UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-30503
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AVSTAR AVIATION GROUP, INC.
(Exact name of registrant as specified in its charter)
Colorado 76-0635938
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 Gessner, Suite 220, Houston, Texas 77063
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (281) 710-7103
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently computed second fiscal
quarter: $351,449.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 103,049,542 as of June 14, 2010
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment to Form 10-K is being filed solely to reflect an employment
agreement with our principal executive officer and the effects of several stock
issuances during the earlier part of 2010 that were overlooked prior to the
filing of the Form 10-K. To bring our stock ownership more current, another
stock issuance occurring subsequent to the filing of the Form 10-K is also
reflected in this Amendment. Other than for the preceding, no other changes are
being made to the Form 10-K.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those described in this Annual Report on Form
10-K and in our other Securities and Exchange Commission filings.
PART I
ITEM 1. BUSINESS.
GENERAL
Our company, AvStar Aviation Group, Inc., is a Colorado corporation that
was organized on March 11, 1997. For a number of years, we conducted business
as an independent energy company focused on exploration and development of oil
and natural gas reserves. For reasons given hereinafter, in early 2009 we
adopted a significant change in our corporate direction. We decided to focus
our efforts on acquiring aviation related businesses and developing these
businesses to their commercial potential.
In connection with the change in our business focus, we undertook the
following activities:
* We entered into a Share Exchange Agreement fully executed on February
20, 2009 (the "Exchange Agreement") by and between us and
AvStar Aviation Services, Inc. ("AvStar Services"), providing for
our acquisition of all of the outstanding common stock in San
Diego Airmotive ("SDA"), which (through its predecessor entity) has
been providing maintenance, repair and overhaul ("MRO") services in
California since 1987. For more information about the business of
SDA, see "Our Business" below. In connection with this acquisition,
we issued to AvStar Services, the prior owner of SDA, 1.0
million shares of our newly-created series A preferred stock
("Series A Preferred Stock"), which shares then constituted in
the aggregate over 90% of outstanding economic interest and
voting power in us.
2
* We expanded our Board of Directors from one member to a current
number of three members and elected Henry A. Schulle, James H.
Short and Russell Ivy to fill the current Board seats. For more
information about our directors, see "Item 10. Directors, Executive
Officers, Promoters, Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act" below.
* All of our then serving officers resigned, and we elected a new slate
of officers, who currently include the following persons in
the offices indicated to the right of their respective names:
Russell Ivy Chief Executive Officer & President
Henry A. Schulle Vice President & Secretary
Robert Wilson Vice President & Chief
Financial Officer
For more information about our officers, see "Item 10. Directors,
Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance With Section 16(a) of the Exchange Act"
below.
* We amended and restated our Articles of Incorporation to change our
corporate name from "Pangea Petroleum Corp." to "AvStar Aviation
Group, Inc." to reflect our new business focus, and to effect a one-
for-100 reverse split of our common stock to improve our capital
structure. In connection with this reverse stock split, the 1.0
million shares of Series A Preferred Stock issued to AvStar Services
automatically converted into 50.0 million shares of common stock.
Prior to the consummation of the Exchange, there were no material
relationships between us, and our former officers, directors, affiliates,
associates or shareholders, and AvStar Services, and its officers, directors,
affiliates, associates or shareholders.
RECENT EVENTS
On March 31, 2010, the Hangar Sublease dated May 1, 2007 between SDA and
French Valley Aviation, Inc. ("French Valley") terminated. The original term of
this Hangar Sublease had already expired, and the parties had continued the
sublease on a month-to-month basis. French Valley decided that it did not want
to continue this arrangement beyond March 31, 2010, and accordingly this
arrangement terminated on such date. The Company decided not to seek
alternative space to continue SDA's services at French Valley Airport in
Southern California, but intends to continue such services in Florida, per the
proposed transaction described immediately below. The Company intends to
maintain in force and effect SDA's licenses and permits so that the Company can
return to provide services in California in the future, if it elects to do so.
3
On April 8, 2010, (a) Twin Air Calypso Services, Inc., a newly-formed,
indirect wholly-owned Florida subsidiary (the "Operating Subsidiary") of the
Company, and (b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of
sale whereby MAMCO assigned to the Operating Subsidiary certain of its assets
used to provide aviation MRO services. These assets were assigned in
consideration of 750,000 shares of the Company's common stock. In connection
with the organization of the Operating Subsidiary, SDA had previously assigned
all of its assets to the Operating Subsidiary in consideration of all of the
shares of the common stock of the Operating Subsidiary to be outstanding for the
foreseeable future. The Operating Subsidiary was formed to provide aviation MRO
services, as well as airline support services. The services will be offered out
of North Perry Field in Hollywood, Florida in Broward County, Florida. The
impetus for the transaction was the recent termination of SDA's Hangar Sublease
at French Valley Airport in Southern California and the perception that the
continuation of the business historically conducted by SDA in Florida was
advisable in view of the perceived greater strength of the local Florida economy
relative to the local California market in which SDA has historically provided
services.
The consideration for the acquisition of the interests in the MAMCO assets
(including the number of shares issued to MAMCO) was determined in arms-length
negotiations between the Company's management and MAMCO's management. The
factors addressed by the Company in negotiating this consideration included the
Company's need to find a location to continue the business historically
conducted by SDA; the perceived greater strength of the local Florida economy
relative to the local California market in which SDA has historically provided
services; the future prospects for a business using the combined assets of MAMCO
and SDA in Florida in terms of revenues and earnings; an assessment of the
ability of a particular member of MAMCO's management who would serve as the
Operating Subsidiary's president to contribute to the management of the
Operating Subsidiary's business; anticipated ability of the Company's business
to grow and take advantage of new business opportunities using the combined
assets of MAMCO and SDA in Florida; and the restricted nature of the stock
consideration issued in connection with the acquisition.
Prior to the consummation of the acquisition of the MAMCO assets, the
Company had explored with the shareholders of MAMCO the Company's acquisition of
all of the outstanding stock in MAMCO and a brother-sister corporation. In this
connection, the Company had entered into a stock purchase agreement with the
shareholders of MAMCO in 2007 to acquire the outstanding stock in MAMCO and the
brother-sister corporation. This transaction did not close timely, and the
stock purchase agreement expired. The Company and the shareholders of MAMCO
have continued to explore a transaction akin to the one provided for by the
expired stock purchase agreement, and have entered into a letter of intent in
this regard in December 2009. With the Company's acquisition of the MAMCO
assets, the letter of intent will no longer cover the acquisition of MAMCO, but
it remains in effect with regard to the brother-sister corporation. No
definitive agreement has been entered into in connection with this letter of
intent. There can be no assurance that the entry into a definitive agreement in
this regard or the completion of the acquisition of the brother-sister
corporation will occur.
Our Business
General
Our business plan is to acquire, consolidate and grow businesses in the
general aviation industry. We will place our initial focus on the maintenance,
repair and overhaul (MRO) of aircraft providing products and services for the
general aviation sector. We believe that since September 11, 2001, both private
air transportation and the number of aircraft owned by both individuals and
business have dramatically increased, subject to some decreased cause by the
recent United States recession. Each of these sectors, in addition to routine
maintenance, has mandated a number of inspections by the FAA that are commonly
included in traditional MRO services.
4
Our operating subsidiaries and their predecessor entities have been
operating as MRO's since 1987. Our operating subsidiaries historically provided
MRO services for single and multi-engine aircraft. As capital is available to
us, we intend to grow our business through the expansion of our existing MRO
business as well as by acquisitions of existing MRO's, fixed base operations
(FBO), charter operations and other operational aircraft related businesses.
Services
Through our operating subsidiaries, we now offer our customers the
following major services:
* Annual and 100-hour FAA (Federal Aviation Administration)
inspections,
* Depot level maintenance which means all service, maintenance,
repair, rebuilding and inspections of light to medium single and
multi-engine aircraft,
* Maintenance on business jet aircraft,
* FAA mandated phase inspections for turbine airframes,
* Engine and propeller maintenance for piston and turbine engines,
* Airframe and sheet metal repair,
* Crash damage repairs,
* Pre-purchase inspections,
* Installation of STC (supplemental type certificate) approved
accessory items,
* FAA field approvals for minor to major modifications, and
* Special flight permits, also know as ferry permits, issued by
the FAA Flight Standards District Office which permit the transport
of an aircraft that may not currently meet all the applicable
airworthiness requirements but is capable of safe flight from
one location to another, and other FAA matters including the
acquisition of replacement aircraft documents and assisting FAA
inspectors in accident investigations as may be specifically
requested.
Location
The business of our Operating Subsidiary is located at North Perry Field in
Hollywood, Florida in Broward County, Florida. The Operating Subsidiary is
currently using the facilities described hereinafter pursuant to a verbal
licensing agreement with the current tenant. However, the process to cause the
Operating Subsidiary to become a tenant under the related lease has been
commenced, and we see no problem at this time in completing this process. The
sub-leased hangar for the MRO business of our Operating Subsidiary is located on
a lease of 10.3 acres and has parking area for over 80 aircraft. The floor
space is approximately 5,000 square feet with an additional 350 square feet of
avionic test benches and parts storage. The hangar is of concrete, block, and
steel construction with a clear span opening of 100' by 20'. The aircraft
population on North Perry Field is approximately 275. There are two other FAA
Part 145 Certified Repair Stations on North Perry Field; one specializes in
rotor-wing aircraft only, and the other is a factory-owned support facility for
Socata Aircraft. We will be the only airframe, engine, and avionics repair
facility catering to the local and transient general aviation fixed-wing owners.
Additionally, we will provide avionics installations for the manufacturers we
currently represent, AVIDYNE, NAT Avionics, and PS Engineering. We expect to
apply soon for additional dealerships, such as GARMIN. We will also be
providing AVGAS fueling services for based and transient customers. There are
approximately 20 aircraft currently based at our facility. With the
availability of fuel the number of based aircraft should increase quickly and
significantly. There is only one other full-service and one self-service fueling
facility on North Perry Field.
5
Customers Base
Because of our recent move from southern California to the Florida market,
we are in the process of developing new customer relationships. We have "jump
started" our transition by establishing an exclusive maintenance, fueling and
ground support contract with Twin Air Calypso Limited, Inc., an FAA Certified
Part 135 Air Carrier operating seven aircraft principally to the Bahamas.
Although we can have no assurance in this regard, we believe that this business
relationship should maintain revenues at historical levels, and we are guardedly
optimistic that we will expand on these revenues as Twin Air Calypso Limited,
Inc. purchases additional services from us and we are able to sell services to
other third parties in the vicinity. However, we will remain heavily reliant on
this business relationship for the foreseeable future.
Competition
The market for our products and services are extremely competitive, and we
fac competition from a number of sources. Our competitors include aircraft
service companies and other companies providing MRO services. We believe that
our experienced staff, facility amenities, scope of services, availability of
parts, and focus on customer service increase SDA's competitiveness. Most of
our competitors, however, have substantially greater financial and other
resources than are available to us. We cannot assure anyone that competitive
pressures will not materially adversely affect our business, financial
conditions or results of operations or that we will ever attain any competitive
position within our market.
Government Regulation
The aviation industry in the United States is highly regulated by the FAA.
The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft equipment operated in the United States. FAA regulations are designed
to ensure that all aircraft and aircraft equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. All aircraft must
be maintained under a continuous condition-monitoring program and must
periodically undergo thorough inspection and maintenance. The inspection,
maintenance and repair procedures for the various types of aircraft and aircraft
equipment are prescribed by regulatory authorities and can be performed only by
certified repair facilities using certified technicians.
Our Florida subsidiary, the Operating Subsidiary, is providing services
pursuant to a Federal Aviation Administration FAR Part 145 certificate issued to
Miami Aviation Maintenance Co., whose assets the Operating Subsidiary recently
acquired. Although not now active from a business perspective, our California
subsidiary, SDA, holds a Federal Aviation Administration FAR Part 145
certificate, which we will maintain in the event we decide to re-enter the
California market.
Our operations are also subject to a variety of worker and community safety
laws. The Occupational Safety and Health Act ("OSHA") mandates general
requirements for safe workplaces for all employees. Specific safety standards
have been adopted for workplaces engaged in the treatment, disposal and storage
of hazardous waste. We are also subject to various environmental laws including
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Clean Air Act, the Federal Water Pollution Control Act of 1972, the
Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act,
the Toxic Substances Control Act, the Emergency Planning and Community
Right-to-Know Act, the California Hazardous Waste Control Law, the California
Solid Waste Management, Resource, Recovery and Recycling Act, the California
Water Code and the California Health and Safety Code.
We believe that our operations are in material compliance with all of these
laws, rules and regulations.
6
Product Liability
Our business exposes us to possible claims for personal injury or death
that may result from the failure of an aircraft or an aircraft part repaired or
maintained by us or from our negligence in the repair or maintenance of an
aircraft or aircraft part. While we maintain what we believes to be adequate
liability insurance to protect us from claims of this type, we cannot assure
anyone that claims will not arise in the future that may exceed available
coverages or that our insurance coverage will be adequate. Additionally, there
are no assurances that insurance coverages will be maintained in the future at
an acceptable cost. Any liability of this type that is not covered by adequate
insurance could materially adversely affect our business and operations.
Employees
As of June 15, 2010, we had four full-time employees, five part-time
employees, and one full-time consultant.
Our Historical Business
Our historical business involved the exploration and production of oil and
gas. The importance of this segment of business to our business as a whole is
greatly diminished. Management is currently exploring options for the future of
this business, which may include a sale of it or a spin-off of it to
shareholders, so that management can devote its entire attention to our
business.
Item 1A. Risk Factors.
An investment in shares of our common stock is highly speculative and
involves a high degree of risk. You should carefully consider all of the risks
discussed below, as well as the other information contained in this Annual
Report. If any of the following risks develop into actual events, our business,
financial condition or results of operations could be materially adversely
affected and the trading price of our common stock could decline.
RISKS RELATING TO OUR BUSINESS
------------------------------
WE HAVE LIMITED HISTORY OF OPERATIONS AND WE CANNOT ASSURE YOU THAT OUR BUSINESS
MODEL WILL BE SUCCESSFUL IN THE FUTURE OR THAT OUR OPERATIONS WILL BE
PROFITABLE.
We changed our business focus near the end of February 2009 when we
acquired the operations of San Diego Airmotive ("SDA"). Although SDA (through
its predecessor entity) has been providing maintenance, repair and overhaul
services in California since 1987, we are fairly new to this business.
Accordingly, investors have a limited history of operations upon which to
evaluate our business. There can be no assurances whatsoever that we will be
able to successfully implement our business model, identify and close
acquisitions of operating companies, penetrate our target markets or attain a
wide following for our services. We are subject to all the risks inherent in an
early stage enterprise which has experienced rapid growth through acquisitions
and our prospects must be considered in light of the numerous risks, expenses,
delays, problems and difficulties frequently encountered in those businesses.
WE HAVE HAD A HISTORY OF LOSSES, AND WE HAVE A WORKING CAPITAL DEFICIT AND AN
ACCUMULATED DEFICIT. WE MAY NEVER REPORT PROFITABLE OPERATIONS.
We have incurred net losses since our inception, and we had a working
capital deficit of approximately $325,733, an accumulated deficit of
approximately $20,411,003, and our total liabilities exceeded our total assets
by $867,859, all as of December 31, 2009. There can be no assurance that we
will become profitable. Our business has had a history of losses as well.
Unless we are able to raise additional capital to fund our operating expenses,
pay our obligations as they become due and implement our business model, we may
not be able to continue as a going concern, and we could be forced to
discontinue some or all of our operations if our capital resources become
exhausted by losses or expenditures.
7
OUR AUDITOR HAS GIVEN TO US A "GOING CONCERN" QUALIFICATION, WHICH QUESTIONS OUR
ABILITY TO CONTINUE AS A GOING CONCERN WITHOUT ADDITIONAL FINANCING.
Our independent certified public accountant has added an emphasis paragraph
to its report on our consolidated financial statements for the year ended
December 31, 2009 regarding our ability to continue as a going concern. Key to
this determination is our historical losses of $988,990 in 2009 and $312,682 in
2008. Management plans to try to fund our company partially through the raising
of capital through the sale of our equity instruments or issuance of debt,
although there can be no assurance of success in this regard. Moreover,
management plans on additional revenues from operations from our business as a
source to finance our company, although there can be no assurance of that these
revenues will materialize at the expected rates. There can be no assurance that
we will be successful in achieving these objectives, becoming profitable or
continuing our business without either a temporary interruption or a permanent
cessation.
THE RECENT RELOCATION OF OUR BUSINESS PRESENTS A NUMBER OF CHALLENGES AND MAY
NOT PROVE TO BE SUCCESSFUL OR CAUSE US TO BECOME PROFITABLE.
As discussed in "Item 1 - Business - Recent Events," we recently relocated
our business from the French Valley Airport in Southern California to North
Perry Field in Hollywood, Florida. This relocation presents a number of
challenges, such as implementing new operational procedures, working with new
personnel, and developing new customer bases. We have already been successful
in establishing a new customer relationship that we believe gives to us a
foothold in our new market. However, this new customer relationship involves
its own risks. (See "OUR OPERATIONS WILL DEPEND IN THE NEAR FUTURE ON A SINGLE
CUSTOMER" immediately below.) There can be no assurance that we will be able to
succeed in implementing changes required by our re-location, or that we will be
able to achieve positive cash flow or profitable operations as a result of this
change in the location of our business.
OUR BUSINESS WILL DEPEND IN THE NEAR FUTURE ON A SINGLE CUSTOMER.
We have established an exclusive maintenance, fueling and ground support
contract with Twin Air Calypso Limited, Inc., an FAA Certified Part 135 Air
Carrier operating 7 aircraft principally to the Bahamas. We expect to be
constrained to rely heavily on our relationship with this customer in the near
future. If Twin Air Calypso Limited, Inc. breaches or terminates its agreement
with us or otherwise fails to perform its obligations in a timely manner, our
business operations and finances could be materially and adversely affected, and
we could be forced to cease our operations.
THE STOCK OF OUR OPERATING SUBSIDIARY IS PLEDGED TO SECURE CERTAIN INDEBTEDNESS,
AND THIS PLEDGE EXPOSES US TO THE POTENTIAL LOSS OF THE OWNERSHIP OF OUR
OPERATING SUBSIDIARY.
When we acquired all of the outstanding common stock in SDA, such stock was
subject to a pledge to secure certain indebtedness incurred by AvStar Services
(the seller of the SDA stock to us) in connection with AvStar Services' prior
acquisition of the SDA stock from TexCom, Inc. ("Texcom"). Such indebtedness
was originally scheduled to be paid off completely in early 2009, but AvStar
Services fell behind in payments; so we acquired the SDA stock subject to the
pledge. Moreover, our management (which is also the management of AvStar
Services) owns 20.2% of our outstanding voting stock. Texcom has agreed to
extend the due date of the indebtedness until the middle of October 2010.
Moreover, we currently have a good working relationship with Texcom, and Texcom
has been flexible in dealing with this situation. However, we have no assurance
that this relationship and flexibility will continue. Moreover, this
indebtedness has fallen into default in the past, and Texcom appears to have the
usual rights of a secured creditor, which seem to include (in the case of a
future default) the right to compel the sale of the SDA stock to satisfy the
indebtedness in default or else to retain the SDA stock in full satisfaction of
such indebtedness if we do not object. The exercise of such rights could result
in the loss of all or significant portion of the SDA stock, which would almost
certainly have a material and adverse effect on our business operations and
finances and could force us to cease our operations.
8
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL WHEN NECESSARY OR ON TERMS THAT
ARE ACCEPTABLE TO US, IF AT ALL. IF WE ARE SUCCESSFUL IN RAISING ADDITIONAL
CAPITAL AS NECESSARY, THESE ADDITIONAL FINANCING TRANSACTIONS WILL BE DILUTIVE
TO OUR SHAREHOLDERS AND COULD INCREASE OUR INTEREST EXPENSE.
We expect that we will need significant additional cash resources to
operate and expand our business in the future. Our future capital requirements
will depend on many factors, including our ability to significantly increase our
revenues, maintain or reduce our operating expenses and execute our business and
strategic plans as currently conceived. If we raise additional funds through
the issuance of equity or convertible debt securities, the percentage ownership
of our company held by existing shareholders will be reduced and those
shareholders may experience significant dilution. In addition, new securities
may contain certain rights, preferences or privileges that are senior to those
of our common stock. There can be no assurance that acceptable financing can be
obtained on suitable terms, if at all. If we are unable to raise additional
working capital as needed, our ability to continue our current business will be
adversely affected and may be forced to curtail some or all of our operations.
OUR INDUSTRY IS HEAVILY REGULATED AND WE MAY FAIL TO COMPLY WITH ALL SUCH
REGULATIONS. ANY FAILURE BY US COULD REQUIRE US TO INCUR SUBSTANTIAL COSTS IN
COMPLYING WITH SUCH REGULATION AND WE COULD BE FORCED TO CEASE OUR OPERATIONS.
The aviation industry is subject to extensive regulation by the Federal
Aviation Administration (FAA). In addition, our business is subject to numerous
federal, state and local laws, regulations and policies governing environmental
protection and other matters. Although we believe that we are presently in
material compliance with applicable laws and regulations, there is no assurance
that we are correct or that our operations will be deemed to be in compliance in
the future. We may not be able to comply with current laws and regulations, or
any future laws and regulations. To the extent that new regulations are
adopted, we will be required to conform our activities in order to comply with
such regulations. We may be required to incur substantial costs in order to
comply. Our failure to comply with applicable laws and regulations could
subject us to civil remedies, including fines, injunctions, recalls or seizures,
as well as potential criminal sanctions which could have a material and adverse
effect on our business operations and finances and we could be forced to cease
our operations.
WE MAY NOT HAVE SUFFICIENT INSURANCE COVERAGE TO PROTECT US FROM LIABILITY
CLAIMS.
Our business exposes us to possible claims for personal injury or death
that may result if we were negligent in repairing an airplane. We cannot assure
you that claims will not arise in the future or that our insurance coverage will
be adequate to protect us in all circumstances. Additional, we cannot assure
you that we will be able to maintain adequate insurance coverage sin the future
at an acceptable cost. Any liability claim not covered by adequate insurance
will adversely affect our business, financial condition and results of
operations.
9
OUR FINANCIAL PERFORMANCE MAY BE ADVERSELY AFFECTED BY COMPETITION.
We expect our market to be intensely competitive. The majority of our
anticipated competitors will be more established, benefit from greater market
recognition and have substantially greater financial, marketing and other
resources than we do. In addition, larger competitors may be able to absorb the
burden of any changes in federal, state and local laws and regulations more
easily than we can, which would adversely affect our competitive position.
Moreover, some of our competitors have been operating in our core area for a
long time and have demonstrated the ability to operate through industry cycles.
Intense competition could materially adversely affect our business, results of
operations and financial condition.
IF WE GROW OUR BUSINESS AS PLANNED, WE MAY NOT BE ABLE TO MANAGE PROPERLY OUR
GROWTH, AND WE EXPECT OPERATING EXPENSES TO INCREASE, WHICH MAY IMPEDE OUR
ABILITY TO ACHIEVE PROFITABILITY.
If we are successful in growing our business as we plan, our operations may
expand rapidly and significantly. Any rapid growth could significantly strain
on our management, operational and financial resources. In order to manage the
growth of our operations, we will be required to expand existing operations; to
improve on a timely basis existing and implement new operational, financial and
inventory systems, procedures and controls, including improvement of our
financial and other internal management systems; and to train, manage and expand
our employee base. If we are unable to manage growth effectively, our business,
results of operations and financial condition will be materially adversely
affected. In addition, if we are successful in growing our business as we plan,
we expect operating expenses to increase, and as a result, we will need to
generate increased quarterly revenue to achieve and maintain profitability. In
particular, as we grow our business, we would incur additional costs and
expenses related to:
* The expansion of our sales force and distribution channels
* The expansion of our product and services offerings
* Development of relationships with strategic business partners
* The expansion of management and infrastructure
* Brand development, marketing and other promotional activities.
These additional costs and expenses could delay our ability to achieve
profitability.
FUTURE ACQUISITIONS COULD EXPOSE US TO NUMEROUS RISKS.
As part of our business strategy, we may acquire complementary companies,
products, services or technologies. Any acquisition would be accompanied by the
risks commonly encountered in a transaction. Such risks include the following:
* Difficulty of assimilating the operations and personnel of the
acquired companies
* Potential disruption of our ongoing business
* Inability of management to maximize our financial and strategic
position through the successful incorporation of acquired
businesses and technologies
* Additional expenses associated with amortization of acquired
intangible assets
* Maintenance of uniform standards, controls, procedures and policies
* Impairment of relationships with employees, customers, vendors and
advertisers as a result of any integration of new management
personnel
* Potential unknown liabilities associated with acquired businesses
10
There can be no assurance that we would be successful in overcoming these
risks or any other problems encountered in connection with such acquisitions.
Due to all of the foregoing, any future acquisition may materially and adversely
affect our business, results of operations, financial condition and cash flows.
Although we do not expect to use cash for acquisitions, we may be required to
obtain additional financing if we choose to use cash in the future. There can be
no assurance that such financing will be available on acceptable terms. In
addition, if we issue stock to complete any future acquisitions, existing
stockholders will experience further ownership dilution.
WE HIGHLY DEPEND ON OUR CURRENT MANAGEMENT. THE LOSS OF ANY MEMBER OF OUR
CURRENT MANAGEMENT COULD HARM OUR ABILITY TO EXECUTE OUR BUSINESS PLAN.
Our success depends heavily upon the continued contributions of current
management. The loss of the services of one or more of our members of
management could materially adversely affect our business, operating results and
financial condition. No member of our management, other than our principal
executive officer, has entered into an employment agreement. Moreover, the
employment agreement that our principal executive officer has entered into
seemingly may be terminated by him upon notice to us, and it does not contain a
covenant not to compete agreement with us. As a result, any member of our
management may discontinue providing his services to us at any time and for any
reason, and even thereafter commence competition with us. We cannot guarantee
that we will be able to retain our key personnel. Moreover, we currently have
no key person insurance on any members of management.
OUR CURRENT MANAGEMENT RESOURCES MAY NOT BE SUFFICIENT FOR THE FUTURE, AND WE
HAVE NO ASSURANCE THAT WE CAN ATTRACT ADDITIONAL QUALIFIED PERSONNEL.
There can be no assurance that the current level of management is
sufficient to perform all responsibilities necessary or beneficial for
management to perform. Our future success also depends on our continuing
ability to attract, assimilate and retain highly qualified sales, technical and
managerial personnel. Competition for these individuals is intense, and there
can be no assurance that we can attract, assimilate or retain necessary
personnel in the future.
ONE STOCKHOLDER OWNS A CONTROLLING PERCENTAGE OF OUR VOTING STOCK, AND
CUMULATIVE VOTING IS NOT AVAILABLE TO STOCKHOLDERS.
AvStar Aviation Services, Inc. ("AvStar Services") and its shareholders
collectively own an aggregate of approximately 48.5% of our outstanding voting
stock. Moreover, our management (which is also the management of AvStar
Services) owns 20.2% of our outstanding voting stock. Cumulative voting in the
election of Directors is not provided for. Accordingly, AvStar Services has the
ability to elect all of our Board of Directors. AvStar Services' large
percentage ownership of our outstanding voting stock essentially vests fully in
it full control of our company.
11
WE WILL BE REQUIRED TO COMPLY WITH SECTION 404 OF THE SARBANES OXLEY ACT OF
2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, in connection
with this Annual Report and future Annual Reports, we are and will be required
to furnish a report by management on our internal controls over financial
reporting which will contain, among other matters, an assessment of the
effectiveness of our internal control over financial reporting, including a
statement as to whether or not our internal control over financial reporting is
effective. This assessment must include disclosure of any material weaknesses
in our internal control over financial reporting identified by our management.
Based on current information, we expect that in 2010, Section 404 will require
that our independent auditors also provide an attestation on management's
assertion of internal control over financial reporting. During the evaluation
and testing process, if we identify one or more material weaknesses in our
internal control over financial reporting, we will be unable to assert that such
internal control is effective. If we are unable to assert that our internal
control over financial reporting is effective or if in the future our auditors
are unable to attest that our management's report is fairly stated or they are
unable to express an opinion on the effectiveness of our internal controls, we
could lose investor confidence in the accuracy and completeness of our financial
reports. Furthermore, we expect that our compliance with the regulatory
requirements described herein will likely increase our legal and professional
expenses.
RISKS RELATED TO OUR COMMON STOCK
WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN
THE ABSENCE OF WHICH, SHAREHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has
resulted in the adoption of various corporate governance measures designed to
promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges are those that
address board of directors' independence, audit committee oversight, and the
adoption of a code of ethics. Although we have adopted a Code of Ethics, we
have not yet adopted any of these other corporate governance measures and, since
our securities are not yet listed on a national securities exchange, we are not
required to do so. We have not adopted corporate governance measures such as an
audit or other independent committees of our board of directors as we presently
do not have any independent directors. If we expand our board membership in
future periods to include additional independent directors, we may seek to
establish an audit and other committees of our board of directors. It is
possible that if we were to adopt some or all of these corporate governance
measures, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that
policies had been implemented to define responsible conduct. For example, in
the absence of audit, nominating and compensation committees comprised of at
least a majority of independent directors, decisions concerning matters such as
compensation packages to our senior officers and recommendations for director
nominees may be made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should bear in mind
our current lack of corporate governance measures in formulating their
investment decisions.
12
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKEOVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR SHAREHOLDERS.
Provisions of our certificate of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our shareholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of Texas law also may be deemed to
have certain anti-takeover effects which include that control of shares acquired
in excess of certain specified thresholds will not possess any voting rights
unless these voting rights are approved by a majority of a corporation's
disinterested shareholders.
In addition, our certificate of incorporation authorizes the issuance of up
to 10,000,000 shares of preferred stock with such rights and preferences, as may
be determined by our board of directors. Of this authorized preferred stock, no
shares are currently issued and outstanding. Our board of directors may,
without shareholder approval, issue up to 10,000,000 preferred stock with
dividends, liquidation, conversion or voting rights that could adversely affect
the voting power or other rights of our common shareholders.
OUR COMMON STOCK HAS EXPERIENCED ONLY EXTREMELY LIMITED TRADING.
During the prior fiscal year, our common stock was quoted and traded on the
OTC Electronic Bulletin Board and the Pink Sheets under the symbol "AAVG."
Presently, our common stock is quoted and traded only on the Pink Sheets but we
intend to apply later in 2010 to resume quotations and trading on the OTC
Electronic Bulletin Board. Frequently, the volume of trading in our common
stock has been light, and the prices and volumes at which our common stock has
traded have fluctuated fairly widely on a percentage basis. Until shares of our
common stock become more broadly held and orderly markets develop and even
thereafter, the prices of our common stock may fluctuate significantly. Prices
for our common stock will be determined in the marketplace and may be influenced
by many factors, including the following:
* The depth and liquidity of the markets for our common stock;
* Investor perception of us and the industry in which we
participate;
* General economic and market conditions;
* Responses to quarter-to-quarter variations in operating results;
* Failure to meet securities analysts' estimates;
* Changes in financial estimates by securities analysts;
* Conditions, trends or announcements in our industry;
* Announcements of significant acquisitions, strategic alliances,
joint ventures or capital commitments by us or our competitors;
* Additions or departures of key personnel;
* Sales of our common stock;
* Accounting pronouncements or changes in accounting rules that affect
our financial statements; and
* Other factors and events beyond our control.
The market price of our common stock could experience significant
fluctuations unrelated to our operating performance. As a result, a stockholder
(due to personal circumstances) may be required to sell such stockholder's
shares of our common stock at a time when our stock price is depressed due to
random fluctuations, possibly based on factors beyond our control.
13
THE TRADING PRICE OF OUR COMMON STOCK MAY ENTAIL ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
The trading price of our common stock historically has been below $5.00
per share. As a result of this price level, trading in our common stock is
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934. These rules require additional disclosure by
broker-dealers in connection with any trades generally involving any non-NASDAQ
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such rules require the delivery, before any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must determine the suitability of the penny
stock for the purchaser and receive the purchaser's written consent to the
transaction before sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
our common stock. As a consequence, the market liquidity of our common stock
could be severely affected or limited by these regulatory requirements.
STOCKHOLDERS HAVE NO GUARANTEE OF DIVIDENDS.
The holders of our Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. To date, we have paid no cash dividends. The Board of Directors
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in our business operations. If
we obtain additional financing, our ability to declare any dividends will
probably be limited contractually.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our principal executive offices are located in approximately 2,000 square
feet of executive office space. Persons with whom our management has other
business relationships are providing this space to us on a gratuitous, at-will
basis. If this arrangement were to end, we would be required to start paying
rent, or find alternative space, or both.
For information about our operational facilities, see "Item 1 - Business -
Location."
Item 3. Legal Proceedings.
We are not presently a party to any pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2009.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
During the prior fiscal year, our common stock was quoted and traded on the
OTC Electronic Bulletin Board and the Pink Sheets under the symbol "AAVG."
Presently, our common stock is quoted and traded only on the Pink Sheets but we
intend to apply later in 2010 to resume quotations and trading on the OTC
Electronic Bulletin Board. The following table sets forth certain information
as to the high and low bid quotations quoted on the OTC Bulletin Board through
the end of August 2009 and the Pink Sheets thereafter for the fiscal years ended
December 31, 2008 and December 31, 2009. Information with respect to
over-the-counter bid quotations represents prices between dealers, does not
include retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions. Prices in the table take into account the
one-for-100 reverse split of our common stock.
14
Common Stock
------------
2008 High Low
---- ---- ---
First Quarter $0.49 $0.25
Second Quarter $0.50 $0.28
Third Quarter $0.49 $0.08
Fourth Quarter $0.15 $0.05
Common Stock
------------
2009 High Low
---- ---- ---
First Quarter $0.14 $0.05
Second Quarter $0.20 $0.06
Third Quarter $0.12 $0.022
Fourth Quarter $0.13 $0.0125
As of April 27, 2010, we had approximately 290 common shareholders of
record and 103,049,542 common shares outstanding.
We have not paid any cash dividends on the common stock, and we do not
intend to pay any dividends prior to the consummation of a business
combination.
During November 2009, we issued an aggregate of 10.1 million shares of its
common stock for the following purposes:
* 4.0 million shares were issued to Russell Ivy, the Company's
president, as a sign-on bonus
* 2.5 million shares were issued to Greg Noble, the Company's former
vice president and a former Company director, as promised
compensation for his service as a Company officer
* 1.5 million shares were issued to Robert Wilson, a Vice President
and the Company's Chief Financial Officer, in lieu of cash
compensation
* 1.475 million shares were issued to Henry L. Schulle, an
outside consultant, in lieu of cash compensation for past and
future services
* An aggregate of 300,000 shares were issued to the Company's
three directors (100,000 shares each) for services as such
* 250,000 shares were issued to an attorney for legal services
previously provided having a value to be determined
* 75,000 shares were issued to a registered securities broker
dealer for services in connection with a capital raising
transaction
The preceding issuances to Messrs. Ivy, Noble and Wilson were made pursuant to
Board of Director approval on October 5, 2009 when the Company's common stock
closed at a per-share price of $.06.
During December 2009, the Company issued 723,157 shares of its common stock
to Henry L. Schulle in cancellation of debt in the amount of $137,399 owed by
the Company to him.
During January 2010, the Company issued 600,000 shares of its common stock
to CMS Capital to resolve temporarily certain disagreements that this firm had
with the Company.
15
During February 2010, the Company issued 521,052 shares of our common stock
to two Trusts for the benefit of Henry L. Schulle in lieu of cash compensation
for past services provided by him and another 200,000 shares as reimbursement
for certain expenses that he advanced on our behalf.
On March 19, 2010, the Company issued 15.0 million shares of its common
stock to Russell Ivy, the Company's president and Chief Executive Officer, in
connection with the re-negotiation of this officer's verbal employment agreement
(including a salary reduction) and the memorialization of this agreement in
writing. These shares were issued as an inducement to Mr. Ivy to enter into
the written employment agreement.
Moreover, the Company issued an aggregate of 21.0 million shares of its
common stock to three persons holding interests in a convertible promissory note
in exchange for an aggregate of $52,500 of the indebtedness represented by this
note. Of these shares, 14.0 million were issued near the end of March 2010, and
7.0 million were issued about the third week of April 2010.
During April 2010, the Company agreed to issue 750,000 shares of its common
stock to Miami Aviation Maintenance Co. in consideration of the assignment of
certain of its assets to a newly-formed, indirect wholly-owned Florida
subsidiary of the Company.
All of the issuances of shares described in this Item are claimed to be
exempt pursuant to Rule 506 of Regulation D under the Securities Act of 1933
(the "Act"), and (in the case of issuances to Company officers and directors)
Section 4(2) of the Act. No advertising or general solicitation was employed in
offering these securities. The offering and sale was made only to accredited
investors, and subsequent transfers were restricted in accordance with the
requirements of the Act.
Equity Compensation Plans
We currently do not have any equity compensation plans under which our
equity securities are authorized for issuance.
Item 6. Selected Financial Data.
Not applicable.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
We have historically been an independent energy company focused on
exploration and development of oil and natural gas reserves, whose core business
is directed to the development of oil and gas prospects in proven onshore
production areas. We have adopted a significant change in its corporate
direction. We have decided to focus our efforts on acquiring aviation related
businesses and developing these businesses to their commercial potential.
Our business plan is to acquire, consolidate and grow businesses in the
general aviation industry. We will place our initial focus on the maintenance,
repair and overhaul (MRO) of aircraft providing products and services for the
general aviation sector. We believe that since September 11, 2001, both private
air transportation and the number of aircraft owned by both individuals and
business have dramatically increased. Each of these sectors, in addition to
routine maintenance, has mandated a number of inspections by the FAA that are
commonly included in traditional MRO services.
16
Our operating subsidiaries and their predecessor entities have been
operating as MRO's since 1987. Our operating subsidiaries historically provided
MRO services for single and multi-engine aircraft. As capital is available to
us, we intend to grow our business through the expansion of our existing MRO
business as well as by acquisitions of existing MRO's, fixed base operations
(FBO), charter operations and other operational aircraft related businesses.
RESULTS OF OPERATIONS
With the current price of oil, none of wells are producing sufficient to
support our operations. To that end, a decision was made to enter into a Share
Exchange Agreement fully by and between AvStar Aviation Services, Inc. ("AvStar
Services") and us, providing for our acquisition of all of the outstanding
common stock in San Diego Airmotive ("SDA"), which (through its predecessor
entity) has been providing maintenance, repair and overhaul ("MRO") services in
California since 1987.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of its financial condition and results of
operations as of December 31, 2009 are based upon its consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates. We base the estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. These
estimates and assumptions provide a basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions, and these differences may be material.
We believe the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
OIL AND GAS PRODUCING ACTIVITIES
We follow the "successful efforts" method of accounting for our oil and gas
properties. Under this method of accounting, all property acquisition costs
(cost to acquire mineral interests in oil and gas properties) and costs (to
drill and equip) of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves in commercial quantities,
the costs associated with the well are charged to expense. The costs of
development wells are capitalized whether productive or nonproductive.
Geological and geophysical costs and the costs of carrying and retaining
undeveloped properties are expensed as incurred. Management estimates the
future liability for plugging and abandonment of the related wells.
17
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the average holding period. Capitalized costs
of producing oil and gas properties after considering estimated dismantlement
and abandonment costs and estimated salvage values are depreciated and depleted
by the unit-of-production method. On the sale or retirement of a complete unit
of a proved property, the cost and related accumulated depreciation, depletion,
and amortization are eliminated from the property accounts, and the resultant
gain or loss is recognized. On the retirement or sale of a partial unit of
proved property, the cost is charged to accumulated depreciation, depletion, and
amortization with a resulting gain or loss recognized in the statement of
operations.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
OIL AND GAS REVENUES
Oil and gas revenues are recorded under the sales method. We recognize oil
and gas revenues as production occurs. As a result, we accrued revenue relating
to production for which we have not received payment.
COMPARISON OF YEAR ENDED DECEMBER 31, 2009 TO YEAR ENDED DECEMBER 31, 2008.
Financial results for the year ended December 31, 2009 are not directly
comparable to financial results for the year ended December 31, 2008. During
2008, the Company had only limited participation interests in various oil and
gas wells. During the first quarter of 2009, the Company completed the
acquisition of San Diego Airmotive ("SDA"), which provides maintenance, repair
and overhaul ("MRO") services of aircraft in California. This acquisition
greatly affected the financial results for the year ended December 31, 2009
compared to the financial results for the year ended December 31, 2008.
REVENUES. Revenues were $666,196 in 2009 (consisting of $660,947 in
revenues from aviation operations from SDA and $5,249 in revenues from oil and
gas operations) compared to revenue of $29,404 in 2008 consisting solely of
revenues from oil and gas operations. These revenues represent a great increase
from revenues for the 2008, which resulted solely from oil and gas interests,
inasmuch as the Company did not own SDA at any time during 2008. The decrease
in oil and gas revenues from 2008 to 2009 resulted from a decrease in
production.
EXPENSES. Costs and expenses increased to $1,609,598 in 2009 from $220,070
in 2008. This increase in costs and expenses reflects the following:
* $460,581 in costs of goods sold in the 2009 from SDA's operation
compared to $19,154 in costs of goods sold in 2008 when the
Company had more limited activity
* $380,264 in selling, general and administrative expenses in 2009
compared to $193,717 in these expenses in 2008 when the Company had
more limited activity
* $137,613 in depletion and depreciation in 2009 compared to $5,335 in
these expenses in 2008 as the Company wrote down a majority of its
oil and gas assets in 2009
* $631,000 in stock based compensation in 2009 compared to no such
expense in 2008
The increase in costs and expenses was partially offset as interest expense
declined in 2009 to $45,588 compared to $79,090 in 2008.
18
NET LOSS. Despite the considerable increase in revenues in 2009 compared
to 2008, the Company's net loss increased to $988,990 (or $.06 per share) in
2009 from $269,756 (or $-0- per share) in 2008 as expenses increased greatly,
particularly the non-cash expense of stock based compensation.
LIQUIDITY AND CAPITAL RESOURCES
Currently, we have limited financial ability to pursue our business plan.
We are currently trying to determine the scope of the business activities that
we will pursue in the foreseeable future. The amount of capital that we will
need depends on the scope of the business activities that we ultimately decide
to pursue. This scope is uncertain at this time. However, we know that we must
obtain additional financing to pursue our business plan at any level that we are
likely to pursue. We are currently searching for sources of financing, but we
currently do not have any binding commitments for, or readily available sources
of, financing. We cannot assure anyone that financing will be available to us
when needed or, if available, that such financing can be obtained on
commercially reasonably terms. If we do not obtain financing we will be
constrained to contract the scope of our business plan. Under certain
circumstances, we may be constrained to attempt to sell some of our assets.
However, we cannot assure anyone that we will be able to find interested buyers
or that the funds received from any such sale would be adequate to fund our
activities. Under certain circumstances, we could be forced to cease our
operations and liquidate our remaining assets, if any.
We have outstanding the following notes that became due and payable on
December 1, 2008. These notes have an aggregate principal amount totaling
$607,271 and aggregate accrued interest of $99,197 as of May 20 2010. We are
currently exploring ways to satisfy these amounts.
(a) Note payable to Mary Pollock Merritt, daughter of our former chief
executive officer. This note bears interest at rates of 12% per year
and became due on December 31, 2008. This note is not
collateralized. The current outstanding balance on this note as of
May 20, 2010 was $94,191, plus accrued interest.
(b) Note payable to Charles Pollock, our former chief executive officer and
a significant stockholder of ours. This note bears interest of 12% per
year and became due on December 31, 2008. This note is not
collateralized. The current outstanding balance on this note as of
May 20 2010 was $400,911, plus accrued interest.
(c) Note payable to Mark Weller, our former president and a significant
stockholder of ours. This note bears interest of 12% per year and
became due on December 31, 2008. This note is not collateralized. The
outstanding balance on this note as of May 20 2010 was $112,169,
plus accrued interest.
OFF-BALANCE SHEET ARRANGEMENTS
During the year ended December 31, 2009, we had no off balance sheet
arrangements.
Item 7A Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
19
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AvStar Aviation Group, Inc.
Houston, Texas
I have audited the accompanying consolidated statements of financial position of
AvStar Aviation Group, Inc. as of December 31, 2009 and 2008, and the related
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with standards of the Public Company
Accounting Oversight Board (placecountry-regionUnited States). Those standards
require that I plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor was I engaged to perform, an audit of its internal
control over financial reporting. My audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, I express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AvStar Aviation Group,
Inc. as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the placecountry-regionUnited States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant losses and will
require additional capital to develop its business until the Company either (1)
achieves a level of revenues adequate to generate sufficient cash flows from
operations; or (2) obtains additional financing necessary to support its working
capital requirements. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Clay Thomas, P.C.
www.claythomaspc.com
- --------------------
Houston, Texas
April 14, 2010
Clay Thomas, P.C.
www.claythomaspc.com
Houston, Texas
April 14, 2010
F-1
AVSTAR AVIATION GROUP, INC.
BALANCE SHEET
December 31, 2009
ASSETS
Current assets
Cash 4,565
Accounts receivable 23,950
Parts and inventory 27,916
Prepaid expenses 8,301
------
Total Current Assets 64,732
Property and equipment:
Fixed assets 56,657
Investment in subsidiary 60,988
-------
Total Fixed Assets 117,645
-------
Total assets $ 182,377
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable 164,403
Accrued interest payable to related parties 99,197
Notes payable to related parties 11,900
Accrued liability 114,965
------
Total current liabilities 390,465
Long term debt to related parties 659,771
--------
Total liabilities 1,050,236
Stockholders' deficit:
Preferred stock: $.001 par value; 10,000,000
shares authorized, none issued and outstanding -
Common stock: $.001 par value; 500,000,000
shares authorized; 15,728,490 shares
issued and outstanding 400,599
Additional paid-in capital 19,142,545
Accumulated deficit (20,411,003)
-----------
Total stockholders' deficit (867,859)
-----------
Total liabilities and stockholders' deficit 182,377
===========
F-2
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2009 and 2008
2009 2008
Revenue from o\aviation operations 660,947 -
Oil and gas revenue 5,249 29,404
---------------------------
666,196 29,404
Costs and expenses:
Cost of goods sold 460,581 19,154
Production tax 140 1,864
Selling, general and administrative,
including stock based compensation 380,264 193,717
Dry hole costs 0 0
Depletion and depreciation 137,613 5,335
Stock based compensation 631,000 0
---------------------------
Total costs and expenses 1,609,598 220,070
---------------------------
Loss from operations (943,402) (190,666)
Other income and (expenses):
Interest expense (45,588) (79,090)
Settlement income - -
----------------------------
Net loss (988,990) (269,756)
============================
Weighted average common shares outstanding 15,728,490 298,865,393
Basic and diluted net loss per common share (0.06) (0)
F-3
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Years ended December 31, 2009 and 2008
Additional Total
Common Stock Paid-In Accumulated Deferred Stockholders'
Shares Amount Capital Deficit Compensation Deficit
Balance at
December 31,
2005 222,676,886 222,677 17,257,178 (17,778,287) (296,432)
Common stock
issued for
cash 13,700,000 13,700 171,300 185,000
Common stock
issued for
exercise of
cashless
warrants 2,296,434 2,296 (2,296)
Common stock
issued to
compensate
employees and
consult-
ants 34,239,244 34,240 585,881 (4,247) 615,874
Common stock
issued for
Asset
Purchase
Agreement 20,000,000 20,000 150,000 170,000
Cancellation
of shares
under
Securities
Purchase
Agreement
dated Dec.
31,2001 (11,653,998) (11,654) 11,654
Net loss (1,010,931) (1,010,931)
--------------------------------------------------------------------
Balance at
December 31,
2006 281,258,566 281,259 (8,173,717) (18,789,218) (4,247) (338,489)
F-4
Common stock
issued to
compensate
employees and
consult-
ants 25,080,978 25,081 200,112 4,247 229,440
Net loss (402,979) (402,979)
--------------------------------------------------------------------
Balance at
December 31,
2007 306,339,544 306,340 18,373,829 (19,192,197) $0 (512,028)
Stock issued for
compensation 49,160,000 49,160 49,160 0 175,234
Common Stock issued
for property
acquisition 10,000,000 10,000 10,000 32,000
Net (Income) / Loss (330,555) (330,555)
-----------------------------------------------------------------
Balances as of
December 31,
2008 365,499,544 365,500 18,432,989 0 (635,350)
Add stock
issued for
services 125,000,000 125,000 360,594 485,594
Reverse stock
split 1 for
100 (485,594,446)(485,594) 485,594
Stock issued
for service
post-split 235 - -
Acquisition of
subsidiary 50,000,000 50,000 709,907 (719,834) 40,073
Stock issued
for compen-
sation 10,100,000 10,100 482,439 492,439
Stock issued
for payment
of loan HLS
issue
12/4/09 723,157 723 136,676 137,399
Imputed interest - - 25,481 25,481
Net income (loss) (988.990) (988,990)
-----------------------------------------------------------------
Balance as of
December 31,
2009 65,726,490 65,720 20,237,001 (21,231,577) (928,847)
===================================================================
F-5
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2009 and 2008
2009 2008
Cash flows from operating activities:
Net loss (989,990) (312,682)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depletion and depreciation expense 5,335
Impairment of oil and gas properties 42,926
Dry hole expense -
Plug and abandonment costs -
Stock-based compensation 149,924
Changes in assets and liabilities: 11,900
Accounts receivable 5,694 (1,844)
Prepaid expenses - -
Accounts payable and accrued liabilities 141,746 (35,259)
Other 20,107 (7,020)
---------------------------
Net cash (used in) operating activities (809,543) (158,620)
Cash flows (used in) investing activities:
Capital and exploratory expenditures 149,339 31,768
Cash flows from financing activities:
Proceeds from the sale of common stock 655,741 -
Proceeds from notes payable 126,729
----------------------------
Net cash provided by financing activities 655,741 126,729
----------------------------
Net change in cash and cash equivalents (4,463) (123)
Cash and cash equivalents at beginning of year 9,028 0
----------------------------
Cash and cash equivalents at end of year 4,565 (123)
============================
F-6
AVSTAR AVIATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
- ------------
AvStar Aviation Group, Inc. (the "Company") is a Colorado corporation that has
historically engaged in oil and gas exploration and development. The Company was
originally incorporated in 1997 as Zip Top, Inc. and subsequently adopted a name
change to Pangea Petroleum Corporation. On April 26, 2000, the Company was
recapitalized when the Company acquired the non-operating public shell, Segway
II Corporation. Segway II Corporation had no significant assets or liabilities
at the date of acquisition and, accordingly, the transaction was accounted for
as a recapitalization. In February 2009, the Company adopted a significant
change in its corporate direction by deciding to focus its efforts on acquiring
aviation related businesses and developing these businesses to their commercial
potential. The Company subsequently changed its name to AvStar Aviation Group,
Inc. on September 21, 2009.
Our company, AvStar Aviation Group, Inc., is a Colorado corporation that was
organized on March 11, 1997. For a number of years, we conducted business as an
independent energy company focused on exploration and development of oil and
natural gas reserves. For reasons given hereinafter, in early 2009 we adopted a
significant change in our corporate direction. We decided to focus our efforts
on acquiring aviation related businesses and developing these businesses to
their commercial potential.
In connection with the change in our business focus, we undertook the following
activities:
We entered into a Share Exchange Agreement fully executed on February 20, 2009
(the "Exchange Agreement") by and between us and AvStar Aviation Services, Inc.
("AvStar Services"), providing for our acquisition of all of the outstanding
common stock in San Diego Airmotive ("SDA"), which (through its predecessor
entity) has been providing maintenance, repair and overhaul ("MRO") services in
California since 1987. For more information about the business of SDA, see "Our
Business" below. In connection with this acquisition, we issued to AvStar
Services, the prior owner of SDA, 1.0 million shares of our newly-created series
A preferred stock ("Series A Preferred Stock"), which shares constituted in the
aggregate over 90% of outstanding economic interest and voting power in us.
Prior to the consummation of the Exchange, there were no material
relationships between us, and our former officers, directors, affiliates,
associates or shareholders, and AvStar Services, and its officers, directors,
affiliates, associates or shareholders.
F-7
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Derivative Values and Hedging. This guidance resolves issues
addressed in Statement 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets". This
Statement permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006. Its
adoption did not have a material impact on the Company's financial condition or
results of operations.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Fair Value Measurements and Disclosures which establishes a formal
framework for measuring fair value under GAAP. It defines and docifies the many
definitions of fair value included among various other authoritative literature,
clarifies and, in some instances, expands on the guidance for implementing fair
value measurements, and increases the level of disclosure required for fair
value measurements. Although SFAS 157 applies to and amends the provisions of
existing FASB and AICPA pronouncements, it does not, of itself, require any new
fair value measurements, nor does it establish valuation standards. SFAS 157
applies to all other accounting pronouncements requiring or permitting fair
value measurements, except for SFAS No. 123 (F), share-based payment and related
pronouncements, the practicability exceptions to fair value determinations
allowed by various other authoritative pronouncements, and AICPA Statements of
Position 97-2 and 98-9 that deal with software revenue recognition. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Management does not believe the adoption of SFAS 157 will have a
material impact on the Company's financial condition or results of operations.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Financial Instruments which is an elective, irrevocable election to
measure eligible financial instruments and certain other assets and liabilities
at fair value on an instrument-by-instrument basis. The election may only be
applied at specified election dates and to instruments in their entirety rather
than to portions of instruments. Upon initial election, the entity reports the
difference between the instruments' carrying value and their fair value as a
cumulative-effect adjustment to the opening balance of retained earnings. At
each subsequent reporting date, an entity reports in earnings, unrealized gains
and losses on items for which the fair value option has been elected. SFAS 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and is applied on a prospective basis. Early adoption of
SFAS 159 is permitted provided the entity also elects to adopt the provisions of
SFAS 157 as of the early adoption date selected for SFAS 159. The Company has
elected not to adopt the provisions of SFAS 159 at this time.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Income Taxes which clarifies the accounting for uncertainty in
income taxes recognized in financial statements in accordance with FASB 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The provisions of
FIN 48 are effective for fiscal years beginning after December 15, 2006, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The adoptions of this pronouncement
did not have a material effect on the financial position or results of
operations of the Company.
F-8
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Business Combinations to increase the relevance, representational
faithfulness, and comparability of the information a reporting entity provides
in its financial reports about a business combination and its effects. SFAS 141R
replaces SFAS 141, " Business Combinations " but, retains the fundamental
requirements of SFAS 141 that the acquisition method of accounting be used and
an acquirer be identified for all business combinations. SFAS 141R expands the
definition of a business and of a business combination and establishes how the
acquirer is to: (1) recognize and measure in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquired company; (2) recognize and measure the goodwill
acquired in the business combination or a gain from a bargain purchase; and (3)
determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is applicable to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, and is to be applied
prospectively. Early adoption is prohibited. SFAS 141R will impact the Company
only if it elects to enter into a business combination subsequent to December
31, 2008.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Non-Controlling Interests to improve the relevance, comparability,
and transparency of the financial information a reporting entity provides in its
consolidated financial statements. SFAS 160 amends ARB 51 to establish
accounting and reporting standards for noncontrolling interests in subsidiaries
and to make certain consolidation procedures consistent with the requirements of
SFAS 141R. It defines a noncontrolling interest in a subsidiary as an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 changes the way the consolidated
income statement is presented by requiring consolidated net income to include
amounts attributable to the parent and the noncontrolling interest. SFAS 160
establishes a single method of accounting for changes in a parent's ownership
interest in a subsidiary which does not result in deconsolidation. SFAS 160 also
requires expanded disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. SFAS 160 shall be applied
prospectively, with the exception of the presentation and disclosure
requirements which shall be applied retrospectively for all periods presented.
The Company does not believe that the adoption of SFAS 160 would have a material
effect on its consolidated financial position, results of operations or cash
flows.
ACCOUNTING ESTIMATES
- ---------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the country-regionplaceUnited States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates mainly involve the useful lives of property and equipment, the
impairment of unproved oil and gas properties, the valuation of deferred tax
assets and the realizability of accounts receivable.
CASH AND CASH EQUIVALENTS
- ----------------------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased to
be cash equivalents.
F-9
OIL AND GAS PRODUCING ACTIVITIES
- ------------------------------------
The Company follows the "successful efforts" method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs (cost to acquire mineral interests in oil and gas properties) and costs
(to drill and equip) of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves in commercial quantities,
the costs associated with the well are charged to expense. The costs of
development wells are capitalized whether productive or nonproductive.
Geological and geophysical costs and the costs of carrying and retaining
undeveloped properties are expensed as incurred.
Effective January 1, 2009, AvStar Aviation adopted the authoritative guidance
for Asset Retiremetn and Environmental Obligations which requires entities to
record the fair value of a liability for asset retirement obligations ("ARO") in
the period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. The present value of the estimated asset
retirement cost is capitalized as part of the carrying amount of the long-lived
asset and is depreciated over the useful life of the asset. The Company accrues
an abandonment liability associated with its oil and gas wells when those assets
are placed in service. The ARO is recorded at its estimated fair value and
accretion is recognized over time as the discounted liability is accreted to its
expected settlement value. Fair value is determined by using the expected future
cash outflows discounted at the Company's credit adjusted risk-free interest
rate. No market risk premium has been included in the Company's calculation of
the ARO balance. The Company's ARO liability at December 31, 2009 was $0.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and, if necessary, a loss is
recognized by providing an impairment allowance. The Company recorded $137,613
and $42,926 of impairment expense in the years ended December 31, 2009 and 2008,
respectively. Other unproved properties are amortized based on the Company's
average holding period.
Capitalized costs of producing oil and gas properties after considering
estimated dismantlement and abandonment costs and estimated salvage value, are
depreciated and depleted by the unit-of-production method. On the sale or
retirement of a complete unit of proved property, the cost and related
accumulated depreciation, depletion, and amortization are eliminated from the
property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in the statement of operations.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
OTHER PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 5 years for office
furniture and equipment and transportation and other equipment. Additions or
improvements that increase the value or extend the life of an asset are
capitalized. Expenditures for normal maintenance and repairs are expensed as
incurred. Disposals are removed from the accounts at cost less accumulated
depreciation and any gain or loss from disposition is reflected in operations.
F-10
OIL AND GAS REVENUES
- -----------------------
Revenues from the sale of oil and natural gas are recognized when the product is
delivered at a fixed or determinable price, title has transferred,
collectibility is reasonably assured and evidenced by a contract. The Company
follows the "sales method" of accounting for its oil and natural gas revenue, so
it recognizes revenue on all natural gas or crude oil sold to purchasers,
regardless of whether the sales are proportionate to its ownership in the
property. A receivable or liability is recognized only to the extent that the
Company has an imbalance on a specific property greater than the expected
remaining proved reserves
IMPAIRMENT OF LONG-LIVED ASSETS
- ----------------------------------
In the event facts and circumstances indicate the carrying value of a long-lived
asset, including associated intangibles, may be impaired, an evaluation of
recoverability is performed by comparing the estimated future undiscounted cash
flows associated with the asset to the asset's carrying amount to determine if a
write-down to fair market value or discounted cash flow is required. Based upon
a recent evaluation by management, an impairment write-down of the Company's
long-lived assets was recorded to write such assets down to their estimated net
realizable value resulting in an impairment expense of $137,613 and $42,926 in
2009 and 2008, respectively.
STOCK BASED COMPENSATION
- --------------------------
Effective January 1, 2009, AvStar Aviation adopted the authoritative guidance
for Stock Compensation which established financial accounting and reporting
standards for stock based employee compensation plans. It defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. In January 2006, the Company implemented SFAS No. 123R, and
accordingly, the Company accounts for compensation cost for stock option plans
in accordance with SFAS No. 123R.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
- ------------------------------------------------------
Financial instruments which subject the Company to concentrations of credit risk
include cash and cash equivalents and accounts receivable. The Company has
concentrated its credit risk for cash by maintaining deposits in a financial
institution, which may at times exceed the amounts covered by insurance provided
by the United States Federal Deposit Insurance Corporation ("FDIC") The Company
has not experienced any losses on deposits. During the years ended December 31,
2009 and 2008, 100% of the Company's revenues were received from five customers.
INCOME TAXES
- -------------
The Company uses the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against defe rred tax
assets, based upon management's assessment as to their realization.
BASIC AND DILUTED NET LOSS PER SHARE
- ------------------------------------------
Basic loss per share is computed using the weighted average number of shares of
common stock outstanding during each period. Diluted loss per share includes the
dilutive effects of common stock equivalents on an "as if converted" basis. For
the years ended December 31, 2009 and 2008, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
F-11
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flow.
2. GOING CONCERN CONSIDERATIONS
Since its inception, the Company has suffered recurring losses from operations
and has been dependent on existing stockholders and new investors to provide the
cash resources to sustain its operations. During the years ended December 31,
2009 and 2008, the Company reported losses of $(988,990) and $ (269756),
respectively. These conditions raise substantial doubt as to the Company's
ability to continue as a going concern.
The Company developed a multi-step plan and during 2008 and 2009 took actions to
improve its financial position and deal with its liquidity problems. The final
steps of the plan are still being developed, but may include additional private
placements of the Company's common stock, and efforts to raise additional debt
financing or equity offerings.
The Company's long-term viability as a going concern is dependent on certain key
factors, as follows:
- - The Company's ability to obtain adequate sources of outside financing to
support near term operations and to allow the Company to continue forward with
current strategic plans.
- - The Company's ability to ultimately achieve adequate profitability and cash
flows to sustain continuing operations.
The consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
3. OIL AND GAS PROPERTIES
Oil and gas properties consist of the following at December 31, 2009:
Oil and gas properties 309,074
Less accumulated depletion (271,953)
---------
Net oil and gas properties $ 37,121
=========
During the years ended December 31, 2009 and 2008, the Company recorded dry
hole, abandonment and impairment charges of $137,613 and $42,926, respectively.
At December 31, 2009, the Company has working interests in two wells.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2009:
Office equipment 3 to 5 years $33,174
Furniture and fixtures 3 to 5 years -
-------
33,174
Less accumulated depreciation (13,638)
-------
Net property and equipment $19,536
=======
F-12
5. INCOME TAXES
The Company has incurred losses since its inception and, therefore, has not been
subject to federal income taxes. As of December 31, 2009, the Company had net
operating loss ("NOL") carryforward for income tax purposes of approximately
$8,240,528, which expire in various tax years through 2027. Additionally,
because United States tax law limits the time during which NOL carryforwards may
be applied against future taxable income, the Company will, in all likelihood,
be unable to take full advantage of its NOL for federal income tax purposes
should the Company generate taxable income.
The composition of deferred tax assets and the related tax effects at December
31, 2009 are as follows:
Net operating losses $3,081,173
Less valuation allowance (3,081,173)
----------
Net deferred tax asset $
==========
6. COMMITMENTS AND CONTINGENCIES
LEASE
- -----
Our principal executive offices are located in approximately 2,000 square feet
of executive office space. Persons with whom our management has other business
relationships are providing this space to us on a gratuitous, at-will basis. If
this arrangement were to end, we would be required to start paying rent, or find
alternative space, or both.
EMPLOYMENT AGREEMENT
- ---------------------
The only employment agreement that we have entered into with one of our Named
Executive Officers is a verbal employment agreement with Russell Ivy, our Chief
Executive Officer and President, pursuant to which Mr. Ivy is to receive a
salary in the amount of $15,000 per month. Because of our lack of funds, Mr.
Ivy received none of his salary in 2009. In addition, Mr. Ivy received 4.0
million shares of our common stock as a sign-on bonus at a time when these
shares had a value of $240,000 based on the closing price of our shares on the
date of grant.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
- ----------------
The Company's articles of incorporation authorize the issuance of up to
10,000,000 shares of series preferred stock, with a par value of $.001 and other
characteristics determined by the Company's board of directors. As of December
31, 2009, there was no preferred stock issued or outstanding.
COMMON STOCK
- -------------
During the years ended December 31, 2009 and 2008, the Company issued shares for
cash under private placements of securities and as compensation to employees and
consultants.
During February 2009 we issued 1.0 million shares of our newly-created
series A preferred stock to AvStar Aviation Services, Inc. in consideration of
all of the outstanding common stock in San Diego Airmotive. These 1.0 million
shares of Series A Preferred Stock automatically converted into 50.0 million
shares of common stock on September 21, 2009.
F-13
During November 2009, we issued an aggregate of 10.1 million shares of its
common stock for the following purposes:
* 4.0 million shares were issued to Russell Ivy, the Company's
president, as a sign-on bonus
* 2.5 million shares were issued to Greg Noble, the Company's former
vice president and a former Company director, as promised
compensation for his service as a Company officer
* 1.5 million shares were issued to PersonNameRobert Wilson, a
Vice President and the Company's Chief Financial Officer, in
lieu of cash compensation
* 1.475 million shares were issued to Henry L. Schulle, an
outside consultant, in lieu of cash compensation for past and
future services
* An aggregate of 300,000 shares were issued to the Company's
three directors (100,000 shares each) for services as such
* 250,000 shares were issued to an attorney for legal services
previously provided having a value to be determined
* 75,000 shares were issued to a registered securities broker dealer
for services in connection with a capital raising transaction
During December 2009, the Company issued 723,157 shares of its common stock
to Henry L. Schulle in cancellation of debt in the amount of $137,399 owed by
the Company to him.
STOCK OPTIONS
- --------------
The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the success
of the Company's business and to enhance the ability to attract and retain the
services of qualified persons. The Board of Directors approves the issuance of
such options. The exercise price of an option granted is determined by the fair
market value of the stock on the date of grant.
A summary of the Company's stock option activity and related information for the
years ended December 31, 2009and 2008 follows:
NUMBER OF WEIGHTED
SHARES AVERAGE
UNDER EXERCISE EXERCISE
OPTION PRICE PRICE
----------------------------------------
Balance outstanding at
January 1, 2006 350,000 $ 0.200-$1.000 $ 0.56
Balance outstanding at
December 31, 2007 350,000 $ 0.200-$1.000 $ 0.56
Balance outstanding at
December 31, 2008 350,000 $ 0.200-$1.000 0.56
Balance outstanding at
December 31, 2009 350,000 $ 0.200-$1.000 0.56
All outstanding stock options are exercisable at December 31, 2009. A summary of
outstanding stock options at December 31, 2009 follows:
REMAINING
NUMBER OF COMMON EXPIRATION CONTRACTED
STOCK EQUIVALENTS DATE LIFE (YEARS) EXERCISE PRICE
50,000 May 2010 2.1 $0.500
100,000 May 2010 2.1 1.000
100,000 August 2010 2.6 0.200
100,000 January 2011 2.9 0.500
--------
350,000
=========
F-14
Effective June 1, 2005, the Company adopted the 2005 Equity Compensation Plan
(the "Plan") under which stock in lieu of cash compensation awards may be
granted from time to time to employees and consultants of the Company. The Plan
allows for grants to other individuals contributing to the success of the
Company at the discretion of the Company's board of directors. The purpose of
the Plan is to provide additional incentives to promote the success of the
Company and to enhance the Company's ability to attract and retain the services
of qualified individuals. The Company reserved 25,000,000 shares of stock for
issuance under the Plan. No further shares are currently available for
issuance pursuant to the Plan.
There are no non-vested shares at December 31, 2009.
STOCK WARRANTS
- ---------------
The Company did not grant any warrants in 2008 or 2009.
STOCK WARRANTS
- ---------------
A summary of the Company's stock warrant activity and related information for
the years ended December 31, 2009 and 2008 follows:
NUMBER OF WEIGHTED
SHARES AVERAGE
UNDER EXERCISE EXERCISE
WARRANT PRICE PRICE
-------------------------------------------------
Warrants outstanding at
December 31, 2005 22,589,487 $ 0.008-$3.75 0.015
Issued 9,000,000 $ 0.010-$0.015 0.014
Exercised (3,626,100) $ 0.007-$0.019 0.015
Expired (3,428,000) $ 3.75 0.016
----------
Warrants outstanding at
December 31, 2006 24,535,387 $ 0.008-$0.02 0.016
Issued 0
Exercised 0
Expired (0)
-----------
Warrants outstanding at
December 31, 2007 24,535,387 $ 0.008-$0.02 0.016
Issued 0
Exercised 0
Expired (0)
-----------
Warrants outstanding at
December 31, 2008 24,535,387 $ 0.008-$0.02 0.016
===========
Warrants outstanding at
December 31, 2009 24,535,387 $ 0.008-$0.02 0.016
All stock warrants are exercisable at December 31, 2009. A summary of
outstanding stock warrants at December 31, 2009 follows:
F-15
REMAINING
NUMBER OF COMMON CONTRACTED
STOCK EQUIVALENTS EXPIRATION LIFE EXERCISE
DATE (YEARS) PRICE
- ----------------------------------------------------------------
6,000 January 2010 1.6 0.010
3,000 February 2010 1.7 0.120
11,250 June 2010 1.9 0.008
20,000 January 2012 3.8 0.01
70,000 February 2012 3.9 0.015
---------
110,250
==========
F-15
8. SUBSEQUENT EVENTS
On March 31, 2010, the Hangar Sublease dated May 1, 2007 between San Diego
Airmotive ("SDA") and French Valley Aviation, Inc. ("French Valley") terminated.
The original term of this Hangar Sublease had already expired, and the parties
had continued the sublease on a month-to-month basis. French Valley decided that
it did not want to continue this arrangement beyond March 31, 2010, and
accordingly this arrangement terminated on such date. The Company decided not to
seek alternative space to continue SDA's services at French Valley Airport in
Southern California, but intends to continue such services in Florida, per the
proposed transaction described immediately below. The Company intends to
maintain in force and effect SDA's licenses and permits so that the Company can
return to provide services in California in the future, if it elects to do so.
On April 8, 2010, (a) Twin Air Calypso Services, Inc., a newly-formed,
indirect wholly-owned Florida subsidiary (the "Operating Subsidiary") of the
Company, and (b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of
sale whereby MAMCO assigned to the Operating Subsidiary certain of its assets
used to provide aviation MRO services. These assets were assigned in
consideration of 750,000 shares of the Company's common stock. In connection
with the organization of the Operating Subsidiary, SDA had previously assigned
all of its assets to the Operating Subsidiary in consideration of all of the
shares of the common stock of the Operating Subsidiary to be outstanding for the
foreseeable future. The Operating Subsidiary was formed to provide aviation MRO
services, as well as airline support services. The services will be offered out
of North Perry Field in Hollywood, Florida in Broward County, Florida.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period of this report, our principal executive and
principal financial officer 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 management, including our Chief Executive Officer and Principal Financial
Officer. We have concluded, based on that evaluation, that, as of such date,
the disclosure controls and procedures were not effective to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Although
the evaluation did not detect any material weaknesses in the Company's system of
internal accounting controls over financial reporting, management identified
significant deficiencies with respect to the timely public reporting of events
requiring such reporting. We are instituting corrective action to ensure that
such events are timely reported publicly.
Notwithstanding management's assessment that our internal control over financial
reporting was ineffective as of December 31, 2009, and the significant
deficiencies described above, we believe that the consolidated financial
statements included in this Annual Report on Form 10-K correctly present our
financial condition, results of operations and cash flows for the fiscal years
covered thereby in all material respects.
A controls system cannot provide absolute assurance, however, that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
using accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.
There were no adjustments at year-end and so management considers the controls
in place are adequate for the company.
Management uses a separation of function approach to insure adequate
controls. There was no material weakness identified during the preparation of
year-end financial reports.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal controls over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that the company to provide only management's report in
the annual report.
Changes in Internal Controls over Financial Reporting
During the fourth fiscal quarter of 2009, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
Our current directors and executive officers are as follows:
NAME AGE POSITIONS
- ---- --- ---------
Russell Ivy 43 Chief Executive Officer, President
and director
Henry A. Schulle 46 Vice President, Secretary, and
director
James H. Short 67 Director
Robert Wilson 53 Vice President and Chief Financial
Officer
The following is the background of our officers and directors:
RUSSELL IVY. Mr. Ivy has served as one of our directors and our Chief
Executive Officer and President since April 2009. Mr. Ivy has served as
President and Chief Executive Officer of AvStar Aviation Services, Inc., the
Company's controlling stockholder, since January 2009. From January 1996
through the present, he has been a principal of the Ivy Companies, several
companies that provided various merger and acquisition consulting services for
various operating entities both private and public. From September 2002 to May
2004, Mr. Ivy was a principal of Seafood Anywhere, LLC., a Houston-based startup
seafood distribution company supplying various types of seafood to restaurants
in the Houston, Austin, San Antonio, and Dallas areas. He earned a Bachelors
Degree in International Trade/Economics in 1991 from Texas Tech University.
HENRY A. SCHULLE. Mr. Schulle has served as one of our directors and our
Vice President and Secretary since February 2009. Mr. Schulle has served as
AvStar Services' Vice President and a member of AvStar Services' Board of
Directors since July 2006; from July 2006 until January 2008 he also served as
AvStar Services' President and Chairman of the Board of Directors. Since
January 8, 2004 he has served as Chairman of the Board of Directors and a
principal of Martex Trading Company, a privately held company active in the oil
and gas industry as well as real estate investments and development. Martex
Trading Company was the controlling member of Aurora Financial Services, LLC, a
FINRA-registered broker dealer that has acted as a placement agent for AvStar
Services. From December 2003 until July 2004 Mr. Schulle served as a member of
the Board of Directors of TexCom, Inc. (Pink Sheets: TEXC). AvStar Services
acquired San Diego Airmotive from TexCom, Inc. From January 1997 to November
2003, he was President and a Director of Texas Commercial Resources, Inc. (Pink
Sheets: TCRI) from its inception as a privately held company that merged with
EZUtilities in 2001. Mr. Schulle continued as an officer and director of Texas
Commercial Resources, Inc. through its subsequent successful combination with
Petrosearch Energy Corporation (OTCBB: PTSG), a Houston based energy company.
He served as Chairman of the Board of Unicorp, Inc., which was quoted on the OTC
Bulletin Board from November 1991 until January 1998. Mr. Schulle negotiated the
merger of Unicorp, Inc. with United States Refining Company, a diversified,
vertically integrated petroleum refining and petrochemical company that was
acquired by Houston American Energy Corp. in April 2001. From January 1998 to
July 2004, Mr. Schulle was employed by Dell Computer Corporation as a database
support specialist working on international assignments.
JAMES H. SHORT. Mr. Short has served as one of our directors since
February 2009. He has been a member of AvStar Services' Board of Directors
since July 2006. Since December 2003 he has served as a member of the Board of
Directors of TexCom, Inc. (Pink Sheets: TEXC). AvStar Services acquired San
Diego Airmotive from TexCom, Inc. He also served as a member of the Board of
Directors of Texas Commercial Resources, Inc. (Pink Sheets: TCRI) from 2001
until 2003. Mr. Short is currently a principal and Vice president of Finance &
Administration for Sabine Storage & Operations, Inc., an engineering and a
consulting firm specializing in the design, engineering, permitting,
construction management, and operations of hydrocarbon storage facilities in
subsurface salt dome formations. In addition, he is a principal and Vice
President of Marketing for Sabine Resources, Inc., a surface and mineral owner
of property having hydrocarbon storage potential in a salt dome formation. Mr.
Short was previously associated with Energy Consultants, Inc., a natural gas
marketing entity serving municipalities in South Illinois and Indiana, on an
independent contractor basis, from 1984 until 2001.From 1979 to 1984, he was
Senior Vice President and a director of Coronado Transmission Company with
responsibilities for gas acquisition, transportation, and sales throughout the
Southern States and Rocky Mountain area. Mr. Short served as Vice President of
Corporate Planning and Vice President of Gas Supply, Transportation and Sales of
Lovaca Gathering Company from 1972 to 1979. He was an employee of Cities Service
Oil Company from 1966 to 1972. Mr. Short holds a B.S. degree from the
University of Tennessee
ROBERT WILSON. Mr. Wilson has served as our Vice President and Chief
Financial Officer since April 2008. He has also served as AvStar Services' Vice
President and Chief Financial Officer since July 2004. Mr. Wilson also serves
as the Chief Financial Officer and Operations Principal for several broker
dealers and investment banking firms where his duties include compliance with
FINRA, SEC and NYSE rules and regulations, the design and implementation of
accounting and operations control procedures, representing firms as an expert
witness and with FINRA examinations. He currently serves as a director and audit
committee chairman for American Security Resources, Inc. and American Enterprise
Development Corporation and as a consultant with The Professional Directors
Institute. Mr. Wilson is a CPA and has over 15 years of experience as the owner
of a certified public accounting firm, was previously a member of the FINRA
Board of Arbitrators and has several FINRA and NYSE licenses. Mr. Wilson has
previously served as operations compliance manager of the AIM Management Group,
Vice President Compliance/Internal Audit of the Kemper Securities Group and an
auditor with Price Waterhouse. Mr. Wilson is a 1977 graduate of Houston Baptist
University and pursued additional studies at Georgetown University.
Our Board of Directors has three members. Each director serves a one-year
term that expires at the following annual meeting of stockholders. Executive
officers are appointed by the Board of Directors and serve until their
successors are appointed. There are no family relationships among our directors
or executive officers.
Corporate Governance
Our Board of Directors has not established any standing committees,
including an Audit Committee, Compensation Committee or a Nominating Committee.
The Board of Directors as a whole undertakes the functions of those committees.
The Board of Directors may establish one or more of these committees whenever it
believes that doing so would benefit us.
Code of Ethics
We adopted a Code of Ethics for our Principal Executive and Senior
Financial Officers on February 6, 2005. Anyone can obtain a copy of the Code of
Ethics by contacting us at the following address: 3600 Gessner, Suite 220,
Houston, Texas 77063, attention: Chief Executive Officer, telephone: (713)
914-9193. The first such copy will be provided without charge.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors, executive officers and persons who are the beneficial owners of
more than ten percent of our common stock (collectively, the "Reporting
Persons") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish us with copies of these
reports. To the best of our knowledge based solely on information available to
us, the following persons have failed to file, on a timely basis, the identified
reports required by Section 16(a) of the Exchange Act during fiscal year ended
December 31, 2009: Each of AvStar Aviation Services, Inc., Russell Ivy, Greg
Noble, Henry A. Schulle, James H. Short and Robert Wilson failed to file timely
their respective initial Form 3's; however, each of these persons (other than
Mr. Noble) filed a Form 3 prior to December 31, 2009. Thomas Mathew failed to
file his initial Form 3 and a Form 5 to correct the failure to file the Form 3.
Each of Russell Ivy and Robert Wilson failed to file a Form 4 regarding the
October 2009 grant to them of shares for their services as officers and a Form 5
to correct the failure to file the Form 4. Each of Russell Ivy, Henry A.
Schulle, and James H. Short failed to file a Form 4 regarding the October 2009
grant to them of shares for their services as directors and a Form 5 to correct
the failure to file the Form 4.
Item 11. Executive Compensation.
The following table sets forth the compensation we paid during the fiscal
years ended December 31, 2009 and 2008 to our principal executive officer and
any other executive officer whose total compensation exceeded $100,000. The
executive officers listed in the table below are referred to as the "Named
Executive Officers."
Summary Compensation Table (1)
Name and Year Salary ($) Bonus ($) Stock Awards ($) Total ($)
Principal Position
(a) (b) (c) (d) (e) (j)
Russell Ivy,
Chief Executive
Officer (2) 2009 $120,000 (3)$240,000(4) $6,000(5) $366,000
Gregory H. Noble,
Interim Chief Executive
Officer and Vice
President (6) 2009 $-0- $-0- $150,000(7) $150,000
Thomas Mathew,
Chief Executive
Officer (8) 2009 $-0- $-0- $-0- $-0-
Alan Premel
Chief Executive
Officer (9) 2008 $-0- $-0- $-0- $-0-
Charles B. Pollock,
Chief Executive
Officer (10) 2008 $-0- $-0- $-0- $-0-
(1) The Columns designated by the Securities and Exchange Commission for the
reporting of option awards, non-equity incentive plan compensation,
nonqualified deferred compensation earnings or all other compensation
have been eliminated as no such awards, compensation or earnings were
made to, earned by, or paid to or with respect to any person named in
the table during any fiscal year covered by the table.
(2) Mr. Ivy was elected Chief Executive Officer and President effective
April 30, 2009.
(3) All of this amount was accrued and not paid.
(4) The figure in the table is based on a sign-on bonus comprised of 4.0
million shares of our common stock multiplied by $.06, the closing
price of our common stock on the date of grant. These 4.0 million
shares had a value of $140,000 as of April 12, 2010, based on the
$.035 closing price of our common stock on that date.
(5) The figure in the table is based on a stock award for services as a
director comprised of 100,000 shares of our common stock multiplied by
$.06, the closing price of our common stock on the date of
grant.
(6) Mr. Nobel was elected Interim Chief Executive Officer effective April 3,
2009, and he served as such until April 30, 2009. He was elected Vice
President effective February 20, 2009, and he served as such
until October 5, 2009.
(7) The figure in the table is based on an issuance of 2.5 million shares of
our common stock to settle claims for compensation multiplied by
$.06, the closing price of our common stock on the date of grant.
These 2.5 million shares had a value of $87,500 as of April 12, 2010,
based on the $.035 closing price of our common stock on that date.
(8) Mr. Mathew was elected President effective December 31, 2008, and he
served as such until February 27, 2009.
(9) Mr. Premel was elected President effective December 23, 2008, and he
served as such until December 31, 2008.
(10) Mr. Pollock served as Chief Executive Officer and President until
December 23, 2008.
No options or unvested stock awards had been granted in favor of our Named
Executive Officers as of December 31, 2009.
Employment Agreements
The only employment agreement that we have entered into with one of our
Named Executive Officers is an employment agreement dated March 17, 2010 with
Russell Ivy, our president and Chief Executive Officer (the "Employment
Agreement"). The Employment Agreement has a one-year term, possibly subject to
earlier termination by either Mr. Ivy or us upon notice to the other. Under the
Employment Agreement, Mr. Ivy is to receive an annual salary of $37,500, which
represents a significant reduction from a salary that Mr. Ivy had heretofore
been receiving pursuant to a verbal employment agreement. Furthermore, per the
Employment Agreement, we agreed to issue to Mr. Ivy, 15.0 million shares of our
common stock as an inducement to Mr. Ivy to enter into the written employment
agreement. Mr. Ivy is also entitled to participate in any and all employee
benefit plans now existing or hereafter established for our employees, provided
that he meets the eligibility criterion therefor. The Employment Agreement
replaced verbal employment agreement with Mr. Ivy, our Chief Executive Officer
and President, pursuant to which Mr. Ivy was to receive a salary in the amount
of $15,000 per month. Because of our lack of funds, Mr. Ivy received none of
his salary in 2009, but all of his salary was accrued. In addition, Mr. Ivy
received 4.0 million shares of our common stock as a sign-on bonus at a time
when these shares had a value of $240,000 based on the closing price of our
shares on the date of grant.
DIRECTOR COMPENSATION
The following table sets forth director compensation paid during the fiscal
year ended December 31, 2009, not already reflected in the Summary Compensation
Table set forth above (1).
Stock Awards Total
Name ($) ($)
(a) (c) (h)
Henry A. Schulle $6,000(2) $6,000
James H. Short $6,000(2) $6,000
(1) The columns designated by the SEC for the reporting of certain fees
earned or paid in cash, option awards, non-equity incentive plan
compensation, nonqualified deferred compensation earnings or all other
compensation have been eliminated as no such awards, compensation or
earnings were made to, earned by, or paid to or with respect to any
person named in the table during fiscal 2009.
(2) The figure in the table is based on a stock award comprised of 100,000
shares of our common stock multiplied by $.06, the closing price of
our common stock on the date of grant.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The table sets forth below contains certain information as of April 27,
2010 concerning the beneficial ownership of our voting stock by each stockholder
who is known by us to own beneficially in excess of 5% of an outstanding class
of voting stock. Each of Russell Ivy, Henry A. Schulle and James H. Short are
officers and directors of AvStar Aviation Services, Inc. and thus may be deemed
to be the beneficial owners of the shares owned by such corporation, provided,
however, each of them has disclaimed beneficial ownership of such shares, and no
ownership of such shares is attributed to them in the table below.
In addition to the entries set forth in the table below, we are aware that
each of Real Time Interests, Inc. and Big Time Financial, Inc. (on or about
March 23, 2010), and Mary Merritt (on or about April 14, 2010) acquired 7.0
million of our shares of common stock, requiring them to report such share
ownership on a Schedule 13D or a Schedule 13G. To our knowledge, no such
filings were made by any of the three preceding persons. In addition, each of
these persons has placed its or her shares in "street" name, so that we are not
able to ascertain their continued ownership of our common stock, if any. As a
result, we are not in a position to include the beneficial ownership of any of
the three persons named in this paragraph.
Except as otherwise indicated, all persons listed below have (i) sole
voting power and investment power with respect to their shares, except to the
extent that authority is shared by spouses under applicable law, and (ii) record
and beneficial ownership with respect to their shares. Shares not outstanding
but deemed beneficially owned by virtue of the right of a person or member of a
group to acquire them within 60 days of April 27, 2010 are treated as
outstanding only for determination of the number and percent owned by such group
or person. Except as otherwise indicted, the address for all persons indicated
in the table is 3600 Gessner, Suite 220, Houston, Texas 77063.
Amount and Nature of Beneficial Ownership
Name of Beneficial Owner Number Percent
- ------------------------ ------ -------
Non-Management 5% Stockholders
- ------------------------------
AvStar Aviation Services, Inc. 50,000,000 48.5%
La Jolla IPO, Inc. (1)
7486 La Jolla Blvd., #360
La Jolla, CA 92037 6,000,000 5.8%
Directors and Executive Officers
- -----------------------------------
Russell Ivy 19,100,000 18.5%
Robert Wilson 1,500,000 1.5%
Henry A. Schulle 100,000 *
James A. Short 100,000 *
All directors and executive officers
as a group (four persons) 20,800,000 20.2%
(1) The information for this beneficial owner is derived from a Schedule 13G
filed with the SEC on May 3, 2010.
* Less than one percent
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
Except as described below, none of the following persons has any direct or
indirect material interest in any transaction to which we were or are a party
since the beginning of the last fiscal year, or in any proposed transaction to
which we propose to be a party:
(a) any of our directors or executive officers;
(b) any nominee for election as one of our directors;
(c) any person who is known by us to beneficially own, directly
or indirectly, shares carrying more than 5% of the voting rights
attached to our common stock; or
(d) any member of the immediate family (including spouse, parents,
children, siblings and in-laws) of any of the foregoing persons
named in paragraph (a), (b) or (c) above.
We entered into a Share Exchange Agreement fully executed on February 20,
2009 providing for our acquisition of all of the outstanding common stock in San
Diego Airmotive ("SDA"). In connection with this acquisition, we issued to
AvStar Aviation Services, Inc. ("AvStar Services"), the prior owner of SDA, 1.0
million shares of our series A preferred stock, which shares then constituted in
the aggregate over 90% of outstanding economic interest and voting power in us.
These 1.0 million shares of our series A preferred stock eventually converted
into 50.0 million shares of common stock. Each of Henry A. Schulle and James H.
Short (each now a director of ours, and in the cases of Mr. Schulle, an officer
as well) was a director or an officer or both of AvStar Services prior to the
completion of this transaction. Russell Ivy (now an officer and a director of
ours) became an officer and a director of AvStar Services after our acquisition
of SDA. For more information about this transaction, see "Item 1. Business -
General."
Independence of Directors
The rules of the American Stock Exchange (the "AMEX") generally require
that a listed company's Board of Directors be composed of a majority of
independent directors. However, these rules provide that a "smaller reporting
company" need only maintain a Board of Directors comprised of at least 50%
independent directors. Although we are not listed on the AMEX, we use the
standards established by the AMEX for determining whether or not each of our
directors is "independent." We have determined that, as of May 17, 2010, James
H. Short is an "independent" director in accordance with the AMEX independence
standards.
Item 14. Principal Accountant Fees and Services.
During 2009 and 2008, the aggregate fees that we paid to Clay Thomas,P.C.,
our independent auditors, for professional services were as follows:
Year Ended December 31,
-----------------------
2009 2008
---- ----
Audit Fees (1) $ 47,000(2) $ 15,000
Audit-Related Fees N/A N/A
Tax Fees N/A N/A
All Other Fees N/A N/A
(1) Fees for audit services include fees associated with the annual audit
and the review of our quarterly reports on Form 10-Q.
(2) Includes $15,000 for the audit of the 2008 financial statements of San
Diego Airmotive, which was acquired during 2009.
Audit Committee Pre-Approval of Audist and Permissable
Non-Audit Services of Independent Registered Public Accounting Firm.
We do not have an audit committee, but our entire Board of Directors
functions as such. Our Board of Directors pre-approves the engagement of Clay
Thomas, P.C. for all audit and permissible non-audit services. Our Board of
Directors annually reviews the audit and permissible non-audit services
performed by Clay Thomas, P.C., and reviews and approves the fees charged by
Clay Thomas, P.C. Our Board of Directors has considered the role of Clay
Thomas, P.C. in providing tax and audit services and other permissible non-audit
services to us and has concluded that the provision of such services was
compatible with the maintenance of Clay Thomas, P.C.'s independence in the
conduct of its auditing functions.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following Exhibits are filed as part of this report.
Exhibit No. Description
- ------------ -----------
2.1 Stock Acquisition and Reorganization Agreement between us and Segway II
Corp. dated April 26, 2000 is incorporated herein by reference to our
Current Report on Form 8-K (SEC File No. 0-30503) filed with the SEC on
April 28, 2000, Exhibit 2.1.
2.2 Share Exchange Agreement by and between us and AvStar Aviation Services,
Inc. is incorporated herein by reference to our Current Report on Form
8-K (SEC File No. 0-30503) filed with the SEC on February 25,
2009, Exhibit 2.1.
3.1 First Amended and Restated Articles of Incorporation are incorporated
herein by reference to our Current Report on Form 8-K (SEC File No.
0-30503) filed with the SEC on September 22, 2009, Exhibit 3.1.
3.2 By-laws are incorporated herein by reference to our Current Report on
Form 8-K (SEC File No. 0-30503) filed with the SEC on April 28, 2000,
Exhibit 3.2.
10.1 Bill of Sale dated April 8, 2010 by and between Twin Air Calypso
Services, Inc. and Miami Aviation Maintenance Co. is incorporated
herein by reference to our Current Report on Form 8-K (SEC File No.
0-30503) filed with the SEC on April 13, 2010, Exhibit 10.1.
10.2 $235,000 principal amount note dated November 22, 2006 issued by AvStar
Aviation Services, Inc. (AvStar") to TexCom, Inc. is incorporated
herein by reference to our Annual Report on Form 10-K (SEC File No.
0-30503) filed with the SEC on May 15, 2009, Exhibit 10.1.
10.3 Modification agreement regarding promissory note dated November 22,
2006 is incorporated herein by reference to our Annual Report on Form
10-K (SEC File No. 0-30503) filed with the SEC on May 15, 2009,
Exhibit 10.2.
10.4 Pledge of Shares of Stock dated November 17, 2006 is incorporated
herein by reference to our Annual Report on Form 10-K (SEC File No.
0-30503) filed with the SEC on May 15, 2009, Exhibit 10.3.
10.5 Employment Agreement dated March 17, 2010 with Russell Ivy is
incorporated herein by reference to our Current Report on Form 8-K (SEC
File No. 0-30503) filed with the SEC on May 19, 2010, Exhibit
10.1.
14.1 Code of Ethics is incorporated herein by reference to Annual Report on
Form 10-KSB for the year ended December 31, 2005 (SEC File No. 0-30503),
Exhibit 14.1.
21.1 Subsidiaries - filed herewith.
31.01 Sarbanes Oxley Section 302 Certifications - filed herewith
31.02 Sarbanes Oxley Section 906 Certifications - filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVSTAR AVIATION GROUP, INC.
By: /s/ Russell Ivy
Russell Ivy
Chief Executive Officer & President
Date: June 15, 2010