U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ____________.
Commission file number 000-49849
ARIZONA AIRCRAFT SPARES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0483722
------ -----------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3431 EAST HEMISPHERE LOOP, TUCSON, ARIZONA 85706
------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number: (520) 806-0666
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $ .001 Par Value
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 preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ].
As of September 30, 2004 the Registrant had 35,361,151 shares of common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ARIZONA AIRCRAFT SPARES, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet: As of September 30, 2004
Condensed Consolidated Statements of Operations: Nine Months
Ended September 30, 2004 and 2003 And Three Months Ended
September 30, 2004 and 2003
Condensed Consolidated Statement of Stockholders' Equity: As
of September 30, 2004
Condensed Consolidated Statements of Cash Flows: Nine Months
Ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements: As of
September 30, 2004
Item 2. Management Discussion and Analysis
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
Item 1. Financial Statements
The following unaudited Condensed Consolidated Financial Statements as of
September 30, 2004 and for the nine months and three months ended September 30,
2004 and 2003 have been prepared by Arizona Aircraft Spares, Inc.
ARIZONA AIRCRAFT SPARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30
2004
----
ASSETS
Current Assets
Cash $ 15,372
Accounts receivable, net 226,424
Inventory 1,607,357
------------
Total Current Assets 1,849,153
Property and Equipment, Net 4,848
------------
Total Assets $ 1,854,001
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 304,166
Note Payable - related party, Note B 572,124
Note payable - short term -net current portion 352,170
------------
Total Current Liabilities 1,228,460
------------
Long term debt, net of current portion 82,286
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock $.001 par value; Shares authorized:10,000,000
Shares Issued & Outstanding: None --
Common Stock $.001 Par Value; Shares authorized:40,000,000
Issued & outstanding: 35,361,151 at September 30, 2004 35,361
Additional paid in capital 3,980,108
Retained earnings (deficit) (3,472,214)
------------
Total Stockholders' Equity 543,255
------------
Total Liabilities & Stockholders' Equity $ 1,854,001
============
See accompanying footnotes to the unaudited condensed
consolidated financial statements
3
ARIZONA AIRCRAFT SPARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues $ 43,284 $ 456,087 $ 440,027 $ 561,370
Cost of Goods Sold 83,914 241,768 337,449 280,757
------------- ------------- ------------- -------------
Gross Profit (40,630) 214,319 102,578 280,613
------------- ------------- ------------- -------------
Operating expenses:
Selling, General & Administrative 150,823 126,214 490,494 228,612
Non-cash Compensation 3,017,500 -- 3,017,500 --
Depreciation 6,200 3,625 9,300 10,875
------------- ------------- ------------- -------------
Total Operating Expenses 3,174,523 129,839 3,517,294 239,487
------------- ------------- ------------- -------------
Income (Loss) Before Other Expenses (3,215,153) 84,480 (3,414,716) 41,126
Interest Expense 22,255 36,632 66,919 60,918
------------- ------------- ------------- -------------
Net Income (Loss) $ (3,237,408) $ 47,848 $ (3,481,635) $ (19,792)
============= ============= ============= =============
Net Earnings (Loss) Per Share -Basic & Diluted $ (0.10) $ 0.00 $ (.10) $ .0.00
============= ============= ============= =============
Weighted Average Number of Common Shares Used in
the Computation of
Earnings or Loss Per Share 32,723,000 26,484,047 32,723,000 12,311,782
============= ============= ============= =============
See accompanying footnotes to the unaudited condensed
consolidated financial statements
4
ARIZONA AIRCRAFT SPARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
Additional Total
Common Stock Paid-In Subscription Retained Shareholders'
Shares Amount Capital Receivable Earnings Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 27,228,249 $ 27,228 $ 675,304 $ (500,000) $ 9,421 $ 211,953
Shares sold, net of costs 3,097,902 3,098 792,339 -- -- 795,437
Shares subscribed by consultants
and employees -first quarter 2004 565,000 565 281,935 (282,500) --
Administrative reduction in
Subscriptions receivable see below
Shares Subscribed by consultants -
third quarter 2004 3,305,000 3,305 1,649,195 575,000 2,227,500
Shares Subscribed by employees -
third quarter 2004 1,165,000 1,165 581,335 207,500 790,000
Net loss for the nine months ended
September 30, 2004 -- -- -- -- (3,481,635) (3,481,635)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2004 35,361,151 $ 35,361 $ 3.980,108 $ 0 $(3,472,214) $ 543,255
============ ============ ============ ============ ============ ============
See accompanying footnotes to the unaudited condensed
consolidated financial statements
5
ARIZONA AIRCRAFT SPARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2004 2003
---- ----
Cash (Used) by Operating Activities $ (578,402) $ (198,685)
Cash ( Used ) in Investing Activities -- --
Cash Provided (Used ) in Financing Activity 593,229 198,542
------------ ------------
Net Increase (Decrease) in Cash Balances 14,827 (143)
Cash Balances at Beginning of Period 545 595
------------ ------------
Cash Balance at End of Period $ 15,372 $ 452
============ ============
Supplemental Information:
Cash paid during the period for interest $ 66,919 $ 60,918
============ ============
Cash paid during the period for taxes 0 --
============ ============
Consulting fees and employee options paid with stock 3,017,500 --
============ ============
See accompanying footnotes to the unaudited condensed
consolidated financial statements
6
ARIZONA AIRCRAFT SPARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
General
- -------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America for a complete set
of financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from operations for the nine months and three-month period ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. The unaudited consolidated
financial statements should be read in conjunction with the December 31, 2003
financial statements and footnotes thereto included in the Company's Securities
and Exchange Commission Form 10-KSB.
Basis of Presentation
- ---------------------
Arizona Aircraft Spares, Inc. (the "Company" or "AASI"), formerly American
Market Support Network, Inc., was incorporated under the laws of the state of
Nevada in December, 2000. The Company specializes in manufacturing military
aircraft parts for the US Air Force, Navy and Army aviation divisions. The
Company also distributes its products to a number of US and foreign private
aircraft companies and friendly foreign governments.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Arizona Aircraft Spares, Inc., a company formed
under the laws of Arizona in 1990. All significant inter-company transactions
have been eliminated in consolidation.
Stock Based Compensation
- ------------------------
In December 2002, the FASB issued Statement of Financial Accounting Standards
No.148 (SFAS No.148), "Accounting for Stock-based Compensation- Transition and
Disclosure-an amendment of SFAS 123 ". This statement amends SFAS No.123,
"Accounting for stock based Compensation "to provide alternative methods of
transition for a voluntary charge to the fair value based method of accounting
for stock based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No.123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock based
compensation using the intrinsic value method prescribed in APB Opinion No.25
and related interpretations. Accordingly, compensation expense for stock options
is measured as excess, if any, of the fair market value of the Company's stock
at the date of the grant over the exercise price of the related option. The
Company has adopted the annual disclosure provisions of SFAS No.148 in its
financial reports for the year ended December 31, 2003 and the period ended
September 30, 2004. The Company has issued 4,973,000 shares of stock through
options issued in its Employee Stock Option Plan and its Non-employee
Consultants Stock Option Plan during the last quarter of 2003 and the nine
months ended September 30, 2004. $3,017,500 has been charged to compensation and
consulting expenses for shares issued without cash payments during this same
period.
7
Reclassifications
- -----------------
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
NOTE B - DUE TO RELATED PARTY
As of September 30, 2004, the Company was indebted to its President and
principal shareholder for $572,124. No formal repayment terms exist.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
The following information should be read in conjunction with the financial
statements and the notes thereto, as well as the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" from
the Company's merger agreement Report on Form 8-K for it. The analysis set forth
below is provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
General Business Description
- ----------------------------
Arizona Aircraft Spares, Inc. (AASI) is a subsidiary of a publicly held Nevada
Corporation. The Company specializes in manufacturing commercial and military
aircraft parts for the US Air Force, Navy and Army aviation divisions and a
number of US and Foreign private aircraft companies and friendly foreign
governments. Their products are included in fixed wing and rotary aircraft and
the Company often provides prototype designs, assembly and subassembly
contracting services. AASI has an approved MIL-I-45208A program and is
considered a prime contractor to the US government.
FORWARD-LOOKING STATEMENTS
- --------------------------
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COMPANY'S DEPENDENCE ON THE
TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF PRODUCTS, THE IMPACT
OF COMPETITION AND DOWNWARD PRICING PRESSURES, THE ABILITY OF THE COMPANY TO
REDUCE ITS OPERATING EXPENSES AND RAISE ANY NEEDED CAPITAL, THE EFFECT OF
CHANGING ECONOMIC CONDITIONS, RISKS IN TECHNOLOGY DEVELOPMENT AND THE EFFECTS OF
OUTSTANDING LITIGATION. OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE THE
RISKS AND UNCERTAINTIES DETAILED IN THE COMPANY'S MOST RECENT FORM 10-KSB AND
ITS OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
Results of Operations
- ---------------------
The Company's revenues are difficult to forecast and may vary significantly from
quarter to quarter. In addition the Company's expense levels for each quarter
are, to a significant extent, fixed in advance based upon the Company's
expectation as to the net revenues to be generated during that quarter. The
Company therefore is generally unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in net revenues. Further as a result of
these factors any delay in product introductions, whether due to internal delays
or delays caused by third party difficulties, or any significant shortfall in
demand in relation to the Company's expectations, would have an almost immediate
adverse impact on the Company's operating results and on its ability to maintain
profitability in a quarter.
8
While the Company's expenses are, to a significant extent, fixed in advance, the
Company is making efforts to adjust spending in relation to net revenues until
such time, if any, that new products are released and such new products and/or
current products gain market acceptance. However, there can be no assurance that
new products will be released by the Company, or if released that such releases
will be on a timely basis; or that any products will achieve any degree of
market acceptance or that such acceptance will be sustained for any significant
period; or that they will be profitable, or that profitability, if any, can be
sustained. Failure to complete new products on a timely basis, or lack of demand
for products upon completion and distribution, would have a severe material
adverse effect upon the Company.
Comparison of the Nine Months Ended September 30, 2004 (the "2004 Period") with
- -------------------------------------------------------------------------------
the Nine Months Ended September 30, 2003 (the "2003 Period")
- ------------------------------------------------------------
Revenues:
- ---------
The Company's lack of available financial resources has impaired managements'
ability to complete its contractual obligations in a timely manner and as a
result, revenues from continuing operations have decreased $ 121,343 or 22% from
$ 561,370 to $ 440,027 for the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003. Management believes without new
sources of financing, revenues from continuing operations will continue at their
current level.
The cost of the Company's production during this period is charged to work in
process inventory during this delay period. When a first article is approved,
the order can be shipped to the buyer and will then be added to revenue. Because
the Company did not have working capital prior to the current statement, the
pipe lines needed to be restocked before the sales levels could be maintained
and increased significantly.
Cost of Sales
- -------------
For the nine months ended September 30, 2004, the Company's gross profit margin
was 23% compared to 50% for the first nine months of 2003. The Company's margins
will fluctuate from period to period because absorbed overhead increases when
volume decreases and because labor ratios are less than optimized in
manufacturing processes when revenues decrease. Revenues decreased during this
period, creating an unbalanced application of available resources, which affects
operating margins dramatically.
Selling, General and Administrative
- -----------------------------------
The Company's selling, general and administrative expenses increased $261,882,
or 115 %, from $228,612 for the nine months ended September 30, 2003 to
$490,494. for the nine months ended September 30, 2004. The increase in selling,
general and administrative expenses is a result of the Company's restructure as
a public entity in 2003. Administrative expenses for consultants, legal costs,
audits and accounting services have all increased during this 2004 period over
the 2003 period. In addition, there are further increases expected in the coming
months. Although the Company's general and administrative expenses are, to a
significant extent, fixed in advance, the Company is making efforts to adjust
spending in relation to the expected net revenues. The Company has yet to
complete all increased expense items relating to its public company status.
Until these expense categories have gone full cycle, the administrative expenses
will continue to rise but will become more controlled in relation to sales
revenue as the Company becomes well funded and revenues increase.
On November 19, 2003 the company filed a registration under Form S-8 for an
Employee Stock Option Plan (ESOP) and a Non-Employee Consultants Stock Option
Plan. The ESOP registered 1,250,000 Non-employee free trading shares and 500,000
employee free trading shares. On August 13, 2004, the Company amended the ESOP
and registered 1,770,000 Non-employee free trading shares and 2,230,000 employee
free trading shares. The total number of shares registered with both S-8 filings
was 5,750,000 shares of which 778,000 had not been issued to employees and
non-employees as of September 30, 2004. On September 30, 2004, the ESOP
Committee, made up of the Board of Directors of the Company, voted and approved
an amendment to the plan to eliminate all payment for the past issued shares and
any remaining un-issued shares in the plan at the end of the period. This action
resulted in $3,017,500 in subscriptions receivable from employees and
non-employee to be charged to expenses for services during the period ended
September 30, 2004. The fair market value of the shares issued was determined to
be $0.50 per share at the time of issue according to the ESOP Committee.
9
As the Company continues to expand, it will incur additional costs for
personnel. In order for the Company to attract and retain quality personnel,
management anticipates it will continue to offer competitive salaries, issue
common stock to employees, and grant Company stock options to current and future
employees.
Financing Expenses
- ------------------
The Company incurred interest expense of $66,919 during the nine months ended
September 30, 2004 as compared to $60,918 in 2003, a decrease of $6,001, or
10.0%. The increase is a result of higher interest rates and total debt in 2004
as compared to the similar period in 2003. As a result of the Company's
anticipated growth and resulting continued need for financing, interest costs
are likely to increase in the future.
Comparison of the Three Months Ended September 30, 2004 (the "2004 Period") with
- --------------------------------------------------------------------------------
the Three Months Ended September 30, 2003 (the "2003 Period")
- -------------------------------------------------------------
Revenues
- --------
The Company's lack of available financial resources has impaired managements'
ability to complete its contractual obligations in a timely manner and as a
result, revenues from continuing operations have decreased $412,803 or 90% from
$456,087 to $43,284 for the quarter ended September 30, 2004 as compared to the
quarter ended September 30, 2003. Management believes without new sources of
financing, revenues from continuing operations will continue at their current
level.
Cost of Sales
- -------------
Cost of revenues consists of direct manufacturing costs and applied overhead
expenses for the Company's aircraft repair and replacement parts business. Cost
of sales as a percentage of net revenues decreased to 193% in the three months
ended September 30, 2004 as compared to 53% for the three months period ended
September 30, 2003. The cost of goods sold percentage will fluctuate from
quarter to quarter because absorbed overhead increases when volume decreases and
because labor ratios are less than optimized in manufacturing processes when
revenues decrease. In this quarter, production employment was maintained to
complete orders in backlog even though goods were not being shipped.
Selling, General and Administrative
- -----------------------------------
The Company's selling, general and administrative expenses increased $24,609, or
20% to $150,283 during the three months ended September 30 2004, as compared to
$126,214 during the quarter ended September 30, 2003. The increase in selling ,
general and administrative expenses is a result of the Company's restructure as
a public entity in 2003.
On September 30, 2004, the ESOP Committee, made up of the Board of Directors of
the Company, voted and approved an amendment to the plan to eliminate all
payment for the past issued shares and any remaining un-issued shares in the
plan at the end of the period. This action resulted in $3,017,500 in
subscriptions receivable from employees and non-employee to be charged to
expenses for services during the period ended September 30, 2004
As the Company continues to expand, it will incur additional costs for
personnel. In order for the Company to attract and retain quality personnel,
management anticipates it will continue to offer competitive salaries and grant
stock options to current and future employees.
10
Financing Expenses
- ------------------
The Company incurred interest expense of $22,255 in 2004 as compared to $36,632
in 2003, a decrease of $14,377, or 40%. The decrease is a result of reduction of
debt in 2004 as compared to the similar period in 2003. As a result of the
Company's anticipated growth and resulting continued need for financing, it
likely that interest costs will increase in the future.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2004, the Company had current assets of $1,849,153 and
current liabilities of $1,228,460 which resulted in a working capital position
of $620,693.
As a result of our net loss from operations of $3,414,716 offset by a non-cash
transaction, of $3,017,500 and increased cost of approximately $133,000 in
current period spending, from the Company incurred a loss from operations of
$578,402 during the nine months ended September 30, 2004. We met our cash
requirements during the period through the sale of stock of approximately
$795,000 less principal payments of approximately $202,000 of loans.
The Company has a short term loan in the amount of $202,320 that was due and
payable on September 30, 2004 and for which it is currently renegotiating the
terms of the agreement to extend the payment date. The Company is also pursuing
other financial resources to augment its cash requirements for retirement of
debt, expansion of operations and acquisition of suitable companies and
products. The restricted stock placement to sophisticated investors is an
example of cash infusion that will provide the Company with much needed working
capital to continue its expansion and sales growth into international and
domestic markets.
Business Concentration
- ----------------------
During the nine months ended September 30, 2004, the Company recognized
approximately 95 % of its revenues from sales of its products to the US
Government. While the Company's management considers its relationships with the
customers to be satisfactory, given the concentration of its sales to a few key
customers, its continued relationships may be subject to the policies and
practices of the customers. The Company management continues to concentrate its
efforts on expanding its customer base in order to reduce its reliance on its
current customers.
The Company's success and on-going financial viability is contingent upon its
selling of its products and the related generation of cash flows. The Company
evaluates its liquidity and capital needs on a continuous basis and based on the
Company's requirements and capital market conditions may, from time to time,
raise working capital through additional debt or equity financing. There is no
assurance that such financing will be available in the future to meet additional
capital needs of the Company, or that any such terms or conditions of any such
financing would be favorable to the Company. Both the management of the
Company's current growth and the expansion of the Company's current business
involve financial risk and require significant capital investment.
Application of Critical Accounting Policies
- -------------------------------------------
During December, 2002 the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123
and 95, that would require companies to account for stock-based compensation to
employees using a fair value method as of the grant date. The proposed statement
addresses the accounting for transactions in which a Company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled through the issuance of such equity instruments, which
includes the accounting for employee stock purchase plans. This proposed
statement would eliminate a Company's ability to account for share-based awards
to employees using APB Opinion 25, Accounting for Stock Issued to Employees but
would not change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting for employee
stock ownership plans. The proposed statement, if adopted, would be effective
for awards that are granted, modified, or settled in fiscal years beginning
after December 15, 2004. The Company is in the process of assessing the
potential impact of this proposed statement to the financial statements.
Inventory Valuation Reserves
- ----------------------------
The Company provides for inventory obsolescence based upon assumptions
concerning future demand, market conditions and anticipated timing of the
release of products. If actual market conditions or future demand are less
favorable than those projected by management, inventory write-downs may be
required.
11
Non-GAAP Financial Measures
- ---------------------------
The financial statements appearing in this quarterly report on Form 10-QSB do
not contain any financial measures which are not in accordance with generally
accepted accounting procedures.
New Accounting Pronouncements
- -----------------------------
In January 2003, the FASB issued interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), as revised December 2003. This
interpretation of Accounting Research Bulletin No. 51, Condensed Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities (VIEs) that either: (1) do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the equity investors lack an
essential characteristic of a controlling financial interest. This
interpretation applies immediately to VIEs created after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to VIEs in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The application of FIN 46 did not have a material
effect on our consolidated financial statements.
Inflation
- ---------
In the opinion of management, inflation has not had a material effect on the
Company's financial condition or results of its operations
Off-Balance Sheet Arrangements
- ------------------------------
The Company does not maintain off-balance sheet arrangements nor does it
participate in non-exchange traded contracts requiring fair value accounting
treatment.
Trends, Risks and Uncertainties
- -------------------------------
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
Potential Fluctuations in Quarterly Operating Results
- -----------------------------------------------------
Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside our control,
including: the demand for our products; seasonal trends in purchasing, the
amount and timing of capital expenditures and other costs relating to the
development of our products; price competition or pricing changes in the
industry; technical difficulties or system downtime; general economic
conditions, and economic conditions specific to the consumer lighting industry.
Our quarterly results may also be significantly impacted by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results will fall below
our expectations or those of investors in some future quarter.
Dependence Upon Management
- --------------------------
Our future performance and success are dependant upon the efforts and abilities
of our Management. To a very significant degree, we are dependent upon the
continued services of Vito Peppitoni, our Chief Executive Officer and Chairman
of the Board of Directors and Sylvia Quintero, our Chief Financial Officer and
12
member of our Board of Directors. If the Company lost the services of either Mr.
Peppitoni or Ms. Quintero, or other key employees before we could get qualified
replacements, that loss could materially adversely affect our business. We do
not maintain key man life insurance on any of our Management.
Lack of Independent Directors
- -----------------------------
We cannot guarantee that our Board of Directors will have a majority of
independent directors in the future. In the absence of a majority of independent
directors, our executive officers, who are also principal stockholders and
directors, could establish policies and enter into transactions without
independent review and approval thereof. This could present the potential for a
conflict of interest between the Company and its stockholders generally and the
controlling officers, stockholders or directors.
Limitation of Liability and Indemnification of Officers and Directors
- ---------------------------------------------------------------------
Our officers and directors are required to exercise good faith and high
integrity in our Management affairs. Our Articles of Incorporation provide,
however, that our officers and directors shall have no liability to our
shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated their
duty of loyalty, did not act in good faith, engaged in intentional misconduct or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our Articles and By-Laws
also provide for the indemnification by us of the officers and directors against
any losses or liabilities they may incur as a result of the manner in which they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner that
they reasonably believe to be in, or not opposed to, the best interests of the
Company, and their conduct does not constitute gross negligence, misconduct or
breach of fiduciary obligations. To further implement the permitted
indemnification, we have entered into Indemnity Agreements with our officers and
directors.
Continued Control by Current Officers and Directors
- ---------------------------------------------------
The present officers and directors own the majority of the outstanding shares of
the Company's common stock, and therefore are in a position to elect all of our
Directors and otherwise control the Company, including, without limitation,
authorizing the sale of equity or debt securities of the Company, the
appointment of officers, and the determination of officers' salaries.
Shareholders have no cumulative voting rights.
Management of Potential Growth
- ------------------------------
We anticipate rapid growth, which will place a significant strain on our
managerial, operational, and financial systems resources. To accommodate our
current size and manage growth, we must continue to implement and improve our
financial strength and our operational systems, and expand, train and manage our
sales and distribution base. There is no guarantee that we will be able to
effectively manage the expansion of our operations, or that our facilities,
systems, procedures or controls will be adequate to support our expanded
operations. Our inability to effectively manage our future growth would have a
material adverse effect on the Company.
Limited Market Due to Penny Stock
- ---------------------------------
The Company's stock differs from many stocks, in that it is a "penny stock." The
Securities and Exchange Commission has adopted a number of rules to regulate
"penny stocks." These rules include, but are not limited to, Rules 3a5l-l,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and
Exchange Act of 1934, as amended. Because our securities probably constitute
"penny stock" within the meaning of the rules, the rules would apply to us and
our securities. The rules may further affect the ability of owners of our stock
to sell their securities in any market that may develop for them. There may be a
limited market for penny stocks, due to the regulatory burdens on
broker-dealers. The market among dealers may not be active. Investors in penny
stock often are unable to sell stock back to the dealer that sold them the
stock. The mark-ups or commissions charged by the broker-dealers may be greater
than any profit a seller may make. Because of large dealer spreads, investors
may be unable to sell the stock immediately back to the dealer at the same price
the dealer sold the stock to the investor. In some cases, the stock may fall
quickly in value. Investors may be unable to reap any profit from any sale of
13
the stock, if they can sell it at all. Stockholders should be aware that,
according to the Securities and Exchange Commission Release No. 34- 29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. These patterns include: - Control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; -
Manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; - "Boiler room" practices involving high
pressure sales tactics and unrealistic price projections by inexperienced sales
persons; - Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and - The wholesale dumping of the same securities by
promoters and broker- dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with consequent
investor losses. Furthermore, the "penny stock" designation may adversely affect
the development of any public market for the Company's shares of common stock
or, if such a market develops, its continuation. Broker-dealers are required to
personally determine whether an investment in "penny stock" is suitable for
customers. Penny stocks are securities (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an
issuer with net tangible assets less than $2,000,000 (if the issuer has been in
continuous operation for at least three years) or $5,000,000 (if in continuous
operation for less than three years), or with average annual revenues of less
than $6,000,000 for the last three years. Section 15(g) of the Exchange Act, and
Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to
provide potential investors with a document disclosing the risks of penny stocks
and to obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor's account. Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Rule 15g-9 of the Commission requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for the Company's stockholders to
resell their shares to third parties or to otherwise dispose of them.
Item 3. CONTROLS AND PROCEDURES
As of September 30, 2004, under the supervision and with the participation of
management, including the chief executive officer and the chief financial
officer, the Company has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures. Based on our evaluation, our chief
executive officer and our chief financial officer concluded that these controls
and procedures are effective in alerting them in a timely manner to material
information required to be disclosed in the reports that we file with the SEC.
There have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 - Changes in Securities
(a) None.
(b) None.
(c) During the nine months ended September 30, 2004, the Company
issued a total of 8,132,902 shares of common stock in exchange
for $795,437 in cash, net of costs and $3,017,500 for services
of consultants and employees. The issuance is considered
exempt from registration by reason of the Section 4(2) of the
Securities Act of 1933.
14
(d) On November 19, 2003 the company filed a registration under
Form S-8 for an Employee Stock Option Plan (ESOP) and a
Non-Employee Consultants Stock Option Plan. The ESOP
registered 1,250,000 Non-employee free trading shares and
500,000 employee free trading shares. On August 13, 2004, the
Company amended the ESOP and registered 1,770,000 Non-employee
free trading shares and 2,230,000 employee free trading
shares. The total number of shares registered in the S-8 was
5,750,000 shares of which 778,000 had not been issued to
employees and non-employees as of September 30, 2004. On
September 30, 2004, the ESOP Committee, made up of the Board
of Directors of the Company, voted and approved an amendment
to the plan to eliminate all payment for the past issued
shares and any remaining un-issued shares in the plan at the
end of the period. This action resulted in $3,017,500
subscriptions receivable from employees and non-employee to be
charged to expenses for services during the period ended
September 30, 2004. The fair market value of the shares issued
was determined to be $.50 per share at the time of issue
according to the ESOP Committee.
(e) None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
(1) Certification by Vito A. Peppitoni
(2) Certification by Sylvia Quintero
Exhibit (32) Section 1350 Certifications
(1) Certification by Sylvia Quintero
(2) Certification by Vito A. Peppitoni
(b). Reports on Form 8-K
None.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
ARIZONA AIRCRAFT SPARES, INC.
Date: November 12, 2004 By: /s/ Vito A. Peppitoni
-------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November12, 2004 By: /s/ Sylvia Quintero
-------------------------------------
Chief Operating Officer
Principal Accounting and Financial Officer
16