-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AzN0Oi8fSoE55z3kAbd6fyK92byH78afuubqiViA+GT4A9xwpLU1RlIaS3GH7ewJ e5afmNqwbV65RogFqsqHUw== 0000925328-99-000101.txt : 19991117 0000925328-99-000101.hdr.sgml : 19991117 ACCESSION NUMBER: 0000925328-99-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIATION GENERAL INC CENTRAL INDEX KEY: 0001063703 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24795 FILM NUMBER: 99752534 BUSINESS ADDRESS: STREET 1: 7200 N.W. 63RD STREET STREET 2: HANGER 8 WILEY POST AIRPORT CITY: BETHANY STATE: OK ZIP: 73008 BUSINESS PHONE: 4054958080 MAIL ADDRESS: STREET 1: 7200 N.W. 63RD STREET STREET 2: HANGER 8, WILEY POST AIRPORT CITY: BETHANY STATE: OK ZIP: 73008 10-Q 1 3RD QUARTER FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q - ------ X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ------ SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 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) 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 requirement for the past 90 days. Yes__X___ No_____ There were 6,688,786 Shares of Common Stock Outstanding as of October 29, 1999. ================================================================================ PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS
AVIATION GENERAL, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 1999 1998 ------------------- ------------------ ASSETS Current Assets: Cash and cash equivalents $444,753 $645,706 Investment in debt securities - related party 200,000 1,000,000 Accounts receivable 979,801 6,941 Notes receivable from related party 1,601,820 1,507,843 Notes receivable 19,181 21,286 Inventories 5,885,604 5,783,398 Prepaid expenses and other assets 396,019 259,860 ------------------- ------------------ Total current assets 9,527,178 9,225,034 ------------------- ------------------ Property and equipment: Office equipment and furniture 361,597 347,565 Vehicles and aircraft 84,021 84,021 Manufacturing equipment 361,178 358,332 Tooling 527,696 525,536 Leasehold improvements 311,764 309,144 ------------------- ------------------ 1,646,256 1,624,598 Less: Accumulated depreciation (932,585) (850,313) ------------------- ------------------ Net property and equipment 713,671 774,285 ------------------- ------------------ Other assets: Notes receivable - less current maturities 132,243 148,649 =================== ================== Total other assets 132,243 148,649 =================== ================== $10,373,092 $10,147,968 =================== ================== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Accounts payable $656,142 $622,618 Accrued expenses 631,672 343,100 Refundable deposits 114,830 252,498 Notes payable 1,553,267 600,000 ------------------- ------------------ Total current liabilities 2,955,911 1,818,216 ------------------- ------------------ Long-term debt - - Shareholders' investment (deficit): Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares outstanding - - Common stock, $.50 par value, 20,000,000 shares authorized; 7,043,186 shares issued and outstanding at September 30, 1999 and 7,280,548 shares issued and outstanding at December 31, 1998 3,521,593 3,640,274 Additional paid-in capital 36,881,266 37,178,230 Retained earnings (deficit) (32,985,678) (32,488,752) ------------------- ------------------ Total shareholders' investment 7,417,181 8,329,752 ------------------- ------------------ $10,373,092 $10,147,968 =================== ==================
The accompanying notes are an integral part of these financial statements. AVIATION GENERAL, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, 1999 1998 ---------------------- ----------------------- Net sales - aircraft $2,600,952 $3,276,189 Net sales - service 379,187 399,005 ---------------------- ----------------------- Total net sales 2,980,139 3,675,194 ---------------------- ----------------------- Cost of sales - aircraft 2,232,918 2,743,833 Cost of sales - service 281,083 342,404 ---------------------- ----------------------- Total cost of sales 2,514,001 3,086,237 ---------------------- ----------------------- Gross margin 466,138 588,957 ---------------------- ----------------------- Other operating expenses: Product development and engineering costs 83,871 68,577 Selling, general and administrative expenses 562,136 718,806 ---------------------- ----------------------- Total other operating expenses 646,007 787,383 ---------------------- ----------------------- Operating income (loss) (179,869) (198,426) ---------------------- ----------------------- Other income (expenses): Other income 47,227 102,575 Interest expense (32,962) 1,958 Other expense - (1,296) ---------------------- ----------------------- Total other income (expenses) 14,265 103,237 ---------------------- ----------------------- Net loss ($165,604) ($95,189) ====================== ======================= Net loss per share: Weighted average common shares outstanding, basic and diluted 7,093,322 7,280,548 ---------------------- ----------------------- Loss per share, basic and diluted ($0.02) ($0.01) ====================== =======================
The accompanying notes are an integral part of these financial statements. AVIATION GENERAL, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30, 1999 1998 ----------------------- ----------------------- Net sales - aircraft $6,906,003 $8,316,882 Net sales - service 1,387,538 915,439 ----------------------- ----------------------- Total net sales 8,293,541 9,232,321 ----------------------- ----------------------- Cost of sales - aircraft 6,093,561 7,260,265 Cost of sales - service 927,820 829,608 ----------------------- ----------------------- Total cost of sales 7,021,381 8,089,873 ----------------------- ----------------------- Gross margin (deficit) 1,272,160 1,142,448 ----------------------- ----------------------- Other operating expenses: Product development and engineering costs 238,142 221,987 Selling, general and administrative expenses 1,625,525 2,027,908 ----------------------- ----------------------- Total other operating expenses 1,863,667 2,249,895 ----------------------- ----------------------- Operating income (loss) (591,507) (1,107,447) ----------------------- ----------------------- Other income (expenses): Other income 158,628 342,223 Interest expense (63,130) (1,274) Other expense (916) (5,539) ----------------------- ----------------------- Total other income (expenses) 94,582 335,410 ----------------------- ----------------------- Net loss ($496,925) ($772,037) ======================= ======================= Net loss per share: Weighted average common shares outstanding, basic and diluted 7,168,012 7,280,548 ----------------------- ----------------------- Loss per share, basic and diluted ($0.07) ($0.11) ======================= =======================
The accompanying notes are an integral part of these financial statements. AVIATION GENERAL, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1999 1998 --------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($496,925) ($772,037) Adjustments to reconcile net loss to net cash provided by (used in) operating activities--- Depreciation and amortization 82,272 78,380 Write-off of fixed assets (net) - (209) Changes in operating assets and liabilities, excluding cash: Accounts receivable (972,860) 178,271 Notes receivable - related parties (93,977) (10,047) Notes receivable 18,511 156,657 Inventories (102,207) 1,247,648 Prepaid expense and other assets (136,159) (74,025) Accounts payable 33,524 27,789 Accrued expenses 288,572 118,193 Refundable deposits (137,668) 149,840 --------------------- -------------------- Net cash provided by (used in) operating activities (1,516,917) 1,100,460 --------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (21,658) (95,676) Investment in Notes - related party 800,000 (1,000,000) Investment in certificates of deposit - (144,713) --------------------- -------------------- Net cash provided by (used in) investing activities 778,342 (1,240,389) --------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 953,267 - Purchase of treasury stock (415,645) - Repayments of borrowings from bank line - (100,000) --------------------- -------------------- Net cash provided by (used in) financing activities 537,622 (100,000) --------------------- -------------------- Net increase (decrease) in cash (200,953) (239,929) Cash and cash equivalents at beginning of period 645,706 1,022,024 --------------------- -------------------- Cash and cash equivalents at end of period $444,753 $782,095 ===================== ==================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 53,093 $ 3,705 Income taxes - -
The accompanying notes are an integral part of these financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments necessary to present fairly the financial position of Aviation General, Incorporated as of September 30, 1999 and December 31, 1998, and the results of operations for the three month and nine month periods ended September 30, 1999 and 1998, and the cash flows for the nine month periods ended September 30, 1999 and 1998 have been included and are of a normal, recurring nature. The results of operations for such interim periods are not necessarily indicative of the results for the full year. It is suggested that these condensed financial statements be read in conjunction with the Company's 1998 Annual Report on Form 10-K. 2. The earnings per share of common stock were computed by using the weighted average number of shares of common stock outstanding during the period. Basic and diluted amounts are the same for all periods presented. 3. The Company purchased 252,784 shares of its common stock at an aggregate purchase price of $446,538.50 from its majority shareholder during the period beginning March 11, 1999 through August 30, 1999. This price was consistent with shares trading freely on the Nasdaq SmallCap Market on that date. In additon, 2,000 shares were purchased on the open market at an aggregate price of $3,750.00. A total of 17,422 shares were issued to the accounts of qualified participants in the employees' 401(k) program. The balance of the common stock purchased, totaling 237,362, shares was cancelled. 4. Inventories consist primarily of finished goods and parts for manufacturing and servicing aircraft. Inventory costs include all direct manufacturing costs and applied overhead. These inventories, other than used aircraft, are stated at the lower of cost or market, and cost is determined by the average-cost method. Used aircraft are valued on a specific-identification basis at the lower of cost or current estimated realizable wholesale price. Inventory components at the balance sheet dates were as follows:
September 30, 1999 December 31, 1998 Raw materials $3,422,894 $3,112,257 Work in process 846,973 602,457 Demonstration aircraft 1 ,220,473 987,325 Used aircraft 395,264 1,081,359 Total inventories $5,885,604 $5,783,398
5. The Company is subject to regulation by the FAA. The Company is subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. The Company has a Production Certificate from the FAA, which delegates to the Company the inspection of each aircraft. The sale of the Company's product internationally is subject to regulation by comparable agencies in foreign countries. The Company faces the inherent business risk of exposure to product liability claims. In 1988, the company agreed to indemnify a former manufacturer of the Commander single engine aircraft against claims asserted against the manufacturer with respect to aircraft built from 1972 to 1979. In 1994, Congress enacted the General Aviation Revitalization Act, which established an eighteen-year statute of repose for general aviation manufacturers. This legislation prohibits product liability suits against manufacturers when the aircraft involved in an accident is more than eighteen years old. This action effectively eliminated all potential liability for the Company with respect to aircraft produced in the 1970s as of December 31, 1997. 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 and unjustified claims. The Company is not insured for product liability claims. Management believes there is no litigation outstanding which would have a material adverse effect on the financial position or operations of the Company. 6. Since commencement of production in 1992, annual revenues have increased significantly and annual losses have substantially declined, concurrent with ongoing investment in the Company's future. Cash needs have been financed with debt, private investor capital, proceeds from an initial public offering, and proceeds from subsequent stock issuances. The Company continues to broaden its general aviation capabilities by increasing its business in the pre-owned piston and jet markets. These markets are much larger than the market for new high performance, single engine aircraft. Furthermore, this diversifies the Company's business and revenue base and is synergistic with the manufacturing, marketing and support services of our high performance, single engine Commander aircraft. Management believes the reduction for 1998 in net loss from operations and the continued improvements in margins for 1999 is attributable to plans implemented in late 1996 and 1997 to provide new revenues for the Company. During 1998 the Company continued to expand the Aviation Services Division, which sells pre-owned aircraft and markets refurbishment services. Also in 1998, the Company expanded its efforts to purchase pre-owned aircraft, accept aircraft on trade for new units, and refurbish and sell the aircraft. Revenue from sales of pre-owned aircraft increased by 69% in 1998 and revenues from refurbishment and service increased over 11%. For the first nine months of 1999 revenue from pre-owned aircraft sales increased 39% over the first nine months of 1998 and revenues from services and parts increased 52% for the same period. Management expects growth to continue for both refurbishment services and pre-owned aircraft sales in the future. The Company continues to take advantage of its factory facilities to market upgrades to existing aircraft owners for new paint, interior and equipment. In October 1998 the Company announced the formation of Strategic Jet Services, Inc., a wholly owned subsidiary established to provide brokerage, sale, consulting and refurbishment work for jet aircraft. Income from this line of business is expected to begin improving the Company's profitability in 2000. During the second quarter of 1999, a brokerage commission was earned for the sale of a pre-owned Boeing 727 jet. The Company is continuing to expand efforts in this market. The Company introduced a new de-icing option and received certification from the Federal Aviation Administration in 1998, allowing equipped aircraft to operate in known icing conditions similar to larger, more expensive aircraft. Sales of this optional equipment not only provide additional revenues and earnings, but also increase the value of the aircraft relative to its competition. In addition to the above actions by the Company to increase revenue, management has made efforts to reduce costs and cash requirements by optimizing its production schedule using just-in-time scheduling, thereby systematically decreasing inventories and payables since production commenced in 1992. Management has reduced the costs incurred to advertise new aircraft by focusing its marketing efforts at a specific customer profile. The Company continues to advertise in industry and trade publications at a significantly reduced level, while directly contacting potential customers whose demographic characteristics closely match the typical customer, especially in the areas of income, pilot experience, and types of businesses with demonstrated regional travel requirements. Further reducing selling expenses, the Company completed a reorganization of its service center, paint and interior shops into a completion center to focus on the growing after-market refurbishment business. The Company has expanded its operations to include the Aviation Services Division and Strategic Jet Services, Inc., improved its products, dramatically decreased sales and marketing expenses and reduced debt and interest expense. Management believes that it has made significant progress since 1998 and it is reasonable to expect the Company to continue to improve revenues, reduce costs, improve operating results and stabilize cash flow in 1999. Due to numerous factors beyond the control of the Company, there can be no assurances that these results will be achieved. 7. On August 5, 1998, Commander Aircraft Company was merged with Aviation General, Incorporated, a Delaware holding company. Each share of Commander Aircraft Company common stock was converted into a share of Aviation General, Incorporated common stock. The merger had no direct affect upon the operations or management of the company. The stock continued to trade on the NASDAQ SmallCap Market under the name of Aviation General, Incorporated and the ticker symbol "AVGE". ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL: For the three months ended September 30, 1999, Aviation General, Incorporated reported revenues of $2,980,139 and net loss of $165,604, or $.02 per share, compared to revenues for the third quarter of 1998 of $3,675,194 and a net loss of $95,189, or $.01 per share. For the nine months ended September 30, 1999, revenues were $8,293,541 compared to $9,232,321 for the first nine months of 1998. The net loss for the nine month period ended September 30, 1999 was $496,925, or $.07 per share, compared to a net loss of $772,037, or $.11 per share for the nine months ended September 30, 1998. The Company entered the fourth quarter of 1999 with a backlog of over $2.6 million and expects the quarter to be profitable. The financial results for 1999 should be the best in the Company's history with continued improvement expected for next year. RESULTS FROM OPERATIONS: Revenues from the sale of aircraft for the third quarter of 1999 were derived from the sale of fourteen new and pre-owned aircraft which totaled $2,600,952 compared to sixteen aircraft sold in the comparable quarter of 1998 totaling $3,276,189. The decrease in revenue for the third quarter of 1999 was the result of delivering two fewer aircraft from the comparable period of 1998. For the first nine months of 1999 revenues from aircraft sales and broker commissions totaled $6,906,003 compared to $8,316,882 for the comparable period in 1998. The decrease was due to slower sales in the first and third quarters of 1999 compared to 1998. Through the first nine months of 1999, the Company delivered 33 new, pre-owned or brokered piston aircraft, compared to 36 for the first nine months of 1998. Management expects a significant improvement in revenues derived from the sale of aircraft for the fourth quarter of 1999. Service revenues of $379,187 for the quarter ended September 30, 1999 decreased 5% from $399,005 for the comparable quarter in 1998. For the nine months ended September 30, 1999 service revenues totaled $1,387,538, an increase of 52% from $915,439 for the nine months ended September 30, 1998. The increase in revenues was due to additional billings for refurbishment of pre-owned aircraft and service billings to customers, including one large rebuild job totaling over $240,000 during the first quarter of 1999. Cost of aircraft sales for the three month period ended September 30, 1999 decreased to $2,232,918 from $2,743,833 for the three-month period ended September 30, 1998. The decrease was due primarily to the decrease in sales of new and pre-owned aircraft sold during the period. For the first nine months of 1999 cost of aircraft sales decreased to $6,093,561 from $7,260,265 for the comparable period in 1998. The decrease was due to the mix between new and pre-owned piston sales and fewer total units delivered during the period. Cost of sales for service and parts for the quarter ended September 30, 1999 decreased to $281,083 from $342,404 for the quarter ended September 30, 1998. The decrease was due primarily to the improvements made in margins on spare parts and refurbishment work arising from increased prices and reductions in operating and overhead costs in the quarter. For the nine months ended September 30, 1999 cost of sales for service increased 12% to $927,820 from $829,608 for the nine months ended September 30, 1998. The increase was due primarily to the 52% increase in sales volume. Product development and engineering costs increased for the three months ended September 30, 1999 totaling $83,871 compared to $68,577 for the comparable period in 1998. The increase was due to costs associated with the certification of new avionics equipment. For the nine months ended September 30, 1999 product development and engineering expenses totaled $238,142 compared to $221,987 for the nine months ended September 30, 1998. Sales and marketing expense decreased 20% for the three-month period ended September 30, 1999 to $349,353 from $436,043 for the comparable period ended September 30, 1998. Included in the third quarter of 1999 are costs totaling $34,049, consisting primarily of salaries, travel and office expenses for the Company's subsidiary, Strategic Jet Services, Inc. Advertising and show expenses were reduced during the third quarter of 1999 by $70,000 from the third quarter of 1998, due to fewer media ads and show expenses. All other areas of expense decreased slightly due to the reduction in advertising, personnel and demonstrator aircraft usage. For the nine months ended September 30, 1999, sales and marketing expenses decreased 25% to $993,277 from $1,319,769 for the same period in 1998. Reductions in advertising and show expense accounted for over 80% of the decrease, while printing, travel, salary and commissions accounted for the balance of the reduction. General and administrative expenses decreased approximately 25% to $212,783 for the third quarter of 1999 from $282,763 for the third quarter of 1998. The decrease was due primarily to legal and professional fees associated with the merger of Commander Aircraft Company and Aviation General, Incorporated during the third quarter of 1998. For the nine months ended September 30, 1999 general and administrative expenses decreased to $632,248 from $708,139 from the nine months ended September 30, 1998. Other income decreased to $47,227 for the quarter ended September 30, 1999 from $102,575 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, other income decreased to $158,628 from $342,223 for the nine months ended September 30, 1998. The decrease was due primarily to interest earned on certificates of deposit held by the Company that were converted to cash during 1998 and the repayment of a note from an affiliate during the first quarter of 1999. Interest expense increased to $32,962 for the third quarter of 1999 from ($1,958) for the comparable period in 1998. For the first nine months of 1999 interest expense totaled $63,130 compared to $1,274 for the first nine months of 1998. This increase was due primarily to borrowings on the Company's line of credit with banks. LIQUIDITY AND CAPITAL RESOURCES: Cash balances decreased to $444,753 at September 30, 1999 from $645,706 at December 31, 1998. Accounts receivable increased to $979,801 at September 30, 1999 from $6,941 at December 31, 1998 due to aircraft that were sold and awaiting pick up by customers. Notes receivable decreased to $151,424 at September 30, 1999 from $169,935 at December 31, 1998 due to regular monthly payments received from the debtors. The balance due from the note receivable from related parties was $1,601,820 at September 30, 1999 and $1,507,843 at December 31, 1998. The note receivable from the related party is due June 30, 2000. The note is personally guaranteed by Mishal Al Sabah, a director and major shareholder of the Company, and is collateralized by common stock of Aviation General, Incorporated. During the first quarter of 1999, Stratesec, Incorporated redeemed $800,000 of the $1,000,000 notes receivable. The $200,000 of note receivable from Stratesec, Incorporated, was converted to common stock at $1.50 per share on October 8, 1999. Inventories increased to $5,885,604 at September 30, 1999 from $5,783,398 at December 31, 1998. Raw materials, parts, and work in process increased approximately $555,153 while completed aircraft inventories increased $233,148 as the company maintained four demonstration aircraft on hand at September 30, 1999 and three at December 31, 1998. Inventory of pre-owned aircraft decreased by $686,095 at September 30, 1999 from December 31, 1998. Prepaid expenses and other current assets increased to $396,019 at September 30, 1999 compared to $259,860 at December 31, 1998, reflecting accrued interest receivable and prepayments for parts, material and tooling services. During the first nine months of 1999 expenditures for fixed assets totaled $21,658, which were primarily for tooling, leasehold improvements and improvements to the Company's computer systems. The Company does not plan to spend significant funds for new property, plant and equipment for the balance of fiscal 1999. Most expenditures will be for repairs or replacements of plant equipment, and for computer hardware and software improvements which are not expected to exceed $10,000 for the balance of the fiscal year. Accounts payable increased to $656,142 at September 30, 1999 from $622,618 at December 31, 1998. The small increase was due primarily to the increase in inventory to support the growing volume in the service and parts business. Accrued expenses increased to $631,672 at September 30, 1999 from $343,100 at December 31, 1998. The increase in accrued expenses is attributable to amounts owed for payroll taxes, accrued employee benefits, and a pre-owned aircraft payment transferred after September 30, 1999. Refundable deposits decreased to $114,830 at September 30, 1999 from $252,498 at December 31, 1998 reflecting a large deposit for service work applied to a payment to restore a customer's damaged aircraft which was completed and paid during the first quarter of 1999. Borrowings from bank lines increased to $1,553,267 at September 30, 1999 from $600,000 at December 31, 1998. The Company has two credit facilities in place to fund aircraft held for sale. In addition, a working capital revolving credit line is expected to be in place during the fourth quarter of 1999. The Company does not carry insurance for product liability and could be subject to substantial financial risk in the event of an unfavorable judgement arising from litigation involving its products. Although the Company is not aware of any pending claims, there is no guarantee that claims will not be asserted in the future. Since commencement of production in 1992, annual revenues have increased significantly and annual losses have substantially declined, concurrent with ongoing investment in the Company's future. Cash needs have been financed with debt, private investor capital, proceeds from an initial public offering, and proceeds from subsequent stock issuances. The Company continues to broaden its general aviation capabilities by increasing its business in the pre-owned piston and jet markets. These markets are much larger than the market for new high performance, single engine aircraft. Furthermore, this diversifies the Company's business and revenue base and is synergistic with the manufacturing, marketing and support services of our high performance, single engine Commander aircraft. Management believes the reduction in net loss from operations is attributable to plans implemented in late 1996 and 1997 to provide new revenues for the Company. During 1998 the Company continued to expand the Aviation Services Division, which sells pre-owned aircraft and markets refurbishment services. Also in 1998, the Company expanded its efforts to purchase pre-owned aircraft, accept aircraft on trade for new units, and refurbish and sell the aircraft at a reasonable profit. Revenue from sales of pre-owned aircraft increased by 69% in 1998 and revenues from refurbishment and service increased over 11%. For the first nine months of 1999, revenues from pre-owned aircraft sales have increased 33% and revenues from refurbishment and service increased 52%. Management expects growth to continue for the balance of 1999 for both refurbishment services and pre-owned aircraft sales. The Company continues to take advantage of its factory facilities to market upgrades to existing aircraft owners for new paint, interior and equipment. In October 1998 the Company announced the formation of Strategic Jet Services, Inc. (SJS), a wholly owned subsidiary established to provide brokerage, sale, consulting and refurbishment work for jet aircraft. Income from this line of business is expected to begin improving the Company's profitability in 2000. During the second quarter of 1999, one jet aircraft was sold by SJS and a commission of $107,750 was earned. The Company introduced a new de-icing option and received certification from the Federal Aviation Administration in 1998, allowing equipped aircraft to operate in known icing conditions similar to larger, more expensive aircraft. Sales of this optional equipment not only provide additional revenues and earnings, but also increase the value of the aircraft relative to its competition. During the third quarter of 1999, the Company was quick to offer installation of the latest state-of-the-art autopilot and navigational avionics. The Company continues to keep pace with its competition by factory installing the most popular options available on single-engine aircraft. In addition to the above actions by the Company to increase revenue, management has made efforts to reduce costs and cash requirements by optimizing its production schedule using just-in-time scheduling, thereby systematically decreasing inventories and payables since production commenced in 1992. Management has reduced the costs incurred to advertise new aircraft by focusing its marketing efforts at a specific customer profile. The Company continues to advertise in industry and trade publications at a significantly reduced level, while directly contacting potential customers whose demographic characteristics closely match the typical customer, especially in the areas of income, pilot experience, and types of businesses with demonstrated regional travel requirements. Further reducing selling expenses, the Company completed a reorganization of its service center, paint and interior shops into a completion center to focus on the growing after-market refurbishment business. The Company has expanded its operations to include the Aviation Services Division and Strategic Jet Services, Inc., improved its products, dramatically decreased sales and marketing expenses and reduced debt and interest expense. Management believes that it made significant progress in 1998 and 1999, and it is reasonable to expect the Company to improve revenues, reduce costs, improve operating results and stabilize cash flow in 2000. Due to numerous factors beyond the control of the Company, there can be no assurances that these results will be achieved. Year 2000 Compliance The Y2K problem, or millennium bug, refers to the possibility that computers may not perform properly on or after January 1, 2000, because their programming may recognize dates ending with 00 as the year 1900, rather than the year 2000. The problem is worldwide in scope and affects computers both large and small, including virtually any machine or electronic equipment that uses computer chips. During 1998 the Company spent over $45,000 to upgrade its internal computer systems to be Y2K compliant. The Information Systems Manager, along with senior management, has continued to review key suppliers of parts, materials and services, as well as its banks, 401(k) provider, and insurance companies, to insure that each has a readiness plan for Y2K. Virtually all surveyed have made assurances that their systems are compliant or they have a specific plan to insure compliance in the near future. During the second quarter of 1999, the Company purchased a new software program for tracking property, plant and equipment, as well as depreciation of its fixed assets for accounting and valuation purposes. A new file server was acquired during the third quarter of 1999 with a total cost for this hardware and software upgrades of $6,000. A contingency plan was prepared during the third quarter and approved October 29, 1999, even though management believes that they have successfully addressed the Y2K challenge. Due to the complexity of the year 2000 issues and the interdependence between companies, government agencies, utilities, financial institutions and other entities, it is impossible to guarantee that the Company's year 2000 readiness program will be completely successful. Forward-Looking Statements This Form 10-Q 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-Q that addresses activities, events, or developments that the Company expects, projects, believes, or anticipates will or may occur in the future, including matters having to do with expected and future aircraft sales and services revenues, the Company'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, the Company's performance on its current contracts and its success in obtaining new contracts, the Company's 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. ITEM 3. QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The registrant has no material market risk associated with interest rates, foreign currency exchange rates or commodity prices. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for a vote during the three-month period ended September 30, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K - None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AVIATION GENERAL INCORPORATED (Registrant) By: /s/ Stephen R. Buren Stephen R. Buren Vice President Finance (Chief Financial Officer and Authorized Signatory) Date: November 15, 1999 EX-27 2 FDS --
5 1 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1998 1 444,753 0 1,821,001 0 5,885,604 9,527,178 1,646,256 (932,585) 10,373,092 2,955,911 0 0 0 3,521,593 3,895,588 10,373,092 8,293,541 8,293,541 7,021,381 7,021,381 1,863,667 0 63,130 (496,925) 0 (496,925) 0 0 0 (496,925) (0.07) (0.07)
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