100 shares outstanding 2,000 2,000
Common Stock, $.01 per value, 10,000,000 shares
authorized, 4,790,801 and 4,790,801 shares
issued and outstanding 48,000 48,000
Additional paid-in capital 55,448,000 55,448,000
Retained earnings (deficit) (14,213,000) (11,809,000)
---------------- -------------
Total Shareholders' Equity 41,287,000 43,691,000
---------------- -------------
Total Liabilities and Shareholders' Equity $ 61,112,000 $ 63,744,000
================ =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
<CAPTION>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 31,
2000 1999
---- ----
<S> <C> <C>
Revenue $ 4,694,000 $ 3,129,000
Cost of revenue 1,976,000 1,916,000
------------ ------------
Gross profit 2,718,000 1,213,000
------------ ------------
General and administrative expenses 3,179,000 1,496,000
Depreciation and amortization 1,459,000 169,000
------------ ------------
4,638,000 1,665,000
Loss from operations (1,920,000) (452,000)
------------ ------------
Other income (expenses)
Other income (expense) 18,000 --
Interest expense, net (502,000) (177,000)
------------ ------------
(484,000) (177,000)
------------ ------------
Loss from continuing operations (2,404,000) (629,000)
Income from discontinued operations -- 30,000
------------ ------------
Net loss $ (2,404,000) $ (599,000)
============ ============
Loss per common share
Loss before discontinued operations $ (0.50) $ (0.18)
Income from discontinued operations -- 0.01
----------- ------------
Net loss per share (basic and diluted) $ (0.50) $ (0.17)
=========== ============
Weighted average shares outstanding
Basic and diluted 4,790,801 3,573,928
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
<TABLE>
<CAPTION>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net (Loss) $(2,404,000) $(599,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization 1,459,000 233,000
Decrease in restricted time deposits 156,000 --
Decrease in accounts receivable 79,000 260,000
Decrease in affiliate receivable 1,586,000 --
(Increase) in inventories (167,000) (160,000)
(Increase) decrease in prepaids and other current assets (561,000) 183,000
Increase in accounts payable 235,000 193,000
Decrease in accrued liabilities (387,000) (26,000)
Other 179,000 47,000
----------- ---------
Total Adjustments 2,579,000 730,000
----------- ---------
Net Cash Provided by Operating Activities 175,000 131,000
----------- ---------
Cash Flows From Investing Activities:
Sales of property and equipment 10,000 42,000
----------- ---------
Net Cash Provided by Investing Activities 10,000 42,000
Cash Flows From Financing Activities:
Proceeds (repayments) of short-term borrowings, net (7,000) 74,000
Principal payments on long-term debt (70,000) (169,000)
----------- ---------
Net Cash Used by Financing Activities (77,000) (95,000)
----------- ---------
Net Increase in Cash and Cash Equivalents 108,000 78,000
Cash and Cash Equivalents at Beginning of Period 432,000 84,000
----------- ---------
Cash and Cash Equivalents at End of Period $ 540,000 $ 162,000
=========== =========
Supplemental Disclosure of Cash Paid for Interest and Income Taxes:
Cash paid for interest $ 277,000 $ 139,000
Cash paid for income taxes -- --
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
In the opinion of management of Aviation Group, Inc. ("Aviation Group"
or the "Company"), the accompanying balance sheets and related interim
statements of income and cash flows include all adjustments (consisting only of
normal recurring items) necessary for their fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Examples include
valuation of acquired assets, provisions for warranty claims and bad debts and
the length of assets' useful lives. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. The information in this Form 10-QSB should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Company's Form 10-KSB for the year ended June 30, 2000.
NOTE B - SALE OF DISCONTINUED BUSINESS SEGMENTS & MERGER ACTIVITY
The Company has since 1999 been in discussions with third parties
regarding the possible sale or merger of the entire enterprise, and is also in
discussions with certain third parties regarding the sale of certain remaining
segments of the Company's operations on an individual basis. Other parties
interested in the Company's status as a public company have expressed interest
in a business combination, spin-off, or other transaction.
On December 29, 1999 the Company sold its Tri-Star Airline Services
ground handling subsidiary operations. On February 8, 2000 the Company sold its
Casper Air Service general aviation fixed base operations. Both businesses were
sold to unrelated third parties and, when combined, generated a net gain on sale
to the Company of $600,000 in fiscal 2000.
In late February, 2000 Aviation Group entered into letters of intent
and publicly announced a proposed three-way business combination with Global
Leisure Travel, Inc. and travelbyus.com ltd. Global Leisure Travel, Inc. is a
travel business specializing in the sale of Hawaiian and other Pacific-region
vacation tour and other travel products to consumers. travelbyus.com ltd. is an
integrated travel company. The business combination contemplates the acquisition
by Aviation Group of these two companies with financing provided by
travelbyus.com ltd. and private investment capital raised by Doerge Capital
Management, the Company's financial advisor for this transaction. Additionally,
Aviation Group engaged the investment firm of CIBC World Markets Corp. to review
the transaction with travelbyus.com ltd. and express an opinion regarding the
fairness of the terms to Aviation Group shareholders. Current Aviation Group
shareholders will retain approximately 5% of the combined entity after the
combination with travelbyus.com. See Note D - Proposed Business Combination with
travelbyus.com ltd.
NOTE C - ACQUISITION OF GLOBAL LEISURE TRAVEL, INC.
On March 17, 2000, the Company executed agreements to purchase Global
Leisure Travel, Inc. ("Global"). On May 10, 2000, the Company completed its
acquisition of Global, and Global is now a wholly-owned subsidiary of Aviation
Group. As consideration for the purchase, the Company issued:
$16,500,000 in liquidation preference, represented by 1,650 shares, of
its Series A 9% cumulative convertible preferred stock and Series A
warrants to purchase 750,000 shares of its common stock at an exercise
price of $5.00 per share to the former owners of Global in exchange
for the transfer or cancellation of the stock and indebtedness owned
by them and their affiliates; and
Series B warrants to purchase 3,500,000 shares of its common stock at
an exercise price of $3.00 per share to the former warrantholders in
Global in exchange for cancellation of their warrants.
-4-
<PAGE>
In connection with the acquisition, the Company also invested $20.4
million in Global. These funds were used primarily to pay debts and other
payables of Global. The financing for this investment by Aviation Group in
Global was provided by:
$5,000,000 invested by travelbyus.com ltd. through the purchase of 500
shares of Series B preferred stock from Aviation Group at $10,000 per
share;
$2,000,000 invested by private investors in the purchase of 750,000
shares of Aviation Group common stock at $2.667 per share; and
$16,000,000 invested by private investors in the purchase of 1,600
units of Aviation Group's Series B 12% cumulative preferred stock and
Series C warrants, at a price of $10,000 per unit, each unit
consisting of one share and 750 warrants.
Effective September 30, 2000, Global Leisure and travelbyus.com entered
into a management agreement under which travelbyus.com assumed responsibility
for management of Global Leisure's business. travelbyus.com provides management
and support services, including office space, utilities, office equipment, staff
support, bookkeeping, accounting, billing, collection, contract administration
and other overhead services. To the extent funds are available, Global Leisure
is required to pay to travelbyus.com a servicing fee of $55 per paid trip and a
monthly retainer of $5,000 and to reimburse travelbyus.com for direct
advertising and marketing expenses and long distance, postage and delivery
charges arising from Global Leisure's business. travelbyus.com also assumed
responsibility for Global Leisure's working capital deficits during the
agreement's term. This management agreement expires September 1, 2001.
For financial reporting purposes, the Company has treated the Global
acquisition as if it occurred on March 31, 2000, and Global'a operating results
have been consolidated with the Company's results since April 1, 2000. The
following unaudited pro-forma consolidated results of operations for the three
month period ended September 30, 1999 assumes the Global acquisition occurred as
of July 1, 1999. 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.
Three months ended
September 30, 1999
-------------------
Revenues $5,394,000
Net loss (7,319,000)
Net loss per share (basic and diluted) $(2.05)
NOTE D - PROPOSED BUSINESS COMBINATION WITH TRAVELBYUS.COM LTD.
Aviation Group executed on May 3, 2000 an agreement to combine its
business with travelbyus.com through a statutory arrangement under Canadian law.
The completion of the arrangement is subject to receipt of requisite regulatory
approval, and when the arrangement is completed, travelbyus.com will become an
indirect subsidiary of Aviation Group. The transaction involves a one-for-one
share exchange. Former travelbyus.com shareholders will own directly or
indirectly approximately 95% of Aviation Group's outstanding common stock after
completion of the arrangement. As of November 10, 2000, Aviation Group and
travelbyus.com had approximately 4,957,000 and 97,004,000 common shares
outstanding, respectively.
travelbyus.com is an integrated travel company, which provides travel
services via the Internet, through 1-800 call centers and through traditional
travel agencies. travelbyus.com's Web site, www.travelbyus.com, provides
consumers with on-line travel options 24 hours per day. In addition to offering
consumers travel options through the Internet, travelbyus.com also offers the
consumer travel options through 1-800 call centers and traditional travel
agencies. travelbyus.com provides a broad range of travel products, targeted
primarily at the leisure customer, including airline tickets, cruise packages
and ground packages.
-5-
<PAGE>
The companies have scheduled shareholder meetings on December 20, 2000
to vote on the business combination. If approved, the companies expect to
account for the arrangement under the purchase method of accounting as if
travelbyus.com had acquired Aviation Group and had been recapitalized under the
capital structure of Aviation Group.
NOTE E - BUSINESS SEGMENT INFORMATION
The following table summarizes financial information by the Company's
three business segments and corporate for the three-month periods ended
September 30, 2000 and 1999, respectively. See Item 2. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for descriptions
of the segments.
Quarter Ended
Ended September 30,
----------------------
2000 1999
---- ----
Net Revenues:
Painting and maintenance $ 2,364,000 $ 2,194,000
Manufacturing 1,218,000 935,000
Travel 1,112,000 --
----------- -----------
Total $ 4,694,000 $ 3,129,000
=========== ===========
Operating income (loss):
Painting and maintenance $ (149,000) $ (132,000)
Manufacturing 59,000 (50,000)
Travel (1,798,000) --
Corporate (534,000) (447,000)
----------- -----------
Total $(2,422,000) $ (629,000)
=========== ===========
Total assets:
Painting and maintenance $ 3,696,000 $ 4,025,000
Manufacturing 4,224,000 4,146,000
Travel 51,107,000 --
Discontinued Operations -- 3,669,000
Corporate 2,085,000 685,000
----------- -----------
Total $61,112,000 $12,525,000
=========== ===========
There were no significant intersegment sales or transfers for either period.
Operating income by business segment excludes interest and other miscellaneous
income. Corporate assets consist primarily of cash and cash equivalents and
prepaid expenses.
-6-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
A key element of Aviation Group's strategy historically involved growth
through acquisitions of other companies, assets or product or service lines that
would complement or expand Aviation Group's existing aviation service
operations. Since 1996, Aviation Group has purchased five separate entities.
Management believed that acquisitions would enable it to leverage its fixed
costs of operations and further expand the products and services that it could
offer to its customers. Aviation Group intended to use its common stock as the
major source of its capital to execute its acquisition strategy.
While management was successful in identifying candidates that met its
acquisition criteria, the trading price of Aviation Group's shares and the level
of trading volume experienced in the public marketplace created a significantly
negative environment for acquiring aviation businesses for Aviation Group using
its stock as consideration. Management endeavored since 1998 to remedy this
condition, while continuing to incur high corporate overhead costs necessary to
properly operate and maintain its aviation service enterprises.
During the fiscal 2000 year, management concluded that (a) Aviation
Group's stock traded below the potential value of its existing underlying
companies, (b) acquisitions of new companies at these lower share price levels
would dilute existing shareholders, and (c) continuation of its historical
corporate overhead strategy without growth from acquisitions would erode
shareholder value. Accordingly, in August 1999, the board of directors approved
a management plan to engage investment advisors and pursue the additional
strategy of selling all or part of Aviation Group's businesses, or merging with
another company with greater growth and shareholder appreciation potential.
During the quarter ended December 31, 1999, Aviation Group sold its
Tri-Star Airline Services ground handling subsidiary operations. On February 8,
2000, Aviation Group sold its Casper Air Service general aviation fixed base
operations. Both businesses were sold to unrelated third parties, and together
generated a net gain on sale to Aviation Group of $600,000. In February 2000
Aviation Group entered into letters of intent and publicly announced a proposed
three-way business combination with Global Leisure Travel, Inc. and
travelbyus.com ltd. Global Leisure is a travel business specializing in the sale
of Hawaiian and other Pacific-region vacation tour and other travel products to
consumers. travelbyus.com is an integrated travel company which provides travel
services via the Internet, through 1-800 call centers and through traditional
travel agencies. This business combination and its related costs have been
funded by financing provided to Aviation Group by travelbyus.com along with
private investment capital raised by Doerge Capital Management, Aviation Group's
financial advisor for this transaction. Additionally, Aviation Group engaged the
investment firm of CIBC World Markets Corp. to review the transaction and
express an opinion regarding the fairness of the terms to Aviation Group
shareholders.
The combination with travelbyus.com, when approved, will allow
management to immediately begin to reduce overlapping corporate overhead,
complete the integration of its Global Leisure travel operations into and with
travelbyus.com, and pursue the sale of its remaining aviation service and
manufacturing businesses. While negotiations regarding the sale of these
businesses is underway with certain third parties, no agreements have been
reached. Proceeds from the sale of these entities will be used first to fund
repayment of Global Leisure acquisition financing, with the remainder if any
invested in Aviation Group's travel operations.
Results of Operations
The following discussions and tables set forth a summary of changes in
the major operating categories: aircraft painting, aviation parts manufacturing
and service, and travel. These historical results are not necessarily indicative
of results to be expected for any future period.
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<PAGE>
Quarter Ended Sept. 30,
( 000's)
------------------------
Total Aviation Group 2000 1999
-------------------- ---- ----
Revenues $ 4,694 $3,129
Cost of revenue (1,976) (1,916)
Operating and other expenses (2,819) (1,192)
------- ------
Division income (loss) (101) 21
------- ------
Corporate overhead (360) (313)
Depreciation and amortization (1,459) (169)
Income from discontinued operations -- 30
Other income 18 9
Interest expense (502) (177)
------- ------
Pre-tax loss $(2,404) $ (599)
======= ======
Paint Division
Revenues are generated primarily from stripping and painting and other
aircraft coating services to major passenger and freight airlines and corporate
aircraft and aviation related companies. For the last two years, the Paint
Division has operated out of three separate locations in Louisiana, Oregon, and
Mississippi. During fiscal 2000, Aviation Group completed construction and
executed a hangar-facility operating lease on a new Boeing-747 sized hangar at
its Louisiana painting headquarters. This new location commenced operations in
July 2000, and its addition to Aviation Group's capacity should allow the Paint
Division to consolidate much of its operations in Louisiana, thus reducing costs
and improving future operating margins.
Aviation Group's paint operations and related revenue and income can
vary significantly from quarter to quarter based upon seasonality and scheduling
factors of its major customers. During fiscal 2000, Aviation Group experienced
reductions in revenues relating to the completion of its multi-year painting
contract with United Airlines. This reduction, along with the retention of
multiple paint facility locations pending the completion of its Boeing-747 sized
paint facility in Louisiana, contributed to the operating loss for the fiscal
2000 year. Management anticipates, based upon projected backlog amounts from
existing and new customers, increases in paint revenues and improvements in
operating performance beginning in calendar 2001.
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.
Quarter Ended Sept. 30,
( 000's)
-------------------------
Aircraft Paint Division 2000 1999
----------------------- ---- ----
Revenues $ 2,364 $2,194
Cost of revenue (1,293) (1,371)
Operating and other expenses (1,042) (826)
------- ------
Division income (loss) $ 29 $ (3)
======= ======
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<PAGE>
Aviation Parts Manufacturing & Service Division
Aviation Group's Aviation Parts Manufacturing & Service Division
consists of two operating entities, Aero Design, Inc. and General
Electrodynamics Corporation. Aero Design manufactures and sells aviation
batteries, primarily in the replacement aftermarket. Aero Design is positioning
for significant growth, and during the fiscal 2000 year, it applied for and won
approval from the FAA for numerous additional manufacturing licenses relating to
its line of commercial and general aviation replacement batteries. These
licenses will allow Aero Design to focus its activities in future operating
periods on growth in sales and operating profits. General Electrodynamics
manufactures, sells, and services aviation scales to airlines and aviation
maintenance customers worldwide. It also manufactures under bid-to-produce
contracts various electronic aviation equipment for original equipment
manufacturers. This business segment is expected to increase in activity and
focus during the fiscal 2001 year.
Quarter Ended Sept. 30,
( 000's)
Aviation Parts Manufacturing & -----------------------
Service Division 2000 1999
---------------- ---- ----
Revenues $ 1,218 $ 935
Cost of revenue (683) (545)
Operating and other expenses (355) (366)
------- -----
Division income (loss) $ 180 $ 24
======= =====
Leisure Travel Division
In conjunction with Aviation Group's letter of intent agreement to
merge with travelbyus.com, on March 17, 2000, Aviation Group executed agreements
to purchase Global Leisure. On May 10, 2000, Aviation Group completed its
acquisition of Global Leisure, and Global Leisure is now a wholly-owned
subsidiary of Aviation Group. Global Leisure provides travel related services
primarily through retail travel agencies, and is a seller of bulk travel
services, maintaining several wholesale and discount contracts with leading
providers of travel in the industry. Global Leisure has contracts with several
major airlines, hotel operators and touring companies, including United
Airlines, Continental Airlines, Delta Airlines, Hawaiian Airlines, Alaskan
Airlines, Outrigger Hotels Hawaii, and Hotel Corporation of the Pacific d/b/a
Aston Hotels & Resorts. These contracts allow Global Leisure to purchase airline
tickets, hotel reservations and travel packages at wholesale prices.
Global Leisure travel products are resold to the public through retail
travel agents and other sellers. Several tradenames under which Global Leisure
operates are "Sunmakers", "Kailani Hawaii Tours", and "Hawaii Leisure". Global
Leisure has contracts with travel agencies and suppliers of travel in
Washington, Hawaii, Nevada and California. These agencies have designated Global
Leisure as a preferred supplier for all destinations and products that Global
Leisure offers in exchange for certain sales-based commissions.
Since its acquisition, Aviation Group has worked closely with
travelbyus.com to integrate Global Leisure's products and operations into those
of travelbyus.com. Aviation Group has executed a management agreement with
travelbyus.com providing for the integration of Global Leisure's business into
and with travelbyus.com. Cost reductions have been implemented by shutting down
Global Leisure's Seattle, Washington offices, and combining its operations with
those of travelbyus.com in Reno, Nevada. Global Leisure's travel products are
being combined and cross-sold with travelbyus.com travel products, thus
increasing potential for future revenue growth. When fully integrated into
travelbyus.com's Internet distribution system, operating margins of Global
Leisure should improve in the coming fiscal year. Management believes that this
integration is vital to the success of its leisure travel operations, and if
successful, can allow Global Leisure to grow and achieve profitability for
Aviation Group and travelbyus.com.
For financial reporting purposes, Aviation Group has treated the Global
Leisure acquisition as if it occurred on March 31, 2000, and its operations are
included in Aviation Group's unaudited statements of operations beginning April
1, 2000.
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<PAGE>
Quarter Ended Sept. 30,
( 000's)
-----------------------
Leisure Travel Division 2000 1999
----------------------- ---- ----
Gross bookings $6,227 $ -
Cost of tickets (5,115) -
------
Reportable revenues 1,112 -
Operating and other expenses (1,422) -
------
Division income (loss) $ (310) -
======
Aviation Group - Corporate Overhead
Operating expenses consist of all general and administrative and
operating costs to provide management to Aviation Group's divisions and not
directly attributable to the divisions' operations. These charges include legal,
accounting, travel and other related overhead. During the fiscal quarters ended
September 30, 2000 and 1999, Aviation Group incurred $137,000 and $58,000 in
non-amortizable acquisition related costs and direct costs associated with
Aviation Group's status as a public company. A key benefit of its intended
merger with travelbyus.com is the reduction in corporate expenses, which
management believes it generates upon its complete integration into the
travelbyus.com business. These costs include legal, accounting, public-company
costs, and other overhead items that significantly overlap with existing
travelbyus.com operations.
Quarter Ended Sept. 30,
( 000's)
-----------------------
Corporate Overhead 2000 1999
------------------ ---- ----
Operating and other expenses $ (223) $ (255)
Acquisition and merger activity costs (137) (58)
------ ------
Total corporate expenses $ (360) $ (313)
====== ======
Seasonality and Variability of Results
The Global Leisure travel operations experience seasonal variability in
revenues, primarily relating to the heavy summer and year-end leisure travel
seasons. Management believes, however, that the integration of Global Leisure
into travelbyus.com's other travel and technology companies will allow it to
increase revenues above historical levels in future periods, and that when
combined with other travelbyus.com travel products, can generate higher gross
margins as well. Aviation Group's aircraft painting operations can experience
significant seasonality and quarter-to-quarter variability in its stripping and
painting operations. Scheduling of Aviation Group's paint customer fleet
deliveries can significantly affect quarter-to-quarter results as well. During
fiscal 2000, Aviation Group experienced reductions in revenues relating to the
completion of its multi-year painting contract with United Airlines. This
reduction, along with the retention of multiple paint facility locations pending
the completion of its Boeing-747 sized paint facility in Louisiana contributed
to the operating loss for the fiscal 2000 year. Management anticipates, based
upon projected backlog amounts from existing and new customers, increases in
paint revenues and operating performance beginning in calendar 2001. Significant
changes in such scheduled operations or failure to attract additional aircraft
painting contracts could have a material adverse effect on Aviation Group
operations. Management, therefore, is required to plan cash flow accordingly.
-10-
<PAGE>
Quarter Ended September 30, 2000 Compared to the
Quarter Ended September 30, 1999
Aviation Group's net revenue increased by $1,565,000, or 50%, for the
three months ended September 30, 2000 compared to the quarter ended September
30, 1999. The increase was primarily due the inclusion of net travel revenues of
$1,112,000 from the Company's Global Travel subsidiary, and growth in aviation
battery operations. Costs of revenue for the fiscal 2001 quarter of $1,976,000
were basically flat compared to the fiscal 2000 quarter. Costs of revenue as a
percentage of revenue decreased by 19%, from 61% in 1999, to 42% in 2001. This
improvement results from the inclusion of travel revenues on a net basis for
accounting purposes. Marginal cost of revenues in the Company's aircraft paint
business were flat, while aircraft battery margins improved slightly during the
three months ended September 30, 2000 compared to the same period last year.
Operating costs and overhead associated with Global Leisure travel
operations accounted for most of the increase in fiscal 2001 to $2,821,000 from
$1,192,000 in fiscal 2000. Aviation Group's interest expense was $402,000 for
the three months ended September 30, 2000 versus $177,000 for the three months
ended September 30, 1999, and included non-cash interest expense of $131,000
associated with common stock warrants issued to lenders relating to Aviation
Group's short term note financings in the fiscal 2000 year.
Depreciation and amortization expense rose significantly during the
quarter ended September 30, 2000 to $1,459,000 from $169,000 for the quarter
ended September 30, 1999. This increase relates to goodwill amortization
associated with Aviation Group's acquisition of Global Leisure and, while
non-cash in nature, will have a significant negative effect on reported net
income figures in future periods, totaling approximately $50,000,000 over the
next ten years.
Certain stock options and warrants were re-priced in fiscal 2000. These
options and warrants have been accounted for as variable instruments beginning
July 1, 2000, which will entail recording expense for any increase in Aviation
Group's stock price over the exercise prices of the options and warrants. This
had no effect for the quarter ended September 30, 2000, but could have a
material effect on Aviation Group's future results of operations.
Financial Condition and Liquidity
Aviation Group has incurred significant losses, due in part to
corporate overhead associated with Aviation Group's acquisition strategy.
Management continues its efforts to reduce overhead costs. 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
have also been pursued.
Since the acquisition of Global Leisure, Aviation Group has worked
closely with travelbyus.com to integrate Global Leisure's products and
operations into those of travelbyus.com. Aviation Group has executed a
management agreement with travelbyus.com providing for the integration of Global
Leisure's business into and with travelbyus.com, including the funding by
travelbyus.com of operating shortfalls at Global Leisure pending the completion
of Aviation Group's combination with travelbyus.com. Cost reductions have been
implemented by shutting down Global Leisure's Seattle, Washington offices and
combining its operations with those of travelbyus.com in Reno, Nevada. Global
Leisure's travel products are being combined and cross-sold with travelbyus.com
travel products, thus increasing potential for future revenue growth. When fully
integrated into travelbyus.com's Internet distribution system, operating margins
of Global Leisure should improve in the coming fiscal year. Management believes
that this integration and the related arrangement with travelbyus.com is vital
to the long term success of Aviation Group.
During the fiscal year ended June 30, 2000, Aviation Group sold its
Tri-Star Airline Services ground handling and its Casper Air Service general
aviation fixed base operations. Both businesses were sold to unrelated third
parties, and together generated a gain on sale to Aviation Group of $600,000. In
connection with Aviation Group's acquisition of Global Leisure, through March
31, 2000, Aviation Group raised a total of $20.4 million in capital. These funds
were used primarily to finance Global Leisure, with Aviation Group retaining
approximately $500,000 in funds for operating and transaction cost funding
purposes. These funds have supplemented Aviation Group's existing revolving
credit facilities to fund its business. At September 30, 2000, Aviation Group
had a working capital deficit of $10,424,000. Aviation Group has negotiated with
certain of its aviation service vendors and other lenders exchange agreements
wherein these parties may receive Aviation Group common stock in exchange for
cancellation of certain current payables and debt. Global Leisure also obtained
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an agreed deferral of payables approximating $3.5 million until September 2001.
Additionally, $3,000,000 in debt is supported by a travelbyus.com guarantee.
While these funds combined with current operating levels should allow Aviation
Group to meet its working capital requirements during fiscal 2001, significant
interruptions in currently scheduled Aviation Group operations would adversely
affect Aviation Group's financial condition and require additional capital from
asset sales, borrowings, or equity financings in order to allow Aviation Group
to meet its obligations. No assurance can be made that such sales or financings
will be available or available on terms deemed advantageous to Aviation Group if
such events occur.
The combination with travelbyus.com, when approved, will allow
management to begin immediately to reduce overlapping corporate overhead,
complete the integration of its Global Leisure travel operations into and with
the travel operations of travelbyus.com, and pursue the sale of its remaining
aviation service and manufacturing businesses. While negotiations regarding the
sale of these businesses is underway with certain third parties, no agreements
have been reached. Proceeds from the sale of these entities will be used first
to redeem preferred stock, with the remainder, if any, invested in Aviation
Group's travel operations. If the business combination of Aviation Group with
travelbyus.com is not approved by shareholders, the board of directors intends
to negotiate and enact an arrangement with travelbyus.com that allows both
companies to continue their relationship and joint business activities, and
thereby promote the long-term viability of Aviation Group's operations. The
terms and conditions of this alternative arrangement may have less potential for
success that those unanimously recommended by the board of directors under the
arrangement agreement.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Since the beginning of the quarter ended September 30, 2000, the
Company issued or agreed to issue the following nonregistered
securities, which were not previously reported under Item 5 of the
Company's Form 10-KSB Annual Report for the fiscal year ended June 30,
2000:
In connection with the conversion in March 2000 by holders of $340,600
in convertible notes, as previously reported, the Company guaranteed that any
resales of the shares obtained by these holders would result in proceeds of at
least the conversion price. In early November 2000, five of these holders agreed
to accept the issuance of 60,071 shares of common stock in satisfaction of a
total of approximately $60,000 owed to them under the resale price guaranty. The
Company agreed to register these shares for resale under the Securities Act and
promised to protect them from any loss realized from the resale of these new
shares if the net proceeds are less than $1 per share. These recipients are all
existing shareholders and prior noteholders of the Company. The Company relied
upon the exemption from registration provided by Section 4(2) of the Securities
Act. The Company believed these recipients to be sophisticated and knowledgeable
investors possessing sufficient information about the Company.
In connection with the Company's purchase of Aero Design, Inc. and
Battery Shop, L.L.C., as previously reported, the Company promised to pay to one
of the former owners a royalty equal to 2 1/2% of the Company's net sales from
new products for which the Company obtains new PMA licenses developed by Aero
Design through the former owner's efforts. In August 2000, the former owner
agreed to accept the issuance of 58,737 shares of common stock in satisfaction
of the Company's accrued royalty obligation as of August 7, 2000. The Company
relied upon the exemption from registration provided by Section 4(2) or 3(9) of
the Securities Act. The former owners are existing shareholders of the Company,
are executive officers or directors of Aero Design and active in Aero Design's
business, and are considered by the Company to be sophisticated and
knowledgeable investors.
In May 2000, as previously reported, the Company issued warrants to
purchase 225,000 shares of common stock to SW Pelham Fund, L.P. in connection
with a $3,000,000 loan made by SW Pelham Fund to the Company. The warrants have
an exercise price of $2.125 and expire on May 8, 2005. In early November 2000,
these warrants were amended to represent the right to purchase 250,000 shares at
$1.50 per share in connection with an extension of the loan. The amended
warrants were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. The Company believed that SW Pelham Fund was
a sophisticated and knowledgeable investor.
In July 2000, the Company negotiated an arrangement with one of its
landlords, the Oregon Public Employee Retirement Fund, to accept a note and
shares of common stock in satisfaction of past due rents, operating expenses and
accrued interest owed by the Company totaling approximately $498,000. The note's
maturity was extended to January 31, 2001 as a result of the Company's agreement
to issue additional shares. A total of 331,842 shares have been or will be
issued. The Company agreed to register the shares for resale under the
Securities Act. Any proceeds received by the Fund from the resale of the shares
must be credited against the note balance. The Company relied upon the exemption
from registration provided by Section 4(2) of the Securities Act. The Company
believed that the Fund was a sophisticated and knowledgeable investor possessing
sufficient information regarding the Company.
The Company has granted to holders of notes payable by the Company's
subsidiaries the right to exchange the debt represented by the notes into shares
of the Company's common stock. Notes payable aggregating approximately
$1,054,000 are exchangeable at $1.50 per share into a total of approximately
703,000 shares of common stock. Notes payable aggregating approximately $86,940
are exchangeable at $3.00 per share into a total of approximately 28,980 shares
of common stock. The holders of these notes consist of one bank and eight trade
vendors of the Company's subsidiaries. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act in granting the
exchange rights. The Company believed that the holders were sophisticated and
knowledgeable in business matters in general.
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(d) Not applicable.
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
10.1 Amended and Restated Warrant Agreement dated November 2, 2000 between
Aviation Group, Inc. and SW Pelham Fund, L.P. (a)
10.2 Waiver and Amendment Agreement dated as of November 2, 2000 among
Aviation Group, Inc., SW Pelham Fund, L.P. and Curtis Holdings, Inc.(a)
10.3 Form of Amended and Restated Exchangeable Promissory Note, Resale Price
Indemnity and First Amendment to Resale Price Indemnity executed by
Aviation Exteriors Portland, Inc. or Aviation Exteriors Louisiana, Inc.
with various trade vendors (a)
10.4 Form of Exchange Agreement and First Amendment to Exchange Agreement
executed between Aviation Group, Inc. and various trade vendors (a)
27.1 Financial Data Schedule
--------------------------------
(a) Incorporated herein by reference to the Form SB-2 Registration
Statement of Aviation Group, Inc. (File No. 333-49658).
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 17, 2000.
AVIATION GROUP, INC.
By: /s/ Richard L. Morgan
----------------------------------------------
Richard L. Morgan, Chief Financial Officer and
Executive Vice President
