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, 2002
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 X No
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 revenue 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 8,270,397 at January 31, 2004.
Total number of pages including cover page 51.
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TABLE OF CONTENTS
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PART I
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Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote
of Security Holders
PART II
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Item 5. Market for Common Equity and
Other Stockholder Matters
Item 6. Selected Financial Data
Item 7. Managements' Discussion and
Analysis or Plan of Operations
Item 8. Financial Statements
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
PART III
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Item 10. Directors and Executive Officers of Registrant.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
PART IV
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Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Reports on Form 8-K
Item 16. Controls and Procedures
Signatures
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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 fourth 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
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,
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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
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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, a 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
upgraded avionics package which includes global navigation, communication, and
4
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.
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- 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 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 could 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 and 2002, 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 two 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.
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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.
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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
8
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.
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 it 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. At December 31, 2002, all
insurance coverage had been suspended due to the inability of the Company to pay
for this coverage 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, Commander Aircraft 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
9
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.
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 3 contract employees as of January
21, 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.
10
A summary of lease payments is presented in Note G - Leases, of the Notes to
Consolidated Financial Statements for 2002.
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, 2002,
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), trades 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
-----------------------------------------
2002 2001
--------------- ---------------
Quarter High Low High Low
------- ---- --- ---- ---
1st .38 .23 1.75 .81
2nd .67 .33 1.00 .41
3rd .95 .28 .70 .20
4th .30 .05 .42 .20
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, 2002.
Item 6. Selected Financial Data
-----------------------------------
The selected financial data presented below for each year in the five year
period ended December 31, 2002 have been derived from the Company's audited
11
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)
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Operation Data:
----------------
Net sales $ 8,443 $ 9,488 $16,831 $13,667 $10,712
Net earnings (loss) $(4,285) $(5,520) $ 450 $ (385) $(1,849)
Earnings (loss) per share
basic & diluted $ (.60) $ (.84) $ 0.07 $ (.05) $ (.25)
Balance Sheet Data:
---------------------
Total assets $ 3,715 $ 7,304 $11,809 $ 8,632 $10,148
Long-term debt $ 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.
12
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 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.
13
Results of Operations:
2002 vs. 2001
-------------
The Company's business began to rebound and improve in the first half of 2002 as
compared to 2001. However, the economy 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 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.
During the second half of 2002, 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.
The following is a more detailed explanation of the components of the financial
results that were affected:
Revenues decreased 11% in 2002 to $8,443,416 from $9,487,795 in 2001, resulting
in a net loss of $(4,285,111) for 2002 compared to a net loss of $(5,519,592) in
2001. The net loss per basic and diluted share was $(0.60) in 2002 compared to
a net loss of $(0.84) per basic and diluted share in 2001.
Revenues from aircraft sales decreased 8% in 2002 to $7,412,519 from $8,027,663
in 2001. New aircraft deliveries were 6 units in 2002 compared to 8 units in
2001. Pre-owned and consigned aircraft sales decreased to 16 aircraft in 2002
from 24 in 2001. Revenues generated by the service, parts and refurbishment
business was $1,030,897 in 2002 compared to $1,460,132 in 2001.
Aircraft cost of sales was $6,679,481 in 2002 as compared to $7,665,233 for
2001. The gross margin on aircraft sales increased to 10% in 2002 from 5% in
2001.
Service and parts cost of sales was $829,954 in 2002 compared to $1,291,618 in
2001. The decrease was partially due to a lower volume of service activity and
spare parts shipments, however, the gross margin on service and parts sales
increased to 19% in 2002 from 12% in 2001.
Engineering and product development costs decreased to $126,232 in 2002 from
$278,379 in 2001. The decrease in these expenses is due to the downsizing in
this area.
Selling, general and administrative expenses decreased by 33% from $3,616,933 in
2001 to $2,440,414 in 2002. This decrease is due primarily to reductions both
in the sales and administrative staffs and operations.
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
14
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 2001.
During 2001, the Company recognized bad debts form a related party in the amount
of $1,529,889. There was no corresponding bad debts for 2002.
Interest income totaled $1,929 in 2002, down from $15,350 in 2001. This
decrease was due to a reduction in interest bearing funds during 2002.
Interest expense decreased by 51% to $243,414 in 2002 from $498,715 in 2001 due
to reduced activity in short-term borrowings from the Company's lines of credit.
Litigation settlements increased by 33% from $150,000 in 2001 to $200,000 in
2002. This increase was due to the settlement during 2002 of a claim resulting
from a crash of a aircraft manufactured by the Company.
During 2002, the Company realized a loss on the sale of available for sale
equity securities in the amount of $(395,973)
Liquidity and Capital Resources
----------------------------------
Cash used in operations totaled $(648,036) for 2002 compared to cash provided by
operations of $868,244 in 2001.
Inventories decreased by $2,927,701 primarily due in part to the recognition of
$1,758,620 in impairments on inventory and in part due to the reduction in the
number of new and used aircraft held in inventory.
16
Accounts payable decreased by $163,229 at December 31, 2002. Long-term debt
increased to $1,234,795. The Company had no long-term debt as of December 31,
2001 and 2000.
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 $1,359,819 at December 31, 2002.
For 2002, the Company reported $8,443,416 in revenues and a loss,
$(4,285,111), with six new aircraft deliveries. For the year 2001, the Company
reported $9,487,795 in revenues and a loss of $(5,519,592), with deliveries of
eight new aircraft.
Contractual Obligations and Commercial Commitments. The following table is a
summary of the Company's contractual obligations as of December 31, 2002.
Payment Due by Period
-----------------------
Total Less than One 1-3 Years Thereafter
----- ------------- ---------- ----------
Year
----
Long-Term Debt $1,234,795 $ - $1,234,795 $ -
Current Note Payable 1,359,819 1,359,819 - -
Operating Leases 396,900 75,600 226,800 94,500
---------- ---------- ---------- --------
Total $2,991,514 $1,435,419 $1,461,595 $ 94,500
========== ========== ========== ========
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
benefit from historically low interest rates, which lower significantly the
financing cost of aircraft purchases.
17
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 19
Financial Statements:
Consolidated Balance Sheet December 31, 2002 21
Consolidated Statements of Operations for the years ended 23
December 31, 2002 and 2001
Consolidated Statement of Stockholders' Equity for the 24
years ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended 25
December 31, 2002 and 2001
Notes to Consolidated Financial Statements 27
18
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, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2002 and 2001. 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, 2002, and the results of their
operations and their cash flows for the years ended December 31, 2002 and 2001
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 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
January 30, 2004
19
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002
ASSETS
CURRENT ASSETS:
Accounts receivable $ 9,431
Inventories 3,211,531
Prepaid expenses and other assets 3,591
------------
Total current assets 3,224,553
------------
PROPERTY AND EQUIPMENT - AT COST:
Office equipment and furniture 365,373
Vehicles and aircraft 95,115
Manufacturing equipment 385,179
Tooling 676,747
Leasehold improvements 112,748
------------
1,635,162
Less accumulated depreciation (1,144,693)
------------
490,469
------------
$ 3,715,022
============
The accompany notes are an integral part of these financial statements.
21
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
LIABILITIES NOT SUBJECT TO COMPROMISE -
Cash overdraft $ 2,145
Notes payable 1,359,819
-----------
Total current liabilities 1,361,964
LIABILITIES SUBJECT TO COMPROMISE -
Accounts payable 2,146,221
Accrued expenses 1,299,117
Refundable deposits 146,500
-----------
Total liabilities subject to compromise 3,591,838
-----------
Total current liabilities 4,953,802
-----------
NONCURRENT LIABILITIES:
Notes payable 1,234,795
-----------
REDEEMABLE COMMON STOCK - $.01 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
authorized shares; no shares outstanding -
Common stock, $.50 par value; 20,000,000
shares authorized; 8,120,397 at December 31, 2002 4,060,198
Additional paid-in capital 37,254,305
Less: Treasury stock at cost, 1,009,551 shares
at December 31, 2002 (1,709,638)
Accumulated (deficit) (42,228,440)
Accumulated other comprehensive income (loss) -
-----------
Total stockholders' equity (deficit) (2,623,575)
-----------
$ 3,715,022
===========
The accompany notes are an integral part of these financial statements
22
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ----------
NET SALES:
Aircraft $ 7,412,519 $ 8,027,663
Service 1,030,897 1,460,132
------------ -----------
8,443,416 9,487,795
------------ -----------
COST OF SALES:
Aircraft 6,679,481 7,665,233
Service 829,954 1,291,618
------------ -----------
7,509,435 8,956,851
------------ -----------
Gross margin 933,981 530,944
------------ -----------
OTHER OPERATING EXPENSES:
Product development and
engineering costs 126,232 278,379
Selling, general, and
administrative expenses 2,440,414 3,616,933
Impairments and allowances 1,758,620 -
Bad debt expense - related party - 1,529,889
------------ -----------
Total operating expenses 4,325,266 5,425,201
------------ -----------
Operating income (loss) (3,391,285) (4,894,257)
------------ -----------
OTHER INCOME (EXPENSES):
Interest income 1,929 15,350
Other income 27,564 23,770
Interest expense (243,414) (498,715)
Other expense (65,966) (15,740)
Litigation settlement (200,000) (150,000)
Loss abandonment of lease (17,966) -
Realized loss on available
for sale equity securities (395,973) -
------------ -----------
Total other expenses (893,826) (625,335)
------------ -----------
NET (LOSS) $ (4,285,111) $(5,519,592)
============ ===========
NET (LOSS) PER SHARE
Weighted average common shares
outstanding; basic 7,143,250 6,581,467
============ ===========
Net (loss) per share; basic $ (.60) $ (.84)
============ ===========
Weighted average common shares
outstanding; diluted 7,143,250 6,581,467
============ ===========
Net (loss) per share; diluted $ (.60) $ (.84)
============ ===========
The accompany notes are an integral part of these financial statements
23
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
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, 2001 7,051,519 $ 3,525,759 $ 36,889,799 772,189 $(1,294,193) $(32,423,737) $ 113,691 $ 6,811,319
Issuance of
common stock 580,000 290,000 110,500 - - - - 400,500
Comprehensive income:
Net loss - - - - - (5,519,592) - (5,519,592)
Other comprehensive
loss -
Change in
unrealized
investment
gain, net - - - - - - (367,564) (367,564)
--------- ----------- ------------ --------- ------------ ------------ ---------- -----------
Comprehensive
income - - - - - (5,519,592) (367,564) (5,887,156)
--------- ----------- ------------ --------- ------------ ------------ ---------- -----------
Balance at
December 31, 2001 7,631,519 3,815,759 37,000,299 772,189 (1,294,193) (37,943,329) (253,873) 1,324,663
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
income -
Change in
unrealized
investment
loss, net - - - - - - 253,873 253,873
--------- ----------- ------------ --------- ------------ ------------ ---------- -----------
Comprehensive
loss - - - - - (4,285,111) 253,873 (4,031,238)
--------- ----------- ------------ --------- ------------ ------------ ---------- -----------
Balance at
December 31, 2002 8,120,397 $4,060,19 $37,254,305 $1,009,551 $ (1,709,638) $(42,228,440) $ - $(2,623,575)
========= ========== =========== ========== ============ ============ ========== ===========
The accompany notes are an integral part of these financial statements
24
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(4,285,111) $(5,519,592)
Adjustments to reconcile net
earnings (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization 130,684 120,098
Common stock issued for litigation
settlement, services, and interest
charges 83,000 450,500
Receipts on aircraft notes receivable 101,896 19,653
Bad debt expense - related party - 1,529,889
Loss on retirement of
property and equipment 17,965 -
Realized loss on sale of
available-for-sale equity
securities 395,973 14,508
Changes in assets and
liabilities:
(Increase) decrease in -
Accounts receivable (9,431) 551,425
Inventories 2,927,701 1,852,939
Prepaid expenses and other -
assets 66,564 83,335
Increase (decrease) in
Accounts payable (163,229) 1,083,036
Accrued expenses 685,001 52,718
Refundable deposits (599,049) 629,735
----------- -----------
Net cash provided by (used
in) operating activities (648,036) 868,244
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (37,243)
Proceeds from available-for-sale
equity securities - 20,260
----------- -----------
Net cash provided by
(used in) investing activities - (16,983)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 3,693,325 4,486,810
Payments on borrowings (3,258,790) (5,261,731)
----------- -----------
Net cash provided by (used in)
financing activities 434,535 (774,921)
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (213,501) 76,340
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 211,356 135,016
----------- -----------
CASH AND CASH EQUIVALENTS
(OVERDRAFT) AT END OF YEAR $ (2,145) $ 211,356
=========== ===========
The accompany notes are an integral part of these financial statements
25
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
------------------------------------
Interest $ 260,928 $ 493,000
Income taxes - -
Noncash investing and financing activities -
--------------------------------------------
2001 -
Exchange of common stock for a reduction in a note payable from a related
party of $100,000 and interest of $20,000.
Exchange of common stock for Board of Directors fees of $78,000
Exchange of redeemable common stock upon legal settlement of $150,000.
Exchange of common stock for legal services of $202,500.
2000 -
Exchange of note receivable from related party of $165,617 and $134,383 of
accrued interest thereon for acquisition of treasury stock.
The accompany notes are an integral part of these financial statements
26
AVIATION GENERAL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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, 2001, the Company had
approximately $212,000 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.
27
3. Investments - Continued
-------------------------
The components of other comprehensive income (loss) are as follows for the
years ended December 31:
2002 2001
--------- ----------
Unrealized holding gains (losses) arising
during the period $ - $(440,640)
Less reclassification adjustment for net
realized losses included in net income 253,873 14,508
Income tax benefit (expense) - 58,568
--------- ---------
Other comprehensive income (loss) $ 253,873 $(367,564)
========= =========
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, 2002:
2002
------------
Raw materials $ 1,321,993
Work in process 510,506
New and pre-owned aircraft 1,359,782
Other 19,250
------------
$ 3,211,531
============
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.
28
During 2002 the Company recognized an 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.
Depreciation expense was $130,684 and $120,098 for 2002 and 2001,
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. Prepaid Advertising and Advertising Costs
----------------------------------------------
The Company expenses the cost of advertising as incurred, except for
prepaid advertising. Prepaid advertising largely consists of costs for future
magazine advertisements. These costs are expensed when the advertisements are
published. Advertising expense for the years ended December 31, 2002 and 2001
was approximately $5,363 and $198,000, respectively.
10. 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.
11. 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.
29
12. 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.
Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.
13. Going Concern
--------------
During the years ended December 31, 2001 and 2002, the Company incurred net
(losses) of ($5,519,592) and ($4,285,111), respectively. As of December 31,
2002, the Company had a negative working capital of ($1,729,244) and a deficit
net worth of ($2,623,575). 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.
14. 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
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 costs for the years ended December 31, 2002 and 2001 were $61,052 and
$41,500, 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, 2002 and 2001 were $200,000 and
$150,000, respectively.
15. 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
impairments of its long-term assets that might occur as a result of its
inability to continue as a going concern.
30
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, 2002
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 C - NOTE RECEIVABLE
From time to time, the Company finances the sale of new aircraft with notes
receivable from customers which are collateralized by the aircraft. At December
31, 2001, the Company had one note receivable which matures February 1, 2005 and
bears interest at prime plus 1.5%. This note was paid in full during the year
ended December 31, 2002.
NOTE D - NOTES PAYABLE
Notes payable consist of the following at December 31, 2002:
2002
----------
Revolving credit facilities (a) $1,359,819
Note payable to individual, 0% interest,
payable at confirmation of bankruptcy
plan confirmation. 200,000
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
Note payable to individual, payable in
monthly installments of $8,699, including
interest at 8%, through September 30, 2002;
uncollateralized 34,795
----------
$2,594,614
==========
(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, 2002. In the bankruptcy
plan of reorganization, the credit facilities are secured debt and are not
impaired.
31
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, 2002 and 2001. 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.
2002
-------------------------
Carrying Fair
amount value
------------ -----------
Cash and cash equivalents (overdraft) $ (2,145) $ (2,145)
Notes payable $(2,594,614) (2,594,614)
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, 2002, approximately 952,000 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
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.
32
2002 2001 2000
------------ ------------ --------
Net (loss):
As reported $(4,284,744) $(5,519,592) $450,033
Pro forma (4,397,114) (5,932,547) 17,407
(Loss) per share,
basic and diluted
As reported $ (.60) $ (.84) $ .07
Pro forma $ (.62) $ (.90) $ .01
NOTE F - STOCK OPTION PLAN - CONTINUED
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 2002 and 2001, 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 which 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, 2002 and 2001 and changes during the years ending on those dates is
presented below.
2002 2001
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
--------- -------- --------- --------
Outstanding at beginning of year 2,655,550 $1.49 2,394,667 $2.15
Granted 661,000 $ .33 1,123,383 $0.48
Exercised - $ - - -
Expired (422,167) $1.60 (117,500) $2.57
Forfeited (561,300) $1.39 (745,000) $1.85
Outstanding at end of year 2,333,083 $1.14 2,655,550 $1.49
Options exercisable at year end 1,672,083 $1.44 993,076 $2.17
Weighted average fair value of
options granted during the year $ .17 $0.23
33
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2002:
Options outstanding Options exercisable
------------------------------------ ---------------------
Weighted
average Weighted Weighted
Number remaining average Number average
outstanding contractual exercise exercisable exercise
at 12/31/02 life price at 12/31/02 price
----------- ----------- -------- ----------- --------
Range of exercise prices
$0.33 to $1.38 1,529,017 1.97 $0.46 - -
$1.39 to $1.75 77,500 .88 $1.56 77,500 $1.56
$1.76 to $2.75 726,566 .67 $2.53 726,566 $2.53
--------- -------
$0.50 to $2.75 2,333,083 804,066
========= =======
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 $287,000 and $287,000 for the years ended
December 31, 2002 and 2001, 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,
2003 $ 75,600
2004 113,400
2005 113,400
2006 94,500
--------
Total future minimum lease payments $396,900
========
34
NOTE H - SALES CONCENTRATIONS
The geographic sales of the Company's new aircraft are as follows:
2002 2001
----------------- -----------------
Number Amount Number Amount
------ ---------- ------ ----------
United States 6 $3,758,426 7 $3,883,801
Europe - 1 505,225
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.
Pre-owned aircraft sold during 2001 in the United States was 15, totaling
$3,413,533. Brokerage commissions of $225,104 were received in 2001 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
$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 $38,000 and $15,000 for
the years ended December 31, 2001 and 2000. There were no purchases from this
entity in 2002.
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 collectibility, 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.
35
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, 2002:
2002
------------
Deferred tax assets (liabilities)
Note receivable from related party $ 613,000
Inventories 1,152,000
Depreciation and amortization (106,000)
Unrealized losses (gains) on investments -
Accrued liabilities 98,000
Net operating loss carryforwards 13,600,000
------------
15,357,000
Valuation allowance (15,357,000)
------------
Total deferred tax liabilities $ -
============
The valuation allowance on tax assets increased $1,655,000 and $2,418,000
in 2002 and 2001, respectively, primarily due to the generation of net operating
loss carryforwards in both years.
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
------------
Total net operating loss carryforwards $ 33,890,786
============
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.
36
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 which 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.
During 2001, the Company executed a consulting agreement with a member of
the Board of Directors. The agreement provides for a consulting fee of $60,000
over an initial one-year term. The agreement renews automatically for
successive one-year periods unless terminated by either party upon 90 days prior
written notice. Upon termination of the agreement without cause (as defined),
the Company would be obligated through the remainder of the then-current term of
the agreement. The agreement also includes a noncompete clause effective
throughout the term of the agreement and for a period of six months 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.
On September 24, 2002 the Company's common stock was delisted from
theNasdaq 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 tradeable 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.
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).
37
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 has a profit sharing 401(k) plan covering substantially all
employees. Eligible employees may contribute up to 15% of their compensation.
The Company contributes an amount equal to at least 25% of each employee's
contributions not in excess of 10% of compensation. However, additional
contributions may be made at the Company's discretion. Expense under the plan
was approximately $19,000 and $20,000 for 2002 and 2001, respectively.
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. Expense under the
plan was approximately $26,117 and $338,000 for 2002 and 2001, respectively.
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:
38
2002 2001
----------- -----------
Revenues:
Jet aircraft brokerage and refurbishment $ 122,732 $ 95,000
Aircraft sales and service 8,320,684 9,392,795
----------- -----------
Total $ 8,443,416 $ 9,487,795
=========== ===========
Operating income (loss):
Jet aircraft brokerage and refurbishment $ 19,732 $ (223,486)
Aircraft sales and service (3,410,650) (4,670,771)
----------- -----------
Total $(3,390,918) $(4,894,257)
=========== ===========
Assets:
Jet aircraft brokerage and refurbishment $ - $ 3,871
Aircraft sales and service 3,715,022 7,299,986
----------- -----------
Total $ 3,715,022 $ 7,303,857
=========== ===========
Jet aircraft
brokerage and Aircraft sales Consolidated
refurbishment and service total
------------- -------------- ------------
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 - - -
Other significant items - 2001:
Interest income $ 566 $ 14,784 $ 15,350
Interest expense - 498,715 498,715
Depreciation and amortization 1,487 118,611 120,098
Expenditures for long-lived assets - 37,243 37,243
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:
2002 2001
----------- -----------
Numerator
Net (loss) $(4,284,744) $(5,519,592)
Denominator for earnings (loss) per share
Weighted average shares outstanding, basic 7,143,250 6,581,467
Effect of dilutive securities -
stock options - -
Denominator for earnings (loss) per share
assuming dilution 7,143,250 6,581,467
(Loss) per share, basic $ (.60) $ (.84)
(Loss) per share, assuming dilution $ (.60) $ (.84)
39
Outstanding options of 2,655,550, and 1,278,366, for the years ended
December 31, 2002, and 2001, 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
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:
40
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 31,2002 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, 2002 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, 2002 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 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, 2002, the Company had $650,000 in Class D claims payable.
41
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, 2002, 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,
2002, the Company had $1,242,648 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
42
USDOL from any debtor or non-debtor without further Court Order. This class
is not impairedAs of December 31, 2002 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, 2002, 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, 2002, the
Company had $1,810,000 in Class I payables.
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.
43
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:
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)
2001
Three months ended
March 31 June 30 September 30 December 31
Total net sales $2,639,760 $3,219,008 $ 1,552,396 $ 2,076,631
Gross margin 381,674 523,783 290,553 (665,066)
Net loss (598,587) (455,408) (559,764 (3,905,833)
Net loss per share,
basic and diluted (0.10) (0.07) (0.08) (0.59)
2000
Three months ended
March 31 June 30 September 30 December 31
Total net sales $3,942,575 $4,256,087 $ 4,804,798 $ 3,827,574
Gross margin 844,616 949,555 1,083,029 1,076,295
Net income 38,183 113,049 252,353 46,448
Net income per share,
basic and diluted 0.01 0.02 0.04 0.01
44
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
$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.
45
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.
In light of cost considerations and concerns that Grant Thornton has regarding
their independence as a result of monies owned to them by the Company, the
company has not received authorization from Grant Thornton to resubmit their
audit of the Company's financial statements for the year ending December 31,
2001 which was included in the Company's 2001 which was included in the
Company's 2001 10KSB previously filed and which is identical to that submitted
herewith in the Company's 10KSB for 2002.
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 2003 Proxy Statement, and the information included therein is incorporated
by reference.
Item 10. Directors and Executive Officers of the Registrant
-------------------------------------------------------------------
Information regarding directors of the Registrant required by this item is
incorporated herein by reference to the Company's 2002 Proxy Statement under the
caption "Election of Directors - Nominees".
The information regarding executive officers of the Company required by this
item appearing in the Company's 2002 Proxy Statement under the caption "Election
of Directors - Other Officers" is hereby incorporated by reference.
Item 11. Executive Compensation
----------------------------------
The following table reflects the required disclosures regarding Executive
Compensation for the years ended December 31, 2002 and 2001, 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 2002 $ 127,846 $ - - 10,000 120,000 - $20,000
Chief Executive
Officer 2001 $ 128,077 $ - - - 120,000 - $20,000
Mat Goodman
President/CEO 2002 $ 68,457 $ 3,950 - 48,485 50,000 - $ -
Commander Aircraft
Company, Inc. 2001 $ 59,000 $70,072 - - 53,133 - $ -
John DeHavilland
Director 2002 $ 56,646 $ - - - - - $20,000
2001 $ 89,231 $65,385 - - 180,000 - $ 5,000
Glenn A. Jackson 2002 $ 9,646 $ - - - - - $ -
Chief Financial
Officer 2001 $ - $ - - - - - $ -
(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
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------------------------
The following table sets forth as of December 31, 2002, 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 and each nominee for director to
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) 916,447 12.0%
N. Gene Criss (2) 363,636 4.8%
John deHavilland (2) 186,970 2.4%
Matthew J. Goodman (2) 81,977 1.0%
Carl R. Gull (2) 60,083 *
Nyltiak Investments, LLC (3) 1,176,471 15.1%
All Officers and Directors 1,609,113 21.1%
as a Group (5 persons) (4)
-------------------------------
* less than one percent
(1) Includes 78,000 shares owned by a trust for the benefit of Mr. Walker's son
and 117,000 shares owned by a trust for the benefit of Mr. Walker's mother,
both of which Mr. Walker is the trustee. Does not include 261,714 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, 311,665 shares; Mr. Criss, 303,333
shares; Mr. DeHavilland, 126,667 shares; Mr. Goodman, 61,177 shares; and
Mr. Gull, 60,083 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, 2002, executive officers and directors of the Company as a
group (5 persons) held options to purchase an aggregate of 1,661,083 shares
of Common Stock, representing approximately 58.9% of outstanding options at
that date. The numbers set forth in this table include an aggregate of
862,925 shares underlying options, which are exercisable within 60 days of
such 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 2002 are hereby incorporated by reference.
46
PART IV
-------
Item 14. 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, 2002 17
Consolidated Statements of Operations for the
years ended December 31, 2002 and 2001 19
Consolidated Statement of Stockholders' Equity for the
years ended 2002 and 2001 20
Consolidated Statements of Cash Flows for the
years ended December 31, 2002 and 2001 21
Notes to Consolidated Financial Statements 23
(2) The following financial schedule for the years
2002 and 2001 is submitted herewith:
Selected Quarterly Financial Data for the
years ended December 31, 2002 and 2001 (unaudited)
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.
47
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).
48
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 Security Purchase Agreement dated July 22, 2002 between Aviation
General, Incorporated and Nyltiak Investments, LLC filed August 14,
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 14. 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 10KSB
for December 31, 2002, 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.
Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly effect
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.
49
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 28th day of March 2001.
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