U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________ TO ____________.
Commission file number 000-49849
ARIZONA AIRCRAFT SPARES, INC.
(FORMERLY AMERICAN MARKET SUPPORT NETWORK, INC.)
(Exact name of registrant as specified in its charter)
NEVADA 88-0483722
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3431 EAST HEMISPHERE LOOP, TUCSON, ARIZONA 85706
(Address of Principal Executive Offices)
Registrant's telephone number: (520)806-0666
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $ .001 Par Value
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
As of September 30, 2003 the Registrant had 26,484,047
shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ARIZONA AIRCRAFT SPARES, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2003
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of operations:
Three and Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2003
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements:
September 30, 2003
Item 2. Management Discussion and Analysis
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Item 1. Financial Statements
The following Unaudited Condensed Consolidated Financial
Statements as of September 30, 2003 and for the three months and
nine months ended September 30, 2003 and 2002 have been
prepared by Arizona Aircraft Spares, Inc., a Nevada Corporation.
The Condensed Consolidated Balance Sheets as of December 31,
2002 are audited and presented herein for comparative purposes.
ARIZONA AIRCRAFT SPARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30 December 31
2003 2002
(Unaudited) (Audited)
Current Assets
Cash $ 452 $ 595
Accounts Receivable - Note 1 275,283 7,292
Inventory - Note 1 2,694,761 2,010,752
Total Current Assets 2,970,496 2,018,639
Property and Equipment - Note 1
Property and Equipment 216,711 216,711
Less Accumulated Depreciation (207,707) (196,832)
Total Property and Equipment 9,004 19,879
Total Assets $2,979,500 $2,038,518
See accompanying footnotes to the unaudited condensed
consolidated financial statements
LIABILITIES & SHAREHOLDER'S EQUITY
Current Liabilities
Accounts Payable - Note 3 78,614 44,408
Accrued Expenses 27,343
Private Party Loans- Note 4 98,000
Note Payable - Private Placement - Note 5 260,000
Customer Deposits - Note 6 28,088 21,565
Current Portion of Long Term Debt 128,066 134,067
Total Current Liabilities 620,111 200,040
Long-Term Liabilities - Note 7
Note Payable - Bank 169,048 199,592
Note Payable - GMAC 6,877 10,527
Notes Payable - Unsecured Creditors 128,579 128,579
Note Payable - Individual - Note 7 127,100 156,825
Note Payable - Officer - Note 7 154,036 1,151,575
Less Current Portion of Long Term Debt (128,066) (134,067)
Total Long-Term Debt 457,574 1,513,031
Total Liabilities 1,077,685 1,713,071
Shareholder's Equity - Note 9
Preferred Stock $.001 par value, 10,000,000
Shares Authorized, No Shares Issued &
Outstanding Common Stock $.001 Par Value -
Note 9 Authorized Shares - 40,000,000
Issued & Outstanding 26,484,047 & 1,000,000 26,484 1,000
Additional Paid in Capital 1,678,742 99,000
Retained Earnings 196,589 225,447
Total Shareholder's Equity 1,901,815 325,447
Total Liabilities & Shareholder's Equity $2,979,500 $2,038,518
See accompanying footnotes to the unaudited condensed
consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Additional Total
Common Stock Paid In Retained Shareholders'
Shares Amount Capital Earnings Equity
Balance at Dec. 31, 2002 1,000,000 $ 1,000 $ 99,000 $ 225,447 $ 325,447
Cancellation of Private Co. Shares
July 16, 2003 (1,000,000) (1,000) (99,000) (100,000)
American Market Support Network,
Inc. Outstanding Shares Held by
Existing Shareholders at Time
of Merger 5,225,650 5,226 (5,226)
Net Liabilities Assumed with Merger (3,840) (3,840)
Common Stock Issued July16, 2003 For
Merger with American Market Support
Network, Inc 19,658,397 19,658 80,342 100,000
Common Stock Issued
For Inventory To Mr. Peppitoni 600,000 600 599,400 600,000
Common Stock Issued
For Promissory Note - Peppitoni 1,000,000 1,000 999,000 1,000,000
Net Loss for the Period Ended
September 30, 2003 (19,792) (19,792)
Totals as of September 30, 2003 26,484,047 $26,484 $1,678,742 $196,589 $1,901,815
See accompanying footnotes to the unaudited condensed
consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September September , 30
2003 2002 2003 2002
Revenues
Sales - Parts & Service $ 456,087 $ 332,932 $ 561,370 $ 675,259
Cost of Goods Sold 241,768 156,066 280,757 443,782
Gross Profit 214,319 176,866 280,613 231,477
Operating expenses:
General and Admin Exp 126,214 73,852 228,612 107,956
Depreciation Expense 3,625 3,625 10,875 10,875
Total Operating Expenses 129,839 77,477 239,487 118,831
Income (Loss) from Operations 84,480 99,389 41,126 112,646
Interest Expense 36,632 8,378 60,918 52,646
Income taxes - - - -
Net Income(Loss) $ 47,848 $ 91,011 $ (19,792) $ 60,000
Net Income(Loss) Per Share $ 0.00 $ 0.09 $ (0.00) $ 0.06
Weighted Average Number of Common
Shares Used in the Computation of
Loss or Earnings Per Share 26,484,047 1,000,000 12,311,782 1,000,000
See accompanying footnotes to the unaudited condensed
consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
Nine Months Nine Months
Ended Sept. Ended Sept.
30, 2003 30, 2002
Cash Flow From Operating Activities
Net (Loss) Income For The Period $ (19,792) $ 60,000
Non Cash Items Included in Income
Depreciation 10,875 10,875
Changes in Current Assets (Increase) Decrease
Accounts Receivable (267,991) 7,642
Inventory (84,009) (40)
Prepaid Expenses 400
Changes in Current Liabilities
(Decrease) Increase
Accounts Payable 30,366 19,799
Accrued Expenses 27,343
Customer Deposits 6,523 4,466
Proceeds from Private Party Loans 98,000 (2,105)
Cash Provided (Used) by
Operating Activities (198,685) 101,037
Cash Flow to Investing Activities
Cash Provided ( Used ) in
Investing Activities -
Cash Flow to Financing Activities
Proceeds from Private Party Loan 260,000
Payment of Principal on Note Payable - NBA (30,544) (27,451)
Payment of Principal on Note Payable - GMAC (3,650) (5,290)
Payments on Note Payable - Individual (29,725)
Proceeds from(Payments of) Loan from Officer 2,461 (55,800)
Cash Provided (Used ) in
Financing Activities 198,542 (88,541)
Net Increase (Decrease) in Cash Balances (143) 12,496
Cash Balances at Beginning of Period 595 938
Cash Balance at End of Period 452 13,434
Supplemental Information:
Cash paid during the period for interest 60,918 62,588
Cash paid during the period for taxes 0 0
See accompanying footnotes to the unaudited condensed
consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Nine Months Nine Months
Ended Sept. Ended Sept.
30, 2003 30, 2002
Non-cash Investing and Financing Activities:
Common stock issued in connection
with acquisition of inventory $ 600,000 $ -
Common stock issued in exchange for
stockholder debts 1,000,000 -
Acquisition:
Liabilities assumed 3,840 -
- -Common stock issued 5,226 -
- -Acquisition costs 9,066 0
See accompanying footnotes to the unaudited condensed
consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
General
The accompanying unaudited condensed financial statements have
been prepared in accordance with the instructions to Form 10-
QSB, and therefore, do not include all the information necessary
for a fair presentation of financial position, results of
operations and cash flows in conformity with accounting
principles generally accepted in the United States of America
for a complete set of financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. The results from operations for the nine month period
ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31,
2003. The unaudited condensed consolidated financial statements
should be read in conjunction with the December 31, 2002
financial statements and footnotes thereto included in the
Company's Securities and Exchange Commission Form 8-K, as amended.
Basis of Presentation
The consolidated financial statements include the accounts of the
Registrant (formerly American Market Support Network, Inc.) and
the consolidated assets and liabilities of Arizona Aircraft
Spares, Inc., herein considered a wholly owned subsidiary of the
Company. All significant inter-company transactions and balances
have been eliminated in consolidation. This financial report is
the first financial report prepared and issued by Arizona Aircraft
Spares, Inc. (AASI) since becoming a wholly owned subsidiary of a
public entity on July 16, 2003. Prior to the merger with American
Market Support Network, Inc., (AMSNI), AASI was a privately held
Arizona company.
Description of the Business Activity
Arizona Aircraft Spares, Inc. (AASI), is a Nevada Corporation
that specializes in manufacturing military aircraft parts for
the US Air Force, Navy, Coast Guard, and Army and Marine Corp.
aviation divisions. Their customers also include a number of US
and Foreign private aircraft companies and friendly foreign
governments. Their products are included in fixed wing and
rotary aircraft and the company often provides prototype
designs, assembly and subassembly contracting services. AASI
has an approved MIL-I-45208A program and is considered a prime
contractor to the US government.
The private company was formed in 1990 as an Arizona Corporation
and 100% of the outstanding common shares were owned by Mr. Vito
Peppitoni, its CEO and President. Mr. Peppitoni is a
mechanical engineer and founder of this company and its
predecessor Vital Aircraft, Inc., a California corporation.
Merger Agreement
On July 16, 2003 American Market Support Network, Inc. (AMSNI),
entered into an acquisition agreement with a small privately
company Arizona Aircraft Spares, Inc. (AASI) doing business in
Tucson, Arizona. The acquisition plan of reorganization filed
for the quarter ended June 30, 2003 with the Securities and
Exchange Commission on AMSNI's Form 10QSB describes the
transaction as an acquisition and recapitalization of AASI.
AMSNI issued 19,658,397 shares of its $.001 par value common
stock in exchange for 100% of the outstanding shares of AASI
owned by Mr. Vito Peppitoni. At the time of the merger AMNSI
had 5,225,650 outstanding common shares. Mr. Peppitoni now owns
approximately 81% of the combined company after the transaction.
The resulting combined proforma balance sheet is presented as
supplementary information to show the effect of this share
acquisition agreement. The name of the public company is in the
process of being changed to Arizona Aircraft Spares, Inc.
On July 16, 2003, Mr. Peppitoni entered into a series of
agreements with Arizona Aircraft Spares, Inc. that was subject
to the completion of the acquisition agreement with American
Market Support Network, Inc. When the acquisition was
completed, Mr. Peppitoni agreed 1) to transfer all of the
government engineering drawings and specifications owned
personally at a value set by an appraiser, 2) to transfer
$600,000 of finished goods inventory and 3) to exchange
$1,000,000 of his personal promissory note due from the company
in exchange for additional restricted shares valued at $1.00 per
share. The finished goods inventory transfer and the conversion
of the promissory note took place on July 16, 2003 and the
company issued 1,600,000 restricted common shares for this
transaction. The engineering drawings have not yet been
appraised nor the shares issued for the determined value.
Bankruptcy Filing
Arizona Aircraft Spares, Inc. filed a voluntary petition for
relief under Chapter 11 of the US Federal Bankruptcy Code on
July 7, 2000. The Company's plan of reorganization was first
filed on November 6, 2000 and was subsequently approved by the
United States Bankruptcy Court for the District of Arizona on
June 19, 2001. The company's reorganization plan was approved
for payment of 100% of the impaired and non-impaired debt, but
resulted in restructuring the debt in some cases for payment
over a ten year period. See Note 3 for a financial summary of
the accounts payable treatment in the accepted plan and its
results to the date of this report.
Note 1 - Summary of Significant Accounting Policies
A. Financial Statement Presentation
The company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America.
B. Accounting Basis for Recording Income
Revenue for products and services sold is recorded on the
accrual basis and revenue is recognized at the point of sale.
Cost for product development and the related overhead expense
are accumulated in work in process until the customer has
accepted the contracted product. At the date of acceptance,
income or loss is recognized on the project. At any time where a
loss on a contract becomes known, the entire amount of the
estimated ultimate loss is accrued.
B. Cash Equivalents
For the purposes of the statements of cash flow, the company
considers all highly liquid debt instruments purchased with
maturity of three months or less to be cash equivalents. There
are no cash equivalents in these financial statements.
C. Accounts Receivable
Accounts Receivable is recorded at the gross sales price of the
product or services sold. The allowance for doubtful accounts
is considered unnecessary by management since the US Government
is the main customer and no commercial losses have been
experienced in many years.
D. Inventory
Inventory is recorded at cost and includes labor, material,
supplies and absorbed overhead in the cost of goods sold.
Because of 100% testing of products and the cost savings of
multiple unit production, the company often produces more units
than is needed to fill an order. This excess production is then
added to finished goods inventory at cost and is used to fill
future orders. Mr. Peppitoni transferred $1,750,000 worth of
finished goods inventory during 1997 and $600,000 worth of
finished goods inventory on July 16, 2003 from his previous
company, Vital Aircraft, Inc. and provided the valuations of
this inventory to the company.
Obsolete inventory and inventory write-down adjustments are
charged to cost of goods sold and carrying value of inventory is
reduced when management becomes aware that the value of an
inventory item has been impaired or becomes worthless.
Worthless inventory is disposed of as scrap.
Inventory at the end of each period is as follows:
Period Ended September 30, 2003 December 31, 2002
Description
Finished Goods $2,286,486 $1,668,748
Work in Process 279,832 224,622
Staging Goods 49,064 42,523
Raw materials & Parts 79,339 74,859
Total Inventory $2,694,761 $2, 010,752
E. Property, Equipment and Depreciation
Fixed assets are recorded at actual cost and are depreciated
using straight line method over a 3 to 7 year useful life for
equipment and software. Tax depreciation is equal to book
depreciation for the periods ended September 30, 2003 and
December 31, 2002. The following table presents a summary of
the company's fixed assets.
Period Ended September 30, 2003 December 31, 2002
Description
Equipment & Machinery $182,647 $182,647
Office Equipment 26,016 26,016
Leasehold Improvements 8,048 8,048
Total Fixed Assets 216,711 216,711
Less Accumulated Depreciation (207,707) (196,832)
Net Fixed Assets $ 9,004 $ 19,879
F. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These decisions affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
G. Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (Statement 109). Statement 109 requires that deferred
income taxes be recognized for tax consequences of "temporary
differences" by applying enacted statutory income tax rates
applicable to future years to the difference between the
financial statements carrying amounts and the tax basis of
existing assets and liabilities.
The Company filed for Sub Chapter S tax treatment in the
formation year which resulted in all tax aspects of the company
to be taxed to the shareholder for the year ended December 31,
2002. There are no income tax expenses or deferred taxes from
the results of operations because of this tax treatment and
there are no recorded operating loss carryovers or tax credits
available to the corporation for the year ended December 31,
2002 or any prior years.
When the Company merged with AMSNI it became a regular C
corporation and its earnings are now subject to tax at the
corporate level. The anticipated Federal and State Combined
rate is estimated at 39.0% for future periods, but does not
result in any tax for the current period. There are no
significant other tax attributes for the current period of operations.
H. Leased Employees
The company leases its employees from Barrett Business Services,
Inc., a firm that provides the full cost of employment wages and
taxes for the employer. All payroll taxes, benefits, and
carrying costs are paid by the leasing company. No accruals for
unpaid taxes or payroll are included in these statements and all
unpaid expenses billed and unpaid by the leasing company have
been included in accounts payable.
I. New Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt", and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement amends FASB
Statement No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that a similar to sale-
leaseback transactions. The Company does not expect the adoption
to have a material impact to the Company's financial position or
results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective
for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company does not
expect the adoption to have a material impact to the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions
of Certain Financial Institutions-an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9", which removes
acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No.
141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. In addition, this Statement amends SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to include in its scope long-term customer relationship
intangible assets of financial institutions such as depositor-
and borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions of
financial institutions are effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The
provisions related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. The adoption of this Statement did
not have a material impact to the Company's financial position or
results of operations as the Company has not engaged in either of
these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure", which
amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending
after December 15, 2002, with earlier application permitted in
certain circumstances. The interim disclosure provisions are
effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation 46
changes the criteria by which one company includes another entity
in its consolidated financial statements. Previously, the
criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's
residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity.
The consolidation requirements of Interpretation 46 apply
immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. The Company
does not expect the adoption to have a material impact to the
Company's financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts ( collectively referred to as
derivatives ) and for hedging activities under FASB Statement
No.133, Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts entered
into or modified after June 30, 2003. The adoption of this
Statement did not have a material impact to the Company's
financial position or results of operations as the Company has
not engaged in either of these activities.
In May 2003, the FASB issued Statement No.150, " Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity," which establishes standards for how an
issuer clarifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of
this Statement did not have a material impact to the Company's
financial position or results of operations as the Company has
not engaged in either of these activities.
Note 2 - Employee Loans
The company loans funds to employees for various reasons and
recovers these funds through payroll deductions. These loans
which total $5,419 are included in accounts receivable.
Note 3 - Accounts payable
Arizona Aircraft Spares, Inc. filed for Chapter 11 bankruptcy
protection on July 7, 2000 and the court approved their plan on
June 19, 2001. At the time of filing, the outstanding accounts
payable to creditors totaled $145,579. This amount was impaired
by the court and the company was ordered to complete payment in
full to all of the creditors over a period that ranged from
seven to ten years. The payment requires that the company pay
into an interest bearing account the amount of $2,517 per month
and to disburse the funds quarterly to the creditors until all
creditors have been paid in full. The company has made payment
to one of these creditors in the amount of $17,000 but has not
yet made payment to all other creditors. See Note 7.A. for
additional treatment of National Bank of Arizona long term debt.
Unpaid rent is included in accounts payable and was impaired
equally with other unsecured creditors.
Period Ended September 30, 2003 December 31, 2002
Pre Chapter 11 - LT Debt $128,579 $128,579
Post Chapter 11 - Current 78,614 44,408
Total Accounts Payable $207,193 $172,987
Note 4 - Related Party Loans
The company has solicited private placement loans from family,
employees and acquaintances in order to provide working capital
for operations. These notes are non interest bearing and are
short term demand notes. The total outstanding debt at
September 30, 2003 was $98,000.
Note 5 - Note Payable - Performance Funding, Inc.
On January 29, 2003 the company entered into an agreement with a
financial resources group to procure financing for the company.
The engagement involved preparation of financing documents and
sourcing funds for the company. The agreement required an up-
front payment of fees that would be earned when the funds were
received and the company advanced fees in the amount of $20,000
to the resources group. The prepaid finance fees have been
charged to expense during the current period.
On May 1, 2003, the Company entered into an agreement with
Performance Funding, LLC, a Phoenix, Arizona company, to procure
operating capital for the company. On May 1, 2003, Performance
Funding loaned the Company $260,000 in a ninety day promissory
note that was due on August 1, 2003, and subsequently was
extended to December 31, 2003. The note carries interest at the
rate of 24.5% per annum and contains a late payment penalty of
25% of any late payment. Payments are due monthly for interest
only on the first day of each month. This loan is secured by
equipment valued at $656,445 which is owned personally by Mr.
Peppitoni and his predecessor corporation, VAP Investments, LLC.
The loan is personally guaranteed by Mr. Peppitoni and
corporately guaranteed by VAP Investments, LLC. and Arizona
Aircraft Spares, Inc. The loan was extended by the maker on a
month to month basis until the company is able to arrange
refinancing and pay off the loan from other sources. AASI and
Mr. Peppitoni are negotiating with other financial groups to
provide the financing for the payoff.
Note 6 - Customer Deposits
The company requires that its non-government customers prepay
most contracts with an upfront payment of 50% of the contract
amount for items to be manufactured. Customer deposits are then
classified as revenue when the product has been accepted by the
customer. Items from finished goods inventory are delivered and
billed when ordered.
Note 7 - Long Term Liabilities
A. Note Payable - National Bank of Arizona
The National Bank of Arizona promissory note in the original
amount of $300,000 was borrowed on December 8, 1997. The note
bears interest at 11% per annum and had a maturity of March 8,
1998, but was extended many times until July 7, 2000, the date
of filing for bankruptcy protection by the company. Due to this
filing, this note was refinanced as ordered by the court on June
19, 2001 when the accrued interest and principal was established
to be $254,000. The refinanced note requires payments of
$5,146.42 per month, including interest at 11% per annum, until
the note is retired. The present retirement date of this note
is expected to be December 31, 2006. The current portion of
principal payment on this debt is $34,494. This note is secured
by a lien on all equipment, inventory, and accounts receivable
of the company that is currently owned or acquired after
December 8, 1997.
B. Note Payable - GMAC
On May 10, 2001 the company financed a 1998 GMC vehicle with
General Motors Acceptance Corporation. The loan is a 43 month
loan bearing interest at 10.75% and has monthly payments of $529.96.
C. Note Payable - Individual
On April 7, 2001 the Company entered into an agreement to pay
the amount of $246,000 to Krystal Peppitoni, the ex-wife of the
CEO and a 50% stockholder of the company, for her agreement to
cancel all of her shares of stock and to release her equity in
the inventory consigned to the company in 1997. The agreement
requires a monthly payment of $4,100 for a period of 60 months
and does not bear interest.
D. Note Payable - Officer
During 1997, Vito and Krystal Peppitoni, the shareholders,
consigned inventory from their previous company to Arizona
Aircraft Spares, Inc. and valued this finished goods inventory
at $1,750,000. They received a promissory note for the
consignment that had no payment or interest provision. Before
and subsequent to this consignment various loans in cash were
made to the company over the years. Mr. Peppitoni and the
former Mrs. Peppitoni elected to receive payments on these notes
in lieu of some of their salary over these years. On April 7,
2001, as part of their divorce settlement, Mrs. Peppitoni agreed
to receive $246,000 for her share of this note and all of her
interest in the company. These transactions resulted in
balances due to Mr. Peppitoni of $1,151,575 on December 31,
2002. On July 16, 2003 Mr. Peppitoni converted $1,000,000 of
this note into restricted common shares of the company at a rate
of $1.00 per share. The balance of this loan in the amount of
$154,036 is considered a long term debt because management has
no intention of current repayment.
Note 8 - Long Term Liabilities
Notes payable are classified into two distinct categories;
current notes are those that come due or mature in less than one
year and long term notes that mature or come due in more than
one year. The current portion of long-term debt is the
principal portion of the debt that is due in the next twelve
months. The following table discloses the current portion and
the long term debt of the Company.
TABLE OF LONG TERM DEBT
Amt Due Amt Due
Current Interest Date Sept 30 Dec. 31
Description Portion Rate Due 2003 2002
Notes Payable:
National Bank of AZ $ 34,494 11.0% 12/06 $ 169,048 $ 199,592
GMAC. Auto 3,124 1.9% 6/06 6,877 10,527
Chapter 11 Obligations 41,248 0 7/12 128,579 128,579
Note K Peppitoni 49,200 0 4/06 127,100 156,825
Note - Vito Peppitoni 0 0 0 154,036 1,151,575
Total $128,066 $ 585,640 $1, 647,098
Note 9 - Common Stock and Additional Paid In Capital
On July 16, 2003 the company entered into a merger agreement
with American Market Support Network, Inc. (AMSNI), and AMSNI
issued 19,658,397 shares of its $.001 par value common stock in
exchange for 100% of the outstanding shares of AASI owned by Mr.
Vito Peppitoni. On July 16, 2003 Mr. Peppitoni converted
$1,000,000 of his personal promissory note into restricted
common shares of the company at a rate of $1.00 per share and
$600,000 worth of finished goods inventory owned by him and his
previous company. These transactions resulted in 21,258,397
common shares of stock owned by Mr. Peppitoni, or 81% of the
total outstanding shares. In accordance with Staff Accounting
Bulletin Topic 5-G, the Company accounted for the contribution
of the inventories by Mr. Peppitoni to the Company at Mr.
Peppitoni's historical cost.
AMSNI had 5,225,650 outstanding shares at the time of the merger.
The total common shares outstanding at September 30, 2003 were 26,484,047.
Prior to the merger, AMSNI amended the Articles of Incorporation
to increase the authorized common stock to 40,000,000 shares and
also increased preferred stock authorized to 10,000,000 shares.
The total outstanding common stock was 1,000,000 shares at
December 31, 2002, and all shares of the privately held company
were owned by Mr. Peppitoni.
Note 10 - Cost of Goods Sold
All cost of materials and goods held for resale are recorded in
inventory and to cost of goods sold at the lower of cost or
market pricing method. Impaired values are written off to
expense when management decides that the material or finished
good has no reasonable expectation for sale. Many of the parts
manufactured by the company are considered replacement parts for
obsolete aircraft and the world continues to use aircraft long
past the period of normal inventory turnover. Management feels
that the inventory of the company will eventually sell because
the market of replacement parts becomes smaller each day.
Cost of production employees wages are charged to cost of goods
sold with full absorption of overhead cost. Therefore, the
finished goods inventory will also absorb the full amount of
labor and overhead costs.
Note 11 - Related Party Transactions
Mr. Vito Peppitoni, President and CEO is the only related party
to the Company. Mr. Peppitoni is the controlling shareholder of
AASI. The balances on the loans he has made to the company are
shown in the Summary of long term debt in Note 7. On July 16,
Mr. Peppitoni transferred inventory assets to the company with a
total cost as provided by Mr. Peppitoni of $600,000 and
converted a promissory note due to him from the company in the
amount of $1,000,000 into restricted common shares. Both of
these transactions resulted in the issuance of 1,600,000
restricted common shares to Mr. Peppitoni.
Mr. Peppitoni has taken a nominal salary from the company during
the period January 1, 2001 through December 31, 2002. He has
also taken payments on his promissory note due to him from the
company to meet personal obligations. The following table
describes the related party transactions that have occurred
during these statement periods for Mr. Peppitoni.
Period Ended September 30, 2003 December 31, 2002
Description
Salary $ 10,500 $ 29,250
Auto Usage 4,500 6,000
Payments of Loan to Officer 13,537
Loans from Officer 2,461
Purchase of Inventory with Shares 600,000
Conversion of Stockholder Debt to
Equity Shares 1,000,000
Note 12 - Future Obligations
Obligations for principal payments on notes maturing in future
years are as follows:
Years ending December 31: 2003 $ 128,066
2004 122,408
2005 120,400
2006 97,000
Note 13 - Future Lease Obligations
On January 1, 2003 the company extended the long-term property
lease on its office space in Tucson, Arizona with rental
obligations extending through April 30, 2008. The annual future
obligations on this agreement are as follows:
2004 $ 83,004
2005 $ 83,004
2006 $ 83,004
2007 $ 83,004
2008 $ 27,668
Note 14 - Concentrations of Credit Risks
The company maintains sums greater than $100,000 in its bank
accounts from time to time. These funds exceed the Federal
Depository Insurance Corporation guarantee limits for amounts
over $100,000.
Note 15 - Subsequent Events
Subsequent to the last balance sheet date of September 30, 2003,
and until the date of these statements, the Company has had no
material events that are significant to its operations and its
financial condition.
ARIZONA AIRCRAFT SPARES, INC.
SUPPLEMENTARY INFORMATION
On July 16, 2003, Arizona Aircraft Spares, Inc., a company
incorporated under the laws of the state of Arizona ("AASI-
Arizona") completed an Agreement and Plan of Reorganization
("Agreement") with American Market Support Network, Inc.
("American Support") in a transaction accounted for using the
purchase method of accounting. The total purchase price and
carrying value of net assets acquired of American Market Support
was $1. During the past several years, until the date of the
merger, American Market Support was an inactive corporation with
no assets and liabilities. As a result of the acquisition,
there was a change in control of the public entity. Subsequent
to the date of the merger, American Market Support changed its
name to Arizona Aircraft Spares, Inc. ("Company"), with AASI-
Arizona becoming a wholly owned subsidiary of the Company.
Effective with the Agreement, all previously outstanding common
stock, preferred stock, options and warrants owned by the former
AASI-Arizona stockholder was exchanged for an aggregate of
19,658,397 shares of the American Support's common stock. The
value of the 5,225,650 shares of common stock retained by the
American Support shareholders was the historical cost of
American Market Support's net tangible assets, which did not
differ materially from their fair value. The results of
operations subsequent to the date of acquisition are included in
the Company's consolidated statement income and retained
earnings. In accordance with SFAS no. 141, Arizona Aircraft
Spares, Inc., the public entity, is the acquiring entity.
The total purchase price and carrying value of net assets
acquired of the American Support was $1. The net assets
acquired were as follows:
Assets acquired $ 0
Liabilities assumed 3,840
Common stock retained by American Network shareholders 5,266
Acquisition costs - applied to retained earnings (9,066)
Cash paid 0
In accordance with SOP 98-5, the Company will charge this cost
as an expense entry to retained earnings in the amount of $9,066.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following information should be read in conjunction with the
financial statements and the notes thereto, as well as the
section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" from the
Company's merger agreement Report on Form 8-K for it. The
analysis set forth below is provided pursuant to applicable
Securities and Exchange Commission regulations and is not
intended to serve as a basis for projections of future events.
Forward-Looking Statements
Except for historical information contained herein, the matters
discussed in this form 10-qsb are forward-looking statements
that are subject to certain risks and uncertainties that could
cause actual results to differ materially from those set forth
in such forward-looking statements. such risks and uncertainties
include, without limitation, the company's dependence on the
timely development, introduction and customer acceptance of
products, the impact of competition and downward pricing
pressures, the ability of the company to reduce its operating
expenses and raise any needed capital, the effect of changing
economic conditions, risks in technology development and the
effects of outstanding litigation. other factors that could
cause actual results to differ materially from those set forth
in such forward-looking statements include the risks and
uncertainties detailed in the company's most recent form 10-ksb
and its other filings with the securities and exchange
commission from time to time.
General Business Description
Arizona Aircraft Spares, Inc. (AASI) is a privately held Arizona
Corporation that specializes in manufacturing military aircraft
parts for the US Air Force, Navy and Army aviation divisions.
Their customers also include a number of US and Foreign private
aircraft companies and friendly foreign governments. Their
products are included in fixed wing and rotary aircraft and the
company often provides prototype designs, assembly and
subassembly contracting services. AASI has an approved MIL-I-
45208A program and is considered a prime contractor to the US government.
Results of Operations
The Company's revenues are difficult to forecast and may vary
significantly from quarter to quarter. In addition the Company's
expense levels for each quarter are, to a significant extent,
fixed in advance based upon the Company's expectation as to the
net revenues to be generated during that quarter. The Company
therefore is generally unable to adjust spending in a timely
manner to compensate for any unexpected shortfall in net
revenues. Further as a result of these factors any delay in
product introductions, whether due to internal delays or delays
caused by third party difficulties, or any significant shortfall
in demand in relation to the Company's expectations, would have
an almost immediate adverse impact on the Company's operating
results and on its ability to maintain profitability in a quarter.
While the Company's expenses are, to a significant extent, fixed
in advance, the Company is making efforts to adjust spending in
relation to net revenues until such time, if any, that new
products are released and such new products and/or current
products gain market acceptance. However, there can be no
assurance that new products will be released by the Company, or
if released that such releases will be on a timely basis; or
that any products will achieve any degree of market acceptance
or that such acceptance will be sustained for any significant
period; or that they will be profitable, or that profitability,
if any, can be sustained. Failure to complete new products on a
timely basis, or lack of demand for products upon completion and
distribution, would have a severe material adverse effect upon
the Company.
Comparison of the Unaudited Nine Months Ended September 30, 2003
(the "2003 Period") with the Unaudited Nine Months Ended
September 30, 2002 (the "2002 Period")
During the first nine months of 2003 the Company's revenues
decreased because of lack of working capital to complete a
number of contracts with the US Government, some of which the
Company expects to complete in the last quarter of 2003.
Revenues dropped from $675,259 in the nine months ended
September 30, 2002 to $561,370 in the nine months ended
September 30, 2003. Sales for the third quarter of 2003
increased over the same period of 2002 because more
contracted products were made available to the company from
their major military customers. The Company feels that with the
working capital provided in recent months from private placement
lenders that the number of contracts to be completed and
finished goods inventory sales in the last quarter will improve.
The Government activity in war related aircraft repair contracts
is on the increase and this will improve the number of contracts
available to the company.
Cost of revenues consists of direct manufacturing costs and
applied overhead expenses for the Company's aircraft repair and
replacement part business. Cost of revenues as a percentage of
net revenues decreased to 50 % in the nine months ended
September 30, 2003 to $280,757 as compared to $443,782 or 63% of
revenue for the nine months ended September 30, 2002. Cost of
sales for the third quarter of 2003 increased over the same
period of 2002 to 53% of revenues as compared to 47% of revenue
for the same period in 2002. The cost of goods sold percentage
will fluctuate from quarter to quarter because absorbed overhead
increases when volume is decreasing and because labor ratios are
less than optimized in manufacturing processes when revenues are
lower. As revenue increases, cost of goods sold, as a
percentage of revenue, should become increasingly favorable for
the company. The overall increase in the cost of goods sold
during the third quarter of 2003 is directly attributable to the
increase in net revenues.
General and administrative (operating) expenses increased during
the first nine months and third quarter of 2003 due primarily to
the added cost of becoming a public entity. Administrative
expenses for consultants, legal costs, audits and accounting
services have all increased during these 2003 periods over 2002
and these costs are expected to increase more so in the coming
months. Although the Company's general and administrative
expenses are to a significant extent fixed in advance, the
Company is making efforts to adjust spending in relation to the
expected net revenues, but has yet to complete all expense items
relating to its public company status. Until these expense
categories have gone full cycle, the administrative expenses
will continue to rise but will become more controlled in
relation to sales revenue as the company becomes well funded and
revenues increase.
Net Income (Loss)
For the reasons outlined above the Company realized a net loss
of $19,792 for the nine months ended September 30, 2003 as
compared to a net income of $60,000 for the three months ended
September 30, 2002. For the three months ended September 30,
2003 the company earned $47,848 as compared to a net income of
$91,011 during the three months ended September 30, 2002.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2002 was $595 and $452
at September 30, 2003. Cash used in operating activities during
the first nine months of 2003 was $794,485 due mainly to the
acquisition of inventory from the controlling stockholder, a
non-cash expenditure completed by the issue of common stock. The
Company has used its working capital to finance ongoing
operations and the development and marketing of its aircraft
repair products. Additionally, the Company expended substantial
cash for professional fees and support staff required to
complete its merger with the public entity. In the future, the
company intends to evaluate, from time to time, acquisitions of
products or companies that could complement the Company's
business, expand its product line, or augment its revenues and
cash flows.
The Company's has a short term loan in the amount of $260,000
that is due and payable on December 31, 2003 and is currently
renegotiating the terms of the agreement to extend the payment
date. The company is also pursuing other financial resources
to augment its cash requirements for retirement of debt,
expansion of operations and acquisition of suitable companies
and products.
The Company's success and ongoing financial viability is
contingent upon its selling of its products and the related
generation of cash flows. The Company evaluates its liquidity
and capital needs on a continuous basis and based on the
Company's requirements and capital market conditions may, from
time to time, raise working capital through additional debt or
equity financing. There is no assurance that such financing
will be available in the future to meet additional capital needs
of the Company, or that any such terms or conditions of any such
financing would be favorable to the Company. Both the
management of the Company's current growth and the expansion of
the Company's current business involve significant financial
risk and require significant capital investment.
Application of Critical Accounting Policies
Inventory valuation reserves
We provide for inventory obsolescence based upon assumptions
concerning future demand, market conditions and anticipated
timing of the release of products. If actual market conditions
or future demand are less favorable than those projected by
management, inventory write-downs may be required.
Non-GAAP Financial Measures
The financial statements appearing in this quarterly report on
Form 10-QSB do not contain any financial measures which are not
in accordance with generally accepted accounting procedures.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation 46
changes the criteria by which one company includes another
entity in its consolidated financial statements. Previously, the
criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's
residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that
entity. The consolidation requirements of Interpretation 46
apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 149 amends
SFAS No. 133 to provide clarification on the financial
accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar
characteristics be accounted for on a comparable basis. The
provisions of SFAS 149 are effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The adoption of SFAS 149 will
not have a material impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. SFAS 150 establishes standards on the
classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. The
provisions of SFAS 150 are effective for financial instruments
entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The
adoption of SFAS 150 will not have a material impact on the
Company's results of operations or financial position.
Item 3. CONTROLS AND PROCEDURES
As of September 30, 2003, under the supervision and with the
participation of our management, including our chief executive
officer and chief financial officer, we have evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on their evaluation, our chief
executive officer and chief financial officer concluded that
these controls and procedures are effective in alerting them in
a timely manner to material information required to be disclosed
by us in the reports that we file with the SEC. There have been
no significant changes in our internal controls or in other
factors that could significantly affect those controls
subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as listed below there are no non-ordinary course of business
legal proceedings threatened, pending or on-going.
Item 2 - Changes in Securities
The company issued 1.6 million shares at $1.00 per share of restricted
common stock to Vito Peppitoni, President, on July 16, 2003 in exchange for
(1) the transfer of all of the government engineering drawings and
specifications, (2) the transfer of $600,000 of finished goods inventory owned
personally by Mr. Peppitoni, and (3) the exchange of $1,000,000 of his personal
promissory note due from the company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
(1) Certification by Vito A. Peppitoni
Exhibit (32) Section 1350 Certifications
(1) Certification by Sylvia Quintero
B. Reports on Form 8-K
- July 16, 2003, Form 8-K for the Share Agreement between American
Market Support, Inc. and Arizona Aircraft Spares, Inc., as
referenced herein.
- September 15, 2003, Amendment to the Form 8-K filed on July 16, 2003
wherein the Registrant filed the financial statements for the
Share Exchange Agreeement between American Market Support, Inc. and
Arizona Aircraft Spares, Inc., as referenced herein.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
ARIZONA AIRCRAFT SPARES, INC.
Date: December 15, 2003 By: /s/ Vito A. Peppitoni
President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 15, 2003 By: /s/ Sylvia Quintero
Chief Operating Officer (Principal
Accounting and Financial Officer)