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 MARCH
31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM -
___________ TO ____________.
Commission file number 000-49849
ARIZONA AIRCRAFT SPARES, INC.
(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 March 31, 2004 the Registrant had 29,045,928 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 March 31, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets: March 31, 2004 and December 31, 2003
Consolidated Statements of operations: Three Months Ended March 31, 2004 and
2003
Consolidated Statement of Stockholders' Equity: As of March
31, 2004 and December 31, 2003
Consolidated Statements of Cash Flows: Three Months Ended
March 31, 2004 and 2003
Notes to Consolidated Financial Statements: As of March 31,
2004 and December 31, 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 Consolidated Financial Statements as of March
31, 2004 and for the three months ended March 31, 2004 and 2003 have
been prepared by Arizona Aircraft Spares, Inc., a Nevada Corporation.
The Consolidated Balance Sheets as of December 31, 2003 are audited
and presented herein for comparative purposes.
ARIZONA AIRCRAFT SPARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2004 2003
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 89,450 $ 545
Accounts Receivable - Note A 268,914 558,514
Prepaid expenses, net 15,660 15,000
Inventory - Note A 1,652,486 1,224,871
Total Current Assets 2,026,510 1,798,930
Property and Equipment, net - Note C 9,309 10,779
Total Assets 2,035,819 1,809,709
LIABILITIES & SHAREHOLDER'S EQUITY
Current Liabilities
Accounts Payable and accrued expenses - Note D 238,317 265,993
Long term debt, current portion - Note E 104,470 105,200
Note payable - short term - Note E 278,948 362,869
Customer deposits - Note H 5,392 7,042
Total Current Liabilities 627,127 741,104
Long-Term Liabilities - Note E
Long term debt, net of current portion 86,896 156,996
Long term debt, related party net of current portion 576,124 576,077
Accounts payable & accrued expenses -
long term portion 74,665 123,579
Total Long-Term Debt 737,685 856,652
Total Liabilities 1,364,812 1,597,756
Shareholder's Equity - Note I
Preferred Stock $.001 par value; Shares
authorized:10,000,000
Shares Issued & Outstanding: -0- - -
Common Stock $.001 Par Value; Shares
authorized:40,000,000
Issued & Outstanding 29,045,928 &
27,228,249 29,046 27,228
Subscription receivable (500,000) (500,000)
Additional Paid in Capital 1,120,425 675,304
Retained Earnings 21,536 9,421
Total Shareholder's Equity 671,007 211,953
Total Liabilities & Shareholder's Equity 2,035,819 1,809,709
See accompanying footnotes to the unaudited consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
2004 2003
(Unaudited) (Unaudited)
Revenues $ 318,532 $ 77,089
Cost of Goods Sold 135,816 51,392
Gross Profit 182,716 25,697
Operating expenses:
Selling General & Administrative 151,606 45,486
Depreciation 3,100 3,625
Total Operating Expenses 154,706 49,111
Income (Loss) from Operating activities 28,010 (23,414)
Interest Expense (15,896) (6,381)
Net Income (Loss) 12,114 (29,795)
Net Earnings (Loss) Per Share -basic & diluted 0.01 (0.03)
Weighted Average Number of Common
Shares Used in the Computation of
Earnings or Loss Per Share 29,045,928 1,000,000
See accompanying footnotes to the unaudited consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Common Stock Add'l Subscription Retained Total
Paid In Receivable Earnings Shareholders'
Shares Amount Capital Equity
Balance at December 31, 2001 1,000,000 $ 1,000 $ 99,000 $ 69,439 $ 169,439
Net Income for the year ended
December 31, 2002 62,649 62,649
Balance at December 31, 2002 1,000,000 1,000 99,000 132,088 232,088
Cancellation of Private Co. Shares
July 16, 2003 (1,000,000) (1,000) 1,000
American Market Support Network,
Inc. Outstanding Shares Held by
Existing Shareholders at
Time of Merger 5,225,650 5,226 (5,226)
Common Stock Issued July16,
2003 For Merger with American
Market Support Network, Inc 19,658,397 19,658 (19,658)
Common stock issued in exchange
for services rendered 100,000 100 59,900 60,000
Common stock issued in exchange
for services rendered 1,244,202 1,244 36,062 37,306
Common stock subscribed 1,000,000 1,000 499,000 (500,000)
Net Loss for the year ended
December 31, 2003 - - - - (122,667) (122,667)
Balance at December 31, 2003 27,228,249 27,228 675,304 (500,000) 9,421 211,953
Restricted common shares sold to
general public - net of cost of
sale commissions 1,817,679 1,818 445,122 446,940
Net Income for the
three months ended March 31, 2004 - - - - 12,114 12,114
Balance at March 31, 2004 29,045,928 29,046 1,120,426 (500,000) 21,536 671,007
See accompanying footnotes to the unaudited consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
(Unaudited)
Cash Flow From Operating Activities
Net (Loss) Income For The Period $ 12,114 $ (29,795)
Non Cash Items Included in Income
Depreciation 3,100 3,625
Changes in Current Assets (Increase) Decrease
Accounts Receivable 289,600 (29,584)
Inventory (427,615) 6,500
Employee loans & prepaid expenses 660 (5,817)
Changes in Current Liabilities (Decrease) Increase
Accounts Payable (27,676) 34,557
Note payable - short term (83,921)
Customer Deposits (1,650) (494)
Proceeds from Private Party Loans 49,980
Cash Provided (Used) by Operating Activities (235,388) 28,972
Cash Flow to Investing Activities
Purchase of office equipment (3,050)
Payment of prepaid finance charges 0 (20,000)
Cash ( Used ) in Investing Activities (3,050) (20,000)
Cash Flow to Financing Activities
Proceeds from sale of restricted common stock net 446,940
Payment of Principal on Long Term Debt (70,100) (11,006)
Payments on long term debt - accounts payable (49,544) (11,275)
Proceeds from(Payments of) Loan from Officer 47 7,972
Cash Provided (Used ) in Financing Activities 327,343 (14,309)
Net Increase (Decrease) in Cash Balances 88,905 (5,337)
Cash Balances at Beginning of Period 545 595
Cash Balance at End of Period 89,450 (4,742)
Supplemental Information:
Cash paid during the period for interest 15,895 6,381
Cash paid during the period for taxes 0 0
See accompanying footnotes to the unaudited consolidated financial statements
ARIZONA AIRCRAFT SPARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows.
General
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-QSB, and
therefore, do not include all the information necessary for a fair
presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America for a complete set of financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results from operations for the three-month period
ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. The
unaudited consolidated financial statements should be read in
conjunction with the December 31, 2003 financial statements and
footnotes thereto included in the Company's Securities and Exchange
Commission Form 10-KSB.
Basis of Presentation
Arizona Aircraft Spares, Inc. (the "Company" or "AASI"), formerly
American Market Support Network, Inc., was incorporated under the
laws of the state of Nevada in December, 2000. The Company
specializes in manufacturing military aircraft parts for the US Air
Force, Navy, Coast Guard, Army and Marine Corp. aviation divisions.
The Company also distributes its products to a number of US and
foreign private aircraft companies and friendly foreign governments.
The consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiary, Arizona Aircraft Spares,
Inc., a company formed under the laws of Arizona in 1990. Significant
inter-company transactions have been eliminated in consolidation.
Bankruptcy Filing
The Company's subsidiary, 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 D).
Revenue Recognition
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 requires
that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's
judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts.
Provisions for discounts and rebates to customers, estimated returns
and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue
for which the product has not been delivered or is subject to refund
until such time that the Company and the customer jointly determine
that the product has been delivered or no refund will be required.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in bank deposit
accounts and short term, highly liquid maturities of three months or
less at the date of purchase. Cash equivalents are carried at
amortized cost, which approximate fair value.
Accounts Receivable
Accounts receivable is reported at its fair value and, in the opinion
of management, is collectible without provisions for allowance for
doubtful accounts as of March 31, 2004 and December 31, 2003.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
No.144 (SFAS 144). The Statement requires that long lived assets and
certain identifiable intangibles held and used by the Company be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Events relating to recoverability may include significant unfavorable
changes in business conditions, recurring losses or a forecasted
inability to achieve break even operating results over an extended
period. The Company evaluates the recoverability of long lived assets
based upon forecasted undercounted cash flows. Should impairment in
value be indicated, the carrying value of intangible assets will be
adjusted, based on estimates of future discounted cash flows resulting
from the use and ultimate disposition of the asset. SFAS No.144 also
requires assets to be disposed of and be reported at the lower of the
carrying amount or the fair value less costs to sell.
Property and Equipment
Property and equipment are recorded at cost. Minor additions and
renewals are expensed in the year incurred. Depreciation is calculated
using the straight line method over the estimated useful lives of the assets.
Net Earnings (Loss) Per Share
The Company computes earnings per share under Financial Accounting
Standard No. 128, "Earnings Per Share" (SFAS 128). Net loss per common
share is computed by dividing net loss by the weighted average number
of shares of common stock and dilutive common stock equivalents
outstanding during the year. Dilutive common stock equivalents consist
of shares issuable upon conversion of convertible preferred shares and
the exercise of the Company's stock options and warrants (calculated
using the treasury stock method). During the three months ended March
31, 2004, common stock equivalents are not considered in the
calculation of the weighted average number of common shares
outstanding because the company was privately held and there were no
common stock equivalents.
Concentration of Credit Risk
Financial instruments and related items, which potentially subject
the Company to concentrations of credit risk, consist primarily of
cash, cash equivalents and related party receivables. The Company
places its cash and temporary cash investments with credit quality
institutions. At times, such investments may be in excess of the FDIC
insurance limit. The Company periodically reviews its trade
receivables in determining its allowance for doubtful accounts.
The major customer of the Company is mainly the US military. Working
with the US military represents the least cash intensive growth
strategy for the company, as the government systematically pays
within 30 days after the company has shipped the product. The US
government demands that certain parts be made of special materials to
meet the government standards. The use of certain materials or
processing is often limited to a few select vendors. The Company
builds into the bidding process for price escalation and specialized
materials.
Inventory
Inventories are stated at the lower of cost or market determined by
the first-in, first-out method. Inventory costs include direct labor,
raw materials, and supplies and absorbed overhead. Inventories
consist of four components: finished goods, work-in-process, staging
and raw materials. Components of inventories at March 31, 2004 and
December 31, 2003 are as follows:
March 31, 2004 December 31, 2003
Finished goods $1,020,005 $ 865,021
Work in process 508,203 251,121
Staging goods 55,790 39,222
Raw materials 68,488 69,507
Inventory, net 1,652,486 1,224,871
Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS
109) which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on
the difference between financial statements and tax basis of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Temporary differences
between taxable income reported for financial reporting purposes and
income tax purposes are insignificant.
The Company's subsidiary had elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those provisions,
the Company did not pay federal corporate income taxes on its taxable
income and was not allowed a net operating loss carryover or carry
back as a deduction. Instead, the stockholders are liable for
individual federal income taxes on their respective shares of taxable
income or include their respective shares of the Company's net
operating loss in their individual income tax returns.
Effective with the merger with American Market Support Network, Inc.
(see Note B), the election to be taxed under Sub Chapter S of the
Internal Revenue Code was terminated.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," establishes standards for reporting
and displaying of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company does not have
any items of comprehensive income in any of the periods presented.
Stock Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No.148 (SFAS No.148), "Accounting for Stock-based
Compensation- Transition and Disclosure-an amendment of SFAS 123 ".
This statement amends SFAS No.123, "Accounting for stock based
Compensation "to provide alternative methods of transition for a
voluntary charge to the fair value based method of accounting for
stock based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No.123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen
to continue to account for stock based compensation using the
intrinsic value method prescribed in APB Opinion No.25 and related
interpretations. Accordingly, compensation expense for stock options
is measured as excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of
the related option. The Company has adopted the annual disclosure
provisions of SFAS No.148 in its financial reports for the year ended
December 31, 2003 and the period ended March 31, 2004. As of December
31, 2003 and March 31, 2004, the Company has not issued any options.
Advertising
The Company follows the policy of charging the costs of advertising
to expenses incurred. The Company incurred no advertising costs
during the periods ended March 31, 2004 and 2003.
Interim Financial Statements
The accompanying balance sheet as of March 31, 2004, the statements
of operations and cash flows for the three months ended March 31,
2004 and 2003 are unaudited. These unaudited interim financial
statements include all adjustments (consisting of normal recurring
accruals), which, in the opinion of management, are necessary for a
fair presentation of the results of operations for the periods
presented. Interim results are not necessarily indicative of the
results to be expected for a full year.
Reclassifications
Certain reclassifications have been made in prior year's financial
statements to conform to classifications used in the current year.
Recent Pronouncements
In January 2003, the FASB issued interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), as revised December 2003. This
interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises
of variable interest entities (VIEs) that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or
(2) the equity investors lack an essential characteristic of a
controlling financial interest. This interpretation applies
immediately to VIEs created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to
VIEs in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The application of FIN 46 did not have a
material effect on our consolidated financial statements.
NOTE B- ACQUISITION AND CAPITAL RESTRUCTURE
On July 16, 2003, the Company entered into an Agreement and Plan of
Reorganization ("Agreement") with American Market Support Network,
Inc. ("AMSN") an inactive publicly registered shell corporation with
no significant assets or operations. In accordance with SFAS No. 141,
the Company was the acquiring entity. While the transaction is
accounted for using the purchase method of accounting, in substance,
the Agreement is a recapitalization of the Company's capital structure.
For accounting purposes, the Company has accounted for the
transaction as a reverse acquisition and the Company shall be the
surviving entity. The total purchase price and carrying value of net
assets acquired was $9,066. The Company did not recognize goodwill or
any intangible assets in connection with the transaction. Effective
with the Agreement, AMSN changed its name to Arizona Aircraft Spares, Inc.
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 Market Support Network, Inc. was $9,066. The net assets
acquired were as follows:
Assets acquired $ -
Liabilities assumed 3,800
Common stock retained by existing shareholders 5,266
Acquisition costs (9,066)
Cash paid -
In connection with the merger, AMSN shareholders retained 5,225,260
shares of AMSN common stock. The common shares were valued at $5,266,
or $ .001 per share, which approximated the fair value of the shares
retained and were expensed as organization costs during the year
ended December 31, 2003 in accordance with Statement of Position 98-5.
NOTE C- PROPERTY AND EQUIPMENT
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 three months ended March 31, 2004 and the year
ended December 31, 2003. The following table presents a summary of
fixed assets..
March 31, 2004 December 31, 2003
Machinery and equipment $ 182,647 $ 182,647
Leasehold improvements 27,436 27,436
Office equipment 9,678 8,048
Total fixed assets 219,761 218,131
Less accumulated depreciation (210,452) (207,352)
Net fixed assets 9,309 10,779
The Company recognized deprecation expense of $3,100 during the three
months ended March 31, 2004 and $10,520 during the year ended
December 31, 2003 in connection with these assets.
NOTE D - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
March 31, 2004 December 31, 2003
Accts payable, net of current portion
(Pre-Chapter 11) $ 74,665 $ 123,579
Accounts payable, current portion
(Post-Chapter 11) 238,317 265,993
Total Accounts Payable 312,982 389,572
On July 7, 2000, the Company's wholly-owned subsidiary, AASI
(Arizona) filed for Chapter 11 bankruptcy protection, upon which the
court approved their plan on June 19, 2001. At the time of filing for
Chapter 11 bankruptcy protection, the outstanding accounts payable to
creditors totaled $145,579. This amount was impaired by the court and
AASI (Arizona) 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 AASI (Arizona) pay into an interest bearing
account the amount of $2,517 per month and disburse the funds
quarterly to the creditors until all creditors have been paid in
full. As of December 31, 2003, AASI has made payment to one of these
creditors in the amount of $22,000, and during the period ended March
31, 2004 the company paid $48,914 on these debts. (see Note E).
For cash flow purposes, the Company deems the payments made to long-
term portion of accounts payable and accrued expenses as financing
activity.
NOTE E - NOTES PAYABLE
Notes payable at March 31, 2004 and December 31, 2003 are as follows:
March 31, 2004 December 31, 2003
(Unaudited)
Short-term note payable, original nine
month note payable amount of $260,000;
acquired on April 2003; principal and
accrued interest at 24.5% payable every six
months beginning in April, 2004; secured by
assets of the Company's president and
guaranteed by the Company president; the
Company negotiated an extension to
September 30, 2004. If the note is in
default, upon the option of the holder, the
Company is subject to 41% annual interest
on the unpaid principal balance. The
Company is charged a penalty of 25% on any
late payments. $ 226,948 $ 264,868
Notes payable to Company President,
shareholders and related parties due in
September, 2004; these notes bear interest
at 10%, are unsecured and payable in
September, 2004; the Company issued 50,000
five-year warrants with and exercise price
of $0.10 to the note holders in accordance
with the previously agreed upon
modification to extend the due date of the
note. 40,000 40,000
Eight (8) Notes payable to Company
President, shareholders and related
parties; Five (5) notes accrue interest at
20% per annum and are unsecured; As of the
report date of the financial statements,
the Company was in default of the note
balance The Company is obligated to issue a
fixed number of the Company's restricted
common stock in lieu of interest for the
remaining three (3) notes.; the notes are
unsecured and payable by January 2004 The
Company calculated the fair market value of
the Company's shares to be issued over the
period the notes were outstanding and
accrued the value of the shares due. As of
March 31, 2004, these notes were paid in full. -0- 34,000
Notes payable to Company President,
shareholders and related parties due
September 2004; unsecured and payable
within twelve months. These notes bear
interest at 20% per annum. 12,000 24,000
Note payable to Bank due December 2006;
monthly principal and interest payments of
$5,146; secured by Company's property,
equipment, inventory and accounts
receivable. This note draws interest at
20% per annum. 87,081 140,950
Note payable to finance company due in
December 2005; monthly principal and
interest payment of $530, secured by
Company transportation equipment. This note
draws interest at 10.75% per annum. 5,885 8,496
Note Payable to former Company shareholder,
due March, 2006; unsecured and non-interest
bearing; monthly payment of principal of
$4,100. 98,400 112,750
Total notes payable 470,314 625,064
Less: Short-term notes payable 278,948 362,868
Less: Long-term debt, current portion 104,470 105,200
Long-term debt, net of current portion 86,896 156,996
Aggregate maturities of long-term debt as of December 31, 2003 are as
follows:
Year Amount
2004 $468,069
2005 100,777
2006 56,218
Total $625,064
NOTE F- WARRANTS
Non- Employee warrants
The following table summarizes the changes in warrants outstanding and
the related prices for the shares of the Company's common stock issued
to non-employees of the Company. These options were granted in lieu of
cash compensation in connection with issuance of the Company's debt.
Warrants Outstanding Warrants Exercisable
Weighted Average Weighed Weighted
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
$ .10 50,000 5.0 $ .10 50,000 $ .10
Transactions involving warrants issued to non-employees are summarized
as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at January 1, 2003 50,000 $ 0.10
Granted - -
Exercised - -
Canceled or expired - -
Outstanding at December 31, 2003 50,000 0.10
Granted - -
Exercised - -
Canceled or expired - -
Outstanding at March 31, 2004 50,000 0.10
All options granted to non-employees are non-compensatory and the
exercise prices of options are higher than the fair market value of
the Company's common stock.
NOTE G - DUE TO RELATED PARTY
During the year 1997, the Company's President and controlling
shareholder contributed certain inventory valued at $1,750,000 to the
Company in exchange for a note payable. In 2001, the Company
corrected the valuation of the inventory contributed in 1997 and
recorded a write-down of the inventory in the amount of $601,099 and
a corresponding adjustment to the note payable. The note has no
interest and no formal repayment terms. As of March 31, 2004 and
December 31, 2003, the Company was indebted to the president for
$576,124 and $576,077 respectively.
NOTE H - 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.
As of March 31, 2004 and December 31, 2003, the Company had received
deposits of $5,392 and $7,042 respectively.
NOTE I - STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of preferred
stock, with $0.001 par value per share. As of March 31, 2004 and
December 31, 2003, there are no preferred shares issued and
outstanding. The Company is authorized to issue 40,000,000 shares of
common stock, with $0.001 par value per share. As of March 31, 2004
and December 31, 2003, the Company has issued and outstanding
29,045,928 and 27,228,249 common shares respectively.
In July, 2003, the Company issued 19,658,397 shares of common stock
in connection with the merger with American Market Support Network,
Inc. (see Note B).
During August, 2003, the Company issued 1,244,202 shares of its
restricted common stock in exchange for services provided the Company
valued at $0.03 per share which represents the fair value of the
services received and which did not differ materially from the value
of the stock issued.
During the first week of November 2003, the Company issued 100,000
shares of its common stock in exchange for services provided and
future considerations, which the Company aggregately valued at $0.60
per share and which represents the fair value of the services
received which did not differ materially from the value of the stock
issued.
During December, 2003, the Company issued 1,000,000 shares of its
common stock in exchange for a subscription receivable aggregating
$500,000.
On July 16, 2003, the Company issued 50,000 five-year warrants with
and exercise price of $0.10 to the note holders in accordance with a
note payable extension agreement. As of March 31, 2004 the warrants
were still outstanding.
During the three months ended March 31, 2004, the Company sold
1,817,679 shares of restricted common stock. The proceeds to the
Company, net of commissions, equaled approximately $0.25 per share.
The total amount of capital raised during the period, net of costs,
was $446,940.
Share amounts presented in the consolidated balance sheets and
consolidated statements of stockholders' equity reflect the actual
share amounts outstanding for each period presented.
NOTE J- COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space for its corporate offices in Tucson,
Arizona under a long term lease through April, 2008. The annual
future obligations on this Lease Obligation are as follows:
2004 $ 83,004
2005 83,004
2006 83,004
2007 83,004
2008 27,668
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following information should be read in conjunction with the
financial statements and the notes thereto, as well as the section
entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" from the Company's merger agreement Report
on Form 8-K for it. The analysis set forth below is provided
pursuant to applicable Securities and Exchange Commission regulations
and is not intended to serve as a basis for projections of future events.
General Business Description
Arizona Aircraft Spares, Inc. (AASI) is a 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.
FORWARD-LOOKING STATEMENTS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH FORWARD-
LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, WITHOUT
LIMITATION, THE COMPANY'S DEPENDENCE ON THE TIMELY DEVELOPMENT,
INTRODUCTION AND CUSTOMER ACCEPTANCE OF PRODUCTS, THE IMPACT OF
COMPETITION AND DOWNWARD PRICING PRESSURES, THE ABILITY OF THE
COMPANY TO REDUCE ITS OPERATING EXPENSES AND RAISE ANY NEEDED
CAPITAL, THE EFFECT OF CHANGING ECONOMIC CONDITIONS, RISKS IN
TECHNOLOGY DEVELOPMENT AND THE EFFECTS OF OUTSTANDING LITIGATION.
OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE THE
RISKS AND UNCERTAINTIES DETAILED IN THE COMPANY'S MOST RECENT FORM
10-KSB AND ITS OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION FROM TIME TO TIME.
Results of Operations
The Company's revenues are difficult to forecast and may vary
significantly from quarter to quarter. In addition the Company's
expense levels for each quarter are, to a significant extent, fixed
in advance based upon the Company's expectation as to the net
revenues to be generated during that quarter. The Company therefore
is generally unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in net revenues. Further as
a result of these factors any delay in product introductions, whether
due to internal delays or delays caused by third party difficulties,
or any significant shortfall in demand in relation to the Company's
expectations, would have an almost immediate adverse impact on the
Company's operating results and on its ability to maintain
profitability in a quarter.
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 Three Months Ended March 31, 2004 (the
"2004 Period") with the Unaudited Three Months Ended March 31, 2003
(the "2003 Period")
During the first three months of 2004 the Company's revenues
increased because of the provision of working capital to complete a
number of contracts with the US Government, some of which the Company
completed in the first quarter of 2004. Revenues increased from
$77,089 to $318,532 for the quarter ended March 31, 2004 as compared
to the quarter ended March 31, 2003. Sales for the first quarter of
2004 increased over the same period of 2003 mainly because the
Company could afford to complete more contracted products for its
major military customers. The Company feels that with the working
capital provided in recent months from private placement lenders ,
the number of contracts to be completed and sales of finished goods
inventory will increase in the last quarter. 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 sales as a percentage of net revenues
decreased to 43 % in the three months ended March 31, 2004 to
$135,616 as compared to $51,392 or 67% of revenue for the three
months ended March 31, 2003. The cost of goods sold percentage will
fluctuate from quarter to quarter because absorbed overhead increases
when volume decreases and because labor ratios are less than
optimized in manufacturing processes when revenues decrease As
revenues increase, cost of goods sold as a percentage of revenue
should become more favorable for the Company. The overall increase in
the cost of goods sold during the first quarter of 2004 is directly
attributable to the increase in net revenues.
General and administrative (operating) expenses increased during the
first three months of 2004 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
this 2004 period over the 2003 period. In addition, there are further
increases expected in the coming months. Although the Company's
general and administrative expenses are, to a significant extent,
fixed in advance, the Company is making efforts to adjust spending in
relation to the expected net revenues. However, the Company 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)
Because of the reasons outlined above, the Company realized a net
income of $12,114 for the three months ended March 31, 2004 as
compared to a net loss of $(29,795) for the three months ended March
31, 2003.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2004 was $89,450 and $545 at
December 31, 2003. Cash used in operating activities during the first
three months of 2004 was $235,388 due mainly to the acquisition of
inventory from the company's suppliers to service the orders that
have increased dramatically since the company became public. The
Company has used its working capital to finance ongoing operations
and to develop and market its aircraft spare parts 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 has a short term loan in the amount of $278,948 that is
due and payable on September 30, 2004 and for which it is currently
renegotiating the terms of the agreement to extend the payment date.
The Company is also pursuing other financial resources to augment its
cash requirements for retirement of debt, expansion of operations and
acquisition of suitable companies and products. The restricted stock
sale offering in foreign countries is an example of cash infusion
that will provide the Company with much needed working capital to
continue its expansion and sales growth into international and
domestic markets.
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
On March 31, 2004, the Financial Accounting Standards Board (FASB)
issued a proposed Statement, Share-Based Payment, an amendment of
FASB Statements No. 123 and 95, that would require companies to
account for stock-based compensation to employees using a fair value
method as of the grant date. The proposed statement addresses the
accounting for transactions in which a company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the company's equity
instruments or that may be settled through the issuance of such
equity instruments, which includes the accounting for employee stock
purchase plans. This proposed statement would eliminate a company's
ability to account for share-based awards to employees using APB
Opinion 25, Accounting for Stock Issued to Employees but would not
change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting
for employee stock ownership plans. The proposed statement, if
adopted, would be effective for awards that are granted, modified, or
settled in fiscal years beginning after December 15, 2004. The
Company is in the process of assessing the potential impact of this
proposed statement to the financial statements.
Inventory valuation reserves
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 (FIN 46), as revised December 2003.
This interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities (VIEs) that
either: (1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support, or (2) the equity investors lack an
essential characteristic of a controlling financial interest. This
interpretation applies immediately to VIEs created after January 31,
2003. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to VIEs in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The application
of FIN 46 did not have a material effect on our consolidated
financial statements.
Item 3. CONTROLS AND PROCEDURES
As of March 31, 2004, under the supervision and with the
participation of management, including the chief executive officer
and the chief financial officer, the Company has evaluated the
effectiveness of the design and operation of our disclosure controls
and procedures. Based on our evaluation, our chief executive officer
and our chief financial officer concluded that these controls and
procedures are effective in alerting them in a timely manner to
material information required to be disclosed in the reports that we
file with the SEC. There have been no significant changes in our
internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 - Changes in Securities
(a) None.
(b) None.
In March 2004, the Company sold 794,718 shares of the Company for
proceeds of $220,557.43 at a price of $0.2775 per share, less ten percent,
for proceeds to the Company of $198,502. The issuance is considered
exempt from registration by reason of the Section 4(2) of the Securities
Act of 1933.
In March 2004, the Company sold 1,022,961 shares of the Company for
proceeds of $277,533.01, at a price of $0.2713 per share, less ten percent,
for proceeds to the Company of $248,438. The issuance is considered
exempt from registration by reason of the Section 4(2) of the Securities
Act of 1933.
(d) None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
(1) Certification by Vito A. Peppitoni
(2) Certification by Sylvia Quintero
Exhibit (32) Section 1350 Certifications
(1) Certification by Vito A. Peppitoni
(2) Certification by Sylvia Quintero
(b). Reports on Form 8-K
None.
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: May 24, 2004 By: /s/ Vito A. Peppitoni
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 24, 2004 By: /s/ Sylvia Quintero
Chief Operating Officer (Principal
Accounting and Financial Officer)