SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24795
AVIATION GENERAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 73-1547645
(State of Incorporation) (IRS Employer Identification No.)
7200 NW 63rd Street
Hangar 8, Wiley Post Airport
Bethany, Oklahoma 73008
(Address of principal executive offices) (Zip Code)
(405) 440-2255
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock; $.50
par value
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 [ ] No [X]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. (X)
State issuer's revenues for its most recent fiscal year: $2,142,000
Based on the closing sales price of January 31, 2004 the aggregate market value
of the voting stock held by non-affiliates of the registrant was $650.
The number of shares outstanding of the registrant's common stock, $.50 par
value, was 7,110,846 (net of treasury stock of 1,009,551) at January 31, 2004.
Total number of pages including cover page 57.
TABLE OF CONTENTS
PART I
Item 1. Description of Business 3
Item 2. Description of Property 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity and Other Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Managements' Discussion and Analysis or Plan of Operations 12
Item 8. Financial Statements 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of Registrant. 41
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 43
PART IV
Item 13. Certain Relationships and Related Transactions 43
Item 14. Principal Accounting Fees and Services 43
Item 15. Exhibits and Reports on Form 8-K 44
Item 16. Controls and Procedures 46
Signatures
2
PART 1
Item 1. Business
------------------
Overview
--------
Aviation General, Incorporated (the "Company" or "AGI") is a publicly
traded holding company (Pink Sheets: AVGE.PK) incorporated under the laws of the
State of Delaware. The Company has two wholly owned subsidiaries: Commander
Aircraft Company ("CAC") and Strategic Jet Services, Inc. ("SJS"). Commander
Aircraft Company (www.commanderair.com) manufactures, markets, and provides
support services for its line of single engine, high performance Commander
aircraft, and consulting, brokerage, and refurbishment services for all types of
piston-powered aircraft. Strategic Jet Services, Inc. provides consulting,
brokerage, sales, and refurbishment services for jet aircraft.
During the 4th quarter of 2002, SJS discontinued its operations, and CAC
suspended indefinitely production of new aircraft. Other cost-cutting and
overhead reductions were implemented due to the weakness in the Company's
business. Management believes this weakness is primarily the result of depressed
economic conditions and anxiety over terrorism and war in Iraq, which have had a
pronounced, adverse effect on big-ticket, discretionary capital expenditures by
businesses and individuals.
On December 27, 2002, Commander Aircraft Company filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code for the District of
Delaware. Commander Aircraft Company filed a final reorganization plan on July
5, 2003, following the execution of a letter agreement on that date with Tiger
Aircraft, LLC ("Tiger") to fund the plan. A stock purchase agreement was
entered into with Tiger on November 1, 2003, pursuant to which an amended plan
was filed on December 10, 2003. The U. S. bankruptcy court confirmed this plan
on December 10, 2003, with the effective date scheduled for on or before March
31, 2004, unless extended by the consent of CAC, AGI, Tiger, the official
committee of unsecured creditors, the U. S. Department of Labor, and Nyltiak
Investments, LLC.
The agreement with Tiger resulted from months of negotiations, contact with
other potential investors, and legal proceedings pursuant to the bankruptcy
process. Since the bankruptcy filing, Tiger has provided CAC with Debtor in
Possession financing, which has allowed CAC to continue its operations and
provide service and support to the fleet of Commander aircraft owners,
refurbishment services, parts, and pre-owned aircraft brokerage. CAC expects to
resume the production of new aircraft following the consummation of the
transaction with Tiger.
Pursuant to the confirmed bankruptcy plan and agreement with Tiger, Tiger
will invest approximately $2.8 million in Aviation General, Incorporated in
return for an 80% ownership interest in AGI. Approximately $2 million will be
used to settle with creditors in accordance with CAC's bankruptcy plan, and the
remainder will be used for working capital. Pursuant to the agreement with
Tiger, AGI must secure the approval of the agreement from its shareholders as
well as their authorization to amend the Company's Certificate of Incorporation
to increase the Company's authorized common shares from 20,000,000 shares to
100,000,000 shares. The Company currently has 20,000,000 common shares
authorized and approximately 7,000,000 common shares (excluding Treasury stock
which will be retired) issued and outstanding. The agreement with Tiger will
necessitate the issuance of approximately 28,000,000 new shares of common stock
to Tiger, resulting in a total of approximately 35,000,000 shares to be issued
and outstanding.
Forward Looking Statements
----------------------------
This form 10-KSB includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
3
Act. All statements, other than statements of historical fact, included in this
Form 10-KSB that address activities, events or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including matters having to do with CAC's emergence from bankruptcy and
continuance as a going concern, expected and future aircraft sales and service
revenues, CAC's ability to fund its operations and repay debt, business
strategies, expansion and growth of operations and other such matters, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by our management in light of its experience and its
perception of historical trends, current conditions, expected future
developments, and other factors it believes are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including general economic and business conditions, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company and its performance with respect to contracts and its success in
developing new business, the ability to attract and retain qualified employees,
and other factors, many of which are beyond the Company's control. You are
cautioned that these forward-looking statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in such statements.
History
-------
Commander Aircraft Company was incorporated in 1988 upon the acquisition
from Gulfstream Aerospace Corporation of the Commander single engine product
line. The original Commander single engine aircraft was designed and
manufactured by Rockwell International Corporation and received certification
from the Federal Aviation Administration ("FAA") in 1972. Between 1972 and
1979, Rockwell produced 1,162 aircraft, including the Commander 112, 112TC, 114,
and other models. Rockwell ceased production in 1979 and sold its General
Aviation Division to Gulfstream Aerospace Corporation in 1981. Gulfstream never
manufactured Commander single engine aircraft.
After CAC acquired the Commander single engine product line in 1988, it
designed, engineered and implemented significant improvements to the proven
Rockwell Commander line, resulting in the new CAC Commander 114B. CAC was
issued a new Type Certificate for the Commander 114B by the FAA in 1992 and
commenced production. The 114B features include an extensive range of avionics
equipment, retractable landing gear, a 260 horsepower fuel-injected engine, a
constant speed propeller, a standard range of 725 nautical miles (833 statute
miles), a 1,216 pound useful load, maximum cruise speed of 164 knots (188 miles
per hour), a large luxurious four-place cabin, and low operating and maintenance
costs.
In 1994, CAC added the Commander 114AT All-Purpose Trainer to its line of
single engine, high performance aircraft. The Commander 114AT is a four-place
high performance trainer designed for military, professional, and civilian
flight training. An all-in-one aircraft, the Commander 114AT All-Purpose
Trainer is ideal for primary through instrument flight training. The Commander
114AT shares the same design heritage as the luxurious Commander 114B, with a
modified instrument panel and more utilitarian interior.
In 1995, CAC received certification from the FAA for the Commander 114TC, a
turbocharged version of the Commander 114B. The Commander 114TC is equipped
with the same expansive interior and state-of-the-art systems as the Commander
114B, but utilizes a 270 horsepower turbocharged Lycoming engine, which provides
speeds up to 197 knots (227 miles per hour). The Commander 114TC is certified
to an altitude of 25,000 feet, which makes it an excellent aircraft for
mountainous regions, as well as high-density altitude environments. Like the
114B, the Commander 114TC has received numerous favorable reviews by the
aviation press.
In 2000, CAC introduced the 115 series of high performance, single engine
aircraft. The Commander 115 and 115TC represent the culmination of a variety of
improvements to the Commander line, and feature numerous airframe, engine and
systems refinements, as well as significantly increased range capability and an
4
upgraded avionics package which includes global navigation, communication, and
moving map displays. The Commander 115 series is the latest of a thoroughbred
line of aircraft that offer a combination of performance, comfort, safety, and
utility.
To date, approximately $50 million has been invested to build Commander
Aircraft Company. In an industry where a $100 million investment is often
insufficient to engineer, design, and FAA type certify an aircraft, management
believes that CAC's achievements are considerable. They include: the acquisition
of Rockwell's single engine high performance Commander aircraft line, the
modification and enhancement of the value of the existing fleet of Commander
aircraft built from 1972 through 1979 by Rockwell International Corporation,
extensively enhancing the aerodynamics, avionics, systems, interior, and power
plant of the original Rockwell Commander design resulting in a new aircraft FAA
type certification designated 114B and 114TC, the introduction of new avionics
packages, enhancements and derivative aircraft models (the current 115 and 115TC
series), and the establishment of manufacturing operations and marketing,
aircraft brokerage, refurbishment, and service and support capabilities.
CAC is one of the few companies in the world with an FAA Type Certificate
for production of a four-place single engine high performance aircraft.
Commander aircraft are certified to the more recent stringent standards of FAR
23 through Amendment 7 and have had zero airframe ADs (Airworthiness Directives)
since re-certification in 1992. Management believes that Commander aircraft
have a strong reputation in their class due to their superior safety, design,
quality, comfort, reliability, resale value, and ramp appeal.
Industry Overview
------------------
The general aviation industry originated in the United States in 1903 with
the first flight of an aircraft by the Wright brothers. Today, general aviation
is a multi-billion dollar international industry, which includes the production,
sale and servicing of non-military and non-commercial single engine piston,
multi engine piston, turboprop, and turbojet aircraft. The U. S. general
aviation industry is uniquely American and considered the best in the world.
There are approximately 155,000 previously produced single engine piston
aircraft in the United States that are still flying today, of which
approximately one-third, or 50,000, aircraft are single engine high performance
aircraft. The average age of the single engine high performance fleet is
approximately 35 years, and the Company estimates that the replacement value of
these aircraft is over $15 billion.
Although the general aviation market has been depressed in recent years, we
believe that the market for single engine high performance aircraft could
improve as a result of: an improving economy, attrition of the aging fleet of
aircraft, evolution of new international markets for general aviation aircraft,
increased use of single engine aircraft as a corporate tool for small and medium
sized businesses, and demand for advances single engine trainers.
The market for pre-owned general aviation aircraft, from single engine to
jet aircraft, is substantially larger than the market for new aircraft as are
the attendant markets for pre-owned aircraft refurbishment, avionics, and
service and support.
According to the General Aviation Manufacturers Association ("GAMA"),
general aviation ("GA") is one of our nation's most important and dynamic
industries, flying over 32 million hours (nearly twice the major airlines'
flight hours) and carrying 166 million passengers annually. GA is relied on
exclusively by more the 5,400 communities as their only source of air
transportation, (scheduled airlines serve approximately 600 of 5,400 airports).
Approximately 70 percent of the hours flown by GA are for business and
commercial purposes.
- GA aircraft range from two-seat training aircraft to intercontinental
business jets.
5
- GA is estimated to be an $18 billion industry.
- Domestic GA exports one-third of its production and leads the world in
development of new technology aircraft.
- Most people first learn to fly in a GA aircraft.
There are approximately 219,464 active GA and air taxi aircraft in the USA
(excluding commuters). Of this total, more than half (150,886) are single-engine
piston aircraft. GA enjoys the use of over 5,000 airports in the United States.
Business Strategy
------------------
Commander Aircraft Company has established a business model that management
believes distinguishes it from its competitors. CAC has a low volume, high
margin, diversified revenue and value-added service base model rather than a
high volume, low margin, pure manufacturing model. Depending upon contributions
from CAC's non-manufacturing activities, CAC believes that it can achieve
break-even financial results with the manufacture and sale of as few as 12 to 15
new Commander aircraft per annum and may be able to achieve significant
profitability above these levels.
CAC's model is built on the following foundation:
- Manufacture, service, and support of high-end aircraft with a reputation
for high quality.
- Assembly-manufacturer operations allow streamlined production, lower
capital investment in equipment, smaller production staff and size of
manufacturing facility.
- Semi-custom built to order in accordance with customer specifications of
avionics, equipment, paint, and interior with customer deposits upon
order and progress payments during the manufacturing process.
- Factory direct sales in the U. S. (instead of using dealers, which
receive a 15-25% discount).
- Appointment of leading aviation fixed-based operators ("FBOs") as
Commander Authorized Service Centers as referral sources for new
aircraft orders and ability to provide complementary service and
support functions.
- Diversification into pre-owned piston aircraft brokerage, refurbishment
services, paint, part, and avionics - encouraging our customers to deal
directly with the factory whenever possible.
This strategy served CAC well with revenues doubling from approximately
$8.0 million in 1997 to $16.8 million in 2000 and the achievement of
profitability. Based on trends of the previous years and sales and marketing
forecasts, CAC significantly increased its production schedule for 2001 and had
to scale it back as the economy, particularly manufacturing, began to slide into
a prolonged recession. The depressed domestic and international economic
climate, which is continuing, has been coupled with one of the largest declines
in history of asset values in the U. S. securities markets, terrorist attacks,
and the uncertainty over the international situation and war with Iraq.
During 2001 through 2003, CAC's marketing, sales, and advertising
expenditures declined significantly due to budget constraints, and as a result,
CAC incurred several significant financial charges.
Notwithstanding the disappointing financial results of the last few years
and subsequent bankruptcy filing and suspension of new aircraft production, CAC
believes its business model is sound and that, with adequate capitalization and
emergence from bankruptcy, CAC can return to profitability in the future
following the recommencement of new aircraft production and funding for
appropriate marketing, sales, and advertising.
6
Marketing Strategy
-------------------
There are an estimated 55,000 general aviation single engine high
performance aircraft in existence (approximately one-third of the total single
engine fleet). The average age of these aircraft is over 35 years, and the
Company estimates that the cost of replacing the fleet of such aircraft would
exceed $15 billion. CAC is one of the few companies in the world with an FAA
Type Certificate for production of a four-place single engine high performance
aircraft. Commander aircraft are certified to the more recent stringent
standards of FAR 23 through Amendment 7 and have had zero airframe ADs since
re-certification in 1992.
CAC believes its aircraft possess many qualities superior to those of its
competitors including safety, design, comfort, performance, quality, resale
value, utility, and ramp appeal. Furthermore, CAC offers value-added services
and programs such as a turn-key ownership program, certified flight instructor
program, and trade-up program together with assistance with financing,
insurance, trade-ins, training, hangaring, and pilot services.
Commander Aircraft Company believes the market for its products will
improves as a result of attrition of the existing fleet of aging single engine,
high performance aircraft, development of new international markets for general
aviation aircraft, and increased use of single engine aircraft as a
cost/convenience effective corporate tool for small and medium sized businesses.
CAC's primary targeted markets are as follows:
- The existing pilot base comprised of pilots who may or may not
currently own aircraft.
- New pilots in various stages of pilot training.
- Small and medium sized businesses with regional travel needs.
To address these markets, CAC has developed:
- The Commander Trade-Up Program, which targets owners of other aircraft
types.
- The Commander CFI Program, which targets newer pilots and their
Certified Flight Instructors by bringing both together in the aircraft
evaluation and acquisition process.
- The Commander Aircraft Ownership Program, which provides business owners
who may be non-pilots with a complete turn-key program including
aircraft acquisition, financing, insurance, maintenance, storage,
product support, private pilot service, and instruction, if desired.
CAC stresses the superior aspects of its aircraft such as safety, design,
quality, comfort, reliability, resale value, and ramp appeal as well as
value-added service and support through direct contact and growing relationships
with its prospects and customers.
CAC implements its marketing strategy via factory direct sales comprised of
regional sales personnel who are directly managed and supported from CAC's
headquarters in Oklahoma. The marketing organization is augmented by a
worldwide network of Commander Authorized Service Centers (ASCs), which are
leading independent FBOs (fixed base operators). CAC believes that factory
direct sales and marketing of its products and services provides total control
of product pricing, quality, and business integrity in addition to unsurpassed
customer relations and repeat business. Unfortunately, CAC's marketing, sales,
and advertising expenditures have been sharply curtailed over the past two years
due to budget constraints.
7
Competition
-----------
Commander Aircraft Company competes in the single engine high performance
category directly with normally aspirated and turbo-charged aircraft of the same
type produced by Raytheon's Beechcraft unit, the New Piper Aircraft Company,
Mooney Aerospace Group, and Aerospatiale's Socata subsidiary. CAC also
competes, for aircraft purchasers, indirectly with aircraft in other categories
such as: single engine fixed gear aircraft manufactured by Cessna, Cirrus, and
Lancair, single engine pressurized and turboprop aircraft, twin engine aircraft
and alternatives available to purchasers in the pre-owned market.
Purchasers of single engine, high performance aircraft choose among
competitive models on the basis of numerous factors, including performance,
reliability, price, appearance, quality of service and reputation of the
aircraft and the manufacturer. Commander Aircraft Company believes that it can
favorably compete with its competitors on the basis of the safety, quality,
comfort, and performance of its aircraft, and the quality and scope of the
support services CAC provides to its customers. CAC further believes its
aircraft are competitively priced and have a number of features, including
certification to stricter standards, newer, more attractive design and larger
cabin size, which make them competitive with or superior to the single engine,
high performance aircraft produced by its four principal competitors. Raytheon
Aircraft Corporation suspended production of one of its single engine, high
performance models, the F33A Bonanza, in 1994. Raytheon's other single engine,
high performance model, the A36, remains in production. However, it is decades
older in design, FAA certified to lesser standards, and has an inferior safety
record than Commander aircraft. Mooney Aerospace Group produces single engine,
high performance aircraft that are significantly smaller than the Commander 115
and 115TC, and Mooney aircraft are also decades older in design and FAA
certified to lesser standards with inferior safety records. New Piper Aircraft
Corporation produces a single engine, high performance, six place aircraft with
similar performance, the normally aspirated and turbo-charged Saratoga/Cherokee
series, which again is decades older in design, FAA certified to lesser
standards, and possesses a substantially inferior safety record to Commander
aircraft. Socata's marketing efforts are, for the most part, focused in Europe
and Asia. Each of these competitors has been well established in the general
aviation industry for years and may have access to greater resources than are
available to CAC.
Commander Aircraft Company's aircraft are decades newer in design than the
Bonanza, Mooney and Piper competitive models and are certified to the newer,
more stringent Federal Aviation Administration ("FAA") Regulation (FAR) 23
through Amendment 7 standard rather than the older Civil Air Regulation (CAR) 3.
The Commander line has the best safety record in its class, according to an
independent study of FAA and National Transportation and Safety Board ("NTSB")
statistics conducted by R. E. Breiling Associates, the leading accident analysis
firm in general aviation.
Factors inhibiting our market share include:
- Our competitors' larger outstanding fleets of aircraft, which are eight
to ten times the size of ours, providing them with a larger pool of
potential trade-in business.
- Our competitors' use of dealers.
- Our competitors' significantly greater expenditures on marketing and
advertising.
- Our competitors' pricing policies.
Commander Aircraft Company believes its aircraft are superior in many
respects, including safety, design, quality, comfort, reliability, resale value,
and ramp appeal, and accordingly, Commander aircraft are priced approximately
10-25% higher than those of our competitors, except for the Beech Bonanza
series, which are priced approximately 10-20% higher than comparably equipped
Commander aircraft. Inherent in our pricing are value-added programs, and
individual consultation with each purchaser and customization of each aircraft
in accordance with their specifications.
8
Unfortunately, economic conditions during the past several years have
caused price deflation in manufactured goods, with aircraft among the most
affected products. Our competitors have been unable to maintain pricing
integrity and have resorted in many cases to price reduction policies intended
to foster sales. We believe that these competitors will not be able to sustain
these policies as the margins they result in are not profitable. Although our
competitors have reduced prices, we plan to maintain our prices while offering
additional avionics as standard equipment on our aircraft, making them more
price competitive with comparably equipped aircraft offered by our competitors.
Insurance
---------
Commander Aircraft Company normally carries most types of insurance
customary for a manufacturer of general aviation aircraft, including coverage
for general liability, property damage, aircraft loss or damage and worker's
compensation, but does not carry product liability insurance. There is no
assurance that the amount of insurance carried by CAC would be sufficient to
protect it fully in the event of a serious accident and liability claim, but CAC
believes that the amounts and coverage of its insurance protection are
reasonable and appropriate for the CAC's business operations. Although highly
probable, there is no assurance that such insurance will continue to be
available on commercially reasonable terms.
From time to time, CAC is the target of litigation, including suits filed
regarding accidents of Commander aircraft. In mid 1994, Congress enacted the
General Aviation Revitalization Act, S. 1458 ("GARA"), which established an
18-year statute of repose for general aviation aircraft and component
manufacturers. GARA prohibits product liability suits against aircraft
manufacturers for aircraft that are more than 18 years old when an accident
occurs. This action eliminated from the liability tail all Rockwell-manufactured
Commander aircraft, last produced in 1979. The only aircraft for which the
Company has potential liability as a manufacturer are aircraft it has produced
since 1992. This currently represents approximately 200 aircraft, approximately
70 of which have been exported outside of the United States.
Through March 1, 1995, CAC maintained product liability insurance with
coverage of $10 million per occurrence and $10 million in the aggregate, with
deductible of $200,000 for aircraft built through March 1, 1995. Management
believes that the premiums for this type of insurance are rapacious, the
policies are full of holes, the insurance companies end up controlling any
litigation and are loathe to vigorously defend unwarranted claims, and prefer to
settle and raise premiums rather than defend unwarranted claims. Thus,
management believes that the interest of shareholders is better served by
vigorously defending claims through the services of highly qualified specialists
and attorneys rather than retaining product liability insurance to settle
exorbitant claims. As such, CAC elected not to retain product liability
insurance coverage commencing March 1, 1995. CAC could be exposed to
significant financial risks if losses from product liability were to occur.
Since CAC dropped its product liability insurance in 1995, it has saved an
estimated $8-10 million in insurance premium costs versus expenditures of
approximately $1.5 million in litigation and settlement costs, most of which
would have been expended even with liability insurance because of insurance
policy deductibles.
The General Aviation Revitalization Act established an 18-year statute of
repose for general aviation aircraft and component manufacturers. This law
prohibits product liability suits against aircraft manufacturers when the
aircraft involved in an accident is more than 18 years old when the accident
occurs. This action eliminated all Rockwell manufactured Commanders produced in
the 1970's from CAC's liability tail. The only aircraft that CAC bears
manufacturing responsibility for are the models 115, 115TC, 114B, 114TC, and
114AT produced from 1992 through the present, which currently represent
approximately 200 aircraft.
9
Parts and Materials Availability
-----------------------------------
Commander Aircraft Company purchases parts and materials from over 100
different suppliers. Though some of these vendors are key to the manufacture of
CAC's aircraft, there are no long-term commitments or contracts with any
suppliers. CAC considers its relationship with its suppliers, including those
affected by the bankruptcy filing, to be satisfactory and does not anticipate
any shortages or interruption to production due to lack of available components
on a timely basis.
Government Regulations
-----------------------
In order for an aircraft model to be manufactured for sale, the FAA must
issue a Type Certificate for the aircraft model and, in order for a particular
aircraft to be operated, an Airworthiness Certificate for that aircraft must be
issued. Commander Aircraft Company was issued a Type Certificate for the
Commander 114B in 1992 and a Type Certificate for the Commander 114TC in 1995.
CAC owns Type Certificates for all predecessor and current single engine
Commander models. The sale of CAC's product internationally is subject to
regulation by comparable agencies in foreign countries.
CAC received a Production Certificate from the FAA in 1993, which allows
CAC to issue Airworthiness Certificates from the FAA. An Airworthiness
Certificate is issued for a particular aircraft when it is certified to have
been built in accordance with specifications approved under the Type Certificate
for that particular model aircraft. Commander aircraft are certified to FAR 23,
Amendment 7, meeting more stringent standards for single engine aircraft than
aircraft certified under the older CAR 3 regulations. CAC's production
certificate has remained dormant during suspension of new aircraft production.
CAC plans to reactivate its production certificate upon recommencing new
aircraft production. Although a production certificate is not necessary to
produce aircraft, having one facilitates the production process and interaction
with the FAA.
Employees
---------
The Company has a total of 14 full-time and 2 contract employees as of
March 15, 2004. The Company believes that its future success will depend, in
part, upon its continued ability to recruit and retain highly skilled employees.
Although competition for qualified personnel is strong, the Company has been
successful in attracting and retaining skilled employees. None of the Company's
employees are covered by a collective bargaining agreement, and the Company
considers its employee relations to be good. The Company believes resumption of
new aircraft production and achievement of profitable financial results will
require approximately 50 to 60 full-time employees.
Item 2. Properties
--------------------
The Company has operated in a 103,650 square foot facility, which consists
of three buildings constructed in 1981, located at the Wiley Post Airport in
Bethany, Oklahoma. The Company performs all of its operations and services from
this facility. During the past ten years, the Company has improved its facility
to assure safety and compliance with environmental laws and regulations.
In 2003, the Company transferred its lease with the Oklahoma City Airport
Trust Authority to The Servicenter, Inc., a company with plans to operate a
Fixed Base Operation in the facility and to provide significant aesthetic
upgrades to the facility. The Company negotiated a 3.5 year sub-lease for
50,011 square feet of manufacturing, service and office space, guaranteed
renewable at six-month intervals.
A summary of lease payments is presented in Note G - Leases, of the Notes
to Consolidated Financial Statements for 2003.
10
Item 3. Legal Proceedings
----------------------------
The Company is a defendant in a lawsuit resulting from a crash of one its
manufactured aircraft. Management does not believe the Company bears any
responsibility and has vigorously defended against this claim. The National
Transportation and Safety Board accident investigation has found the probable
cause of this crash was pilot error. This matter will be discharged pursuant to
the bankruptcy plan upon its completion. The Company is also a defendant
resulting from a crash of a 1977 Rockwell Commander aircraft that was not
manufactured by the Company and for which the Company believes it bears no
responsibility, and in any event, will be discharged pursuant to the bankruptcy
plan upon its completion.
On December 27, 2002, CAC filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code in the United States bankruptcy court for the
District of Delaware. CAC filed a final reorganization plan on July 5, 2003,
following the execution of a letter of agreement on that date with Tiger
Aircraft, LLC ("Tiger") to fund the plan. A stock purchase agreement was
entered into with Tiger on November 1, 2003, pursuant to which an amended plan
was filed on December 10, 2003, with the effective date scheduled for on or
before March 31, 2004, unless extended by the consent of CAC, AGI, Tiger, the
official committee of unsecured creditors, the U. S. Department of Labor, and
Nyltiak Investments, LLC. For additional information, see Note R of Notes to
Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
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Item 5. Market for the Registrant's Common Stock and Related Shareholder
--------------------------------------------------------------------------------
Matters
-------
The common stock of Aviation General, Incorporated, $.50 par value (symbol
AVGE.PK), traded on the NASDAQ Small-Cap Market until it was delisted and began
trading on the over-the-counter bulletin board on September 24, 2002 and has
recently been traded on the pink sheets. This table presents its high and low
market prices during the past two years. The Company has never paid dividends
in the past, and does not intend to pay dividends in 2004.
Quarterly Common Stock Price Ranges
-----------------------------------------
2003 2002
--------------- ---------------
Quarter High Low High Low
------- ---- --- ---- ---
1st .09 .03 .38 .23
2nd .51 .03 .67 .33
3rd .26 .02 .95 .28
4th .06 .0001 .30 .05
In 2002, The Company issued 251,516 shares of its common stock as
settlement of certain obligations. Included were 136,364 shares issued for
$45,000 for Board of Directors fees and 115,152 shares issued for $38,000 for
sales commissions.
There were approximately 300 holders of record of the Company's common
stock as of December 31, 2003.
Item 6. Selected Financial Data
-----------------------------------
The selected financial data presented below for each year in the five year
11
period ended December 31, 2003 have been derived from the Company's audited
financial statements. This data should be read in conjunction with the
Financial Statements and related notes thereto and other financial information
appearing elsewhere in this Form 10-K.
Year Ended December 31
------------------------------------------------
(Amounts in thousands, except per share data)
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Operation Data:
----------------
Net sales $ 2,142 $ 8,443 $ 9,488 $16,831 $13,667
Net earnings (loss) $(1,308) $(4,285) $(5,520) $ 450 $ (385)
Earnings (loss) per share
basic & diluted $ (.18) $ (.60) $ (.84) $ 0.07 $ (.05)
Balance Sheet Data:
---------------------
Total assets $ 2,424 $ 3,715 $ 7,304 $11,809 $ 8,632
Long-term debt $ 1,262 $ 1,235 - - -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
--------------
You should read the following discussion and analysis together with our
financial statements and accompanying notes appearing elsewhere in this Form
10KSB. The following information contains forward-looking statements that
involve risks and uncertainties. Actual results may differ materially from those
anticipated due to many factors, including those set forth under Items 1 and 3,
Business and Legal Proceedings.
Critical Accounting Estimates and Accounting Policies
We must make estimates of the collectability of accounts receivable. We
analyze historical write-offs, changes in our internal credit policies and
customer concentrations when evaluating the adequacy of our allowance for
doubtful accounts. Differences may result in the amount and timing of expenses
for any period if we make different judgments or use difference estimates.
Inventories are valued at the lower of cost or market. We must
periodically evaluate the carrying value of our inventories to determine whether
market conditions have impaired the carrying value of our inventories.
Property and equipment are evaluated for impairment whenever indicators of
impairment exist. Accounting standards require that if an impairment indicator
is present, the Company must assess whether the carrying amount of the asset is
unrecoverable by estimating the sum of the future cash flows expected to result
form the asset, undiscounted and without interest charges. If the carrying
amount is less than the recoverable amount, an impairment charge must be
recognized, based on the fair value of the asset. Management assumed the
Company was a going concern for purposes of evaluating the possible impairment
of its property and equipment. Should the Company not be able to continue as a
going concern, there may be significant impairment in the value of the Company's
property and equipment.
We must estimate the future liability related to warranty work on new
aircraft sold.
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves estimating
12
our current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent that we establish a
valuation allowance or increase this allowance in a period, we must include a
tax provision or reduce our tax benefit in the statements of operations. We use
our judgment to determine our provision or benefit for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We believe, based on a number of factors including
historical operating losses, that we will not realize the future benefits of a
significant portion of our net deferred tax assets and we have accordingly
provided a full valuation allowance against our deferred tax assets. However,
various factors may cause those assumptions to change in the near term.
We cannot predict what future laws and regulations might be passed that
could have a material effect on our results of operations. We assess the impact
of significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
We have determined the significant principles by considering accounting
policies that involve the most complex or subjective decisions or assessments.
Our most significant accounting policies are those related to revenue
recognition and accounting for stock-based compensation.
Aircraft Sales and Marketing
-------------------------------
We recognize the sale of new aircraft when a purchase agreement is funded
and title is transferred to the buyer, which occurs after the Company receives
an airworthiness certificate from the Federal Aviation Administration. Sales of
pre-owned aircraft are recognized upon execution and the funding of a purchase
agreement. Service revenues are recognized when the services are performed.
Our aircraft production is dependent upon the perception of our customers
that the purchase of our aircraft is desirable over others that they could
choose. Often the purchase of an aircraft is dependent upon investment decisions
made by the buyer that could be affected by many factors. Among these factors
are the general economic conditions at the time the decision is made, the
performance of the buyer's investments and the tax treatment or possible changes
in the tax treatment of the aircraft purchase for the buyer. Additionally, as we
have seen in the last year, the perception of safety, both personal and
national, can have an impact on the business of the Company.
Inventories
-----------
Our inventories, other than pre-owned aircraft, are stated at the lower of
cost or market, and cost is determined by the average-cost method. The inventory
costs include all direct manufacturing costs and overhead. The inventories
consist of parts for manufacturing and servicing of aircraft, parts for resale
and work in process, as well as new and pre-owned aircraft. Pre-owned aircraft
are valued on a specific-identification basis at the lower of cost or current
estimated realizable wholesale price.
Results of Operations:
2003 vs. 2002
-------------
During the second half of 2002, the Company entered into a renewed
slowdown, which management believes was probably the result of continued
weakness in the overall economy, which may have resulted from renewed anxiety
over possible events such as anthrax, air travel, potential terrorist
13
activities, and the march toward war with Iraq, and it caused a decline in the
purchase of big-ticket durable goods such as automobiles and aircraft. The
Company experienced cancellation or postponement of several new and pre-owned
aircraft orders and transactions, causing a cash flow crisis resulting in the
necessity of filing a Chapter 11 bankruptcy petition on December 27, 2002.
The Company, along with many other companies in the aviation industry, has
been affected by macro political and economic events beyond its control and
endeavored to adjust its new aircraft production schedule and overall business
accordingly. However, there are lead and lag financial consequences to doing
so. For example, the terrorist attacks on the United States in 2001, concurrent
with the largest decline in asset values in the securities markets in history,
and a weakening economy, presented enormous adjustment challenges to the
Company.
During 2003, the Company operated without any aircraft manufacturing
activities while continuing to support the existing fleet with part sales and
service and sales of pre-owned aircraft. Management has remained focused on the
confirmation of the Chapter 11 bankruptcy plan and its pending completion.
The following is a more detailed explanation of the components of the
financial results that were affected:
Revenues decreased 75% in 2003 to $2,141,734 from $8,443,416 in 2002,
resulting in a net loss of $(1,308,272) for 2003 compared to a net loss of
$(4,285,111) in 2002. The net loss per basic and diluted share was $(0.18) in
2003 compared to a net loss of $(0.60) per basic and diluted share in 2002.
Revenues from aircraft sales decreased 82% in 2003 to $1,347,762 from
$7,412,519 in 2002. Pre-owned and consigned aircraft sales decreased to 13
aircraft in 2003 from 16 new, pre-owned and consigned aircraft sales in 2002.
Revenues generated by the service, parts and refurbishment business decreased by
23% to $793,972 in 2003 compared to $1,030,897 in 2002.
Aircraft cost of sales decreased by 83 % to $1,176,706 in 2003 as
compared to $6,679,481 for 2002. This decrease was due to a 75% decrease in
sales combined with an increase in gross profit margins to 13% in 2003 from 10%
in 2002.
Service and parts cost of sales decreased by 36% to s $627,463 in 2003
compared to $829,954 in 2002. The decrease was partially due to a lower volume
of service activity and spare parts shipments. The gross margin on service and
parts sales increased to 21% in 2003 from 19% in 2002.
Engineering and product development costs decreased to $1,930 in 2003 from
$126,232 in 2002. The decrease in these expenses is due to the downsizing in
this area.
Selling, general and administrative expenses decreased by 36% from
$2,440,414 in 2002 to $1,557,638 in 2003. This decrease is due primarily to
reductions both in the sales and administrative staffs and operations, however,
significant legal and administrative expenses were incurred in 2003 from
activities associated with the Chapter 11 bankruptcy.
Also included in operating expenses for 2002 is an impairment of Work in
Process (WIP), parts and aircraft inventory of $1,758,620. Of this, pre-owned
aircraft inventory was impaired by $296,699 to reflect the depressed market
values during the current recession, reducing the values to the lower of cost or
market; WIP was impaired by $510,506 in anticipation of the additional time and
expenses necessary to restart manufacturing and; inventory was impaired by
$951,415 to reduce value of slow-moving inventories, thereby reducing the
inventory values to the lower of cost or market. No such impairment was
recognized in 2003.
14
Other income (expense) went from expense of $56,368 in 2002 to income of
$62,581 in 2003. This increase was due primarily to various refunds received
during 2003.
Interest expense decreased by 39% to $148,850 in 2003 from $243,414 in 2002
due to reduced activity in short-term borrowings from the Company's lines of
credit.
The Company had no litigation settlements in 2003, compared with $200,000
in 2002.
During 2002 the Company realized a loss of $(395,973) on certain available for
sale equity securities. The Company had no such loss in 2003.
Liquidity and Capital Resources
----------------------------------
Cash provided by operations totaled $485,582 for 2003 compared to cash used
in operations of $648,036 in 2002.
The Company experienced positive cash flows from operations during 2003 due
primarily to a decreased by $1,189,816 in inventories combined with a $456,828
increase in accrued liabilities, which more than offset the 2003 loss from
operations of $(1,308,272).
The Company had no capital expenditures in 2002.
The Company established a line of credit with a bank in the amount of
$2,500,000 for the purpose of funding pre-owned aircraft for inventory. The
notes bear interest at prime plus 1% and are secured by individual aircraft and
certain guarantees. In addition, the Company established a line of credit with
a financial institution in the amount of $3,000,000 to provide funding for new
aircraft as well as pre-owned piston and turbine aircraft. The notes contain
variable interest rates up to 12.5%, mature in six-month intervals and are
renewable at the option of the Company for an additional six months. Borrowings
under these lines of credit totaled $453,477 at December 31, 2003.
During 2003, the Company was able to obtain $427,000 of new financing which
was used in current operations.
Contractual Obligations and Commercial Commitments
------------------------------------------------------
The following table is a summary of the Company's contractual obligations
as of December 31, 2003.
Payment Due by Period
-----------------------
Total Less than One 1-3 Years Thereafter
----- ------------- ---------- ----------
Year
----
Long-Term Debt $1,261,795 $ - $1,261,795 $ -
Current Note Payable $ 853,477 $ 853,477 $ - $ -
Operating Leases $ 321,300 $ 113,400 $ 207,900 $ -
---------- ---------- ---------- ----------
Total $2,436,572 $ 966,877 $1,469,695 $ -
========== ========== ========== ==========
As we go forward in 2004, management believes that economic conditions and
financial markets appear to have stabilized and that the Company could benefit
from increased interest in general aviation, due to inconvenience and safety
factors now attendant with commercial airline travel. The Company could also
15
benefit from historically low interest rates, which lower significantly the
financing cost of aircraft purchases.
Market Risk
------------
The Company's market risk is impacted by changes in interest rates, foreign
currency exchange rates and certain equity security prices. The note receivable
held by the Company includes a quarterly adjustment clause, which permits the
Company to increase or decrease, the amount of interest charged based on bank
prime rates. All transactions with international customers are made in U.S.
dollars, thereby minimizing the risk associated with foreign currency exchange
rates. The Company's investment in equity securities is classified as
available-for-sale with unrealized gains or losses excluded from income and
reported as other comprehensive income. The Company has no significant risk
associated with commodity prices.
Inflation
---------
Management believes that the overall effects of inflation on the Company's
costs of materials and supplies have been minimal. For each of the past five
years, cost of sales was virtually the same as it would have been on a current
cost basis. The Company uses a moving average cost for inventory valuation and
cost changes are not readily recognized in the short-term.
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------------
Index to Financial Statements and Supplementary Data:
Page
Report of Independent Public Accountants 16
Financial Statements:
Consolidated Balance Sheets December 31, 2003 17
Consolidated Statements of Operations for the years ended 19
December 31, 2003 and 2002
Consolidated Statement of Stockholders' Equity for the 20
years ended December 31, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended 21
December 31, 2003 and 2002
Notes to Consolidated Financial Statements 23
16
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Aviation General, Incorporated
We have audited the accompanying consolidated balance sheet of Aviation General,
Incorporated and Subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
two years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aviation General,
Incorporated and Subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes A and Q to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a deficit net worth at December 31, 2003 that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note Q. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
\s\Murrell, Hall, McIntosh & Co, PLLP
Murrell, Hall, McIntosh & Co, PLLP
Oklahoma City, Oklahoma
March 15, 2004
17
AVIATION GENERAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,595
Accounts receivable 14,840
Inventories 2,021,715
Prepaid expenses and other assets 700
Total current assets 2,042,850
PROPERTY AND EQUIPMENT
Office equipment and furniture 365,373
Vehicles and aircraft 95,115
Manufacturing equipment 384,979
Tooling 676,747
Leasehold improvements 112,748
1,634,962
Less accumulated depreciation (1,253,474)
381,488
------------
$ 2,424,338
============
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
18
AVIATION GENERAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
LIABILITIES NOT SUBJECT TO COMPROMISE
Accounts payable $ 139,864
Accrued expenses 1,153,418
Notes payable 853,477
------------
Total current liabilities not
subject to compromise 2,146,759
------------
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable 1,974,920
Accrued expenses 602,527
Refundable deposits 220,184
------------
Total liabilities subject to compromise 2,797,631
------------
Total current liabilities 4,944,390
------------
NONCURRENT LIABILITIES
Notes payable 1,261,795
------------
1,261,795
------------
REEDEEMABLE COMMON STOCK - $.50 par value;
Issued 150,000 shares in 2001; stated at
redemption value 150,000
------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding -
Common stock, $.50 par value, 20,000,000
shares authorized; 8,120,397 shares issued 4,060,198
at December 31, 2003
Additional paid-in capital 37,254,305
Less: Treasury stock at cost, 1,009,551 shares at
December 31, 2003 (1,709,638)
Accumulated (deficit) (43,536,712)
------------
Total stockholders' equity (deficit) (3,931,847)
------------
$ 2,424,338
============
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
19
AVIATION GENERAL, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the years ended December 31,
--------------------------------
2003 2002
----------- -----------
NET SALES
Aircraft $ 1,347,762 $ 7,412,519
Service 793,972 1,030,897
----------- -----------
Total net sales 2,141,734 8,443,416
----------- -----------
COST OF SALES
Aircraft 1,176,706 6,679,481
Service 627,463 829,954
----------- -----------
Total cost of sales 1,804,169 7,509,435
----------- -----------
Gross margin 337,565 933,981
----------- -----------
OTHER OPERATING EXPENSES
Product development and engineering costs 1,930 126,232
Selling, general and administrative expenses 1,557,638 2,440,414
Impairments and allowances - 1,758,620
----------- -----------
Total other operating expenses 1,559,568 4,325,266
----------- -----------
Operating income (loss) (1,222,003) (3,391,285)
----------- -----------
OTHER INCOME (EXPENSES)
Interest income - 1,929
Other income (expense) 62,581 (56,368)
Interest expense (148,850) (243,414)
Litigation settlement - (200,000)
Realized loss on available for sale
equity securities (395,973)
----------- -----------
Total other expenses (86,269) (893,826)
----------- -----------
NET EARNINGS (LOSS) $(1,308,272) $(4,285,111)
=========== ===========
NET EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding;
basic 7,110,846 7,110,846
----------- -----------
Net earnings (loss) per share; basic $ (0.18) $ (0.60)
=========== ===========
Weighted average common shares outstanding;
diluted 7,110,846 7,110,846
=========== ===========
Net earnings (loss) per share; diluted $ (0.18) $ (0.60)
=========== ===========
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
20
AVIATION GENERAL, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Stock Paid-in Treasury Stock Accumulated Comprehensive Stockholders'
Shares Amount Capital Shares Amount Deficit Income (Loss) Equity
--------- ---------- ----------- --------- ------------ ------------ -------------- -------------
Balance at
January 1, 2002 7,631,519 $3,815,759 $37,000,299 772,189 $(1,294,193) $(37,943,329) $(253,873) $1,324,633
Treasury Stock not
retired as planned 237,362 118,681 296,764 237,362 (415,445) -
Issuance of
common stock 251,516 125,758 (42,758) 83,000
Comprehensive loss
Net loss (4,285,111) (4,285,111)
Other
comprehensive
loss
Change in
unrealized
investment
loss, net 253,873 253,873
Comprehensive
loss (4,031,238)
--------- ---------- ----------- --------- ------------ ------------ ---------- -----------
Balance at
December 31, 2002 8,120,397 4,060,198 37,254,305 1,009,551 (1,709,638) (42,228,440) - (2,623,575)
Comprehensive loss
Net loss (1,308,272) (1,308,272)
--------- ---------- ----------- --------- ------------ ------------ --------- -----------
Balance at
December 31,2003 8,120,397 $4,060,198 $37,254,305 1,009,551 $(1,709,638) $(43,536,712) $ - $(3,931,847)
========= ========== =========== ========= =========== ============ ========= ===========
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
21
AVIATION GENERAL, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
--------------------------------
2003 2002
----------- -----------
Increase (decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $(1,308,272) $(4,285,111)
Adjustments to reconcile net earnings
(loss) to net cash provided by
(used in) operating activities
Depreciation and amortization 108,918 130,684
Noncash interest earnings
Common stock issued for litigation
settlement, services, interest
charges, commissions and
directors' fees - 83,000
Receipts on aircraft notes receivable - 101,896
Loss (gain) on retirement of
property and equipment (1,437) 17,965
Realized loss on sale of
available-for-sale equity securities - 395,973
Changes in assets and liabilities
(Increase) decrease in
Accounts receivable (5,409) (9,431)
Inventories 1,189,816 2,927,701
Prepaid expenses and other assets 2,891 66,564
Increase (decrease) in
Accounts payable (31,437) (163,229)
Accrued expenses 456,828 685,001
Refundable deposits 73,684 (599,049)
----------- -----------
Net cash provided by (used in)
operating activities 485,582 (648,036)
----------- -----------
Cash flows from investing activities
Proceeds on sales of property and equipment 1,500 -
----------- -----------
Net cash provided by (used in)
investing activities 1,500 -
----------- -----------
Cash flows from financing activities
Proceeds from borrowings 427,000 3,693,325
(Payments on) borrowings (906,342) (3,258,790)
----------- -----------
Net cash provided by (used in)
financing activities (479,342) 434,535
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 7,740 (213,501)
Cash and cash equivalents at beginning of year (2,145) 211,356
----------- -----------
Cash and cash equivalents (overdraft)
at end of year 5,595 (2,145)
========== ===========
Cash paid during the year for:
-----------------------------------
Interest 47,483 260,928
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
22
AVIATION GENERAL, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
Noncash investing and financing activities
----------------------------------------------
2002
Exchange of common stock for commissions of $$38,000.
Exchange of common stock of $45,000 for Board of Directors fees.
See accompanying Summary of Accounting Policies and Notes to Financial
Statements.
23
Aviation General, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE A - ORGANIZATION AND OPERATIONS
Aviation General, Incorporated (AGI) was incorporated August 4, 1998 under
the laws of the State of Delaware, and is the successor to the operations of
Commander Aircraft Company (CAC). AGI is a holding company which, through its
wholly owned subsidiaries, CAC and Strategic Jet Services, Inc. (SJS)
(collectively referred to as the Company), manufactures, markets, and provides
support services for single engine, high performance Commander aircraft and to a
lesser extent provides sales and service of other pre-owned aircraft. The
Company also provides consulting, sales, brokerage, and refurbishment services
for jet aircraft through SJS.
The Board of Directors of AGI is authorized to issue preferred stock in one
or more series. The Board of Directors is further authorized to fix the number
of shares constituting such series and to fix the relative rights and
preferences of the shares of the series.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
-----------------------------
The Company consolidates the accounts of its subsidiaries, CAC and SJS.
All intercompany balances and transactions are eliminated in consolidation.
2. Cash and Cash Equivalents
----------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less and money market funds to be cash equivalents.
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risks on
cash and cash equivalents. As of December 31, 2003 the Company had
approximately $5.595 on deposit at one financial institution. The Company had a
bank overdraft of $(2,145) at December 31, 2002.
3. Investments
-----------
The Company had an investment consisting of 245,000 shares of Stratesec
Inc. common stock which had historically been classified as an
available-for-sale security and reported at fair value with unrealized gains and
losses excluded from earnings and reported in other comprehensive income.
However, during 2002, certain information has come to the Company's
attention concerning the ability of Stratesec's stock to recover its fair value.
Among these are deteriorating financial condition, the lack of development of
merger or acquisition opportunities and notification from the American Stock
Exchange on July 18, 2002 that Stratesec does not meet minimum equity
requirements and is subject to being de-listed. Based on the above facts an
impairment loss of approximately $396,000 has occurred and has been recorded as
a charge to earnings. At December 31, 2001, unrealized losses, net of income tax
effects, of $(253,873) had been recorded in accumulated other comprehensive
income.
24
The components of other comprehensive income (loss) are as follows for the
years ended December 31:
2003 2002
-------- -----------
Unrealized holding gains (losses)
arising during the period $ - $ -
Less reclassification adjustment for
net realized losses included in
net income - 253,873
Income tax benefit (expense) - -
-------- -----------
Other comprehensive income (loss) $ - $ 253,873
========= ===========
4. Revenue Recognition
--------------------
Sales of aircraft are recognized upon execution and funding of the purchase
agreement and transfer of title to the buyer, which occurs after the Company
receives the airworthiness certificate from the Federal Aviation Administration
(FAA). Additionally, for aircraft financed by the Company it must also be
determined that the buyer's initial and continuing investments in the aircraft
are adequate to demonstrate a commitment to pay. Sales of pre-owned aircraft are
recognized upon execution and funding of the purchase agreement. Service revenue
is recognized when the services are performed and billable.
5. Inventories
-----------
Inventories consist primarily of finished goods and parts for manufacturing
and servicing of aircraft. Inventory costs include all direct manufacturing
costs and applied overhead. These inventories, other than pre-owned aircraft,
are stated at the lower of cost or market, and cost is determined by the
average-cost method. Pre-owned aircraft are valued on a specific-identification
basis at the lower of cost or current estimated realizable wholesale price.
Inventory components were as follows at December 31, 2003:
Raw materials $ 1,063,298
Work in process 508,209
New and pre-owned aircraft 448,958
Other 1,250
------------
$ 2,021,715
============
During 2002 and 2001, certain indirect costs of manufacturing, primarily
excess capacity costs, were considered abnormal and treated as current period
charges rather than as a portion of inventory costs. Such costs, totaling
approximately $662,000 and $991,000 for 2002 and 2001 respectively, are included
in cost of sales - aircraft. The Company had no manufacturing activities during
2003.
During 2002 the Company recognized and impairment loss of $1,758,620
associated with writing the inventory to the lower of cost or market.
6. Property and Equipment
------------------------
Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over estimated
useful lives of five to seven years for vehicles and aircraft, three to five
years for office equipment and furniture, seven to ten years for leasehold
improvements, and ten to fifteen years for manufacturing equipment and tooling.
25
Depreciation expense was $108,918 and $130,684, for 2003 and 2002.
respectively.
7. Income Taxes
-------------
Deferred income taxes are provided on carryforwards and on temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in taxable or deductible
amounts in future years. Deferred income tax assets and liabilities are
determined by applying the presently enacted tax rates and laws.
The Company provides for a valuation allowance on deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
AGI files a consolidated income tax return with its wholly owned
subsidiaries.
8. Refundable Deposits
--------------------
Refundable deposits consist of payments made by customers prior to having
repairs performed on their aircraft and deposits on aircraft being produced.
These deposits are recognized as revenue in the period the services are
completed or the aircraft sale is recognized.
9. Earnings (Loss) Per Common Share
------------------------------------
Basic earnings (loss) per common share are calculated based on the weighted
average number of common shares outstanding during the year, including
redeemable common shares. Diluted earnings (loss) per common share has been
computed based on the assumption that all dilutive options and warrants are
exercised using the treasury stock method.
10. Use of Estimates
------------------
The preparation of the consolidated financial statements requires the use
of management's estimates and assumptions in determining the carrying values of
certain assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts for certain revenues and expenses during the reporting period.
Actual results could differ from those estimates.
11. New Accounting Pronouncements
-------------------------------
In 2001, the Financial Accounting Standards Board issued new
pronouncements: SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
SFAS No. 144 is effective for the Company for the fiscal year beginning
January 1, 2002 and addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business. SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 and expands the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction.
In April of 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Recession of FASB Statements Non 4, 44, and 64, Amendment of FASB No. 13,
26
and Technical Corrections. SFAS deals with reporting gains and losses for
extinguishment of debt, accounting for intangible Assets of Motor Carriers, and
sales and leaseback transactions.
In June of 2002, the Financial Accounting Standards Board issued SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities. This
statement requires that cost associated with an exit or disposal activity be
recognized only when the liability is incurred.
In October of 2002, the Financial Accounting Standards Board issued SFAS
No. 147 "Acquisition of Certain Financial Institutions.
In December of 2002, the Financial Accounting Standards Board issued SFAS
No. 148 "Accounting for Stock-Based Compensation- Transition and Disclosure.
This statement amends SFAS Non 123 "Accounting for Stock Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
transactions.
In April of 2003, the Financial Accounting Standards Board issued SFAS No.
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial accounting and
reporting for derivative instruments and for hedging actives Under FASB Non 133
"Accounting for Derivative Instruments and Hedging Activities.
Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.
In May of 2003, the Financial Accounting Standards Board issued SFAS No.
150 "Accounting for Certain Financial Instruments with Characteristics of both
Liability and Equity. This standard establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The Company has reclassified retroactively its
redeemable common stock out of the equity section of the accompanying financial
statements.
12. Going Concern
--------------
During the years ended December 31, 2003 and 2002, the Company incurred net
(losses) of $(1,308,272) and $(4,285,111), respectively. As of December 31,
2003, the Company had a negative working capital of $(2,901,540) and a deficit
net worth of $(3,931,847). On December 27, 2002 the Company's wholly owned
subsidiary, Commander Aircraft Company, filed petitions for relief under Chapter
11 of the federal bankruptcy code. These factors raise substantial doubt about
the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon
the Company's ability to successfully reorganize Commander Aircraft Company, to
attain a satisfactory level of profitability, and to obtain suitable and
adequate financing. There can be no assurance that these objectives can be
achieved. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty nor do they take into effect any
adjustments that might occur as a result of a successful plan to reorganize
Commander Aircraft Company. See Note C for further details.
13. Product Warranties and Liability
-----------------------------------
The Company follows the policy of accruing $5,000 in projected product
warranty cost associated with each new aircraft sold. Any portion of this
accrual that is not used within the five-year warranty period is recognized as
27
income at the end of the warranty period. Costs exceeding the $5,000 accrual per
plane are charged to current operations as they are incurred and an additional
accrual is recorded to cover the remaining warranty period on that plane.
Warranty expense for the years ended December 31, 2003 and 2002 were none and ,
$61,052 respectively.
The Company does not carry any product liability insurance and recognizes
product liability costs at such time as a claim arises and an estimate of the
ultimate liability associated with the claim can be determined. Product
liability costs for the years ended December 31, 2003 and 2002 and 2001 were
none and $200,000, respectively.
14. Impairment of Long-Lived Assets
----------------------------------
The Company evaluates long-lived assets for potential impairment in
compliance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. The Company has not recognized any
impairment of its long-term assets that might occur as a result of its inability
to continue as a going concern.
NOTE C - PETITION FOR RELIEF UNDER CHAPTER 11
On December 27, 2002 the Company's wholly owned subsidiary, Commander
Aircraft Company (the "Debtor") filed petitions for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
District of Delaware. Under Chapter 11, certain claims against the Debtor in
existence prior to the filing of the petitions for relief under the federal
bankruptcy laws are stayed while the Debtor continues business operations as
Debtor-in-possession. These claims are reflected in the December 31, 2003
balance sheet as "liabilities subject to compromise." Claims secured against the
Debtor's assets ("secured claims") also are stayed, although the holders of such
claims have the right to move the court for relief from the stay. Secured
claims are secured primarily by liens on the Debtor's property, plant and
equipment.
The Debtor received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages and
product warranties totaling $75,000.
NOTE D - NOTES PAYABLE
Notes payable consist of the following at December 31, 2003:
Revolving credit facilities (a) $ 453,477
Note payable to individual, 0% interest,
payable at the effective date of confirmation
of the bankruptcy plan of reorganization. 200,000 200,000
Debtor in Possession (DIP) financing, 10%
simple interest, payable at the effective date
of confirmation of the bankruptcy plan of
reorganization. 427,000
Note payable to an individual, payable
December 31, 2004. Convertible to common stock
at $.85 a share. Interest due semi annually at
the end of June and December until maturity.
Collateralized by Commander Aircraft Company's
inventory and fixed assets. 1,000,000
28
Note payable to individual, payable in monthly
installments of $8,699, including interest at
8%, through September 30, 2002; uncollateralized 34,795
----------
$2,115,272
==========
(a) The revolving credit facilities may be drawn down to manufacture new
and purchase pre-owned aircraft. Interest is payable monthly at fixed
rates of 8% to 8.5% with specific draws and accrued unpaid interest
thereon generally due within six months. The facilities are
collateralized by specific new and pre-owned aircraft. The revolving
credit facilities are subject to certain covenants and the Company was
not in compliance with covenants on one of the facilities at December
31, 2003. In the bankruptcy plan of reorganization the credit
facilities are secured debt and are not impaired.
NOTE E - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 2003 and 2002. Such
information does not purport to represent the aggregate net fair value of the
Company:
Cash and Cash Equivalents. The balance sheet carrying amounts of cash and
cash equivalents approximate fair values of such assets. Note Receivable.
The carrying amount approximates fair value because of the fluctuating
interest rate associated with the note receivable.
Notes Payable. The carrying value of notes payable approximates fair value
because of variable interest rates and the short-term nature of the
instruments.
All of the Company's financial instruments are for purposes other than
trading. As of December 31, 2003, a recap of the Company's financial
instruments is as follows:
Carrying Fair
amount value
----------- -----------
Cash and cash equivalents $ 5,595 $ 5,595
Notes payable $(2,115,272) $(2,115,272)
NOTE F - STOCK OPTION PLAN
In December 1993, the Company approved a stock option plan for issuance of
options to purchase up to 300,000 shares of common stock to employees at the
discretion of the committee appointed by the Board of Directors. The number of
shares authorized for issuance has subsequently been increased to 3,300,000
shares. The stock option plan also provides for automatic grants of options to
purchase 20,000 shares of common stock to each director on an annual basis. At
December 31, 2003, approximately 1,563,000 shares remain to be granted under the
plan. The stock options generally vest ratably over a three-year period and the
exercise price of all options equaled or exceeded market price of the stock at
the date of grant.
The Company uses the intrinsic value method to account for its stock option
plan in which compensation is recognized only when the fair value of each option
exceeds its exercise price at the date of grant. Accordingly, no compensation
cost has been recognized for the options issued. Had compensation cost been
29
determined based on the fair value of the options at the grant dates, the
Company's net earnings (loss) and earnings (loss) per share would have been
decreased/increased to the pro forma amounts for the years ended as indicated
below.
2003 2002
------------ ------------
Net earnings (loss)
As reported $(1,308,272) $(4,284,744)
Pro forma (1,308,272) (4,397,114)
Earnings (loss) per share,
basic and diluted
As reported $ (.18) $ (.60)
Pro forma $ (.18) $ (.62)
The fair value of each grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002, respectively: No expected
dividends; expected volatility of 75% and 75%, risk-free interest rate of 4%and
, 4.3% and expected lives of three years.
The Black-Scholes options pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A summary of the status of the Company's stock option plan as of December
31, 2003 and 2002 and changes during the years ending on those dates is
presented below.
2003 2002
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
--------- -------- --------- --------
Outstanding at beginning of year 2,333,083 $1.49 2,655,550 $1.49
Granted - $ - 661,000 $0.33
Exercised - $ - - $ -
Expired (770,200) $2.47 (422,167) $1.60
Forfeited $ - (561,300) $1.39
--------- ----- --------- -----
Outstanding at end of year 1,562,883 $0.48 2,333,083 $1.14
========= =========
Options exercisable at year end 1,562,883 $0.48 1,672,083 $1.44
Weighted average fair value of
options granted during the year $ .00 $ .17
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2003:
30
Options outstanding Options exercisable
------------------------------------ ---------------------
Weighted
average Weighted Weighted
Number remaining average Number average
outstanding contractual exercise exercisable exercise
at 12/31/03 life price at 12/31/03 price
----------- ----------- -------- ----------- --------
Range of exercise prices
$0.33 to $0.50 1,462,883 .83 $0.42 1,462,883 $0.42
$1.33 to $1.50 100,000 .43 $1.45 100,000 $1.45
--------- ---------
1,562,883 1,562,883
========= =========
NOTE G - LEASES
The Company leases office space, hangar space, its manufacturing and
service facility, and certain office equipment under agreements classified as
operating leases that expire at various dates through 2004. Rental expense
under these leases was approximately $175,000 and, $287,000, for the years ended
December 31, 2003 and 2002 respectively.
The Company's lease for office space, hangar space, and its manufacturing
and service facility was a revocable permit to lease the facility. The permit
required monthly rentals in the same amounts as the original lease. The permit
further required the Company to pay outstanding delinquent amounts plus
penalties as defined in the permit. On April 23, 2003, the Company transferred
its lease to a third party. The Company negotiated a 3.5-year sub-lease with
this third party for 50,011 square feet of manufacturing, service and office
space, guaranteed renewable at six-month intervals. The Company also agreed to
pay $94,359 in past due rent to this third party.
The future annual minimum lease payments under the April 23, 2003
operating lease are as follows:
Year ending December 31
2004 $113,400
2005 113,400
2006 94,500
--------
Total future minimum lease payments $321,300
NOTE H - SALES CONCENTRATIONS
The geographic sales of the Company's new aircraft are as follows:
2003 2002
-------------------- --------------------
Number Amount Number Amount
------ ------ ------ ------
United States - 6 $3,758,426
Pre-owned aircraft sold during 2003 in the United States was 12, totaling
$1,347,762. Brokerage commissions of $65,180 were received in 2003 as a selling
agent for pre-owned aircraft.
Pre-owned aircraft sold during 2002 in the United States was 16, totaling
$3,654,093. Brokerage commissions of $138,482 were received in 2002 as a selling
agent for pre-owned aircraft.
NOTE I - RELATED PARTY TRANSACTIONS
On May 9, 2001, the Company entered into a $200,000 unsecured note payable
bearing interest at 9% and due on demand with a Company controlled by the
Chairman of the Board of Directors. On August 3, 2001, the Company issued
200,000 shares of common stock having a fair value at the date of issue of
31
$120,000 in exchange for a $100,000 reduction in the note payable and interest
expense of $20,000. On October 18, 2001, the affiliate assigned the note payable
with an outstanding balance of $85,000 to a stockholder.
During 2001, 130,000 shares of common stock having a fair value at the date
of issue of $78,000 were issued to members of the Board of Directors in exchange
for services provided. During 2002, 115,152 shares of common stock having a fair
value at the date of issue of $45,000 were issued to members of the Board of
Directors in exchange for services provided.
At December 31, 2001, amounts payable for brochures and publications to a
company controlled by the Chairman of the Board of Directors were approximately
$33,000. Purchases from this entity were approximately $15,000 for the year
ended December 31, 2001. There were no purchases from this entity in 2002 or
2003.
In prior years, the Company extended financing for aircraft and spare parts
sold either directly to a director of the corporate general partner of the
Company's majority stockholder or to an Authorized Sales and Service
Representative (ASSR) owned by the director under a line of credit of
$5,000,000. The Company has made efforts to collect amounts owed under this
line, including repeated requests for payment, attempts to obtain or cancel
approximately 800,000 shares of common stock of the Company collateralizing the
line and attempts to block ownership transfers of said shares. However, during
2001, the ASSR went out of business and the individual suffered other business
reversals. In addition, the individual resigned from the Company's Board of
Directors in 2001 and all of his stock options were cancelled. Due to the
uncertainties relating to ultimate collectability, during the fourth quarter of
2001, the Company recorded bad debt expense relating to this line of credit for
the outstanding balance of $1,529,889. In addition, the Company wrote off
accrued, unpaid interest of $115,977. Bad debt expense of $1,529,889 is
recorded in other operating expenses and the write-off of interest of $115,977
is recorded as an offset to interest income in the 2001 statement of operations.
Management intends to continue to attempt to collect on amounts owed and
continue to attempt to take possession of the common stock collateralizing the
line.
NOTE J - INCOME TAXES
No current or deferred tax provision (benefit) has been recognized in the
accompanying statements of operations given the historical operating losses
incurred.
Components of the net deferred tax assets (liabilities) rounded to the
nearest thousand are as follows at December 31, 2003:
2003
--------------
Deferred tax assets (liabilities)
Note receivable from related party $ 612,000
Inventories 1,152,000
Depreciation and amortization (66,000)
Accrued liabilities 35,000
Net operating loss carryforwards 14,100,000
--------------
15,833,000
Valuation allowance (15,833,000)
--------------
Total deferred tax liabilities $ -
==============
The valuation allowance on tax assets increased $476,000 and $1,655,000 in
2003 and 2002, respectively, primarily due to the generation of net operating
loss carryforwards in both years.
32
The Company's net operating loss carryforwards will expire as follows:
Year ending December 31
2005 $ 2,998,231
2006 17,434
2007 6,466,819
2008 3,982,473
2009 4,523,401
2010 2,279,486
2011 3,445,366
2012 1,869,674
2018 1,681,538
2019 438,829
2021 3,298,986
2022 2,888,549
2023 1,394,365
------------
Total net operating loss carryforwards $ 35,285,151
============
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation by the FAA. The Company is subject to
inspections by the FAA and may be subjected to fines and other penalties
(including orders to cease production) for noncompliance with FAA regulations.
The Company has a Production Certificate from the FAA, which delegates to the
Company the inspection of each aircraft. The sale of the Company's product
internationally is subject to regulation by comparable agencies in foreign
countries.
The Company faces the inherent business risk of exposure to product
liability claims. In 1988, the Company agreed to indemnify a former manufacturer
of the Commander single engine aircraft against claims asserted against the
manufacturer with respect to aircraft built from 1972 to 1979. In 1994, Congress
enacted the General Aviation Revitalization Act, which established an 18-year
statute of repose for general aviation aircraft manufacturers. This legislation
prohibits product liability suits against manufacturers when the aircraft
involved in an accident is more than 18 years old. This action effectively
eliminated all potential liability for the Company with respect to aircraft
produced in the 1970s. The Company's product liability insurance policy with
coverage of $10 million per occurrence and $10 million annually in the aggregate
with a deductible of $200,000 per occurrence and annually in the aggregate
expired March 1, 1995. Subsequent to March 1, 1995, the Company is not insured
for product liability claims.
During 2001, the Company executed an employment contract with its President
and Chief Executive Officer through August 2006 that provides for a specified
annual salary, subject to periodic adjustments and incentives. Should the
Company terminate this executive without cause (as defined), the Company will be
obligated to pay the executive an amount equal to his salary in effect at
termination through the expiration of the term of the agreement. Further,
should a termination without cause occur within two years following a change in
control (as defined), the Company will pay the executive an additional amount
equal to 2.99 times the executives salary in effect at the time of such change
in control. The contract also includes a noncompete clause effective
throughout the term of the employment contract and for a period of one year
thereafter.
The Company is routinely involved in various legal matters arising in the
normal course of business. Management believes that losses, if any, arising from
such actions will not have a material adverse effect on the financial position
or operations of the Company.
33
On September 24, 2002 the Company's common stock was delisted from the Nasdaq
SmallCap Market and began trading on the Over-the-Counter Bulletin Board, or
OTCBB, under the symbol AVGE.OB due to the Company's noncompliance with the
applicable minimum asset and equity requirements and the minimum bid price
requirement.
NOTE L - REDEEMABLE COMMON STOCK
On October 3, 2001, the Company, pursuant to an agreement, issued 150,000
shares of common stock. Under the agreement, the Company will be obligated for
the difference between the net proceeds to the holder and $150,000 should the
holder elect to sell the shares within 12 months of such shares becoming fully
tradable or if such shares cannot be sold or are not fully tradable within 13
months of issuance the Company is obligated to buy back the shares for $150,000.
As such, during 2001, the Company recorded redeemable common stock of $150,000
for the estimated fair market value of the redeemable securities issued. In
accordance with the provisions of Financial Accounting Standards Board Statement
No 150 " Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, this redeemable common stock has not been included
in the equity section of the financial statements.
NOTE M - STOCKHOLDERS' EQUITY
In connection with the following Shareholder Rights Agreement, the Company
created a series of 100,000 shares of preferred stock, par value $.01 per share,
designated as Series A Junior Participating Preferred Stock (Series A Preferred
Stock).
During 2001, the Company adopted a Shareholder Rights Agreement providing
each outstanding share of common stock with a Series A preferred share purchase
right (right) that expires in July of 2011. Each right entitles the holder to
purchase one one-thousandth of a share of Series A preferred stock at a price of
$10 per one one-thousandth of a share of Series A preferred stock. The rights
will generally become exercisable only if a person or group (acquiring group),
excluding the Company's largest stockholder, acquires, without approval of the
Company's Board of Directors, 15% or more of the Company's common stock or
announces a tender offer with the intention to do the same. Upon exercise, each
holder, excluding the acquiring group, will receive the number of shares of
common stock having a value equal to two times the exercise price of the right
or one one-thousandth of a share of Series A preferred stock. The number of
shares issuable upon exercise of rights is subject to certain antidilution
adjustments. Generally, the rights may be redeemed by the Company at $.01 per
right. The rights are non-participating and non-voting until exercised.
Series A preferred stock issued, if any, upon exercise of the rights will
be entitled to the greater of a cumulative quarterly dividend payment of $10 per
share when, and if, declared or 1,000 times the dividend declared per common
share. In the event of liquidation, the Series A preferred share holders will
be entitled to the greater of $1,000 per share or an aggregate payment of 1,000
times the aggregate payment per common share. Each share of Series A preferred
stock will be entitled to 1,000 votes on all matters submitted to the
stockholders. The Series A preferred stock will not be redeemable or
convertible into common stock or any other security of the Company.
NOTE N - EMPLOYEE BENEFIT PLANS
The Company discontinued its profit sharing 401(k) plan in 2002. While
effective, the plan covered substantially all employees. Eligible employees were
able to contribute up to 15% of their compensation. The Company contributed an
amount equal to at least 25% of each employee's contributions not in excess of
10% of compensation, with additional contributions made at the Company's
discretion. Expense under the plan was approximately $19,000 for 2002.
34
Through December 31, 2001, the Company had a contributory health care
benefit plan covering substantially all employees and eligible dependents. The
plan provided for covered major medical expense benefits subject to certain
deductibles, coinsurance provisions, and lifetime maximums. Through October 31,
2001, the plan had certain stop-loss coverage under an insurance policy that
provided for payments of covered benefits in excess of $25,000 per year per
covered person. The policy also provided an aggregate monthly stop-loss for the
plan based on number of covered persons. Effective October 31, 2001, due to a
lapse in insurance coverage, the Company became uninsured on this plan for
benefit claims occurring through December 31, 2001. As of January 1, 2002, the
Company terminated its employee health care benefits. Management has accrued
amounts, which it believes are sufficient to cover claims for incidents
occurring from October 31, 2001 through December 31, 2001
NOTE O - SEGMENT INFORMATION
The Company operates in the segments of piston engine aircraft
manufacturing sales and service and jet aircraft brokerage and refurbishment.
Information concerning the Company's reportable segments are as follows for the
years ended December 31:
2003 2002
------------ -----------
Revenues
Jet aircraft brokerage and refurbishment $ 1,857 $ 122,732
Aircraft sales and service 2,139,877 8,320,684
------------ -----------
Total $ 2,141,734 $ 8,443,416
============ ===========
Operating income (loss)
Jet aircraft brokerage and refurbishment $ 1,857 $ 19,732
Aircraft sales and service (1,310,129) (3,410,650)
------------ -----------
Total $ (1,308,272) $(3,390,918)
=========== ===========
Assets
Jet aircraft brokerage and refurbishment $ - $ -
Aircraft sales and service 2,424,338 3,715,022
------------ -----------
Total $ 2,424,338 $ 3,715,022
============ ===========
Jet aircraft
brokerage and Aircraft sales Consolidated
refurbishment and service total
------------- -------------- ------------
Other significant items - 2003:
Interest income $ - $ - $ -
Interest expense - 148,850 148,850
Depreciation and amortization - 108,918 108,918
Expenditures for long-lived assets - - -
Other significant items - 2002
Interest income $ - $ 1,929 $ 1,929
Interest expense - 243,414 243,414
Depreciation and amortization - 130,684 130,684
Expenditures for long-lived assets - - -
35
NOTE P - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of earnings (loss) per share
and earnings (loss) per share assuming dilution at December 31:
2003 2002
------------ ------------
Numerator
Net earnings (loss) $(1,308,272) $(4,284,744)
Denominator for earnings (loss) per share
Weighted average shares outstanding, basic 7,110,846 7,143,250
Effect of dilutive securities - stock options - -
----------- -----------
Denominator for earnings (loss) per
share assuming dilution 7,110,846 7,143,250
=========== ===========
Earnings (loss) per share, basic $ (.18) $ (.60)
=========== ===========
Earnings (loss) per share, assuming dilution $ (.18) $ (.60)
=========== ===========
Outstanding options of 1,562,883 and 2,655,550, for the years ended
December 31, 2003, and 2002, respectively, have been excluded from the above
calculations as they would be antidilutive.
NOTE Q - MANAGEMENT PLANS
During the second half of 2002, the Company experienced an abrupt lull and
slowdown of its business, evidenced by cancellation or postponement of several
new and pre-owned aircraft orders and the absence of prospective new business.
Management continued to reduce its overhead expenses including employee layoffs,
terminating the business operations of Strategic Jet Services, Inc., and
suspending new aircraft production.
On December 27, 2002, Commander Aircraft Company filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code for the District of
Delaware. Management's plan was to go forward and:
- Continue CAC's operations and provide service and support to the fleet of
Commander aircraft owners, refurbishment services, parts, and pre-owned
aircraft brokerage.
- Secure adequate Debtor in Possession ("DIP") financing to allow CAC to
continue to operate.
- Develop, secure, and establish investor funding for a financial
reorganization plan that would allow CAC to emerge from bankruptcy
to the satisfaction of its creditors and with minimal dilution to its
shareholders.
Management has been successful in fulfilling these objectives, culminating
in a court-confirmed reorganization plan, dated December 10, 2003, with the
effective date scheduled for on or before March 31, 2004, unless extended, with
Tiger Aircraft LLC or affiliate, which has been providing CAC with interim DIP
financing, as the investor.
Pursuant to the confirmed bankruptcy plan and agreement with Tiger, Tiger
will invest approximately $2.8 million in Aviation General, Incorporated in
return for an 80% ownership interest in AGI. Approximately $2 million will be
used to settle with creditors in accordance with CAC's bankruptcy plan, and the
remainder will be used for working capital. Pursuant to the agreement with
36
Tiger, AGI must secure the approval of the agreement from its shareholders as
well as their authorization to amend the Company's Certificate of Incorporation
to increase the Company's authorized common shares from 20,000,000 shares to
100,000,000 shares. The Company currently has 20,000,000 common shares
authorized and approximately 7,000,000 common shares (excluding Treasury stock
which will be retired) issued and outstanding. The agreement with Tiger will
necessitate the issuance of approximately 28,000,000 new common shares of stock
to Tiger, resulting in a total of approximately 35,000,000 shares issued and
outstanding.
CAC plans to resume new aircraft production following the consummation of
the transaction with Tiger and proceed to operate within the business model and
strategies articulated in this document.
NOTE R - SUBSEQUENT EVENTS
On December 10, 2003 the Company's wholly owned subsidiary, Commander
Aircraft Company (Commander), received confirmation of the First Amended Plan
under Chapter 11 of the Bankruptcy Code filed by Commander on July 5, 2003 as
amended on July 30, 2003 and December 10, 2003. The plan outlines the classes of
claims and their treatments as follows:
Class A (Administrative Claims). Class A consists of Administrative
Claims, including Professional Claims, whether secured or unsecured,
including the Debtor in Possession Loan. Claims in Class A approved and
Allowed by the Court shall be paid in full, in cash, by Commander on the
Effective Date of the Plan or as soon thereafter as the amount thereof can
be fixed, unless a different treatment is agreed to or provided for in this
Plan. Administrative Claims which by their terms are not due and payable on
or before the Effective Date shall be paid as and when due. This class is
not impaired. As of December 31,2003 the Company had $350,000 in Class A
claims payable.
Class B (Priority Claims). Class B consists of Priority Claims under
11 U.S.C. 507 other than Administrative Claims and Priority Tax Claims.
Allowed Claims in Class B shall be paid in full, in cash, by Commander on
the Effective Date of the Plan or as soon thereafter as the amount thereof
can be fixed, unless a different treatment is agreed to or provided for in
this Plan. This class is not impaired. As of December 31, 2003 the Company
had $112,000 in Class B claims payable.
Class C (Priority Tax Claims). Class C consists of Priority Tax Claims
Pursuant to 11 U.S.C. 507(a)(8). In full and complete satisfaction of the
obligation of Commander and all co-debtors (including responsible parties
against whom trust fund taxes have been or may potentially be assessed) on
Claims in Class C, such claims shall be paid in full in deferred cash
payments, with simple interest at 6% p.a. running from the Effective Date
of the Plan until paid, amortized over 20 equal quarterly payments. Any
contrary interpretation of the foregoing provision notwithstanding,
Commander shall pay each Class C claim or relevant portion thereof in full
on or before the sixth anniversary of the assessment date of each portion
of such claim; provided, however, that any Creditor to which this provision
applies must apply all payments on Class C claims to such claims in the
order of assessment. If a holder of a Class C claim declares Commander to
be in default of Commander's obligations to it under the Plan, and such
default is not cured within 20 days after receipt by Commander and its
counsel of the notice thereof by certified mail, then the entire liability
shall become immediately due and payable, and such creditor may exercise
any rights available under applicable non-bankruptcy law to collect such
liability from Commander or any co-debtor or responsible party. As of
December 31, 2003 the Company had $150,000 in Class C claims payable.
Class D (Secured Claim of Nyltiak). Class D consists of the secured
pre-petition claim of Nyltiak Investments, LLC. The holder of the claim in
Class D shall retain its pre-petition lien on the Commander's Assets, and
Commander shall cure any pre- and post-petition arrearages (including all
accrued interest at the non-default rate, fees, and other charges) in cash
on the Effective Date of the Plan, and shall, on the Effective Date of the
Plan, make a payment in the amount necessary to reduce the outstanding
37
balance to $500,000, which shall fully satisfy the replacement lien and
administrative claim. Any non-monetary defaults of Commander and any
co-Debtor existing on the Petition Date and/or the Effective Date shall be
waived and deemed cured, with all interest paid at the non-default rate
with no late fees. All pre-payment penalties shall be waived. Thereafter,
Commander shall pay the claim in accordance with the contract terms, except
that the following terms of the loan documents dated July 22, 2002 shall be
deleted and of no further force or effect as to any party or guarantor to
said documents: Securities Purchase Agreement, Section 4 ("Covenants,"
including reservation of shares), Section 5 ("Right of First Offer"), and
Section 6 ("Transfer Agent Instructions"); Secured Convertible Note,
Article I (option to convert note into AGI shares), Article III, Sections
3.2 and 3.2 (Redemption), Article IV, Section 4.2 (default for failure to
issue conversion shares), and Article V, Section 5.10 (notice of corporate
events); and the entirety of the Investor Rights Agreement. Tiger Aircraft,
LLC, shall provide an additional guaranty to the Nyltiak loan in a form
substantially similar to that of the existing guarantors. Provided payments
hereunder are not in default, the Debtor may sell Inventory in the ordinary
course of business free and clear of the lien of Nyltiak, which lien shall
be replaced by a replacement lien on Inventory of the types to which its
pre-petition lien attaches, manufactured or acquired after the Petition
Date, in an amount equal to the value of the Nyltiak lien on Inventory sold
after the Petition Date. This class is impaired. As of December 31, 2003,
the Company had $650,000 in Class D claims payable.
Class E (Secured Claim of the IRS). Class E consists of the claim of
the Internal Revenue Service secured by a pre-petition tax lien. In full
and complete satisfaction of the obligation of Commander and all co-debtors
(including responsible parties against whom trust fund taxes may
potentially be assessed) on the claim in Class E, the holder of such claim
shall retain its pre-petition lien until paid in full, and such claim shall
be paid in full in deferred cash payments, with simple interest at 6% p.a.
running from the Effective Date of the Plan until paid, amortized over 20
equal quarterly payments. If a holder of a Class E claim declares Commander
to be in default of Commander's obligations to it under the Plan, and such
default is not cured within 20 days after receipt by Commander and its
counsel of the notice thereof by certified mail, then the entire liability
shall become immediately due and payable, and such creditor may exercise
any rights available under applicable non-bankruptcy law to collect such
liability from Commander or any co-debtor or responsible party. Provided
payments hereunder are not in default which has not been cured as provided
in the preceding sentence, Commander may sell inventory in the ordinary
course of business free and clear of the lien of the IRS, which lien shall
be replaced by a replacement lien on inventory manufactured or acquired
after the Petition Date in an amount equal to the value of the IRS lien on
inventory sold after the Petition Date, said replacement lien to be junior
to the lien of Nyltiak on inventory of the types to which Nyltiak's
pre-petition lien attaches. This class is impaired. As of December 31,
2003, the Company had $552,891 in Class E claims payable.
Class F (Secured Claim of Uptown Bank). Class F consists of the
secured claim of Uptown National Bank of Chicago or its successor in
interest, Bridgeview Bank and TrustIn full and complete satisfaction of the
obligation of Commander and all co-debtors on the claim in Class F, the
holder of the claim in Class F shall retain its pre-petition lien on
Commander's assets, and Commander shall pay interest and other accrued
charges through the Effective Date at the contract rate in cash on the
effective date of the Plan. Thereafter, interest shall accrue at the rate
of 8% p.a. on the outstanding principal balance allocable to each aircraft.
Upon the sale of any aircraft which is Collateral for this claim, the
Debtor shall pay the loan balance allocable to such aircraft in full, with
all accrued interest and other charges, and the lien on such aircraft shall
thereupon be released. Each 6 months after the Effective Date, the Debtor
shall pay all accrued interest to date, plus a curtailment of 10% of the
then-outstanding principal balance. In the event any portion of the claim
remains unpaid on the second anniversary of the Effective Date, the Debtor
shall, as to each aircraft which is Collateral for the Claim, either (a)
fully pay in cash the balance of the claim allocable to such aircraft, or
(b) surrender the aircraft to the Holder of the Claim in full satisfaction
of the claim allocable to such aircraft. This class is impaired. As of
December 31, 2003, the Company had $453,477 in Class F claims payable.
Class G (Any other Secured Claim). Class G consists of any Allowed
Secured Claim other than those in Classes A, D, E, F, J, or L. Any holder
of an Allowed Claim in Class G shall retain its pre-petition lien on
Commander's Assets, and Commander shall cure any pre- and post-petition
arrearages in cash on the Effective Date of the Plan (such that the claim
of the U.S. Department of Labor and any other such claim due in full under
the terms thereof will be paid in cash on the Effective Date of the Plan).
Any dispute as to the allowance of such Claim or the amount thereof, and/or
the amount necessary to cure such arrearages shall be submitted to the
Court for determination, with any undisputed amount paid on the Effective
Date of the plan and any additional amount upon entry of a Final Order
fixing the amount thereof. Any non-monetary defaults of Commander and any
co-Debtor existing on the
Petition Date and/or the Effective Date shall be waived and deemed
cured. Thereafter, Commander shall pay the claim in accordance with the
contract terms or applicable law. With respect to the claim of the U.S.
Department of Labor, to the extent of payments made under Classes B, I
and/or J directly to the employees on whose behalf or for whose wages which
the Department of Labor claim was brought, such payments shall be credited
to the payment due on such claim to the Department of Labor. To the extent
that the amounts reflected in the USDOL claim are not paid (either directly
or to the wage claimants as provided herein) in full in cash by the
Effective Date, the USDOL, seven days after written notice to the debtor,
shall exercise any and all of its administrative and judicial remedies to
collect any amounts due the USDOL from any debtor or non-debtor without
further Court Order. This class is not impaired as of December 31, 2003 the
Company had $78,841 in Class G claims payable.
Class H (Unliquidated tort/warranty claims for pre-petition personal
injury, property damage, or wrongful or death). Class H consists of all
tort and warranty claims for personal injury, property damage or wrongful
death that were unliquidated or in litigation as of the Petition Date,
including any subrogation claims. The claim(s) in Class H shall be paid a
total of $100,000.00 in cash on the Effective Date in full satisfaction of
their claim(s) against Commander and Aviation General, Incorporated. In the
event more than one such claim is filed before the Bar Date and is allowed,
such amount shall be placed in an interest-bearing account until the
allowed amount of the Class H claims is liquidated, such amount to be
divided pro rata among the holders of such claims upon liquidation thereof.
If there are no such claims ultimately allowed, or if such claims are
allowed in an amount such that the Class H claims would receive less than a
total of $100,000 were they included in Class I, the Debtor shall apply the
$100,000 to the payment of the Class I Claims and the Class H Claims shall
be treated as Class I claims. In the event that Class H votes to accept
this Plan, no holder of a Class H claim objects to this Plan or appeals the
Confirmation Order, and the holders of all Class H claims agree on or
before the Effective Date on allocation of payments to the holders of Class
H claims, the total payment to the holder(s) of Class H claims shall be
increased to $200,000.00 and shall be paid on the Effective Date in full
satisfaction of such claims. This class is impaired. As of December 31,
2003, the Company had $200,000 in Class H payables.
Class I (General Unsecured Claims). Class I consists of Unsecured
Non-Priority Claims other than those in Class H, J, or L. General unsecured
claims shall be paid as follows: $500,000 shall be placed in an
interest-bearing bank account on the Effective Date of the Plan, and shall
be distributed pro rata to the holders of allowed Class I claims within 30
days of the Effective Date. The pro-rata share of the claimed amount of any
claims which are then subject to objections as to which a Final Order has
not been entered shall remain in the bank account until a Final Order is
entered. When Final Orders are entered disallowing or allowing and
liquidating all Class I claims, the remaining funds in the bank account
shall be distributed to the holders of all Class I claims pro rata. This
class is impaired. As of December 31, 2003, the Company had $1,810,000 in
Class I payables.
38
Class J (Small Claims administrative convenience class). Class J
consists of any Claims (other than Class K or L claims) in an amount less
than $500.00, or as to which the holder thereof elects to receive treatment
as a Class J claim. Class J claims shall be paid in cash on the Effective
Date of the Plan in the allowed amount thereof (or $500.00 in the event of
holders of claims in other classes electing treatment under Class J), in
full satisfaction of such claims. This class is not impaired. As of
December 31, 2003, the Company had $12,500 in Class J payables.
Class K (Equity Claims). Class K consists of any Claims based upon
Equity Interests. The existing stock of the Debtor, 100% of which is owned
by Aviation General, Incorporated, shall be cancelled. This class is
impaired.
Class L (Corporate Family Claims). Class L consists of any Claims of
Aviation General, Incorporated, and/or Strategic Jet Services, Inc. Class L
claims shall be discharged and shall not be paid; in consideration thereof,
all claims of Commander and the Estate against Aviation General,
Incorporated ("AGI"), and/or Strategic Jet Services, Inc. ("SJS"), existing
as of the Confirmation Date shall be released. Nothing in this plan shall
relieve AGI or SJS of any obligation to the Debtor expressly set forth in
this Plan, nor of any obligation owed directly to any Creditor.
Commander will fund this Plan primarily from the issuance of new stock.
Commander's existing 100% shareholder, Aviation General, Incorporated ("AGI"),
has agreed to purchase, on the Effective Date of the Plan, 2000 newly-issued
shares of the stock of Commander, which stock shall be sold to it for $1000 per
share ($2,000,000). Such shares shall not be subject to Nyltiak's lien. To the
extent additional funds are needed to implement this Plan or for working
capital, AGI has agreed to purchase at that same price up to 800 additional
shares of stock of Commander ($800,000), upon the request of Commander, at any
time during the 5 years after the Effective Date of the Plan.
AGI shall fund this acquisition through the sale to Tiger Aircraft, LLC, of
shares constituting 80% of the share capital of AGI for a total purchase price
of $2.8 million (of which $2.3 million will be paid in cash on the effective
date and $500,000 in a demand note at 6% interest). Tiger shall also guarantee
payment of the remaining claim in Class D, and shall guarantee AGI's performance
of Commander's option to sell the 800 additional Commander shares at
$1000/share.
"Effective Date" means March 31, 2004, or such earlier date as Tiger, AGI,
and Commander may jointly agree upon, provided that the Effective Date may not
be earlier than the first Business Day after the Confirmation Order becomes a
Final Order. The date of March 31, 2004, may be extended only on written consent
of counsel for the Creditors Committee, counsel for the U.S. Department of
Labor, and counsel for Nyltiak Investments, LLC. In the event that Tiger does
not close under the Stock Purchase Agreement by March 31, 2003 (or such later
date as may be agreed by the Debtor, AGI, Tiger, the Committee, the DoL, and
Nyltiak), this Confirmation Order shall be void and of no further force or
effect
The following is a summary of the quarterly results of operations for the
years ended December 31:
2003
---------------------------------------------------
Three months ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------- ------------
Total net sales $ 312,361 $ 770,235 $ 823,107 $ 236,031
Gross margin 60,256 140,522 84,656 52,131
Net loss (316,866) (339,156) (249,376) (402,874)
Net loss per share,
basic and diluted (0.04) (0.05) (0.04) (0.06)
39
2002
---------------------------------------------------
Three months ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------- ------------
Total net sales $1,504,821 $4,729,309 $ 1,674,338 $ 534,948
Gross margin 272,232 108,986 47,220 505,543
Net loss (290,185) (411,956) (1,288,804) (2,294,166)
Net loss per share,
basic and diluted (0.04) (0.06) (0.18) (0.32)
The sum of per-share amounts for the four quarters may differ from the
annual per share amounts due to rounding and the required method of
computing weighted average number of shares in the respective periods.
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure.
----------------------
On November 4, 2003, the Aviation General, Incorporated appointed Murrell, Hall,
--------------------------------------------------------------------------------
McIntosh & Co PLLP as its independent auditors.
------------------------------------------------------
On February 14, 2003, Grant Thornton LLP ("Grant Thornton") resigned as
independent auditors of Aviation General, Incorporated (the "Registrant"). Grant
Thornton advised the Registrant that the reason for its resignation was that it
had determined that in light of the Registrant's financial condition and size,
the Registrant does not meet Grant Thornton's current criteria for
public-company audit clients.
The reports of Grant Thornton as of and for the fiscal years ended December
31, 2001 and 2000 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles, except that the report on the Registrant's 2001 financial statements
contained an explanatory paragraph describing an uncertainty about the
Registrant's ability to continue as a going concern. During the two fiscal years
ended December 31, 2001, and during the subsequent interim periods prior to
February 14, 2003, there were no (i) disagreements between Grant Thornton and
the Registrant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Grant Thornton, would have caused it to make
a reference to the subject matter of the disagreement in connection with its
reports on the Registrant's financial statements, or (ii) events as described in
Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934,
as amended, except as described below.
On February 21, 2003, the Registrant filed a report on Form 8-K disclosing
the resignation of Grant Thornton, and on March 7, 2003 the Registrant filed an
amendment to the report on Form 8-K. The March 7 amendment included as an
exhibit a letter from Grant Thornton dated March 5, 2003. The Registrant is
further amending the report on Form 8-K to include under this Item 4 the
following language, which was contained in Grant Thornton's March 5 letter
previously filed as an exhibit. References to "we" and "us" in this excerpt from
Grant Thornton's letter refer to Grant Thornton.
"On January 10, 2003, the Registrant filed a Form 10-QSB/A for the period
ended June 30, 2002, in which the Registrant reported that:
During the preparation of the third quarter 2002 financial statements,
management identified certain excess capacity costs of approximately
40
$662,000 which were capitalized as work in process inventories as of June
30, 2002. Management believes these costs were incurred primarily as a
result of the reduced manufacturing environment and should have been
expensed during the second quarter 2002.
Management reported this improper capitalization to us in November 2002. By
way of a letter dated February 14, 2003 (Internal Control Communication), we
notified the Registrant's Management and Audit Committee of certain matters
involving internal control and its operation that we considered to be reportable
conditions under standards established by the American Institute of Certified
Public Accountants. More particularly, we informed them that "the reportable
condition relating to `work in process inventory [that] included significant
excess capacity costs that should have been expensed as incurred,'" in our view,
constituted "a material weakness" We also noted in our Internal Control
Communication that:
We have been informed that management took appropriate remedial
actions to amend the second quarter interim financial statements and
implemented additional controls to provide reasonable assurance that excess
capacity costs are expensed and not capitalized as work in process
inventory.
Separately, and in addition to the matter involving the capitalization of
excess capacity costs, we also pointed out in our February 14, 2003 Internal
Control Communication that the Registrant's "current principal financial officer
and existing accounting department staff may lack the requisite expertise needed
for assessing and applying new and non-routine accounting principles and for
preparing required financial and SEC reporting disclosures" and made
recommendations for improvement."
We have responded to this concern by engaging the services of an outside
Certified Public Accountant on a consulting basis to assist our principal
financial offer with assessing and applying new and non-routine principles and
in preparing financial and SEC reporting disclosures.
The Registrant furnished Grant Thornton with a copy of this amendment to
its report and requested it to furnish the Registrant with a letter addressed to
the Commission stating whether it agrees with the statements made by the
Registrant in response to Item 304(a) of Regulation S-K and, if not, stating the
respects in which it does not agree. A copy of Grant Thornton's letter is filed
as Exhibit 16 to the amendment to Form 8-K.
PART III
--------
Certain information required by Part III is omitted from this report in
that registrant will file a definitive proxy statement pursuant to Regulation
14A for its 2004 Proxy Statement, and the information included therein is
incorporated by reference.
Item 10. Directors and Executive Officers of the Registrant
-------------------------------------------------------------------
Wirt D. Walker, III, age 57, has served as a director of the Company from
September 1989 to February 1991, as Chairman of the Board of Directors since May
1991 and as Chief Executive Officer since June 1998. Mr. Walker previously
served as the Company's Chief Executive Officer from May 1991 to August 1991 and
from December 1992 to May 1995. Since 1982, Mr. Walker has served as a director
and the Managing Director of KuwAm Corporation, a private investment firm. He
served as Chairman of Stratesec, Incorporated, a publicly traded provider of
integrated technology security systems, from 1992 to September 2003.
41
John H. deHavilland, age 52, has served as a director of the Company as
well as President/CEO of its wholly owned subsidiary, Strategic Jet Services,
since September 2000. He has twenty-two years of industry experience, most
recently as President of deHavilland Aircraft, Incorporated from 1996 to 2000.
DeHavilland Aircraft specialized in the purchase, refurbishment and brokerage of
jet aircraft. From 1980 to 1996, he held several positions with British
Aerospace, including Director of Sales and Marketing for the Turbo Prop Asset
Management Division, Program Director and Market Development Director for the
Corporate Jets Division, and Regional Marketing Manager for British Aerospace
PLC Corporate Jets Division. His tenure at British Aerospace was interrupted
from 1984 to 1987, during which Mr. deHavilland held the position of Managing
Director/Head of Marketing at A.R.A.V.C.O Ltd in London.
Matthew J. Goodman, age 51, has served as President of Commander Aircraft
Company since July 2002. Prior to this Mr. Goodman was Senior Vice-President
Marketing and Sales of Commander Aircraft Company. Mr. Goodman joined Commander
Aircraft Company in 1989 as Aircraft Sales Manager. He subsequently was promoted
to the position of Vice-President Marketing, and later to Vice-President,
Marketing and Sales of the company's General Aviation Services Division. Prior
to joining Commander Aircraft Company, he was Vice-President Sales of Kenosha
Aero Service, a full line Cessna dealership and FBO, and served in various
aircraft sales management positions since 1978.
Glenn A. Jackson, age 40, has served as Vice-President/Chief Financial
Officer since December 2002. Prior to joining the Company, Mr. Jackson served as
Vice-President, Finance, for Spectrum Design Group from 2000 to 2002 and as
Account Manager at Seagate Technology from 1997 to 2000. Mr. Jackson earned a
B.A. degree and M.B.A. degree from the University of Memphis.
Item 11. Executive Compensation
----------------------------------
The following table reflects the required disclosures regarding Executive
Compensation for the years ended December 31, 2003 and 2002 respectively.
Annual Compensation Long-Term Compensation
-------------------------------- -----------------------------------------------
Awards Payouts
----------------------- ---------------------
Securities
Restricted Underlying
Stock Options All Other
Awards Awarded LTIP Compen-
Year Salary (1) Bonus Other (in shares) (in shares) Payouts sation (2)
---- ---------- ------ ----- ----------- ----------- ------- ----------
Wirt D. Walker III
Chairman and 2003 $ 102,400 $ - - - 20,000 - $20,000
Chief Executive
Officer 2002 $ 127,846 $ - - 30,303 120,000 - $20,000
Mat Goodman
President/CEO 2003 $ 73,623 $44,036 - - - - $ -
Commander Aircraft
Company, Inc. 2002 $ 68,457 $ 3,950 - 48,485 50,000 - $ -
John DeHavilland
Director 2003 $ - $ - - - - - $ -
2002 $ 56,646 $ - - - - - $20,000
Glenn A. Jackson 2003 $ 62,400 $ - - - - - $ -
Chief Financial
Officer 2002 $ 9,646 $ - - - - - $ -
(1) Salary and bonus payments include voluntary salary reduction
contributions to the Company's 401(k) savings plan
(2) Amounts paid as director's fees unless otherwise indicated
42
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------------------------
The following table sets forth as of December 31, 2003, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
any person known by the Company to be the beneficial owner of more than 5% of
the Company's voting securities, (ii) each director of the Company, (iii) each
of the executive officers named in the Summary Compensation Table appearing
herein, and (iv) all executive officers and directors of the Company as a group.
Name Number of Shares Percent of Total
---- ------------------ ------------------
Wirt D. Walker, III (1)(2) 907,396 12.8%
John deHavilland (2) 260,303 3.7%
Matthew J. Goodman (2) 165,618 2.3%
Nyltiak Investments, LLC (3) 1,176,471 16.5%
All Officers and Directors 1,333,317 18.7%
as a Group (3 persons) (4)
-------------------------------
(1) Includes 300,000 shares owned by Mr. Walker's son; 100,900 shares
owned by the estate of Mr. Walker's mother, of which Mr. Walker is a
trustee; and 33,714 shares owned by KuwAm Corporation, of which Mr.
Walker is a Managing Director.
(2) Includes shares issuable upon exercise of options that are exercisable
within 60 days, as follows: Mr. Walker, 280,000 shares; Mr.
DeHavilland, 200,000 shares; and Mr. Goodman, 103,133 shares.
(3) Consists of shares that are issuable upon conversion of a convertible
note held by Nyltiak Investments, LLC. James E. Lawson is the managing
member of Nyltiak Investments and thus may be deemed to be the
beneficial owner of shares owned by it.
(4) On December 31, 2003, executive officers and directors of the Company
as a group (3 persons) held options to purchase an aggregate of
583,133 shares of Common Stock, representing approximately 37.3% of
outstanding options at that date.
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------------
Note E - Disclosures About Fair Value of Financial Instruments and Note I -
Related Party Transactions, of the Notes to Consolidated Financial Statements
for 2003 are hereby incorporated by reference.
PART IV
-------
Item 14. Principal Accounting Fees and Services
-----------------------------------------------------
Audit Fees. The aggregate fees billed by Murrell, Hall, McIntosh & Co.,
PLLP for professional services rendered for the audit of the Company's annual
financial statements for the fiscal years ended December 31, 2003 and December
31, 2002 and the review of the financial statements included in the Company's
Forms 10-Q for fiscal years 2003 and 2002 totaled $36,000 and $21,000,
respectively.
Audit-Related Fees. The aggregate fees billed by Murrell, Hall, McIntosh &
Co., PLLP for assurance and related services that are reasonably related to the
43
performance of the audit or review of the Company's financial statements for the
fiscal years ended December 31, 2003 and December 31, 2002 and that are not
disclosed in the paragraph captioned "Audit Fees" above, were $0 and $0,
respectively.
Tax Fees. The aggregate fees billed by Murrell, Hall, McIntosh & Co., PLLP
for professional services rendered for tax compliance, tax advice and tax
planning for the fiscal years ended December 31, 2003 and December 31, 2002 were
$0 and $0, respectively.
All Other Fees. The aggregate fees billed by Murrell, Hall, McIntosh & Co.,
PLLP for products and services, other than the services described in the
paragraphs "Audit Fees," "Audit-Related Fees," and "Tax Fees" above for the
fiscal years ended December 31, 2003 and December 31, 2002 were $1,500 and $500,
respectively. The services performed by Murrell, Hall, McIntosh & Co., PLLP in
connection with these fees consisted of the following: Edgarizing.
The Audit Committee has established its pre-approval policies and procedures,
pursuant to which the Audit Committee approved the foregoing audit and
permissible non-audit services provided by Murrell, Hall, McIntosh & Co., PLLP
in fiscal 2003.
Item 15. Exhibits, Financial Statement Schedules, and Reports of Form 8-K:
--------------------------------------------------------------------------------
Page
(a) (1) The following financial statements are included
in Part II Item 8:
Report of Independent Public Accountants 16
Financial Statements:
Consolidated Balance Sheets December 31, 2003 17
Consolidated Statements of Operations for
the years ended December 31, 2003 and 2002 19
Consolidated Statement of Stockholders' Equity
for the years ended 2003 and 2002 20
Consolidated Statements of Cash Flows for
the years ended December 31, 2003 and 2002 21
Notes to Consolidated Financial Statements 23
(2 ) The following financial schedule for the years
2003 and 2002 is submitted herewith:
Selected Quarterly Financial Data for the
years ended December 31, 2003 and 2002 (unaudited) 45
All other schedules are omitted because they are
not applicable or the required information has
been presented in the financial statements
or notes thereto.
(3) Exhibits included are hereby incorporated by reference
to the Exhibit Index, page 48 of this report.
44
INDEX OF EXHIBITS
Exhibit No Description
----------- -----------
3.1 Certificate of Incorporation of Aviation General, Incorporated. This
exhibit is incorporated by reference to Exhibit 3.1 of the
Registrant's Form S-4 filed June 12, 1998 (Reg. No. 333-56731).
3.2 Bylaws of Aviation General, Incorporated. This exhibit is incorporated
by reference to Exhibit 3.2 of the Registrant's Form S-4 filed June
12, 1998 (Reg. No. 333-56731).
4.1(a) Certificate of Incorporation, describing the Common Stock (included
in Exhibit 3.1). This exhibit is incorporated by reference to Exhibit
4.1(a) of the Registrant's Form S-4 filed June 12, 1998 (Reg. No.
333-56731).
10.1 Federal Aviation Administration ("FAA") Type Certificates issued to
Commander Aircraft Company (the "Company") for models 112, 114, 112TC,
112B, 112TCA, 114A, and 114B. This exhibit is incorporated by
reference to Exhibit 10.1 of the Registrant's Form S-1 filed March 4,
1993 (Reg. No. 33-59128).
10.2 FAA Repair Station Air Agency Certificate issued to the Company. This
exhibit is incorporated by reference to Exhibit 10.2 of the
Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.3 Lease and operations Agreement between the Company and the Trustees of
the Oklahoma City Airport Trust dated August 9, 1988, as amended by
the Supplemental Agreement No. 1 dated December 18, 1991, and the
Supplemental Agreement No. 2 dated April 2, 1992. This exhibit is
incorporated by reference to Exhibit 10.19 of the Registrant's Form
S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.4 Textron Lycoming Finance Plan No. 1 between Textron Financial
Corporation and the Company dated June 26, 1991, as amended to the
Finance Plan No. 1 dated as of May 28, 1992, the Second Amendment
dated as of September 29, 1992, and the Third Amendment dated as of
December 10, 1992. This exhibit is incorporated by reference to
Exhibit 10.29 of the Registrant's Form S-1 filed March 4, 1993
(Reg.No. 33-59128).
10.5 International Distributorship Agreement between the Company and
Com-Air Flugzeughandel Gmbh. This exhibit is incorporated by reference
to Exhibit 10.31 of the Registrant's Form S-1 filed March 4, 1993
(Reg. No. 33-59128).
10.6 International Distributorship Agreement between the Company and Aero
Service b.v. This exhibit is incorporated by reference to Exhibit
10.32 of the Registrant's Form S-1 filed March 4, 1993 (Reg. No.
33-59128).
10.7 International Dealership Agreement between the Company and Commander
Khaleej Trading Establishment. This exhibit is incorporated by
reference to Exhibit10.28 of the Registrant's Form 10-K filed March
30, 1994.
10.8 Form of the Company's Authorized Sales and Service Representative
Policy and Procedures Manual. This exhibit is incorporated by
reference to Exhibit 10.37 of the Registrant's Form S-1 filed March 4,
1993 (Reg. No. 33-59128).
10.9 Form of the Company's Authorized Sales and Service Representative
Agreement. This exhibit is incorporated by reference to Exhibit 10.38
of the Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).
45
10.10 Form of the Company's Service Center Agreement. This exhibit is
incorporated by reference to Exhibit 10.39 of the Registrant's Form
S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.11 The Commander Aircraft Company Profit Sharing Plan. This exhibit is
incorporated by reference to Exhibit 10.40 of the Registrant's Form
S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.12 Nonstatutory Stock Option Agreement between the Company and Wirt D.
Walker III dated January 31, 1994. This exhibit is incorporated by
reference to Exhibit 10.48 of the Registrant's Form 10-K filed March
30, 1994.
10.13 Nonstatutory Stock Option Agreement between the Company and Mishal
Y.S. Al Sabah dated January 31, 1994. This exhibit is incorporated by
reference to Exhibit 10.49 of the Registrant's Form 10-K filed March
30, 1994.
10.14 Form of Company's Aircraft Delivery and Acceptance Agreement. This
exhibit is incorporated by reference to Exhibit 10.63 of the
Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.15 Form of the Company's Aircraft Retail Warranty. This exhibit is
incorporated by reference to Exhibit 10.64 of the Registrant's Form
S-1 filed March 4, 1993 (Reg. No. 33-59128).
10.16 Commander Aircraft Company 1993 Stock Option Plan. This exhibit is
incorporated by reference to Exhibit 10.53 of the Registrant's Form
10-K filed March 28, 1996.
10.17 Convertible Note and Purchase Agreement with Nyltiak Investments, LLC.
10.18 Security Purchase Agreement dated July 22, 2002 between Aviation
General, Incorporated and Nyltiak Investments, LLC filed August 4,
2002.
21 List of subsidiaries
31.2 Certification of Wirt D. Walker III
31.2 Certification of Glenn A. Jackson
32 Certification of Wirt D. Walker III and Glenn A. Jackson
Item 16. Controls and Procedures
------------------------------------
Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and the Company's principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rule 13a-14(c)and 15d-14(c)
as of the date of the financial statements included in this report on Form
10-KSB for December 31, 2003, have concluded that as of the evaluation date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this annual report on Form
10-KSB was being prepared.
46
Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the evaluation
date, nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions. As a result, no
corrective actions were taken.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto authorized on the 26th day of March 2003.
AVIATION GENERAL INCORPORATED
By:\s\ Wirt D. Walker III
-----------------------------------------------
Wirt D. Walker III
By:\s\ Glenn A. Jackson
-----------------------------------------------
Glenn A. Jackson
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed above by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
Wirt D. Walker III Chairman March 24, 2004
Chief Executive Officer
President
Principal Financial Officer and Accounting Officer:
Glenn A. Jackson Chief Financial Officer March 24, 2004
Directors:
Wirt D. Walker III Director March 24, 2004
47