Attached files
file | filename |
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EX-5.1 - Avantair, Inc | v172078_ex5-1.htm |
EX-23.1 - Avantair, Inc | v172078_ex23-1.htm |
EX-10.18 - Avantair, Inc | v172078_ex10-18.htm |
EX-10.19 - Avantair, Inc | v172078_ex10-19.htm |
EX-10.17 - Avantair, Inc | v172078_ex10-17.htm |
EX-10.13 - Avantair, Inc | v172078_ex10-13.htm |
EX-10.14 - Avantair, Inc | v172078_ex10-14.htm |
EX-10.16 - Avantair, Inc | v172078_ex10-16.htm |
EX-10.15 - Avantair, Inc | v172078_ex10-15.htm |
As
filed with the Securities and Exchange Commission on January 26,
2010
Registration
No. ____333-163152____
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
AMENDMENT
NO. 1
TO
FORM
S-1
Registration
Statement
Under
The
Securities Act of 1933
Avantair,
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
4522
(Primary Standard Industrial
Classification Code number)
|
|
20-1635240
(I.R.S. Employer
Identification No.)
|
4311
General Howard Drive
Clearwater,
FL 33762
(727)
539-0071
(Address,
including zip code, and telephone number, including area code, of Registrant’s
principal executive offices)
Steven
Santo
Chief
Executive Officer
Avantair,
Inc.
4311
General Howard Drive
Clearwater,
FL 33762
(727)
539-0071
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Jamie
Knox, Esq.
Douglas
Rappaport, Esq.
DLA
Piper LLP (US)
1251
Avenue of the Americas
New
York, NY 10020
(212)
335-4500
Approximate
date of commencement of proposed sale to the public:
From time
to time after the Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement number for the
same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company
þ
|
CALCULATION
OF REGISTRATION FEE
Title of
securities to
be registered
|
Amount to be
Registered (1)
|
Proposed maximum
aggregate offering
price (2)
|
Amount of
registration fee
|
|||||||||
Common
Stock, Par value $0.0001 per share
|
11,425,307
|
$
|
18,280,491
|
$
|
1,020
|
|||||||
Total
|
11,425,307
|
18,280,491
|
1,020
|
(3) |
(1) Pursuant
to Rule 416, this Registration Statement also covers such additional securities
that may be issuable as a result of stock splits, stock dividends and similar
transactions. Includes 455,887 shares issuable upon the exercise of
warrants.
(2) Estimated
solely for purposes of calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933, as amended, based upon the average bid and
asked prices of the Common Stock on November 12, 2009.
(3) Previously
Paid.
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS
11,425,307
Shares
Avantair,
Inc.
This
prospectus relates solely to the sale or other disposition of up to an aggregate
of 11,425,307 shares of common stock of Avantair, Inc., including 455,887 shares
of common stock underlying warrants issued by Avantair, to the
Selling Stockholders identified in the section entitled “Selling Stockholders”
on page 47 of this prospectus or their transferees.
The
Selling Stockholders may, from time to time, sell, transfer or otherwise dispose
of any or all of their shares of common stock or interests in shares of common
stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices. For additional information, you should refer to the section
entitled “Plan of Distribution” on page 63 of this prospectus. We will not
receive any proceeds from the sale or other disposition of the shares of common
stock covered hereby by the Selling Stockholders. We are contractually obligated
to pay all expenses of registration incurred in connection with this offering,
except any underwriting discounts and commissions incurred by the Selling
Stockholders.
Our
common stock is currently quoted on the Over-the-Counter Bulletin Board under
the symbol “AAIR.OB”. On January 21, 2010 the last reported sale price of our
shares was $2.10 per share. You should rely only on the information contained in
this prospectus. We have not authorized any other person to provide you with
different information.
You should consider carefully the
risks that we have described in “Risk Factors” beginning on page 7 before deciding whether to invest in
our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful and complete. Any representation to the contrary is a criminal
offense.
This
prospectus is
dated ,
2010.
You
should rely only on the information contained in this prospectus or contained in
any free writing prospectus filed with the Securities and Exchange Commission,
or SEC. We have not authorized anyone to provide you with information different
from that contained in this prospectus. The Selling Stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale or other disposition of our
common stock.
The
information in this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
Subject
to Completion, dated January 26, 2010
TABLE
OF CONTENTS
PAGE
|
|
PROSPECTUS
SUMMARY
|
1
|
SELECTED
FINANCIAL DATA
|
5
|
RISK
FACTORS
|
7
|
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
|
15
|
MARKET
AND INDUSTRY DATA
|
15
|
USE
OF PROCEEDS
|
15
|
PRICE
RANGE OF SECURITIES AND DIVIDENDS
|
16
|
DIVIDEND
POLICY
|
16
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
17
|
BUSINESS
|
26
|
MANAGEMENT
|
34
|
SELLING
STOCKHOLDERS
|
47
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS RELATED PARTY
TRANSACTIONS
|
55
|
DESCRIPTION
OF CAPITAL STOCK
|
57
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
62
|
PLAN
OF DISTRIBUTION
|
63
|
LEGAL
MATTERS
|
64
|
EXPERTS
|
64
|
WHERE
YOU CAN FIND MORE INFORMATION
|
64
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
F-1
|
This summary highlights selected
information more fully described elsewhere in this prospectus. You should read
the following summary together with the entire prospectus, including the more
detailed information regarding us and the common stock being sold in this
offering and our financial statements and the related notes appearing elsewhere
in this prospectus. You should carefully consider, among other things, the
matters discussed in the section entitled “Risk Factors” beginning on
page 7 before deciding
to invest in our common stock. Unless otherwise stated or the context requires
otherwise, references in this prospectus to “we,” “our,” “us,” “Avantair” or the
Company refer to Avantair, Inc., and its subsidiaries.
Overview
Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
January 21, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.
Avantair
also operates fixed flight based operations (FBO) in Camarillo, California and
effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair
fleet.
Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under maintenance and
management agreements with fractional owners, Avantair provides pilots,
maintenance, fuel and hangar space for the aircraft.
In
response to the general economic downturn and the resulting growth of flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This new product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.
Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. During the second quarter of fiscal
2010, the Company, through an arms-length transaction, transferred its rights to
purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing
aircraft purchase agreement between the Company and Piaggio. Upon delivery of
the aircraft, Piaggio returned to the Company $2.6 million of deposits
previously paid on the aircraft by the Company. Simultaneous with
this transaction, the Company entered into an eight-year management agreement
for those aircraft and the Company issued 2,373,260 warrants to Lorne Weil, the
Managing Member of LW Air LLC. Pursuant to the agreement between the
parties, the Company will manage each aircraft for a monthly fee which is
variable based upon aircraft flight hours but will not exceed $56,500 per month.
The agreement also allows the Company to enter into short-term leases for the
use of the aircraft at a specified dry lease rate per flight hour. These
aircraft are anticipated to be utilized to satisfy fleet demands of the growing
flight hour card and Axis Club Membership Program product
lines.
In
October 2009, the Company consummated a private sale of its common stock to
investors generating net proceeds of approximately $8.0 million. Together
with the proceeds of the private placements consummated in June and September
2009, the Company received total net proceeds of approximately $9.9 million.
(See recent developments below.)
The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Sales by product category follow:
FY 2009 Unit Sales for the Three Months Ended
|
FY 2010
|
|||||||||||||||||||||||
|
September 30, 2008
|
December 31, 2008
|
March 31, 2009
|
June 30, 2009
|
Total
|
September 30, 2009
|
||||||||||||||||||
New
Fractional shares
|
19.5
|
16.5
|
-
|
2
|
38
|
2
|
||||||||||||||||||
Flight
hour cards
|
27
|
53
|
29
|
51
|
160
|
86
|
||||||||||||||||||
Axis
Club Memberships
|
N/A
|
N/A
|
2
|
8
|
10
|
3
|
1
Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At January 21, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.
At
September 30, 2009 and June 30, 2009, Avantair had assets of approximately
$155.2 million and $164.0 million, respectively. For the fiscal quarter ended
September 30, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.2 million and $136.8 million, respectively, and net
losses of approximately $1.4 million and $4.5 million, respectively. Avantair
has incurred losses since inception and may not be able to generate sufficient
net revenue from its business in the future to achieve or sustain profitability.
At December 31, 2009, the Company had approximately $6.8 million of unrestricted
cash on hand and assuming there is no change in sales and expense trends
experienced since the fourth quarter of fiscal 2009, the Company believes that
its cash on hand is sufficient to continue operations for the foreseeable
future.
Recent
Developments
The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. On December 14, 2009, the Company sold the aircraft to a third
party for $2.9 million and paid the remaining outstanding balance of the
purchase price to JMMS.
On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. Each unit consisted of two shares of common stock and one warrant to
purchase one common share. The warrants had an exercise price of $4.00 per share
and were exercisable until June 30, 2012. The sale was consummated under the
terms of a Securities Purchase Agreement between Avantair and each of the
private placement investors. Pursuant to a registration rights agreement,
Avantair has agreed to use it best efforts to register the shares issued to the
private placement investors and the shares underlying the warrants issued to the
private placement investors for sale under the Securities Act of 1933, as
amended. By agreement between Avantair, the investors in the June 30, 2009
private placement and that offering’s placement agent, the period for additional
sales of units was extended until October 15, 2009. On September 25, 2009, the
Company sold an additional 250,000 units at a price of $2.50 per unit generating
net proceeds of approximately $0.6 million. On October 19, 2009, the Company
sold 8,818,892 shares of common stock to new investors at a price per share of
$0.95 for net proceeds of approximately $8.0 million pursuant to the October 16,
2009 Securities Purchase and Exchange Agreement. In addition, pursuant to the
October 16, 2009 Securities Purchase and Exchange Agreement, on October 19, 2009
the Company exchanged the 817,200 outstanding warrants that had been issued to
existing investors in the June and September private placements for an aggregate
of 516,127 shares of common stock. The October 2009 Securities Purchase and
Exchange Agreement terminated the Securities Purchase and Registration Rights
Agreements entered into in connection with the June and September 2009 private
placements.
In
connection with the transactions contemplated by the Securities Purchase and
Exchange Agreement,
Avantair entered into a Registration Rights Agreement with the parties to the
Securities Purchase and Exchange Agreement. The Registration Rights
Agreement requires the Company promptly, but not later than November 18, 2009,
to file a registration statement registering for sale the shares issued to the
investors and to cause the registration statement to be declared effective prior
to the earlier of (i) five business days after the Securities and Exchange
Commission (“SEC”) has informed the Company that no review of the
registration statement will be made or that it has no further comments on the
registration statement or (ii) January 17, 2010 (March 18, 2010, if the registration
statement is reviewed by the SEC). Under the terms of the Registration Rights
Agreement, the Company is obligated to maintain the effectiveness of the sale
registration statement, subject to certain exceptions, until all
securities registered thereunder are sold or otherwise can be sold pursuant to
Rule 144, without restriction and to promptly register
the securities covered thereby on a “short-form” registration statement once the
Company becomes eligible to do so. The Company is required to
pay to each investor an amount in cash, as liquidated damages, 1.5% of the
aggregate amount invested by such investor for each 30-day period or pro rata
for any portion thereof that the Company fails to be in compliance with the
requirements of the Registration Rights Agreement. The registration statement
incorporating this prospectus has been filed in partial satisfaction of the
Company’s obligations under the October 2009 Registration Rights
Agreement.
2
On
October 16, 2009, pursuant to an agreement between EarlyBirdCapital, Inc. and
the Company, in consideration for services rendered as placement agent for the
Company’s June, September and October 2009 private placements, the Company
issued to EarlyBirdCapital, Inc. and its affiliates 455,887 fully vested
warrants which expire on June 30, 2012. Each warrant permits the holder to
purchase one share of the Company’s common stock at an exercise price of $1.05
per share. The shares issuable upon exercise of the warrants are entitled to
registration rights under the October 2009 Registration Rights Agreement. The
Company may redeem the warrants at any time on or after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 200.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The fair value of the warrants (which will be completed in
connection with the preparation of the Company’s financial statements for the
quarter ended December 31, 2009) will be charged to additional paid-in
capital.
During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6
million of deposits previously paid on the aircraft by the
Company. Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour.
The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. On December 15, 2009, LW Air took delivery of the fourth aircraft
and as such, has satisfied the conditions for vesting of all the warrants.
The
Company will account for the LW Air transaction and the issuance of the warrants
by recording the charges paid to the owner (including the fair value of the
warrants which will be completed in connection with the preparation of the
Company’s financial statements for the quarter ended December 31, 2009) to the
Cost of Flight Operations on a straight-line basis ratably over the initial term
of the agreement.
On
October 19, 2009, the Company repaid the outstanding balance of approximately
$2.7 million of the promissory note entered into with CNM in August
2007.
On
October 19, 2009, the Company repaid the aircraft deposit agreement entered into
with MidSouth of approximately $0.5 million. The aircraft deposit agreement was
entered into on November 18, 2008 was for a term of twelve months and provided
for up to approximately $0.6 million of financing for the payment to the
aircraft manufacturer of deposits on future deliveries.
Industry
Overview
The
Company believes that fractional aircraft ownership provides customers with the
convenience and flexibility of private air service without the more significant
costs associated with sole ownership of an aircraft. Additionally, fractional
aircraft companies generally provide the same conveniences and benefits to
individuals and businesses through their various flight hour card programs.
Commercial flight delays can be costly and tiresome, commercial hubs are
increasingly crowded, major commercial airports may be far from final
destinations and commercial air travel is increasingly subject to threats and
security-related inconveniences. Attempting to divide the use of a plane among
multiple parties to maximize its value can be logistically challenging. For
businesses and high net worth individuals, fractional ownership and flight hour
card programs often offer a balance between convenience and
cost.
A
fractional aircraft company assembles a fleet of planes with each of these
planes available for a certain number of revenue generating flight hours per
year. Those hours are then divided into partial ownership shares and these
partial ownership shares are sold to individuals and businesses. Avantair’s
customers typically purchase one-sixteenth or one-eighth shares in an aircraft,
although in some cases the purchases are one-quarter shares or more. The
purchase of a one-eighth share means that the owner will pay approximately
one-eighth of the aircraft retail price initially and receive one-eighth of the
total number hours of flying time per year for the initial term of the contract,
which is five years for a new shareowner. An Avantair fractional share owner
agrees to pay Avantair an additional predetermined monthly fee to cover the
various costs of maintaining and operating the aircraft. Avantair is responsible
for all of these services.
According
to AvData, the North American fractionally owned aircraft fleet has grown from 8
aircraft in 1986 to an aggregate of 1,054 aircraft as of October 2009. According
to AvData, five companies have 10.0% or more of the total market for fractional
aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet,
CitationShares, and Avantair, with NetJets having a market share of
approximately 50.0% and Flight Options, FlexJet, CitationShares having a
combined market share of approximately 35.0%. According to AvData, as of October
2009, Avantair had an approximate market share of 10.0%.
3
The
general aviation industry builds and sells aircraft ranging from single
passenger, single engine propeller planes to multimillion dollar transoceanic
jets costing $50.0 million or more. The fractional aircraft industry has
primarily concentrated on the middle to upper end of that market. Most
fractionally owned aircraft have a capacity of between four and seven passengers
and a minimum range of 1,250-1,500 nautical miles. The list prices of these
types of aircraft are generally $5.0 million to $50.0 million. Avantair’s
Piaggio aircraft have a capacity of eight passengers and a minimum range of
1,200-1,500 nautical miles. The list price of a 1/16th share
of an Avantair Piaggio aircraft is $425,000 or $6.8 million for all 16 of the
shares in one aircraft. There are numerous manufacturers and models in most
categories of aircraft. Both providers of fractional aircraft shares and
purchasers of these shares consider the choice of aircraft based upon a variety
of factors including:
|
·
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price;
|
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·
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availability;
|
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·
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operating
costs;
|
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·
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reliability;
|
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·
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speed;
|
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·
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range;
|
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·
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cabin
size and features;
|
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·
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safety
features and record;
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·
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environmental
impact;
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·
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efficiency;
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·
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maintenance
cost;
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·
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manufacturer;
and
|
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·
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runway
requirements.
|
Some
of Avantair’s principal competitors are wholly or partially owned by aircraft
manufacturers and/or their affiliated parent companies, which have resulted in
their fleets being largely comprised of aircraft built by their respective
parent companies. Although Avantair operates exclusively one aircraft type, the
Company is not owned by any manufacturer.
Fractional
operators must have sufficient numbers of aircraft in the fleet to provide the
service required. Since fractional share buyers desire to enter the program as
soon as possible after purchasing shares, operators are obligated to provide
access to aircraft when the shareowner requests it. If the operator does not
have ample capacity available, it must charter that capacity, a practice that
can be very costly. As a result, fractional operators tend to place orders for
aircraft in advance, and only sell shares within a few weeks prior to taking
delivery of the aircraft. Fractional operators may also offer various flight
hour card programs, which provide a certain number of flight hours to be used
during a specific period of time, generally one year. The flight hour card
programs subject the fractional operators to similar capacity requirements as
fractional shareowners.
The
capital requirements for ordering aircraft require the operator to place
deposits well in advance of receiving its planes. Progress payments are made as
certain milestones are achieved. The amounts of the deposits and progress
payments are a function of several factors including the price of the underlying
plane, the creditworthiness of the buyer, and the time until delivery. The
majority of the payments are generally made upon delivery.
Corporate
Information
Avantair’s
principal executive offices are located at 4311 General Howard Drive,
Clearwater, Florida 33762 and its telephone number is (727) 539-0071. The
Company’s website address is www.avantair.com. The information on, or that can
be accessed through, its website is not part of this prospectus. In 2007, the
Company changed its fiscal year end from December 31st to June
30th.
The
Offering
Common
stock covered hereby
|
Up
to 11,425,307 shares
|
|
Use
of Proceeds
|
The
Company will not receive any proceeds from the sale or other disposition
of the shares of common stock covered by this
prospectus.
|
|
OTC
Bulletin Board symbol for our Common Stock
|
“AAIR.OB”
|
As of
January 21, 2010, the Company had 26,384,603 shares of common stock outstanding,
1,058,166 shares of common stock available for future issuance under its 2006
Long-Term Stock Incentive Plan, and warrants to purchase 2,829,507 shares
outstanding. In addition, as of January 21, 2010, the Company has 152,000 shares
of Series A Preferred Shares outstanding. The Company has
4,251,857 shares of common stock reserved on its books and records for issuance
upon the conversion of the outstanding Series A Preferred Shares. As a result of
the sales of shares consummated on June 30, September 25, and October 16, 2009,
the conversion price of the Series A Preferred Shares was reduced from $5.15 to
$3.57.
The
Company is contractually obligated to pay all expenses of registration incurred
in connection with this offering, except any underwriting discounts and
commissions incurred by the Selling Stockholders.
4
SELECTED
FINANCIAL DATA
The
following table presents the Company’s summary historical consolidated financial
information. The summary consolidated statements of operations data for each of
the two fiscal years in the period ended June 30, 2009 and the consolidated
balance sheet data as of June 30, 2009 and 2008 have been derived from our
audited consolidated financial statements included elsewhere in this report. The
consolidated statement of operations data for each of the fiscal years ended
June 30, 2007, and 2006 and the consolidated balance sheet information as of
June 30, 2007 and 2006 was derived from our audited consolidated financial
statements. The summary consolidated statement of operations data for the
three-month period ended September 30, 2009 and 2008 and the consolidated
balance sheet data as of September 30, 2009 are derived from unaudited condensed
consolidated financial statements which are included elsewhere in this
prospectus. These historical results are not necessarily indicative of results
to be expected in any future period.
Avantair,
Inc. and Subsidiaries
Consolidated
Statement of Operations
Three Months Ended
|
Years Ended June 30,
|
|||||||||||||||||||||||
September 30, 2009
|
September 30, 2008
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||||||
Consolidated
Statement of Operations Data
|
||||||||||||||||||||||||
Revenue
|
||||||||||||||||||||||||
Fractional
aircraft sold
|
$
|
11,978,836
|
$
|
12,493,716
|
$
|
51,864,010
|
$
|
43,426,696
|
$
|
29,695,175
|
$
|
23,756,070
|
||||||||||||
Maintenance
and management fees
|
17,974,569
|
17,077,139
|
70,693,367
|
58,211,457
|
38,787,596
|
22,824,940
|
||||||||||||||||||
Flight
hour card and Axis membership revenue
|
3,858,470
|
1,844,126
|
9,384,110
|
7,236,151
|
3,607,831
|
210,900
|
||||||||||||||||||
Other
revenues
|
1,393,009
|
1,261,480
|
4,885,563
|
6,744,679
|
4,302,630
|
1,603,470
|
||||||||||||||||||
Total
revenue
|
35,204,884
|
32,676,461
|
136,827,050
|
115,618,983
|
76,393,232
|
48,395,380
|
||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||
Cost
of fractional aircraft shares sold
|
10,200,603
|
10,605,023
|
44,118,352
|
36,637,959
|
24,370,988
|
19,166,722
|
||||||||||||||||||
Cost
of flight operations
|
12,420,238
|
11,810,384
|
46,723,184
|
50,058,692
|
35,665,057
|
25,362,985
|
||||||||||||||||||
Write-off
of aircraft deposit
|
-
|
-
|
-
|
-
|
300,000
|
-
|
||||||||||||||||||
Gain
on sale of asset
|
-
|
-
|
(1,394,164
|
)
|
(861,410
|
)
|
(207,544
|
)
|
||||||||||||||||
Cost
of fuel
|
3,638,902
|
4,512,406
|
13,349,084
|
16,489,422
|
10,192,406
|
6,419,835
|
||||||||||||||||||
General
and administrative expenses
|
6,252,381
|
5,660,787
|
23,628,541
|
20,703,120
|
18,540,610
|
10,757,280
|
||||||||||||||||||
Selling
expenses
|
985,765
|
907,751
|
3,736,424
|
4,670,246
|
4,333,268
|
3,672,754
|
||||||||||||||||||
Depreciation
and amortization
|
||||||||||||||||||||||||
1,457,917
|
1,082,265
|
5,233,250
|
3,624,710
|
2,013,530
|
2,649,096
|
|||||||||||||||||||
Total
operating expenses
|
34,955,806
|
34,578,616
|
135,394,671
|
131,322,739
|
95,415,859
|
67,821,128
|
||||||||||||||||||
Income
(loss) from operations
|
249,078
|
(1,902,155
|
)
|
1,432,379
|
(15,703,756
|
)
|
(19,022,627
|
)
|
(19,425,748
|
)
|
||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||
Interest
income
|
5,163
|
24,702
|
46,073
|
482,666
|
444,179
|
557,508
|
||||||||||||||||||
Other
income
|
2,250
|
1,200
|
2,848
|
252
|
284,723
|
230,438
|
||||||||||||||||||
Interest
expense
|
(1,623,454
|
)
|
(1,459,481
|
)
|
(5,942,221
|
)
|
(3,661,227
|
)
|
(3,406,181
|
)
|
(2,110,119
|
)
|
||||||||||||
Total
other expenses
|
(1,616,041
|
)
|
(1,433,579
|
)
|
(5,893,300
|
)
|
(3,178,309
|
)
|
(2,677,279
|
)
|
(1,322,173
|
)
|
||||||||||||
Net
loss
|
(1,366,963
|
)
|
(3,335,734
|
)
|
(4,460,921
|
)
|
(18,882,065
|
)
|
(21,699,906
|
)
|
(20,747,921
|
)
|
||||||||||||
Preferred
stock dividend and accretion of expenses
|
(402,115
|
)
|
(391,513
|
)
|
(1,488,071
|
)
|
(903,851
|
)
|
-
|
-
|
||||||||||||||
Net
loss attributable to common stockholders
|
$
|
(1,769,078
|
)
|
$
|
(3,727,247
|
)
|
$
|
(5,948,992
|
)
|
$
|
(19,785,916
|
)
|
$
|
(21,699,906
|
)
|
$
|
(20,747,921
|
)
|
||||||
Loss
per common share:
|
||||||||||||||||||||||||
Basic
and diluted
|
$
|
(0.11
|
)
|
$
|
(0.24
|
)
|
$
|
(0.39
|
)
|
$
|
(1.30
|
)
|
$
|
(2.47
|
)
|
$
|
(6.31
|
)
|
||||||
Weighted-
average common shares outstanding:
|
||||||||||||||||||||||||
Basic
and diluted
|
16,468,122
|
15,287,694
|
15,306,725
|
15,230,482
|
8,780,234
|
3,288,590
|
5
Three Months Ended
|
As of June 30,
|
|||||||||||||||||||
September 30, 2009
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Consolidated
Balance Sheet Data
|
||||||||||||||||||||
Total
assets
|
$
|
155,197,812
|
$
|
164,065,403
|
$
|
204,477,455
|
$
|
160,490,260
|
$
|
105,154,683
|
||||||||||
Long-term
liabilities
|
$
|
78,301,720
|
$
|
88,229,537
|
$
|
123,018,837
|
$
|
112,509,063
|
$
|
72,844,665
|
||||||||||
Stockholders'
deficit
|
$
|
(37,199,063
|
)
|
$
|
(36,007,683
|
)
|
$
|
(31,651,546
|
)
|
$
|
(11,959,024
|
)
|
$
|
(35,030,607
|
)
|
6
RISK
FACTORS
You
should carefully consider the risks described below before making a decision to
buy our common stock. If any of the following risks actually occurs, our
business, financial condition and results of operations could be harmed. In that
case, the trading price of our common stock could decline and you might lose all
or part of your investment in our common stock. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the related notes.
Risks
Related to Our Common Stock
There
will be a substantial number of shares of Avantair’s common stock available for
sale in the future that may be dilutive to its current stockholders and may
cause a decrease in the market price of its common stock.
As of
January 21, 2010, the Company had 26,384,603 shares of common stock outstanding,
1,058,166 shares of common stock available for future issuance under its 2006
Long-Term Stock Incentive Plan and warrants to purchase 2,829,507 shares
outstanding. In addition, as of January 21, 2010, the Company has 152,000 shares
of Series A Preferred Shares outstanding. As of January 21,
2010, the Company has 4,251,857 shares of common stock reserved on its books and
records for issuance upon the conversion of the outstanding Series A Preferred
Shares. The 11,425,307 shares of common stock registered pursuant to this
Registration Statement will be freely tradable once this Registration Statement
is declared effective by the Securities and Exchange Commission without
restriction or further registration under the Securities Act, unless the shares
are purchased by “affiliates” as that term is defined in Rule 144 under the
Securities Act. Any shares purchased by an affiliate may not be resold except
pursuant to an effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144 of the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. As a result of the sales of shares
consummated on June 30, September 25, and October 16, 2009, the conversion price
of the Series A Preferred Shares was reduced from $5.15 to $3.57. Options to
purchase a total of 300,000 units at an exercise price of $9.90 per unit (with
each unit consisting of one share of the Company’s common stock and two
warrants, each to purchase one share of its common stock at an exercise price of
$6.25 per share) were issued in connection with the underwriting of its initial
public offering and will expire on February 23, 2010.
Future
sales or issuances of the Company’s common stock or securities convertible into
common stock, the perception such sales or issuances may occur or the
availability for sale in the public market of substantial amounts of our common
stock could adversely affect the prevailing market price of our common stock and
could impair our ability to raise capital through future sales of equity
securities at a time and price that we deem appropriate.
Avantair’s
shares of common stock may become subject to the SEC’s penny stock rules and
broker-dealers may experience difficulty in completing customer transactions and
trading activity in its securities may be adversely affected.
If at any
time Avantair has net tangible assets of $5.0 million or less and its ordinary
shares have a market price per share of less than $5.00, transactions in its
ordinary shares may be subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional accredited investors
must:
|
·
|
make
a special written suitability determination for the
purchaser;
|
|
·
|
receive
the purchaser’s written agreement to a transaction prior to
sale;
|
|
·
|
provide
the purchaser with risk disclosure documents that identify certain risks
associated with investing in “penny stocks” and that describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
|
|
·
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has actually received the required risk disclosure document
before a transaction in a “penny stock” can be
completed.
|
If
Avantair’s shares of common stock become subject to these rules, broker-dealers
may find it difficult to effectuate customer transactions and trading activity
in its securities may be adversely affected. As a result, the market price of
the securities may be depressed, and you may find it more difficult to sell the
securities.
Avantair
has been unable to receive a listing of its securities on NASDAQ or another
national securities exchange, and this may make it more difficult for its
stockholders to sell their securities.
Shares of
Avantair’s common stock and units are currently traded in the over-the-counter
market and quoted on the OTCBB. The Company’s common stock and units are not
currently eligible for inclusion in The NASDAQ Stock Market. If the Company is
unable to receive a listing or approval of trading of securities on NASDAQ or
another national securities exchange, then it may be more difficult for
stockholders to sell their securities.
7
Under
the October 16, 2009 Securities Purchase and Exchange Agreement, the Company has
agreed to use its commercially reasonable best efforts to qualify for the
listing of the outstanding common stock on the NASDAQ Capital Market as promptly
as practicable. In order to complete a listing on the NASDAQ Capital Market, the
Company may be required to complete a reverse split of its common stock to
satisfy the minimum per share price requirement for initial listing on that
market. The consummation of a reverse split will reduce the number of
outstanding shares of the Company’s common stock and may adversely affect the
trading price and liquidity of the Company’s common stock. The Company cannot
provide assurance that a reverse stock split will increase the trading price of
its common stock. Even if a reverse stock split is completed, the Company may be
unable to qualify its common stock for listing on the NASDAQ Capital Market, or
to maintain such a listing if initially qualified.
Risks
Related to Our Business
Avantair
has a history of losses and may not be able to generate sufficient net revenue
from its business in the future to achieve or sustain
profitability.
Avantair
has incurred losses since inception. To date, Avantair’s revenues have largely
come from sales of fractional interests and flight hour cards in aircraft and
monthly management fees. Avantair’s primary expenses - cost of aircraft, cost of
flight operations and overhead - have increased over the past several years and
significantly exceeded revenues. Avantair’s consolidated financial statements
have been prepared assuming that Avantair will continue as a going concern. This
basis of accounting contemplates the recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. Successful
transition to profitable operations is dependent upon obtaining a level of sales
adequate to support the Company’s cost structure and an uninterrupted delivery
of aircraft. The Company has suffered recurring losses resulting in a
stockholders’ deficit of approximately $37.2 million and a working capital
deficiency of $52.0 million as of September 30, 2009 and a stockholders’ deficit
of $36.0 million and a working capital deficiency of $49.2 million as of June
30, 2009. Historically, the Company has been able to finance operations from the
capital obtained through the Reverse Merger which was completed on February 22,
2007 and the capital obtained through the November 2007 private placement of
Series A Convertible Preferred Stock which raised gross proceeds of $15.2
million and the June, September and October 2009 private placements of Common
Stock which raised net proceeds of $1.3 million, $0.6 million and $8.0 million,
respectively. Management intends to continue to finance the operations of the
Company through future cash flows from operations and future financings.
However, Avantair’s expenses are expected to increase as it acquires additional
aircraft and expands its operations, and there is no assurance that Avantair
will be able to obtain sufficient financing (or financing on acceptable terms)
or earn sufficient revenues to generate positive cash flow and attain
profitability.
If
Avantair is unable to fund its operations and capital expenditures, Avantair may
not be able to continue to acquire additional inventory of aircraft, which would
have a material adverse effect on its business.
Avantair
has experienced significant negative cash flow since its inception. In order to
fund Avantair’s operations and capital expenditures, Avantair may be required to
incur borrowings or raise capital through the sale of debt or equity securities.
The Company’s ability to borrow or access the capital markets for future
offerings may be limited by its financial condition at the time of any such
offering as well as by adverse market conditions resulting from, among other
things, general economic conditions and contingencies and uncertainties that are
beyond our control. Avantair’s failure to obtain the funds for necessary future
capital expenditures would limit its ability to acquire additional inventory of
aircraft and could have a material adverse effect on our business, results of
operations and financial condition.
Avantair
is dependent upon key personnel whose loss may adversely impact Avantair’s
business.
Avantair
depends on the expertise, experience and continued services of its senior
management employees, especially Steven Santo, its Chief Executive Officer
(CEO), Richard Pytak, its Chief Financial Officer (CFO) and Kevin Beitzel, its
Chief Operating Officer (COO). Mr. Santo has acquired specialized knowledge and
skills with respect to Avantair and its operations and most decisions concerning
the business of Avantair will be made or significantly influenced by him.
Avantair does not maintain life insurance with respect to Messrs. Santo, Pytak
or Beitzel or any other of its executives. The loss of Messrs. Santo, Pytak,
Beitzel or other senior management employees, or an inability to attract or
retain other key individuals, could materially adversely affect the Company. The
Company seeks to compensate and incentivize its key executives, as well as other
employees, through competitive salaries and bonus plans, but there can be no
assurance that these programs will allow Avantair to retain key or hire new
employees. As a result, if Messrs. Santo, Pytak and/or Beitzel were to leave
Avantair, the Company could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any such successors
obtain the necessary training and experience. On September 29, 2006, Avantair
entered into a three year employment agreement with Mr. Santo which expired in
September 2009. On September 24, 2009, Avantair entered into a new three- year
employment agreement effective that same day. However, there can be no assurance
that a successor employment agreement will be entered into with Mr. Santo
following this three year term or that the terms of this employment agreement
will be sufficient to retain Mr. Santo.
Avantair’s
management systems and personnel may not be sufficient to effectively manage its
growth.
Avantair’s
growth strategy involves increasing the number of available aircraft, fractional
share owners, flight hour card and membership program participants and fixed
base operations. Achieving Avantair’s growth strategy is critical in order for
its business to achieve economies of scale and to achieve profitability. Any
condition that would deny, limit or delay its ability to acquire additional
aircraft, sell fractional shares, flight hour cards and/or memberships and open
additional fixed base operations in the future will constrain Avantair’s ability
to grow. Acquiring additional aircraft, selling fractional shares, flight hour
cards and/or memberships and opening fixed base operations requires Avantair to
commit a substantial amount of resources. Expansion is also dependent upon
Avantair’s ability to maintain a safe and secure operation and will require
additional personnel, equipment and facilities.
8
An
inability to hire and retain personnel, timely secure the required equipment and
facilities in a cost-effective manner, efficiently operate Avantair’s expanded
facilities, or maintain the necessary regulatory requirements may adversely
affect Avantair’s ability to achieve its growth strategy. There can be no
assurance that Avantair will be able to successfully expand its business in this
increased competitive environment, and if Avantair fails to do so, its business
could be harmed.
Expansion
of Avantair’s business will also strain its existing management resources and
operational, financial and management information systems to the point that they
may no longer be adequate to support its operations, requiring Avantair to make
significant expenditures in these areas. Avantair will need to develop further
financial, operational and management reporting systems and procedures to
accommodate future growth and reporting requirements under Section 404 of the
Sarbanes Oxley Act of 2002 (including pursuant to other applicable securities
laws). There can be no assurance that Avantair will be able to develop such
additional systems or procedures to accommodate its future expansion on a timely
basis, and the failure to do so could harm its business.
The
aviation industry has inherent operational risks that may not be adequately
covered by Avantair’s insurance.
Avantair
maintains insurance on its aircraft for risks commonly insured against by
aircraft owners and operators, including hull physical damage liability,
third-party liability, airport premises liability, war risk liability and ground
hangar keepers’ liability coverage. Avantair can give no assurance that Avantair
will be adequately insured against all risks or that its insurers will pay a
particular claim. Even if its insurance coverage is adequate to cover its
losses, Avantair may not be able to timely obtain a replacement aircraft in the
event of a loss. Furthermore, in the future, Avantair may not be able to obtain
adequate insurance coverage at reasonable rates for its fleet. Avantair’s
insurance policies will also contain deductibles, limitations and exclusions
which, although the Company believes that such policies are standard in the
aviation industry, may nevertheless increase its costs. Moreover, certain
accidents or other occurrences may result in intangible damages (such as damages
to reputation) for which insurance may not provide an adequate
remedy.
Avantair
may not be able to generate sufficient cash flows to meet its debt service
obligations or other financial obligations.
Avantair’s
ability to make payments on its indebtedness and acquire additional aircraft
will depend on its ability to generate cash from its future operations. As of
September 30, 2009 and June 30, 2009, Avantair had incurred an aggregate of
approximately $40.2 and $42.6 million, respectively, in short and long term
indebtedness to third party lenders. Much of this indebtedness is secured by
some or all of Avantair’s assets. In addition, as of January 21, 2010, the
Company has commitments valued at $330 million to purchase 52 additional
aircraft through 2013. Avantair’s business may not generate sufficient cash flow
from operations or from other sources sufficient to enable it to repay its
indebtedness and to fund its other liquidity needs, including capital
expenditure and aircraft acquisition requirements. Avantair may need to
refinance or restructure all or a portion of its indebtedness or other financial
obligations on or before maturity. Avantair may not be able to refinance any of
its indebtedness on commercially reasonable terms, or at all. If Avantair cannot
service or refinance its indebtedness or restructure its other financial
obligations, it may have to take actions such as selling assets, seeking
additional equity or reducing or delaying capital expenditures, any of which
could have a material adverse effect on our operations. Additionally, Avantair
may not be able to effect such actions, if necessary, on commercially reasonable
terms, or at all.
A
default under Avantair’s indebtedness may have a material adverse effect on
Avantair’s financial condition.
In the
event of a default under certain of Avantair’s indebtedness, the holders of the
indebtedness generally would be able to declare all of such indebtedness,
together with accrued interest, to be due and payable. In addition, borrowings
under certain of Avantair’s indebtedness are secured by a first priority lien on
all of its assets, and, in the event of a default, the lenders generally would
be entitled to seize the collateral. In addition, default under certain debt
instruments could in turn permit lenders under other debt instruments to declare
borrowings outstanding under those other instruments to be due and payable
pursuant to cross default clauses. Accordingly, the occurrence of a default
under any debt instrument, unless cured or waived, would likely have a material
adverse effect on Avantair’s business and Avantair’s results of
operations.
Avantair’s
loan agreements contain restrictive covenants that will limit Avantair’s
liquidity and corporate activities.
Avantair’s
loan agreements impose operating and financial restrictions that will limit
Avantair’s ability to:
|
·
|
create
additional liens on its assets;
|
|
·
|
make
investments;
|
|
·
|
engage
in mergers or acquisitions;
|
|
·
|
pay
dividends; and
|
|
·
|
sell
any of Avantair’s aircraft or any other assets outside the ordinary course
of business.
|
9
Therefore,
Avantair will need to seek permission from its lenders in order for Avantair to
engage in some corporate actions. Avantair’s lenders’ interests may be different
from those of Avantair, and no assurance can be given that Avantair will be able
to obtain its lenders’ permission when needed. This may prevent Avantair from
taking actions that are in its best interest.
Avantair’s
dependence on Piaggio Avanti aircraft manufacturers poses a significant risk to
its business and prospects.
As
part of the Company’s business strategy, Avantair has historically sold and
flown only Piaggio Avanti aircraft. The type of aircraft sold and operated by
Avantair is the product of a single manufacturer. If the Piaggio Avanti
manufacturer faced production delays due to, for example, natural disasters or
labor strikes, Avantair may experience a significant delay in the delivery of
previously ordered aircraft, which would adversely affect its revenues and
profitability and could jeopardize its ability to meet the demands of its
customers. Although Avantair could choose to operate aircraft of other types,
such a change would involve substantial expense to the Company and could disrupt
the Company’s business activities. Avantair has limited alternatives to find
alternate sources of new aircraft.
Avantair’s
dependence on the importation of foreign aircraft poses a significant risk to
its business prospects.
Avantair’s
revenue and profitability are based in part on current laws and regulations
regarding the exportation from Italy by Piaggio Aero Industries S.p.A, the
country of manufacture and importation into the United States of the aircraft.
Current laws and regulations do not preclude the exportation from the subject
manufacturers’ countries of operation or importation of the aircraft into the
United States, provided that all applicable statutory and regulatory
requirements are satisfied. Modification of such statutes and regulations by any
foreign government or any agency thereof with respect to the exportation of the
aircraft or modification of such statutes and regulations by the federal
government of the United States or any agency thereof affecting the importation
of the aircraft, could pose a significant risk to Avantair’s business
operations. The risks for Avantair associated with the modification of the
exportation and importation statutes and regulations are increased due to
Avantair’s current dependence on the importation of foreign aircraft for the
operation of its business. Piaggio America, Inc. ensures compliance with the
statutory and regulatory requirements for the importation of the aircraft into
the United States prior to the Company taking delivery of the aircraft in the
United States.
Avantair’s
reputation and financial results could be harmed in the event of an accident or
incident involving its aircraft, or aircraft of the same type.
An
accident or incident involving one of Avantair’s aircraft could involve
significant potential claims of injured passengers or others in addition to
repair or replacement of a damaged aircraft and its consequential temporary or
permanent loss from service. Although Avantair believes it currently maintains
liability insurance in amounts and of the type generally consistent with
industry practice, the amount of such coverage may not be adequate and Avantair
may be forced to bear substantial losses from an accident. Substantial claims
resulting from an accident in excess of Avantair’s related insurance coverage
would harm its business and financial results. Moreover, any aircraft accident
or incident, even if fully insured, could cause a public perception that
Avantair or the Piaggio Avanti aircraft is less safe or reliable than other
competitors, which would harm Avantair’s business. In addition, any accident
involving the Piaggio Avanti aircraft type, even if the aircraft involved is not
operated by Avantair, could also cause a public perception that Avantair or the
Piaggio Avanti aircraft is less safe or reliable than other competitors, which
would harm Avantair’s business.
The
fractional aircraft industry is competitive.
Avantair
competes with national airlines, regional airlines, charter carriers, other
fractional aircraft ownership operators, and particularly on shorter routes,
ground transportation. According to AvData, five companies have 10.0% or more of
the total market for fractional aircraft, based upon the units in operation -
NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets
having a market share of approximately 50.0% and Flight Options, FlexJet,
CitationShares having a combined market share of approximately 35.0%. According
to AvData, as of October 2009, Avantair had an approximate market share of
10.0%. Many of Avantair’s competitors have been in business far longer than
Avantair and have significantly greater financial stability, access to capital
markets and name recognition. In addition, some of our competitors offer a
greater selection of aircraft (including jet aircraft), some of which permit
owners to fly greater distances or at greater speeds, travel with a greater
number of passengers and on shorter advance notice before flying. Unanticipated
shortfalls in expected revenues as a result of price competition or in delivery
delays by suppliers would negatively impact our financial results and harm
Avantair’s business. There is no assurance that Avantair will be able to
successfully compete in this industry.
10
Restriction
on foreign ownership and possible required divestiture of stock may impact
Avantair’s stock price.
In
some cases, including all current international operations, Avantair is deemed
to transport persons or property by air for compensation, and Avantair
accordingly is regulated by the FAA and the U.S. Department of Transportation as
an on demand air carrier. Therefore, to comply with restrictions imposed by U.S.
aviation laws on foreign ownership of air carriers, the Company’s certificate of
incorporation and bylaws have been amended to reflect that at least 75.0% of its
voting stock is required to be held by U.S. citizens. Although Avantair’s
amended and restated certificate of incorporation contains provisions limiting
non-citizen ownership of its voting stock, Avantair could lose its operating
certificate, which allows it to conduct aircraft operations in the U.S., if such
provisions prove unsuccessful in maintaining the required level of citizen
ownership. Such loss would have a material adverse effect on Avantair. If
Avantair determines that persons who are not citizens of the U.S. own more than
the permitted percentage, currently 25.0%, of Avantair’s voting stock, Avantair
may redeem such stock or, if redemption is not permitted by applicable law or
Avantair’s Board of Directors, in its discretion, elects not to make such
redemption, the Company may restrict the voting rights of such excess shares.
The required redemption would be at a price equal to the average closing price
during the preceding 10 trading days, which price could be materially different
from the current price of the common stock, or if the Company’s common stock is
not traded or quoted, at a price equal to the fair market value as
determined in good faith by Avantair’s Board of Directors, in each case, plus
the amounts of any dividends or other distributions which may be owed to the
stockholder. Avantair’s Board of Directors has not adopted a formula for
determining fair market value as the Company’s common stock is currently traded
and quoted. If a non-citizen purchases the voting stock, there can be no
assurance that their stock will not be redeemed, which redemption could result
in a material loss, or that they will be able to exercise full voting rights
with respect to such voting stock. Such restrictions and redemption rights may
make Avantair’s equity securities less attractive to potential investors, which
may result in Avantair’s publicly traded voting stock having a lower market
price than it might have in the absence of such restrictions and redemption
rights.
Future
acquisitions of fixed base operations (“FBO”) businesses or other assets by
Avantair would subject Avantair to additional business, operating and industry
risks, the impact of which cannot presently be evaluated, and could adversely
impact Avantair’s capital structure.
In the
future, Avantair may intend to pursue other acquisition opportunities to the
extent reasonably feasible. While Avantair is not presently committed to any
additional acquisition, it may in the future consider acquisitions of other
types of businesses. Acquisitions may be of fixed base operations businesses,
operations in the aircraft industry or other businesses that may be
complementary to Avantair’s business. In addition, Avantair is not limited to
any particular industry or type of business for potential acquisitions.
Accordingly, there is no current basis to evaluate the possible merits or risks
of the particular business or assets that Avantair may acquire, or of the
industry in which such business operates. If Avantair acquires a business in an
industry characterized by a high level of risk, it may be affected by the
currently unascertainable risks of that industry. Although Avantair’s management
will endeavor to evaluate the risks inherent in a particular industry or target
business, there can be no assurance that Avantair will properly ascertain or
assess all of the significant risk factors.
In
addition, the financing of any acquisition could adversely impact Avantair’s
capital structure as any such financing would likely include the issuance of
additional equity securities and/or the borrowing of funds. The issuance of
additional equity securities may significantly reduce the equity interest of
existing stockholders and/or adversely affect prevailing market prices for
Avantair’s common stock. If Avantair incurs indebtedness, it could increase the
risk of a default that would entitle the holder to declare such indebtedness due
and payable and/or to seize any collateral securing the indebtedness. In
addition, default under one debt instrument could in turn permit lenders under
other debt instruments to declare borrowings outstanding under those other
instruments to be due and payable pursuant to cross default clauses.
Accordingly, the financing of future acquisitions could adversely impact the
capital structure and equity interest in Avantair.
Except as
required by law or the rules of any securities exchange on which Avantair’s
securities might be listed at the time Avantair seeks to consummate an
acquisition, shareholders will not be asked to vote on any proposed acquisition
and will not be entitled to exercise conversion rights in connection with any
such acquisition.
Avantair’s
business is subject to extensive government regulation, which can result in
increased costs, delays, limits on its operating flexibility and competitive
disadvantages.
Commercial
aircraft operators are subject to extensive regulatory requirements. Many of
these requirements result in significant costs. For example, the Federal
Aviation Administration (FAA) from time to time issues directives and other
regulations relating to the maintenance and operation of aircraft, and
compliance with those requirements drives significant expenditures.
Moreover,
additional laws, regulations, taxes and airport rates and charges have been
enacted from time to time that have significantly increased the costs of
commercial aircraft operations, reduced the demand for air travel or restricted
the way the Company can conduct its business. For example, the Aviation and
Transportation Security Act, which became law in 2001, mandates the
federalization of certain airport security procedures and imposes additional
security requirements on airlines. Similar laws or regulations or other
governmental actions in the future may adversely affect Avantair’s business and
financial results.
Avantair’s
results of operations may be affected by changes in law and future actions taken
by governmental agencies having jurisdiction over Avantair’s operations,
including:
|
·
|
changes
in the law which affect the services that can be offered by commercial
aircraft operators in particular markets and at particular
airports;
|
|
·
|
restrictions
on competitive practices (for example court orders, or agency regulations
or orders, that would curtail a commercial aircraft operator’s ability to
respond to a competitor);
|
|
·
|
the
adoption of regulations that impact customer service standards (for
example, new passenger security standards);
or
|
|
·
|
the
adoption of more restrictive locally-imposed noise
restrictions.
|
11
The FAA
has jurisdiction over many aspects of Avantair’s business, including personnel,
aircraft and ground facilities. Avantair is required to have an FAA Air Carrier
Operating Certificate to transport personnel and property for compensation in
aircraft it operates directly. The FAA certificate contains operating
specifications that allow Avantair to conduct its present operations, but it is
potentially subject to amendment, suspension or revocation in accordance with
procedures set forth in federal aviation laws. The FAA is responsible for
ensuring that Avantair complies with all FAA regulations relating to the
operation of its aviation business, and conducts regular inspections regarding
the safety, training and general regulatory compliance of its aviation
operations. Additionally, the FAA requires Avantair to file reports confirming
our continued compliance.
Avantair
is also subject to various federal and state environmental laws. The Company
does not anticipate that the costs of compliance with current environmental
regulations will have a material adverse effect on our business. However, the
cost of compliance with any future environmental regulations is unknown and may
have a material effect. Although the Company believes its aircraft produce
35.0% less carbon emissions than competitors’ aircraft, the Company could be
impacted significantly if more stringent environmental laws and
regulations related to aircraft emissions were imposed.
Avantair
could be adversely affected by a failure or disruption of its computer,
communications or other technology systems.
Avantair
is highly dependent on its computer systems and call center software to operate
its business. The systems and software on which Avantair relies to manage the
scheduling and monitoring of its flights could be disrupted due to events beyond
Avantair’s control, including natural disasters, power failures, terrorist
attacks, equipment failures, software failures and computer viruses and hackers.
Further, the vendor of Avantair’s scheduling software is a small business and
highly dependent on the services of its founder. Any substantial or repeated
failure of Avantair’s systems or software could impact Avantair’s operations and
customer service, result in a disruption in flight scheduling, the loss of
important data, loss of revenues, increased costs and generally harm its
business. Moreover, a catastrophic failure of certain of Avantair’s vital
systems could limit its ability to operate flights for an indefinite period of
time, which would have a material adverse impact on Avantair’s
business.
Avantair
may not be able to obtain acceptable customer contracts covering all of the
fractional interests of its new airplanes, a sufficient number of flight hour
cards and/or Axis Club Memberships, or a combination thereof, which could
adversely affect our profitability.
Since
the beginning of the current economic recession, the Company has experienced a
decrease in the number of fractional aircraft share sales, resulting in an
unsold inventory of fractional aircraft shares. As a result, the
Company is paying finance charges on
floor-plan arrangements used to secure aircraft for fractional share sales until
the related aircraft are fully fractionalized. The Company believes that the
decrease in fractional aircraft share sales is due to capital constraints on,
and reluctance to commit to long-term expenditures
by, individuals and companies who are potential customers. In
contrast, the Company has experienced an increase in flight hour time card sales
which allow customers to fly privately without the capital commitment or
long-term obligations of fractional ownership. This increase in
flight hour time card sales requires an increase in the Company’s aircraft fleet
in order to meet demand, with the Company bearing all of the financing risk in
respect of the
additional aircraft. The Company may not be able to secure sufficient
financing for its fleet expansion or generate sufficient revenue from short-term
flight hour time card sales to satisfy the cost of financing the acquisition of
additional aircraft. If the Company is unable to continue to generate sufficient
revenue from flight hour time cards sales to cover the costs of such additional
aircraft, the Company’s
financial performance may be adversely affected.
Sales
of fractional interests and flight hour cards in excess of available fleet
capacity could adversely affect Avantair’s business.
Since
fractional shareowners generally desire to enter a fractional program when they
make their decision to purchase a fractional share, it is difficult for a
fractional operator to pre-sell many shares in advance of receipt of additional
aircraft. Flight hour card as well as Axis Club Membership program participants
often likewise purchase their flight hour cards and begin utilizing the services
within a short time thereafter. An aircraft fleet provides a finite level of
capacity, and the addition of significant additional share owners and flight
hour card users to the usage base may require an increase in charter usage,
which may not be economical. If Avantair does not adequately manage the sales
process and sells shares or timecards in excess of its available capacity, its
business could be adversely affected.
Avantair’s
business could be adversely affected by a failure to attract and retain
qualified pilots and other operations personnel.
Avantair’s
ability to attract and retain qualified pilots, mechanics, and other highly
trained personnel will be an important factor in determining Avantair’s future
success. Many of Avantair’s customers require pilots of aircraft that service
them to have high levels of flight experience. The market for these experienced
and highly trained personnel is extremely competitive. If Avantair is unable to
attract and retain such persons, flight operations may be disrupted, which could
have a negative effect on its results.
12
Avantair’s
business is affected by many changing economic conditions beyond its control
which may adversely affect its results of operations.
Ownership
of fractional shares and flight hour cards is likely considered a luxury item to
consumers, especially compared to the costs associated with commercial air
travel. As a result, a general downturn in economic, business and financial
conditions, including the current recession, inflation and higher interest
rates, could have an adverse effect on consumers’ spending habits and could
cause them to travel less frequently and, to the extent they travel, to travel
using commercial air carriers or other means considered to be more economical
than owning a fractional interest, flight hour card, and/or membership in a
fractional aircraft program.
The
operation of aircraft is dependent on the price and availability of fuel.
Continued periods of historically high fuel costs may materially adversely
affect Avantair’s operating results.
Avantair’s
operating results may be significantly impacted by changes in the availability
or price of fuel for aircraft operated by Avantair. Fuel prices have fluctuated
significantly since 2004, and have been especially volatile over the past year.
Although Avantair is currently able to obtain adequate supplies of fuel, it is
impossible to predict the price of fuel. Political disruptions or wars involving
oil-producing countries, changes in government policy, changes in fuel
production capacity, environmental concerns and other unpredictable events may
result in fuel supply shortages and additional fuel price increases in the
future. Furthermore, Avantair bears the entire cost of fuel when repositioning
aircraft and for satisfying flight hour card sale demands. There can be no
assurance that Avantair will be able to fully recover its increased fuel costs
by passing these costs on to its customers. In the event that Avantair is unable
to do so, Avantair’s operating results will be adversely
affected.
Avantair’s
reliance on current laws and regulations with respect to the opportunity to
conduct sales with foreign customers and flights to currently permitted areas
poses a significant risk to its business prospects.
Avantair’s
revenue and profitability are based in part on current laws and regulations by
the federal government of the United States and the agencies thereof, including
but not limited to the Department of Homeland Security, the Department of State,
the Department of Commerce and the Department of the Treasury, allowing sales to
and provision of services for foreign persons and flights to foreign locations
that are permissible under current laws and regulations. Modification of such
statutes and regulations could pose a significant risk to Avantair’s business
operations by reducing the pool of potential customers through the preclusion of
foreign persons and the locations of permissible flights.
Risks
Related to this Offering
The
trading price of Avantair’s common stock is likely to be volatile, and you might
not be able to sell your shares at or above the public offering
price.
The
trading price of Avantair’s common stock is likely to be subject to wide
fluctuations. Factors, in addition to those outlined elsewhere in this
prospectus, that may affect the trading price of the Company’s common stock
include:
|
·
|
actual
or anticipated variations in the Company’s operating
results;
|
|
·
|
announcements
of technological innovations, new products or product enhancements,
strategic alliances or significant agreements by the Company or its
competitors;
|
|
·
|
changes
in recommendations by any securities analysts that elect to follow the
Company’s common stock;
|
|
·
|
the
financial projections the Company may provide to the public, any changes
in these projections or its failure to meet these
projections;
|
|
·
|
the
loss of a key customer;
|
|
·
|
the
loss of a key supplier;
|
|
·
|
the
loss of key personnel;
|
|
·
|
government
regulations affecting our industry;
|
|
·
|
lawsuits
filed against the Company;
|
|
·
|
changes
in operating performance and stock market valuations of other companies
that sell similar products and
services;
|
|
·
|
price
and volume fluctuations in the overall stock
market;
|
|
·
|
market
conditions in our industry, the industries of our customers and the
economy as a whole; and
|
|
·
|
other
events or factors, including those resulting from war, incidents of
terrorism or responses to these
events.
|
Substantial
future sales of Avantair’s common stock in the public market could cause its
stock price to fall.
As of
January 21, 2010, the Company had 26,384,603 shares of common stock outstanding,
1,058,166 shares of common stock available for future issuance under its 2006
Long-Term Stock Incentive Plan and warrants to purchase 2,829,507 shares
outstanding. Additional sales of Avantair’s common stock in the public market
after this Registration Statement is declared effective by the SEC, or the
perception that these sales could occur, could cause the market price of its
common stock to decline. The 11,425,307 shares of common stock registered
pursuant to this Registration Statement will be freely tradable once this
Registration Statement is declared effective by the Securities and Exchange
Commission without restriction or further registration under the Securities Act,
unless the shares are purchased by “affiliates” as that term is defined in Rule
144 under the Securities Act. Any shares purchased by an affiliate may not be
resold except pursuant to an effective registration statement or an applicable
exemption from registration, including an exemption under Rule 144 of the
Securities Act. These restricted securities may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities
Act.
13
If
securities analysts do not publish research or reports about Avantair’s business
or if they downgrade its stock, the price of its stock could
decline.
The
research and reports that industry or financial analysts publish about Avantair
or its business will likely have an effect on the trading price of its common
stock. If an industry analyst decides not to cover the Company, or if an
industry analyst decides to cease covering the Company at some point in the
future, the Company could lose visibility in the market, which in turn could
cause its stock price to decline. If an industry analyst downgrades Avantair’s
stock, its stock price would likely decline rapidly in response.
The
concentration of Avantair’s capital stock ownership with insiders will likely
limit your ability to influence corporate matters.
Avantair’s
insiders, (its executive officers, directors, current five percent or greater
stockholders and affiliated entities) together beneficially own approximately
80.7% of our outstanding common stock. As a result, these
stockholders, acting together, will have significant influence over all matters
that require approval by the Company’s stockholders, including the election of
directors and approval of significant corporate transactions. Corporate action
might be taken even if other stockholders, including those who purchased shares
in this offering, oppose them. This concentration of ownership might also have
the effect of delaying or preventing a change of control that other stockholders
may view as beneficial.
Provisions
of the Company’s amended and restated certificate of incorporation and bylaws
and Delaware law might discourage, delay or prevent a change of control of or
changes in its management and, as a result, depress the trading price of its
common stock.
Avantair’s
certificate of incorporation and bylaws contain provisions that could
discourage, delay or prevent a change in control or changes in its management
that its stockholders may deem advantageous. These provisions:
|
·
|
require
super-majority voting to amend some provisions in the Company’s
certificate of incorporation and
bylaws;
|
|
·
|
authorize
the issuance of “blank check” preferred stock that the Company’s board
could issue to increase the number of outstanding shares and to discourage
a takeover attempt;
|
|
·
|
limit
the ability of the Company’s stockholders to call special meetings of
stockholders;
|
|
·
|
prohibit
stockholder action by written consent, which requires all stockholder
actions to be taken at a meeting of its
stockholders;
|
|
·
|
provide
that the board of directors is expressly authorized to make, alter or
repeal the Company’s bylaws; and
|
|
·
|
establish
advance notice requirements for nominations for election to the Company’s
board or for proposing matters that can be acted upon by stockholders at
stockholder meetings.
|
In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law, which, subject to some exceptions, prohibits “business
combinations” between a Delaware corporation and an “interested stockholder,”
which is generally defined as a stockholder who becomes a beneficial owner of
15.0% or more of a Delaware corporation’s voting stock for a three-year period
following the date that the stockholder became an interested stockholder.
Section 203 could have the effect of delaying, deferring or preventing a change
in control that the Company’s stockholders might consider to be in their best
interests. See “Description of Capital Stock.”
These
anti-takeover defenses could discourage, delay or prevent a transaction
involving a change in control. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect
directors of your choosing and cause us to take corporate actions other than
those you desire.
The
Company does not expect to pay any cash dividends for the foreseeable
future.
The
Company does not anticipate that it will pay any cash dividends to holders of
its common stock in the foreseeable future. Accordingly, investors must rely on
sales of their common stock after price appreciation, which may never occur, as
the only way to realize any future gains on their investment. Investors seeking
cash dividends in the foreseeable future should not purchase the Company’s
common stock.
14
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This Form
S-1 contains forward-looking statements relating to future events and the future
performance of the Company, including, without limitation, statements regarding
the Company’s expectations, beliefs, intentions or future strategies that are
signified by the words “expects,” “anticipates,” “intents,” “believes,” or
similar language. You should read statements that contain these words carefully
because they:
|
·
|
discuss
future expectations;
|
|
·
|
contain
information which could impact future results of operations or financial
condition; or
|
|
·
|
state
other “forward-looking”
information.
|
We
believe it is important to communicate our expectations to the Avantair
stockholders. However, there may be events in the future that we are not able to
accurately predict or over which we have no control and which could cause our
actual results to differ materially from the information contained in the
forward-looking statements contained in this document. The risk factors and
cautionary language discussed in this Registration Statement and in our Annual
Report on Form 10-K provide examples of risks, uncertainties and events that may
cause actual results to differ materially from the expectations described by
Avantair in its forward-looking statements, including among other
things:
|
(1)
|
our
inability to generate sufficient net revenue in the
future;
|
|
(2)
|
our
inability to fund our operations and capital
expenditures;
|
|
(3)
|
our
inability to acquire additional inventory of aircraft from our single
manufacturer;
|
|
(4)
|
the
loss of key personnel;
|
|
(5)
|
our
inability to effectively manage our
growth;
|
|
(6)
|
our
inability to generate sufficient cash flows to meet our debt service
obligations;
|
|
(7)
|
competitive
conditions in the fractional aircraft
industry;
|
|
(8)
|
extensive
government regulation;
|
|
(9)
|
the
failure or disruption of our computer, communications or other technology
systems;
|
|
(10)
|
increases
in fuel costs;
|
|
(11)
|
changing
economic conditions; and
|
|
(12)
|
our
failure to attract and retain qualified pilots and other operations
personnel.
|
You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this document.
All
forward-looking statements included herein attributable to Avantair or any
person acting on Avantair’s behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. Except to
the extent required by applicable laws and regulations, Avantair undertakes no
obligations to update these forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the occurrence of
unanticipated events.
You
should be aware that the occurrence of the events described in the “Risk
Factors” section and elsewhere in this Registration Statement could have a
material adverse effect on Avantair.
MARKET
AND INDUSTRY DATA
This
prospectus includes market and industry data and forecasts that we have
developed from independent consultant reports, publicly available information,
various industry publications, other published industry sources and our internal
data and estimates. Independent consultant reports, industry publications and
other published industry sources generally indicate that the information
contained therein was obtained from sources believed to be
reliable.
Our
internal data and estimates are based upon information obtained from our
investors, trade and business organizations and other contacts in the markets in
which we operate and our management’s understanding of industry conditions.
Although we believe that such information is reliable, we have not had this
information verified by any independent sources.
USE
OF PROCEEDS
The
Company will not receive any proceeds from the sale or other disposition of the
shares of common stock covered by this prospectus. The maximum proceeds the
Company could receive upon the exercise of all the warrants with respect to
which the underlying shares of common stock have been registered on this
Registration Statement is $455,888.
15
PRICE
RANGE OF SECURITIES AND DIVIDENDS
Avantair’s
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
AAIR. The following table sets forth the range of high and low closing bid
prices for the common stock for the periods indicated. The over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions. On January
21, 2010, the last reported sale price of our shares was $2.10 per share. As of
January 21, 2010, the Company had approximately 75 shareholders of record for
its common stock.
Common Stock
|
||||||||
Quarter Ended
|
High
|
Low
|
||||||
2008
|
||||||||
First
Quarter
|
$
|
5.25
|
$
|
4.47
|
||||
Second
Quarter
|
5.30
|
4.23
|
||||||
Third
Quarter
|
5.15
|
2.80
|
||||||
Fourth
Quarter
|
3.00
|
1.94
|
||||||
2009
|
||||||||
First
Quarter
|
2.20
|
1.50
|
||||||
Second
Quarter
|
1.90
|
0.57
|
||||||
Third
Quarter
|
1.75
|
0.80
|
||||||
Fourth
Quarter
|
1.90
|
1.15
|
||||||
2010
|
||||||||
First
Quarter
|
1.65
|
1.20
|
DIVIDEND
POLICY
The
Company has never declared or paid cash dividends on our common stock. The
Company currently expects to retain all future earnings for use in the operation
and expansion of our business and does not anticipate paying cash dividends in
the foreseeable future. The declaration and payment of any dividends in the
future will be determined by our board of directors, in its discretion, and will
depend on a number of factors, including our earnings, capital requirements and
overall financial condition.
16
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed below and elsewhere in this prospectus, particularly
under the heading “Risk Factors” and in our Annual Report on Form
10K.
Overview
Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
January 21, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.
Avantair
also operates fixed flight based operations (FBO) in Camarillo, California and
effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair
fleet.
Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under maintenance and
management agreements with fractional owners, Avantair provides pilots,
maintenance, fuel and hangar space for the aircraft.
In
response to the general economic downturn and the resulting growth of flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This new product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.
Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. During the second quarter of fiscal
2010, the Company, through an arms-length transaction transferred its rights to
purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing
aircraft purchase agreement between the Company and Piaggio. Upon delivery of
the aircraft, Piaggio returned $2.6 million of deposits previously paid on the
aircraft by the Company. Simultaneous with this transaction, the
Company entered into an eight-year management agreement for those aircraft and
the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW
Air LLC. Pursuant to the agreement between the parties, the Company will
manage each aircraft for a monthly fee which is variable based upon aircraft
flight hours but will not exceed $56,500 per month. The agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour. These aircraft are anticipated
to be utilized to satisfy fleet demands of the growing flight hour card and Axis
Club Membership Program product lines.
In
October 2009, the Company consummated a private sale of its common stock to
investors generating net proceeds of approximately $8.0 million. Together
with the proceeds of the private placements consummated in June and September
2009, the Company received total net proceeds of approximately $9.9
million.
The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Sales by product category follow:
FY 2009 Unit Sales for the Three Months Ended
|
FY 2010
|
|||||||||||||||||||||||
|
September 30, 2008
|
December 31, 2008
|
March 31, 2009
|
June 30, 2009
|
Total
|
September 30, 2009
|
||||||||||||||||||
New
Fractional shares
|
19.5
|
16.5
|
-
|
2
|
38
|
2
|
||||||||||||||||||
Flight
hour cards
|
27
|
53
|
29
|
51
|
160
|
86
|
||||||||||||||||||
Axis
Club Memberships
|
N/A
|
N/A
|
2
|
8
|
10
|
3
|
17
Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At January 21, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.
At
September 30, 2009 and June 30, 2009, Avantair had assets of approximately
$155.2 million and $164.0 million, respectively. For the fiscal quarter ended
September 30, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.2 million and $136.8 million, respectively, and net
losses of approximately $1.4 million and $4.5 million, respectively. Avantair
has incurred losses since inception and may not be able to generate sufficient
net revenue from its business in the future to achieve or sustain profitability.
At December 31, 2009, the Company had approximately $6.8 million of unrestricted
cash on hand and assuming there is no change in sales and expense trends
experienced since the fourth quarter of fiscal 2009, the Company believes that
its cash on hand is sufficient to continue operations for the foreseeable
future.
Critical
Accounting Policies and Estimates
As
discussed in our Form 10-K for the fiscal year ended June 30, 2009, the
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently, actual results could
differ from those estimates. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgement and
estimation. The judgments, or the methodology on which the judgments are made,
are reviewed with the Audit Committee.
Revenue
Recognition
Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use and access to its aircraft fleet
through either 15 or 25 hour flight hour cards (either individually or through
the Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The
purchase agreement grants the customer the right to the use of the aircraft for
a specified number of hours each year the aircraft is in service. When a
customer purchases a fractional share, they are also required to enter into a
five-year management and maintenance agreement. Under the terms of the
maintenance and management agreement, the Company agrees to manage, operate and
maintain the aircraft on behalf of the customer in exchange for a fixed monthly
fee which is recognized ratably over the term of the agreement, usually five
years. If a customer prepays its management and maintenance fee for a period of
one year or longer, the prepayment is recorded as unearned revenue and amortized
into revenue on a monthly basis in accordance with the schedule provided for
within each agreement. Flight hour cards provide customers with flight hours for
a fixed fee. The Company defers the entire amount paid and recognizes revenue on
an incremental basis as aircraft hours are flown. Axis Club Membership fees are
paid in advance, deferred and recognized over the three year membership term.
Similar to standard flight hour card sales, payment for flight hour cards sold
through the Axis Club Membership program are collected in advance of access to
the aircraft fleet, deferred and recognized as revenue on an incremental basis
over the three year membership term.
Fractional
Aircraft Shares Sales
The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of FASB ASC
Topic 605-25 “Revenue Multiple
Element Arrangement” to account for the sale of fractional
shares of aircraft. Accordingly, as the sales of the fractional shares cannot be
separated from the underlying maintenance and management agreement, fractional
share sale revenue is recognized ratably over the five-year life of the
maintenance and management agreement. The period in which revenue is recognized
will be evaluated on a periodic basis. Factors that impact management’s
assessment of the most appropriate period of revenue recognition will include,
but not be limited to, customer turnover, terms and conditions of the related
fractional share sale, maintenance arrangements as well as any other factor that
could impact revenue.
Aircraft
Costs Related To Fractional Sales
The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of FASB ASC Topic 605-25 “Revenue Multiple Element
Arrangement,” the Company recognizes revenue from the sale of fractional
shares as income over the five-year period. The aircraft costs related to sales
of fractional shares consist of the cost of the aircraft and are recorded as an
asset and recognized as the cost of aircraft shares sold over the five-year
period.
18
Maintenance
Expense Policy
The
Company uses the direct expensing method of accounting for non-refurbishment
aircraft maintenance. Engine maintenance is performed by third parties under
contracts which transfer risk, and related costs are expensed as incurred.
Airframe maintenance is performed in-house and related costs are expensed as
incurred. Refurbishments of the interiors of the aircraft, which extend the life
of the aircraft, are capitalized and amortized over the estimated life of three
years.
Stock-Based
Compensation
The
Company accounts for share-based compensation to employees and directors in
accordance with FASB ASC Topic 718 “Compensation- Stock
Compensation,” which requires the recognition of compensation expense for
employee stock options and other share-based payments. Under ASC 718, expense
related to employee stock options and other share-based payments is recognized
over the relevant service period based on the fair value of each stock option
grant. In addition, the Company recognizes in its Condensed Consolidated
Statements of Operations the grant-date fair value of stock options and other
equity-based compensation issued to employees and directors. Compensation
expense for equity-based awards is recognized over the requisite service period,
usually the vesting period on a straight line basis, while compensation expense
for liability-based awards (those usually settled in cash rather than stock) is
measured to fair-value at each balance sheet date until the award is
settled.
Results
of Operations
Three
Months Ended September 30, 2009 Compared with Three Months Ended September 30,
2008
Revenues
for the three months ended September 30, 2009 were $35.2 million, an increase of
7.7% from $32.7 million for the three months ended September 30, 2008. This
increase was the result of a 4.1% decrease in the revenue generated from the
sale of fractional aircraft shares to $12.0 million for the three months ended
September 30, 2009 from $12.5 for the comparable 2008 period, offset by an
increase of 5.3% in maintenance and management fees to $18.0 million for the
three months ended September 30, 2009 from $17.1 for the comparable 2008 period,
an increase of 109.2% in flight hour card and Axis Club Membership revenue to
$3.9 million for the three months ended September 30, 2009 from $1.8 million for
the comparable 2008 period, and an increase of 10.4% in other revenue to $1.4
million for the three months ended September 30, 2009 from $1.3 million for the
comparable 2008 period.
Revenue
from the sale of fractional aircraft shares decreased due to the full
amortization of revenue from shares sold in prior periods, partially offset by
an increase of 4.4% in the average number of total fractional shares sold
through September 30, 2009 from the comparable 2008 period.
The
increase in revenue from maintenance and management fees is primarily due to a
4.4% increase in the average number of fractional shares sold through September
30, 2009 from the comparable 2008 period, coupled with an increase in the
average monthly management fee per shareowner.
Flight
hour card revenue and Axis Club Membership revenue increased $2.0 million
primarily as a result of an increase in flight hour card revenue due to
increased flight hour card sales as a result of the greater acceptance of time
card travel in the existing economy compared to fractional ownership and the
timing of flight hour card utilization by owners during the three months ended
September 30, 2009 from the comparable 2008 period.
Other
revenue was relatively consistent between the two periods due to increased fuel
and remarketing revenue offset by a decrease in demonstration
revenue.
Operating
expenses for the three months ended September 30, 2009 were 1.2% higher than the
three months ended September 30, 2008, with total operating expenses of $35.0
million compared to $34.6 million, respectively. The cost of fractional aircraft
shares sold decreased to $10.2 million for the three months ended September 30,
2009 from $10.6 million for the three months ended September 30, 2008, due to a
4.4% increase in the average number of fractional shares sold through September
30, 2009 from fractional shares sold through September 30, 2008. The cost of
flight operations, together with the cost of fuel, decreased 1.6% to $16.1
million for the three months ended September 30, 2009 from $16.3 million for the
three months ended September 30, 2008, primarily due to:
|
·
|
an
increase in maintenance expense as a result of an increase in fleet size
and flight hours, partially offset by decreases in insurance expense and
aircraft lease expense as a result of the conversion of a Company leased
aircraft to a Company core aircraft;
and
|
|
·
|
a
$0.9 million decrease in cost of fuel due to a 34.0% decrease in the per
gallon cost of fuel (as a result of Avantair negotiating lower fuel rates
and also due to the global decrease in fuel costs) coupled with improved
aircraft utility;
|
General
and administrative expenses increased 10.5% to $6.3 million for the three months
ended September 30, 2009 from $5.7 million for the three months ended September
30, 2008, primarily due to a $0.2 million increase in payroll and related
expenses, a $0.2 million increase in expenses related to fixed based operations
primarily as a result to increased volume of fuel sales, and a $0.2 million
increase in other expenses due to Company growth.
Selling
expenses increased 8.6% to $1.0 million for the three months ended September 30,
2009 from $0.9 million for the three months ended September 30, 2008 due to an
increase in commission expenses as a result of increased flight hour card
sales.
19
Income
from operations was $0.2 million for the three months ended September 30, 2009,
an increase from $1.9 million loss from operations for the three months ended
September 30, 2008 for the reasons set forth above.
Interest
expense was $1.6 million for the three months ended September 30, 2009 was
relatively consistent with the $1.5 million for the three months ended September
30, 2008, due to the relative consistency of the short and long- term debt
balances between the two periods.
Net loss
decreased to $1.4 million for the three months ended September 30, 2009 compared
to $3.3 million for the three months ended September 30, 2008 due to the
decrease in loss from operations partially offset by the increase in total other
expense discussed above.
Fiscal
year ended June 30, 2009 compared to the fiscal year ended June 30,
2008
Revenues
for the fiscal year ended June 30, 2009 were $136.8 million, an increase of
18.3% from $115.6 million for the fiscal year ended June 30, 2008. This increase
was the result of a 19.4% increase in the revenue generated from the sale of
fractional aircraft shares to $51.9 million for the fiscal year ended June 30,
2009 from $43.4 million for the comparable 2008 period, an increase of 21.4% in
maintenance and management fees to $70.7 million for the fiscal year ended June
30, 2009 from $58.2 million for the comparable 2008 period, an increase of 29.7%
in flight hour card and Axis Club Membership revenue to $9.4 million for the for
the fiscal year ended June 30, 2009 from $7.2 million for the comparable 2008
period, and a decrease of 27.6% in other revenues to $4.9 million for the fiscal
year ended June 30, 2009 from $6.7 million for the comparable 2008
period.
Revenue
from the sale of fractional aircraft shares increased primarily due to an
increase in the average number of fractional shares sold through June 30, 2009
from the comparable 2008 period. The increase in the average number of
fractional shares sold reflected the results of enhanced sales initiatives,
including an emphasis on a national market, marketing of the fuel efficiency of
the Piaggio aircraft and the cost value of an Avantair fractional share compared
to light-jet fractional shares of competitors.
The
increase in revenue from maintenance and management fees is primarily due to a
14.0% increase in the average number of fractional shares sold through June 30,
2009 from the comparable 2008 period, coupled with an increase in the average
monthly management fee per shareowner.
Flight
hour card and Axis Club Membership revenue increased $2.1 million primarily as a
result of an increase in Flight hour card revenue due to increased flight hour
card sales as a result of the greater acceptance of time card travel in the
existing turbulent economy compared to fractional ownership and the timing of
flight hour card utilization by owners during the fiscal year ended June 30,
2009 from the comparable 2008 period.
Other
revenue decreased $1.9 million primarily as a result of the $1.6 million
decrease in demonstration revenue as a result of the reduction in fractional
share sales activity during the fiscal year ended June 30, 2009 from the
comparable 2008 period.
Operating
expenses for the fiscal year ended June 30, 2009 increased 3.1% to $135.4
million compared to $131.2 million, for the comparable 2008 period. The cost of
fractional aircraft shares sold increased 20.4% to $44.1 million for the fiscal
year ended June 30, 2009 from $36.6 million for the fiscal year ended June 30,
2008, due to an increase in the average number of fractional shares sold through
June 30, 2009 from fractional shares sold through June 30, 2008. Gain on sale of
assets increased 61.9% to $1.4 million related to a nonrecurring gain recognized
on the sale of one of the Company’s core aircraft in fiscal year 2009 as
compared to $0.8 million nonrecurring gain recognized in the comparable 2008
period. The cost of flight operations, together with the cost of fuel decreased
9.7% to $60.0million for the fiscal year ended June 30, 2009 from $66.5million
for the fiscal year ended June 30, 2008, primarily due to:
|
·
|
a
$3.5 million reduction in chartering expenses as a result of the increased
use of the Company's core aircraft to alleviate scheduling conflicts, use
of enhanced flight optimization software and flight staff
training;
|
|
·
|
a
$3.1 million decrease in cost of fuel due to a 19.0% decrease in the per
gallon cost of fuel (as a result of Avantair negotiating lower fuel rates
in fiscal year 2009 and also due to the global decrease in fuel costs)
coupled with improved aircraft utility; and
|
|
·
|
a
$1.3 million decrease in maintenance expense primarily as a result of the
replacement of the Company’s former engine service vendor with another
nationally recognized, FAA certified engine maintenance vendor in January
2009, offset by general increases in operating costs due to an increase in
fleet size.
|
|
·
|
The
above were partially offset by a $1.2 million increase in pilot expenses
related to pilot salaries and training costs as a result to flight crew
expansion and a $0.6 million increase in insurance coverage and other
expenses to an increase in fleet
size.
|
General
and administrative expenses increased 14.1% to $23.6 million for the fiscal year
ended June 30, 2009 from $20.7 million for the fiscal year ended June 30, 2008,
primarily due to a $1.3 million increase in payroll and related expenses due to
hiring and rate increases in 2009, and a $1.1 million increase in other expenses
due to company growth.
20
Selling
expenses decreased 20.0% to $3.7 million for the fiscal year ended June 30, 2009
from $4.7 million for the fiscal year ended June 30, 2008 primarily due to a
decrease of $0.7 million in marketing expenses as a result of a more direct
approach to marketing implemented during fiscal year 2009.
Income
from operations was $1.4 million for the fiscal year ended June 30, 2009, an
increase of 109.1% from the $15.7 million loss from operations for the fiscal
year ended June 30, 2008 for the reasons set forth above.
Interest
expense was $5.9 million for the fiscal year ended June 30, 2009 compared to
$3.6 million for the fiscal year ended June 30, 2008, primarily due to an
increase in floor plan borrowing agreements incurred to acquire aircraft and
$0.4 million of interest expense relating to the financing arrangements with Jet
Support Services, Inc., partially offset by decrease in interest due to the
reduction in outstanding principal balances.
Net loss
decreased to $4.5 million for the fiscal year ended June 30, 2009 compared to
$18.9 million for the fiscal year ended June 30, 2008 due to the decrease in
loss from operations partially offset by the increase in total other expense
discussed above.
Liquidity
and Capital Resources
Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facilities, cash raised in the preferred and common stock offerings, and
other asset- based borrowing (see Notes 4 and 5 to the Company’s condensed
consolidated financial statements for the period ended September 30, 2009). The
Company uses its cash primarily to fund losses from operations, deposits made on
aircraft, leasehold improvements, and to fund the purchase of core aircraft and
aircraft which are to be fractionalized. Cash generated from operations has not
been sufficient to provide for all the working capital needed to meet Avantair’s
requirements. At September 30, 2009 and June 30, 2009, Avantair had a working
capital deficit of approximately $52.0 million and $49.2 million, respectively,
and a stockholders’ deficit of approximately $37.2 million and $36.0 million,
respectively. As of September 30, 2009, cash and cash equivalents amounted to
approximately $5.1 million and total assets to $155.2 million. The cash and cash
equivalent balance increased $1.3 million from June 30, 2009 and total assets
decreased $8.9 million. The increase in cash and cash equivalents occurred
primarily as a result of cash received from the sale of fractional shares,
flight hour cards, Axis Club Memberships, fuel and rent, collection of
maintenance and management fees and other receipts including proceeds from the
sale of the Company’s common stock. On June 30 and September 25, 2009, Avantair
sold 567,200 and 250,000 units, respectively, at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
and $0.6 million, respectively (See Notes 4 and 5 to the Company’s condensed
consolidated financial statements for the period ended September 30, 2009). By
agreement between Avantair, the investors in the June 30, 2009 private placement
and that offering’s placement agent, the period for additional sales of units
was extended until October 15, 2009. In October 2009, the Company sold an
additional 8,818,892 shares at a price of $0.95 per share generating net
proceeds of approximately $8.0 million. Partially offsetting these receipts are
cash disbursements of $1.2 million in payments for deposits on future aircraft
deliveries, and $3.6 million repayment of debt, in addition to expenditures for
the cost of operations, including insurance and capital and leasehold
improvements.
In
January 2009, the Company introduced the Axis Club Membership Program designed
to bridge the gap between the financial commitment of a fractional share and
flight hour card. The current rate of flight hour card sales including those
through the Axis Club Membership will require the Company to acquire aircraft to
satisfy the increased flight hour demands on its core aircraft fleet if its core
utility is strained. During October 2009, Avantair entered into an agreement
with a third party to whom it sold its rights to purchase three Piaggio Avanti
II aircraft in exchange for the $2.6 million cost of the deposits paid on the
aircraft by the Company. In connection with this transaction, the Company
entered into an eight-year management agreement with the third party. Pursuant
to the agreements, the Company will manage the aircraft for a monthly fee; the
agreement also allows the Company to enter into short-term leases for the use of
the aircraft at a specified dry lease rate per flight hour. The third party has
also agreed to purchase one additional aircraft during the remainder of calendar
2009 under the same terms with the Company. These aircraft are anticipated to be
utilized to satisfy fleet demands of the growing flight hour card and Axis Club
Membership Program product lines. However, there can be no assurance that
membership program sales will be sufficient to compensate for a decrease in
fractional share sales, or that financing of additional aircraft to be acquired
to service this program will be available.
The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Sales by product category follow:
Unit Sales for the Three Months Ended
|
||||||||
September 30, 2009
|
September 30, 2008
|
|||||||
New
Fractional shares
|
2 | 19.5 | ||||||
Flight
hour cards
|
86 | 27 | ||||||
Axis
Club Memberships
|
3 | N/A |
Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At January 21, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.
21
At
September 30, 2009 and June 30, 2009, Avantair had assets of approximately
$155.2 million and $164.0 million, respectively. For the fiscal quarter ended
September 30, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.2 million and $136.8 million, respectively, and net
losses of approximately $1.4 million and $4.5 million, respectively. Avantair
has incurred losses since inception and may not be able to generate sufficient
net revenue from its business in the future to achieve or sustain profitability.
At December 31, 2009, the Company had approximately $6.8 million of unrestricted
cash on hand and assuming there is no change in sales and expense trends
experienced since the fourth quarter of fiscal 2009, the Company believes that
its cash on hand is sufficient to continue operations for the foreseeable
future.
Fiscal
year ended June 30, 2009 compared to fiscal year ended June 30, 2008.
Net cash
used in operating activities was $5.8 million for the year ended June 30, 2009
compared to cash used in operating activities of $15.5 million for the same
period last year. Net cash used in operating activities during the year ended
June 30, 2009 is primarily attributable to the $4.5 million net loss, combined
with depreciation expense of $5.2 million and stock based compensation expense
of $0.4 million, less the gain on sale of assets of $1.4 million, $12.0 million
of unsold aircraft costs including $1.4 million expended to acquire four
fractional shares on a floor planned aircraft upon expiration of the floor plan
on June 30, 2009 (of which approximately $1.0 million was collected subsequent
to June 30, 2009 from the sale of two of these fractional shares), a decrease of
$1.6 million due to the collection of notes receivable in accordance with normal
payment terms, a $0.9 million decrease in prepaid expenses, a $0.7 net increase
in accounts payable and accrued expenses, a net decrease of approximately $1.6
resulting from decreases in deferred maintenance, other assets and restricted
cash and a $0.4 million decrease in other liabilities.
Net cash
provided by investing activities was $1.0 million for the year ended June 30,
2009 compared to cash used in investing activities of $2.7 million for the same
period last year. Net cash provided by investing activities during the year
ended June 30, 2009 resulted primarily from $1.9 million from the sale of one of
the Company’s core aircraft, net of capital expenditures on leasehold
improvements and computer systems. Cash used in investing activities for the
year ended June 30, 2008 resulted from $2.5 million in proceeds from rights to
purchase 18 Embraer Phenom 100 Positions, net of capital
expenditures.
Net
cash used in financing activities was $10.5 million for the year ended June 30,
2009 compared to cash used in operating activities of $24.8 million for the same
period last year. Net cash used in financing activities for the year ended June
30, 2009 results primarily from net proceeds from the issuance of stock of $1.3
million and net additional borrowings. On June 30, 2009, Avantair sold 567,200
units at a price of $2.50 per unit to investors in a private placement. The sale
was consummated under the terms of a securities purchase agreement between
Avantair and each of the investors. Pursuant to a registration rights agreement,
Avantair agreed to use it best efforts to register the shares issued to the
investors and the shares underlying the warrants issued to the investors for
sale under the Securities Act of 1933, as amended. During the fiscal year ended
June 30, 2009, the Company had additional net borrowings under short-term notes
payable, comprised of floor plan agreements, of $17.4 million and a net decrease
of long-term debt of $7.5 million.
Financing
Arrangements
Avantair’s
financing arrangements at September 30, 2009, are described below:
Wells
Fargo Equipment Finance, Inc.
|
$ | 2,994,149 | ||
CNM,
Inc.
|
2,725,345 | |||
Jet
Support Services, Inc.
|
3,240,641 | |||
JMMS,
Inc.
|
3,312,304 | |||
Century
Bank, F.S.B.
|
1,869,695 | |||
Wachovia
Bank
|
2,500,000 | |||
Midsouth
Services, Inc
|
12,025,004 | |||
$ | 28,667,138 |
Wells
Fargo Equipment Finance, Inc.: In February 2005, the Company entered into
financing arrangements for the purchase of three aircraft under various notes
payable with Wells Fargo Equipment Finance, Inc. In January 2008, the Company
sold one of these aircraft and repaid the outstanding balance on the related
note payable. The notes outstanding at September 30, 2009 totaled approximately
$3.0 million and are payable in monthly installments ranging from $10,644 to
$38,480 with interest ranging from 5.96% to 6.12% per annum, through 2012. The
notes are collateralized by the aircraft.
CNM,
Inc.: In August 2007, the Company and CNM executed a new note agreement which
converted an outstanding note obligation of approximately $7.0 million into a
term loan payable monthly over three years and bearing interest at 10.0% per
annum. CNM also assumed a promissory note due to Wells Fargo Bank for $2.9
million which was included as part of this new note agreement. Borrowings
outstanding under these arrangements at September 30, 2009 totaled approximately
$2.7 million. During October 2009, the Company repaid the outstanding balance of
the promissory note of approximately $2.7 million.
22
Jet
Support Services, Inc.: On April 24, 2006, Avantair financed an aircraft
maintenance program contract with Jet Support Services, Inc. (“JSSI”) in the
amount of $3.4 million. The promissory note provided for seven monthly
installments of $145,867 and 53 monthly installments of $45,867, respectively,
including interest at 7.0% per year. On April 15, 2008, the Company entered into
a financing arrangement with JSSI by means of a $5.5 million promissory note.
The new note matures on April 1, 2011 and bears interest at the rate of 10.0%
per annum, with 35 monthly payments of principal and interest in an amount of
$185,127 beginning on June 2, 2008. The new note covered the remaining balance
of the aforementioned promissory note of $0.4 million, other costs and fees to
be paid by the Company under service agreements with JSSI and related deferred
financing costs of approximately $1.0 million which will be amortized over the
life of the note using the effective interest method. Upon entering into this
payment arrangement and the $5.5 million promissory note, the parties terminated
the airframe maintenance contract and have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program. Borrowings outstanding under this
arrangement at September 30, 2009 totaled approximately $3.2
million.
In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constituted payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.
JMMS,
Inc.: On August 11, 2006, the Company entered into a sale and leaseback
agreement with JMMS, LLC (“JMMS”). The lease transaction has been accounted for
as finance lease and provides for monthly payments of $39,500 through July 11,
2011. Borrowings outstanding under this arrangement at September 30, 2009
totaled approximately $3.3 million. JMMS notified the Company of its intention
to terminate the sale and leaseback agreement between the parties effective
March 1, 2009, at which date, pursuant to the agreement, the Company was
required to purchase the aircraft at a cost of no more than the $4.2 million.
The closing date of the transaction was extended past March 1, 2009, in
consideration for monthly payments to JMMS totaling $1.25 million through
December 1, 2009. The total amount of the monthly payments made to JMMS by the
Company since March 1, 2009 were deducted from the aircraft purchase price.
On December 14, 2009, the Company sold the aircraft to a third party for $2.9
million and paid the remaining outstanding balance of the purchase price to
JMMS.
Century
Bank, F.S.B.: In August 2007, the Company and Century Bank F.S.B. executed a
$2.2 million note agreement for the purchase of one aircraft. The note
outstanding at September 30, 2009 totaled approximately $1.9 million and is
payable in monthly installments of $27,175 with interest of 8.25% per annum,
through August 3, 2012. The note is collateralized by the aircraft.
Wachovia
Bank: On October 31, 2007, the Company entered into a financing arrangement for
the purchase of one used aircraft at a total purchase price of approximately
$4.5 million (inclusive of the value of a flight hour card of 100 hours).
Financing was obtained from Wachovia through a note payable of $3.9 million.
This debt will be repaid monthly over 7 years at an interest rate of the LIBOR
rate plus 4.0%. Borrowings outstanding under this arrangement at September 30,
2009 totaled approximately $2.5 million.
Midsouth
Services, Inc.: On October 10, 2007, Avantair acquired a core aircraft under a
capital lease obligation with Midsouth Services, Inc. Under the lease agreement,
Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio
Avanti aircraft and holds title to the Aircraft. Midsouth leases the Aircraft
exclusively to Avantair on a five year lease at 15.0% interest per annum. The
monthly lease payments for the term of the lease are $89,000. At the end of the
five year lease, Avantair shall purchase the Aircraft from Midsouth at the
guaranteed residual value in the amount of approximately $2.3 million. Avantair
also has the option to purchase the Aircraft anytime during the lease term at
the then current guaranteed residual value as set forth on the amortization
schedule without penalty. The obligation outstanding under this agreement at
September 30, 2009 totaled approximately $4.1 million.
In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease, dated as of July 31, 2006 between the Company and Midsouth.
Pursuant to the amendment, the Company is required to pay $74,900 monthly until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease. The
obligation outstanding under this agreement at September 30, 2009 totaled
approximately $3.8 million.
In
April 2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio Avanti aircraft to the Company for a
ten year lease term at a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. Hours have been accounted for at their fair value
and are liquidated as hours are flown. Midsouth has the sole option to terminate
the lease at the end of the fifth year of the term and to require the Company to
purchase the leased aircraft for approximately $3.8 million within ninety days
of that date. If this option is not exercised by Midsouth, the lease will
continue for the remaining five years of the term and, at the end of the ten
year lease, the Company will be required to purchase the aircraft from Midsouth
for $0.3 million. The obligation outstanding under this agreement at September
30, 2009 totaled approximately $4.8 million.
For
additional information regarding these financing arrangements, see Note 3 to the
Company’s condensed consolidated financial statements.
23
The
following table represents long-term debt obligations, contractual obligations
and aircraft purchase commitments, each as of June 30, 2009:
Obligations as of June 30, 2009(1)
|
Long-Term
Debt
Obligations
|
Operating
Leases(2)
|
Aircraft
Purchase
Commitments(3)
|
|||||||||
2010
|
$ | 11,020,590 | $ | 2,572,756 | $ | 48,947,371 | ||||||
2011
|
3,740,793 | 2,578,862 | 61,184,214 | |||||||||
2012
|
6,816,198 | 2,614,835 | 55,065,793 | |||||||||
2013
|
4,778,576 | 2,686,368 | 42,828,950 | |||||||||
2014
|
4,589,401 | 2,779,275 | 53,100,000 | |||||||||
After
2014
|
186,043 | 18,999,302 | 92,925,000 | |||||||||
Total
minimum payment
|
$ | 31,131,601 | $ | 32,231,398 | $ | 354,051,328 | ||||||
Less
obligation prepayment as of June 30, 2009
|
— | — | 8,600,000 | |||||||||
$ | 31,131,601 | $ | 32,231,398 | $ | 345,451,328 |
(1)
|
Amounts
shown in table are not necessarily representative of, and may vary
substantially from, amounts that will actually be paid in future years as
Avantair may incur additional or different obligations subsequent to June
30, 2009.
|
(2)
|
Includes
hangar, office and auto leases.
|
(3)
|
Includes
purchase commitments for 56 Piaggio Avanti II aircraft through
2013.
|
Quantitative
and Qualitative Disclosures about Market Risk
Avantair
is exposed to various market risks, including changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and foreign currency exchange rates. Avantair
does not enter into derivatives or other financial instruments for trading or
speculative purposes. Avantair has also not entered into financial instruments
to manage and reduce the impact of changes in interest rates and foreign
currency exchange rates, although Avantair may enter into such transactions in
the future.
Interest
Rate Risk
Avantair
is subject to market risk from exposure to changes in interest rates associated
with its debt facility with Wachovia Bank. The current liability, pursuant to
which Avantair is obligated to pay Wachovia Bank, has an interest rate that is
equal to the LIBOR rate plus 4.0%. At September 30, 2009, the liabilities of
Avantair with exposure to interest rate risk were approximately $2.5
million.
June 30, 2009
Expected Maturity Date
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Liabilities
|
||||||||||||||||||||||||||||
Long
term debt:
|
||||||||||||||||||||||||||||
Fixed
Rate
|
$
|
10,462,461
|
$
|
3,182,664
|
$
|
6,258,070
|
$
|
4,220,448
|
$
|
4,031,273
|
$
|
-
|
$
|
28,154,916
|
||||||||||||||
Average
interest rate
|
9.6
|
%
|
9.6
|
%
|
9.4
|
%
|
9.4
|
%
|
9.4
|
%
|
7.3
|
%
|
||||||||||||||||
Variable
Rate
|
$
|
558,129
|
$
|
558,129
|
$
|
558,128
|
$
|
558,128
|
$
|
558,128
|
$
|
186,043
|
$
|
2,976,685
|
||||||||||||||
Average
interest rate
|
6.5
|
%
|
6.5
|
%
|
6.5
|
%
|
6.5
|
%
|
6.5
|
%
|
6.5
|
%
|
Off-Balance
Sheet Arrangements
Avantair
has no off-balance sheet obligations nor guarantees and has not historically
used special purpose entities for any transactions.
Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2009, under the direction of the Chief Executive Officer and Chief
Financial Officer, the Company evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule 13a —
15(e) under the Securities Exchange Act of 1934, as amended. Based on the
evaluation, it was concluded that the Company’s disclosure controls and
procedures are effective at a reasonable assurance level and are designed to
ensure that the information required to be disclosed in SEC reports is recorded,
processed, summarized and reported within the time period specified by the SEC’s
rules and forms, and is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
24
Limitations
on the Effectiveness of Controls and Other Matters
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934, as amended). Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls may be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
Notwithstanding
the foregoing limitations on the effectiveness of controls, the Company has
nonetheless reached the conclusions set forth above on the Company’s disclosure
controls and procedures and its internal control over financial
reporting.
The
Company assessed the effectiveness of the Company’s internal control over
financial reporting as of September 30, 2009. In making this assessment,
management used the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on
the assessment, management believes that, as of September 30, 2009, the
Company’s internal control over financial reporting was effective.
Changes
to Internal Control Over Financial Reporting
There has
been no change, other than those noted above, in the internal controls over
financial reporting during the three months ended September 30, 2009, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
CEO
and CFO Certifications
Exhibits
31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The
Certifications are required in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002 (the “Section 302 Certifications”). This item of this report is the
information concerning the Evaluation referred to in the Section 302
Certifications and should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics
presented.
25
BUSINESS
Overview
Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
January 21, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.
Avantair
also operates fixed flight based operations (FBO) in Camarillo, California and
effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair
fleet.
Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under maintenance and
management agreements with fractional owners, Avantair provides pilots,
maintenance, fuel and hangar space for the aircraft.
In
response to the general economic downturn and the resulting growth of flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This new product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.
Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. During the second quarter of fiscal
2010, the Company, through an arms-length transaction transferred its rights to
purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing
aircraft purchase agreement between the Company and Piaggio. Upon delivery of
the aircraft, Piaggio returned $2.6 million of deposits previously paid on the
aircraft by the Company. Simultaneous with this transaction, the
Company entered into an eight-year management agreement for those aircraft and
the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW
Air LLC. Pursuant to the agreement between the parties, the Company will
manage each aircraft for a monthly fee which is variable based upon aircraft
flight hours but will not exceed $56,500 per month. The agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour. These aircraft are anticipated
to be utilized to satisfy fleet demands of the growing flight hour card and Axis
Club Membership Program product lines.
In
October 2009, the Company consummated a private sale of its common stock to
investors generating net proceeds of approximately $8.0 million. Together
with the proceeds of the private placements consummated in June and September
2009, the Company received total net proceeds of approximately $9.9
million.
The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Sales by product category follow:
FY 2009 Unit Sales for the Three Months Ended
|
FY 2010
|
|||||||||||||||||||||||
|
September 30, 2008
|
December 31, 2008
|
March 31, 2009
|
June 30, 2009
|
Total
|
September 30, 2009
|
||||||||||||||||||
New
Fractional shares
|
19.5 | 16.5 | - | 2 | 38 | 2 | ||||||||||||||||||
Flight
hour cards
|
27 | 53 | 29 | 51 | 160 | 86 | ||||||||||||||||||
Axis
Club Memberships
|
N/A | N/A | 2 | 8 | 10 | 3 |
Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At January 21, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.
26
At
September 30, 2009 and June 30, 2009, Avantair had assets of approximately
$155.2 million and $164.0 million, respectively. For the fiscal quarter ended
September 30, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.2 million and $136.8 million, respectively, and net
losses of approximately $1.4 million and $4.5 million, respectively. Avantair
has incurred losses since inception and may not be able to generate sufficient
net revenue from its business in the future to achieve or sustain profitability.
At December 31, 2009, the Company had approximately $6.8 million of unrestricted
cash on hand and assuming there is no change in sales and expense trends
experienced since the fourth quarter of fiscal 2009, the Company believes that
its cash on hand is sufficient to continue operations for the foreseeable
future.
Industry
Overview
The
Company believes that fractional aircraft ownership provides customers with the
convenience and flexibility of private air service without the more significant
costs associated with sole ownership of an aircraft. Additionally, fractional
aircraft companies generally provide the same conveniences and benefits to
individuals and businesses through their various flight hour card programs.
Commercial flight delays can be costly and tiresome, commercial hubs are
increasingly crowded, major commercial airports may be far from final
destinations and commercial air travel is increasingly subject to threats and
security-related inconveniences. Attempting to divide the use of a plane among
multiple parties to maximize its value can be logistically challenging. For
businesses and high net worth individuals, fractional ownership and flight hour
card programs often offer a balance between convenience and
cost.
A
fractional aircraft company assembles a fleet of planes with each of these
planes available for a certain number of revenue generating flight hours per
year. Those hours are then divided into partial ownership shares and these
partial ownership shares are sold to individuals and businesses. Avantair’s
customers typically purchase one-sixteenth or one-eighth shares in an aircraft,
although in some cases the purchases are one-quarter shares or more. The
purchase of a one-eighth share means that the owner will pay approximately
one-eighth of the aircraft retail price initially and receive one-eighth of the
total number hours of flying time per year for the initial term of the contract,
which is five years for a new shareowner. An Avantair fractional share owner
agrees to pay Avantair an additional predetermined monthly fee to cover the
various costs of maintaining and operating the aircraft. Avantair is responsible
for all of these services.
According
to AvData, the North American fractionally owned aircraft fleet has grown from 8
aircraft in 1986 to an aggregate of 1,054 aircraft as of October 2009. According
to AvData, five companies have 10.0% or more of the total market for fractional
aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet,
CitationShares, and Avantair, with NetJets having a market share of
approximately 50.0% and Flight Options, FlexJet, CitationShares having a
combined market share of approximately 35.0%. According to AvData, as of October
2009, Avantair had an approximate market share of 10.0%.
The
general aviation industry builds and sells aircraft ranging from single
passenger, single engine propeller planes to multimillion dollar transoceanic
jets costing $50.0 million or more. The fractional aircraft industry has
primarily concentrated on the middle to upper end of that market. Most
fractionally owned aircraft have a capacity of between four and seven passengers
and a minimum range of 1,250-1,500 nautical miles. The list prices of these
types of aircraft are generally $5.0 million to $50.0 million. Avantair’s
Piaggio aircraft have a capacity of eight passengers and a minimum range of
1,200-1,500 nautical miles. The list price of a 1/16th share
of an Avantair Piaggio aircraft is $425,000 or $6.8 million for all 16 of the
shares in one aircraft. There are numerous manufacturers and models in most
categories of aircraft. Both providers of fractional aircraft shares and
purchasers of these shares consider the choice of aircraft based upon a variety
of factors including:
|
·
|
price;
|
|
·
|
availability;
|
|
·
|
operating
costs;
|
|
·
|
reliability;
|
|
·
|
speed;
|
|
·
|
range;
|
|
·
|
cabin
size and features;
|
|
·
|
safety
features and record;
|
|
·
|
environmental
impact;
|
|
·
|
efficiency;
|
|
·
|
maintenance
cost;
|
|
·
|
manufacturer;
and
|
|
·
|
runway
requirements.
|
Some of
Avantair’s principal competitors are wholly or partially owned by aircraft
manufacturers and/or their affiliated parent companies, which have resulted in
their fleets being largely comprised of aircraft built by their respective
parent companies. Although Avantair operates exclusively one aircraft type, the
Company is not owned by any manufacturer, giving it a greater level of
flexibility than most of its competitors.
27
Fractional
operators must have sufficient numbers of aircraft in the fleet to provide the
service required. Since fractional share buyers desire to enter the program as
soon as possible after purchasing shares, operators are obligated to provide
access to aircraft when the shareowner requests it. If the operator does not
have ample capacity available, it must charter that capacity, a practice that
can be very costly. As a result, fractional operators tend to place orders
for aircraft in advance, and only sell shares within a few weeks prior to taking
delivery of the aircraft. Fractional operators may also offer various flight
hour card programs, which provide a certain number of flight hours to be used
during a specific period of time, generally one year. The flight hour card
programs subject the fractional operators to similar capacity requirements as
fractional shareowners.
The
capital requirements for ordering aircraft require the operator to place
deposits well in advance of receiving its planes. Progress payments are made as
certain milestones are achieved. The amounts of the deposits and progress
payments are a function of several factors including the price of the underlying
plane, the creditworthiness of the buyer, and the time until delivery. The
majority of the payments are generally made upon delivery. As of January 21,
2010, the Company has paid $7.2 million in deposits for these future aircraft
deliveries.
How
Avantair’s Fractional Ownership Program Works
Each
of Avantair’s current aircraft is available to fractional owners for a total of
800 flight hours per year. Those hours are then divided into blocks of
ownership, beginning at fifty hours per year (a one-sixteenth share of the
aircraft), and these partial ownership shares are sold to buyers. A share of an
aircraft currently can be purchased from Avantair starting at $425,000 for a
one-sixteenth share. Purchase prices for larger interests are slightly
discounted. Each fractional owner must enter into a Management and Dry Lease
Exchange Agreement with Avantair as part of the purchase of shares in an
Avantair aircraft. A monthly maintenance and management fee, currently $9,650,
is assessed per 1/16th share owned. This fee covers any direct costs in
operating and maintaining the aircraft, other than fuel surcharges which are
based on actual aircraft usage. This is unlike most other fractional programs,
which generally charge fractional owners an occupied hourly rate for use of the
aircraft. All programs have fuel surcharges, but due to the efficiency of the
Avanti and the way Avantair calculates its management fee, Avantair believes its
surcharges tend to be less than those charged by its competitors. Any landing
fees, excess catering fees, applicable international fees and taxes are billed
to the owner. Monthly fees are adjusted upwards on each anniversary date by the
greater of either the current Consumer Price Index or 3.75%, but will not exceed
the then-current rate offered to new share owners.
Each
fractional owner is allocated a certain number of flight hours per year based on
the size of their ownership share. The owner may exceed the number of annual
allocated hours by up to 20.0%, to the extent that the owner did not use all of
their allocated hours in the prior year and/or as an advance use of the next
year’s allocated hours.
Each
share owner owns an “undivided interest” that cannot be affected or encumbered
by the financial actions of other owners. In order to avoid scheduling
conflicts, each share owner throughout Avantair’s fleet agrees to exchange use
of such owner’s airplane with the other share owners in the fleet. Avantair must
move planes to the necessary destinations to meet the fractional owners’ needs.
Avantair keeps a certain number of core aircraft in the fleet in order to have
enough planes to meet demand. Owners may assign or transfer rights with respect
to their undivided interest. Each owner has the right to sell their undivided
interest in their aircraft. Further, each owner is entitled to assign
their undivided interest in the aircraft to a wholly owned subsidiary, parent or
successor in interest with the Company’s prior written consent, which shall not
be unreasonably withheld.
Aircraft
Usage and Scheduling
A
fractional share owner is required to provide a minimum of 24 hours notice to
Avantair prior to the scheduled take-off time when scheduling the first leg of a
trip during non-peak travel times. During peak travel times, requests for use by
owner of an aircraft must be made at least 72 hours prior to the scheduled
departure date of the first leg. No later than January 1st of each year,
Avantair will notify all of its fractional owners of a list of the year’s peak
travel days, which will not exceed 25 days.
For all
flights outside of the Primary Service Area, which varies by program and is
comprised of the continental United States, as well as certain airports in
geographic locations such as the Bahamas, Canada, Mexico and the Caribbean,
fractional owners must request an aircraft at least 7 days prior to the
scheduled date of the first leg of the trip. All such requests are completed,
provided that, for each such request, the fractional owner has provided
sufficient information regarding the trip to enable Avantair to schedule the
trip.
The
Avantair Card Program
In 2006,
Avantair introduced a card program that allows a purchaser to access Avantair’s
aircraft for 15 or 25 hours of flight time without the requirement to purchase
ownership shares in an aircraft. The card holder purchases the entire card
amount in advance and receives the same service as a fractional owner. After the
card holder has exhausted the hours purchased, the holder has no further
obligations to Avantair. The program offers an alternative to fractional
ownership for individuals and businesses seeking to experience private aircraft
travel. Avantair’s management considers its card program to be an effective
means of introducing potential purchasers to its fractional ownership program.
Avantair’s card program currently is priced at $105,000 for a 25 hour card.
Additionally, Avantair created an introductory 25 hour card for a first flight
hour card purchaser currently at a rate of $95,000.
28
The
Axis Club Membership Program
In 2009,
Avantair introduced the Axis Club Membership program. The membership program -
‘The Axis Club’ - allows a customer access flight blocks of 25 hours at a set
rate for a three-year term. A one-time membership fee starts as low as $75,000
for the term. Tiered membership options are available to fit the flight needs of
the customer. Each membership has a minimum required purchase of three 25 hour
blocks of flight hours over the three year term. Each block of 25 flight hours
has a price of $80,000 or less, depending on the membership level. The cost of
each block of flight hours is also subject to an annual CPI increase. In
addition, conversion options into a fractional share are also available, should
a customer’s needs change throughout the course of the membership
term.
Chartering
Whenever
possible, Avantair will schedule an aircraft from its fleet for each request for
use by a fractional owner. In the event that none of Avantair’s aircraft are
available, Avantair will charter a comparable aircraft for use by the owner,
provided that the fractional owner has complied with all applicable notice
requirements and all other program provisions. Avantair will only charter
aircraft that satisfy the Aviation Research Group US (ARG/US) Gold or Platinum
rating.
Expiration
of the Program
Upon the
expiration of the term of Avantair’s agreement with a fractional owner, the
owner shall have the option to (i) sell the owner’s interest in the aircraft and
cease to participate in the Avantair program, (ii) sell their interest and
purchase an interest in another aircraft that participates or will participate
in the Avantair program or (iii) retain their interest and renew their
participation in the program.
Sales
and Marketing
Avantair
targets customers based on demographic data, including net worth, household
income, job title and age.
Avantair
uses a variety of methods to market and advertise its various programs,
including print advertising, direct mail, trade events, web site and online and
referral incentives. In fiscal 2009, approximately half of Avantair’s marketing
budget was allocated to print advertising. Advertising placement is based on
historical data, demographics and competitive analysis.
Avantair’s
direct mail advertising consists of several mailings and e-mailings per year to
targeted prospective customers. Avantair also participates in live events,
including aircraft display events at fixed base operators attended by owners and
prospective owners. The events are targeted geographically and costs are often
shared with the aircraft manufacturer to reduce the cost to
Avantair.
As part
of its marketing, Avantair maintains a web site at www.avantair.com. All of
Avantair’s collateral and print marketing materials, direct mail, email and
video materials direct prospective buyers to its web site.
Public
relations efforts are driven by editorial opportunities and news pitches to key
editors. Recent editorial placements include magazines such as Robb Report,
Forbes and Business Jet Traveler, as well as travel and aircraft industry
publications. An owner electronic newsletter, Contrails, is published quarterly
with pertinent news, purchase reinforcement and any new programs.
An
important element of Avantair’s marketing strategy is referral incentives.
Approximately 30.0% of new share sales during 2005 and 2006 have been generated
from referrals from existing share owners. Approximately 40.0% of new share
sales during 2007 and 2008 have been generated from referrals from existing
share owners. Approximately 70.0% of new share sales during 2009 have been
generated from referrals from existing share owners. Under Avantair’s referral
incentive program, a fractional owner who refers a customer to Avantair receives
a choice, dependent on the number of referrals, of additional allocated hours of
flight time or items such as a Vespa or motorcycle.
One
internal measurement used to assess future sales is leads generated by both the
sales force and the other marketing methods described above. The number of
Avantair’s sales leads has nearly doubled over the past year. While many leads
do not turn into sales, they provide the basis for future sales. Another
important indicator is demonstration flights. A very high percentage of
potential buyers of shares will request a demonstration flight on one or more
aircraft types and on one or more products from different fractional operators.
Avantair’s demonstration flights cost the potential buyer approximately $4,000
per hour, with the price charged deducted from the purchase only in the event
that a share or shares are ultimately purchased.
Avantair’s
sales department is comprised of a senior executive vice president of sales and
marketing, vice president of sales, regional sales directors and regional sales
managers supported by a sales department and a marketing department. Avantair’s
sales staff is compensated with a base salary plus commissions.
Fleet
and Geographic Scope
As of
January 21, 2010, Avantair operated 55 aircraft within its fleet which is
comprised of 46 aircraft for fractional ownership, 5 company- owned core
aircraft and 4 leased and company- managed aircraft.
29
At
January 21, 2010, Avantair had 52 additional Piaggio aircraft on order.
Currently, all of the fractional aircraft in Avantair’s fleet are Piaggio Avanti
turboprops. In addition, on October 17, 2006, Avantair announced orders for 20
Embraer Phenom 100 aircraft. The Phenom 100 is in the Very Light Jet category of
business jets, with the largest cabin in the category. On June 20, 2008,
Avantair assigned its rights and obligations to the purchase agreement for the
purchase of these 20 Embraer Phenom 100 aircraft to a wholly owned subsidiary,
called Share 100 Holding Co., LLC. On the same date, Avantair sold 100 percent
of the Class A membership interest of the LLC, with the rights and obligations
to 18 of the 20 aircraft, to a third party called Executive AirShares
Corporation; Avantair retains the Class B membership interest of the LLC, with
the rights and obligations to purchase aircraft 19 and 20. If Executive
AirShares Corporation defaults under its obligations as a Class A member of the
LLC, Avantair will then be responsible for the rights and obligations of the
remaining undelivered aircraft.
Avantair
has focused its sales efforts to date on a national basis. A fractional owner is
entitled to board a plane at the location of his/her choosing. The costs of
moving a plane, or repositioning it, are borne by Avantair. These costs have
been very significant due to fuel, pilots and crew and maintenance costs arising
from increased overall usage of the aircraft. As the number of planes in
Avantair’s fleet increases, Avantair believes that the relative amount of
repositioning should decline. As the size of Avantair’s fleet reaches a critical
mass, aircraft will be positioned in strategic locations based on travel
patterns. Those locations are frequently determined through the usage of a
software optimization program. In addition, Avantair incurs costs associated
with pilots and crew, such as transportation to flight departure locations, per
diems, meals and hotel expenses. As Avantair’s fleet expands, crews will be
domiciled in cities frequented by fractional owner and flight hour card holder
flights. This presents an opportunity for Avantair to leverage more favorable
discounts for air and hotel due to volume, as well as making more efficient use
of pilot and crew work hours.
Avantair
believes that operating a very limited number of aircraft models provides it
with cost and operating advantages relative to other fractional aircraft
operators that may operate as many as 24 different aircraft models. Among
the advantages of operating a limited number of aircraft models
are:
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Maintenance – Reduces
costs of repair and maintenance by enabling nearly every member of
Avantair’s maintenance staff to service all of its aircraft, plus reduced
repositioning of an aircraft results in fewer flight hours and therefore
less frequent maintenance;
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Pilot Training - Pilots
need to be certified for a given aircraft model, therefore the operation
of a limited number of models means that nearly all employed pilots are
available to operate any aircraft in the
fleet.
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Inventory— Fewer parts
need to be inventoried which reduces the overall cost of inventory. Due to
the uniformity of the fleet, Avantair is exposed to lower capital
investment and inventory due to interchangeability of parts and the
greater ease of troubleshooting.
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Avantair
is the sole fleet provider of the Piaggio Avanti aircraft in North America. The
Piaggio Avanti has a unique design that uses forward wing technology which the
Company believes allows it to both provide the fastest speed of any turboprop
and yet have an unusually large cabin relative to aircraft in its category. The
Piaggio Avanti also compares favorably to light jets as the Piaggio Avanti has
the lowest fuel usage in the category. This aircraft also allows access to a
greater number of airports than most of the jets in its category since it has
the capability to land on shorter runways.
The
Piaggio Avanti has several features such as:
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Stand-up Cabin– A
stand-up cabin and a private lavatory, which is unique in its
category.
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Flying Capacity–
Ability to fly 1,300 nautical miles with five passengers, luggage and a
full fuel load.
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Speed– Fastest
turboprop manufactured, with jet-like speed of 458
mph.
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Runway capability–
Ability to land on shorter runways allowing access to a greater number of
airports.
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Comfortable Ride– Sound
dampening interior and rear mounted props, which help deliver a quiet
ride.
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Safety– Since its
introduction in 1989, there has not been a fatal accident involving a
Piaggio Avanti. In addition, the Avanti’s wing design reduces the effects
of turbulence and its de-icing system reduces the impact of inclement
weather on aircraft operation.
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Avantair
believes that the pricing structure afforded by utilizing the Piaggio Avanti
allows Avantair to attract a customer desiring quality at a lower price point.
Offering the cabin cross section of a mid-size aircraft and fuel efficiency of a
turboprop, along with no hourly fees, allows Avantair to lower the cost of
private air travel for a broader range of consumers.
Flight
Operations
Avantair’s
Operations Control Center is made up of four departments that all play a role in
an Avantair program participants trip from the first phone call to completion of
the trip at the final destination:
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Owner
Services
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Pilot
Services
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30
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·
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Flight
Specialists
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·
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Flight
Following
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After a
purchase with Avantair in one of our various programs, an owner is assigned an
Owner Services team. This team assists the owner in scheduling flights and
making necessary arrangements based on the owner’s flight requirements,
including coordinating with Avantair’s Operations Control Center.
The
flight scheduling process begins when an owner contacts the owner’s Owner
Services team. When an owner contacts Avantair to schedule a flight, an assigned
Owner Services team member handles the request. The team member will ask for all
details of the proposed trip, including airport of departure and arrival as well
as fixed base operation preference. This department also handles any ground
transportation and/or catering orders.
The trip
request is subject to an approval process with the Flight Specialist. After
approval, the trip is entered into Avantair’s FlightOps computer system by Owner
Services. The trip request is then delivered to the owner for approval. This is
used as a quality control so that Avantair is sure it has all the correct
details of the owner’s trip. After a signed confirmation is received from the
owner, Owner Services will confirm this trip reservation in FlightOps. The night
before and the morning of the trip, Owner Services reconfirms all ground and/or
catering requests for quality control.
The day
before the trip, the flights will be assigned to an Avantair aircraft by the
Flight Specialist. The Flight Specialist then confirms the availability and
location of the aircraft for the next day in an effort to ensure that the owner
gets the optimal schedule with the least amount of repositioning time. This
confirmation process also takes into consideration the crew duty, rest and
flight time regulations.
The job
of Pilot Services is to schedule pilots for flights and arrange accommodations
for pilots away from their base of operations. Pilot Services is also
responsible for the crew scheduling of all aircraft.
Flight
Following tracks all current flights that are in progress through direct contact
with the crew and through FlightOps. Flight Following monitors weather
conditions and other situations which may lead to delays, and works with the
flight crews and the Operations Control Center to resolve delays as quickly as
possible.
Pilot
Hiring and Training
Avantair
selects and hires pilots based on a detailed screening process, including
interviews, assessments of the candidate’s knowledge of Avantair’s aircraft,
applicable regulations and flight skills, and background checks. All pilots are
initially hired into first officer positions. Minimum requirements for initial
hires include:
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2,500
hours of total flight time;
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1,000
multi-engine flight hours; and
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250
flight hours within the previous 12
months.
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All
pilots must complete FAA required and approved ground and flight training prior
to flying any flight leg for any of Avantair’s fractional owners. Further, all
of Avantair’s pilots must fulfill ongoing training requirements. Avantair’s
pilots have an average of over 6,200 hours of total flight time.
Aircraft
Maintenance
Avantair
aircraft maintenance follows a schedule of inspections based on the numbers of
hours flown at the recommendation of the aircraft manufacturer and approval of
the FAA. This schedule consists of four levels of inspection - A, B, C and D
checks. An A check occurs at every 150 flight hours; a B check at every 600
flight hours; a C check at every 1,500 flight hours; and a D check at every
3,000 flight hours. The scheduled maintenance events, as well as unanticipated
events, result in an average downtime of one day for A checks, two days for B
checks, five days for C checks and twenty-one days for D checks. As a condition
of employment, all of Avantair’s maintenance technicians must have an FAA
license and are subject to a background check and drug screening prior to
employment. Avantair’s Lead Technicians and Supervisors attend the FAA-approved
Piaggio factory training program at Flight Safety. In addition, training is
provided at the Rockwell Collins factory school as well as Pratt & Whitney
Powerplant (engine) school. Avantair’s main maintenance base and its Maintenance
Control Center, which oversees and coordinates all maintenance activity on
Avantair’s aircraft, is located in Clearwater, Florida and is staffed 24 hours a
day and seven days a week. The average years of experience is over 17 years for
Avantair’s maintenance technicians, 20 years for its maintenance controllers and
over 25 years for its maintenance quality control staff.
In April
2008, the Company terminated its Airframe Maintenance contract with its third
party vendor and began to manage the Airframe Maintenance Program on an internal
basis. In January 2009, the Company replaced a former engine service vendor with
another nationally recognized, FAA certified engine maintenance
vendor.
31
Competition
Avantair
faces competition from other fractional aircraft operations. Avantair’s primary
competitors are NetJets, a subsidiary of Berkshire Hathaway, Flight Options,
FlexJet, a Bombardier subsidiary, and CitationShares, which is 75.0% owned by
Cessna, a wholly-owned Textron subsidiary. None of these competitors are
stand-alone entities like Avantair and all of these competitors are
significantly larger than Avantair and with more resources. Some of these
companies are subsidiaries of business jet manufacturers, which Avantair’s
management believes may hamper their flexibility in purchasing aircraft.
According to AvData, five companies have 10.0% or more of the total market for
fractional aircraft, based upon the units in operation – NetJets, Flight
Options, FlexJet, CitationShares, and Avantair, with NetJets having a market
share of approximately 50.0% and Flight Options, FlexJet, and CitationShares
having a combined market share of approximately 35.0%. According to AvData, as
of October 2009, Avantair had an approximate market share of
10.0%.
Avantair
and other fractional airlines also face competition from charter airlines, air
taxis and commercial airlines. Some of these competitors offer greater selection
of aircraft (including jet aircraft), some of which permit owners to fly greater
distances or at greater speeds, travel with a greater number of passengers and
on shorter advance notice before flying.
Avantair’s
management believes that fractional and flight hour card aircraft operators
compete on the basis of aircraft model and features, price, customer service and
scheduling flexibility. Avantair’s management believes that customers are
generally willing to continue to use the same aircraft operator so long as such
operator provides satisfactory service with competitive pricing. Avantair’s
management believes that the quality of its aircraft and service, and the value
it provides to its customers, enables it to compete effectively against its
larger competitors.
Information
Technology
Avantair’s
core software application, FlightOps, is designed, developed, and licensed by
Bitwise Solutions, Inc. for use in Avantair’s Operations Control Center to plan,
schedule and track fractional owner trips as well as manage its fleet. FlightOps
uses Oracle as its database server.
Avantair
has invested in an efficient high-performance computing environment that
includes Dell PowerEdge servers with the latest commercially available
Windows-based operating system. In addition, Avantair has approximately 100
Fujitsu Tablet PCs that are used as part of its pilots’ Electronic Flight Bag.
These PCs are equipped with core software applications that include navigational
aids, flight charts, and aircraft manuals.
Avantair
currently has two agreements with Application Services Providers:
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Salesforce
– Customer Relationship Management Sales Force Automation;
and
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Corridor
– Enterprise Resource Management Aviation Service Software (Maintenance,
Inventory and FBOs).
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Government
and Other Regulations
Avantair,
like all air carriers, is subject to extensive regulatory and legal compliance
requirements, both domestically and internationally. In addition to state and
federal regulation, airports and municipalities enact rules and regulations that
affect aircraft operations. The FAA regulates Avantair’s activities, primarily
in the areas of flight operations, maintenance, and other safety and technical
matters. FAA requirements cover, among other things, security measures,
collision avoidance systems, airborne windshear avoidance systems, noise
abatement and other environmental concerns, and aircraft safety and maintenance
procedures. Specifically, the FAA may issue mandatory orders, relating to, among
other things, the grounding of aircraft, inspection of aircraft, installation of
new safety-related items and removal and replacement of aircraft parts that have
failed or may fail in the future.
The FAA
also has authority to issue air carrier operating certificates and aircraft
airworthiness certificates and regulate pilot and other employee training, among
other responsibilities. Avantair’s management of fractional aircraft is
regulated by the FAA under Part 91, subpart K of the Federal Aviation
Regulations (“FARs”), and the FAA has issued Management Specifications
reflecting Avantair’s authority to manage such aircraft. In some cases,
including all current international operations, the FAA deems Avantair to
transport persons or property by air for compensation. Such “charter” operations
are regulated under Part 135 of the FARs, and Avantair’s authority to conduct
those operations is reflected in an Air Carrier Operating Certificate with
operating specifications. Both types of FAA authority potentially are subject to
amendment, suspension or revocation. From time to time, the FAA issues rules
that require aircraft operators to take certain actions, such as the inspection
or modification of aircraft and other equipment.
Avantair’s
charter operations under Part 135 also are subject to economic regulation by the
U.S. Department of Transportation (“DOT”). To retain its DOT registration as an
air taxi, Avantair must remain a U.S. citizen; that is, U.S. citizens must
actually control Avantair, at least 75.0% of Avantair’s outstanding voting stock
must be owned and controlled by U.S. citizens, and the President and two-thirds
of the directors and other managing officers must be U.S. citizens. Avantair’s
organizational documents provide for the automatic reduction in voting power of
common stock owned or controlled by non-U.S. citizens if necessary to maintain
U.S. citizenship. If Avantair cannot maintain its U.S. citizenship, it would
lose its ability to conduct its charter operations (though not its fractional
program manager operations).
32
Aircraft
operators also are subject to various other federal, state and local laws and
regulations. The Department of Homeland Security (“DHS”) has jurisdiction over
virtually all aspects of civil aviation security and arrivals into and
departures from the United States. Avantair is also subject to inquiries by DOT,
the FAA, and other U.S. and international regulatory bodies.
Environmental
Regulation
Many
aspects of Avantair’s operations also are subject to increasingly stringent
federal, state, local and foreign laws and regulations protecting the
environment concerning emissions to the air, discharges to surface and
subsurface waters, safe drinking water, and the management of hazardous
substances, oils, and waste materials. Future regulatory developments in the
U.S. and abroad could require aircraft operators to take additional action to
maintain compliance with applicable laws. For example, potential future actions
that may be taken by the U.S. government, foreign governments, or the
International Civil Aviation Organization to limit the emission of greenhouse
gases by the aviation sector are unknown at this time but could require
significant action from aircraft operators in the future.
Avantair
is also subject to other environmental laws and regulations, including those
that require it to remediate soil or groundwater to meet certain objectives.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act (commonly known as “Superfund”) and similar environmental cleanup
laws, generators of waste materials, and owners or operators of facilities, can
be subject to liability for investigation and remediation costs at facilities
that have been identified as requiring response actions. Certain operations of
Avantair are also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. Avantair
also conducts voluntary remediation actions. Environmental cleanup obligations
can arise from, among other circumstances, the operation of fueling facilities,
and primarily involve airport sites. Future costs associated with these
activities are not expected to have a material adverse effect on Avantair’s
business.
Risk
of Loss and Liability Insurance
The
operation of any fractional aircraft business includes risks such as mechanical
failure, physical damage, collision, property loss or damage due to events
beyond the operator’s control. Avantair carries an all-risk aviation insurance
policy (subject to standard aviation exclusions and provisions) which offers
protection for physical damage to the hull, bodily injury to passengers, as well
as third party bodily injury and property damage. While Avantair believes that
its present insurance coverage is adequate, not all risks can be insured, and
there can be no guarantee that any specific claim will be paid, or that Avantair
will always be able to obtain adequate insurance coverage at reasonable
rates.
Legal
Proceedings
From
time to time, the Company is party to various legal proceedings in the normal
course of business. It is expected that these claims would be covered by
insurance subject to customary deductibles. Those claims, even if lacking merit,
could result in the expenditure of significant financial and managerial
resources. As of January 21, 2010, there were no legal proceedings which the
Company would anticipate having a material adverse effect on its financial
position, results of operations or cash flows.
Employees
As of
January 21, 2010, Avantair had approximately 450 full-time employees, 40 of whom
were management and 410 of whom were operational. Avantair believes that it has
good relations with its employees.
Facilities
Avantair
leases its corporate headquarters and hangar space, which is approximately
125,000 square feet at 4311 General Howard Drive, Clearwater, Florida under two
leases that each expire on April 30, 2020. In addition, Avantair currently
leases the following principal properties:
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approximately
17,752 square feet of office and hangar space at 125 Passaic Avenue,
Caldwell, New Jersey under a lease that expires on October 31, 2018;
and
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approximately
65,258 square feet of office and hangar space at 575 Aviation Drive,
Camarillo, California under a lease that expires on August 1,
2021.
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33
MANAGEMENT
Executive
Officers and Directors
The
Company’s current directors and executive officers are as follows:
Barry
J. Gordon
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Chairman
of the Board
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Steven
Santo
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Chief
Executive Officer and Director
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Arthur
H. Goldberg
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Director
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Richard
B. DeWolfe
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Director
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Stephanie
A. Cuskley
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Director
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A.
Clinton Allen
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Director
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Robert
J. Lepofsky
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Director
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Richard
A. Pytak Jr.
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Chief
Financial Officer
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Kevin
Beitzel
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41
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Chief
Operating Officer
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Barry J. Gordon. Mr. Gordon
has been Avantair’s (formerly known as Ardent Acquisition Corporation) Chairman
of the Board since its inception. Mr. Gordon has nearly 40 years of experience
in evaluating aviation industry securities, including membership for 25 years in
the Society of Airline Analysts (with 5 years as its president), and over 30
years experience in the senior management of a mutual fund specializing in the
airline, aerospace and technology industries. Mr. Gordon served as executive
vice president of American Fund Advisors, Inc. from September 1978 until
December 1980, as its president from December 1980 until May 1987 and has been
its chairman of the board since May 1987. American Fund Advisors is a private
money management firm that manages money for high net worth individuals, pension
and profit sharing plans. Mr. Gordon has been a director of American Fund
Advisors since December 1980. From December 1991 to March 2005, he was
president, and from December 1991 to December 1993, he was director, of the John
Hancock Technology Series, Inc., an investment company. Since September 1999,
Mr. Gordon has been President, Chief Executive Officer and a director of
BlueStone AFA Management, LLC, the general partner of the AFA Private Equity
Fund 1 (formerly BlueStone AFA Fund), a venture capital fund providing equity
capital for public and private companies primarily in the technology sector, and
since January 2000, he has been a director of the AFA Private Equity Fund. Mr.
Gordon had been Chairman of the Board and Chief Executive Officer of North Shore
Acquisition Corp., a blank check company formed in June 2007 for the purpose of
effecting a business combination with an operating business, since its inception
in June 2007 until August 2009. Mr. Gordon has also been chairman of the board
and Chief Executive Officer of the New Jersey Cardinals, a Class A affiliate of
the St. Louis Cardinals, from February 1990 until April 2006 and the Norwich
Navigators, a Class AA affiliate of the San Francisco Giants, from March 1991
until April 2005. He also served as a director of Winfield Capital Corp., an
Over The Counter Bulletin Board listed small business investment company, from
October 1995 to October 2005. In 1992, Mr. Gordon was awarded Entrepreneur of
the Year for Long Island in financial services. Mr. Gordon received a B.B.A.
from the University of Miami and an M.B.A. from Hofstra
University.
Steven F. Santo. Mr. Santo has
served as Chief Executive Officer, President and a Director of Avantair since
its inception in June 2003 and Skyline Aviation Services, Inc. since June 2002.
Mr. Santo is a licensed, commercially-rated pilot who has been flying for
approximately 21 years. From 1995 through 2001, Mr. Santo practiced law as an
attorney in private practice, concluding his law practice in 2001 as a name
partner at the firm of Fields, Silver & Santo. From 1992 to 1995, Mr. Santo
served as an Assistant District Attorney in New York working in the office’s
major crimes unit. Mr. Santo received a J.D. from St. Johns’ University School
of Law and a bachelor’s degree from Villanova University and has earned an
Professional Director Certification issued by the Corporate Directors Group, an
accredited educational organization of RiskMetric ISS Governance
Services.
Arthur H. Goldberg. Mr.
Goldberg has been a member of Avantair’s (formerly known as Ardent Acquisition
Corporation) Board of Directors since inception. Mr. Goldberg has served as a
member of Corporate Solutions Group since January 2000. From February 1994 to
December 1999, Mr. Goldberg served president of Manhattan Associates, an
investment and merchant banking firm. Mr. Goldberg has been a trustee of
Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust), a New York
Stock Exchange listed real estate investment trust, since 1998. Mr. Goldberg has
been a director of North Shore Acquisition Corp., a blank check company formed
in June 2007 for the purpose of effecting a business combination with an
operating business, since its inception in June 2007. Mr. Goldberg received a
B.S. (cum laude) from New York University Stern School and a J.D. from the New
York University School of Law.
Richard B. DeWolfe. Mr.
DeWolfe was appointed to the Board effective January 29, 2009. Mr. DeWolfe is
Managing Partner of DeWolfe & Company, LLC, a real estate management and
investment consulting firm. He serves as a Director and Chairman of the Audit
Committee of Manulife Financial Corporation which is the parent company of John
Hancock Financial Services, Inc. He is also a director of The Boston Foundation;
Trustee of Boston University; Trustee of the Marine Biological Laboratory; and
an honorary director of The Boston Center for Community and Justice. He was
formerly Chairman and CEO of The DeWolfe Companies, Inc., the largest
homeownership organization in New England, which was previously listed on the
American Stock Exchange and acquired by Cendant Corporation in 2002. Mr. DeWolfe
was formerly Chairman and Founder of Reliance Relocations Services, Inc. and was
formerly Chairman of the Board of Trustees, Boston University. Mr. DeWolfe holds
a BAS, Marketing and Finance from Boston University and has earned an
Professional Director Certification issued by the Corporate Directors Group, an
accredited educational organization of RiskMetric ISS Governance
Services.
34
Stephanie A. Cuskley. Ms.
Cuskley has served as a member of Avantair’s Board of Directors since 2007. In
addition, Ms. Cuskley has been on the Board of Directors of Insituform
Technologies Inc. (NASDAQ:INSU) since 2005 and is chair of its audit committee.
On January 19, 2009, she was appointed to the position of Chief Executive
Officer of NPower, a nonprofit information technology services network. She also
serves as the Executive Director of NPower NY, an affiliated organization of
NPower. From 2003 thru 2005, Ms. Cuskley was a Managing Director with JPMorgan
Chase where she headed the Investment Banking Coverage for the firm’s mid-cap
clients located in the eastern US. Ms. Cuskley joined JPMorgan Chase in 1994 and
spent 7 years in high yield origination. From 2001 to 2003, she led a global
culture and leadership development initiative sponsored by the firm’s CEO and
Executive Committee. Prior to joining JPMorgan Chase, Ms. Cuskley was an
Executive VP with Integrated Resources, a large NY-based financial services
company, and advised on their financial restructuring. She started her
investment banking career in 1985 at Drexel Burnham Lambert as a corporate
finance generalist. She is also a commissioner and co-head of the Economic
Development committee of the NYC Mayor’s Commission on Women’s Issues and a
member of the Resources Development Committee for United Way of New York City.
Ms. Cuskley received her MBA from Cornell and her BA from the University of
Toronto.
A. Clinton Allen. Mr. Allen
has served as a member of Avantair’s Board of Directors since 2007. Mr. Allen is
the CEO of A. C. Allen & Company, a private investment banking consulting
firm. He is the Lead Director of Steinway Musical Instruments, one of the
world’s largest manufacturers of musical instruments. He is also a member of the
board of directors of Brooks Automation, Inc., which provides integrated tool
and factory automation solutions for the global semiconductor and related
industries, the board of directors and Executive Committee of LKQ Corporation,
the largest nationwide provider of recycled OEM automotive parts and Chairman of
the Board of Collectors Universe, a high end provider of collectible grading. He
served on the board of directors of Blockbuster Entertainment Corporation from
1986 until its acquisition by Viacom/Paramount in September 1994. Mr. Allen
graduated from Harvard University and serves on the Executive Committee of the
Friends of Harvard Football, as well as the Harvard Visiting Committee on
University Resources and the Harvard Major Gifts Committee. He is a member of
the Board of Directors and the President’s Council of the Massachusetts General
Hospital. Mr. Allen has earned an Advanced Professional Director Certification
issued by the Corporate Directors Group, an accredited educational organization
of RiskMetric ISS Governance Services.
Robert J. Lepofsky. Mr.
Lepofsky has served as a member of Avantair’s Board of Directors since 2007. Mr.
Lepofsky has been the President, Chief Executive Officer and Director of Brooks
Automation, Inc., a publicly held producer of automation, vacuum and
instrumentation solutions for the global semiconductor industry since October
2007. Mr. Lepofsky has also been Chairman of Westcliff Capital Group, a private
holding company since November 2006. After serving for ten years on the Board of
Directors of Ensign-Bickford Industries, Inc., a broadly diversified,
privately-held corporation with business interests ranging from food flavorings,
industrial manufacturing, aerospace defense products and real estate
development, Mr. Lepofsky became President and Chief Executive Officer of
Ensign-Bickford in January 2005, a position he held until his retirement in
November, 2006. From January 1989 to December 2004, Mr. Lepofsky was President
and Chief Executive Officer of Helix Technology Corporation, a publicly-held
producer of innovative vacuum systems for the semiconductor industry. Mr.
Lepofsky previously served as its Senior Vice President and Chief Operating
Officer from 1979 through 1988. From January 2005 Mr. Lepofsky was non-executive
Chairman of the Board of Helix, a position he held until October 2005 when Helix
merged with Brooks Automation, Inc. In the not-for-profit sector Mr. Lepofsky is
a member of the Board of Overseers of the Boston Symphony Orchestra and a Life
Trustee at the Beth Israel Deaconess Medical Center - a major Harvard teaching
hospital in Boston. Mr. Lepofsky received his B.S. degree from Drexel Institute
of Technology and has earned an Professional Director Certification issued by
the Corporate Directors Group, an accredited educational organization of
RiskMetric ISS Governance Services.
Richard A. Pytak Jr. Mr. Pytak
has been the Chief Financial Officer since April 14, 2008. Prior thereto, Mr.
Pytak was the Company’s Vice President of Finance since joining the Company in
February 2008. Prior to joining Avantair, Mr. Pytak served as Group Controller
of Gibraltar Industries, Inc., from August 2003 to January 2008 and as Treasurer
from June 1998 to July 2003. Gibraltar Industries, Inc. is a leading
manufacturer, processor, and distributor of products for the building,
industrial, and vehicular markets, with annual sales of over $1 billion dollars
in 2007.
Kevin Beitzel. Mr. Beitzel has
been the Chief Operating Officer since February 8, 2008. Mr. Beitzel served as
the Company’s Executive Vice President of Maintenance and Operations from
September 2007 to February 8, 2008. From December 2005 through August 2007, Mr.
Beitzel served as the Company’s Vice President of Maintenance. Prior to joining
Avantair, Mr. Beitzel served as Director of Vendor Maintenance at US Airways
from February 2005 to December 2005. From July 1999 to February 2005 Mr. Beitzel
served as Maintenance Operations Manager at US Airways.
Corporate
Governance and Board of Directors Matters
The
affairs of Avantair are managed by the Board of Directors, which is comprised of
at least a majority of independent directors. Each member of the Board of
Directors is elected at the annual meeting of stockholders each year or
appointed by the incumbent Board of Directors and serves until the next annual
meeting of stockholders or until a successor has been elected or
approved.
Current
Members of the Board of Directors
The
members of the Board of Directors on the date of this Registration Statement,
and the committees of the Board of Directors on which they serve, are identified
below:
35
Director
|
|
Audit
Committee
|
|
Compensation
Committee
|
|
Nominating and
Corporate Governance
Committee
|
Barry
J. Gordon
|
||||||
Arthur
H. Goldberg
|
ü
|
ü
|
ü
|
|||
Steven
Santo
|
||||||
Stephanie
A. Cuskley
|
Chair
|
ü
|
||||
A.
Clinton Allen
|
Chair
|
|||||
Robert
J. Lepofsky
|
ü
|
ü
|
Chair
|
|||
Richard
B. DeWolfe
|
ü
|
ü
|
Role of the Board of Directors’
Committees
The Board
of Directors has standing Audit, Compensation and Nominating and Corporate
Governance Committees.
Audit
Committee . The Audit Committee is responsible for assist Avantair’s
Board in fulfilling the oversight responsibilities it has under the law with
respect to financial reports and other financial information provided by
Avantair to the public, Avantair’s systems of internal controls regarding
finance and accounting that management and the Board have established and
Avantair’s auditing, accounting and financial reporting processes generally. The
current charter of the Audit Committee was revised on September 18, 2008, and is
available in the Investors section of Avantair’s website (www.avantair.com). A
copy of this charter may also be obtained upon request from Avantair’s Corporate
Secretary. The audit committee consists of four directors, Ms. Cuskley and
Messrs. Goldberg, Lepofsky, and DeWolfe each of who are considered independent
within the meaning of SEC regulations and the listing standards of the Nasdaq
Global Market. The Company’s audit committee includes at least one member who
has been determined by the board of directors to meet the qualifications of an
“audit committee financial expert” (as that term is defined in the rules
promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002). Ms. Cuskley
is the independent director who has been determined to be an audit committee
financial expert and serves as the chairperson of the audit committee. The Audit
Committee met seven times during the fiscal year ended June 30,
2009.
Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for developing and implementing policies and practices
relating to corporate governance, including reviewing and monitoring
implementation of Avantair’s Corporate Governance Charter. In addition, the
Nominating and Corporate Governance Committee develops and reviews background
information on candidates for the Board of Directors and makes recommendations
to the Board of Directors regarding such candidates. The Nominating and
Corporate Governance Committee also evaluates and makes recommendations to the
Board of Directors in connection with its annual review of director
independence. The current charter of the Nominating and Corporate Governance
Committee is available in the Investors section of Avantair’s website
(www.avantair.com). A copy of this charter may also be obtained upon request
from Avantair’s Corporate Secretary. All of the members of the Nominating and
Corporate Governance Committee are independent within the meaning of the listing
standards of the Nasdaq Global Market. The members of the corporate governance
and nominating committee are Ms. Cuskley and Messrs. Goldberg and Lepofsky. Mr.
Lepofsky serves as chairman of the corporate governance and nominating
committee. The Nominating and Corporate Governance Committee met three times
during the fiscal year ended June 30, 2009.
Compensation
Committee. The compensation committee of the board of directors reviews,
makes recommendations to the board and approves the Company’s compensation
policies and all forms of compensation to be provided to the executive officers
and directors, including, among other things, annual salaries, bonuses, stock
options and other incentive compensation arrangements. In addition, the
compensation committee administers the Company’s stock plans, including
reviewing and granting stock options, with respect to its executive officers and
directors, and may from time to time assist the board of directors in
administering its stock plans with respect to all of the other employees. The
compensation committee also reviews and approves other aspects of compensation
policies and matters. The current charter of the Compensation Committee was
revised on September 18, 2008, and is available in the Investors section of
Avantair’s website (www.avantair.com). A copy of this charter may also be
obtained upon request from Avantair’s Corporate Secretary. All of the members of
the Compensation Committee are independent within the meaning of the listing
standards of the Nasdaq Global Market. The current members of the compensation
committee are Messrs. Allen, Goldberg, Lepofsky, and DeWolfe. Mr. Allen serves
as chairman of the Compensation Committee. The Compensation Committee met two
times during the fiscal year ended June 30, 2009.
Executive
Sessions of the Independent Directors
The
Company’s “non-employee” directors (as determined under the listing standards of
the Nasdaq Global Market) typically meet at each regularly scheduled meeting of
the Board of Directors, in executive session without any management present. No
single director has been chosen to preside at all of such meetings. Instead, a
director is selected at each such meeting to preside over such meeting. See the
section titled “Stockholder Communication with the Board of Directors” for the
method for interested parties to make their concerns known to an independent
director, or the independent directors as a group.
36
Board
of Directors Meetings during Fiscal 2009
The
Board of Directors held a total of seven meetings during the fiscal year ended
June 30, 2009. All directors attended 75.0% or more of the aggregate number of
Board of Directors meetings and committee meetings. The Chairman of the Board
presides over all meetings of the Board of Directors.
Policy Regarding Attendance at Annual
Meeting of Stockholders
Avantair
encourages all directors to endeavor to attend all annual stockholders meetings,
absent unanticipated personal or professional obligations which preclude them
from doing so. The majority of Avantair’s directors attended the 2009 Annual
Meeting.
Stockholder
Communication with the Board of Directors
The board
of directors will give appropriate attention to written communications on issues
that are submitted by stockholders and other interested parties, and will
respond if and as appropriate. The chairman of the nominating and corporate
governance committee will be primarily responsible for monitoring communications
from stockholders and other interested parties and will provide copies or
summaries of such communications to the other directors as he considers
appropriate.
Communications
will be forwarded to all directors if they relate to substantive matters and
include suggestions or comments that the chairman of the nominating and
corporate governance committee considers to be important for the directors to
know.
Stockholders
and other interested parties who wish to send communications on any topic to the
board of directors should address such communications to chairman of the
corporate nominating and corporate governance committee at the address provided
on the first page of this registration statement.
Code
of Conduct and Professional Ethics
The
Company’s board of directors has adopted a code of conduct and professional
ethics that applies to all of its directors, employees and officers, including
its principal executive officer, principal financial officer, and principal
accounting officer or controller, or persons performing similar functions. The
full text of the Company’s code of conduct and professional ethics is posted on
its website at www.avantair.com under the Corporate Governance section. The
Company intends to disclose future amendments, if any, to certain provisions of
its code of conduct and professional ethics, or waivers of such provisions,
applicable to its directors and executive officers, including its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, at the same location on its
website identified above and also in a Current Report on Form 8-K within four
business days following the date of such amendment or waiver. The inclusion of
the Company’s website address in this registration statement does not include or
incorporate by reference the information on its website into this registration
statement.
Directors’
Compensation
Upon the
recommendation of the compensation committee, the full board of directors
approved an annual compensation arrangement for the Company’s independent
directors effective February 23, 2007. Such arrangement is comprised as
follows:
Annual Fee. Each director,
other than those directors serving as employees, receives an annual cash
retainer in the amount of $40,000, paid quarterly in arrears. Each director has
the option to receive, in whole or in part, such amount in cash or hours flown
in Company aircraft. The hours flown in Company aircraft will be valued at
estimated fair market value. Mr. Gordon will receive an additional $35,000 in
annual cash compensation for service as the non-Executive Chairman.
Audit Committee Chair. The
chair of the audit committee, Ms. Cuskley, receives an additional annual cash
compensation of $20,000 as the audit committee chair.
In March
2008, Avantair granted 3,000 shares of restricted stock to each of the then five
non-employee directors on the Company’s Board of Directors. In addition, on May
2009, Avantair granted 3,000 shares of restricted stock to each of the six
non-employee directors on the Company’s Board of Directors. The restricted
shares granted to the director’s vest one third upon each of the next three
successive annual meetings, subject to the grantee’s continued service on the
Board of Directors.
37
The
following director compensation table shows the compensation paid in fiscal year
ended June 30, 2009 to the Company’s non-employee directors:
Director
Compensation Table
Name
|
Fees Earned or
Paid in Cash ($)(1)
|
Restricted
Stock Awards
($)(2)
|
Total ($)
|
|||||||||
A.
Clinton Allen
|
40,000 | 3,555 | 43,555 | |||||||||
Barry
J. Gordon
|
75,000 | 3,555 | 78,555 | |||||||||
Arthur
H. Goldberg
|
40,000 | 3,555 | 43,555 | |||||||||
Robert
J. Lepofsky
|
40,000 | 3,555 | 43,555 | |||||||||
Stephanie
A. Cuskley
|
60,000 | 3,555 | 63,555 | |||||||||
Richard
B. DeWolfe
|
40,000 | 3,555 | 43,555 |
(1)
|
The
fees earned by the directors may be paid, at the director’s option, in
cash and/or in hours flown in Company aircraft at estimated fair market
value per hour. Messrs. Allen, Goldberg, Lepofsky and DeWolfe have chosen
to be paid in hours flown in company aircraft. Mr. Gordon and Ms. Cuskley
have chosen to be paid in cash.
|
(2)
|
The
amounts shown reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended June 30, 2009, in accordance
with Statement of Financial Accounting Standards No. 123(R). The balance
remaining to be recognized over the remaining vesting period of the award
is $29,852.
|
Executive
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
The
primary goals of the compensation committee of Avantair’s board of directors
with respect to executive compensation are to attract and retain the most
talented and dedicated executives possible, to tie annual and long-term cash and
stock incentives to achievement of specified performance objectives, and to
align executives’ incentives with stockholder value creation.
To
achieve these goals, the compensation committee recommends executive
compensation packages to the board of directors that are generally based on a
mix of salary, discretionary bonus and equity awards. Although the compensation
committee has not adopted any formal guidelines for allocating total
compensation between equity compensation and cash compensation, the Company
intends to implement and maintain compensation plans that tie a substantial
portion of its executives’ overall compensation to achievement of corporate
goals and value-creating milestones such as the development of the Company’s
products, the establishment and maintenance of key strategic relationships,
reaching sales and marketing targets and the growth of its customer base as well
as its financial and operational performance, as measured by metrics such as
revenues and profitability.
The
compensation committee performs reviews based on surveys of executive
compensation paid by peer companies in the fractional aircraft industry as well
as reviews other industries of similar age and size, as it sees fit, in
connection with the establishment of cash and equity compensation and related
policies.
In
2008, the compensation committee engaged Pearl Meyer & Partners, a
compensation consultant, to conduct a competitive assessment of compensation for
the Company’s executives and top management positions. The consultant provided
benchmark data for each position. The survey data used for the study included
aviation industry specific information, as well as broader survey data that
covered a wide range of companies across all industries and revenue sizes. The
consultant performed a regression analysis of the survey data to recognize
differences in company revenue. With the consultant’s assistance, a comparative
peer group of 7 publicly traded aviation-related companies was developed based
on similarities in such measures as revenues, gross profit and dividend
policies. Information from the public filings of the peer group
companies was used as an additional comparative measure for equivalent positions
within the Company. The peer group consisted of: PHI Inc., Air
Methods Corp., Alabama Aircraft Industries Inc., Gulfstream International Group
Inc., Clark Holdings Inc., Air T Inc. and Express-1 Expedited Solutions
Inc.
Elements
of Compensation
The
compensation committee evaluates individual executive performance with a goal of
setting compensation at levels the committee believes are comparable with
executives in other companies of similar size and stage of development operating
in the industry and are competitive and further the Company’s objectives of
motivating achievement of its short- and long-term financial performance goals
and strategic objectives, rewarding superior performance and aligning the
interests of its executives and shareholders. The compensation received by the
Company’s executive officers consists of the following elements:
|
·
|
base
salary;
|
|
·
|
discretionary
annual bonus;
|
|
·
|
equity-based
long-term incentives, including stock appreciation rights and
performance-based restricted stock;
and
|
|
·
|
401(k),
profit-sharing, welfare and other personal
benefits
|
38
Base
Salary
General
Considerations
Base
salaries for the Company’s executives are established based on the scope of
their responsibilities and individual experience, taking into account
competitive market compensation paid by other companies for similar positions
within the fractional aircraft industry. Base salaries are reviewed annually,
and adjusted from time to time to realign salaries with market levels after
taking into account individual responsibilities, performance and experience.
Since January 2009, the base salary of the Chief Executive Officer has been
$416,000. The annual base salary for the other executive officers range from
$215,000 to $250,000. Effective October 1, 2009, the base salary of the Chief
Executive Officer will increase to $500,000, and the annual base salary range
for the other executive officers will increase to a range of $250,000 to
$265,000.
The
compensation committee believes that these base salary levels are commensurate
with the general salary levels for similar positions in companies in a similar
stage of development in the industry.
Annual
Incentive Compensation
Discretionary
Annual Bonus
In
addition to base salaries, the compensation committee has the authority to award
discretionary annual bonuses to the Company’s executive officers. The annual
incentive bonuses are intended to compensate officers for achieving corporate
goals and for achieving what the committee believes to be value-creating
milestones.
For
the fiscal year ended June 30, 2009, the compensation committee principally
considered the named executive officers’ contributions in achieving the
following objectives in their determination of appropriate levels of bonus
compensation: (i) the success of the Company’s named executive officers in
improving the Company’s balance sheet strength during the 2009 fiscal year, (ii)
the success of the Company’s named executive officers in obtaining necessary
financing for the Company’s activities during the 2009 fiscal year, (iii) the
success of the Company’s named executive officers in implementing the Company’s
new business model, including the deployment of the Axis Club membership
program, (iv) the success of the Company’s named executive officers in achieving
positive EBITDA for the Company during the 2009 fiscal year and (v) the impact
of negative macro-economic and industry trends, which heightened the difficulty
for the Company’s named executive officers to achieve these
successes.
Long-Term
Compensation- 2006 Long-Term Incentive Plan
In
February 2007, Avantair’s Board of Directors and stockholders approved
Avantair’s 2006 Long Term Incentive Plan ( “the Plan”).
The
purpose of the Plan is to further and promote the interests of Avantair, its
subsidiaries and its stockholders by enabling Avantair and its subsidiaries to
attract, retain and motivate employees, non-employee directors and consultants
or those who will become employees, non-employee directors or consultants, and
to align the interests of those individuals and Avantair’s
stockholders.
Number of Shares
The
maximum number of shares of Avantair common stock as to which awards may be
granted under the Plan may not exceed 1,500,000 shares. Shares of Avantair
common stock subject to issuance upon exercise or settlement of awards with
respect to stock options, stock appreciation rights, restricted stock and
restricted stock units shall count against this limit. Awards of performance
units which are paid in cash are not subject to this limit and will not count
against the number of shares of Avantair common stock available under the Plan.
With respect to awards intending to be “qualified performance-based
compensation” under Section 162(m) of the Internal Revenue Code ( “the Code”)
the maximum amount that can be awarded in any calendar year to any participant
is (i) in respect of performance units, performance-based restricted shares and
restricted stock units and other awards (other than options and stock
appreciation rights), 150,000 shares of Avantair common stock (or the then
equivalent fair market value of such shares), and (ii) in the case of stock
options and stock appreciation rights, 150,000 underlying shares of Avantair
common stock. Avantair may grant awards that exceed the 150,000 share limit so
long as the amount in excess of such limit is not intended to be “qualified
performance-based compensation” under the code. The limits on the numbers of
shares described in this paragraph and the number of shares subject to any award
under the Plan are subject to proportional adjustment as determined by
Avantair’s Board to reflect certain stock changes, such as stock dividends and
stock splits (see “Recapitalization Adjustments” below).
If any
awards under the Plan expire or terminate unexercised, the shares of common
stock allocable to the unexercised or terminated portion of such award shall
return to Avantair’s treasury and again be available for award under the
Plan.
Administration
The
administration, interpretation and operation of the Plan will be vested in the
Compensation Committee of Avantair’s Board of Directors. The Compensation
Committee may designate persons other than members of the Compensation Committee
to carry out the day-to-day administration of the Plan.
Eligibility
The Plan
permits awards to employees and non-employee directors and consultants of
Avantair and its subsidiaries.
39
No
determination has been made as to future awards which may be granted under the
Plan, although it is anticipated that recipients of awards will include the
current executive officers of Avantair. It is not determinable what awards under
the Plan would have been received by the executive officers and directors of
Avantair and its subsidiaries.
Awards
under the Plan
Awards
under the Plan may consist of stock options, stock appreciation rights (which
are sometimes referred to as SARs), restricted shares, restricted stock units or
performance unit awards, each of which is described below. All awards will be
evidenced by an award agreement between Avantair and the individual participant
and approved by the Compensation Committee. At the discretion of the
Compensation Committee, an eligible employee may receive awards from one or more
of the categories described below, and more than one award may be granted to an
eligible employee.
Stock
Options and Stock Appreciation Rights
A stock
option is an award that entitles a participant to purchase shares of Avantair
common stock at a price fixed at the time the option is granted. Stock options
granted under the Plan may be in the form of incentive stock options (which
qualify for special tax treatment) or non-qualified stock options, and may be
granted alone or in addition to other awards under the Plan.
An SAR
entitles a participant to receive, upon exercise, an amount equal to the excess
of the fair market value on the exercise date of a share of Avantair common
stock, over the fair market value of a share of Avantair common stock on the
date the SAR was granted, multiplied by the number of shares of Avantair common
stock for which the SAR has been exercised.
The
exercise price and other terms and conditions of stock options and the terms and
conditions of SARs will be determined by the Compensation Committee at the time
of grant, and in the case of stock options, the exercise price per share may not
be less than 100 percent of the fair market value of a share of Avantair common
stock on the date of the grant. In addition, the term of any incentive stock
options granted under the Plan may not exceed ten years. An option or SAR grant
under the Plan does not provide the recipient of the option any rights as a
shareholder and such rights will accrue only as to shares actually purchased
through the exercise of an option or the settlement of an SAR.
If stock
options and SARs are granted together in tandem, the exercise of such stock
option or the related SAR will result in the cancellation of the related stock
option or SAR to the extent of the number of shares in respect of which such
option or SAR has been exercised.
Stock
options and SARs granted under the Plan shall become exercisable at such time as
designated by the Compensation Committee at the time of grant.
Payment
for shares issuable pursuant to the exercise of a stock option may be made
either in cash, by certified check, bank draft or money order payable to the
order of Avantair, or by payment through any other mechanism permitted by the
Compensation Committee, including, if the Compensation Committee so determines,
by delivery of shares of Avantair common stock.
In
addition, the Compensation Committee, in its sole discretion, may provide in any
stock option or SAR award agreement that the recipient of the stock option or
SAR will be entitled to dividend equivalents with respect to such award. In such
instance, in respect of any such award which is outstanding on a dividend record
date for Avantair common stock, the participant would be entitled to an amount
equal to the amount of cash or stock dividends that would have paid on the
shares of Avantair common stock covered by such stock option or SAR award had
such shares of Avantair common stock been outstanding on the dividend record
date.
Restricted Share Awards and
Restricted Stock Units
Restricted
share awards are grants of Avantair common stock made to a participant subject
to conditions established by the Compensation Committee in the relevant award
agreement on the date of grant. Restricted stock units are similar to restricted
shares except that no shares of common stock are actually awarded to a
participant on the date of grant and the common stock underlying the award will
generally be provided to the participant after the vesting conditions have been
satisfied.
Restricted
shares and restricted stock units will vest in accordance with the conditions
and vesting schedule, if any, provided in the relevant award agreement. A
participant may not sell or otherwise dispose of restricted shares or restricted
stock units until the conditions imposed by the Compensation Committee with
respect to such shares and/or units have been satisfied. Restricted share awards
and restricted stock units under the Plan may be granted alone or in addition to
any other awards under the Plan. Restricted shares which vest will be reissued
as unrestricted shares of Avantair common stock.
Each
participant who receives a grant of restricted shares will have the right to
receive all dividends and vote or execute proxies for such shares. Any stock
dividends granted with respect to such restricted shares will be treated as
additional restricted shares. Participants receiving grants of restricted stock
units will not be stockholders until the common stock underlying the award is
provided to them and they will not enjoy the rights of stockholders (such as
receiving dividends and voting or executing proxies) until that
time.
40
Performance
Units
Performance
units (with each unit representing a monetary amount designated in advance by
the Compensation Committee) are awards which may be granted to participants
alone or in addition to any other awards granted under the Plan. Generally,
participants receiving performance unit grants will only earn such units if
certain performance goals are satisfied during a designated performance period.
The Compensation Committee will establish such performance goals and may use
measures such as level of sales, earnings per share, income before income taxes
and cumulative effect of accounting changes, income before cumulative effect of
accounting changes, net income, earnings before interest and taxes, return on
assets, return on equity, return on capital employed, total stockholder return,
market valuation, cash flow, cash EBITDA, completion of acquisitions and/or
divestitures, comparisons to peer companies, individual or aggregate participant
performance or such other measure or measures of performance as the Compensation
Committee determines. The participant may forfeit such units in the event the
performance goals are not met. If all or a portion of a performance unit is
earned, payment of the designated value thereof will be made in cash,
unrestricted shares of Avantair common stock, in restricted shares or in any
combination thereof, as provided in the relevant award agreement.
Performance
Goals for Qualified Performance-Based Compensation
Section
162(m) of the Code limits Avantair’s ability to deduct compensation paid to its
senior executive officers, unless the compensation qualifies as “qualified
performance-based compensation,” as defined in that section and the regulations
promulgated under that section. In order to qualify as “qualified
performance-based compensation,” the material terms of the performance goals
must be disclosed to Avantair’s stockholders and approved by the stockholders.
Among the material terms of the performance goals are descriptions of the
business criteria on which the performance goals will be based.
To the
extent possible Avantair intends to have the Plan satisfy the requirements of
Section 162(m) so that the Compensation Committee is able to grant awards
satisfying the requirements of “qualified performance-based compensation.”
Consequently, Avantair must disclose the following business criteria in
establishing performance goals under the plan:
|
·
|
level
of sales,
|
|
·
|
earnings
per share,
|
|
·
|
income
before income taxes and cumulative effect of accounting
changes,
|
|
·
|
income
before cumulative effect of accounting
changes,
|
|
·
|
net
income,
|
|
·
|
earnings
before interest and taxes,
|
|
·
|
return
on assets,
|
|
·
|
return
on equity,
|
|
·
|
return
on capital employed,
|
|
·
|
total
stockholder return,
|
|
·
|
market
valuation,
|
|
·
|
cash
flow,
|
|
·
|
cash
EBITDA,
|
|
·
|
comparisons
to peer companies, and
|
|
·
|
completion
of acquisitions and/or
divestitures.
|
These
performance goals will be based on any of the above business criteria, either
alone or in any combination, on either a consolidated or business unit or
divisional level, as the Compensation Committee may determine. Such business
criteria will have any reasonable definitions that the Compensation Committee
may specify, which may include or exclude any or all of the following items:
extraordinary, unusual or non-recurring items; effects of accounting changes;
effects of currency fluctuations; effects of financing activities (e.g., effect
on earnings per share of issuing convertible debt securities); expenses for
restructuring or productivity initiatives; non-operating items; acquisition
expenses; and effects of divestitures. Any such performance criterion or
combination of such criteria may apply to a participant’s award opportunity in
its entirety or to any designated portion or portions of the award opportunity,
as the Compensation Committee may specify.
Recapitalization
Adjustments
Awards
granted under the Plan, any agreements evidencing such awards and the maximum
number of shares of Avantair common stock subject to all awards, as well as the
per participant per calendar year limitations described above, shall be subject
to adjustment or substitution, as determined by Avantair’s Board of Directors,
as to the number, price or kind of a security or other consideration subject to
such awards or as otherwise determined by the Board to be equitable (i) in the
event of changes in the outstanding stock or in the capital structure of
Avantair by reason of stock or extraordinary cash dividends, stock splits,
reverse stock splits, recapitalization, reorganizations, mergers,
consolidations, combinations, exchanges, or other relevant changes in
capitalization occurring after the date of grant of any such award or (ii) in
the event of any change in applicable laws or any change in circumstances which
results in or would result in any substantial dilution or enlargement of the
rights granted to, or available for, participants, or which otherwise warrants
equitable adjustment because it interferes with the intended operation of the
Plan. Avantair shall give each participant notice of an adjustment hereunder
and, upon notice, such adjustment shall be conclusive and binding for all
purposes.
41
Mergers
and Other Similar Events
In the
event of any of the following:
|
A.
|
Avantair
is merged into or consolidated with another corporation or
entity;
|
|
B.
|
All
or substantially all of the assets of Avantair are acquired by another
person; or
|
|
C.
|
The
reorganization or liquidation of
Avantair
|
Avantair’s
Board of Directors may cancel any outstanding awards and cause the holders
thereof to be paid, in cash, securities or other property (including any
securities or other property of a successor or acquirer), or any combination
thereof, the value of such awards as determined by Avantair Board of Directors,
in its sole discretion (e.g., in the case of Stock Options, based upon the
excess of the value of a share of Avantair common stock over the exercise price
per share). Avantair’s Board of Directors may provide that such cash, securities
or other property is subject to vesting and/or exercisability terms similar to
the award being cancelled.
Amendment,
Suspension or Termination of the Plan
Unless
earlier terminated by Avantair’s Board of Directors, the Plan shall terminate on
the date 10 years after the date the first award is granted thereunder. The
Board may amend, suspend or terminate the Plan (or any portion thereof) at any
time. However, no amendment shall (a) materially and adversely affect the rights
of any participant under any outstanding award, without the consent of such
participant (except as described below) or (b) increase the number of shares
available for awards under the Plan without shareholder approval.
Section
409A of the Code provides substantial penalties to persons deferring taxable
income, unless the requirements of Section 409A have been
satisfied. The Plan provides the ability to issue awards that may be
subject to subject to Section 409. The Plan explicitly provides the ability for
Avantair’s Board of Directors to amend the Plan , without participant consent,
in any way it deems appropriate, even if such amendment would materially and
adversely affect the rights of participants to satisfy Section 409A and the
regulations that will be issued thereunder.
401(k)
and Retirement Programs
The
Company has a tax-qualified employee savings and retirement plan, or 401(k)
plan, which generally covers its employees. The plan is intended to qualify
under Sections 401(a), 401(k) and 401(m) of the Internal Revenue Code of 1986,
as amended, so that contributions, and income earned thereon, are not taxable to
employees until withdrawn from the plan. Under the plan, employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit ($16,500 in calendar year 2009) and have the amount of the reduction
contributed to the plan. The plan also permits, but does not require, us to make
matching contributions and profit-sharing contributions to the plan on behalf of
participants. In addition, eligible employees may elect to contribute an
additional amount of their eligible compensation as a catch-up contribution to
the 401(k) plan, provided that such employees are age 50 or older ($5,500 in
calendar year 2009). To date, the Company has not made any discretionary or
profit-sharing contributions to the 401(k) plan. As a tax-qualified plan, the
Company can generally deduct contributions from the participants’ pre-tax
compensation when made, and such contributions and their earnings are not
taxable to participants until distributed from the plan. Pursuant to the terms
of the plan, participants may direct the trustees to invest their accounts in
selected investment options.
Nonqualified
Deferred Compensation
On
December 18, 2008, the Company adopted the Avantair Leadership Deferred
Compensation Plan (which we sometimes refer to as the “Deferred Compensation
Plan”) approved by the Board of Directors for a select group of management or
highly compensated employees, and non-employee Directors, effective January 1,
2009. The Deferred Compensation Plan is comprised of an Adoption Agreement and a
Basic Plan Document. The Deferred Compensation Plan is a nonqualified, unfunded
deferred compensation plan that provides specified benefits to a select group of
management or highly compensated employees. Specifically, the Deferred
Compensation Plan is intended to:
|
·
|
provide
participants with supplemental retirement benefits determined by the
Company in its complete discretion (which amounts may vary by participant
and which are subject to a vesting requirement);
and
|
|
·
|
allow
participants to defer compensation in excess of the amounts permitted
under the Avantair Inc. 401(k) Profit Sharing Plan &
Trust.
|
Investment
returns on amounts credited pursuant to the Plan are based on one or more
investment funds selected by a participant from among those provided under the
Deferred Compensation Plan.
The
Deferred Compensation Plan will provide the payments to a participant who
separated from service in a single lump sum or in annual installments over 5,
10, or 15 years, as elected by the participant. Payments will be made
in a single lump sum due to the participant’s death, disability, or termination
of the Deferred Compensation Plan (under certain conditions). In
addition, in the event of an unforeseeable financial emergency, a participant
may make a written request to the Deferred Compensation Plan administrator for a
hardship withdrawal. No income taxes are payable on amounts credited
pursuant to the Deferred Compensation Plan until paid to the
participant.
42
The
Company may amend or terminate the Deferred Compensation Plan at any
time.
As of
June 30, 2009, the Company has made no contributions to the Plan.
Welfare
and Other Benefits
The
Company maintains benefit programs for its U.S. based employees, including
medical and prescription coverage, dental and vision programs, short and
long-term disability insurance, group life insurance and supplemental life
insurance as well as customary vacation, leave of absence and other similar
policies. Avantair’s Named Executive Officers are eligible to participate in
these programs on the same basis as the rest of the salaried
employees.
Policies
Relating to Our Common Stock
Insider
Trading Policy and Stock Ownership Guidelines
Avantair’s
insider trading policy prohibits directors, employees and certain of their
family members from purchasing or selling any type of security, whether issued
by the Company or another company, while aware of material non-public
information relating to the issuer of the security or from providing such
material non-public information to any person who may trade while aware of such
information. The Company restricts trading by its officers and directors, as
well as other categories of employees who may be expected in the ordinary course
of performing their duties to have access to material non-public information, to
quarterly trading windows that begin at the close of business on the second
trading day following the date of public disclosure of the financial results for
the prior fiscal quarter or year and end on the tenth calendar day of the third
fiscal month of the fiscal quarter. While the Company does not have a policy
that specifically prohibits its executive officers from hedging the economic
risk of stock ownership in its stock, it discourages its executive officers from
entering into certain types of hedges with respect to its securities. In
addition, federal securities laws prohibit the executive officers from selling
“short” the stock.
Tax
and Accounting Considerations
Tax
Deductibility of Executive Compensation
Section
162(m) of the Internal Revenue Code generally prohibits a public company from
deducting compensation paid in any year to Named Executive Officers in excess of
$1.0 million. Certain compensation is specifically exempt from the deduction
limit to the extent it qualifies as “performance-based” under the qualification
requirements established under Section 162(m). In evaluating whether to
structure executive compensation components as qualified performance-based
compensation and thus, tax deductible, the Compensation Committee considers the
net cost to us, its ability to effectively administer executive compensation in
the long-term interest of stockholders, and the specific corporate goal
underlying the various items of compensation. Stock option grants and
performance share awards made to executive officers under the Company’s 2006
Long- Term Incentive Plan and cash payments under its Discretionary Annual Bonus
are structured generally to be fully deductible under Section 162(m). The
Compensation Committee believes, however, that it is important to preserve the
flexibility in administering compensation programs in a manner designed to
promote corporate goals.
Section
409A of the Internal Revenue Code requires that “nonqualified deferred
compensation” be deferred and paid under plans or arrangements that satisfy the
requirements of the law with respect to the timing of deferral elections, timing
of payments and certain other matters. In general, it is the Company’s intention
to design and administer its compensation and benefits plans and arrangements
for all of its employees so that they are either exempt from, or satisfy the
requirements of, Section 409A. The Company believes it is currently operating
such plans in compliance with Section 409A.
Accounting
for Share-Based Compensation
Before
the Company grants share-based compensation awards, it considers the accounting
impact of the award as structured and other scenarios in order to analyze the
expected impact of the award.
Summary Compensation
Table
The
following table summarizes the compensation of Avantair’s Named Executive
Officers for the fiscal year ended June 30, 2009. The Named Executive Officers
are the Company’s Chief Executive Officer and Chief Financial Officer, along
with its next most highly compensated executive officer, based upon total
compensation as reflected in the table below.
43
Name and Principal Position
|
Year</
fon
t>
|
Salary ($) |
Bonus
($)(2)<
;/f
ont>
|
Stock
Awards ($)(1)</
fon
t>
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||
Steven
Santo
|
2009
|
$
|
408,000
|
$
|
452,000
|
$
|
35,229
|
$
|
67,439
|
(3)
|
$
|
962,668
|
||||||||||
Chief
Executive Officer and
Director
|
2008
|
400,000
|
100,000
|
94,173
|
74,450
|
668,623
|
||||||||||||||||
Richard
A. Pytak Jr.
|
2009
|
189,298
|
75,250
|
-
|
16,314
|
(4)
|
280,862
|
|||||||||||||||
Chief
Financial Officer
|
2008
|
59,077
|
50,000
|
-
|
37,539
|
146,616
|
||||||||||||||||
(As
of April 14, 2008)
|
||||||||||||||||||||||
Kevin
L. Beitzel
|
2009
|
230,526
|
87,500
|
5,256
|
1,502
|
(4)
|
324,784
|
|||||||||||||||
Chief
Operating Officer
|
2008
|
179,006
|
50,000
|
14,933
|
6,468
|
250,407
|
||||||||||||||||
(As
of February 8, 2008)
|
(1)
|
The
amounts shown reflect the dollar amount recognized for financial statement
reporting purposes, in accordance with Statement of Financial Accounting
Standards No. 123(R) (“SFAS 123R”). For valuation of the stock awards
management measured the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost was recognized over the period during which
an employee is required to provide service in exchange for the award—the
requisite service period (the vesting
period).
|
(2)
|
The
amounts shown reflect performance bonuses to Messrs. Santo, Pytak and
Beitzel of $312,000, $75,250, and $87,500, respectively relating to fiscal
year 2009 and $140,000 awarded to Mr. Santo in fiscal year 2009 as a
partial performance bonus relating to fiscal year 2008 and which was
voluntary deferred by Mr. Santo until the following
year.
|
(3)
|
The
amounts shown for 2009 include a housing allowance of $45,936, and a tax
gross up of $21,503 relating to this
perquisite.
|
(4)
|
The
amounts shown for 2009 includes tax gross up payments to Mr. Pytak of
$16,314 for incidental moving expenses and Mr. Beitzel of $1,502 for an
automobile allowance which did not exceed $25,000 or 10.0% of the total
perquisites.
|
Grants
of Plan – Based Awards for the Fiscal Year Ended June 30, 2009
Awards of
restricted stock are granted under the 2006 Long-Term Incentive Plan. The Plan
was approved on February 22, 2007. The Company has granted shares of restricted
stock or other plan-based awards and plans to continue to grant shares of
restricted stock or other plan-based awards to executive officers, employees and
other service providers. Avantair made no stock grants to its executive officers
and employees during the fiscal year ended June 30, 2009 and granted an
aggregate of 22,500 shares of restricted stock to its executive officers and
employees in the fiscal year ended June 30, 2008. On September 23, 2009, by
recommendation of the Compensation Committee and approval by the Board of
Directors, 25,000 shares of restricted stock were granted to each of the
Company's three named executive officers, effective October 1, 2009. One-third
of the shares will vest one year following the grant date, and one-twelfth of
the shares vest every three months thereafter.
Outstanding
Equity Awards for the Fiscal Year Ended June 30, 2009
The
following table provides information concerning outstanding equity awards as of
June 30, 2009, by each of the Company’s named executive officers:
Name
|
Date Granted
|
Number of Shares or Units of Stock
That Have Not Vested(1)
|
Market Value of Shares or Units of Stock
That Have Not Vested
|
|||||||
Steven
Santo
|
5/18/07
|
22,334 | $ | 25,684 | ||||||
Richard
A. Pytak Jr.
|
6/30/08
|
5,000 | $ | 5,750 | ||||||
Kevin
Beitzel
|
6/30/08
|
13,334 | (2) | $ | 15,334 |
(1)
|
Awards
of restricted stock granted under the 2006 Long-Term Incentive Plan.
One-third of the share granted to each executive officer vested one year
following the grant date, and one-twelfth of the shares vest every three
months thereafter.
|
(2)
|
Mr.
Beitzel was granted 10,000 shares on May 18, 2007 as well as another
15,000 shares on June 30, 2008. Each grant award contained vesting terms
of one-third of the shares granted to vest one year following the grant
date, and one-twelfth of the shares vest every three months thereafter.
Therefore, as of June 30, 2009, approximately one-third of the shares
granted in 2007 and two-thirds of the shares granted in 2008 had not yet
vested and are included in the calculation
above.
|
Option
Exercises and Stock Vested
No named
executive officer was granted any stock options and there were no options
exercised during the fiscal year ended June 30, 2009. In addition, there were
124,101 shares of restricted stock that vested and 5,007 that were exercised
during the fiscal year ended June 30, 2009.
44
Employment
Arrangement with Named Executive Officer
Steven
Santo
On
September 29, 2006, the Company entered into a three year employment agreement
with Mr. Santo, our Chief Executive Officer and a director. Mr. Santo received
an annual base salary of $400,000 after the closing of the sale of the company
to Ardent Acquisition Corporation and received an annual performance bonus. For
2009, Mr. Santo received an annual base salary of $416,000 and an annual
performance bonus. On September 24, 2009, the Company entered into a new three
year employment agreement with Mr. Santo effective that same day and will
receive an annual base salary of $500,000 and is eligible to receive an annual
performance bonus. Future annual base salary will not be less than $500,000 (or
subsequent to any increases, below his then current salary), with increases
approved by the Compensation Committee and/or the Board of Directors. Pursuant
to the employment agreement entered into on September 24, 2009, Mr. Santo is
entitled, among other things, to:
|
·
|
participate
in all benefit programs, including the registered retirement savings plan,
established and made available to its
employees;
|
|
·
|
monthly
living expenses in the amount of $2,800 through September 30,
2009;
|
|
·
|
monthly
automobile lease reimbursement of $1,500;
and
|
|
·
|
reimbursement
for any reasonable out-of-pocket expenses incurred in the course of
employment.
|
The
Company does not have employment agreements with the other named executive
officers.
Termination
Benefits
If the
agreement is terminated by Mr. Santo voluntarily without good reason, Avantair
shall have no further obligations following the effective date of termination
other than to pay the employee for any accrued but unpaid salary and
reimbursable expenses.
If the
agreement is terminated by Avantair for cause, Mr. Santo will not be entitled to
and shall not receive any compensation or benefits of any type following the
effective date of the termination.
If the
agreement is terminated by Avantair without cause, then Mr. Santo is
respectively entitled to:
|
·
|
any
then accrued but unpaid base salary and performance bonus as of the date
of termination; and
|
|
·
|
payment
of the base salary in effect at the time of termination for a period of 12
months and continuation of health insurance for a period of 18
months.
|
In the
agreement, “cause” means:
|
·
|
employee’s
fraud or breach of fiduciary obligations in connection with performance of
his duties with Avantair (including but not limited to any acts of
embezzlement or misappropriation of
funds);
|
|
·
|
employee’s
indictment for a felony or plea of guilty or nolo contendere to a felony
charge or any criminal act involving moral
turpitude;
|
|
·
|
employee’s
being under the influence of any drugs (other than prescription medicine
or other medically-related drugs to the extent that they are taken in
accordance with their directions) or repeatedly being under the influence
of alcohol, during the performance of his duties under his employment
agreement, or, while under the influence of such drugs or alcohol,
engaging in grossly inappropriate conduct during the performance of his
duties under his employment
agreement;
|
|
·
|
employee’s
refusal to substantially perform his duties under his employment
agreement, except in the event that the employee becomes permanently
disabled;
|
|
·
|
employee’s
willful misconduct or gross negligence in connection with his
employment;
|
|
·
|
employee’s
material violation of any Avantair policies or procedures relating to
harassment, discrimination or insider trading; or employee’s material
breach of any provision of his employment
agreement.
|
In
addition, Mr. Santo’s interest in any stock options or restricted stock will
fully vest on the effective date of a termination without cause.
If the
agreement is terminated by Avantair without cause during a change in control
period, then Mr. Santo is respectively entitled to:
|
·
|
any
then accrued but unpaid base salary and performance bonus as of the date
of termination; and
|
45
·
|
payment
of the base salary in effect at the time of termination for a period
of 36 months and continuation of health insurance for a period
of 36 months.
|
In the
agreement, “change of control” means:
·
|
the
acquisition, in one or more transactions, by any Person of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended) of more than 50.0% of (A) all
shares of capital stock of Company to be outstanding immediately following
such acquisition, or (B) the combined voting power of all shares of
capital stock of Company to be outstanding immediately
following such acquisition that are entitled to vote generally in the
election of directors (the shares described in clauses (A) and (B),
collectively “Company Voting Stock”);
|
||
·
|
the
closing of a sale or other conveyance of 40.0% or more of the assets of
Company;
|
||
·
|
individuals
who, as of the date hereof, constitute the Board (the “Incumbent Board”)
cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a member of the Board (a
“Director”) subsequent to the date hereof whose election, or nomination
for election by the Company’s stockholders, was approved by a vote of at
least two-thirds of the Directors then comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of the
Company in which such person is named as a nominee for director, without
objection to such nomination) shall be deemed to have been a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest (within the meaning of Rule 14a-11 of the
Exchange Act) with respect to the election or removal of Directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
|
||
·
|
the
effective time of any merger, share exchange, consolidation, or other
business combination involving Company if immediately after such
transaction, persons who hold a majority of the outstanding voting
securities entitled to vote generally in the election of directors of the
surviving entity (or the entity owning 100.0% of such surviving entity)
are not persons who, immediately prior to such transaction, held Company
Voting Stock.
|
If the
agreement is terminated by the executive for good reason or for disability, then
Mr. Santo is respectively entitled to:
·
|
any
then accrued but unpaid base salary and performance bonus as of the date
of termination; and
|
|
·
|
payment
of the base salary in effect at the time of termination for a period of 12
months and continuation of health insurance for a period of 18
months.
|
In the
agreement, “good reason” means:
·
|
Avantair’s
willful material breach of any provision of his employment
agreement;
|
|
·
|
any
material adverse change in employee’s position, authority, duties or
responsibilities (other than a change due to employee’s permanent
disability or as an accommodation under the Americans With Disabilities
Act) which results in: (A) a diminution in any material respect in
employee’s position, authority, duties, responsibilities or compensation,
which diminution continues in time over at least thirty (30) days, such
that it constitutes an effective demotion; or (B) a material diversion
from employee’s performance of the functions of employee’s position,
excluding for this purpose material adverse changes made with employee’s
written consent or due to employee’s termination for cause or termination
by employee without good reason; or
|
|
·
|
relocation
of Avantair’s headquarters and/or employee’s regular work address to a
location which requires the employee to travel more than forty (40) miles
from employee’s place of employment on the date of his employment
agreement.
|
Under the
employment agreement with Mr. Santo, if the employment agreement had been
terminated by the Company without cause or by Mr. Santo for good reason or for
disability, effective June 30, 2009 (the last business day of the Company’s
fiscal year of 2009), he would have been paid a total of $453,684, including:
(i) $416,000 representing his base salary then in effect, (ii) $12,000
representing the continuation of health insurance for a period of 12 months; and
(iii) $25,684 representing the acceleration of the vesting of 22,334 shares of
restricted stock from the 2006 Long-term Incentive Plan (based on the closing
price of $1.15 per share as of June 30, 2009).
46
SELLING
STOCKHOLDERS
The
following table sets forth information with respect to the Selling Stockholders
including the number of shares of common stock and warrants beneficially owned
by each Selling Stockholder. The table identifies the number of shares of common
stock purchased by each Selling Stockholder in the June, September and October
2009 private placements or, with respect to the warrantholders, in connection
with services rendered in connection with such private placements that may be
sold or disposed of under this prospectus. When the Company refers to the
“Selling Stockholders” in this prospectus, it means those persons listed in the
table below, as well as the pledgees, donees, transferees or other
successors-in-interest who later hold any of the Selling Stockholders’
interests. The information is based on information that has been provided to the
Company by or on behalf of the Selling Stockholders. The information provided
below assumes all of the shares covered hereby are sold or otherwise disposed of
by the Selling Stockholders pursuant to this prospectus. However, the
Company does not know whether the Selling Stockholders will in fact sell or
otherwise dispose of the shares of common stock listed next to their names
below. In addition, the Selling Stockholders may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise dispose of, at any
time and from time to time, the shares of common stock in transactions exempt
from the registration requirements of the Securities Act, after the date on
which they provided the information set forth on the table below. Information
concerning the Selling Stockholders may change from time to time, and any
changed information will be set forth if and when required in prospectus
supplements or other appropriate forms permitted to be used by the
SEC.
For
the purposes of the following table, the number of shares of the Company’s
common stock beneficially owned has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934 as of January 21, 2010, and such
information is not necessarily indicative of beneficial ownership for any other
purpose. Under Rule 13d-3, beneficial ownership includes any shares as to which
a Selling Stockholder has sole or shared voting power or investment power and
also any shares which that Selling Stockholder has the right to acquire within
60 days of the date of this prospectus through the exercise of any stock option,
restricted stock unit, warrant or other rights.
47
Number of Shares
|
Number of
|
Number of Shares
|
% of Common Stock
|
||||||||||||
Beneficially Owned
|
Shares
|
Beneficially Owned
|
Beneficially Owned
|
||||||||||||
Name of Selling Stockholder
|
Prior to Offering
|
Offered
|
After Offering
|
After the Offering
|
|||||||||||
A.
Clinton Allen
(1)
|
247,474 | 126,316 | 121,158 | * | |||||||||||
Lawson
P. Allen
(2)
|
63,158 | 63,158 | - | - | |||||||||||
Barry
Rubenstein
(3)
|
1,118,172 | 526,316 | 591,856 | 2.2 | % | ||||||||||
Dalewood
Associates, LP
(4)
|
426,918 | 105,263 | 321,655 | 1.2 | % | ||||||||||
Glen
S. Davis
(5)
|
55,526 | 50,526 | 5,000 | * | |||||||||||
Kleeman
Family 2004 REV TR
(6)
|
221,053 | 221,053 | - | - | |||||||||||
Steven
Levine
(7)
|
238,632 | (27 | ) | 145,632 | 93,000 | * | |||||||||
Joseph
R. Martin
(8)
|
105,263 | 105,263 | - | - | |||||||||||
David
Nussbaum
(9)
|
313,632 | (28 | ) | 145,632 | 168,000 | * | |||||||||
John
Francis O’Brien
(10)
|
126,316 | 126,316 | - | - | |||||||||||
Howard
Tooter
(11)
|
63,158 | 63,158 | - | - | |||||||||||
Beverly
Wilkes Armstrong Revocable Trust, dated June 15, 1997 as amended
(12)
|
131,579 | 131,579 | - | - | |||||||||||
Richard
B. DeWolfe Revocable Trust
(13)
|
143,263 | 105,263 | 38,000 | * | |||||||||||
Sylvester
Pierce Walmsley
(14)
|
157,895 | 157,895 | - | - | |||||||||||
Scott
Sibley
(15)
|
814,916 | (29 | ) | 526,316 | 288,600 | 1.1 | % | ||||||||
Matthew
Campbell
(16)
|
53,000 | 53,000 | - | - | |||||||||||
BBS
Capital Fund, LP
(17)
|
320,000 | 320,000 | - | - | |||||||||||
Jonathan
Auerbach
(18)
|
3,977,714 | 368,421 | 3,609,293 | 13.7 | % | ||||||||||
Edward
Kovary Jr.
(19)
|
35,000 | 35,000 | - | - | |||||||||||
Charles
N. Mathewson Trust dated July 22, 1992(20)
|
763,522 | 763,522 | - | - | |||||||||||
Amstel
Investment, LLC
(21)
|
150,000 | 150,000 | - | - | |||||||||||
Carpe
Diem Partners, LLC
(22)
|
125,000 | 125,000 | - | - | |||||||||||
David
Greenhouse
(23)(24)
|
425,000 | 425,000 | - | - | |||||||||||
EarlyBirdCapital,
Inc. (26)
|
674,432 | (30 | ) | 239,887 | 434,545 | 1.6 | % | ||||||||
Carl
Wiseman (25)
|
60,000 | (31 | ) | 30,000 | 30,000 | * | |||||||||
Special
Situations Fund III QP, L.P.(24)
|
3,947,369 | 3,947,369 | - | - | |||||||||||
Special
Situations Cayman Fund, L.P. (24)
|
1,315,790 | 1,315,790 | - | - | |||||||||||
Special
Situations Private Equity Fund, L.P. (24)
|
1,052,632 | 1,052,632 | - | - | |||||||||||
TOTAL
|
17,096,414 | 11,425,307 | 5,671,107 |
48
*
|
Less
than 1%
|
|
(1)
|
The
business address of Mr. Allen is 710 South Street, Needham, MA
02492.
|
|
(2)
|
The
business address of Mrs. Allen is 710 South Street, Needham, MA 02492
.
|
|
(3)
|
The
business address of Mr. Rubenstein is 68 Wheatley Road, Brookville, NY
11545. Through their control, Mr.and Mrs. Rubenstein share voting and
investment control over the portfolio securities.
|
|
(4)
|
The
business address of Dalewood Associates, LP is 275 Madison Avenue 27th
Floor, New York, NY 10017. Through their control of Dalewood Associates,
LP, Messrs. Levine and Nussbaum and Mrs. Moore share voting and investment
control over the portfolio securities of the fund listed above. Dalewood
Associates is an affilate of EarlyBirdCapital, Inc., the placement agent
in the June, September and October 2009 private placements and a financial
advisor to Avantair.
|
|
(5)
|
The
business address of Mr. Davis is 11828 SW Riverwood Road, Portland, OR
97219.
|
|
(6)
|
The
business address of Kleeman Family 2004 Revocable Trust is 526 Via
Sinuosa, Santa Barbara, CA 93110. Through his control of Kleeman Family
2004 Revocable Trust, Mr. Kleeman has voting and investment control over
the portfolio securities of the trust.
|
|
(7)
|
The
business address of Mr. Levine is c/o EarlyBirdCapital, Inc., 275 Madison
Avenue 27th Floor, New York, NY 10016.
|
|
(8)
|
The
business address of Mr. Martin is 17 Stornoway Road, Cumberland Foreside,
ME 04110.
|
|
(9)
|
The
business address of Mr. Nussbaum is 83 Village Road, Roslyn Heights, NY
11577.
|
|
(10)
|
The
business address of Mr. O’Brien is 762 South Street, Needham, MA
02492.
|
|
(11)
|
The
business address of Mr. Tooter is 143 Old Mill Lane, Stamford, CT
06902.
|
|
(12)
|
The
business address of Beverly Wilkes Armstrong Revocable Trust, dated June
15, 1997 as amended is 901 E. Cary Street Suite 1500, Richmond, VA 23219.
Through her control of Beverly Wilkes Armstrong Revocable Trust, dated
June 15, 1997 as amended, Mrs. Armstrong has voting and investment control
over the portfolio securities of the trust.
|
|
(13)
|
The
business address of Richard B. DeWolfe Revocable Trust is 206 Grove
Street, Westwood, MA 02090. Through his control of Richard B. DeWolfe
Revocable Trust, Mr. DeWolfe has voting and investment control over the
portfolio securities of the trust.
|
|
(14)
|
The
business address of Mr. Walmsley is 5503 Cary Street Road, Richmond, VA
23226.
|
|
(15)
|
The
business address of Mr. Sibley is 930 South Fourth Street #100, Las Vegas,
NV 89101.
|
|
(16)
|
The
business address of Mr. Campbell is 1396 Park Lane, Pelham, NY
10803.
|
|
(17)
|
The
business address of BBS Capital Fund, LLP is c/o Stephen Augustin Jeffries
Prime Brokerage, 4975 Preston Park Blvd. Suite # 775W, Plano, TX 75093.
Through his control of BBS Capital Fund, LLP, Mr. Bakay has voting and
investment control over the portfolio securities of the
fund.
|
|
(18)
|
The
business address of Mr. Auerbach is Hound Partners, LLC 101 Park Avenue,
48th Floor, New York, NY 10178. The shares are held by Hound Partners, LP,
and Hound Partners Offshore Fund, LP. Mr. Auerbach is the Managing Member
of Hound Performance, LLC and Hound Partners, LLC, investment management
firms that serve as the general partner and investment manager,
respectively, to Hound Partners, LP and Hound Partners Offshore Fund, LP.
Mr. Auerbach has voting and investment control over the portfolio
securities of each of these funds.
|
|
(19)
|
The
business address of Mr. Kovary is c/o EarlyBirdCapital, Inc., 275 Madison
Avenue 27th Floor, New York, NY 10016.
|
|
(20)
|
The
business address of Charles N. Mathewson Trust is 9295 Prototype Dr.,
Reno, NV 89521. Through his control of Charles N. Mathewson Trust, Mr.
Mathewson has voting and investment control over the portfolio securities
of the trust.
|
|
(21)
|
The
business address of Amstel Investment, LLC is 11111 Santa Monica Blvd
Suite 2200 Los Angeles, CA 90025. Through his control of Amstel
Investment, LLC, Mr. Schnabel has voting and investment control over the
portfolio securities of this entity.
|
|
(22)
|
The
business address of Carpe Diem Partners, LLC is 3400 N. Lakeshore Dr.
Suite 2E, Chicago, IL 60657. Through his control of Carpe Diem Partners,
LLC, Mr. Ziegelman has voting and investment control over the portfolio
securities of this entity.
|
|
(23)
|
The
business address of Mr. Greenhouse is 527 Madison Avenue Suite 2600, New
York, NY
10022.
|
49
(24)
|
The
business address of Special Situations Funds is 527 Madison Avenue Suite
2600, New York, NY 10022. MGP Advisors Limited (“MGP”) is the general
partner of the Special Situations Fund III, QP, L.P. AWM Investment
Company, Inc. (“AWM”) is the general partner of MGP, the general partner
of and investment adviser to the Special Situations Cayman Fund, L.P. and
the investment adviser to the Special Situations Fund III, QP, L.P. and
the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David
M. Greenhouse are the principal owners of MGP and AWM. Through their
control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and
investment control over the portfolio securities of each of the funds
listed above.
|
|
(25)
|
The
business address of Mr. Wiseman is 275 Madison Ave 27th Floor New York, NY
10016.
|
|
(26)
|
The
business address of EarlyBirdCapital, Inc. is 275 Madison Ave 27th Floor New York, NY
10016. Through his control of EarlyBirdCapital, Inc., Mr. Levine has
voting and investment control over the portfolio securities of this
entity. EarlyBirdCapital is a registered broker-dealer, Messrs. Levine,
Nussbaum and Wiseman are affiliates of
EarlyBirdCapital.
|
|
(27)
|
Includes
93,000 shares issuable upon exercise of warrants, 82,632 shares of common
stock and 21,000 units at an exercise price of $9.90 per unit (with each
unit consisting of one share of common stock and two warrants, each to
purchase one share of Company common stock at an exercise price of $6.25
per share) which were sold in connection with the underwriting of its
initial public offering and will expire on February 23,
2010.
|
|
(28)
|
Includes
93,000 shares issuable upon exercise of warrants, 82,632 shares of common
stock and 46,000 units at an exercise price of $9.90 per unit (with each
unit consisting of one share of common stock and two warrants, each to
purchase one share of Company common stock at an exercise price of $6.25
per share) which were sold in connection with the underwriting of its
initial public offering and will expire on February 23, 2010. David
Nussbaum, Steven Levine, Carl Wiseman, and Dalewood Associates are
affilates of EarlyBirdCapital, Inc., the placement agent in the June,
September and October 2009 private placements and a financial advisor to
Avantair.
|
|
(29)
|
Includes
538,816 shares of common stock owned by Scott Sibley and 276,000 shares of
common stock owned by Sibley Family L.P.
|
|
(30)
|
Includes
239,887 shares issuable upon exercise of warrants which were received as
underwriting compensation in connection with the 2009 private placements,
104,545 shares of common stock and 110,000 units at an exercise price of
$9.90 per unit (with each unit consisting of one share of common stock and
two warrants, each to purchase one share of Company common stock at an
exercise price of $6.25 per share) which were sold in connection with the
underwriting of its initial public offering and will expire on February
23, 2010. EarlyBirdCapital, Inc., serves as the underwriter, the placement
agent in the June, September and October 2009 private placements and a
financial advisor to Avantair.
|
|
(31)
|
Includes
30,000 shares issuable upon exercise of warrants which were received as
underwriting compensation in connection with the 2009 private
placements and 30,000 shares of common
stock.
|
50
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the beneficial ownership of common stock of Avantair
as of January 21, 2010 by: (i) each of Avantair’s directors and nominees for
director; (ii) each of the Named Executive Officers listed in the Summary
Compensation Table below; (iii) all current directors and executive officers of
Avantair as a group and (iv) each person known by Avantair to own beneficially
more than five percent of the outstanding shares of its common stock. The number
and percentage of shares beneficially owned is determined under rules of the SEC
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Unless otherwise indicated in the footnotes, each person has
sole voting and investment power (or shares such powers with his or her spouse)
with respect to the shares shown as beneficially owned. A total of 26,384,603
shares of Avantair’s common stock were issued and outstanding as of January 21,
2010.
Name and Address of Beneficial Owner(1)
|
Beneficial Ownership
|
Percent of Class
|
|||||||
Kevin
Beitzel
|
47,312 |
(2
|
)(3) | * | |||||
Richard
A. Pytak Jr.
|
31,315 | (3 | )(4) | * | |||||
Steven
Santo
|
1,720,107 | (3 | )(5) | 6.5 | % | ||||
A.
Clinton Allen(6)
|
247,474 | (7 | )(8) | * | |||||
Stephanie
A. Cuskley(9)
|
36,000 | (8) | * | ||||||
Richard
B. DeWolfe(10)
|
143,263 | (11) | * | ||||||
Arthur
H. Goldberg(12)
|
243,000 | (8) | * | ||||||
Barry
J. Gordon(13)
|
675,439 | (8) | 2.4 | % | |||||
Robert
J. Lepofsky(14)
|
46,000 | (8) | * | ||||||
David
M. Greenhouse(15)(16)
|
6,740,791 | 25.5 | % | ||||||
Austin
W. Marxe(15)(16)
|
6,315,791 | 23.9 | % | ||||||
Jonathan
Auerbach(17)
|
3,977,714 | 15.1 | % | ||||||
Paul
J Solit(18)
|
2,194,476 | 8.3 | % | ||||||
Lorne
Weil(19)
|
2,373,620 | (20 | ) | 8.3 | % | ||||
Paul
Sonkin(21)
|
2,175,554 | (22 | ) | 8.2 | % | ||||
Gilder,
Gagnon, & Howe & Co. LLC(23)
|
1,663,156 | 6.3 | % | ||||||
Allison
Roberto
|
1,646,650 | (24 | ) | 6.2 | % | ||||
All
directors and executive officers as a group (9 individuals) (25)
|
3,039,910 | 11.5 | % |
51
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise noted, the business address of each of the following is c/o
Avantair, 4311 General Howard Drive, Clearwater FL
33762
|
|
(2)
|
Represents
10,000 shares of restricted stock granted to Mr. Beitzel which one third
vested on May 18, 2008 and one-twelfth of the shares vest every three
months thereafter. In addition, 15,000 shares of restricted stock were
granted to Mr. Beitzel on June 30, 2008 which one third vested on June 30,
2009 and one-twelfth of the shares vest every 3 months
thereafter.
|
|
(3)
|
Includes
25,000 shares of restricted stock granted on October 1, 2009 pursuant to
the Company's Long-Term Incentive Plan. One- third of the shares vests on
October 1, 2010 and one-twelfth of the shares vest every three months
thereafter.
|
|
(4)
|
Represents
7,500 shares of restricted stock granted on June 30, 2008 pursuant to the
Company's Long-Term Incentive Plan. One-third of the shares vested on June
30, 2009, and one-twelfth of the shares vest every three months
thereafter.
|
|
(5)
|
1,641,650
of the shares are held by Camelot 27 LLC. Each of Steven Santo and Allison
Roberto are members of Camelot 27 LLC. Includes 67,000 shares of
restricted stock which were granted to Steven Santo individually, which
one third vested on May 18, 2008 and one twelfth of the shares vest every
3 months thereafter.
|
|
(6)
|
The
business address of Mr. Allen is 710 South Street, Needham, MA
02492.
|
|
(7)
|
Includes
144,000 shares purchased directly and indirectly pursuant to a Securities
Purchase Agreement, dated as of June 30, 2009. Includes the exchange of
72,000 warrants at an exchange ratio of 0.63158 shares of Common Stock per
warrant, converted pursuant to a Securities Purchase and Exchange
Agreement, dated as of October 16, 2009.
|
|
(8)
|
Includes
30,000 shares of common stock issuable upon exercise of options of which
20,000 vested on February 22, 2008 and February 22, 2009 and 10,000 which
will vest on February 22, 2010. Includes 3,000 shares of restricted stock
granted on May 4, 2009 and 3,000 shares of restricted stock granted on
March 5, 2008, which vest equally upon each of the next 3 successive
annual meetings of stockholders (depending on the grant
date).
|
|
(9)
|
The
business address of Ms. Cuskely is c/o Npower 3 Metrotech Center,
Brooklyn, NY 11201.
|
|
(10)
|
The
business address of Mr. DeWolfe is c/o DeWolfe & Company, PO Box 299,
Milton, MA 02186.
|
|
(11)
|
Includes
3,000 shares of Restricted Stock granted pursuant to the Company's
Long-Term Incentive Plan. The shares shall vest one-third upon each of the
next three successive annual meetings of stockholders. Includes 80,000
common stock shares purchased indirectly pursuant to a Securities Purchase
Agreement dated as of June 30, 2009 and the exchange of 40,000 warrants at
an exchange ratio of 0.63158 shares of Common Stock per warrant, converted
pursuant to a Securities Purchase and Exchange Agreement, dated as of
October 16, 2009 owned by Richard B. DeWolfe Revocable Trust. All of the
aforementioned shares are under the beneficial control of Mr.
Dewolfe.
|
|
(12)
|
The
business address of Mr. Goldberg is c/o Corporate Solutions Group, 175
Great Neck Road, Suite 408, Great Neck, NY 11021.
|
|
(13)
|
The
business address of Mr. Gordon is 7808 Talavera Place, DelRay Beach,
Florida 33446.
|
|
(14)
|
The
business address of Mr. Lepofsky is c/o Westcliff Capital Group, PO Box
81367, Wellesley Hills, MA 02461.
|
|
(15)
|
The
business address of each of Messrs. Marxe and Greenhouse is 527 Madison
Avenue, Suite 2600, New York, New York.
|
|
(16)
|
Includes
(i) 3,947,369 shares held by Special Situations Fund III QP, L.P., (ii)
1,315,790 shares held by Special Situations Cayman Fund, L.P. and (iii)
1,052,632 shares held by Special Situations Private Equity Fund,
L.P. MGP Advisors Limited (“MGP”) is the general partner of the
Special Situations Fund III, QP, L.P. AWM Investment Company,
Inc. (“AWM”) is the general partner of MGP, the general partner of and
investment adviser to the Special Situations Cayman Fund, L.P. and the
investment adviser to the Special Situations Fund III, QP, L.P. and the
Special Situations Private Equity Fund, L.P. Austin W. Marxe
and David M. Greenhouse are the principal owners of MGP and
AWM. Through their control of MGP and AWM, Messrs. Marxe and
Greenhouse share voting and investment control over the portfolio
securities of each of the funds listed above.
|
|
(17)
|
The
business address of Mr. Auerbach is Hound Partners, LLC 101 Park Avenue,
48th Floor, New York, NY 10178. The shares are held by Hound Partners, LP,
and Hound Partners Offshore Fund, LP. Mr. Auerbach is the Managing Member
of Hound Performance, LLC and Hound Partners, LLC, investment management
firms that serve as the general partner and investment manager,
respectively, to Hound Partners, LP and Hound Partners Offshore Fund, LP.
Includes 2,797,274 shares of common stock that may be acquired upon the
conversion of Series A Convertible Preferred Stock.
|
|
(18)
|
The
business address of Mr. Solit is Potomac Capital Management, 825 Third
Avenue, 33 Floor, New York, NY 10022. The shares are held by Potomac
Capital Management LLC and Potomac Capital Management Inc. Mr. Solit is
the Managing Member of Potomac Capital Management LLC and the President
and Sole Owner of Potomac Capital Management Inc. Includes 1,118,910
shares of common stock that may be acquired upon the conversion of Series
A Convertible Preferred
Stock.
|
52
(19)
|
The
business address of Mr. Weil is 750 Lexington Avenue 25th Floor, New York, NY
10022.
|
|
(20)
|
Includes
2,373,620 warrants, each to purchase one share of the Company’s common
stock for $1.25 per share. The warrants expire on October 16,
2012, and any underlying shares purchased upon exercise of each warrant
may not be sold, transferred, assigned or hypothecated, in whole or in
part, at any time on or prior to October 16, 2011, other than to an
affiliate of Lorne Weil.
|
|
(21)
|
The
business address of Mr. Sonkin is 460 Park Avenue, 12th Floor, New York,
New York 10022. The shares are held by Hummingbird Value Fund, L.P., The
Hummingbird Microcap Value Fund, L.P. and The Hummingbird Concentrated
Fund, L.P. Mr. Sonkin, as managing member and control person of
Hummingbird Management LLC, the investment manager of such entities, has
sole voting and dispositive power over such shares.
|
|
(22)
|
Includes
335,673 shares of common stock that may be acquired upon the conversion of
Series A Convertible Preferred Stock.
|
|
(23)
|
This
information is based on Schedule 13G filed with the SEC on February 6,
2008 by Walter Weadock, member of Gilder, Gagnon, Howe and Co.
LLC.
|
|
(24)
|
1,641,650
of the shares are held by Camelot 27 LLC. Each of Steven Santo and Allison
Roberto are members of Camelot 27 LLC. Includes 5,000 shares of restricted
stock which was granted to Allison Roberto individually which one third
vested on May 18, 2008 and one twelfth of the shares vest every 3 months
thereafter.
|
|
(25)
|
Includes
189,759 shares of restricted stock. Includes 100,000 shares of common
stock issuable upon exercise of
options.
|
53
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires Avantair’s executive
officers and directors, and persons who beneficially own more than ten percent
of its common stock to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and beneficial owners
of more than ten percent of the Company’s common stock are required by the SEC
to furnish the Company with copies of all Section 16(a) forms they
file.
Based
upon a review of the forms furnished to Avantair and written representations
from its executive officers and directors, the Company believes that during
fiscal 2009 all Section 16(a) filing requirements applicable to its executive
officers, directors and beneficial owners of more than ten percent of its common
stock were complied with.
Compensation
Committee Interlocks and Insider Participation
No
member of the Compensation Committee of the Board of Directors was an officer or
employee of Avantair during the fiscal year ended June 30, 2009 or was formerly
an officer or employee. In addition, none of Avantair’s executive officers
served as a member of another entity’s board of directors or as a member of the
compensation committee of another entity (or other board committee performing
equivalent functions) during the fiscal year June 30, 2009. There are no
compensation committee interlocks and no insider participation in compensation
decisions that are required to be reported under the rules and regulations of
the Exchange Act during the fiscal year ended June 30, 2009.
54
RELATED
PARTY TRANSACTIONS
Related Party Transactions
Policy
The
Company has adopted a Code of Conduct and Professional Ethics, applicable to its
directors, officers and employees, including its Chief Executive Officer, Chief
Financial Officer and all of its other executives pursuant to which all
directors, officers and employees must promptly disclose to us, any material
transaction or relationship that reasonably could be expected to give rise to an
actual or apparent conflict of interest with Avantair, Inc. In approving or
rejecting the proposed agreement, the audit committee shall consider the
relevant facts and circumstances available and deemed relevant to the audit
committee, including, but not limited to the risks, costs and benefits to the
Company, the terms of the transaction, the availability of other sources for
comparable services or products, and, if applicable, the impact on a director’s
independence. The audit committee shall approve only those agreements that, in
light of known circumstances, are in, or are not inconsistent with, the
Company’s best interests, as the audit committee determines in the good faith
exercise of its discretion.
Related
Party Transactions
The
following is a summary of transactions entered into since July 1, 2007, to which
the Company has been a party in and in which any of the Company’s executive
officers, directors or beneficial holders of more than 5.0% of its capital stock
had or will have a direct or indirect material interest.
Effective
April 11, 2008, the Company’s former Chief Financial Officer, John Waters,
departed the Company and resigned his position as a director of the Company. In
connection with the former Chief Financial Officer’s departure, on
April 14, 2008, the Company entered into a separation agreement pursuant to
which the former Chief Financial Officer received (i) a payment equal to
eight months salary ($183,333), (ii) reimbursement of premium payments for
COBRA benefits until the earlier of a period of eight (8) months commencing
April 14, 2008 or at such time that the former Chief Financial Officer
obtains employment providing health benefits and (iii) pursuant to an
amendment to his previously issued restricted stock award, 33,334 shares of
common stock. In addition, the former Chief Financial Officer has agreed not to
transfer any shares of the Company’s common stock for a period of six
(6) months commencing April 14, 2008. At the end of the six
(6) month period, the former Chief Financial Officer’s unrestricted shares
shall be freely tradable in the open market, subject to the Company’s “Right of
First Refusal” and in compliance with applicable securities law. In addition,
the former Chief Financial Officer has agreed to cooperate fully with the
Company’s reasonable requests for assistance in transitioning his previous
responsibilities for a period of eight (8) months commencing April 14,
2008.
On
March 5, 2008, Avantair granted 3,000 shares of restricted stock to each of
Barry Gordon, Arthur Goldberg, Stephanie Cuskley, Robert Lepofsky and A. Clinton
Allen. Each of these individuals is a director of Avantair. The shares of
restricted stock granted to the directors’ vest one third upon each of the next
three successive annual meetings of stockholders, subject to the grantee’s
continued service on the Board of Directors, and the dollar amount recognized
for financial statement reporting purposes in respect of the restricted stock
awards will be determined on each vesting date.
In May
2009, Avantair granted 3,000 shares of restricted stock to each of Barry Gordon,
Arthur Goldberg, Stephanie Cuskley, Robert Lepofsky, Richard DeWolfe and A.
Clinton Allen. Each of these individuals is a director of Avantair. The shares
of restricted stock granted to the directors’ vest one third upon each of the
next three successive annual meetings of stockholders, subject to the grantee’s
continued service on the Board of Directors, and the dollar amount recognized
for financial statement reporting purposes in respect of the restricted stock
awards will be determined on each vesting date.
In
addition annually Avantair participates as one of the sponsors of the Corporate
Directors Group, an accredited educational organization of RiskMetric ISS
Governance Services, of which A. Clinton Allen presides as its chairman. The
sponsorship provides the Corporate Directors Group with 23 hours of aircraft
usage annually in lieu of compensation. In addition, the Company sponsors the
Corporate Directors Group Piaggio Avanti Owners Club which provides the club
with 15 hours of aircraft usage annually in lieu of compensation. Each
sponsorship involves amounts less than $120,000.
On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. Each unit consisted of two shares of common stock and one warrant to
purchase one common share. The warrants had an exercise price of $4.00 per share
and were exercisable until June 30, 2012. The sale was consummated under the
terms of a Securities Purchase Agreement between Avantair and each of the
private placement investors. Pursuant to a registration rights agreement,
Avantair has agreed to use it best efforts to register the shares issued to the
private placement investors and the shares underlying the warrants issued to the
private placement investors for sale under the Securities Act of 1933, as
amended. By agreement between Avantair, the investors in the June 30, 2009
private placement and that offering's placement agent, the period for additional
sales of units was extended until October 15, 2009. On September 25, 2009, the
Company sold an additional 250,000 units at a price of $2.50 per unit generating
net proceeds of approximately $0.6 million. On October 19, 2009, the Company
sold 8,818,892 shares of common stock to new investors at a price per share of
$0.95 for net proceeds of approximately $8.0 million pursuant to the October 16,
2009 Securities Purchase and Exchange Agreement. In addition, pursuant to the
October 16, 2009 Securities Purchase and Exchange Agreement, on October 19, 2009
the Company exchanged the 817,200 outstanding warrants that had been issued to
existing investors in the June and September private placements for an aggregate
of 516,127 shares of common stock. The October 2009 Securities Purchase and
Exchange Agreement terminated the Securities Purchase and Registration Rights
Agreements entered into in connection with the June and September 2009 private
placements.
55
In
connection with the transactions contemplated by the Securities Purchase and
Exchange Agreement,
Avantair entered into a Registration Rights Agreement with the parties to the
Securities Purchase and Exchange Agreement. The Registration
Rights Agreement requires the Company promptly, but not later than November 18,
2009, to file a registration statement registering for sale the shares issued to
the investors and to cause the registration statement to be declared effective
prior to the earlier of (i) five business days after the Securities and Exchange
Commission (“SEC”) has informed the Company that no review of the
registration statement will be made or that it has no further comments on the
registration statement or (ii) January 17, 2010 (March 18, 2010, if the
registration statement is reviewed by the SEC). Under the terms of the
Registration Rights Agreement, the Company is obligated to maintain the
effectiveness of the sale registration statement, subject to
certain
exceptions, until all securities registered thereunder are sold or otherwise can
be sold pursuant to Rule 144, without restriction and to promptly
register the securities covered thereby on a “short-form” registration statement
once the Company becomes eligible to do so. The Company is
required to pay to each investor an amount in cash, as liquidated damages, 1.5%
of the aggregate amount invested by such investor for each 30-day period or pro
rata for any portion thereof, that the Company fails to be in compliance with
the requirements of the Registration Rights Agreement. The investors in the
June, September and October 2009 private placements included certain of our
directors and 5.0% shareholders, as identified in the section “Selling
Stockholders.”
The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption.
Director
and Officer Indemnification
The
Company has entered into agreements to indemnify its directors and executive
officers to the fullest extent permitted under Delaware law. In addition, the
Company’s certificate of incorporation to be in effect upon the completion of
this offering contains provisions limiting the liability of its directors and
its bylaws contain provisions requiring the Company to indemnify its officers
and directors. See “Description of Capital Stock—Limitation of
Liability.”
56
DESCRIPTION
OF CAPITAL STOCK
The
following description of the material terms of the Company’s capital stock and
warrants includes a summary of its amended and restated certificate of
incorporation. This description is subject to the relevant provisions of
Delaware General Corporation Law.
General
The
Company’s authorized capital stock consists of 76 million shares of all classes
of capital stock, of which 75 million are shares of common stock, par value,
$0.0001 per share, and 1 million are shares of preferred stock, par value of
$0.0001 per share.
Common
Stock
The
holders of shares of Avantair’s common stock are entitled to one vote for each
share on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Subject to the preferences and rights, if any,
applicable to the shares of preferred stock, the holders of the shares of common
stock are entitled to receive dividends if and when declared by the Board of
Directors. Subject to the prior rights of the holders, if any, of the preferred
shares, the holders of the Company’s shares of common stock are entitled to
share ratably in any distribution of its assets upon liquidation, dissolution or
winding-up, after satisfaction of all debts and other liabilities.
Unissued
Shares of Capital Stock
Common
Stock. As of January 21, 2010, the Company had 26,384,603 shares of its
common stock outstanding and 1,058,166 shares of common stock available for
future issuance under the Company’s 2006 Long-Term Stock Incentive Plan. As of
January 21, 2010, the Company has 152,000 shares of Series A Preferred Shares
outstanding. The Company has 4,251,857
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares. As a result of the
sales of shares consummated on June 30, September 25, and October 16, 2009, the
conversion price of the Series A Preferred Shares was reduced from $5.15 to
$3.57. The remaining shares of authorized and unissued common stock will be
available for future issuance without additional stockholder approval (subject
to applicable securities laws and the rules of any securities market or exchange
on which our common stock is quoted at the time). While the additional shares
are not designed to deter or prevent a change of control, under some
circumstances we could use the additional shares to create voting impediments or
to frustrate persons seeking to effect a takeover or otherwise gain control by,
for example, issuing those shares in private placements to purchasers who might
side with our Board of Directors in opposing a hostile takeover
bid.
Preferred
Stock
Shares of
preferred stock may be issued from time to time in one or more series and the
Company’s Board of Directors, without approval of the stockholders, is
authorized to designate series of preferred stock and to fix the rights,
privileges, restrictions and conditions to be attached to each such series of
shares of preferred stock. The issuance of shares of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of holders of the Company’s shares of common stock.
There
are 152,000 shares of Series A Convertible Preferred Stock outstanding. The
terms of the Series A Convertible Preferred Stock are set forth in a Certificate
of Designations filed November 14, 2007 with the State of Delaware. Pursuant to
such Certificate of Designations, the shares of Series A Convertible Preferred
Stock (a) will rank senior to all currently outstanding classes of stock of the
Company with respect to liquidation and dividends, (b) will be entitled to
receive a cash dividend at the annual rate of 9.0%, payable quarterly (with such
rate being subject to increase up to a maximum of 12.0% if such dividends are
not timely paid), (c) will be convertible into shares of the Company’s common
stock at any time at the option of the Investors based on an adjusted conversion
price of $3.57 per share (subject to adjustment), (d) may be redeemed by the
Company following the seventh anniversary of the issuance of the shares of
Series A Convertible Preferred Stock, (e) may be redeemed by the Company in
connection with certain change of control or acquisition transactions, (f) will
be redeemed by the Company following the ninth anniversary of the issuance of
the shares of Series A Convertible Preferred Stock, upon receipt of the written
consent of the holders of a majority of the then outstanding shares of Series A
Convertible Preferred Stock (g) will vote on an as-converted basis with the
Company’s Common Stock and (h) will have a separate vote over certain material
transactions or changes which the Company may wish to effect. The Company paid
its investment adviser 5.0% of cash amount of this preferred
financing.
Warrants
On
November 14, 2008, the Company commenced a warrant retirement program, which
offered the holders of its publicly traded warrants the outstanding the
opportunity to purchase 14,146,000 shares of common stock on an amended term for
a limited time. Pursuant to a tender offer that expired on December 12, 2008,
the Company announced the completion of the warrant retirement program. Under
the tender offer, no warrants were exercised and the Company decided not to
extend the offer. The original terms of the warrants were reinstituted and the
warrants expired on February 23, 2009.
57
In
addition, options to purchase a total of 300,000 units at an exercise price of
$9.90 per unit (with each unit consisting of one share of common stock and two
warrants, each to purchase one share of Company common stock at an exercise
price of $6.25 per share) were sold in connection with the underwriting of its
initial public offering and will expire on February 23, 2010.
On
June 30 and September 25, 2009, Avantair sold 567,200 and 250,000 units,
respectively, at a price of $2.50 per unit to investors in a private placement.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants had an exercise price of $4.00 per share and were
exercisable until June 30, 2012. The sale was consummated under the terms of a
Securities Purchase Agreement between Avantair and each of the investors.
Pursuant to a registration rights agreement, Avantair has agreed to use it best
efforts to register the shares issued to the investors and the shares underlying
the warrants issued to the investors for sale under the Securities Act of 1933,
as amended. Upon effectiveness of the registration statement, the issuance of
shares of common stock will be available upon exercise of the Company’s
outstanding publically traded warrants. The warrants are issued in registered
form under a warrant agreement between Continental Stock Transfer & Trust
Company, as warrant agent, and Avantair, Inc. The exercise price and number of
shares of common stock issuable on exercise of the warrants may be adjusted in
certain circumstances including in the event of a stock dividend, or Avantair’s
recapitalization, reorganization, merger or consolidation. However, the warrants
will not be adjusted for issuances of common stock at a price below their
respective exercise prices.
On
October 19, 2009, Avantair sold approximately 8,818,892 shares of common stock
to new investors at a price per share of $0.95. In addition, pursuant to the
Securities Purchase and Exchange Agreement, the Company exchanged the 817,200
outstanding warrants that had been issued to existing investors in the two prior
private placements for an aggregate of 516,127 shares. The Securities
Purchase and Exchange Agreement terminated the purchase agreement and
registration rights agreement entered into in connection with the June and
September 2009 private placements.
On
October 16, 2009, in consideration of services rendered relating to the
Company’s June, September and October 2009 private placements, the Company
issued to EarlyBirdCapital and its affiliates 455,887 fully vested warrants,
each to purchase one share of the Company’s common stock for $1.05 per share of
common stock and the shares issuable upon exercise of the warrants are entitled
to the same registration rights as the shares sold to the investors in the
offering (as detailed above) which expire on June 30, 2012.
During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6
million of deposits previously paid on the aircraft by the
Company. Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour.
The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption.
Board
of Directors; Vacancies
The
Company’s Board of Directors currently has seven members. Any director elected
to fill a vacancy, including a vacancy created by increasing the size of the
Board, will hold office until such director’s successor shall have been duly
elected and qualified. No decrease in the number of directors will shorten the
term of any incumbent director. These provisions may have the effect of slowing
or impeding a third party from initiating a proxy contest, making a tender offer
or otherwise attempting a change in the membership of the Company’s Board of
Directors that would effect a change of control.
Limitation
of Liability of Directors
The
amended and restated certificate of incorporation provides that no director will
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except to the extent that this
limitation on or exemption from liability is not permitted by the Delaware
General Corporation Law and any amendments to that law. As currently enacted,
the Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation will not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability
for:
·
|
any
breach of the director’s duty of loyalty to the corporation or its
stockholders;
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58
·
|
acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
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·
|
payments
of unlawful dividends or unlawful stock repurchases or redemptions;
or
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·
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any
transaction from which the director derived an improper personal
benefit.
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The
principal effect of this limitation on liability provision is that a stockholder
will be unable to recover monetary damages against a director for breach of
fiduciary duty unless the stockholder can demonstrate that one of the exceptions
listed in the Delaware General Corporation Law applies. This provision, however,
will not eliminate or limit director liability arising in connection with causes
of action brought under the Federal securities laws. The Company’s certificate
of incorporation does not eliminate our directors’ fiduciary duties. The
inclusion of this provision in the certificate of incorporation may, however,
discourage or deter stockholders or management from bringing a lawsuit against
directors for a breach of their fiduciary duties, even though such an action, if
successful, might otherwise have benefited us and our stockholders. This
provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director’s breach of his or her fiduciary
duties.
The
Delaware General Corporation Law provides that a corporation may indemnify its
directors and officers as well as its other employees and agents against
judgments, fines, amounts paid in settlement and expenses, including attorneys’
fees, in connection with various proceedings, other than an action brought by or
in the right of the corporation, if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reasonable cause to believe his or her conduct
was unlawful. A similar standard is applicable in the case of an action brought
by or in the right of the corporation, except that indemnification in such a
case may only extend to expenses, including attorneys’ fees, incurred in
connection with the defense or settlement of such actions, and the statute
requires court approval before there can be any indemnification where the person
seeking indemnification has been found liable to the corporation. The Company’s
amended and restated certificate of incorporation provides that it will
indemnify its directors to the fullest extent permitted by Delaware law. Under
these provisions and subject to the Delaware General Corporation Law, the
Company will be required to indemnify its directors for all judgments, fines,
settlements, legal fees and other expenses incurred in connection with pending
or threatened legal proceedings because of the director’s position with the
Company or another entity that the director serves as a director, officer,
employee or agent at the Company’s request, subject to various conditions, and
to advance funds to its directors before final disposition of such proceedings
to enable them to defend against such proceedings. To receive indemnification,
the director must have been successful in the legal proceeding or have acted in
good faith and in what was reasonably believed to be a lawful manner in the
Company’s best interest.
Registration
Rights
In
connection with the transactions contemplated by the Securities Purchase and
Exchange Agreement,
Avantair entered into a Registration Rights Agreement with the parties to the
Securities Purchase and Exchange Agreement . The Registration
Rights Agreement requires the Company promptly, but not later than November 18,
2009, to file a registration statement registering for sale the shares issued to
the investors and to cause the registration statement to be declared effective
prior to the earlier of (i) five business days after the Securities and Exchange
Commission (“SEC”) has informed the Company that no review of the
registration statement will be made or that it has no further comments on the
registration statement or (ii) January 17, 2010 (March 18, 2010, if the registration
statement is reviewed by the SEC). Under the terms of the Registration Rights
Agreement, the Company is obligated to maintain the effectiveness of the sale
registration statement,
subject to certain exceptions, until all
securities registered thereunder are sold or otherwise can be sold pursuant to
Rule 144, without restriction
and to promptly register the securities covered thereby on a
“short-form” registration statement once the Company becomes eligible to do
so. The
Company is required to pay to each investor an amount in cash, as liquidated
damages, 1.5% of the aggregate amount invested by such investor for each 30-day
period or pro rata for any portion thereof, that the Company fails to be in
compliance with the requirements of the Registration Rights Agreement. The
registration statement incorporating this prospectus has been filed in partial
satisfaction of the Company’s obligations under the October 2009 Registration
Rights Agreement. The Company previously entered into a registration rights
agreement in connection with the June and September 2009 private placements,
which agreement was terminated pursuant to the October 2009 Securities Purchase
and Exchange Agreement, and replaced by the October 2009 Registration Rights
Agreement.
Anti-Takeover
Provisions
Delaware
Law
·
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The
Company will be subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers, which prohibits a Delaware corporation
from engaging in any business combination with an “interested
stockholder,” unless:
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·
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prior
to the date of the transaction, the board of directors of the corporation
approved either the business combination or the transaction which resulted
in the stockholder becoming an interested
stockholder;
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59
·
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the
interested stockholder owned at least 85.0% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers, and (b) shares owned
by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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·
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on
or subsequent to the date of the transaction, the business combination is
approved by the Company’s board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
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·
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Except
as otherwise specified in Section 203, an “interested stockholder” is
defined to include:
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·
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any
person that is the owner of 15.0% or more of the outstanding voting
securities of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15.0% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the date of determination and
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·
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the
affiliates and associates of any such person.
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Amended
and Restated Certificate of Incorporation and Bylaws
The
Company’s amended and restated certificate of incorporation and
bylaws:
·
|
provide
for the automatic reduction in voting power of voting stock owned or
controlled by a non-U.S. citizen if necessary to maintain Avantair’s U.S.
citizenship (as defined below);
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·
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permit
its Board of Directors to otherwise limit transfer and voting rights or
redeem shares to the extent necessary to maintain Avantair’s U.S.
citizenship; and
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·
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permit
its Board of Directors to make such determinations as may reasonably be
necessary to ascertain such ownership and implement such
limitations.
|
In
some cases, including all current international operations, the Company is
deemed to transport persons or property by air for compensation. Therefore,
federal law requires that at least 75.0% of the Company’s voting securities be
owned or controlled by citizens of the U.S. (as defined below), that the Company
be under the actual control of citizens of the United States, and that the
Company’s president and at least two-thirds of its directors and other managing
officers be U.S. citizens. All of the Company’s officers and directors are
presently U.S. citizens and at no time shall the president or less than
two-thirds of its directors and other managing officers be non-U.S. citizens.
The Company’s bylaws provide that no shares of its voting stock may be voted by
or at the direction of non-U.S. citizens unless such shares are registered on a
separate stock record, which will be referred to as the foreign stock record.
The Company’s bylaws may further provide that no shares of its voting stock will
be registered on the foreign stock record if the amount so registered would
exceed the foreign ownership and control restrictions imposed by federal law.
The Company’s bylaws may additionally provide that at least two-thirds of its
directors and other managing officers be U.S. citizens and that we be under the
actual control of U.S. citizens.
Avantair’s
certificate of incorporation gives its Board of Directors the power to effect
any and all measures necessary and desirable to ensure its compliance with the
citizenship requirements that at least two-thirds of its directors and other
managing officers are U.S. citizens and that the Company is under the actual
control of U.S. citizens.
The
Company’s certificate of incorporation allows its Board of Directors to
implement certain measures described below in the event the Board believes that
a transfer or purported transfer of shares of the Company’s capital stock would
result in the voting control by more than the percentage permitted by federal
aviation law, currently 25.0%, of the Company’s voting stock by persons or
entities that are not U.S. citizens. Persons or entities that are U.S citizens
will be referred to as U.S. citizens and persons or entities that are not U.S.
citizens will be referred to as non-citizens. For these purposes, “U.S. citizen”
means:
·
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an
individual who is a citizen of the United States;
|
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·
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a
partnership each of whose partners is an individual who is a citizen of
the United States; or
|
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·
|
a
corporation or association organized under the laws of the United States
or a State, the District of Columbia, or a territory or possession of the
United States, of which the president and at least two-thirds of the board
of directors and other managing officers are citizens of the United
States, which is under the actual control of citizens of the United
States, and in which at least 75.0% of the voting interest is owned or
controlled by persons that are citizens of the United
States.
|
Avantair’s
Board of Directors has the power to effect any and all measures necessary and
desirable to implement the following provisions designed to ensure compliance
with the domestic stock ownership requirements of federal law: (1) restrictions
or prohibitions on transfer of shares of the Company’s voting stock to
non-citizens, (2) dual stock record or similar system, (3) suspension of voting,
dividend and distribution rights with respect to any shares of voting stock
owned by non-citizens in excess of the 25.0% limitation and (4) if necessary,
mandatory redemption of voting shares owned by non-citizens in excess of the
25.0% limitation. To implement these measures, the Board may amend the Company’s
bylaws. The effect of each of these measures is described
below.
60
The
Company’s amended and restated certificate of incorporation authorizes its Board
of Directors to implement measures to ensure that any transfer or attempted or
purported transfer that would result in more than 25.0% of the shares of the
Company’s voting stock being owned by non-citizens will be ineffective until the
excess no longer exists. With respect to such shares, the Board of Directors may
implement measures that would cause the Company not to recognize the purported
transferee of the shares as a stockholder of Avantair for any purpose other than
the transfer by the purported transferee of such excess to a person who is a
U.S. citizen, or to the extent necessary to effect any other remedy available to
the Company under its amended and restated certificate of
incorporation.
Additionally,
pursuant to the Company’s amended and restated Certificate of Incorporation and
By-Laws;
·
|
no
action can be taken by stockholders except at an annual or special meeting
of the stockholders called in accordance with the Company’s bylaws, and
stockholders may not act by written consent;
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·
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the
approval of holders of two-thirds of the shares entitled to vote at an
election of directors will be required to adopt, amend or repeal the
Company’s bylaws or amend or repeal the provisions of its certificate of
incorporation regarding the election and removal of directors, the ability
of stockholders to take action and the indemnification of its
directors;
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·
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the
board of directors will be expressly authorized to make, alter or repeal
the Company’s bylaws;
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·
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the
board of directors will be authorized to issue preferred stock without
stockholder approval; and
|
|
·
|
the
Company will indemnify officers and directors against losses that may
incur in connection with investigations and legal proceedings resulting
from their services to the Company, which may include services in
connection with takeover defense
measures.
|
These
provisions may make it more difficult for stockholders to take specific
corporate actions and could have the effect of delaying or preventing a change
in control.
Over-the
Counter Bulletin Board Listing
Avantair’s
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“AAIR.OB.”
Stock
Transfer Agent
The
Transfer Agent and Registrar for the shares of the Company’s common stock,
warrants and units is Continental Stock Transfer & Trust
Company.
61
SHARES
ELIGIBLE FOR FUTURE SALE
The
sale of a substantial amount of Avantair’s common stock in the public market
after this offering could adversely affect the prevailing market price of its
common stock. As of January 21, 2010, the Company had 26,384,603 shares of the
common stock outstanding, 1,058,166 shares of common stock available for future
issuance under its 2006 Long-Term Stock Incentive Plan and warrants to purchase
2,829,507 shares outstanding. In addition, as of January 21, 2010, the Company
has 152,000 shares of Series A Preferred Shares outstanding. The Company has 4,251,857
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares. As a result of the
sales of shares consummated on June 30, September 25, and October 16, 2009, the
conversion price of the Series A Preferred Shares was reduced from $5.15 to
$3.57. All of these shares of common stock are freely tradable, subject to Rule
144 limitations applicable to affiliates and the lock-up agreements described in
this document. The 11,425,307 shares of common stock registered pursuant to this
Registration Statement will be freely tradable once this Registration Statement
is declared effective by the Securities and Exchange Commission without
restriction or further registration under the Securities Act, unless the shares
are purchased by “affiliates” as that term is defined in Rule 144 under the
Securities Act. Any shares purchased by an affiliate may not be resold except
pursuant to an effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144 of the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized
below.
Rule
144
In
general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of the Company’s common stock for at least six months from the
later of the date those shares of common stock were acquired from the Company or
from an affiliate of ours would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
·
|
one
percent of the number of shares of common stock then outstanding;
or
|
||
·
|
the
average weekly trading volume of the common stock on Nasdaq during the
four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale of any shares of common
stock.
|
Sales of
shares of common stock under Rule 144 may also be subject to manner of sale
provisions and notice requirements and will be subject to the availability of
current public information about us.
Under
Rule 701 of the Securities Act, each of the Company’s employees, consultants or
advisors who purchased shares from us in connection with a compensatory stock
plan or other written agreement is eligible to resell those shares in reliance
on Rule 144, but without compliance with some of the restrictions, including the
holding period, contained in Rule 144.
No
precise prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Company’s common stock prevailing from time to time. The Company is unable
to estimate the number of its shares that may be sold in the public market
pursuant to Rule 144 or Rule 701 because this will depend on the market price of
its common stock, the personal circumstances of the sellers and other factors.
Nevertheless, sales of significant amounts of the Company’s common stock in the
public market could adversely affect the market price of its common
stock.
Stock
Plans
On
October 7, 2008, the Company filed a Registration Statement on Form S-8 to
register under the Securities Act 1,500,000 shares of common stock reserved for
issuance under its 2006 Long Term Incentive Plan. Such Registration Statement
became effective on October 7, 2008. Shares issued upon the exercise
of stock options are eligible for sale in the public market without restriction,
subject to Rule 144 limitations applicable to affiliates and the lock-up
agreements described in this document.
62
PLAN
OF DISTRIBUTION
The
Selling Stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a Selling Stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The
Selling Stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
-
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
- block
trades in which the broker-dealer will attempt to sell the shares as agent, but
may position and resell a portion of the block as principal to facilitate the
transaction;
-
purchases by a broker-dealer as principal and sale by the broker-dealer for its
account;
- an
exchange distribution in accordance with the rules of the applicable
exchange;
-
privately negotiated transactions;
- short
sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;
- through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
-
broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share; and
- a
combination of any such methods of sale.
The
Selling Stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of Selling
Stockholders to include the pledgee, transferee or other successors in interest
as Selling Stockholders under this prospectus. The Selling
Stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
In
connection with the sale of our common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
Selling Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the Selling Stockholders from the sale of the common stock
offered by them will be the purchase price of the common stock less discounts or
commissions, if any. Each of the Selling Stockholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this
offering.
The
Selling Stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
Selling Stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities
Act. Any discounts, commissions, concessions or profit they earn on
any sale of the shares may be underwriting discounts and commissions under the
Securities Act. Selling Stockholders who are "underwriters" within
the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.
To the
extent required, the shares of our common stock to be sold, the names of the
Selling Stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
63
In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have
advised the Selling Stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to the
activities of the Selling Stockholders and their affiliates. In
addition, to the extent applicable we will make copies of this prospectus (as it
may be supplemented or amended from time to time) available to the Selling
Stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The Selling Stockholders may indemnify any
broker-dealer that participates in transactions involving the sale of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
We have
agreed to indemnify the Selling Stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.
We have
agreed with the Selling Stockholders to keep the registration statement of which
this prospectus constitutes a part effective until the earlier of (1) such time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold without restriction pursuant to Rule 144 of the
Securities Act.
LEGAL
MATTERS
The
validity of the common stock offered in this prospectus will be passed upon for
the Company by DLA Piper LLP (US). Members of DLA Piper do not own any shares of
common stock of Avantair, Inc.
EXPERTS
The
consolidated financial statements of Avantair and its subsidiaries as of June
30, 2009 and 2008 and the related consolidated statements of operations, changes
in stockholders’ deficit and cash flows for each of the years then ended
included herein, have been audited by J.H. Cohn LLP, an independent registered
public accounting firm, as stated in their report dated September 28, 2008,
which is included herein, and such consolidated financial statements have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
Avantair
is a public company and files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any document the Company files at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can
request copies of these documents by writing to the SEC and paying a fee for the
copying cost. Please call the SEC at 1-800-SEC-0330 for more information about
the operation of the public reference room. Our SEC filings are also available
to the public at the SEC’s web site at “http://www.sec.gov.” You can
read and copy reports and other information concerning the Company at the
offices of the National Association of Securities Dealers, Inc. located at 1735
K Street, Washington, D.C. 20006.
This
prospectus is only part of a Registration Statement on Form S-1 that the Company
has filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the Registration Statement. The Company has
also filed exhibits and schedules with the Registration Statement that are
excluded from this prospectus, and you should refer to the applicable exhibit or
schedule for a complete description of any statement referring to any contract
or other document. You may:
·
|
inspect
a copy of the Registration Statement, including the exhibits and
schedules, without charge at the public reference room,
|
|
·
|
obtain
a copy from the SEC upon payment of the fees prescribed by the SEC,
or
|
|
·
|
obtain
a copy from the SEC web
site.
|
64
AVANTAIR,
INC. AND SUBSIDIARY
(Formerly
Ardent Acquisition Corporation)
Consolidated
Financial Statements:
Condensed
Consolidated Balance Sheets as of September 30, 2009 and June 30,
2009
|
F-2
|
Condensed
Consolidated Statements of Operations for the Three Months Ended September
30, 2009 and 2008
|
F-4
|
Condensed
Consolidated Statement of Changes in Stockholders’ Deficit for the Three
Months Ended September 30, 2009
|
F-5
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended September
30, 2009 and 2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-8
|
Report
of Independent Registered Public Accounting Firm
|
F-18
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-19
|
Consolidated
Statements of Operations for the years ended June 30, 2009 and
2008
|
F-21
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the years ended June 30,
2009 and 2008
|
F-22
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 and
2008
|
F-24
|
Notes
to Consolidated Financial Statements
|
F-26
|
F-1
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
September 30,
|
June 30,
|
||||||
|
2009
|
2009
|
||||||
(Unaudited)
|
(Note 2)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
5,055,746
|
$
|
3,773,789
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $231,559 at
September 30, 2009 and $187,842 at June 30, 2009
|
6,235,907
|
5,711,055
|
||||||
Inventory
|
119,875
|
140,997
|
||||||
Current
portion of aircraft costs related to fractional share
sales
|
34,829,890
|
36,910,206
|
||||||
Notes
receivable
|
158,133
|
272,731
|
||||||
Prepaid
expenses and other current assets
|
1,228,475
|
1,278,506
|
||||||
Total
current assets
|
47,628,026
|
48,087,284
|
||||||
Aircraft
costs related to fractional share sales, net of current
portion
|
62,166,794
|
70,199,786
|
||||||
Property
and equipment, at cost, net of accumulated depreciation and amortization
of $13,938,803 at September 30, 2009 and $11,695,228 at June 30,
2009
|
28,617,517
|
29,842,365
|
||||||
OTHER
ASSETS
|
||||||||
Cash
- restricted
|
2,354,665
|
2,352,337
|
||||||
Deposits
on aircraft
|
10,468,616
|
9,264,890
|
||||||
Deferred
maintenance on aircraft engines
|
1,039,685
|
1,538,175
|
||||||
Goodwill
|
1,141,159
|
1,141,159
|
||||||
Other
assets
|
1,781,350
|
1,639,407
|
||||||
Total
other assets
|
16,785,475
|
15,935,968
|
||||||
Total
assets
|
$
|
155,197,812
|
$
|
164,065,403
|
See
Notes to Condensed Consolidated Financial Statements.
F-2
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
September 30,
|
June 30,
|
||||||
2009
|
2009
|
|||||||
(Unaudited)
|
(Note 2)
|
|||||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$
|
5,640,012
|
$
|
7,307,320
|
||||
Accrued
liabilities
|
5,671,418
|
5,010,745
|
||||||
Customer
deposits
|
1,824,978
|
1,282,936
|
||||||
Short-term
debt
|
11,500,000
|
11,500,000
|
||||||
Current
portion of long-term debt
|
10,266,419
|
11,020,590
|
||||||
Current
portion of deferred revenue related to fractional aircraft share
sales
|
40,606,022
|
43,385,779
|
||||||
Unearned
management fees and flight hour card revenues
|
24,035,399
|
17,807,796
|
||||||
Total
current liabilities
|
99,544,248
|
97,315,166
|
||||||
Long-term
debt, net of current portion
|
18,400,719
|
20,111,011
|
||||||
Deferred
revenue related to fractional aircraft share sales, net of current
portion
|
56,702,118
|
65,071,197
|
||||||
Other
liabilities
|
3,198,883
|
3,047,329
|
||||||
Total
long-term liabilities
|
78,301,720
|
88,229,537
|
||||||
Total
liabilities
|
177,845,968
|
185,544,703
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
Series
A convertible preferred stock $.0001 par value, authorized 300,000 shares;
152,000 shares issued and outstanding
|
14,550,907
|
14,528,383
|
||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Preferred
stock, $.0001 par value, authorized 700,000 shares; none
issued
|
-
|
-
|
||||||
Common
stock, Class A, $.0001 par value, 75,000,000 shares authorized, 16,977,642
shares issued and outstanding at September 30, 2009 and 16,463,615 shares
issued and outstanding at June 30, 2009
|
1,697
|
1,646
|
||||||
Additional
paid-in capital
|
48,222,616
|
47,667,493
|
||||||
Accumulated
deficit
|
(85,423,376
|
)
|
(83,676,822
|
)
|
||||
Total
stockholders' deficit
|
(37,199,063
|
)
|
(36,007,683
|
)
|
||||
Total
liabilities and stockholders' deficit
|
$
|
155,197,812
|
$
|
164,065,403
|
See
Notes to Condensed Consolidated Financial Statements.
F-3
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
Three
Months Ended September 30, 2009 and 2008
(Unaudited)
2009
|
2008
|
|||||||
Revenue
|
||||||||
Fractional
aircraft sold
|
$
|
11,978,836
|
$
|
12,493,716
|
||||
Maintenance
and management fees
|
17,974,569
|
17,077,139
|
||||||
Flight
hour card and Axis Club Membership revenue
|
3,858,470
|
1,844,126
|
||||||
Other
revenue
|
1,393,009
|
1,261,480
|
||||||
Total
revenue
|
35,204,884
|
32,676,461
|
||||||
Operating
expenses
|
||||||||
Cost
of fractional aircraft shares sold
|
10,200,603
|
10,605,023
|
||||||
Cost
of flight operations
|
12,420,238
|
11,810,384
|
||||||
Cost
of fuel
|
3,638,902
|
4,512,406
|
||||||
General
and administrative expenses
|
6,252,381
|
5,660,787
|
||||||
Selling
expenses
|
985,765
|
907,751
|
||||||
Depreciation
and amortization
|
1,457,917
|
1,082,265
|
||||||
Total
operating expenses
|
34,955,806
|
34,578,616
|
||||||
Income
(loss) from operations
|
249,078
|
(1,902,155
|
)
|
|||||
Other
income (expenses)
|
||||||||
Other
income
|
2,250
|
1,200
|
||||||
Interest
income
|
5,163
|
24,703
|
||||||
Interest
expense
|
(1,623,454
|
)
|
(1,459,481
|
)
|
||||
Total
other expenses
|
(1,616,041
|
)
|
(1,433,578
|
)
|
||||
Net
loss
|
(1,366,963
|
)
|
(3,335,733
|
)
|
||||
Preferred
stock dividend and accretion of expenses
|
(402,115
|
)
|
(391,513
|
)
|
||||
Net
loss attributable to common stockholders
|
$
|
(1,769,078
|
)
|
$
|
(3,727,246
|
)
|
||
Loss
per common share:
|
||||||||
Basic
and diluted
|
$
|
(0.11
|
)
|
$
|
(0.24
|
)
|
||
Weighted-
average common shares outstanding:
|
||||||||
Basic
and diluted
|
16,468,122
|
15,287,694
|
See
Notes to Condensed Consolidated Financial Statements.
F-4
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Changes in Stockholders’ Deficit
Three
Months Ended September 30, 2009
(Unaudited)
Class A
|
Class B
|
Additional
|
Total
|
|||||||||||||||||||||||||
Common Stock
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||||||||
Balance
at June 30, 2009
|
16,463,615
|
$
|
1,646
|
-
|
$
|
-
|
$
|
47,667,493
|
$
|
(83,676,822
|
)
|
$
|
(36,007,683
|
)
|
||||||||||||||
Expenses
associated with registration of shares
|
(97,321
|
)
|
(97,321
|
)
|
||||||||||||||||||||||||
Stock-based
compensation
|
91,700
|
91,700
|
||||||||||||||||||||||||||
Dividend
on Series A convertible preferred stock
|
(379,591
|
)
|
(379,591
|
)
|
||||||||||||||||||||||||
Accretion
of issuance costs on Series A convertible preferred stock
|
(22,524
|
)
|
(22,524
|
)
|
||||||||||||||||||||||||
Issuance
of shares in connection with vested restricted stock, net of shares
surrendered in lieu of payroll taxes
|
14,027
|
1
|
(4,932
|
)
|
(4,931
|
)
|
||||||||||||||||||||||
Sale
of common stock in connection with private sale
|
500,000
|
50
|
588,200
|
588,250
|
||||||||||||||||||||||||
Net
loss
|
(1,366,963
|
)
|
(1,366,963
|
)
|
||||||||||||||||||||||||
Balance
at September 30, 2009
|
16,977,642
|
$
|
1,697
|
-
|
$
|
-
|
$
|
48,222,616
|
$
|
(85,423,376
|
)
|
$
|
(37,199,063
|
)
|
See
Notes to Condensed Consolidated Financial Statements.
F-5
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
Three
Months Ended September 30, 2009 and 2008
(Unaudited)
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(1,366,963
|
)
|
$
|
(3,335,733
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
1,457,917
|
1,082,265
|
||||||
Amortization
of deferred interest related to capital lease obligation
|
92,873
|
|||||||
Stock-based
compensation
|
91,700
|
95,708
|
||||||
Provision
for uncollectible accounts
|
43,717
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(568,569
|
)
|
(4,907,060
|
)
|
||||
Inventory
|
21,122
|
54,347
|
||||||
Deposits
on aircraft
|
(1,203,726
|
)
|
(928,496
|
)
|
||||
Deferred
maintenance agreement on aircraft engines
|
498,490
|
201,306
|
||||||
Prepaid
expenses and other current assets
|
50,031
|
147,562
|
||||||
Notes
receivable
|
114,598
|
84,020
|
||||||
Aircraft
costs related to fractional shares
|
10,113,308
|
10,517,728
|
||||||
Other
assets
|
(141,943
|
)
|
48,906
|
|||||
Accounts
payable
|
(1,667,308
|
)
|
556,085
|
|||||
Accrued
liabilities
|
276,151
|
(2,331,532
|
)
|
|||||
Unearned
management fees and flight hour card revenue
|
6,087,853
|
(359,081
|
)
|
|||||
Cash-restricted
|
(2,328
|
)
|
(8,600
|
)
|
||||
Customer
deposits
|
542,042
|
(1,399,201
|
)
|
|||||
Other
liabilities
|
151,554
|
45,732
|
||||||
Deferred
revenue related to fractional aircraft share sales
|
(11,148,836
|
)
|
(3,566,417
|
)
|
||||
Net
cash provided by (used in) operating activities
|
3,441,683
|
(4,002,461
|
)
|
|||||
INVESTING
ACTIVITIES:
|
||||||||
Capital
expenditures
|
(93,319
|
)
|
(275,860
|
)
|
||||
Net
cash used in investing activities
|
(93,319
|
)
|
(275,860
|
)
|
||||
FINANCING
ACTIVITIES:
|
||||||||
Borrowings
under short- term debt
|
1,000,000
|
525,000
|
||||||
Principal
payments on long-term debt
|
(2,557,336
|
)
|
(1,604,368
|
)
|
||||
Principal
payments on short-term debt
|
(1,000,000
|
)
|
(5,489,555
|
)
|
||||
Proceeds
from issuance of stock- net
|
588,250
|
-
|
||||||
Cost
of stock redemption/registration
|
(97,321
|
)
|
(84,682
|
)
|
||||
Net
cash used in financing activities
|
(2,066,407
|
)
|
(6,653,605
|
)
|
F-6
AVANTAIR,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
Three
Months Ended September 30, 2009 and 2008
(Unaudited)
2009
|
2008
|
|||||||
Net
increase (decrease) in cash and cash equivalents
|
$
|
1,281,957
|
$
|
(10,931,926
|
)
|
|||
Cash
and cash equivalents, beginning of the period
|
3,773,789
|
19,149,777
|
||||||
Cash
and cash equivalents, end of the period
|
$
|
5,055,746
|
$
|
8,217,851
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$
|
1,612,293
|
$
|
1,142,147
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
|
||||||||
Accretion
of Series A convertible preferred stock
|
$
|
22,524
|
$
|
22,385
|
||||
Dividends
payable on Series A convertible preferred stock
|
$
|
379,591
|
$
|
369,128
|
||||
Flight
hour cards issued in consideration for equipment
|
$
|
139,750
|
$
|
-
|
||||
Common
shares surrendered in lieu of payroll taxes
|
$
|
4,931
|
$
|
-
|
See
Notes to Condensed Consolidated Financial Statements.
F-7
NOTE
1 - BUSINESS OPERATIONS
General
Avantair,
Inc. (formerly known as Ardent Acquisition Corporation) (“Avantair” or the
“Company”), was organized on September 14, 2004 as a blank check company whose
objective was to acquire an operating business.
On
October 2, 2006, the Company signed a definitive stock purchase agreement with
Avantair Inc. (“Old Avantair”). The agreement, as amended on December 15, 2006,
provided for Avantair to issue 6,684,822 shares of common stock to the
stockholders of Old Avantair in exchange for all of the issued and outstanding
shares of Old Avantair (the “Share Exchange” or “Reverse Merger”). On February
22, 2007, the stockholders of Avantair voted in favor of the Reverse Merger. On
February 22, 2007, upon the closing of the reverse acquisition of Ardent
Acquisition Corp., the Company received approximately $36.3 million. For further
details on this reverse acquisition, refer to the audited consolidated financial
statements and the notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2009.
Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
September 30, 2009, Avantair operated 52 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 1 leased and company managed aircraft. Avantair also operates fixed flight
based operations (FBO) in Camarillo, California and effective August 1, 2008, in
Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Reporting
The
accompanying unaudited interim condensed consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and the interim condensed financial statement rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these statements included all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the condensed
consolidated financial statements. The interim condensed operating results are
not necessarily indicative of the results for a full year or any interim period.
The June 30, 2009 consolidated balance sheet has been derived from the audited
consolidated financial statements included in the Company’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2009.
Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. These condensed
consolidated financial statements should be read in conjunction with the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009.
Basis
of Presentation
All
material intercompany accounts and transactions have been eliminated in the
condensed consolidated financial statements.
The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the successful recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. As of
September 30, 2009, the Company’s recurring losses resulting in a stockholders’
deficit of approximately $37.2 million and a working capital deficiency of
approximately $51.9 million. The Company’s primary sources of operating funds
are the collection of management and maintenance fees from fractional share
owners as well as the sale of fractional ownership shares, flight hour cards and
effective January 2009, Axis Club Memberships. Sales by product category
follow:
Unit Sales for the Three Months Ended
|
||||||||
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|||
New
Fractional shares
|
2
|
19.5
|
||||||
Flight
hour cards
|
86
|
27
|
||||||
Axis
Club Memberships
|
3
|
N/A
|
F-8
Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. To finance this growth
strategy, including the purchase of additional aircraft to satisfy the demand of
the growing flight hour card product line, the Company has obtained additional
funds through equity financing, including the sale of additional shares of
common and preferred stock, asset sales, accelerated payments of maintenance and
management fees, debt financing, or a combination thereof. During the fiscal
quarter ended September 30, 2009, the Company raised net proceeds of
approximately $0.6 million through an equity offering detailed in Note 4.
Further, by agreement between Avantair, the investors in the June 30, 2009
private placement and that offering’s placement agent, the period for additional
sales of units was extended until October 15, 2009. On October 16, 2009, the
Company sold an additional 8,818,892 shares at a price of $0.95 per share
generating net proceeds of approximately $8.0 million. The Company believes that
its capital on hand, as may be augmented by these means to fund future growth,
is sufficient to continue operations for the next twelve months and the
foreseeable future thereafter.
FASB Codification
Discussion
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally accepted
accounting principles (GAAP) that the Company follows to ensure the Company
consistently report its financial condition, results of operations, and cash
flows. Over the years, the FASB and other designated GAAP-setting
bodies, have issued standards in the form of FASB Statements, Interpretations,
FASB Staff Positions, EITF consensuses, AICPA Statements of Position,
etc.
The FASB
recognized the complexity of its standard-setting process and embarked on a
revised process in 2004 that culminated in the release on July 1, 2009, of the
FASB Accounting Standards Codification, sometimes referred to as the
Codification or ASC. The Codification does not change how the Company accounts
for its transactions or the nature of related disclosures made. However, when
referring to guidance issued by the FASB, the Company now also refers to topics
in the ASC. The above change was made effective by the FASB for periods ending
on or after September 15, 2009. The Company updated references to GAAP to
reflect the guidance in the Codification.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
disclosures. These estimates and assumptions are based upon management’s best
knowledge of current events and actions that the Company may take in the future.
The Company is subject to uncertainties such as the impact of future events,
economic, environmental and political factors and changes in the Company’s
business environment; therefore, actual results could differ from these
estimates. Accordingly, the accounting estimates used in the preparation of the
Company’s condensed consolidated financial statements will change as new events
occur, as more experience is acquired, as additional information is obtained and
as the Company’s operating environment changes. Changes in estimates are made
when circumstances warrant. Such changes in estimates and refinements in
estimation methodologies are reflected in reported results of operations; if
material, the effects of changes in estimates are disclosed in the notes to the
condensed consolidated financial statements. Significant estimates and
assumptions by management affect: the proper recording of revenue arrangements
with multiple deliverables, the allowance for doubtful accounts, the carrying
value of long-lived assets, the amortization period of long-lived assets, the
provision for (benefit from) income taxes and related deferred tax accounts,
certain accrued expenses and contingencies, and the ability to continue as a
going concern.
Revenue
Recognition
Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use and access to its aircraft fleet
through either 15 or 25 hour flight hour cards (either individually or through
the Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The
purchase agreement grants the customer the right to the use of the aircraft for
a specified number of hours each year the aircraft is in service. When a
customer purchases a fractional share, they are also required to enter into a
five-year management and maintenance agreement. Under the terms of the
maintenance and management agreement, the Company agrees to manage, operate and
maintain the aircraft on behalf of the customer in exchange for a fixed monthly
fee. Flight hour cards provide customers with flight hours for a fixed
fee.
Fractional
Aircraft Shares
The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of FASB ASC
Topic 605-25 “Revenue Multiple
Element Arrangement” to account for the sale of fractional
shares of aircraft. Accordingly, as the sales of the fractional shares cannot be
separated from the underlying maintenance and management agreement, fractional
share sale revenue is recognized ratably over the five-year life of the
maintenance and management agreement. The period in which revenue is recognized
will be evaluated on a periodic basis. Factors that impact management’s
assessment of the most appropriate period of revenue recognition will include,
but not be limited to, customer turnover, terms and conditions of the related
fractional share sale, maintenance arrangements as well as any other factor that
could impact revenue.
Management
and Maintenance Agreement
Revenue
earned in connection with the management and maintenance agreements with
fractional share owners is recognized ratably over the term of the agreement,
usually five years. If a customer prepays its management and maintenance fee for
a period of one year or longer, the prepayment is recorded as unearned revenue
and amortized into revenue on a monthly basis in accordance with the schedule
provided for within each agreement.
F-9
Flight
hour card and Axis Club Membership Revenue
Flight hour card revenue. The
Company also sells access to its aircraft fleet through either a 15 or 25 hour
flight hour card for flight time without the requirement to purchase an
ownership share in an aircraft. The card holder pays the Company the entire
amount in advance of access to the aircraft fleet. The Company defers the entire
amount paid and recognizes revenue on an incremental basis as aircraft hours are
flown.
Axis Club Membership revenue.
In February 2009, the Company initiated the Axis Club Membership program that
offers customers access to blocks of flight time at a discount from standard
flight hour card rates for a set, three year membership fee. The program
requires that Axis Club members purchase a minimum of three 25 hour blocks of
flight hour cards over the three year membership term. Axis Club Membership fees
are paid in advance, deferred and recognized over the three year membership
term. Similar to standard flight hour card sales, payment for flight hour cards
sold through the Axis Club Membership program are collected in advance of access
to the aircraft fleet, deferred and recognized as revenue on an incremental
basis over the three year membership term.
Other
Revenues
Other
revenues are comprised primarily of revenue from demonstration flights, revenue
from the sale of fuel at the Company’s FBO facilities and revenue from the
rental of hangar space at the Company’s operating locations. Revenue from fuel
sales and hangar rentals are recorded when goods are delivered or services are
rendered. Demonstration revenue is earned as the Company charges prospective
fractional share owners on an hourly basis for each hour the prospective share
owners are flown to demonstrate the quality and capabilities of the aircraft.
The Company recognizes revenue related to these demonstration flights when the
flight is completed.
Aircraft
Costs Related To Fractional Sales
The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of FASB ASC Topic 605-25 “Revenue Multiple Element
Arrangement,” the Company recognizes revenue from the sale of fractional
shares as income over the five-year period. The aircraft costs related to sales
of fractional shares consist of the cost of the aircraft and are recorded as an
asset and recognized as the cost of aircraft shares sold over the five-year
period.
Maintenance
Expense Policy
The
Company uses the direct expensing method of accounting for non-refurbishment
aircraft maintenance. Engine maintenance is performed by third parties under
contracts which transfer risk, and related costs are expensed as incurred.
Airframe maintenance is performed in-house and related costs are expensed as
incurred. Refurbishments of the interiors of the aircraft, which extend the life
of the aircraft, are capitalized and amortized over the estimated life of three
years.
Prepaid
Pilot Training
Beginning
in 2008, the costs related to the training of pilots as required by Federal
Aeronautic Regulations are capitalized and amortized over the twelve month
certification period.
Income
Taxes
Income
taxes are accounted for under the asset and liability method in accordance with
FASB ASC Topic 740 “Income
Taxes.” Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is established to reduce
deferred tax assets to the amounts expected to be realized. The Company
calculated an annual effective tax rate to determine the interim period income
tax provisions; however, no tax liability was accrued for the three months ended
September 30, 2009, as the Company expects to have sufficient operating loss and
tax credit carryforwards to cover any taxable income.
Effective
July 1, 2007, the Company adopted the provisions of the FASB ASC Topic 740 “Income Taxes.” ASC Topic
740 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The Company has identified its federal tax return and State of
Florida tax return as “major” tax jurisdictions, as defined in ASC 740. The
Company evaluations were performed for the tax years ended 2005 through 2009.
The Company believes that its income tax positions and deductions would be
sustained on audit and does not anticipate any adjustments that would result in
a material change to its financial position. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as income tax
expense.
F-10
Stock-Based
Compensation
The
Company has one stock-based compensation plan, the 2006 Long Term Incentive
Plan, which the Company’s shareholders approved, for employees, certain
non-employees and non-employee directors. Stock-based awards under this plan may
consist of common stock, common stock units, stock options, cash-settled or
stock-settled stock appreciation rights, restricted stock and other stock-based
awards. The Company issues common stock to satisfy stock option exercises or
vesting of stock awards.
The
Company accounts for share-based compensation to employees and directors in
accordance with FASB ASC Topic 718 “Compensation- Stock
Compensation,” which requires the recognition of compensation
expense for employee stock options and other share-based payments. Under ASC
718, expense related to employee stock options and other share-based payments is
recognized over the relevant service period based on the fair value of each
stock option grant. In addition, the Company recognizes in its Condensed
Consolidated Statements of Operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and directors.
Compensation expense for equity-based awards is recognized over the requisite
service period, usually the vesting period on a straight line basis, while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) is measured to fair-value at each balance sheet date until
the award is settled.
Stock-based
compensation expense related to these plans, which is included in “General and
administrative” costs in the accompanying Condensed Consolidated Statements of
Operations, was $104,434 and $95,708 for the three months ended September 30,
2009 and 2008, respectively. There were no related income tax benefits
recognized in the accompanying Condensed Consolidated Statements of Operations
for the three months ended September 30, 2009 or for the comparable 2008 period.
On September 23, 2009, by recommendation of the Compensation Committee and
approval by the Board of Directors, 25,000 shares of restricted stock were
granted to each of the Company's three named executive officers, effective
October 1, 2009. One-third of the shares will vest one year following the grant
date, and one-twelfth of the shares vest every three months thereafter. As of
September 30, 2009, the Company had 241,834 shares of restricted stock and
150,000 stock options outstanding. The Company made no stock option grants nor
issued warrants during the three months ended September 30, 2009.
Accounting
for Derivative Instruments
The
Company accounts for derivative instruments in accordance with FASB ASC Topic
815 “Derivatives &
Hedging,” which establishes accounting and reporting standards
for derivative instruments and hedging activities, including certain derivative
instruments embedded in other financial instruments or contracts. The Company
also considers ASC 815, which provides criteria for determining whether
freestanding contracts that are settled in a company’s own stock, including
common stock warrants, should be designated as either an equity instrument, an
asset or as a liability under ASC 815. The Company evaluates the conversion
feature embedded in its Series A Convertible Preferred Stock at each reporting
period based on the criteria of ASC 815 to determine whether the conversion
feature would be required to be bifurcated from the Preferred Stock and
accounted for separately as a derivative. Based on management’s evaluation, the
embedded conversion feature did not require bifurcation and derivative
accounting as of September 30, 2009.
Fair
Value Measurements
Effective
July 1, 2008, the Company adopted the provisions of FASB ASC Topic 820 “Fair Value Measurements and
Disclosures.” ASC 820, defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. ASC 820 clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. ASC 820 permits an entity to measure certain financial assets and
financial liabilities at fair value with changes in fair value recognized in
earnings each period. During the three months ended September 30, 2009, the
Company has elected not to use the fair value option permitted under ASC 820 for
any of its financial assets and financial liabilities that are not already
recorded at fair value.
The fair
values of the Company’s assets and liabilities that qualify as financial
instruments under FASB ASC 825 including cash and cash equivalents, restricted
cash, accounts receivable, accounts payable, accrued expenses,
unearned management fees and charter flight hour card revenues and
short-term debt are carried at cost, which approximates fair value due to the
short-term maturity of these instruments. Long-term obligations approximate fair
value, given management’s evaluation of the instruments’ current rates compared
to market rates of interest and other factors.
Loss
Per Share
Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
F-11
For the
three months ended September 30, 2009, a total of 2,025,172 share-equivalents of
potentially dilutive securities were excluded from the calculation of diluted
earnings per share. These securities were comprised of 150,000 options to
purchase shares of common stock and 300,000 unit purchase options (with each
unit consisting of one share and two warrants that expire February 23, 2010)
which were outstanding during the periods but were not included in the
computation of diluted earnings per share because the options’ exercise prices
were greater than the average market price of the common shares, and therefore,
their effect would be anti-dilutive as calculated under the treasury method
promulgated by FASB ASC Topic 260 “Earnings Per
Share.” In accordance with ASC 260’s contingently issuable
shares provision, 157,972 shares of performance-based, unvested common stock
awards (“restricted stock”) granted were not included in the calculation because
all the necessary conditions for vesting had not been satisfied. In addition,
567,200 and 250,000 warrants sold in connection with the private sale on June
30, 2009 and September 25, 2009, respectively, to purchase shares of the
Company’s common stock were not included in the calculation of diluted earnings
per share as they were antidilutive. On October 19, 2009, pursuant to the
October 2009 Securities Purchase and Exchange Agreement, the Company exchanged
the 817,200 outstanding warrants that had been issued to existing investors in
the June and September private placements for an aggregate of 516,127 shares of
common stock. A total of 14,496,834 of potentially dilutive securities were
excluded from the calculation of diluted loss per share for the three months
ended September 30, 2008 and were comprised of 14,146,000 warrants to purchase
one share of the Company’s common stock, 200,834 shares of restricted stock and
150,000 outstanding options.
Subsequent
Events
Effective
July 1, 2009, the Company adopted the provisions of FASB ASC Topic 855 “Subsequent
Events,” which established principles and standards related to
the accounting for and disclosure of events that occur after the balance sheet
date but before the financial statements are issued. ASC Topic 855 requires an
entity to recognize, in the financial statements, subsequent events that provide
additional information regarding conditions that existed at the balance sheet
date. Subsequent events that provide information about conditions that did not
exist at the balance sheet date shall not be recognized in the financial
statements under ASC Topic 855. We have evaluated subsequent events for
recognition or disclosure through November 16, 2009.
Reclassifications
Certain
balances for the three months ended September 30, 2008 were reclassified to
conform to classifications adopted in the current period.
Recently
Issued Pronouncements
Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. The Company follows accounting standards set
by the Financial Accounting Standards Board, commonly referred to as the “FASB.”
The FASB sets generally accepted accounting principles (GAAP) that the Company
follows to ensure it consistently reports its financial condition,
results of operations, and cash flows. References to GAAP issued by the FASB in
these footnotes are to the FASB Accounting Standards Codification, sometimes
referred to as the Codification or ASC. The FASB finalized the Codification
effective for periods ending on or after September 15, 2009. The
Company has updated references to GAAP to reflect the guidance in the
Codification.
In
December 2007, the FASB issued an accounting standard which requires an acquirer
to measure the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. The accounting standard also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies. The accounting standard applies prospectively to business
combinations and is effective for fiscal years beginning on or after December
15, 2008. The accounting standard was subsequently codified into ASC Topic
805, Business
Combinations. The adoption of this new FASB ASC Topic 805 did
not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
December 2007, the FASB issued an accounting standard which requires that a
non-controlling interest in a subsidiary be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the non-controlling interest with disclosure
of both amounts on the consolidated statement of income. The presentation
provisions of the accounting standard are to be applied retrospectively and is
effective for fiscal years beginning on or after December 15, 2008. The
accounting standard was subsequently codified into ASC Topic 810 (“Consolidation”). The
adoption of this new FASB ASC Topic 810 did not have a material impact on the
Company’s financial position, results of operations or cash flows.
In June
2008, the FASB issued an accounting standard which states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are “participating securities” and therefore should be
included in computing earnings per share using the two-class method. According
to the accounting standard, a share-based payment award is a participating
security when the award includes nonforfeitable rights to dividends or dividend
equivalents. The rights result in a noncontingent transfer of value each time an
entity declares a dividend or dividend equivalent during the award’s vesting
period. However, the award would not be considered a participating security if
the holder forfeits the right to receive dividends or dividend equivalents in
the event that the award does not vest. The accounting standard is effective for
financial statements issued in fiscal years beginning after December 15, 2008,
and interim periods within those years. When adopted, its requirements are
applied by recasting previously reported EPS. The accounting standard was
subsequently codified into ASC Topic 260, “Earnings Per
Share.” The adoption of the new FSB ASC Topic 260 did not have
a material impact on the Company’s financial position, results of operations or
cash flows.
F-12
In June
2008, the FASB issued an accounting standard which provides guidance for
determining whether an equity-linked financial instrument (or embedded feature)
issued by an entity is indexed to the entity’s stock. The accounting standard
proscribes a two-step approach under which the entity would evaluate the
instrument’s contingent exercise provisions and then the instrument’s settlement
provisions, for purposes of evaluating whether the instrument (or embedded
feature) is indexed to the entity’s stock. This accounting standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. The accounting standard was subsequently codified
into ASC Topic 815,
“Derivatives and Hedging,” and ASC Topic 718, “Compensation – Stock
Compensation.” The adoption of the new FASB ASC Topic 815 did
not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
November 2008, the FASB issued an accounting standard which enhances the
disclosure requirements for separating disclosing information related to
individually significant arrangements and disclosing the qualitative and
quantitative information on an aggregate basis. This new guidance applies
prospectively to revenue arrangements entered into or materially modified in
fiscal years beginning on or after December 15, 2009. The accounting standard
was subsequently codified into ASC Topic 605-25, “Revenue Multiple Element
Arrangement.” The Company is currently evaluating the
requirements of ASC 605-25 and its impact on its financial condition, results of
operations and cash flows.
No other
pronouncements have been recently issued that Avantair believes will have a
material impact on Avantair’s financial position and results of
operations.
NOTE
3 - COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company conducts a major part of its operations from leased facilities, which
include airplane hangars and administrative offices. The 15 year hangar lease in
Clearwater, Florida expiring in 2020 is classified as an operating lease. The
lease provides for rent allocation credits for the first three years. These
credits have been netted in rental expense on a straight line basis over the
term of the lease. The Company also has a 15 year lease for its fixed flight
based operation in Camarillo, California expiring in 2021, which is classified
as an operating lease.
Most of
the operating leases contain an option to renew at the then fair rental value
for periods of five to ten years. These options enable the Company to retain use
of facilities in desirable operating areas.
In
addition, the Company leases transportation equipment and data processing
equipment under operating leases expiring during the next three
years.
Purchase
Commitments
On June
20, 2008, Avantair assigned its rights and obligations to purchase twenty
Embraer Phenom 100 aircraft positions to Share 100 Holding Co., LLC, a
wholly-owned subsidiary of Avantair. On the same date, Avantair entered into a
membership interest purchase agreement with Executive Air Shares Corporation
(EAS), in which EAS purchased the Class A membership of Share 100 and Avantair
retained the Class B membership. EAS, as Class A member, has the rights and
obligations to purchase the Phenom 100 aircraft with positions one through
eighteen and to fund payment due in connection with these aircraft. EAS paid
Share 100 approximately $2.47 million in connection with these transactions and
made an additional $750,000 capital contribution to Share 100 in December 2008,
all of which was, immediately distributed to Avantair. Avantair, as Class B
member, has the rights and obligations to purchase aircraft positions nineteen
and twenty and to fund payment due in connection with these aircraft. EAS has
the option to purchase aircraft nineteen and twenty, which must be exercised by
October 1, 2010; if exercised, EAS shall reimburse Avantair for all payments
made relative to these aircraft and provide all remaining funds required. In the
event that EAS does not exercise the option to purchase aircrafts nineteen and
twenty by October 1, 2010, Avantair will have the right and obligation to
purchase the nineteenth and twentieth aircraft. If EAS defaults under its
obligations to purchase the aircraft positions, EAS will forfeit all deposits
paid for the undelivered aircraft, including the funds distributed to Avantair.
Avantair will then be responsible for the rights and obligations of the
remaining undelivered aircraft. If Avantair defaults under its obligations
to purchase the last two aircraft positions, any deposits paid by Avantair in
connection with the undelivered Class B Aircraft will be forfeited.
As of
September 30, 2009, Avantair had contractual commitments to purchase 56
additional Piaggio Avanti II aircraft through 2013. The total commitment,
including a recently proposed price escalation, is valued at approximately
$354.0 million.
Financing
Commitments- Short-term
Short-term
debt consists of the following as of September 30, 2009:
2009
|
||||
Midsouth
Services, Inc (“Midsouth”)
|
$
|
11,500,000
|
F-13
Midsouth
Services, Inc
On
October 3, 2007, the Company entered into a floor plan agreement with Midsouth
which provided for up to approximately $5.1 million of financing for aircraft to
be acquired from Piaggio America, Inc., extended on a month-to-month basis from
April 2008 and repaid in July 2008. Effective March 3, 2008, the Company entered
into a second floor plan agreement with Midsouth that provided for up to $5.3
million of financing for aircraft to be acquired from Piaggio America, Inc. for
the six month period commencing with the first delivery of aircraft under the
plan. Each agreement required a $75,000 monthly facility fee with payment of any
outstanding borrowings due in full prior to taking delivery of additional
aircraft. Midsouth also agreed, at the option of the Company, to provide an
additional loan in the amount of $5.3 million, with terms and conditions of the
additional loan substantially similar to the terms of the March 2008 loan, upon
expiration of the October 3, 2007 floor plan agreement.
On July
31, 2008, the Company entered into two new Floor Plan Finance Agreements (each,
an “Agreement” and collectively "the Agreements"), pursuant to which MidSouth
agreed to extend credit to the Company in an amount not to exceed $5,345,000
under each Agreement ($10,690,000 in total for the Agreements), for an initial
term of three months for each Agreement. Indebtedness under the Agreements was
used by the Company to fund the purchase of new Piaggio P-180 aircraft. The
Company renewed the Agreements for three consecutive additional one month terms
at the expiration of the initial term and on a month-to-month basis thereafter.
The effective dates of the two Agreements were July 31, 2008, and August 1,
2008, respectively. The Company agreed to pay to the Lender a monthly
facility fee of $75,000 under each Agreement. In connection with the entry into
the Agreements, on July 31, 2008, the Company terminated the prior Floor Plan
Finance Agreements dated March 3, 2008 and October 3, 2007 between the Company
and Midsouth.
On
November 18, 2008, the Company entered into an aircraft deposit agreement with
MidSouth, for a term of twelve months, which provides for up to approximately
$0.6 million of financing for the payment to the aircraft manufacturer of
deposits on future deliveries. As consideration for providing the deposit for
the aircraft during the term of this agreement, the Company agreed to pay
MidSouth a monthly transaction fee of $9,000 commencing December 2008.
Borrowings outstanding under this arrangement at September 30, 2009 totaled $0.5
million. In October 2009, the Company repaid the aircraft deposit agreement
entered into with MidSouth of $0.5 million.
Further
on April 2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth
to replace Midsouth’s existing Floor Plan Agreements dated July 31,
2008. The new Floor Plan Agreements extended credit to Avantair in an
increased amount of $11.6 million to be used towards the purchase of new Piaggio
P-180 aircraft. Each of the new Floor Plan Agreements are similar to
the prior Floor Plan Agreements and cover an amount not to exceed $5.8 million
for a term of twelve months. The Company has the sole option to
terminate one of the Agreements during the term with ninety days written
notice. The Company has agreed to pay Midsouth a monthly fee of
$82,500 for each Floor Plan Agreement during the term.
Century
Bank, F.S.B.
On May
29, 2008, the Company entered into a Promissory Note (“Note”) with Century Bank,
F.S.B. (“Lender”), pursuant to which the Lender agreed to provide financing to
the Company in the amount of $5.2 million to be used towards the purchase of new
Piaggio P-180 aircraft. The Company paid the following fees for the Note: (1)
$37,500 on the effective date of the Note and (2) $75,000 on the 30th day of the
each month thereafter until repayment in full of the principal amount of the
Note (“Term”). In July 2008, the Company repaid the full amount of the Note with
Century Bank, F.S.B. and paid a fee of $26,000, constituting 0.5% of the
principal balance.
On
January 9, 2009, the Company entered into a new Note with the Lender, pursuant
to which the Lender agreed to provide financing to the Company in the amount of
$5.2 million to be used towards the purchase of new Piaggio P-180 aircraft. The
Company paid the following fees for the Note: (1) $75,000 on the
effective date of the Note and (2) $75,000 each month thereafter until repayment
in full of the principal amount of the Note. The Company
made partial payments to Lender in $325,000 increments upon the closing of each
fractional interest and the Lender provided partial lien releases as to the
respective fractional interests sold. In June 2009, the Company repaid the
full amount of a promissory note issued to Century Bank, F.S.B and paid a fee of
$26,000, constituting 0.5% of the principal balance.
Financing Commitments-
Long-term
Long-term
debt consists of the following as of September 30, 2009:
Wells
Fargo Equipment Finance, Inc.
|
$
|
2,994,149
|
||
CNM,
Inc.
|
2,725,345
|
|||
Jet
Support Services, Inc.
|
3,240,641
|
|||
JMMS,
Inc.
|
3,312,304
|
|||
Century
Bank, F.S.B.
|
1,869,695
|
|||
Wachovia
Bank
|
2,500,000
|
|||
Midsouth
Services, Inc
|
12,025,004
|
|||
28,667,138
|
||||
Less
current portion
|
(10,266,419
|
)
|
||
Long-term
debt
|
$
|
18,400,719
|
F-14
Wells
Fargo Equipment Finance, Inc.
In
February 2005, the Company entered into financing arrangements for the purchase
of three core aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid
the outstanding balance on the related note payable. The notes outstanding at
September 30, 2009 totaled approximately $3.0 million and are payable in monthly
installments ranging from $10,644 to $38,480 with interest ranging from 5.96% to
6.12% per annum, through 2012. The notes are collateralized by the
aircraft.
CNM,
Inc.
In August
2007, the Company and CNM executed a new note agreement which converted an
outstanding note obligation of approximately $7.0 million into a term loan
payable monthly over three years and bearing interest at 10.0% per annum.
The Company accounted for this conversion in accordance with FASB ASC
470-50 “Debt Modification
& Extinguishment” (EITF Issue No. 98-14). CNM also assumed a
promissory note due to Wells Fargo Bank for $2.9 million which was included as
part of this new note agreement. Borrowings outstanding under these arrangements
at September 30, 2009 totaled approximately $2.7 million. During October 2009,
the Company repaid the full amount of the loan of approximately $2.7
million.
Jet
Support Services, Inc.
On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI by
means of a $5.5 million promissory note. The new note matures on April 1,
2011 and bears interest at the rate of 10.0% per annum, with 35 monthly
payments of principal and interest in an amount of $185,127 beginning on
June 2, 2008. The new note covered the remaining balance of the
aforementioned promissory note of $0.4million, other costs and fees to be paid
by the Company under service agreements with JSSI and related deferred financing
costs of approximately $1.0 million which will be amortized over the life of the
note using the effective interest method. Upon entering into this payment
arrangement and the $5.5 million promissory note, the parties terminated the
airframe maintenance contract and have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program. Borrowings outstanding under
this arrangement at September 30, 2009 totaled approximately $3.2
million.
In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constituted payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.
Century
Bank, F.S.B.
In August
2007, the Company and Century Bank F.S.B. executed a $2.2 million note agreement
for the purchase of one aircraft. The note outstanding at September 30, 2009
totaled approximately $1.9 million and is payable in monthly installments of
$27,175 with interest of 8.25% per annum, through August 3, 2012. The note
is collateralized by the aircraft.
Wachovia
Bank
On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a flight hour card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%. Borrowings outstanding under this arrangement at September 30, 2009
totaled approximately $2.5 million. During September 2009, the Company received
a waiver of compliance with a financial covenant in connection with the
note.
Capital
Lease Transactions
JMMS,
Inc.
The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In addition, during the fourth quarter of fiscal year 2009,
the agreement with JMMS matured and therefore has been included in the current
portion of long-term debt on the accompanying condensed consolidated balance
sheet. On December 14, 2009, the Company sold the aircraft to a third party for
$2.9 million and paid the remaining outstanding balance of the purchase price to
JMMS.
F-15
Midsouth Services,
Inc.
On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth. Under the lease agreement, Midsouth
provided funding for the $4.7 million purchase of a pre-owned Piaggio P-180
aircraft and holds title to the Aircraft. Midsouth leases the Aircraft
exclusively to Avantair on a five year lease at 15.0% interest per annum.
The monthly lease payments for the term of the lease are $89,000. At the
end of the five year lease, Avantair shall purchase the Aircraft from Midsouth
at the guaranteed residual value in the amount of approximately $2.3
million. Avantair also has the option to purchase the Aircraft anytime
during the lease term at the then current guaranteed residual value as set forth
on the amortization schedule without penalty. The obligation outstanding
at September 30, 2009 totaled approximately $4.1 million.
In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840 “Leases” (SFAS 13), dated as
of July 31, 2006 between the Company and Midsouth. Pursuant to the amendment,
the Company is required to pay $74,900 monthly until August 2011, the expiration
of the Lease Agreement. In addition, the Company has agreed to purchase the
leased aircraft for approximately $3.0 million from Midsouth within sixty days
following the expiration of the term of the Lease Agreement. The lease, as
amended, has been classified as a capital lease in the accompanying condensed
consolidated balance sheet. The obligation outstanding at September 30, 2009
totaled approximately $3.8 million.
In
April 2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. Hours have been accounted for at their fair value
and are liquidated as hours are flown. Midsouth has the sole option
to terminate the lease at the end of the fifth year of the term and to require
the Company to purchase the leased aircraft for approximately $3.8 million
within ninety days of that date. If this option is not exercised by
Midsouth, the lease will continue for the remaining five years of the term and,
at the end of the ten year lease, the Company will be required to purchase the
aircraft from Midsouth for $0.3 million. The obligation outstanding at September
30, 2009 totaled approximately $4.8 million.
The
capital lease obligations are included in long-term debt in the accompanying
condensed consolidated balance sheets.
NOTE
4 – EQUITY TRANSACTIONS
On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. Each unit consisted of two shares of common stock and one warrant to
purchase one common share. The warrants had an exercise price of $4.00 per share
and were exercisable until June 30, 2012. The sale was consummated under the
terms of a Securities Purchase Agreement between Avantair and each of the
investors. Pursuant to a registration rights agreement, Avantair agreed to use
it best efforts to register the shares issued to the investors and the shares
underlying the warrants issued to the investors for sale under the Securities
Act of 1933, as amended. By agreement between Avantair, the investors in the
June 30, 2009 private placement and that offering’s placement agent,
the period for additional sales of units was extended until October 15,
2009. On September 25, 2009, the Company sold an additional 250,000 units at a
price of $2.50 per unit generating net proceeds of approximately $0.6 million.
(See further discussion in subsequent events.)
NOTE
5 – SUBSEQUENT EVENTS
In
October 2009, the Company sold 8,818,892 shares of common stock to new investors
at a price per share of $0.95 for net proceeds of approximately $8.0 million
pursuant to the October 16, 2009 Securities Purchase and Exchange Agreement. In
addition, pursuant to the October 16, 2009 Securities Purchase and Exchange
Agreement, on October 19, 2009 the Company exchanged the 817,200 outstanding
warrants that had been issued to existing investors in the June and September
2009 private placements for an aggregate of 516,127 shares of common stock for
no additional consideration. The October 2009 Securities Purchase and
Exchange Agreement terminated the Securities Purchase and Registration Rights
Agreement entered into in connection with the June and September 2009 private
placements. Subsequent to the closing of the September private placement, the
terms of the offer were modified from the price of $2.50 per unit in the first
and second private placements to conform to the price in the October private
placement of $0.95 per common share. The exchange represents the
equivalent number of shares necessary to cause the per share price paid in the
June and September private placements to equal the price per share in the
October private placement. The exchange will be recorded at its fair
value as an adjustment to paid-in capital and common stock for its par
value.
In
connection with the October 2009 private placement, Avantair entered into a
new Registration
Rights Agreement with the investors in the June, September and
October private placements. The October 2009 Registration Rights Agreement
requires the Company promptly, but not later than 30 days after the closing, to
file a registration statement registering for sale the shares issued to the
investors and to cause the registration statement to be declared effective on or
prior to the 90th day after the closing (or the 150th day, if the registration
statement is reviewed by the SEC). Under the terms of the Registration Rights
Agreement, the Company is obligated to maintain the effectiveness of the sale
registration statement until all securities registered thereunder are sold or
otherwise can be sold pursuant to Rule 144, without restriction. The Company is
required to pay to each investor an amount in cash each month, as partial
liquidated damages, equal to 1.5% of the aggregate purchase price paid by such
investor in the event of failure (i) to file the registration statement or (ii)
to cause the registration statement to be declared effective, in each case by
the date described in the Registration Rights Agreement, for so long as such
failure continues.
F-16
On
October 16, 2009, pursuant to an agreement between EarlyBirdCapital, Inc. and
the Company, in consideration for services rendered as placement agent for the
Company’s June, September and October 2009 private placements, the Company
issued to EarlyBirdCapital, Inc. and its affiliates 455,887 fully vested
warrants which expire on June 30, 2012. Each warrant permits the holder to
purchase one share of the Company’s common stock at an exercise price of $1.05
per share. The shares issuable upon exercise of the warrants are entitled to
registration rights under the October 2009 Registration Rights Agreement. The
Company may redeem the warrants at any time on or after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 200.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The fair value of the warrants (which will be completed in
connection with the preparation of the Company’s financial statements for the
quarter ended December 31, 2009) will be charged to additional paid-in
capital.
During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company. Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour.
The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. On December 15, 2009, LW Air took delivery of the fourth aircraft
and as such, has satisfied the conditions for vesting of all the warrants.
The
Company will account for the LW Air transaction and the issuance of the warrants
by recording the charges paid to the owner (including the fair value of the
warrants which will be completed in connection with the preparation of the
Company’s financial statements for the quarter ended December 31, 2009) to the
Cost of Flight Operations on a straight-line basis ratably over the initial term
of the agreement.
F-17
Report
of Independent Registered Public Accounting Firm
The
Stockholders and Board of Directors
Avantair,
Inc.
We have
audited the accompanying consolidated balance sheets of Avantair, Inc. and
Subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ deficit and cash flows for
each of the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Avantair, Inc. and
Subsidiaries as of June 30, 2009 and 2008, and their results of operations
and cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
J.H. Cohn LLP
|
Jericho,
New York
|
September
28, 2009
|
F-18
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
ASSETS
June 30,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
3,773,789
|
$
|
19,149,777
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $187,842 at June 30,
2009 and $213,487 at June 30, 2008
|
5,711,055
|
5,692,809
|
||||||
Inventory
|
140,997
|
252,407
|
||||||
Current
portion of aircraft costs related to fractional sales
|
36,910,206
|
40,417,203
|
||||||
Current
portion of notes receivable
|
272,731
|
832,107
|
||||||
Prepaid
expenses and other current assets
|
1,278,506
|
2,173,992
|
||||||
Total
current assets
|
48,087,284
|
68,518,295
|
||||||
Aircraft
costs related to fractional share sales, net of current
portion
|
70,199,786
|
92,383,071
|
||||||
Property
and equipment, at cost, net of accumulated depreciation and amortization
of $11,695,228 at June 30, 2009 and $8,640,096 at June 30,
2008
|
29,842,365
|
25,663,264
|
||||||
OTHER
ASSETS
|
||||||||
Cash-
restricted
|
2,352,337
|
2,826,290
|
||||||
Deposits
on aircraft
|
9,264,890
|
8,679,277
|
||||||
Deferred
maintenance on aircraft engines
|
1,538,175
|
2,228,509
|
||||||
Notes
receivable-net of current portion
|
-
|
1,008,223
|
||||||
Goodwill
|
1,141,159
|
1,141,159
|
||||||
Other
assets
|
1,639,407
|
2,029,367
|
||||||
Total
other assets
|
15,935,968
|
17,912,825
|
||||||
Total
assets
|
$
|
164,065,403
|
$
|
204,477,455
|
See
Notes to Consolidated Financial Statements
F-19
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
LIABILITIES
AND STOCKHOLDERS' DEFICIT
June 30,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$
|
7,307,320
|
$
|
4,718,355
|
||||
Accrued
liabilities
|
5,010,745
|
5,528,472
|
||||||
Customer
deposits
|
1,282,936
|
1,905,682
|
||||||
Short-term
debt
|
11,500,000
|
15,775,260
|
||||||
Current
portion of long-term debt
|
11,020,590
|
6,648,093
|
||||||
Current
portion of deferred revenue related to fractional aircraft share
sales
|
43,385,779
|
47,778,900
|
||||||
Unearned
management fee and charter card revenues
|
17,807,796
|
16,316,044
|
||||||
Total
current liabilities
|
97,315,166
|
98,670,806
|
||||||
Long-term
debt, net of current portion
|
20,111,011
|
23,856,322
|
||||||
Deferred
revenue related to fractional aircraft share sales, net of current
portion
|
65,071,197
|
96,525,785
|
||||||
Other
liabilities
|
3,047,329
|
2,636,730
|
||||||
Total
long-term liabilities
|
88,229,537
|
123,018,837
|
||||||
Total
liabilities
|
185,544,703
|
221,689,643
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
Series
A convertible preferred stock, $.0001 par value, authorized 300,000
shares; 152,000 shares issued and outstanding
|
14,528,383
|
14,439,358
|
||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Preferred
stock, $.0001 par value, authorized 700,000 shares; none
issued
|
-
|
-
|
||||||
Common
stock, Class A, $.0001 par value, 75,000,000 shares authorized, 16,463,615
shares issued and outstanding at June 30, 2009 and 15,286,792 shares
issued and outstanding at June 30, 2008
|
1,646
|
1,529
|
||||||
Additional
paid-in capital
|
47,667,493
|
46,163,780
|
||||||
Accumulated
deficit
|
(83,676,822
|
)
|
(77,816,855
|
)
|
||||
Total
stockholders' deficit
|
(36,007,683
|
)
|
(31,651,546
|
)
|
||||
Total
liabilities and stockholders' deficit
|
$
|
164,065,403
|
$
|
204,477,455
|
See
Notes to Consolidated Financial Statements
F-20
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Year Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
||||||||
Fractional
aircraft sold
|
$
|
51,864,010
|
$
|
43,426,696
|
||||
Maintenance
and management fees
|
70,693,367
|
58,211,457
|
||||||
Charter
card and Axis Club Membership revenue
|
9,384,110
|
7,236,151
|
||||||
Other
revenue
|
4,885,563
|
6,744,679
|
||||||
Total
revenue
|
136,827,050
|
115,618,983
|
||||||
Operating
expenses
|
||||||||
Cost
of fractional aircraft shares sold
|
44,118,352
|
36,637,959
|
||||||
Cost
of flight operations
|
46,723,184
|
50,058,692
|
||||||
Gain
on sale of assets
|
(1,394,164
|
)
|
(861,410
|
)
|
||||
Cost
of fuel
|
13,349,084
|
16,489,422
|
||||||
General
and administrative expenses
|
23,628,541
|
20,703,120
|
||||||
Selling
expenses
|
3,736,424
|
4,670,246
|
||||||
Depreciation
and amortization
|
5,233,250
|
3,624,710
|
||||||
Total
operating expenses
|
135,394,671
|
131,322,739
|
||||||
Income
(loss) from operations
|
1,432,379
|
(15,703,756
|
)
|
|||||
Other
income (expenses)
|
||||||||
Interest
income
|
46,073
|
482,666
|
||||||
Other
income
|
2,848
|
252
|
||||||
Interest
expense
|
(5,942,221
|
)
|
(3,661,227
|
)
|
||||
Total
other expenses
|
(5,893,300
|
)
|
(3,178,309
|
)
|
||||
Net
loss
|
(4,460,921
|
)
|
(18,882,065
|
)
|
||||
Preferred
stock dividend and accretion of expenses
|
(1,488,071
|
)
|
(903,851
|
)
|
||||
Net
loss attributable to common stockholders
|
$
|
(5,948,992
|
)
|
$
|
(19,785,916
|
)
|
||
Loss
per common share:
|
||||||||
Basic
and diluted
|
$
|
(0.39
|
)
|
$
|
(1.30
|
)
|
||
Weighted-
average common shares outstanding:
|
||||||||
Basic
and diluted
|
15,306,725
|
15,230,482
|
See
Notes to Consolidated Financial Statements
F-21
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Statement of Changes in Stockholders' Deficit
Years
Ended June 30, 2009 and 2008
Class A
|
Class B
|
Additional
|
Total
|
|||||||||||||||||||||||||
Common Stock
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||||||||
Balance
at June 30, 2007
|
15,220,817
|
$
|
1,522
|
-
|
$
|
-
|
$
|
46,124,857
|
$
|
(58,085,403
|
)
|
$
|
(11,959,024
|
)
|
||||||||||||||
Expenses
associated with the issuance of preferred stock
|
(391,423
|
)
|
(391,423
|
)
|
||||||||||||||||||||||||
Stock-based
compensation
|
484,817
|
484,817
|
||||||||||||||||||||||||||
Dividend
on Series A convertible preferred stock
|
(849,387
|
)
|
(849,387
|
)
|
||||||||||||||||||||||||
Accretion
of issuance costs on Series A convertible preferred stock
|
(54,464
|
)
|
(54,464
|
)
|
||||||||||||||||||||||||
Issuance
of shares in connection with vested restricted stock
|
65,975
|
7
|
(7
|
)
|
||||||||||||||||||||||||
Net
loss
|
(18,882,065
|
)
|
(18,882,065
|
)
|
||||||||||||||||||||||||
Balance
at June 30, 2008
|
15,286,792
|
$
|
1,529
|
-
|
$
|
-
|
$
|
46,163,780
|
$
|
(77,816,855
|
)
|
$
|
(31,651,546
|
)
|
See
Notes to Consolidated Financial Statements
F-22
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Statement of Changes in Stockholders' Deficit
Years
Ended June 30, 2009 and 2008
Class A
|
Class B
|
Additional
|
Total
|
|||||||||||||||||||||||||
Common Stock
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||||||||
Expenses
associated with registration of shares
|
(43,804
|
)
|
(43,804
|
)
|
||||||||||||||||||||||||
Stock-based
compensation
|
361,059
|
361,059
|
||||||||||||||||||||||||||
Dividend
on Series A convertible preferred stock
|
(1,399,046
|
)
|
(1,399,046
|
)
|
||||||||||||||||||||||||
Accretion
of issuance costs on Series A convertible preferred stock
|
(89,025
|
)
|
(89,025
|
)
|
||||||||||||||||||||||||
Issuance
of shares in connection with vested restricted stock, net of shares
surrendered in lieu of payroll taxes
|
42,423
|
4
|
(7,732
|
)
|
(7,728
|
)
|
||||||||||||||||||||||
Sale
of common stock in connection with private sale
|
1,134,400
|
113
|
1,283,215
|
1,283,328
|
||||||||||||||||||||||||
Net
loss
|
(4,460,921
|
)
|
(4,460,921
|
)
|
||||||||||||||||||||||||
Balance
at June 30, 2009
|
16,463,615
|
$
|
1,646
|
-
|
$
|
-
|
$
|
47,667,493
|
$
|
(83,676,822
|
)
|
$
|
(36,007,683
|
)
|
See
Notes to Consolidated Financial Statements
F-23
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Year Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(4,460,921
|
)
|
$
|
(18,882,065
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
5,233,250
|
3,624,710
|
||||||
Gain
on sale of assets
|
(1,394,164
|
)
|
(861,410
|
)
|
||||
Stock-based
compensation
|
361,059
|
484,817
|
||||||
Decrease
in bad debt expense
|
18,638
|
21,109
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(36,884
|
)
|
(626,427
|
)
|
||||
Inventory
|
111,410
|
327,110
|
||||||
Deposits
on aircraft
|
(585,613
|
)
|
(1,475,223
|
)
|
||||
Deferred
maintenance agreement on aircraft engines
|
690,334
|
463,030
|
||||||
Prepaid
expenses and other current assets
|
895,486
|
(1,795,598
|
)
|
|||||
Notes
receivable
|
1,567,599
|
1,252,385
|
||||||
Aircraft
costs related to fractional shares
|
25,690,282
|
(26,034,485
|
)
|
|||||
Other
assets
|
389,960
|
(334,726
|
)
|
|||||
Accounts
payable
|
2,588,965
|
1,642,167
|
||||||
Accrued
liabilities
|
(1,924,501
|
)
|
2,042,629
|
|||||
Unearned
management fees and charter card revenue
|
620,091
|
8,269,808
|
||||||
Cash-restricted
|
473,953
|
116,693
|
||||||
Customer
deposits
|
(622,746
|
)
|
1,293,182
|
|||||
Other
liabilities
|
410,599
|
874,571
|
||||||
Deferred
revenue related to fractional aircraft share sales
|
(35,847,709
|
)
|
14,059,804
|
|||||
Net
cash used in operating activities
|
(5,820,912
|
)
|
(15,537,919
|
)
|
||||
INVESTING
ACTIVITIES:
|
||||||||
Proceeds
from sale of assets
|
1,927,000
|
-
|
||||||
Proceeds
from sale of deposits
|
-
|
2,470,000
|
||||||
Capital
expenditures
|
(975,433
|
)
|
(5,195,325
|
)
|
||||
Net
cash provided by (used in) investing activities
|
951,567
|
(2,725,325
|
)
|
F-24
AVANTAIR,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Year Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
FINANCING
ACTIVITIES:
|
||||||||
Borrowings
under long-term notes payable
|
-
|
2,200,000
|
||||||
Borrowings
under short term notes payable
|
17,479,555
|
25,910,842
|
||||||
Principal
payments on long-term notes payable
|
(7,470,907
|
)
|
(6,630,674
|
)
|
||||
Principal
payments on short-term notes payable
|
(21,754,815
|
)
|
(10,135,582
|
)
|
||||
Proceeds
from issuance of preferred stock-net
|
-
|
14,384,894
|
||||||
Proceeds
from issuance of stock-net
|
1,283,328
|
-
|
||||||
Preferred
stock dividends paid
|
-
|
(502,504
|
)
|
|||||
Cost
of stock redemption/registration
|
(43,804
|
)
|
(391,423
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(10,506,643
|
)
|
24,835,553
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
$
|
(15,375,988
|
)
|
$
|
6,572,309
|
|||
Cash
and cash equivalents, beginning of the year
|
19,149,777
|
12,577,468
|
||||||
Cash
and cash equivalents, end of the year
|
$
|
3,773,789
|
$
|
19,149,777
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$
|
5,942,221
|
$
|
3,661,227
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND
|
||||||||
INVESTING
ACTIVITIES
|
||||||||
Accretion
of Series A convertible preferred stock
|
$
|
89,025
|
$
|
54,464
|
||||
Dividends
payable on Series A convertible preferred stock
|
$
|
1,399,046
|
$
|
346,883
|
||||
Common
shares surrendered in lieu of payroll taxes
|
$
|
7,728
|
$
|
-
|
||||
Aircraft
purchased under capital lease obligation
|
$
|
8,098,093
|
$
|
4,828,642
|
||||
Aircraft
purchased under long-term notes payable
|
$
|
-
|
$
|
3,906,000
|
||||
Charter
card issued as partial consideration of aircraft purchase
|
$
|
871,661
|
$
|
95,600
|
||||
Aircraft
sold through settlement of note payable
|
$
|
-
|
$
|
457,600
|
||||
Deferred
financing costs
|
$
|
-
|
$
|
996,188
|
||||
Short-term
notes payable- refinancing
|
$
|
-
|
$
|
2,689,001
|
||||
Note
receivable on sale of deposits
|
$
|
-
|
$
|
750,000
|
See
Notes to Consolidated Financial Statements
F-25
NOTE
1 – OPERATIONS AND MANAGEMENT’S PLANS
Avantair,
Inc. (formerly known as Ardent Acquisition Corporation) (“Avantair”, “Ardent” or
the “Company”), was organized on September 14, 2004 as a blank check
company whose objective was to acquire an operating business.
On
October 2, 2006, the Company signed a definitive stock purchase agreement
(the “Reverse Merger”) with Avantair Inc. (“Old Avantair”). The agreement, as
amended on December 15, 2006, provided for Avantair to issue 6,684,822
shares of common stock to the stockholders of Old Avantair in exchange for all
of the issued and outstanding shares of Old Avantair (the “Share Exchange” or
“Reverse Merger”). The agreement also provided for the Company to issue to the
stockholders of Old Avantair additional shares as follows:
•
|
At
the end of the fiscal year ending June 30, 2008, the Company would
calculate (based on its annual audited consolidated financial statements
for such fiscal year) Cash EBITDA. If Cash EBITDA was greater than
$20,000,000 for the fiscal year ending June 30, 2008, the Company was
to have issued an aggregate of 4,774,873 shares of its common stock to Old
Avantair stockholders. The Company’s results did not meet the requirements
for the year ended June 30, 2008 and therefore these shares were not
issued.
|
•
|
If
at any time prior to February 23, 2009, the closing trading price on
the Over-the-Counter Bulletin Board (or on a national securities market on
which the Company’s common stock is then quoted for trading) of the
Company’s common stock for 20 trading days within any 30 trading day
period equals or exceeds $8.50 per share, then the Company was to have
issued an additional aggregate of 4,774,873 shares of its common stock to
Old Avantair stockholders. The Company’s results did not meet the
requirements for the year ended June 30, 2009 and therefore these
shares were not issued.
|
On
February 22, 2007, the stockholders of Avantair voted in favor of the
Reverse Merger. Subsequent to the Reverse Merger, Old Avantair’s business
activities were the activities of Avantair. The stockholders and management of
Old Avantair own a substantial portion of the equity of the combined company.
The Board of Directors was comprised of three individuals designated by
Avantair’s stockholders and four individuals designated by Old Avantair’s
stockholders, one of which was subject to the approval of Avantair’s
stockholders. In addition, Old Avantair’s management was responsible for
carrying out the Company’s current business plan. As a result, the transaction
was treated as a Reverse Merger, and a capital transaction, equivalent to the
issuance of stock by Old Avantair for Avantair’s net assets and, accordingly,
the historical financial statements prior to February 22, 2007 were those
of Old Avantair. All shares and per share data prior to the Share Exchange have
been restated to reflect the stock issuances and the effect of the closing of
the Share Exchange including the recognition of 8,400,000 shares of Ardent
common stock outstanding as of the closing of the Share Exchange. Upon the
closing of the Share Exchange, 1,601,593 shares of the Company’s common stock
included within the purchase price were transferred to an escrow agent to secure
indemnification obligations of the Company’s stockholders under the stock
purchase agreement. Such shares were released from escrow within 45 days of the
Company filing the Form 10-K for the year ended June 30, 2008.
Avantair
is engaged in the sale of fractional ownership interests and charter card usage
of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of June
30, 2009, Avantair operated 52 aircraft within its fleet, which is comprised of
46 aircraft for fractional ownership, 5 company- owned core aircraft and 1
leased and company- managed aircraft. Avantair also operates fixed flight based
operations (FBO) in Camarillo, California and effective August 1, 2008, in
Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. This basis of accounting
contemplates the successful recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. As of June 30,
2009, the Company’s recurring losses resulting in an accumulated deficit of
approximately $81.4 million and a working capital deficiency of approximately
$49.2 million. Avantair’s primary growth strategy is to continue to increase the
number of fractional share owners and aircraft under management as well as
increase the number of charter cards and Axis Club Memberships sold. To finance
this growth strategy, including the purchase of additional aircraft to satisfy
the demand of the growing charter card product line, the Company has obtained
additional funds through equity financing, including the sale of additional
shares of common stock, assets sales, accelerated payments of maintenance and
management fees, debt financing, or a combination thereof. During the fiscal
year ended June 30, 2009, the Company raised net proceeds of approximately $1.3
million through an equity offering detailed in Note 11, $1.9 million from the
sale of one of the Company’s core aircraft, and approximately $10.5 million of
cash through accelerated payments of management fees. Further, by agreement
between Avantair, the investors in the June 30, 2009 private placement and that
offering’s placement agent, the period for additional sales of units was
extended until October 15, 2009. On September 25, 2009, the Company sold an
additional 250,000 units at a price of $2.50 per unit generating net proceeds of
approximately $0.6 million. The Company believes that its capital on hand, as
may be augmented by these means to fund future growth, is sufficient to continue
operations for the next twelve months and the foreseeable future
thereafter.
F-26
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, and have been prepared in conformity with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). All material intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying disclosures.
These estimates and assumptions are based upon management’s best knowledge of
current events and actions that the Company may take in the future. The Company
is subject to uncertainties such as the impact of future events, economic,
environmental and political factors and changes in the Company’s business
environment; therefore, actual results could differ from these estimates.
Accordingly, the accounting estimates used in the preparation of the Company’s
consolidated financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company’s operating environment changes. Changes in estimates are made when
circumstances warrant. Such changes in estimates and refinements in estimation
methodologies are reflected in reported results of operations; if material, the
effects of changes in estimates are disclosed in the notes to the consolidated
financial statements. Significant estimates and assumptions by management
affect: the proper recording of revenue arrangements with multiple deliverables,
the allowance for doubtful accounts, the carrying value of long-lived assets,
the amortization period of long-lived assets, the provision for (benefit from)
income taxes and related deferred tax accounts, certain accrued expenses and
contingencies, and the ability to continue as a going concern.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash and highly liquid investments held with
financial institutions, with maturities of three months or less from the date of
acquisition.
Cash-
restricted
The
Company agreed to restrict $2,352,337 in cash at June 30, 2009 and $2,826,290 in
cash at June 30, 2008, to secure letters of credit related to deposits for
leases, provide security for credit card charge backs and to secure fuel
purchases. Management believes that these amounts will be restricted for at
least one year and, accordingly, has classified such cash as
non-current.
Revenue
Recognition
Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use and access to its aircraft fleet
through either 15 or 25 hour charter cards (either individually or through the
Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in 1/16th shares or multiples thereof. The purchase
agreement grants the customer the right to the use of the aircraft for a
specified number of hours each year. When a customer purchases a fractional
share, they are also required to enter into a five-year management and
maintenance agreement. Under the terms of the maintenance and management
agreement, the Company agrees to manage, operate and maintain the aircraft on
behalf of the customer in exchange for a fixed monthly fee. Charter cards
provide customers with flight hours for a fixed fee.
Fractional
Aircraft Shares
The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of the
Emerging Issues Task Force (“EITF”) Issue No. 00-21 “Accounting for Revenue
Arrangements with Multiple Deliverables” to account for the sale of
fractional shares of aircraft. Accordingly, as the sales of the fractional
shares cannot be separated from the underlying maintenance and management
agreement, fractional share sale revenue is recognized ratably over the
five-year life of the maintenance and management agreement. The period in which
revenue is recognized will be evaluated on a periodic basis. Factors that impact
management’s assessment of the most appropriate period of revenue recognition
will include, but not be limited to, customer turnover, terms and conditions of
the related fractional share sale, maintenance arrangements as well as any other
factor that could impact revenue.
Referral
Incentive Hours
The
Company accounts for the additional hours granted under the referral incentive
program by expensing costs as they are incurred. Such costs have not been
material to date.
F-27
Management
and Maintenance Agreement
Revenue
earned in connection with the management and maintenance agreements with
fractional share owners is recognized ratably over the term of the agreement,
usually five years. If a customer prepays its management and maintenance fee for
a period of one year or longer, the prepayment is recorded as unearned revenue
and amortized into revenue on a monthly basis in accordance with the schedule
provided for within each agreement.
Charter Card and
Axis Club Membership Revenue
Charter Card revenue. The
Company also sells access to its aircraft fleet through either a 15 or 25 hour
charter card for flight time without the requirement to purchase an ownership
share in an aircraft. The card holder pays the Company the entire amount in
advance of access to the aircraft fleet. The Company defers the entire amount
paid and recognizes revenue on an incremental basis as aircraft hours are
flown.
Axis Club Membership revenue.
In February 2009, the Company initiated the Axis Club Membership program that
offers customers access to blocks of flight time at a discount from standard
charter card rates for a set, three year membership fee. The program requires
that Axis Club members purchase a minimum of three 25 hour blocks of flight
charter cards over the three year membership term. Axis Club Membership fees are
paid in advance, deferred and recognized over the three year membership term.
Similar to standard charter card sales, payment for charter cards sold through
the Axis Club Membership program are collected in advance of access to the
aircraft fleet, deferred and recognized as revenue on an incremental basis over
the three year membership term.
Other
Revenues
Other
revenues are comprised primarily of revenue from demonstration flights, revenue
from the sale of fuel at the Company’s FBO facilities and revenue from the
rental of hangar space at the Company’s operating locations. Revenue from fuel
sales and hangar rentals are recorded when goods are delivered or services are
rendered. Demonstration revenue is earned as the Company charges prospective
fractional share owners on an hourly basis for each hour the prospective share
owners are flown to demonstrate the quality and capabilities of the aircraft.
The Company recognizes revenue related to these demonstration flights when the
flight is completed.
Aircraft
Costs Related To Fractional Sales
The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of EITF 00-21, the Company recognizes
revenue from the sale of fractional shares as income over the five-year period.
The aircraft costs related to sales of fractional shares consist of the cost of
the aircraft and are recorded as an asset and recognized as the cost of aircraft
shares sold over the five-year period.
Maintenance
Expense Policy
The
Company uses the direct expensing method of accounting for non-refurbishment
aircraft maintenance. Engine maintenance is performed by third parties under
contracts which transfer risk, and related costs are expensed as incurred.
Airframe maintenance is performed in-house and related costs are expensed as
incurred. Refurbishments of the interiors of the aircraft, which extend the life
of the aircraft, are capitalized and amortized over the estimated life of three
years.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. The Company provides an allowance for doubtful accounts
equal to the estimated uncollectible amounts. The Company’s estimate is based on
historical collection experience and a review of the current status of trade
accounts receivable.
Prepaid
Pilot Training
Beginning
in 2008, the costs related to the training of pilots as required by Federal
Aeronautic Regulations are capitalized and amortized over the twelve month
certification period. These costs were expensed in prior years. This change did
not have a material impact on the Company’s financial position or results of
operations as of June 30, 2008.
Customer
Deposits
Customer
deposits are cash payments received from customers who have purchased a
fractional interest in an aircraft where that specific aircraft is not available
for delivery.
Advertising
Costs
Advertising
costs are expensed as incurred and totaled $1,585,184 and $2,260,782 for the
years ended June 30, 2009 and 2008, respectively.
F-28
Inventory
Aircraft
parts inventory is valued at the lower of cost (determined by the first-in,
first-out method) or market.
Deferred
Rent
The
aggregate of minimum annual operating lease payments are expensed on a
straight-line basis over the term of the related leases. The amount by which
straight-line rent differs from actual lease payments is recognized as deferred
rent and totaled $2,312,249 and $2,034,362 at June 30, 2009 and 2008
respectively, and is included in other liabilities.
Income
Taxes
Income
taxes are accounted for under the asset and liability method in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 109 (“SFAS No.
109”), “Accounting
for Income Taxes.” Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established to reduce deferred tax assets to the amounts expected to be
realized.
Effective
July 1, 2007, the Company adopted the provisions of the FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. The Company has identified its federal
tax return and State of Florida tax return as “major” tax jurisdictions, as
defined in FIN 48. The Company evaluations were performed for the tax years
ended 2005 thru 2009 which represent all years subject to audit for all tax
jurisdictions. The Company believes that its income tax positions and deductions
would be sustained on audit and does not anticipate any adjustments that would
result in a material change to its consolidated financial position. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense.
Stock-Based
Compensation
The
Company has one stock-based compensation plan, the 2006 Long Term Incentive
Plan, which the Company’s shareholders approved, for employees, certain
non-employees and non-employee directors. Stock-based awards under this plan may
consist of common stock, common stock units, stock options, cash-settled or
stock-settled stock appreciation rights, restricted stock and other stock-based
awards. The Company issues common stock to satisfy stock option exercises or
vesting of stock awards.
The
Company accounts for share-based compensation to employees and directors in
accordance with SFAS 123(R)
“Share-Based Payment,” which requires the recognition of compensation
expense for employee stock options and other share-based payments. Under SFAS
123(R), expense related to employee stock options and other share-based payments
is recognized over the relevant service period based on the fair value of each
stock option grant. In addition, the Company recognizes in its Consolidated
Statements of Operations the grant-date fair value of stock options and other
equity-based compensation issued to employees and directors. Compensation
expense for equity-based awards is recognized over the requisite service period,
usually the vesting period, on a straight-line basis for the entire award, while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) is measured to fair-value at each balance sheet date until
the award is settled.
Stock-based
compensation expense related to these plans, which is included in “General and
administrative” costs in the accompanying Consolidated Statements of Operations,
was $361,059 and $484,817 for the years ended June 30, 2009 and 2008,
respectively. There were no related income tax benefits recognized in the
accompanying Consolidated Statements of Operations for the year ended June 30,
2009 or for the comparable 2008 period.
Accounting
for Derivative Instruments
The
Company accounts for derivative instruments in accordance with SFAS No.
133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS 133”) as
amended, which establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
imbedded in other financial instruments or contracts. The Company also considers
EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own Stock,” which provides
criteria for determining whether freestanding contracts that are settled in a
company’s own stock, including common stock warrants, should be designated as
either an equity instrument, an asset or as a liability under SFAS 133. The
Company evaluates the conversion feature embedded in its Series A Convertible
Preferred Stock at each reporting period based on the criteria of SFAS 133 and
EITF 00-19 to determine whether the conversion feature would be required to be
bifurcated from the Preferred Stock and accounted for separately as a
derivative. Based on management’s evaluation, the embedded conversion feature
did not require bifurcation and derivative accounting as of June 30,
2009.
F-29
Goodwill
and Long-lived Assets
Goodwill
represents the excess of cost over fair value of net assets acquired through
acquisitions. In accordance with SFAS No. 141, “Business Combinations,” all
business combinations must be accounted for under the purchase method of
accounting. SFAS No. 142,
“Goodwill and Other Intangible Assets,” eliminates the amortization of
goodwill and certain other intangible assets and requires an evaluation of
impairment by applying a fair-value based test. The goodwill impairment test is
a two-step process, which requires management to make judgments in determining
what assumptions to use in the calculation. The first step of the process
consists of estimating the fair value of the Company’s reporting units based on
discounted cash flow models using revenue and profit forecasts and comparing the
estimated fair values with the carrying values of the Company’s reporting units
which include the goodwill. If the estimated fair values are less than the
carrying values, a second step is performed to compute the amount of the
impairment by determining an “implied fair value” of goodwill. The determination
of the Company’s “implied fair value” requires the Company to allocate the
estimated fair value to the assets and liabilities of the reporting unit. Any
unallocated fair value represents the “implied fair value” of goodwill, which is
compared to the corresponding carrying value.
The
Company performs its annual goodwill impairment testing in the fourth quarter of
each year, or more frequently if events or changes in circumstances indicate
that goodwill may be impaired. The Company performed its annual evaluation
during June 2009 by comparing the product of the trading price as of June 30,
2009 and the Company’s outstanding shares of common stock on that date to the
Company’s book value.
Application
of the goodwill impairment test requires significant judgments including
estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of growth for the Company, estimation of
aircraft in use, the useful life over which cash flows will occur, and
determination of cost of capital. Changes in these estimates and assumptions
could materially affect the determination of fair value and/or conclusions on
goodwill impairment.
In
accordance with SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets,” the Company reviews long-lived assets to
be held-and-used for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. If the
carrying amount of an asset exceeds its estimated future undiscounted cash flows
the asset is considered to be impaired. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset.
In
preparing its impairment analysis the Company derives fair value based on two
approaches:
Market
prices. At June 30, 2009, the quoted market for Avantair’s common stock was
$1.15 per share with 16,463,615 shares outstanding giving the Company a total
market capitalization of approximately $18.9 million.
Cash flow
projections. Certain key assumptions used in preparing the cash flow
projections, included:
•
|
The
overall basis for management’s cash flow assumptions and conclusions are
based on the fact that the majority of the Company’s revenue is
contractual and therefore management can predict future management fee
revenues with some certainty. The model is based on the premise that for
every plane sold the Company will increase management fees by an agreed
upon amount per plane. When the Company gets to a certain aircraft fleet
size, the management fee income will then exceed all fixed and variable
costs.
|
•
|
The
Company has a commitment from its aircraft manufacturer for the delivery
of 5 planes in the next 12 months and management believes it will sell
fractional shares and charter cards per month which would produce a cash
flow improvement.
|
As a
result of the analysis, no impairment charges were required for long-lived
assets during the years ended June 30, 2009 and 2008.
Loss
Per Share
Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
For the
year ended June 30, 2009, a total of 1,409,933 share-equivalents of potentially
dilutive securities were excluded from the calculation of diluted earnings per
share. These securities were comprised of 150,000 options to purchase shares of
common stock and 300,000 unit purchase options (with each unit consisting of one
share and two warrants that expire February 23, 2010) which were outstanding
during the periods but were not included in the computation of diluted earnings
per share because the options’ exercise prices were greater than the average
market price of the common shares, and therefore, their effect would be
anti-dilutive as calculated under the treasury method promulgated by SFAS No.
128, Earnings Per
Share (“SFAS 128”). In accordance with SFAS No. 128’s contingently
issuable shares provision, 92,733 shares of performance-based, unvested common
stock awards (“restricted stock”) granted were not included in the calculation
because all the necessary conditions for vesting had not been satisfied. In
addition, 567,200 warrants to purchase shares of the Company’s common stock were
not included in the calculation of diluted earnings per share as they were
antidilutive. A total of 14,496,834 of potentially dilutive securities were
excluded from the calculation of diluted loss per share for the year ended June
30, 2008 and were comprised of 14,146,000 warrants to purchase one share of the
Company’s common stock, 200,834 shares of restricted stock and 150,000
outstanding options.
F-30
Property
and Equipment
Property
and equipment is recorded at cost and consists principally of aircraft purchased
which are not fractionalized and which provide additional capacity to the
Company to meet customer demand. Depreciation and amortization is computed using
the straight-line method over the following useful lives:
Aircraft
|
7 years
|
Office equipment and furniture and fixtures
|
5 - 7 years
|
Flight management software/hardware
|
5 years
|
Vehicles
|
5 years
|
Improvements
|
Lesser of estimated useful life or the term of the lease
|
Expenditures
for maintenance and repairs of property and equipment are expensed as incurred.
Major improvements are capitalized.
The
Company capitalizes interest costs relating to borrowings made for the
acquisition of aircraft. No amounts were capitalized for the years ended June
30, 2009 or 2008. In addition, interest costs totaled $5,942,221 and $3,661,227
for the years ended June 30, 2009 and 2008, respectively.
Reclassifications
Certain
balances for the year ended June 30, 2008 were reclassified to conform to
classifications adopted in the current year.
Recently
Issued Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
141 also requires the fair value measurement of certain other assets and
liabilities related to the acquisition such as contingencies. SFAS 141R applies
prospectively to business combinations and is effective for fiscal years
beginning on or after December 15, 2008. The adoption of SFAS 141R did not have
a material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires
that a non-controlling interest in a subsidiary be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the non-controlling interest with disclosure
of both amounts on the consolidated statement of income. The presentation
provisions of SFAS 160 are to be applied retrospectively, and SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The adoption
of SFAS 160 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 changes
the disclosure requirements for derivative instruments and hedging activities.
The Company will be required to provide enhanced disclosures about (a) how and
why derivative instruments are used, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133, and its related interpretations,
and (c) how derivative instruments and related hedged items affect the Company’s
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 did not have an
impact on the Company’s financial position, results of operations or cash flows
as the pronouncement addresses disclosure requirements only.
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (“FSP 142-3”), “Determination of the Useful Life
of Intangible Assets.” FSP 142-3 amends the factors an entity
should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other
Intangible Assets.” This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. FSP 142-3
is effective for fiscal years and interim periods beginning after December 15,
2008. The adoption of FSP 142-3 did not have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.
F-31
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
are “participating securities” as defined in EITF 03-6, “Participating
Securities and the Two-Class Method under FASB Statement No. 128,”
and therefore should be included in computing earnings per share
using the two-class method. According to FSP EITF 03-6-1, a share-based payment
award is a participating security when the award includes nonforfeitable rights
to dividends or dividend equivalents. The rights result in a noncontingent
transfer of value each time an entity declares a dividend or dividend equivalent
during the award’s vesting period. However, the award would not be considered a
participating security if the holder forfeits the right to receive dividends or
dividend equivalents in the event that the award does not vest. FSP EITF 03-6-1
is effective for financial statements issued in fiscal years beginning after
December 15, 2008, and interim periods within those years. When adopted, its
requirements are applied by recasting previously reported EPS. The adoption of
EITF 03-6-1 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
October 2008, the FASB issued FSP No. FAS 157-3 (“FSP 157-3”), “Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active ,
” which clarifies the application of SFAS 157 as it relates to the valuation of
financial assets in a market that is not active for those financial assets. FSP
157-3 is effective immediately and includes those periods for which financial
statements have not been issued. The Company does not have any financial assets
that are valued using inactive markets, and therefore is not impacted by the
issuance of this standard.
In June
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) issued by an entity is indexed to the entity’s stock, and
therefore, would qualify for the first part of the scope exception in paragraph
11(a) of SFAS 133,
“Accounting for Derivative Instruments and Hedging
Activities.” The EITF proscribes a two-step approach under
which the entity would evaluate the instrument’s contingent exercise provisions
and then the instrument’s settlement provisions, for purposes of evaluating
whether the instrument (or embedded feature) is indexed to the entity’s
stock. This EITF is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The Company is
currently evaluating the requirements of EITF 07-5 and its impact on the
Company’s consolidated financial position, results of operations or cash
flows.
In
November 2008, the FASB issued EITF No. 08-01, “Revenue Arrangements with Multiple
Deliverables. ” EITF
08-01 replaces EITF 00-21, “Revenue Arrangements with Multiple
Deliverables” and enhances the disclosure requirements for separating
disclosing information related to individually significant arrangements and
disclosing the qualitative and quantitative information on an aggregate basis.
This new guidance applies prospectively to revenue arrangements entered into or
materially modified in fiscal years beginning on or after December 15, 2009. The
Company is currently evaluating the requirements of EITF No. 08-01 and its
impact on its financial condition, results of operations and cash
flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This new
pronouncement establishes principles and standards related to the accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. SFAS 165 requires an entity to recognize, in
the financial statements, subsequent events that provide additional information
regarding conditions that existed at the balance sheet date. Subsequent events
that provide information about conditions that did not exist at the balance
sheet date shall not be recognized in the financial statements under SFAS 165.
SFAS 165 is effective for financial statements issued for fiscal years and
interim periods beginning after June 15, 2009. The adoption of SFAS 165 did not
have a material impact on the Company’s consolidated financial statements.
Pursuant to SFAS 165, the Company evaluated subsequent events through September
28, 2009.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 168”) as a replacement of FASB Statement
No. 162. The FASB Accounting Standards Codification (“the Codification”) will
become the source of authoritative U.S. GAAP. The Codification, which changes
the referencing of financial standards, is effective for interim or annual
financial periods ending after September 15, 2009. The Codification is not
intended to change or alter existing U.S. GAAP.
No other
pronouncements have been recently issued that Avantair believes will have a
material impact on Avantair’s financial position and results of
operations.
NOTE
3 – CONCENTRATIONS OF RISK
The
Company acquires all of its aircraft from one supplier and is dependent on that
supplier for timely delivery of its airplanes. Any disruption in the delivery of
these airplanes would cause the Company to incur significant costs without the
benefit and the cash flow it receives from its customers.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company maintains its
cash and cash equivalents in bank deposits, the balances of which, at times, may
exceed federally insured limits. Exposure to credit risk is reduced by placing
such deposits in high credit quality financial institutions. At June 30,
2009, the Company had cash and cash equivalents in excess of federally insured
limits of approximately $5.2 million.
F-32
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment, stated at cost as of June 30, 2009 and 2008 consisted of the
following:
2009
|
2008
|
|||||||
Aircraft
|
$
|
33,630,426
|
$
|
27,300,707
|
||||
Leasehold
improvements
|
4,820,095
|
4,235,476
|
||||||
Furniture,
fixtures and equipment
|
1,301,595
|
1,199,528
|
||||||
Flight
management software/hardware
|
1,727,012
|
1,516,826
|
||||||
Vehicles
|
58,465
|
50,823
|
||||||
Total
|
41,537,593
|
34,303,360
|
||||||
Less:
accumulated depreciation and amortization
|
(11,695,228
|
)
|
(8,640,096
|
)
|
||||
$
|
29,842,365
|
$
|
25,663,264
|
Depreciation
and amortization expense for the years ended June 30, 2009 and 2008 was
$5,233,250 and $3,624,710, respectively.
NOTE 5 – RELATED PARTY
TRANSACTIONS
The
following is a summary of transactions entered into during the years ended June
30, 2009 and 2008, to which the Company has been a party in and in which any of
the Company’s executive officers, directors or beneficial holders of more than
5.0% of its capital stock had or will have a direct or indirect material
interest.
On May 4,
2009 Avantair granted 3,000 shares of restricted stock to each of its six
non-employee directors of the Company’s Board of Directors. The restricted
shares granted to the director’s vest one third upon each of the next three
successive annual meetings, subject to the grantee’s continued service on the
Board of Directors.
In
addition, annually, Avantair participates as one of the sponsors of the
Corporate Directors Group, an accredited educational organization of RiskMetric
ISS Governance Services, of which one of our directors presides as its chairman.
The sponsorship provides the Corporate Directors Group with 23 hours of aircraft
usage annually in lieu of compensation. In addition, the Company sponsors the
Corporate Directors Group Piaggio Avanti Owners Club which provides the club
with 15 hours of aircraft usage annually in lieu of compensation.
Effective
April 11, 2008, the Company’s former Chief Financial Officer departed the
Company and resigned his position as a director of the Company. In connection
with the former Chief Financial Officer’s departure, on April 14, 2008, the
Company entered into a separation agreement pursuant to which the former Chief
Financial Officer received (i) a payment equal to eight months salary
($183,333), (ii) reimbursement of premium payments for COBRA benefits for a
period of eight months commencing April 14, 2008 and (iii) pursuant to
an amendment to his previously issued restricted stock award, 33,334 shares of
common stock. In addition, the former Chief Financial Officer agreed not to
transfer any shares of the Company’s common stock for a period of six months
commencing April 14, 2008. At the end of the six month period, the former
Chief Financial Officer’s unrestricted shares became freely tradable in the open
market, subject to the Company’s “Right of First Refusal” and in compliance with
applicable securities law. In addition, the former Chief Financial Officer
agreed to cooperate fully with the Company’s reasonable requests for assistance
in transitioning his previous responsibilities for a period of eight months
commencing April 14, 2008.
In March
2008, Avantair granted 3,000 shares of restricted stock to each of the then five
non-employee directors of the Company’s Board of Directors. The shares of
restricted stock granted to the directors’ vest one third upon each of the next
3 successive annual meetings of stockholders, subject to the grantee’s continued
service on the Board of Directors.
NOTE
6 – INCOME TAXES
The
difference between income tax benefit provided at the Company’s effective rate
and the statutory rate at June 30, 2009 and 2008 are as
follows:
2009
|
2008
|
|||||||
Income
tax benefit at statutory rate
|
$
|
1,371,282
|
$
|
6,608,723
|
||||
State
tax benefit, net of Federal benefit
|
117,538
|
562,373
|
||||||
Increase
in valuation allowance
|
(1,488,820
|
)
|
(7,123,389
|
)
|
||||
Other
|
-
|
(47,707
|
)
|
|||||
Total
|
$
|
-
|
$
|
-
|
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) at June 30, 2009 and 2008 are
as follows:
F-33
2009
|
2008
|
|||||||
Deferred
tax liabilities
|
||||||||
Goodwill
|
$
|
(173,456
|
)
|
$
|
(144,547
|
)
|
||
Depreciation
|
(2,659,248
|
)
|
(1,798,582
|
)
|
||||
Other
|
-
|
(75,792
|
)
|
|||||
(2,832,704
|
)
|
(2,018,921
|
)
|
|||||
Deferred
tax assets
|
||||||||
Deferred
revenues, net of amortized aircraft costs related to fractional share
sales
|
707,848
|
4,371,790
|
||||||
Other
|
1,240,273
|
1,190,382
|
||||||
Net
operating loss carryforwards
|
31,570,388
|
25,653,733
|
||||||
33,518,509
|
31,215,905
|
|||||||
Less
valuation allowance
|
(30,685,805
|
)
|
(29,196,984
|
)
|
||||
2,832,704
|
2,018,921
|
|||||||
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
The
Company considers that the cumulative losses incurred create a rebuttable
presumption that a full valuation allowance continues to be required for its
deferred tax assets. Therefore, the Company has offset the deferred tax assets
attributable to those potential benefits through a valuation allowance in 2009
and 2008 and, accordingly, the Company did not recognize any benefit from income
taxes in the accompanying consolidated statements of operations. At
June 30, 2009, the Company had net operating loss carryforwards of
approximately $73.8 million which begin to expire in 2019.
Upon the
completion of the Reverse Merger, the Company became subject to Section 382
of the IRS Code relating to a change in ownership. In addition, future changes
in ownership could limit the utilization of the net operating loss carryforward
and may be subject to substantial annual limitation due to the ownership change
limitations provided by the IRS Code of 1986, as amended and similar state
provisions. The annual limitation will result in the expiration of the net
operating loss before utilization.
Effective
July 1, 2007, the Company adopted the provisions of the FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”). There were no unrecognized tax benefits as of July 1,
2008 or as of June 30, 2009. FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. The Company has identified its federal
tax return and State of Florida tax return as “major” tax jurisdictions, as
defined in FIN 48. The Company evaluations were performed for the tax years
ended 2005 thru 2009 which represent all years subject to audit for all tax
jurisdictions. The Company believes that its income tax positions and deductions
would be sustained on audit and does not anticipate any adjustments that would
result in a material change to its consolidated financial position. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense. No interest and penalties were incurred at June 30, 2009
and 2008.
Information
related to the activity of the valuation allowance is as follows:
June 30,
|
||||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$
|
29,196,984
|
$
|
22,073,595
|
||||
Increase
in valuation allowance
|
1,488,821
|
7,123,389
|
||||||
Ending
balance
|
$
|
30,685,805
|
$
|
29,196,984
|
NOTE
7 – COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company conducts a major part of its operations from leased facilities, which
include airplane hangars and administrative offices. The 15 year hangar lease in
Clearwater, Florida expiring in 2020 is classified as an operating lease. The
lease provides for rent allocation credits for the first three years. These
credits have been netted in rental expense on a straight line basis over the
term of the lease. The Company also has a 15 year lease for its fixed based
operation in Camarillo, California expiring in 2021, which is classified as an
operating lease.
Most of
the operating leases contain an option to renew at the then fair rental value
for periods of five to ten years. These options enable the Company to retain use
of facilities in desirable operating areas.
In
addition, the Company leases transportation equipment and data processing
equipment under operating leases expiring during the next three
years.
Total
rent expense for the years ended June 30, 2009 and 2008 was $3,066,479 and
$2,665,797, respectively.
Future
minimum lease payments on these leases are:
F-34
Year Ended June 30,
|
||||
2010
|
$
|
2,572,756
|
||
2011
|
2,578,862
|
|||
2012
|
2,614,835
|
|||
2013
|
2,686,368
|
|||
2014
|
2,779,275
|
|||
Thereafter
|
18,999,302
|
|||
$
|
32,231,398
|
Purchase
Commitment
On June
20, 2008, Avantair assigned its rights and obligations to purchase twenty
Embraer Phenom 100 aircraft positions to Share 100 Holding Co., LLC, a
wholly-owned subsidiary of Avantair. On the same date, Avantair entered into a
membership interest purchase agreement with Executive Air Shares Corporation
(EAS), in which EAS purchased the Class A membership of Share 100 and Avantair
retained the Class B membership. EAS, as Class A member, has the rights and
obligations to purchase the Phenom 100 aircraft with positions one through
eighteen and to fund payment due in connection with these aircraft. EAS paid
Share 100 approximately $2.47 million in connection with these transactions and
made an additional $750,000 capital contribution to Share 100 in December 2008,
all of which was, immediately distributed to Avantair. Avantair, as Class B
member, has the rights and obligations to purchase aircraft positions nineteen
and twenty and to fund payment due in connection with these aircraft. EAS has
the option to purchase aircraft nineteen and twenty, which must be exercised by
October 1, 2010; if exercised, EAS shall reimburse Avantair for all payments
made relative to these aircraft and provide all remaining funds required. In the
event that EAS does not exercise the option to purchase aircrafts nineteen and
twenty by October 1, 2010, Avantair will have the right and obligation to
purchase the nineteenth and twentieth aircraft. If EAS defaults under its
obligations to purchase the aircraft positions, EAS will forfeit all deposits
paid for the undelivered aircraft, including the funds distributed to Avantair.
Avantair will then be responsible for the rights and obligations of the
remaining undelivered aircraft. If Avantair defaults under its obligations
to purchase the last two aircraft positions, any deposits paid by Avantair in
connection with the undelivered Class B Aircraft will be forfeited.
As of
June 30, 2009, Avantair had contractual commitments to purchase 56 additional
Piaggio Avanti II aircraft through 2013. The total commitment, including a
recently proposed price escalation, is valued at approximately $354.0
million.
Legal
Proceedings
From time
to time, the Company is party to various legal proceedings in the normal course
of business. It is expected that these claims would be covered by insurance
subject to customary deductibles. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. At
June 30, 2009, there were no legal proceedings which the Company would
anticipate having a material adverse effect on its financial position, results
of operations or cash flows.
NOTE
8 – CAPITAL LEASE TRANSACTIONS
The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In addition, during the fourth quarter of fiscal year 2009,
the agreement with JMMS matured and therefore has been included in the current
portion of long-term debt on the accompanying condensed consolidated balance
sheet. On December 14, 2009, the Company sold the aircraft to a third party for
$2.9 million and paid the remaining outstanding balance of the purchase price to
JMMS.
On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth Services, Inc. Under the lease agreement,
Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio
P-180 aircraft and holds title to the Aircraft. Midsouth leases the
Aircraft exclusively to Avantair on a five year lease at 15.0% interest per
annum. The monthly lease payments for the term of the lease are
$89,000. At the end of the five year lease, Avantair shall purchase the
Aircraft from Midsouth at the guaranteed residual value in the amount of
approximately $2.3 million. Avantair also has the option to purchase the
Aircraft anytime during the lease term at the then current guaranteed residual
value as set forth on the amortization schedule without
penalty.
In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under SFAS 13, dated as of July 31, 2006 between the Company and
Midsouth. Pursuant to the amendment, the Company is required to pay $74,900
monthly until August 2011, the expiration of the Lease Agreement. In addition,
the Company has agreed to purchase the leased aircraft for approximately $3.0
million from Midsouth within sixty days following the expiration of the term of
the Lease Agreement. The lease, as amended, has been classified as a capital
lease in the accompanying consolidated balance sheet.
F-35
In
April 2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. Hours have been accounted for at their fair value
and are liquidated as hours are flown. Midsouth has the sole option to terminate
the lease at the end of the fifth year of the term and to require the Company to
purchase the leased aircraft for approximately $3.8 million within ninety days
of that date. If this option is not exercised by Midsouth, the lease
will continue for the remaining five years of the term and, at the end of the
ten year lease, the Company will be required to purchase the aircraft from
Midsouth for $0.3 million.
The total
capital lease obligations as of June 30, 2009 are comprised of the
following:
2010
|
$
|
6,566,000
|
||
2011
|
2,808,000
|
|||
2012
|
5,058,000
|
|||
2013
|
3,636,693
|
|||
2014
|
4,472,000
|
|||
Total
minimum payments
|
22,540,693
|
|||
Less
amount representing interest
|
(6,716,353
|
)
|
||
Present
value of minimum lease payments
|
$
|
15,824,340
|
The
capital lease obligations are included in long-term debt in the accompanying
consolidated balance sheets.
NOTE
9 – SHORT-TERM DEBT
Short-term
debt consists of the following as of June 30, 2009 and 2008:
2009
|
2008
|
|||||||
Midsouth
Services, Inc
|
$
|
11,500,000
|
$
|
10,575,260
|
||||
Century
Bank, F.S.B.
|
-
|
5,200,000
|
||||||
11,500,000
|
15,775,260
|
Midsouth
Services, Inc
On
October 3, 2007, the Company entered into a floor plan agreement with Midsouth
Services, Inc. (“Midsouth”) which provided for up to approximately $5.1 million
of financing for aircraft to be acquired from Piaggio America, Inc., extended on
a month-to-month basis from April 2008 and repaid in July 2008. Effective March
3, 2008, the Company entered into a second floor plan agreement with Midsouth
that provided for up to $5.3 million of financing for aircraft to be acquired
from Piaggio America, Inc. for the six month period commencing with the first
delivery of aircraft under the plan. Each agreement required a $75,000 monthly
facility fee with payment of any outstanding borrowings due in full prior to
taking delivery of additional aircraft. Midsouth also agreed, at the option of
the Company, to provide an additional loan in the amount of $5.3 million, with
terms and conditions of the additional loan substantially similar to the terms
of the March 2008 loan, upon expiration of the October 3, 2007 floor plan
agreement.
On July
31, 2008, the Company entered into two new Floor Plan Finance Agreements (each,
an “Agreement” and collectively "the Agreements"), pursuant to which MidSouth
has agreed to extend credit to the Company in an amount not to exceed $5,345,000
under each Agreement ($10,690,000 in total for the Agreements), for an initial
term of three months for each Agreement. Indebtedness under the Agreements was
used by the Company to fund the purchase of new Piaggio P-180 aircraft. The
Company renewed the Agreements for three consecutive additional one month terms
at the expiration of the initial term and on a month-to-month basis thereafter.
The effective dates of the two Agreements are July 31, 2008, and August 1, 2008,
respectively. The Company has agreed to pay to the Lender a monthly
facility fee of $75,000 under each Agreement. In connection with the entry into
the Agreements, on July 31, 2008, the Company terminated the prior Floor Plan
Finance Agreements dated March 3, 2008 and October 3, 2007 between the Company
and Midsouth.
On
November 18, 2008, the Company entered into an aircraft deposit agreement with
MidSouth, for a term of twelve months, which provides for up to approximately
$0.6 million of financing for the payment to the aircraft manufacturer of
deposits on future deliveries. As consideration for providing the deposit for
the aircraft during the term of this agreement, the Company has agreed to pay
MidSouth a monthly transaction fee of $9,000 commencing December 2008.
Borrowings outstanding under this arrangement at June 30, 2009 totaled $0.5
million.
Further
on April 2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth
Services, Inc. (“Midsouth”) to replace Midsouth’s existing Floor Plan Agreements
dated July 31, 2008. The new Floor Plan Agreements extend credit to
Avantair in an increased amount of $11.6 million to be used towards the purchase
of a new Piaggio P-180 aircraft. Each of the new Floor Plan
Agreements is similar to the prior Floor Plan Agreements and covers an amount
not to exceed $5.8 million for a term of twelve months. The Company
has the sole option to terminate one of the Agreements during the term with
ninety days written notice. The Company has agreed to pay Midsouth a
monthly fee of $82,500 for each Floor Plan Agreement during the
term.
F-36
Century
Bank, F.S.B.
On May
29, 2008, the Company entered into a Promissory Note (“Note”) with Century Bank,
F.S.B. (“Lender”), pursuant to which Lender agreed to provide financing to the
company in the amount of $5.2 million to be used towards the purchase of a new
Piaggio P-180 aircraft. The Company paid the following fees for the Note: (1)
$37,500 on the effective date of the Note and (2) $75,000 on the 30th day of the
each month thereafter until repayment in full of the principal amount of the
Note (“Term”). In July 2008, the Company repaid the full amount of the Note with
Century Bank, F.S.B. and paid a fee of $26,000, constituting 0.5% of the
principal balance.
On
January 9, 2009, the Company entered into a new Note with the Lender, pursuant
to which Lender agreed to provide financing to the Company in the amount of $5.2
million to be used towards the purchase of new Piaggio P-180 aircraft. The
Company paid the following fees for the Note: (1) $75,000 on the
effective date of the Note and (2) $75,000 on the 9th day of each month
thereafter until repayment in full of the principal amount of the
Note. The principal amount of the Note shall be paid in full within
120 days from the effective date of the Note. The Company made
partial payments to Lender in $325,000 increments upon the closing of each
fractional interest and Lender provided partial lien releases as to the
respective fractional interests sold. In June 2009, the Company repaid the
full amount of a promissory note issued to Century Bank, F.S.B and paid a fee of
$26,000, constituting 0.5% of the principal balance.
NOTE
10 – LONG- TERM DEBT
Long-term
debt consists of the following as of June 30, 2009 and 2008:
2009
|
2008
|
|||||||
Wells
Fargo Equipment Finance, Inc.
|
$
|
3,095,512
|
$
|
3,488,042
|
||||
CNM,
Inc.
|
3,616,652
|
6,968,036
|
||||||
Jet
Support Services, Inc.
|
3,707,209
|
5,461,540
|
||||||
JMMS,
Inc.
|
3,640,810
|
4,347,058
|
||||||
Century
Bank, F.S.B.
|
1,911,203
|
2,082,804
|
||||||
Wachovia
Bank
|
2,976,685
|
3,534,814
|
||||||
Midsouth
Services, Inc
|
12,183,530
|
4,622,121
|
||||||
31,131,601
|
30,504,415
|
|||||||
Less
current portion
|
(11,020,590
|
)
|
(6,648,093
|
)
|
||||
Long-term
debt
|
$
|
20,111,011
|
$
|
23,856,322
|
Wells
Fargo Equipment Finance, Inc.
In
February 2005, the Company entered into financing arrangements for the purchase
of three core aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid
the outstanding balance on the related note payable. The notes outstanding at
June 30, 2009 totaled approximately $3.1 million and are payable in monthly
installments ranging from $10,644 to $38,480 with interest ranging from 5.96% to
6.12% per annum, through 2012. The notes are collateralized by the
aircraft.
CNM,
Inc.
In August
2007, the Company and CNM executed a new note agreement which converted an
outstanding note obligation of approximately $7.0 million into a term loan
payable monthly over three years and bearing interest at 10.0% per annum.
The Company accounted for this conversion in accordance with EITF Issue
No. 98-14, “Debtor’s
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements.”
CNM also assumed a promissory note due to Wells Fargo Bank for $2.9
million which was included as part of this new note agreement. Borrowings
outstanding under these arrangements at June 30, 2009 totaled approximately $3.6
million.
Jet
Support Services, Inc.
On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI
balance of the original note by means of a $5.5 million promissory note. The new
note matures on April 1, 2011 and bears interest at the rate of
10.0% per annum, with 35 monthly payments of principal and interest in an
amount of $185,127 beginning on June 2, 2008. The note covers the balance
of the aforementioned $3.4 million promissory note, other costs and fees to be
paid by the Company under service agreements with JSSI and related deferred
financing costs of approximately $1.0 million which will be amortized over the
life of the note using the effective interest method. Upon entering into this
arrangement and the $5.5 million promissory note, the parties terminated the
airframe maintenance contract and have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program. Borrowings outstanding under this
arrangement at June 30, 2009 totaled approximately $3.7
million.
F-37
In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constituted payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.
JMMS,
Inc.
On
August 11, 2006, the Company entered into a sale and leaseback agreement
with JMMS, LLC (“JMMS”). The lease transaction has been accounted for as finance
lease and provides for monthly payments of $39,500 through July 11, 2011
(See Note 8). In addition, during the year, the agreement with JMMS matured
and therefore has been included in the current portion of long-term debt on the
accompanying consolidated balance sheet.
Century
Bank, F.S.B.
In August
2007, the Company and Century Bank F.S.B. executed a $2.2 million note agreement
for the purchase of one aircraft. The note outstanding at June 30, 2009 totaled
approximately $1.9 million and is payable in monthly installments of $27,175
with interest of 8.25% per annum, through August 3, 2012. The note is
collateralized by the aircraft.
Wachovia
Bank
On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a charter card of 100 hours). Financing was
obtained from Wachovia through a note payable of $3.9 million. The note is
collateralized by the aircraft and requires the Company to maintain certain
financial covenants. This debt will be repaid monthly over 7 years at an
interest rate of the LIBOR rate plus 4.0%. Borrowings outstanding under this
arrangement at June 30, 2009 totaled approximately $3.0 million. During
September 2009, the Company received a waiver of compliance with a financial
covenant in connection with the note.
Midsouth
Services, Inc.
On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth Services, Inc (See Note 8).
On April
2, 2009, the Company entered into two additional lease transactions with
Midsouth. The lease transactions have been accounted for as capital leases (See
Note 8).
Future
minimum payments on long- term debt in years subsequent to June 30, 2009
are as follows:
Year Ended June 30,
|
||||
2010
|
$
|
11,020,590
|
||
2011
|
3,740,793
|
|||
2012
|
6,816,198
|
|||
2013
|
4,778,576
|
|||
2014
|
4,589,401
|
|||
Thereafter
|
186,043
|
|||
$
|
31,131,601
|
NOTE
11 – CAPITAL STOCK
General: The Company’s
authorized capital stock consists of 76 million shares of all classes of capital
stock, of which 75 million are shares of common stock, par value, $0.0001 per
share, and 1 million are shares of preferred stock, par value of $0.0001 per
share.
F-38
Common Stock: The holders of
shares of Avantair’s common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Subject to the preferences and rights, if any, applicable to the shares
of preferred stock, the holders of the shares of common stock are entitled to
receive dividends if and when declared by the Board of Directors. Subject to the
prior rights of the holders, if any, of the preferred shares, the holders of the
Company’s shares of common stock are entitled to share ratably in any
distribution of its assets upon liquidation, dissolution or winding-up, after
satisfaction of all debts and other liabilities. As of June 30, 2009, the
Company had 16,463,615 shares of its common stock outstanding and 1,133,166
shares of common stock available for future issuance under the Company’s 2006
Long-Term Stock Incentive Plan. As of June 30, 2009, the Company has 152,000
shares of Series A Preferred Shares outstanding. The Company has 3,088,898
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares. As a result
of the sale of units consummated on June 30, 2009, the conversion price of the
Series A Preferred Shares was reduced from $5.15 to $4.92. As a
result of additional sales of units, on September 25, 2009, the conversion price
of the Series A Preferred Shares was further reduced from $4.92 to $4.83 and the
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares increased to 3,147,042.
The remaining shares of authorized and unissued common stock will be available
for future issuance without additional stockholder approval (subject to
applicable securities laws and the rules of any securities market or exchange on
which our common stock is quoted at the time). While the additional shares are
not designed to deter or prevent a change of control, under some circumstances
we could use the additional shares to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control by, for example,
issuing those shares in private placements to purchasers who might side with our
Board of Directors in opposing a hostile takeover bid.
Series A Convertible Preferred
Stock: Shares of preferred stock may be issued from time to time in one
or more series and the Company’s Board of Directors, without approval of the
stockholders, is authorized to designate series of preferred stock and to fix
the rights, privileges, restrictions and conditions to be attached to each such
series of shares of preferred stock. The issuance of shares of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of holders of the Company’s shares of common stock. As of June 30, 2009, the
Company has 152,000 shares of Series A Convertible Preferred Stock outstanding.
The terms of the Series A Convertible Preferred Stock are set forth in a
Certificate of Designations filed November 14, 2007 with the State of Delaware.
Pursuant to such Certificate of Designations, the shares of Series A Convertible
Preferred Stock (a) will rank senior to all currently outstanding classes of
stock of the Company with respect to liquidation and dividends, (b) will be
entitled to receive a cash dividend at the annual rate of 9.0%, payable
quarterly (with such rate being subject to increase up to a maximum of 12.0% if
such dividends are not timely paid), (c) will be convertible into shares of the
Company’s common stock at any time at the option of the Investors based on an
adjusted conversion price of $4.83 per share (subject to adjustment), (d) may be
redeemed by the Company following the seventh anniversary of the issuance of the
shares of Series A Convertible Preferred Stock, (e) may be redeemed by the
Company in connection with certain change of control or acquisition
transactions, (f) will be redeemed by the Company following the ninth
anniversary of the issuance of the shares of Series A Convertible Preferred
Stock, upon receipt of the written consent of the holders of a majority of the
then outstanding shares of Series A Convertible Preferred Stock (g) will vote on
an as-converted basis with the Company’s Common Stock and (h) will have a
separate vote over certain material transactions or changes which the Company
may wish to effect. The Company paid its investment adviser 5.0% of the gross
proceeds of this preferred financing.
Registration of shares: On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. Each unit consisted of two shares of common stock and one warrant to
purchase one common share. The warrants have an exercise price of $4.00 per
share and are exercisable until June 30, 2012. The sale was consummated under
the terms of a Securities Purchase Agreement between Avantair and each of the
investors. Pursuant to a registration rights agreement, Avantair has agreed to
use it best efforts to register the shares issued to the investors and the
shares underlying the warrants issued to the investors for sale under the
Securities Act of 1933, as amended. By agreement between Avantair, the investors
in the June 30, 2009 private placement and that offering’s placement agent, the
period for additional sales of units was extended until October 15, 2009. On
September 25, 2009, the Company sold an additional 250,000 units at a price of
$2.50 per unit generating net proceeds of approximately $0.6
million.
NOTE
12 – STOCK-BASED COMPENSATION
Stock
Options
The
Company issues stock-based compensation to its officers, directors, employees
and consultants under its 2006 Long Term Incentive Plan (the “Plan”). There are
1,500,000 shares authorized under the Plan. The term of stock options granted
are determined by the Compensation Committee not to exceed 10 years.
Additionally, the term of the stock grants is limited to five years if the
grantee owns in excess of 10.0% of the stock of the Company at the time of the
grant. The vesting provisions of individual options may vary but in each case
will generally provide for vesting of at least 33.0% per year of the total
number of shares subject to the option. The exercise price and other terms and
conditions of stock options will be determined by the Compensation Committee at
the time of grant. The exercise price per share may not be less than 100 percent
of the fair market value of a share of the Company’s common stock on the date of
the grant.
Upon
adoption of the Plan in February 2007, the Company granted 150,000 stock options
to certain non-employee members of the board of directors which resulted in
$145,321 and $151,339 of stock-based compensation expense during the years ended
June 30, 2009 and 2008, respectively, included in general and
administrative expenses on the accompanying consolidated statement of
operations. All options granted under the Plan are accounted for in accordance
with SFAS 123R.
F-39
A summary
of options activity for the year ended June 30, 2009 is presented
below:
|
Shares
|
Weighted Average
Exercise Price
|
Weighted Average
Fair Value
|
|||||||||
Options
Outstanding as of July 1, 2008
|
150,000
|
$
|
5.34
|
$
|
1.15
|
|||||||
Granted
|
—
|
—
|
—
|
|||||||||
Exercised
|
—
|
—
|
—
|
|||||||||
Forfeited
and Expired
|
—
|
—
|
—
|
|||||||||
Options
Outstanding, June 30, 2009
|
150,000
|
$
|
5.34
|
$
|
1.15
|
|||||||
Vested
and expected to vest, June 30, 2009
|
135,000
|
$
|
5.34
|
$
|
1.15
|
|||||||
Exercisable,
June 30, 2009
|
100,000
|
$
|
5.34
|
$
|
1.15
|
Stock Options Outstanding
|
Stock Options Exercisable
|
||||||||||||||||||||||||||||||||
Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Shares
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|||||||||||||||||||||||||
$
|
5.34
|
150,000
|
3.25
|
$
|
5.34
|
$
|
—
|
100,000
|
3.25
|
$
|
5.34
|
$
|
—
|
The fair
value of each stock option grant to employees is estimated on the date of grant.
A Black-Scholes option-pricing model, applying the following weighted average
assumptions, was used to estimate the fair value for employee stock options
issued:
Year ended June 30,
2007
|
||||
Dividend
yield
|
0.00
|
%
|
||
Expected
volatility
|
60.68
|
%
|
||
Risk-free
rate
|
4.67
|
%
|
||
Expected
life of options
|
6
years
|
Due to
its limited history, the Company has estimated expected volatility based on the
historical volatility of certain companies as determined by management. The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected term of the Company’s employee stock options. The
dividend yield assumption is based on the Company’s intent not to issue a
dividend under its dividend policy. The expected term is based on the simplified
method in accordance with Staff Accounting Bulletin No. 107 “Share Based
Payment.”
As of
June 30, 2009, there was $94,360 of total deferred compensation cost
related to options issued to non-employee board members that will be recognized
in expense over the remaining vesting period of 0.65 years.
In May
2009, the Company issued 18,000 shares of restricted common stock the certain
non-employee members of its Board of Directors. One-third of the 18,000 shares
awarded in May 2009 will vest upon each of the next three successive annual
meetings, subject to the grantee’s continued service on the Board of Directors.
Compensation expense related to this restricted stock is recognized ratably over
the three years based on the fair value of the shares at date of grant, which
was $1.75 per share. As of June 30, 2009, the Company had 92,733 shares of
restricted stock and 150,000 stock options outstanding. The Company did not
issue stock options during the year ended June 30, 2009.
Restricted
Shares
The
Company expenses restricted shares granted in accordance with the provisions of
SFAS 123(R). The fair value of the restricted shares issued is amortized on a
straight-line basis over the vesting period of three years. The expense
associated with the awarding of restricted shares for the years ended
June 30, 2009 and 2008 is $215,735 and $333,478, respectively, which is
included in general and administrative expense on the accompanying consolidated
statement of operations. As of June 30, 2009, $247,284 of deferred
compensation cost related to restricted stock will be charged to operations over
the next three years.
The
following table summarizes information concerning nonvested restricted
shares:
Shares
|
Weighted Average
Fair Value
|
|||||||
Restricted
Shares Balance at June 30, 2008
|
200,834
|
$
|
4.90
|
|||||
Granted
|
18,000
|
1.75
|
||||||
Forfeited/cancelled
|
(2,000
|
)
|
4.90
|
|||||
Vested
|
(124,101
|
)
|
4.80
|
|||||
Restricted
Shares Balance at June 30, 2009
|
92,733
|
NOTE 13 –
WARRANTS
On
November 14, 2008, the Company commenced a warrant retirement program, which
offered the holders of its publicly traded warrants the outstanding the
opportunity to purchase 14,146,000 shares of common stock on an amended term for
a limited time. Pursuant to a tender offer that expired on December 12, 2008,
the Company announced the completion of the warrant retirement program. Under
the tender offer, no warrants were exercised and the Company decided not to
extend the offer. The original terms of the warrants were reinstituted and the
warrants expired on February 23, 2009.
F-40
In
addition, options to purchase a total of 300,000 units at an exercise price of
$9.90 per unit (with each unit consisting of one share of common stock and two
warrants, each to purchase one share of Company common stock at an exercise
price of $6.25 per share) were sold in connection with the underwriting of its
initial public offering and will expire on February 23, 2010.
On
June 30 and September 25, 2009, Avantair sold 567,200 and 250,000 units,
respectively, at a price of $2.50 per unit to investors in a private placement.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants have an exercise price of $4.00 per share and are
exercisable until June 30, 2012. The sale was consummated under the terms of a
Securities Purchase Agreement between Avantair and each of the investors.
Pursuant to a registration rights agreement, Avantair has agreed to use it best
efforts to register the shares issued to the investors and the shares underlying
the warrants issued to the investors for sale under the Securities Act of 1933,
as amended. Upon effectiveness of the registration statement, the issuance of
shares of common stock will be available upon exercise of the Company’s
outstanding publically traded warrants. The warrants are issued in registered
form under a warrant agreement between Continental Stock Transfer & Trust
Company, as warrant agent, and Avantair, Inc. The exercise price and number of
shares of common stock issuable on exercise of the warrants may be adjusted in
certain circumstances including in the event of a stock dividend, or Avantair’s
recapitalization, reorganization, merger or consolidation. However, the warrants
will not be adjusted for issuances of common stock at a price below their
respective exercise prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price, by certified check
payable to Avantair, for the number of warrants being exercised. The warrant
holders do not have the rights or privileges of holders of common stock or any
voting rights until they exercise their warrants and receive shares of common
stock. After the issuance of shares of common stock upon exercise of the
warrants, each holder will be entitled to one vote for each share held of record
on all matters to be voted on by stockholders.
No
warrants will be exercisable unless at the time of exercise a prospectus
relating to common stock issuable upon exercise of the warrants is current and
the common stock has been registered or qualified or deemed to be exempt under
the securities laws of the state of residence of the holder of the warrants.
Under the terms of the warrant agreement, we have agreed to meet these
conditions and use our best efforts to maintain a current prospectus relating to
common stock issuable upon exercise of the warrants until the expiration of the
warrants.
NOTE
14 – RETIREMENT PLAN
Defined
Contribution Plan
The
Company has a 401(k) Profit Sharing Plan (the “401(k) Plan”) available for
substantially all employees. Employees may contribute up to the annual Internal
Revenue Service dollar limit. Company contributions to the 401(k) Plan are at
the discretion of the Company. The Company has not made any discretionary profit
sharing employer contributions to the 401(k) Plan to date.
NOTE
15 – VENDOR SERVICE REIMBURSEMENT
In
January 2009, the Company replaced a former engine service vendor with another
nationally recognized, FAA certified engine maintenance vendor. The service
contracts with both the former and successor engine service vendors transferred
risk. Accordingly, the Company’s policy for engine maintenance is to record the
expense as incurred. As a result of the termination of the arrangement with the
former service provider, the Company realized a $2.9 million reduction in
maintenance expense which was credited to cost of flight operations during the
third quarter of fiscal year 2009, of which approximately $2.0 million of the
credit was related to expenses recorded in the first six months of fiscal year
2009.
NOTE
16 – SUBSEQUENT EVENTS
The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In addition, during the fourth quarter of fiscal year 2009,
the agreement with JMMS matured and therefore has been included in the current
portion of long-term debt on the accompanying condensed consolidated balance
sheet. On December 14, 2009, the Company sold the aircraft to a third party for
$2.9 million and paid the remaining outstanding balance of the purchase price to
JMMS.
F-41
In
addition, on June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per
unit to investors in a private placement, generating net proceeds of
approximately $1.3 million. Each unit consisted of two shares of common stock
and one warrant to purchase one common share. The warrants had an exercise price
of $4.00 per share and were exercisable until June 30, 2012. The sale was
consummated under the terms of a Securities Purchase Agreement between Avantair
and each of the investors. Pursuant to a registration rights agreement, Avantair
has agreed to use it best efforts to register the shares issued to the investors
and the shares underlying the warrants issued to the investors for sale under
the Securities Act of 1933, as amended. By agreement between Avantair, the
investors in the June 30, 2009 private placement and that offering’s placement
agent, the stock offering was extended until October 15, 2009. On September 25,
2009, the Company sold an additional 250,000 units at a price of $2.50 per unit
generating net proceeds of approximately $0.6 million.
On July
15, 2009, the Company entered into a Promissory Note with BRMR, LLC (BRMR) and
Dalewood Associates LP (Dalewood) in the amount of $1.0 million (with each of
BRMR and Dalewood funding $0.5 million) to cover the costs of a portion of the
unsold inventory of fractional ownership interests in one of its aircraft. The
terms of the note were thirty days at an interest rate of one percent and two
percent through the September 14, 2009 date of repayment. Pursuant to the terms
of this transaction, the Company paid BRMR and Dalewood a total of a one percent
origination fee, as well as provided BRMR with a twenty-five flight hour charter
card.
F-42
11,425,307
Shares of Common Stock
AVANTAIR,
INC.
Prospectus
[ ]
No
dealer, salesperson or any person is authorized to give any information or make
any representations in connection with this offering other than those contained
in this prospectus and, if given or made, the information or representations
must not be relied upon as having been authorized by us. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the securities offered by the prospectus, or an offer to
sell or a solicitation of an offer to buy any securities by anyone in any
jurisdiction in which the offer or solicitation is not authorized or is
unlawful.
Dealer
Prospectus Delivery Obligation
Until
[ ],
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the Company’s estimates (other than the SEC
registration fee) of the expenses in connection with the sale and distribution
of the securities being registered, all of which will be paid by the
Company.
Item
|
Amount
|
|||
SEC
registration fee
|
$
|
1,020
|
*
|
|
Legal
fees and expenses
|
$
|
30,000
|
*
|
|
Accounting
fees and expenses
|
$
|
15,000
|
*
|
|
Printing
fees and expenses
|
$
|
5,000
|
*
|
|
Miscellaneous
fees and expenses
|
$
|
700
|
*
|
|
Total
|
$
|
51,720
|
*
|
Item
14. Indemnification of Directors and Officers
Section
102 of the Delaware General Corporation Law (“DGCL”), as amended, allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section
145 of the DGCL provides, among other things, that the company may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the company) by reason of the fact that the person
is or was a director, officer, agent or employee of the company or is or was
serving at the company’s request as a director, officer, agent or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys’ fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the company as well
but only to the extent of defense expenses (including attorneys’ fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to the company, unless the court believes that in light of all the
circumstances indemnification should apply.
Section
174 of the DGCL provides, among other things, that a director, who willfully or
negligently approves of an unlawful payment of dividends or an unlawful stock
purchase or redemption, may be held liable for such actions. A director who was
either absent when the unlawful actions were approved or dissented at the time,
may avoid liability by causing his or her dissent to such actions be entered in
the books containing the minutes of the meetings of the board of directors at
the time such action occurred or immediately after such absent director receives
notice of the unlawful acts.
Article
Eight of the Company’s Amended and Restated Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, to the fullest extent permitted by the DGCL.
The
indemnification provision contained in the Amended and Restated Company’s
Certificate of Incorporation is not exclusive of any other rights to which a
person may be entitled by law, agreement, vote of stockholders or disinterested
directors or otherwise. In addition, the Company maintains insurance on behalf
of its directors and executive directors or officers insuring them against any
liability asserted against them in their capacities as directors or officers or
arising out of such status. The foregoing descriptions are only general
summaries. For additional information we refer you to the full text of our
Amended and Restated Certificate of Incorporation filed on December 5, 2006 as
an Exhibit to our current report on Form 8-K which we incorporate by reference
with this filing.
Item
15. Recent Sales of Unregistered Securities.
On
October 2, 2006, the Company signed the Purchase Agreement with certain
stockholders of Old Avantair. The Purchase Agreement provided for the Company to
issue 6,684,822 shares of common stock to the stockholders of Old Avantair in
exchange for all of the issued and outstanding shares of Old Avantair. These
shares were issued without registration under the Securities Act by reason of
the exemption from registration afforded by the provisions of Section 4 (2)
thereof, as a transaction by an issuer not involving any public offering. The
Purchase Agreement also provided for the Company to issue to the stockholders of
Old Avantair an additional 954,975 shares in fiscal year 2007 and 4,774,873
shares in fiscal year 2008, if certain financial milestones are achieved. The
milestones were not achieved in either period and therefore the Company did not
issue additional shares of stock to the stockholders of Old
Avantair.
II-1
On
November 14, 2007, pursuant to the terms of the Preferred Stock Purchase
Agreement, dated November 14, 2007, by and among Avantair, Hummingbird Microcap
Value Fund, Hummingbird Concentrated Fund LP, Hummingbird Value Fund LP, Hound
Partners, LP and Hound Partners Offshore Fund, LP, Avantair issued 112,000
shares of its newly-created Series A Convertible Preferred Stock for an
aggregate purchase price of $11,200,000. The shares of Series A Convertible
Preferred Stock issued under the Preferred Stock Purchase Agreement were not
registered under the Securities Act of 1933, as amended, and bear restrictive
legends that reflect this status. The securities were issued in a private
placement in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. Avantair did not engage in any
general solicitation or advertisement for the issuance of these securities.
These securities were purchased by a total of five (5) investors, which are
comprised of two groups of affiliated entities. In connection with this
issuance, each of the investors represented that (i) it is an accredited
investor as this term is defined in Regulation D under the Securities Act, (ii)
the securities it is acquiring cannot be resold except pursuant to a effective
registration under the Securities Act or in reliance on an exemption from the
registration requirements of the Securities Act, and that the certificates
representing such securities bear a restrictive legend to that effect and (iii)
it intends to acquire the securities for investment only and not with a view to
the sale thereof. These shares were issued without registration under the
Securities Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as a transaction by an issuer not involving
any public offering.
On
December 5, 2007, pursuant to the terms of the Preferred Stock Purchase
Agreement, dated December 5, 2007, by and among Avantair, Potomac Capital
Partners LP, Pleiades Investment Partners R LP and Potomac Capital International
Ltd., Avantair issued 40,000 shares of its newly-created Series A Convertible
Preferred Stock for an aggregate purchase price of $4,000,000. The shares of
Series A Convertible Preferred Stock issued under the Preferred Stock Purchase
Agreement were not registered under the Securities Act of 1933, as amended, and
bear restrictive legends that reflect this status. The securities were issued in
a private placement in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended. Avantair did not engage
in any general solicitation or advertisement for the issuance of these
securities. These securities were purchased by a total of three (3) investors,
which are comprised of one group of affiliated entities. In connection with this
issuance, each of the investors represented that (i) it is an accredited
investor as this term is defined in Regulation D under the Securities Act, (ii)
the securities it is acquiring cannot be resold except pursuant to a effective
registration under the Securities Act or in reliance on an exemption from the
registration requirements of the Securities Act, and that the certificates
representing such securities bear a restrictive legend to that effect and (iii)
it intends to acquire the securities for investment only and not with a view to
the sale thereof. These shares were issued without registration under the
Securities Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as a transaction by an issuer not involving
any public offering.
The
terms of the Series A Convertible Preferred Stock are set forth in a Certificate
of Designations filed November 14, 2007 with the State of Delaware. Pursuant to
such Certificate of Designations, the shares of Series A Convertible Preferred
Stock (a) will rank senior to all currently outstanding classes of stock of the
Company with respect to liquidation and dividends, (b) will be entitled to
receive a cash dividend at the annual rate of 9.0%, payable quarterly (with such
rate being subject to increase up to a maximum of 12.0% if such dividends are
not timely paid), (c) will be convertible into shares of the Company’s common
stock at any time at the option of the Investors based on a conversion price of
$5.15 per share (subject to adjustment), (d) may be redeemed by the Company
following the seventh anniversary of the issuance of the shares of Series A
Convertible Preferred Stock, (e) may be redeemed by the Company in connection
with certain change of control or acquisition transactions, (f) will be redeemed
by the Company following the ninth anniversary of the issuance of the shares of
Series A Convertible Preferred Stock, upon receipt of the written consent of the
holders of a majority of the then outstanding shares of Series A Convertible
Preferred Stock (g) will vote on an as-converted basis with the Company’s Common
Stock and (h) will have a separate vote over certain material transactions or
changes which the Company may wish to effect. The Company paid its investment
adviser 5.0% of the cash amount of this preferred financing.
On
November 14, 2008, the Company commenced a warrant retirement program, which
offered the holders of its 13,800,000 publically traded warrants the opportunity
to exercise those warrants on an amended term for a limited time. The Company
modified the 13,800,000 warrants to reduce the per-share exercise price from
$5.00 to $2.75. In addition, for each warrant exercised by a holder at the
reduced exercise price, the holder would have had the option to engage in a
cashless exercise by exchanging ten additional warrants for one additional share
of common stock. Warrants tendered for cashless exercise may only be tendered in
groups of ten and no fractional shares were to be issued for odd lots of nine or
less. Pursuant to a tender offer that expired on December 12, 2008, the Company
announced the completion of the warrant retirement program. Under the tender
offer, no warrants were exercised and the Company decided not to extend the
offer. The original terms of the warrants were reinstituted and the warrants
expired on February 23, 2009.
On
October 16, 2009, Avantair, Inc. (the “Company” or “Avantair”) entered into a
Securities Purchase and Exchange Agreement (the “Purchase Agreement”) with the
investors party thereto (the “Investors”) in connection with a PIPE (Private
Investment in a Public Entity) financing. Pursuant to the Purchase
Agreement, certain new investors purchased 8,818,892 shares of common stock in a
private placement for gross proceeds of approximately $8.4 million, or $10.4
million when combined with the proceeds of two prior placements consummated in
June and September 2009. The Company intends to use the net proceeds
from this financing transaction to retire approximately $6.0 million of debt,
for working capital and general corporate purposes.
II-2
Under the
terms of the Purchase Agreement, Avantair sold 8,818,892 shares of common stock
to the new investors at a price per share of $0.95. In addition,
pursuant to the Purchase Agreement, the Company exchanged the 817,200
outstanding warrants that had been issued to existing investors in the two prior
private placements for an aggregate of 516,127 shares of common
stock. The Purchase Agreement terminated the purchase agreement and
registration rights agreement entered into in connection with the June and
September 2009 private placements. The securities were issued in a
private placement in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, and Section 3(a)(9)
under the Securities Act of 1933, as amended. Avantair did not engage in any
general solicitation or advertisement for the issuance of these
securities.
On
October 16, 2009, pursuant to an agreement between EarlyBirdCapital, Inc. and
the Company, in consideration for services rendered as placement agent for the
Company’s June, September and October 2009 private placements, the Company
issued to EarlyBirdCapital, Inc. and its affiliates 455,887 fully vested
warrants which expire on June 30, 2012. Each warrant permits the holder to
purchase one share of the Company’s common stock at an exercise price of $1.05
per share. The shares issuable upon exercise of the warrants are entitled to
registration rights under the October 2009 Registration Rights Agreement. The
Company may redeem the warrants at any time on or after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 200.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The fair value of the warrants (which will be completed in
connection with the preparation of the Company’s financial statements for the
quarter ended December 31, 2009) will be charged to additional paid-in
capital.
During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company. Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour.
The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The
Company will account for the LW Air transaction and the issuance of the warrants
by recording the charges paid to the owner (including the fair value of the
warrants which will be completed in connection with the preparation of the
Company’s financial statements for the quarter ended December 31, 2009) to the
Cost of Flight Operations on a straight-line basis ratably over the initial term
of the agreement.
Item
16. Exhibits
The
Exhibits listed on the Exhibit Index of this Registration Statement are filed
herewith or are incorporated herein by reference to other filings.
Item
17. Undertakings
The
undersigned Registrant hereby undertakes:
(a)
|
1.
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
i.
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
II-3
ii.
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20.0% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration
statement.
|
iii.
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
Provided
however, that:
A.
|
Paragraphs
(a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration
statement is on Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports filed
with or furnished to the Commission by the registrant pursuant to section
13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement;
and
|
B.
|
Paragraphs
(a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the
registration statement is on Form S-3 or Form F-3 and the information
required to be included in a post-effective amendment by those paragraphs
is contained in reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement, or is contained in a form of prospectus filed
pursuant to Rule 424(b) that is part of the registration
statement.
|
2.
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
|
3.
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
4.
|
That,
for the purpose of determining liability under the Securities Act of 1933
to any purchaser:
|
i.
|
If
the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it is first used
after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
|
(b)
|
The
undersigned Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the
Registrant’s annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
II-4
(c)
|
Insofar
as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such
issue.
|
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York on
the 26thday
of January, 2010.
Avantair,
Inc.
|
|
By:
|
/s/ Steven Santo
|
Steven
Santo
|
|
Chief
Executive Officer
|
II-6
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Name
|
Title
|
Date
|
||
/s/ Steven Santo
|
Chief
Executive Officer and
|
January
26, 2010
|
||
Steven
Santo
|
Director
(Principal
Executive Officer)
|
|||
/s/ Richard Pytak
|
Chief
Financial Officer
|
January
26, 2010
|
||
Richard
Pytak
|
(Principal
Financial and Accounting Officer)
|
|||
*
|
Chairman
|
January
26, 2010
|
||
Barry
Gordon
|
||||
*
|
Director
|
January
26, 2010
|
||
A.
Clinton Allen
|
||||
*
|
Director
|
January
26, 2010
|
||
Robert
Lepofsky
|
||||
*
|
Director
|
January
26, 2010
|
||
Arthur
H. Goldberg
|
||||
*
|
January
26, 2010
|
|||
Stephanie
Cuskley
|
Director
|
|||
*
|
January
26, 2010
|
|||
Richard
B. DeWolfe
|
Director
|
/s/ Steven
Santo
|
January
26, 2010
|
|||
Steven
Santo
Attorney-in-fact
|
II-7
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
|
2.1
|
|
Stock
Purchase Agreement, dated as of October 2, 2006 between Ardent Acquisition
Corporation and the Stockholders of Avantair, Inc. (1)
|
2.2
|
|
Letter
Agreement, entered into as of October 2, 2006 between Avantair, Inc.,
certain equity investors and Ardent Acquisition Corporation.
(1)
|
2.3
|
|
Amendment
to Stock Purchase Agreement, dated as of December 15, 2006 between Ardent
Acquisition Corporation and the Stockholders of Avantair, Inc.
(2)
|
2.4
|
Securities
Purchase and Exchange Agreement, dated as of October 16, 2009 by and among
Avantair, Inc. and certain investors. (6)
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation. (3)
|
3.2
|
|
By-laws.
(4)
|
3.3
|
|
Amended
and Restated By-laws. (8)
|
3.4
|
|
Certificate
of Designations, filed with the Secretary of State of the State of
Delaware on November 14, 2007. (9)
|
4.1
|
|
Specimen
Unit Certificate. (4)
|
4.2
|
|
Specimen
Common Stock Certificate. (4)
|
4.3
|
|
Specimen
Warrant Certificate. (4)
|
4.4
|
|
Form
of Unit Purchase Option to be granted to Representative.
(4)
|
4.5
|
|
Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant. (4)
|
4.6
|
|
Form
of Warrant Agreement issued by the Registrant dated as of
October 16, 2009. (12)
|
5.1
|
Opinion of DLA Piper LLP (US) (†) | |
10.1*
|
|
Avantair
Leadership Deferred Compensation Plan Adoption Agreement, dated December
18, 2008. (11)
|
10.2*
|
|
Avantair
Leadership Deferred Compensation Plan Basic Plan Document, dated December
18, 2008. (11)
|
10.3
|
|
Registration
Rights Agreement among the Registrant and the Initial Stockholders.
(4)
|
10.4
|
|
Form
of Warrant Purchase Agreement among EarlyBirdCapital, Inc. and each of the
Initial Stockholders. (4)
|
10.5
|
|
Investors
Rights Agreement, entered into as of October 2, 2006, between Avantair,
Inc. and certain equity investors. (1)
|
10.6
|
|
Loan
Agreement, entered into as of October 2, 2006 by and among Avantair,
Inc., CNM, Inc. and Ardent Acquisition Corporation. (1)
|
10.7
|
|
Amended
and Restated Promissory Note, dated June 1, 2007, made by Avantair, Inc.
to CNM, Inc. (8)
|
10.8*
|
|
2006
Long- Term Incentive Plan. (5)
|
10.
9*
|
|
Employment
Agreement dated September 24, 2009, between the Registrant and Steven F.
Santo.
(6)
|
II-8
10.
10
|
|
Floor
Plan Finance Agreement, dated April 2, 2009, between the Registrant and
MidSouth Services, Inc. with the term commencing on April 3, 2009.
(7)
|
10.
11
|
|
Floor
Plan Finance Agreement, dated April 2, 2009, between the Registrant and
MidSouth Services, Inc. with the term commencing on a date that is yet to
be determined. (7)
|
10.
12
|
|
Registration
Rights Agreement, dated as of October 16, 2009 among the Registrant and
certain investors. (10)
|
10.13
|
Piaggio America, INC. P180 Avanti II Aircraft Purchase Agreement, dated November 10, 2005. (†) | |
10.14
|
Piaggio America, INC. P180 Avanti II Aircraft Purchase Agreement, dated September 24, 2007. (†) | |
10.15
|
Amendment of Aircraft Purchase Agreements dated November 10, 2005 and September 24, 2007 between Piaggio America, Inc. and Avantair, Inc. (dated September 15, 2008). (†) | |
10.16
|
Aircraft Management Agreement between LW Air I LLC and Avantair, Inc. dated October 19, 2009. (†) | |
10.17
|
Aircraft
Lease Agreement between LW Air I LLC and Avantair, Inc. dated October 19,
2009. (†)
|
|
10.18
|
Cross
Lease Exchange Agreement dated October 19, 2009. (†)
|
|
10.19
|
Addendum
Number 1 to LW Air I Lease/Management Agreement.(†)
|
|
23.1
|
Consent
of JH Cohn, LLP. (†)
|
|
23.2
|
|
Consent
of AvData. (8)
|
23.3
|
Consent
of DLA Piper LLP (US) (included in Exhibit
5.1)
|
(†)
|
Filed
herewith
|
(1)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on October 4,
2006.
|
(2)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on December 20,
2006.
|
(3)
|
Incorporated
by reference to Registrant’s current report on Form 8-K, filed with the
Securities and Exchange commission on March 15,
2007.
|
(4)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (SEC
File No. 333-121028).
|
(5)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 23,
2007.
|
(6)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on September 15,
2009.
|
(7)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on April 7,
2009.
|
(8)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (SEC
File No. 333-142312).
|
(9)
|
Incorporated
by reference to the Registrant’s Current Report on Form 10-KSB, filed with
the Securities and Exchange Commission on November 20,
2007.
|
(10)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on October 22,
2009.
|
(11)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on December 22,
2008.
|
(12)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (SEC
File No. 333-163152), filed with the Securities and Exchange
Commission on November 17,
2009.
|
*
|
Management
contract or compensatory plan or
arrangement.
|
II-9