SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-24795
AVIATION GENERAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 73-1547645
(State of Incorporation) (IRS Employer
Identification No.)
7200 NW 63rd Street
Hangar 8, Wiley Post Airport
Bethany, Oklahoma 73008
(Address of principal executive offices) (Zip Code)
(405) 440-2255
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes [Z] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
There were 8,120,397 Shares of Common Stock Outstanding as of September 30, 2003
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet - September 30, 2003
Consolidated Condensed Statements of Operations -
For the Three Months Ended September 30, 2003 and 2002
Consolidated Condensed Statements of Operations -
For the Nine Months Ended September 30, 2003 and 2002
Consolidated Condensed Statements of Shareholders' Equity -
For the Nine Months Ended September 30, 2003 and 2002
Consolidated Condensed Statements of Cash Flows -
For the Nine Months Ended September 30, 2003 and 2002
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other
Item 6. Exhibits and Reports on Form 8K
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30,
ASSETS 2003
-------------
CURRENT ASSETS:
Accounts receivable $ 12,421
Inventories 2,066,047
Prepaid expenses and other assets 3,591
------------
Total current assets 2,082,059
------------
PROPERTY AND EQUIPMENT:
Office equipment and furniture 365,373
Vehicles and aircraft 95,115
Manufacturing equipment 384,979
Tooling 676,747
Leasehold improvements 112,748
------------
1,634,962
Less accumulated depreciation (1,226,244)
------------
408,718
------------
$ 2,490,777
============
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003
-----------
CURRENT LIABILITIES:
LIABILITIES NOT SUBJECT TO COMPROMISE -
Cash overdraft $ 4,898
Accounts payable 181,023
Accrued expenses 212,369
Notes payable 903,477
-----------
Total current liabilities not subject to compromise 1,301,767
-----------
LIABILITIES SUBJECT TO COMPROMISE -
Accounts payable 2,033,596
Accrued expenses 1,369,577
Refundable deposits 178,474
-----------
Total liabilities subject to compromise 3,581,647
-----------
Total current liabilities 4,883,414
-----------
NONCURRENT LIABILITIES:
Notes payable 1,034,795
-----------
REEDEEMABLE COMMON STOCK - $.50 par value;
Issued 150,000 shares; stated at redemption value 150,000
-----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding -
Common stock, $.50 par value, 20,000,000 4,060,198
shares authorized; 8,120,397 issued
Additional paid-in capital 37,254,305
Less: Treasury stock at cost, 1,009,551 shares (1,709,638)
Accumulated (deficit) (43,182,297)
-----------
Total stockholders' equity (deficit) (3,577,432)
-----------
$ 2,490,777
===========
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
--------------------------------
2003 2002
----------- -----------
NET SALES:
Aircraft $ 675,209 $ 1,377,523
Service 147,898 296,815
----------- -----------
823,107 1,674,338
----------- -----------
COST OF SALES:
Aircraft 594,201 1,352,609
Service 144,250 274,509
----------- -----------
738,451 1,627,118
----------- -----------
Gross profit 84,656 47,220
----------- -----------
OTHER OPERATING EXPENSES:
Product development and engineering costs 300 45,193
Selling, general and administrative expenses 372,585 853,246
----------- -----------
Total other operating expenses 372,885 898,439
----------- -----------
Operating (loss) (288,229) (851,219)
----------- -----------
OTHER INCOME (EXPENSES):
Other income (expense) 3,078 (1,626)
Interest expense (27,738) (39,986)
Realized loss on available for sale equity
securities - (395,973)
----------- -----------
(24,660) (437,585)
----------- -----------
(LOSS) BEFORE INCOME TAXES (312,889) (1,288,804)
PROVISION FOR INCOME TAXES - -
----------- -----------
NET (LOSS) $ (312,889) $(1,288,804)
=========== ===========
NET (LOSS) PER SHARE:
Weighted average common shares outstanding;
basic 7,110,846 7,009,330
=========== ===========
Net earnings (loss) per share; basic $ (0.04) $ (0.18)
=========== ===========
Weighted average common shares outstanding;
diluted 7,110,846 7,009,330
=========== ============
Net (loss) per share; diluted $ (0.04) $ (0.18)
=========== ============
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
----------- -----------
NET SALES:
Aircraft $1,347,762 $ 7,189,719
Service 557,941 718,749
---------- -----------
1,905,703 7,908,468
---------- -----------
COST OF SALES:
Aircraft 1,184,622 6,957,217
Service 435,647 522,814
---------- -----------
1,620,269 7,480,031
---------- -----------
Gross profit 285,434 428,437
---------- -----------
OTHER OPERATING EXPENSES:
Product development and engineering costs 1,630 118,366
Selling, general and administrative expenses 1,187,505 1,757,664
---------- -----------
Total other operating expenses 1,189,135 1,876,030
---------- -----------
Operating (loss) (903,701) (1,447,593)
---------- -----------
OTHER INCOME (EXPENSES):
Other income (expense) 62,387 16,442
Interest expense (112,543) (163,820)
Realized loss on available for sale equity
securities - (395,973)
---------- -----------
(50,156) (543,351)
---------- -----------
(LOSS) BEFORE INCOME TAXES (953,857) (1,990,944)
PROVISION FOR INCOME TAXES - -
---------- -----------
NET (LOSS) $ (953,857) $(1,990,944)
========== ===========
NET (LOSS) PER SHARE:
Weighted average common shares outstanding;
basic 7,110,846 7,009,330
========== ===========
Net (loss) per share; basic $ (0.13) $ (0.28)
========== ===========
Weighted average common shares outstanding;
diluted 7,110,846 7,009,330
========== ===========
Net (loss) per share; diluted $ (0.13) $ (0.28)
========== ===========
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Treasury Stock Accumulated Comprehensive Stockholders'
Shares Amount Capital Shares Amount Deficit Income (Loss) Equity
--------- ---------- ----------- --------- ------------ ------------ -------------- -------------
Balance at
January 1, 2002 7,631,519 $3,815,759 $37,000,299 772,189 $(1,294,193) $(37,943,329) $ - $ 1,578,536
Comprehensive income:
Net earnings - - - - - (1,990,944) - (1,990,944)
Other comprehensive
income -
Change in
unrealized
investment
gain, net - - - - - - - -
--------- ---------- ----------- --------- ------------ ------------ ------------- -----------
Comprehensive
income - - - - - (1,990,944) (1,990,944)
--------- ---------- ----------- --------- ------------ ------------ ------------- -----------
Balance at
September 30, 2002 7,631,519 $3,815,759 $37,000,299 772,189 $(1,294,193) $(39,934,273) $ - $ (412,408)
========= ========== =========== ========= ============ ============ ============= ===========
Balance at
January 1, 2003 8,120,397 $4,060,198 $37,254,305 1,009,551 $ (1,709,638) $(42,228,440) $ - $(2,623,575)
Comprehensive income:
Net earnings - (953,857) (953,857)
Other
comprehensive
income -
Change in
unrealized
investment
gain, net - - - - - - - -
--------- ---------- ----------- --------- ------------ ------------ ------------- -----------
Comprehensive
income - - - - - (953,857) - (953,857)
--------- ---------- ----------- --------- ------------ ------------ ------------- -----------
Balance at
September 30, 2003 8,120,397 $4,060,198 $37,254,305 1,009,551 $ (1,709,638) $(43,182,297) $ - $(3,577,432)
========= ========== =========== ========= ============ ============ ============= ===========
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (953,857) $ (1,990,944)
Adjustments to reconcile net
(loss) to net cash provided by
(used in) operating activities -
Depreciation and amortization 81,689 100,324
Realized loss on sale of
equity securities - 395,973
(Gain) on retirement of
property and equipment (138) -
Changes in assets and liabilities:
(Increase) decrease in -
Accounts and notes receivable (2,990) 101,896
Inventories 1,145,484 1,161,293
Prepaid expenses and other assets - 5,821
Increase (decrease) in -
Accounts payable 68,398 404,922
Accrued expenses 282,829 (164,023)
Refundable deposits 31,974 (540,549)
------------ ------------
Net cash provided by (used in)
operating activities 653,389 (525,287)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sales of property and equipment 200 -
------------ ------------
Net cash provided by
investing activities 200 -
------------ ------------
CASH LFOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 250,000 5,053,483
(Payments on) borrowings (906,342) (4,481,063)
------------ ------------
Net cash provided by (used in)
financing activities (656,342) 572,420
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,753) 47,133
CASH AND CASH EQUIVALENTS (OVERDRAFTS)
AT BEGINNING OF PERIOD (2,145) 211,356
------------ ------------
CASH AND CASH EQUIVALENTS (OVERDRAFT)
AT END OF PERIOD $ (4,898) $ 258,489
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 109,089 $ 163,820
Income taxes $ - $ -
See accompanying Summary of Accounting Policies
and Notes to Financial Statements.
AVIATION GENERAL, INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
These consolidated condensed financial statements have been prepared by
Aviation General, Incorporated (the Company) without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission, and
reflect all adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods, on a basis
consistent with the annual audited financial statements. All such
adjustments are of a normal recurring nature. Certain information,
accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the financial statements and information presented not
misleading. These financial statements should be read in conjunction with
the financial statements and the summary of significant accounting policies
and notes thereto included in the Company's most recent annual report on
Form 10-KSB.
1. INVENTORIES
Inventories consist primarily of finished goods, work in process, 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 September 30, 2003:
Raw materials $ 1,106,792
Work in process 509,047
New and pre-owned aircraft 448,958
Other 1,250
------------
$ 2,066,047
============
2. 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
September 30, 2003 balance sheet as "liabilities subject to compromise."
Claims secured against the Debtor's assets ("secured claims") also are
stayed, although the holders of such claims have the right to move the
court for relief from the stay. Secured claims are secured primarily by
liens on the Debtor's property, plant and equipment. Refer to the Company's
most recent annual report on Form 10-KSB.
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.
The Company has obtained the approval of the Bankruptcy court for
Debtor-in-Possession, (DIP), financing of $250,000. The DIP financing bears
interest at the rate of 10% (simple interest), which is payable at the
effective date of the Chapter 11 Plan of Reorganization. The Company has
taken draws on the DIP Financing as follows:
January 7, 2003 $ 50,000
June 5, 2003 50,000
July 17, 2003 50,000
September 4, 2003 13,000
September 11, 2003 87,000
---------
Total DIP Financing Draws through September 30, 2003: $ 250,000
=========
3. 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. During the nine
months ended September 30, 2003, the Company lost an additional $(953,857).
As of September 30, 2003, the Company had a negative working capital of
($2,801,355) and a deficit net worth of ($3,577,432). 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.
4. LEASES
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 $ 50,400
2004 113,400
2005 113,400
2006 94,500
--------
Total future minimum lease payments $371,700
========
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation by the FAA. The Company is subject to
inspections by the FAA and may be subjected to fines and other penalties
(including orders to cease production) for noncompliance with FAA
regulations. The Company has a Production Certificate from the FAA which
delegates to the Company the inspection of each aircraft. The sale of the
Company's product internationally is subject to regulation by comparable
agencies in foreign countries.
The Company faces the inherent business risk of exposure to product
liability claims. In 1988, the Company agreed to indemnify a former
manufacturer of the Commander single engine aircraft against claims
asserted against the manufacturer with respect to aircraft built from 1972
to 1979. In 1994, Congress enacted the General Aviation Revitalization Act,
which established an 18-year statute of repose for general aviation
aircraft manufacturers. This legislation prohibits product liability suits
against manufacturers when the aircraft involved in an accident is more
than 18 years old. This action effectively eliminated all potential
liability for the Company with respect to aircraft produced in the 1970s.
The Company's product liability insurance policy with coverage of $10
million per occurrence and $10 million annually in the aggregate with a
deductible of $200,000 per occurrence and annually in the aggregate expired
March 1, 1995. Subsequent to March 1, 1995, the Company is not insured for
product liability claims.
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
the Nasdaq SmallCap Market and began trading on the Over-the-Counter
Bulletin Board, or OTCBB, under the symbol AVGE.OB due to the Company's
noncompliance with the applicable minimum asset and equity requirements and
the minimum bid price requirement
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Forward Looking Statements
----------------------------
This Form 10-QSB 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-QSB 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
service 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.
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.
Critical Accounting Estimates and Accounting Policies
We must make estimates of the collectability of accounts receivable. We analyze
historical write-offs, changes in our internal credit policies and customer
concentrations when evaluating the adequacy of our allowance for doubtful
accounts. Differences may result in the amount and timing of expenses for any
period if we make different judgments or use difference estimates.
Inventories are valued at the lower of cost or market. We must periodically
evaluate the carrying value of our inventories to determine whether market
conditions have impaired the carrying value of our inventories.
Property and equipment are evaluated for impairment whenever indicators of
impairment exist. Accounting standards require that if an impairment indicator
is present, the Company must assess whether the carrying amount of the asset is
unrecoverable by estimating the sum of the future cash flows expected to result
form the asset, undiscounted and without interest charges. If the carrying
amount is less than the recoverable amount, an impairment charge must be
recognized, based on the fair value of the asset. Management assumed the
Company was a going concern for purposes of evaluating the possible impairment
of its property and equipment. Should the Company not be able to continue as a
going concern, there may be significant impairment in the value of the Company's
property and equipment.
We must estimate the future liability related to warranty work on new aircraft
sold.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes. This process involves estimating 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.
RESULTS FROM OPERATIONS - COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
Revenues from the sale of aircraft for the third quarter of 2003 decreased
by $702,314 or 51% from $1,377,523 to $675,209 during the quarters ended
September 30, 2002 and 2003, respectively. In the third quarter of 2003, three
pre-owned aircraft were sold compared with one new and two pre-owned aircraft
sold in the same period for 2002.
Service and parts revenues decreased by $148,917 or 50% from $296,815 to
$147,898 during the quarters ended September 30, 2002 and 2003, respectively.
Cost of aircraft sales decreased by $758,408 or 56% from $1,352,609 to
$594,201 during the quarters ended September 30, 2002 and 2003, respectively.
This decrease was due primarily to a 51% decrease in aircraft sales revenues
during the comparable periods.
Cost of sales for service and parts decreased by $130,259 or 47% from
$274,509 to $144,250 during the quarters ended September 30, 2002 and 2003,
respectively. This is due primarily to a 50% reduction in service and sales
revenues.
Product development and engineering costs decreased by $44,893 or 99% to
$300 for the third quarter of 2003, from $45,193 for the comparable period in
2002. This decrease was due to the significant reduction in support staff.
Sales, general and administrative expense decreased by $480,661 or 56% for the
three-month period ended September 30, 2003, to $372,585 from $853,246 for the
comparable period ended September 30, 2002. This decrease was primarily due to
staff reductions, offset in part by legal fees associated with the bankruptcy
proceedings of Commander Aircraft Company.
Interest expense decreased by $12,248 or 31% to $27,738 for the third
quarter of 2003 from $39,986 for the comparable period in 2002. This decrease
was due to a reduction of bank lines of credit and lower daily average debt
during the period.
RESULTS FROM OPERATIONS - COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002
Revenues from the sale of aircraft during the nine month period ended
September 30, 2003, decreased by $5,841,957 or 81% from $7,189,719 to
$1,347,762 during the nine months ended September 30, 2002 and 2003,
respectively. In the nine month period ended September 30, 2003, seven pre-owned
aircraft were sold compared with nineteen new and pre-owned aircraft sold in the
same period for 2002.
Service and parts revenues decreased by $160,808 or 22% from $718,749 to
$557,941 during the nine month periods ending September 30, 2002 and 2003,
respectively.
Cost of aircraft sales decreased by $5,772,595 or 83% from $6,957,217 to
$1,184,622 for the nine month periods ended September 30, 2002 and 2003,
respectively. This was due to a 81% decrease in aircraft sales revenues during
the comparable periods.
Cost of sales for service and parts decreased by $87,167 or 17% from
$522,814 to $435,647 for the nine month periods ended September 30, 2002 and
2003, respectively. This is due primarily to a 22% reduction in service and
parts revenues during the comparable periods.
Production development and engineering costs for the nine month period
ended September 30, 2003, decreased by $116,736 or 99% to $1,630 for the nine
month period ended September 30, 2003 from $118,366 for the comparable period in
2003. This decrease was due to the significant reduction in support staff.
Sales, general and administrative expense decreased by $570,159 or 32% for the
nine month period ended September 30, 2003, to $1,187,505 from $1,757,664 for
the comparable period in 2002. This decrease was primarily due to staff
reductions, offset in part by legal fees associated with the bankruptcy proceeds
for Commander Aviation.
Interest expense decreased by $51,277 or 31% for the nine month period
ending September 30, 2003 to $112,543 from $163,820 for the comparable period in
2002. This decrease was due to a reduction of bank lines of credit and lower
daily average debt during the period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations increase by $1,178,676 or 224% to $653,389 for
the nine month period ending September 30, 2003 from a deficit of ($525,287)
during the comparable period in 2002.
Cash flows from operations were positive for the nine months ended
September 30, 2003 due primarily to a $1,145,484 decrease in inventories
combined with a $383,201 increase in payables, accrued expenses and refundable
deposits which more that offset the loss for the year of $(953,857).
Cash balances decreased to a deficit balance of ($4,898) at September 30,
2003 from a deficit balance of ($2,145) at December 31, 2002.
The Company has entered into debtor in possession financing arrangements that
management anticipates will provide the Company with sufficient working capital
to continue until the plan or reorganization is funded.
We anticipate that the confirmed plan of reorganization will provide the Company
with sufficient working capital to commence production activities.
CONTRACTUAL OBLIGATIONS
The following table is a summary of the Company's contractual obligations
as of September 30, 2003.
Payment Due by Period
----------------------------------------------------
Total Less than One 1-3 Years Thereafter
---------- ------------- ---------- ----------
Long-Term Debt $1,034,795 $ - $1,034,795 $ -
Current Note Payable 903,477 903,477 - -
Operating Leases 396,900 75,600 226,800 94,500
---------- ---------- ---------- ---------
Total $2,335,172 $ 979,077 $1,261,595 $ 94,500
========== ========== ========== =========
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of the filing date of this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our principal executive officer and our principal financial
officer, who concluded that our disclosure controls and procedures are
effective. There have been no significant changes in our internal controls or
in other factors, which could significantly affect internal controls subsequent
to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management, including our principal executive
officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 2002, the Company issued a $1 million secured convertible note to
a private investor, the proceeds of which are being used for working capital
purposes. The transaction was exempt from registration under the Securities Act
of 1933 under section 4(2) of the Act because it did not involve a public
offering.
ITEM 5. OTHER
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
The Company believes that the exchange on which the Company's shares are
traded does not affect the market value or intrinsic value of the Company's
business nor the trading liquidity of its shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Securities Purchase Agreement
10.2 Secured Convertible Note
10.3 Investor Rights Agreement
10.4 Security Agreement
10.5 Guarantee*
*Incorporated by reference to the registrant's report on Form 10-QSB for the
period ended September 30, 2002
(b) Reports on Form 8-K - None.
The following exhibits are filed as a part of this quarterly report on form
10-QSB
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
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
AVIATION GENERAL INCORPORATED
-----------------------------
(Registrant)
By: /s/ Wirt D. Walker III
----------------------
Wirt D. Walker III
Chairman of the Board of Directors
(Chief Executive Officer and
Authorized Signatory)
By: /s/ Glenn A. Jackson
--------------------
Glenn A. Jackson
(Chief Financial Officer)