UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21818
FIELDS AIRCRAFT SPARES, INC.
----------------------------
(Name of small business issuer as specified in its charter)
Utah 95-4218263
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2251-A Ward Avenue
Simi Valley, California 93065
-----------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (805) 583-0080
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
shares, par value $.05 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
The issuer's revenues for the fiscal year ended December 31, 1997 were
$12,101,000.
As of December 31, 1997, 2,079,571 of the issuer's common shares were
issued and outstanding, approximately 1,295,404 of which were held by
non-affiliates. As of March 24, 1998, the aggregate market value of shares held
by non-affiliates was approximately $12,954,040. The issuer believes that three
shareholders who owned approximately 13.6%, 12.8% and 7.9%, respectively as of
March 31, 1998 of the total shares issued and outstanding are not affiliates of
the issuer since they do not participate in management decisions.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the documents of the issuer listed below have been
incorporated by reference into the indicated parts of the Form 10-KSB:
Notice of Annual Meeting of Shareholders and Proxy Statement anticipated to
be filed within 120 days after December 31, 1997 . . . Part III, Items 9-12
Transitional Small Business Disclosure Format: Yes No X
--- ---
PART I.
The following Item 1 "BUSINESS" includes statements that relate to future plans,
financial results or projections, events or performance, including statements
with respect to future business potential. These are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially. Actual results may differ from such forward-looking statements as a
result of a number of factors, including but not limited to competitive factors
and pricing pressures, ability to obtain necessary capital or financing, the
price and availability of aircraft parts and other materials, successful
execution of Fields Aircraft Spares, Inc.'s (the "Company") expansion plans
including combining the business of the completed acquisition with the Company's
business and successful completion of additional acquisitions, failure to
maintain existing customer or vendor relationships, shifts in market demand,
general economic conditions and other risks and uncertainties discussed in this
and other periodic reports filed by the Company with the Securities and Exchange
Commission.
ITEM 1. BUSINESS
- -----------------
Development of the Company
- --------------------------
The primary business of the Company is the distribution and stocking of
factory new spare parts applicable to various commercial aircraft models and the
brokerage of a wide variety of new and reconditioned aircraft parts through its
subsidiary Fields Aircraft Spares Incorporated, a California corporation
("FAS"). The Company has, through a subsidiary acquired in January 1998, begun
to manufacture, on a selected basis, certain aircraft spare parts. Flightways
Manufacturing, Inc. ("Flightways"), which the Company acquired, manufactures
plastic replacement parts for aircraft cabin interiors. The Company has entered
into a letter of intent to acquire Skylock Industries Incorporated, a
manufacturer of hardware and retaining devices for aircraft interiors, and
intends to acquire other aircraft cabin interior parts manufacturing companies.
In 1984, the Company was organized as FEP Resources, Inc., under the
laws of the State of Utah. In 1985, the Company was renamed Fields Industrial
Group, Inc. and acquired Fields Industrial Supply, Inc., a California
corporation that was engaged in the sale of cutting tools and supplies. As of
1990, that business was discontinued. In 1987, the Company began distributing
aircraft parts. In 1988, the Company incorporated FAS as a wholly owned
subsidiary. In 1995, McDonnell Douglas Corporation (together with its affiliates
and/or divisions, "MDC") acquired Series A Convertible Preferred Stock of FAS
which converted to common shares of the Company in 1997. In 1995, the Company
changed its name to Fields Aircraft Spares, Inc.
On March 29, 1995, the Company's shareholders authorized the reverse
split of the Company's common shares on the basis of 50 old shares for one new
share. The reverse split was effective as of November 20, 1995.
All material aspects of the Company's business other than manufacturing
are conducted through FAS. Manufacturing is currently conducted through
Flightways and future manufacturing is expected to be conducted in subsidiaries.
The business of the Company as conducted through FAS and Flightways is referred
2
to in this document as the Company's business. References in this document to
the Company, where appropriate, shall be deemed to be references to the Company
and its subsidiaries, collectively.
The Industry
- ------------
According to The Boeing Company ("Boeing"), in their 1997 Current
Market Outlook, the world jetliner fleet is projected to grow from 11,500
airplanes at the end of 1996 to nearly 17,000 airplanes in 2006. Boeing expects
this increase to be driven by an expected 5.5% per year growth in air travel and
6.6% in air cargo.
In its 23rd annual aviation forecast, the Federal Aviation
Administration (the "FAA") projects that U.S. airline passenger traffic will
increase 3.5% in 1998 and that it will continue to grow at an average rate of
3.7% through 2009. Further, the FAA projects international traffic to and from
the United States by foreign and domestic carriers will increase by 5.5% in 1998
with an average growth rate of 5.8% through 2009.
Industry analysts have estimated that 70% of cargo growth will be met
by converting aging passenger fleets to cargo configurations. Management
believes the number of 10 year and older planes in service continues to climb as
cost considerations in an intensely competitive environment favor the "used and
convert instead of new" purchase decision. This has contributed to the
absorption of surplus aircraft parts and inventories at a faster rate as
airlines extend aircraft utilization and convert aircraft into alternative uses.
The Company believes that all of these trends provide the underpinnings
to the long-term growth of the aircraft spare parts industry.
Business of the Company
- -----------------------
Through December 31, 1997, the primary business of the Company was the
distribution and stocking of factory new spare parts applicable to various
commercial aircraft models and the brokerage of a wide variety of new and
reconditioned aircraft parts through FAS. The Company's business has been
concentrated in the distribution and stocking, as an authorized factory
distributor for various manufacturers, of cabin interior replacement parts for a
wide variety of commercial aircraft models. The Company also distributes from
what it believes to be the largest inventory, outside of MDC, of factory new
parts for DC-8, DC-9, DC-10 and MD-80 aircraft. It also purchases and
distributes both new and used parts and related equipment from aircraft
manufacturers for Boeing, McDonnell Douglas and Airbus aircraft. The Company
sells, exchanges or leases parts to commercial aircraft operators servicing both
the passenger and cargo markets, to overhaul facilities and to brokers
throughout the world.
In January 1998, the Company, through the acquisition of Flightways,
expanded into the business of manufacturing aircraft cabin interior parts. The
Company has signed a letter of intent to acquire Skylock Industries
Incorporated, and intends to acquire additional strategic manufacturing entities
that will enhance the Company's ability to compete. In 1998, the Company expects
that its business will be concentrated in the manufacturing and the distribution
and stocking, as an authorized factory distributor for various manufacturers, of
cabin interior replacement parts for a wide variety of commercial aircraft
models.
3
Distributorships
----------------
The Company provides distribution services for manufacturers ("OEM") of
aircraft aftermarket replacement spare parts. The Company concentrates on the
stocking and distributing of interior cabin parts and is an authorized
distributor for a number of OEMs providing replacement parts for lavatories,
galleys, seats, interior latches, tray tables, lighting and cleaning products.
The Company primarily sells these parts to major air carriers and overhaul
facilities. In some cases, the Company has agreements or purchasing arrangements
designating it as the sole or primary source for specific replacement parts. The
Company's acquisition strategy as set forth below is also focused on acquiring
selected manufacturers and distributing its own manufactured parts.
The Company provides inventory management and supply services to air
carriers and aircraft overhaul facilities. By working closely with customers and
aircraft maintenance records, the Company forecasts replacement part demand,
purchases estimated demand from the OEMs, inventories the parts pending the
order, and then supplies the parts to the customers on a just-in-time basis.
This service allows the customers to reduce the cost of carrying and managing
inventory. Further, by consolidating orders, the Company is able to purchase
from OEMs at favorable prices, allowing it to sell to its customers at prices
often below those available to the customer when buying direct from the OEM.
During 1997, the Company served as the exclusive source of specific
replacement parts for galleys, lavatories and seats for two major airlines and
one regional carrier. The Company is in varying stages of negotiations with a
number of other airlines to become their exclusive source of various interior
replacements parts. No formal agreements have been reached with other airlines.
As of December 31, 1997, backlog of distributorship orders for shipment
in 1998, which the Company believes to be firm, was approximately $2.3 million.
There was backlog of approximately $1.6 million of distributorship orders as of
December 31, 1996.
McDonnell Douglas Components and Parts
--------------------------------------
The Company believes that it has the largest factory new inventory of
DC-8, DC-9, DC- 10 and MD-80 parts outside of MDC. This inventory consists of
over $70 Million, catalog value, of factory new spare parts and components
purchased directly from MDC in 1989 and 1991. MDC inventory is generally sold at
a discount to catalog value. The total future discount to catalog value cannot
be quantified at this time.
An important factor in the aircraft spare parts distribution market is
the documentation or traceability that is supplied with an aircraft spare part.
MDC has re-certified the Company's MDC inventory as directly traceable to their
production certificate, and it is the only inventory known to the Company
outside of MDC's direct control that has been certified to allow MDC to
repurchase and ship to customers without having to go through their quality
control department for a source inspection.
Based upon its market research, the Company believes that in many cases
parts in this inventory are the only new material and in many cases are the only
material available in any condition.
4
Once the Company's MDC inventory is depleted, this segment of business
will no longer be a revenue source for the Company.
Brokerage Activities
--------------------
The Company receives inquiries from its customers for parts that are
not currently held in its inventory. The salesperson receiving this request
checks a computerized industry database known as the Inventory Locator Service
("ILS") and utilizes the knowledge of the Company and its staff to locate a
suitable part. Once located, a purchase price is agreed with the owner of the
part. At that time, the sales person contacts the customer and extends a quote.
If the quote is accepted by the customer, the part is purchased and shipment to
the Company's warehouse is arranged. When received at the warehouse, both the
part and its accompanying paperwork are inspected. After inspection and
acceptance, the part is shipped to the customer.
Because of government and industry group guidelines, aircraft operators
have become increasingly careful from whom they buy parts. The Company has had
its quality control systems and procedures audited and evaluated by MDC as well
as by a number of major airlines and freight operators. Almost every major U.S.
airline, freight operator and overhaul facility has designated the Company as
either an approved or preferred vendor. This preferred status has enabled the
Company to act as a broker to purchase parts for airlines when the Company does
not have the parts in stock.
Because parts for brokerage are not purchased until a corresponding
sale has been made, it is less capital intensive than the purchase and sale of
inventory. Brokerage allows incremental increases in sales without corresponding
increases in overhead.
New Material Acquisition
------------------------
The Company uses information provided by its customers and industry
research to identify new parts and materials that customers have difficulty in
obtaining on short notice. The Company then stocks inventories of these items
and makes them available to its customers on a just-in-time basis as well as
through the ILS.
Manufacturing
-------------
Through Flightways, acquired in 1998, the Company manufacturers high
quality plastic replacement components for commercial aircraft seats and
interiors, including foodtrays, latches, shrouds, panels, armcaps, bumper
strips, escutcheons, and components for lavatories, galleys, cockpits, windows
and overhead units. The Company sells new parts to aircraft manufacturers and to
airlines and aircraft repair facilities. Also, through its repair station, the
Company overhauls and repairs seats, seating components, carts and modules.
The customers of Flightways include U.S. domestic airlines as well as
an increasing number of international carriers. The Company intends to initially
operate Flightways out of its Van Nuys, California, facility. The Company may
eventually consolidate its corporate headquarters with that of Flightways into a
larger facility. The Company will deliver the products and services of
Flightways through the Company's distribution system.
5
On January 20, 1998, the Company entered into a letter of intent to
acquire 100% of the outstanding shares of Skylock Industries Incorporated
("Skylock"). Skylock is a designer and manufacturer of hardware and retaining
devices for aircraft interiors. Skylock focuses on using advanced technologies
and manufacturing methods to optimize such critical elements as appearance,
weight, ease of use and security. The acquisition of Skylock is subject to the
entering of a definitive agreement and verification of factual matters. There is
no assurance the acquisition of Skylock will be completed.
Consignments
------------
In 1995, the Company entered into a three-year consignment arrangement
to warehouse and market spare parts for Airweld of Kentucky, Inc. Other
consignment arrangements are currently under negotiation, although no assurances
can be made that the Company will be successful in completing those
negotiations. Under such consignment arrangements, the consignor retains
ownership and the Company arranges the sales for the consignor.
Parts warehoused by the Company under consignment arrangements are also
listed by the Company in the SPEC 2000 and the ILS computerized databanks. In
addition, the Company adds the consignment inventories to the inventory listings
that it provides its customers in computer readable form.
Business Growth Strategy
- ------------------------
The Company intends to pursue the following areas of growth:
Obtain Additional Distributorships. The Company intends to pursue and
secure additional distributorships with other aircraft cabin interior
manufacturers. In addition, the Company intends to expand its distributorship
activities to other aircraft parts and systems.
Acquisitions. The aircraft industry is populated by a large number of
small manufacturing companies providing a variety of parts and services. With
the worldwide demand for aircraft increasing and the growth in outsourcing by
air carriers, along with their desire to reduce the number of vendors they deal
with, the Company believes there is significant opportunity to grow through
acquisition.
Capitalize on Authorized Vendor Status. The Company has been authorized
as a vendor of record by most major air carriers and aircraft overhaul
facilities. This provides the opportunity to expand sales with existing
customers, as those customers work to reduce the number of vendors they deal
with. Also, as the owner of what management believes to be the largest inventory
of factory new MDC parts outside of MDC, customers would be reluctant to remove
the Company as a vendor, which gives the Company a marketing advantage over the
competition.
Brokerage. The increasing population of aircraft in service is expected
to increase the demand for parts. With its relationships in the industry, its
status as a vendor to most major air carriers and its reputation for quality and
service, the Company intends to take advantage of this growing segment of the
market.
6
Expand new parts and material sales. The Company intends to increase
inventories of parts that customers have trouble obtaining on a timely basis
with the goal of providing complete inventory management and supply services to
air carriers.
Operations
- ----------
The Company maintains an inventory consisting primarily of factory new
aircraft spare parts in its warehouse in Fillmore, California. The Company's
inventory is listed in two computerized data banks that are available to the
airline industry: SPEC 2000 and the ILS. The Company pays a fee to be listed on
such systems and continually updates the Company information listed on the
systems to keep them current. In addition, the Company provides an inventory
listing in computer readable form to many of its major customers. The Company
receives orders for spare parts from commercial aircraft operators servicing
both the passenger and cargo markets, from overhaul facilities and from brokers.
The Company currently has seven full-time inside salespersons and six full-time
outside salespersons. Additionally, the Company is represented on an
international basis by a number of independent outside general sales agents.
Orders for parts in inventory are filled and shipped, 24 hours per day,
F.O.B. from the warehouse, generally within five hours of the receipt of the
order. The Company believes that a quick turn-around time, between an order
being taken and the part being delivered, is a key service for which the
customer is willing to pay. Reducing the time that an aircraft is on the ground
is a major advantage the Company offers to its customers. The Company's
warehouse is 60 minutes from Los Angeles International Airport and has a
delivery service to the airport. In addition, the Company utilizes commercial
cargo carriers to deliver spare parts to the Los Angeles airport and around the
world. The Company emphasizes its ability to respond quickly in obtaining parts
for its customers.
The Company's business exposes it to possible claims for personal
injury or death which may result from the failure of an aircraft spare part sold
or manufactured by it. While the Company maintains what it believes to be
adequate liability insurance to protect it from such claims, and while no
material claims have, to date, been made against the Company no assurance can be
given that claims will not arise in the future or that such insurance coverage
will be adequate.
Pricing
- -------
The price at which the Company sells parts is based upon market
competition.
Marketing
- ---------
The Company currently concentrates its marketing efforts in the
following areas:
(i) commercial airlines servicing the passenger market;
(ii) commercial airlines servicing the cargo market;
(iii) aircraft leasing companies; and
(iv) overhaul facilities.
7
As the Company expands into manufacturing, it intends to continue its
marketing efforts in these areas and to add marketing efforts aimed directly at
OEM's.
The Company has not conducted any formal market studies to determine
the actual size of each of its current and any proposed markets, and relies upon
the experience of its officers and key employees for such judgments.
The Company sells its products through three primary methods:
1. The use of its own sales staff which currently includes 13
salespersons. This staff calls on customers and potential customers to determine
the needs of such customers and responds to incoming calls. Once the need is
determined, the order is then sent to the Company's warehouse.
2. The use of computerized parts database systems.
3. The use of exclusive and non-exclusive general sales agency
agreements.
The Company has developed literature and advertising material
describing the Company's products and services. The literature is distributed by
the Company's sales staff and agents, as well as by mail, to previous and
current customers, persons who have responded to previous advertising, and
companies believed to be engaged in the relevant market.
The Company also uses media advertising, such as trade journals and
technical publications, directed toward specific market segments. In addition,
the Company attends trade shows and puts on exhibitions directed to specific
market segments.
During the fiscal year ended December 31, 1997, two customers of the
Company each accounted for more than 10% of sales. No other single customer
accounted for more than 10% of the Company's sales. During the 1996 fiscal year,
one of the Company's customers accounted for more than 10% of sales.
In an effort to increase foreign sales, the Company intends to engage
additional independent representatives to serve foreign markets.
Competition
- -----------
The Company competes with a number of large and small sellers of
aircraft spare parts in the aviation after-market. These competitors include
OEM's such as Boeing, aircraft service companies and aircraft spare parts
redistributors. The major aircraft service companies and aircraft spares parts
redistributors with which the Company competes include AAR Corp., AGES, Aviation
Sales and The Memphis Group. For many of the Company's competitors, the sale of
aircraft spare parts is only a part of larger sales operations. The
manufacturing segments of the aviation industry in which Flightways and Skylock
operate are considered to be highly fragmented and competitive. Many of the
Company's competitors are larger and more established than the Company and have
greater financial resources and larger facilities and marketing forces. The
Company's increased emphasis during the past two years on distributorships and
its current expansion into manufacturing has exposed the Company to new
competitors.
8
Although the Company has not performed any market survey studies, it
believes that industry competition is based primarily upon service, price and
reputation of the supplier. The Company believes that it is competitive and that
it enjoys a good reputation. There can be no assurance, however, that the
Company has, or can maintain, a significant competitive advantage in any of
these areas.
Government Regulation
- ---------------------
The Company's business is regulated in the United States by the FAA.
The FAA has numerous regulations that must be complied with by the Company.
The Company is subject to U.S. federal governmental regulation on
foreign sales of its products. Depending on the type of product, the Company may
be subject to review by various federal agencies for a determination of whether
the specific product is a high technology product subject to restriction. Export
licenses may be denied for certain high technology products. If such a decision
is rendered, the Company may experience substantial time delays and expense in
the application and approval of export licenses. If export licenses are not
granted, the Company would be precluded from selling such products in certain
foreign markets.
The Company's sales in foreign countries are subject to various
applicable foreign governmental regulations. To date, compliance with such
regulations has not had a material adverse effect on the Company's operations.
Financing Arrangements
- ----------------------
McDonnell Douglas Corporation Contracts
---------------------------------------
In 1995, the Company and MDC entered into a Debt Restructure Agreement
and related agreements (collectively the "MDC Agreement") pursuant to which MDC
canceled $7,658,500 of debt owed by the Company in exchange for 586,862 shares
of Series A Convertible Preferred Stock of FAS (the "Series A Shares") and a
cash payment of $850,000.
In connection with the MDC Agreement, the Company and MDC entered into
a Securities Exchange Agreement of even date with the MDC Agreement (the
"Exchange Agreement"). The Exchange Agreement provided for the mandatory
exchange of the Series A Shares for 25% of the issued and outstanding common
shares of the Company on a fully diluted basis within 10 days following the date
on which the common shares were approved for quotation, and were quoted for
trading on. The Nasdaq Stock Market(SM) as a SmallCap issue. The Company
exchanged the MDC Series A Shares for 564,194 common shares on April 4, 1997.
The Exchange Agreement further provided for the Company to register the common
shares issued to MDC in connection with the Exchange Agreement under certain
circumstances.
Peter Frohlich, Alan Fields and Lawrence Troyna (each an affiliate of
the Company and collectively referred to as the "Fields' Group") and the Company
and MDC entered into a Voting Agreement of even date with the MDC Agreement (the
"Voting Agreement"). The Voting Agreement provides that MDC will vote the common
9
shares owned by MDC in favor of directors proposed by the Fields' Group,
provided MDC has the right to designate up to 25% of the directors proposed if
MDC so elects.
Credit Arrangements
-------------------
In 1995, the Company, through FAS, entered into a line of credit
arrangement (the "Credit Agreement") with Norwest Business Credit Inc.
("Norwest") providing originally for a line of credit in the amount of
$10,000,000 with interest payable monthly at 2.5% over the prime rate. In March
1997, an Eighth Amendment to the Credit Agreement was entered into which
permitted the Company to have outstanding $6,131,000.
On April 18, 1997, the Company's wholly owned subsidiaries entered into
separate Loan and Security Agreements for an aggregate of up to $10,000,000 with
NationsCredit Commercial Funding ("NationsCredit") at an annual interest rate of
prime plus 3%. All assets of the Company and its subsidiaries are pledged as
collateral. NationsCredit advanced $6,717,000 on April 18, 1997 which was used
to repay the obligations owed to Norwest and other fees incurred in connection
with the NationsCredit loan facility. In connection with the NationsCredit loan
facility, the Company issued NationsCredit an option to acquire 40,000 common
shares of the Company at a price of $6.25 per share.
In September 1997, the NationsCredit loan facility was amended to allow
the Company to issue 8.5% Subordinated Redeemable Debentures Due 2000 in the
principal amount of $10,000,000.
In connection with the Norwest and NationsCredit credit facilities, the
Company retained a financial advisor to assist the Company in obtaining and
closing the credit facilities. At the closing of each facility, the Company paid
the financial advisor a fee of $200,000. The Company also entered into a
contract with the financial advisor in February 1995 whereby the financial
advisor would provide ongoing consulting to the Company. The contract provided
for the Company to pay the financial advisor a non-refundable retainer of
$150,000, which was payable over the period of the contract. The agreement with
the financial advisor lapsed in February 1998.
Employees
- ---------
At December 31, 1997, the Company had approximately 33 full-time
employees. Following the acquisition of Flightways in January 1998, the number
of employees increased to approximately 138 full-time employees. None of the
employees are unionized. Management is of the opinion that its relationship with
its employees is good. Management believes that, although unemployment has
dropped substaintially in the aviation industry, persons with requisite training
and experience are available to meet Company needs if and when necessary.
10
ITEM 2. DESCRIPTION OF PROPERTY
- ------- -----------------------
The executive offices of the Company are located at 2251-A Ward Avenue,
Simi Valley, California and its telephone number is (805) 583-0080. The
executive office space consists of approximately 5,000 square feet of office
space located in a two-story building. The offices are leased on a month to
month basis.
The Company's warehouse is located at 341 "A" Street, Fillmore,
California. The warehouse building was leased by the Company in 1988. In 1991,
the Company exercised an option to purchase the building. The warehouse is an
older produce-packing building of wood and concrete construction with a
high-ceiling upper floor and a concrete lower/basement floor, all clear span
except for wooden pillar supports. The total storage area for both floors is
83,600 sq. ft. Exterior open-air storage area (secured) is approximately 18,700
sq. ft. A modern fire-prevention system with a ceiling water pressure sprinkler
system is installed on both floors. A visual/aural monitoring security system
operates inside the building and in all the exterior property contained within
the fenced area.
On January 16, 1998, the Company completed its acquisition of
Flightways. Flightways operates in a manufacturing facility located at 7660
Densmore Avenue, Van Nuys, California. The manufacturing facilities consist of
approximately 3,000 square feet of office space and 12,000 square feet of
manufacturing space. The lease on the property expires July 31, 1999.
Flightways also leases approximately 5,000 square feet of warehouse
space located at 16153 Covello, Van Nuys, California. The space is leased on a
month to month basis.
On March 21, 1997, the Company signed a lease effective August 1, 1997
for executive offices and warehousing space. Subsequently, the Company
determined that these premises were too small for the Company and the premises
were sublet to a third party at a rent resulting in a small profit to Company.
The Company maintains an executive office located in London, England.
The office is leased from a third party by Belgravia Sales Financial Services
Limited, an entity owned and controlled by certain officers of the Company, and
is sublicensed to the Company on a month to month basis at a monthly rental to
the Company of $2,150. The underlying lease expires September of 1999. See
"Certain Relationships and Related Transactions."
11
The following chart provides more detailed information concerning the
Company's properties:
Approximate Size
in
Location Sq. Ft. of Facility Lease Expiration Primary Use
- -------- ------------------- ---------------- -----------
Simi Valley, California 5,000 month to month Executive Offices
Fillmore, California 83,600(1) owned Warehouse
Van Nuys, California 15,000 1999 Manufacturing
Van Nuys, California 5,000 month to month Warehouse
London, England 1,000 month to month Executive Offices
Simi Valley, California 24,000 2002 Sublet to Third
Party
(1) Located on two acres.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is currently not a party to any known litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of the Company's shareholders.
PART II.
ITEM 5. MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
- ------- --------------------------------------------------------
Market Information
- ------------------
Until May 17, 1996, there was no market for the Company's common
shares. The common shares were quoted over-the-counter under the symbol FASS
until March 25, 1997. Commencing March 26, 1997, the common shares were quoted
on The Nasdaq Stock Market(SM) as a SmallCap issue under the symbol FASI.
The Nasdaq Stock Market(SM), which began operation in 1971, is the
world's first electronic securities market and the fastest growing stock market
in the U.S. Nasdaq utilizes today's information technologies--computers and
telecommunications--to unite its participants in a screen-based, floorless
market. It enables market participants to compete with each other for investor
orders in each Nasdaq security and, through the use of Nasdaq Workstation II(TM)
and other automated systems, facilitates the trading and surveillance of
12
thousands of securities. This competitive marketplace, along with the many
products and services available to issuers and their shareholders, attracts
today's largest and fastest growing companies to Nasdaq. These include industry
leaders in computers, pharmaceuticals, telecommunications, biotechnology, and
financial services. More domestic and foreign companies list on Nasdaq than on
all other U.S. stock markets combined.
The following table sets forth, for the fiscal quarters indicated, the
high and low bid quotations as reported by the National Quotation Bureau until
March 25, 1997 and thereafter by The Nasdaq Stock Market(SM). The quotations
quoted by the National Quotation Bureau reflect inter-dealer prices without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
================================================================================================================================
Period 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
High Bid Low Bid High Closing Price Low Closing Price
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter --- --- $ 6.00** $2.50**
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Second Quarter $ 6.50* $ 2.50* 6.75 5.00
- --------------------------------------------------------------------------------------------------------------------------------
Third Quarter 5.00 4.00 11.50 4.75
- --------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 5.00 2.50 14.00 8.00
================================================================================================================================
* Beginning May 17, 1996
** From January 1, 1997 to March 25, 1997 prices represent the high and low bid.
Thereafter price represents the closing price on The Nasdaq Stock Market(SM)
Shareholders.
- -------------
At December 31, 1997, the number of record holders of the Company's
common shares was approximately 260. The Company believes it has in excess of
300 round lot shareholders of beneficial interest of the Company's common
shares. The Company has no outstanding preferred shares.
Dividends
- ---------
The Company utilizes all available funds for working capital purposes
and has never paid a dividend. Management does not anticipate paying dividends
in the foreseeable future on common shares. In addition, the Company's loan
arrangements restrict the payment of dividends by the subsidiaries of the
Company. There are no preferred shares currently outstanding. In the future, the
Company may issue preferred shares which may pay dividends.
Issuance of Shares Without Registration
- ---------------------------------------
During the fourth quarter of the year ended December 31, 1997, the
Company issued the following securities without registration under the
Securities Act of 1933:
13
As of September 30, 1997, the Company closed a private placement of
$10,000,000 principal amount of 8.5% Subordinated Redeemable Debentures Due 2000
(the "Debentures") to non-United States persons pursuant to Regulation S. The
holders of Debentures have a one-time right at any time after December 29, 1997,
through September 27, 2000, subject to prior redemption or repurchase, to
convert up to 30% (less any amounts converted pursuant to the Mandatory
Conversion described below) of the principal amount of Debentures into common
shares. The conversion price (the "Conversion Price") is equal to 85% of the
average closing price of the Company's common shares during the 20-trading day
period ending on the date of notice of conversion, but in no event less than
$12.00 per share, subject to certain adjustments. In the event that during any
20-trading day period, the average closing price of the common shares equals or
exceeds $12.00 per share, the Company may require the conversion of up to 20% of
the principal amount of outstanding Debentures at the Conversion Price
("Mandatory Conversion"). Etablissement Pour le Placement Prive, Zurich
Switzerland ("EPP") acted as the Company's placement agent in connection with
the offering. In addition to its commissions of 8% of the offering price, EPP
also received placement fee of $175,000 and 15,000 common shares, valued at
$172,500. After brokerage and issuance costs, the sale of the Debentures
resulted in a net infusion of capital of approximately $8,850,000.
On October 13, 1997 the Company issued 5,000 common shares to EPP at an
agreed on value of $11.50 per share as part payment for consulting services.
Pursuant to its Mandatory Conversion right, the Company converted
approximately $2,000,000 principal amount of Debentures at the Conversion Price
of $12.00 per share. Accordingly, on November 14, 1997, 166,666 common shares,
at $12.00 per share, were issued to Debentureholders and approximately
$2,000,000 principal amount of Debentures were cancelled.
As of February 20, 1998, the Company entered into a First Supplemental
Indenture (the "Supplement") to the Indenture, dated as of September 30, 1997
(the "Indenture"), between the Company and EPP, as Trustee, relating to the
Company's Debentures. The Supplement provides that, solely at the holder's
option, (a) from February 20, 1998 to June 30, 1998, 20% of each holder's
original principal amount of Debentures may be converted into common shares at a
conversion price of $9.75 per common share; (b) from February 20, 1998 to
September 30, 1998, an additional 20% of each holder's original principal amount
of Debentures may be converted into common shares at a conversion price of
$11.00 per common share; and (c) from February 20, 1998 to December 31, 1998, an
additional 20% of each holder's original principal amount of Debentures may be
converted into common shares at a conversion price of $13.00 per common share.
EPP shall receive a fee equal to 3% of all amounts converted pursuant to the
Supplement.
These additional conversion amounts are in addition to the Mandatory
Conversion. Pursuant to the Indenture, an additional 10% of the original
principal amount of Debentures may be converted, at the option of the holders,
prior to September 27, 2000.
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
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 thereto set forth elsewhere
in this Annual Report. The following tables illustrate certain selected
financial information regarding the Company and its subsidiaries:
FOR THE YEAR ENDED DECEMBER 31,
Statement of Operations Data: 1997 1996 1995
---- ---- ----
Sales $12,101,000 $5,734,000 $5,589,000
Net (loss) income $ (147,000) $(242,000) $4,547,000
Net (loss) income per common share $(.07) $(0.13) $3.47
Balance Sheet Date: December 31, 1997 1996 1995
---- ---- ----
Total Assets $22,181,000 $11,499,000 $10,934,000
Current Liabilities $1,535,000 $7,418,000 $8,533,000
Long Term Liabilities $15,047,000 $268,000 -0-
Minority Interest - 0 - -0- $2,050,000
Shareholders' Equity $5,599,000 $3,813,000 $351,000
Results of Operations
- ---------------------
To date, the Company has not achieved sustained profitable operations
for a full fiscal year. The Company has, however, been profitable in each of the
last three quarters of 1997. The Company may incur losses in the future. If such
losses do occur, the Company may be required to reduce its inventory and its
marketing efforts and seek additional financing.
15
The following table sets forth the Company's consolidated statement of
operations for the periods indicated:
Fiscal Year
-----------
1997 1996 1995
---- ---- ----
Statement of Operations (Dollars in
Thousands)
Net Sales 12,101 100% 5,734 100% 5,589 100%
Cost of Sales 7,214 60 2,975 52 2,462 44
------ --- ----- --- ----- ---
Gross Profit 4,887 40 2,759 48 3,127 56
Operating Expenses 3,349 27 2,608 45 2,414 43
------ --- ----- --- ----- ---
Income From Operations 1,538 13 151 3 713 13
Other Income (Expense)
Casualty Gain - - 949 16 - -
Gain on Exchange of Debt - - - - 4,759 85
Gain on Sale of Subsidiary - - - - 183 3
Interest Expense, Net (1,676) (14) (1,338) (23) (1,163) (21)
------- ---- ------- ---- ------- ----
Total Other Income (Expense) (1,676) (14) (389) (7) 3,779 67
------- ---- ------- ---- ------- ----
(Loss) Income Before Taxes (138) (1) (238) (4) 4,492 80
Income Tax (Credit) 9 - 4 - (55) (1)
------- ----- ------- ----- ------- -----
Net (Loss) Income (147) (1%) (242) (4%) 4,547 81%
======= ===== ======= ===== ======= =====
Operations of the Company and its subsidiaries for the year ended
December 31, 1997 generated operating income of $1,538,000, up by 918% from
$151,000 for 1996. The increase in operating income for the year is attributable
to an increase in sales and the resulting increase in gross profit.
Sales for the year ended December 31, 1997 were $12,101,000 compared
to $5,734,000 for 1996, an increase of approximately 111%. The increase in sales
was made up of an increase in after-market aircraft inventory management and
supply sales and brokerage sales of 164% and an increase in MDC inventory sales
of 29%.
Costs of goods sold for the year ended December 31, 1997 and 1996 were
$7,214,000 and $2,975,000, respectively (approximately 60% and 52% of sales,
respectively). The reduction in the gross margin percentage is a result of a
change in the product mix of sales.
Operating expenses increased to $3,349,000 for the year ended December
31, 1997 from $2,608,000 for the year ended December 31, 1996. This was
principally attributable to the increase in sales activity.
During the year ended December 31, 1996, the Company recognized a
nonrecurring gain of $949,000 in connection with a certain casualty insurance
claim. There were no nonrecurring gains in 1997. Interest expense increased to
$1,676,000 from $1,338,000 for the years ended December 31, 1997 and December
31, 1996, respectively. The increase is entirely attributable to an accelerated
amortization of original loan costs and other fees associated with the
refinancing of the Company's primary loan with Norwest. See "Liquidity" below.
Without the approximately $340,000 representing amortization of loan costs and
other fees associated with the repayment of the Norwest loan, which was
recognized in the first quarter of 1997, the Company would have been profitable
for the year ended December 31, 1997.
16
The Company had a net loss in 1997 of $147,000, as compared to a net
loss in 1996 of $242,000, a decrease in loss of $95,000. The net loss for the
year ended December 31, 1997 was entirely due to the nonrecurring accelerated
amortization of loan costs described in the prior paragraph. Any comparison
between the two periods should also take into consideration the 1996
nonrecurring income as described above.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Sales for the year ended December 31, 1996 increased by $145,000, or
3%, to $5,734,000 as compared to $5,589,000 for the year ended December 31,
1995. The increase in net sales was attributable to a 71% increase in
distributorship and brokerage sales offset by a decrease of 36% in MDC inventory
gross sales. The trend of overall increasing net sales and the shift to
distributorship and brokerage sales is evidenced by 1997 sales as described
above.
Cost of goods sold for 1996 increased by $513,000, or 21%, to
$2,975,000 from $2,462,000 in 1995. Cost of goods sold were 52% of sales in 1996
compared to 44% of net sales in 1995. The reduction in the gross margin
percentage is a result of the increasing proportion of total sales represented
by brokerage and distributorship transactions as opposed to MDC inventory where
the margins are larger.
Operating expenses for 1996 increased by $194,000, or 8% to $2,608,000
as compared to $2,414,000 for 1995. Operations of the Company and its
subsidiaries for 1996 generated a profit of $151,000, as compared to $713,000 in
the prior year. The reduction of $562,000 in the profit from operations in 1996
is attributable to an increase in operating expenses and a reduction in gross
margin as a result of the shift in sales mix. Interest expense increased
$175,000 or 15% from $1,163,000 in 1995 as compared with $1,338,000 in 1996. The
major portion of the increase in general and administrative expenses resulted
from additional staffing costs incurred to generate the increased
distributorship and brokerage sales. Interest expense increased because of an
increase in the rate charged by the Company's primary lender and because of the
fees associated with several amendments to the Credit Agreement.
During 1996, the Company recognized a nonrecurring gain of $949,000
from the recovery of a casualty insurance claim as a result of the 1994
earthquake. During 1995, the Company recognized a $4,759,000 gain on exchange of
debt as a result of the exchange of preferred stock of a subsidiary for
$6,809,000 of debt of that subsidiary. In addition, the Company recognized a
nonrecurring gain of $183,000 from the sale of a subsidiary.
As a result of the foregoing, the Company had a net loss in 1996 of
$242,000, as compared to net income in 1995 of $4,547,000, a decrease of
$4,789,000.
Liquidity
- ---------
At December 31, 1997 the Company had working capital (current assets in
excess of current liabilities) of $17,740,000 compared to working capital of
$2,434,000 on December 31, 1996. The increase in liquidity is attributable
principally to obtaining the NationsCredit credit facility and an increase in
17
cash as a result of the Company's receipt of the proceeds of a sale of
$10,000,000 principal amount of Debentures. See "Market For Common Shares and
Related Shareholder Matters -- Issuance of Shares Without Registration." These
changes, coupled with an increase in distributorship inventory, were partially
offset by an increase in accounts payable and accrued liabilities.
Operating activities used $2,681,000 and $350,000 of the Company's cash
flow for the year ended December 31, 1997 and the prior year, respectively. The
major usage of cash resulted in increases in inventory of $2,950,000 and
accounts receivable of $448,000 and these were only partly offset by an increase
in accounts payable of $375,000.
As of January 1, 1997, the Company's outstanding amount on its Credit
Agreement with Norwest was $6,232,000 at an interest rate of 15.25%.
On April 18, 1997, the Company's wholly owned subsidiaries entered into
separate Loan and Security Agreements for an aggregate of up to $10,000,000 with
NationsCredit at an annual interest rate of prime plus 3%. NationsCredit
advanced $6,717,000 on April 18, 1997 which was used to repay the obligations
owed to Norwest and other fees incurred in connection with the NationsCredit
loan facility. In connection with the NationsCredit loan facility, the Company
issued NationsCredit an option to acquire 40,000 common shares of the Company at
a price of $6.25 per share.
As of November 14, 1997, approximately $2,000,000 principal amount of
Debentures were converted to 166,666 common shares at a price of $12.00 per
share, leaving approximately $8,000,000 principal amount of Debentures
outstanding on December 31, 1997.
Capital Resources
- -----------------
The Company's operations to date have been primarily funded through
bank loans, sales of equity and debentures, and vendors deferred purchase notes.
During 1996, the Company began a private placement transaction to
non-United States persons pursuant to Regulation S of the Securities Act.
164,283 units (the "Units") representing 328,566 common shares and warrants to
acquire 164,283 common shares at $6.25 per share (the "Warrants") were sold for
$2,135,685 between September 1996 and March 1997. The Warrants are exercisable
at anytime prior to the second anniversary of their issuance. Etablissement Pour
le Placement Prive, Zurich Switzerland ("EPP"), acted as the Company's placement
agent in connection with the offering. After brokerage and issuance costs, the
sales resulted in a net infusion of capital of approximately $1,654,000 at
December 31, 1996 and approximately $1,724,000 through March 1997. In connection
with that offering, the Company issued, on or about June 26, 1997, additional
warrants to acquire 32,857 common shares at $6.25 per share (the "Agent
Warrants") pursuant to the terms of the Placement Agent Agreement, dated July
22, 1996, between the Company and EPP, as amended. The Agent Warrants are
exercisable at any time prior to the second anniversary of their issuance. The
Company has also agreed to pay EPP a fee of 5% of amounts received by the
Company from the exercise of the Warrants.
On April 18, 1997, the Company's wholly owned subsidiaries entered into
separate Loan and Security Agreements for an aggregate of up to $10,000,000 with
NationsCredit at an annual interest rate of prime plus 3%. NationsCredit
18
advanced $6,717,000 on April 18, 1997 which was used to repay the obligations
owed to Norwest and other fees incurred in connection with the NationsCredit
loan facility. In connection with the NationsCredit loan facility, the Company
issued NationsCredit an option to acquire 40,000 common shares of the Company at
a price of $6.25 per share. At December 31, 1997, approximately $7,047,000 of
credit had been extended under the credit line.
On or about June 27, 1997, the Company sold 15,774 common shares and
warrants to acquire 2,881 common shares at $6.25 per share, for approximately
$98,780. The warrants are exercisable at any time prior to the second
anniversary of their issuance. The securities were sold to EPP in a private
transaction in reliance on Regulation S under the Securities Act.
On September 30, 1997, the Company completed the sale of $10,000,000
principal amount of its Debentures issued under an Indenture (the "Indenture")
dated as of September 30, 1997, between the Company and EPP as Trustee. In
connection with this sale, the Company issued, on September 30, 1997, 15,000
common shares, valued at $172,500, to EPP, to partially pay the Placement Fees.
The Indenture was amended on February 20, 1998. See "Market for Common Shares
and Related Shareholder Matters -- Issuance of Shares Without Registration."
Effective October 13, 1997, the Company issued 5,000 common shares to
EPP and agreed to pay a corporate development fee of $125,000 to EPP in
connection with a future equity raising transaction. The common shares were
issued in reliance on Regulation S under the Securities Act.
As of November 14, 1997, pursuant to its Mandatory Conversion right,
approximately $2,000,000 principal amount of Debentures were converted to
166,666 common shares at a price of $12.00 per share. On February 20, 1998, the
Company amended the Debentures as set forth under "Market for Common Shares and
Related Shareholder Matters -- Issuance of Shares Without Registration."
In January 1998, the Company acquired Flightways by purchasing
substantially all of the issued and outstanding shares of Flightways. The
Company paid approximately $2,900,000 in cash and retired approximately
$1,100,000 in Flightways debt by refinancing such debt using the Company's
credit facility.
On January 20, 1998, the Company entered into a letter of intent with
Skylock Industries Incorporated ("Skylock") to acquire 100% of the issued and
outstanding shares of Skylock. The acquisition of Skylock is subject to the
entering of a definitive agreement and verification of factual matters. There is
no assurance the transaction will close.
As of February 20, 1998, the Company received and accepted
subscriptions for the sale of 26,333 units (the "1998 Units"), representing
210,664 common shares and warrants to acquire 52,666 common shares at $13.00 per
share (the "1998 Warrants") for approximately $2,054,000. The 1998 Units were
sold to accredited non-United States persons in reliance on Regulation S under
the Securities Act. The 1998 Warrants are exercisable at any time prior to
February 20, 2000.
EPP acted as placement agent in connection with the offering of the
1998 Units and received a commission of 9% of the sale price of the Units sold,
or approximately $185,000. EPP also received a corporate development fee of
approximately $61,620, which was based on the number of Units sold.
19
On April 2, 1997, the Board of Directors authorized and issued stock
option contracts to purchase 100,000 common shares at $6.25 per share to
officers and certain key employees of the Company. On August 7, 1997, stock
option contracts to purchase an additional 270,000 common shares at $10.00 per
share were issued to certain officers of the Company. On August 28, 1997, the
Board of Directors authorized the issuance of options to certain directors,
executive officers and employees to purchase 89,500 common shares at $8.25 per
share pursuant to the Company's 1997 Omnibus Stock Option Plan. On January 16,
1998, as a part of the Flightways acquisition and in order to retain key
management personnel and employees, the Company issued options to purchase
50,000 common shares, 10,000 of which were issued under the 1997 Omnibus Stock
Option Plan, at $8.35 per share to key employees. On February 13, 1998, the
Board of Directors adopted the 1998 Nonqualified Share Option Plan (the "1998
Plan") authorizing the issuance of options to purchase 167,600 common shares and
issued options to purchase 119,600 common shares to certain directors, executive
officers and employees of the Company and Flightways. Additional options have
been reserved for attracting and rewarding nonexecutive employees and employees
of acquisition targets. On March 16, 1998, the Company issued options to
purchase 5,000 common shares under the 1998 Plan to an employee. For a
description of the terms of the option plans and option contracts, see
"Executive Compensation" below.
The Company will seek to acquire other companies in similar or allied
businesses. Any such acquisition will only be undertaken following a careful
analysis of the potential acquisition, any potential synergism with the
Company's existing business and the capital needs of the acquired products
compared to the capital needs and resources of the Company. There is no
assurance that any acquisitions will be successfully completed.
The Company will continue to actively seek equity capital infusions.
There is no assurance the Company will be successful in securing additional
capital.
Forward-Looking Statements
- --------------------------
Statements regarding the Company's expectations as to its capital
resources and certain other information presented in this Form 10-KSB constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting the economy and the Company's industry generally, factors that could
cause actual results to differ from expectations include, but are not limited
to, the following: (i) the Company's ability to obtain future debt financing may
be adversely affected by its uncertainty of future profitability; (ii) the
Company's ability to acquire other businesses in similar or allied businesses
may be adversely affected if the Company is not able to raise additional capital
and obtain any necessary debt financing; (iii) the Company's ability to raise
additional capital may be adversely affected by its lack of trading volume and
the Company's uncertainty of future profitability; (iv) regulation by
governmental authorities; (v) growth or lack of growth of the commercial airline
industry; (vi) the price and availability of aircraft parts and other materials;
(vii) the Company's ability to maintain existing customer and vendor
relationships; (viii) successful execution of the Company's expansion plans;
(ix) the Company's ability to service its debt financing; and (x) competition
and pricing pressures.
20
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-16.
The following financial statements of the Company are included beginning at page
F-1.
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-5
Notes to the Consolidated Financial Statements F-6 through F-16
21
[Letterhead]
MOORE STEPHENS FRAZER AND TORBET, LLP
CERTIFIED PUBLIC ACCOUNTANTS
OFFICE: 1199 South Fairway Drive, Walnut, California 91789
MAIL: Post Office Box 3949, City of Industry, California 91744
Telephone: (909) 595-4624 Facsimile: (909) 594-2357
e-mail: 75444,3314@compuserve.com
- --------------------------------------------------------------------------------
The Board of Directors
Fields Aircraft Spares, Inc.
Fillmore, California
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Fields
Aircraft Spares, Inc., formerly known as Fields Industrial Group, Inc., as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1997, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Fields Aircraft
Spares, Inc. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Moore Stephens Frazer and Torbet, LLP
Certified Public Accountants
February 20, 1998
MS An independently owned and operated member of Moore Stephens North America,
Inc. - members in principal cities throughout North America
Moore Stephens North America, Inc. is a member of Moore Stephens
International Limited - members in principal cities throughout the world.
F-1
FIELDS AIRCRAFT SPARES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------
ASSETS 1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 6,071,000 $ 88,000
Accounts receivable, net of allowance for
doubtful accounts of $100,000 in 1997 and
$50,000 in 1996 1,955,000 1,507,000
Inventory 11,058,000 8,108,000
Prepaid expenses 191,000 149,000
----------------- ----------------
Total current assets $ 19,275,000 $ 9,852,000
----------------- ----------------
LAND, BUILDING AND EQUIPMENT:
Land $ 210,000 $ 210,000
Building and building improvements 1,065,000 1,061,000
Furniture and equipment 565,000 548,000
----------------- ----------------
Totals $ 1,840,000 $ 1,819,000
Less accumulated depreciation and amortization 830,000 734,000
----------------- ----------------
Total land, building and equipment, net $ 1,010,000 $ 1,085,000
----------------- ----------------
OTHER ASSETS:
Debt issuance costs, net of accumulated
amortization of $192,000 in 1997 and
$388,000 in 1996 $ 1,267,000 $ 300,000
Other assets 629,000 262,000
----------------- ----------------
Total other assets $ 1,896,000 $ 562,000
----------------- ----------------
Total assets $ 22,181,000 $ 11,499,000
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---- ----
CURRENT LIABILITIES:
Accounts payable $ 1,239,000 $ 864,000
Accrued liabilities 241,000 230,000
Income taxes payable 1,000
Current portion of notes payable 55,000 6,323,000
----------------- -----------------
Total current liabilities $ 1,535,000 $ 7,418,000
----------------- -----------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion $ 15,047,000 $ 268,000
----------------- -----------------
SHAREHOLDERS' EQUITY:
Common stock $ 351,000 $ 312,000
Additional paid-in capital 6,959,000 5,065,000
Retained deficit (1,711,000) (1,564,000)
----------------- -----------------
Total shareholders' equity $ 5,599,000 $ 3,813,000
----------------- -----------------
Total liabilities and shareholders' equity $ 22,181,000 $ 11,499,000
================= =================
The accompanying notes are an integral part of this statement.
F-2
FIELDS AIRCRAFT SPARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
NET SALES $ 12,101,000 $ 5,734,000 $ 5,589,000
COST OF SALES 7,214,000 2,975,000 2,462,000
------------ --------------- ---------------
GROSS PROFIT $ 4,887,000 $ 2,759,000 $ 3,127,000
------------ --------------- ---------------
OPERATING EXPENSES $ 3,349,000 $ 2,608,000 $ 2,414,000
------------ --------------- ---------------
INCOME FROM OPERATIONS $ 1,538,000 $ 151,000 $ 713,000
------------ --------------- ---------------
OTHER INCOME (EXPENSE):
Casualty gain $ $ 949,000 $ -
Gain on exchange of debt - 4,759,000
Gain on sale of subsidiary - 183,000
Interest expense, net (1,676,000) (1,338,000) (1,163,000)
------------ --------------- ---------------
Total other income (expense) $ (1,676,000) $ (389,000) $ 3,779,000
------------ --------------- ---------------
(LOSS) INCOME BEFORE PROVISION (CREDIT) FOR INCOME TAXES $ (138,000) $ (238,000) $ 4,492,000
PROVISION (CREDIT) FOR INCOME TAXES 9,000 4,000 (55,000)
------------ --------------- ---------------
NET (LOSS) INCOME $ (147,000) $ (242,000) $ 4,547,000
============ =============== ===============
NET (LOSS) INCOME PER SHARE (fully-diluted basis) $ (.06) $ (.13) $ 3.47
============ =============== ===============
NET (LOSS) INCOME PER SHARE (primary basis) $ (.07) $ (.13) $ 3.47
============ =============== ===============
The accompanying notes are an integral part of this statement.
F-3
FIELDS AIRCRAFT SPARES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
COMMON STOCK
----------------------------
NUMBER ADDITIONAL TOTAL
OF SHARES PAID-IN RETAINED SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- ------ ------- ------- ----------------
BALANCES, December 31, 1994 944,352 $ 47,000 $ 1,376,000 $ (5,869,000) $ (4,446,000)
Issuance of common stock 40,000 250,000 250,000
Net income 4,547,000 4,547,000
--------- ----------- ------------- -------------- -------------
BALANCES, December 31, 1995 984,352 $ 297,000 $ 1,376,000 $ (1,322,000) $ 351,000
Additional paid-in capital 2,050,000 2,050,000
Issuance of common stock 317,785 15,000 1,639,000 1,654,000
Net loss (242,000) (242,000)
--------- ----------- ------------- -------------- -------------
BALANCES, December 31, 1996 1,302,137 $ 312,000 $ 5,065,000 $ (1,564,000) $ 3,813,000
Issuance of common stock 777,434 39,000 1,894,000 1,933,000
Net loss (147,000) (147,000)
--------- ----------- ------------- -------------- -------------
BALANCES, December 31, 1997 2,079,571 $ 351,000 $ 6,959,000 $ (1,711,000) $ 5,599,000
========= =========== ============= ============== =============
The accompanying notes are an integral part of this statement.
F-4
FIELDS AIRCRAFT SPARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (147,000) $ (242,000) $ 4,547,000
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation 99,000 120,000 89,000
Amortization of debt issuance costs 422,000 211,000 177,000
Loss on sale of assets 51,000
Gain on exchange of debt (4,759,000)
Gain on sale of subsidiary (183,000)
Increase in accounts receivable (448,000) (226,000) (925,000)
(Increase) decrease in inventory (2,950,000) (456,000) 84,000
Increase in prepaid expenses (42,000) (3,000) (93,000)
Increase in other assets (272,000) (81,000)
Decrease in income tax refund receivable 711,000
Increase (decrease) in accounts payable 375,000 376,000 (225,000)
Increase (decrease) in other accrued liabilities 11,000 91,000 (127,000)
Decrease in income taxes payable (1,000) (35,000)
------------- ------------ ------------
Net cash used in operating activities $ (2,681,000) $ (350,000) $ (820,000)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land, building and equipment $ (24,000) $ (13,000) $ (156,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on line of credit $ (6,232,000) $ (1,195,000) $ 1,250,000
Principal payments on notes payable (2,094,000) (193,000) (64,000)
Borrowings on notes payable 18,837,000 74,000 64,000
Costs associated with issuance of notes payable (1,782,000) (424,000)
Net proceeds from issuance of common stock 352,000 1,654,000 250,000
Costs associated with the issuance of common stock (393,000)
------------- ------------ ------------
Net cash provided by financing activities $ 8,688,000 $ 340,000 $ 1,076,000
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 5,983,000 $ (23,000) $ 100,000
CASH AND CASH EQUIVALENTS, beginning of year 88,000 111,000 11,000
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 6,071,000 $ 88,000 $ 111,000
============= ============ ============
The accompanying notes are an integral part of this statement.
F-5
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. Summary of significant accounting policies
------------------------------------------
a. Principles of consolidation and company background
--------------------------------------------------
The consolidated Group financial statements include the
accounts of Fields Aircraft Spares, Inc. (FASI), a Utah corporation, and its
wholly-owned subsidiaries Fields Aircraft Spares Incorporated (FASC), a
California corporation and Fields Aero Management, Inc. All significant
intercompany accounts and activity have been eliminated.
The Group distributes new aircraft parts and equipment for use
on international and domestic commercial and military aircraft and purchases and
sells parts on a brokerage basis.
b. Concentration of credit risk
----------------------------
Substantially all of the Group's trade accounts receivables
are due from companies in the aviation industry located throughout the United
States and internationally. The Group performs periodic credit evaluations of
its customers' financial condition and does not require collateral. Credit
losses relating to customers in the airline industry have consistently been
within management's expectations.
c. Concentration of sales
----------------------
The Group had sales to foreign companies that amounted to 12%,
17% and 32% of total sales for the years ended December 31, 1997, 1996 and 1995,
respectively.
For the year ended December 31, 1997, two customers accounted
for sales of $1,706,000 and $1,395,000. For the year ended December 31, 1996,
two customers accounted for sales of $657,000 and $351,000. For the year ended
December 31, 1995, two customers accounted for sales of $801,000 and $790,000.
d. Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, the Group
considers all highly liquid investments purchased with a maturity of three
months or less to be a cash equivalent.
The Group currently maintains cash in bank deposit accounts
which exceeds federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on cash in bank deposit accounts. Uninsured balances are approximately
$4,575,000 as of December 31, 1997.
F-6
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. Summary of significant accounting policies (continued)
------------------------------------------------------
e. Inventory
---------
Inventory is valued at the lower of cost or market value using
the first-in, first-out method. Where a group of parts were purchased together
as a lot, the cost of the lot was allocated to the individual parts by
management pro rata to the list selling price at the time of purchase.
Consistent with industry practice, inventory is carried as a current asset but
all inventory is not expected to be sold within one year.
f. Land, building and equipment
----------------------------
Land, building and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from 3 to 25 years.
The cost and related accumulated depreciation and amortization
of assets sold or otherwise retired are eliminated from the accounts and any
gain or loss is included in the statement of operations. The cost of maintenance
and repairs is charged to income as incurred, whereas significant renewals and
betterments are capitalized. Depreciation expense for the years ended December
31, 1997, 1996 and 1995 amounted to $99,000, $120,000 and $89,000, respectively.
g. Debt issuance costs
-------------------
Gross debt issuance costs of $1,459,000 less amortization of
$192,000 relate to the issuance of new financing. Amortization of debt issuance
costs for the years ended December 31, 1997, 1996 and 1995 amounted to $422,000,
$211,000 and $177,000, respectively. The costs are amortized using the
straight-line method over the life of the respective loans.
h. Revenue recognition
-------------------
The Group recognizes revenue from all types of sales under
the accrual method of accounting when title transfers. Title transfers at the
Group's facility.
i. Earnings per share
------------------
In March 1995, FASI's shareholders authorized the reverse
split of its common stock on the basis of fifty old shares for one new share.
This reverse split was effective as of November 1995. All references herein to
the number of shares are after the reverse split.
F-7
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. Summary of significant accounting policies (continued)
------------------------------------------------------
i. Earnings per share, (continued)
-------------------------------
Fully-diluted earnings per share was computed using 2,325,078,
1,840,543 and 1,312,469 shares for the years ended December 31, 1997, 1996 and
1995, respectively.
j. Income taxes
------------
The Group files consolidated income tax returns. Deferred
income taxes relate to temporary differences between financial statement and
income tax reporting of certain accrued expenses, state income taxes, bad debts,
inventory, and depreciation.
The Group adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". SFAS 109 requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between tax basis and financial reporting basis of assets
and liabilities. The income tax effect of the temporary differences as of
December 31, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Deferred tax liability resulting from
taxable temporary differences for
accounting for inventory $ (314,000) $ (314,000)
Deferred tax asset resulting from
deductible temporary differences
for allowance for doubtful accounts 6,000 4,000
Deferred tax asset resulting from
deductible temporary differences
for utilization of net operating loss
carryforwards for income tax purposes 1,078,000 1,344,000
Valuation allowance resulting from the
potential nonutilization of net operating
loss carryforwards for income tax
purposes (770,000) (1,034,000)
-------- ----------
Total deferred income taxes $ - $ -
============ ===========
F-8
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. Summary of significant accounting policies (continued)
------------------------------------------------------
k. Employee benefit plan
---------------------
FASC has a 401(k) Plan under Section 401(k) of the Internal
Revenue Code. The Plan allows all employees who are not covered by a collective
bargaining agreement to defer up to 25% of their compensation on a pre-tax basis
through contributions to the Plan. Contributions to the Plan by FASC are
discretionary and are determined by the Board of Directors. No contributions
were made to the Plan during the years ended December 31, 1997, 1996 and 1995.
l. Use of estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
its financial statements are reasonable and prudent. Actual results could differ
from these estimates.
2. Shareholders' equity
--------------------
FASI has 50,000 shares authorized of its $.001 par value
preferred stock. At December 31, 1997 and 1996, there were no shares of
preferred stock issued or outstanding.
FASI has the following common stock as of December 31, 1997
and 1996:
1997 1996
---- ----
Authorized 5,000,000 2,000,000
Issued and outstanding 2,079,571 1,302,137
Par value $.05 $.05
In February 1995, the Group owed $7,658,000 to McDonnell
Douglas Corporation (MDC). MDC canceled the debt in exchange for $850,000 plus
586,862 shares of Series A convertible preferred stock of FASC. This constituted
full and complete satisfaction of the MDC debt. The agreement provided for the
mandatory exchange of the Series A preferred stock of FASC for 25% of the total
outstanding common stock of FASI within 10 days following the date the common
stock is approved for quotation on, and is quoted for trading on, the Nasdaq
Stock Market.
F-9
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
2. Shareholders' equity
--------------------
FASI's common shares began quotation on the Nasdaq SmallCap
Market on March 26, 1997. On April 4, 1997 the MDC Series A shares were
exchanged by MDC for 564,194 common shares of FASI.
In 1996, FASI sold 317,785 shares of common stock and 158,893
warrants. Each warrant allows the holder to purchase one share of common stock
for $6.25. The net proceeds were $1,654,000 after deducting costs of $481,000
for underwriting and issuance.
In April 1997, the Group's wholly-owned subsidiaries entered
into separate Loan and Security Agreements for an aggregate of up to $10,000,000
with NationsCredit Commercial Funding ("NationsCredit") at an interest rate of
prime plus 3%. In connection with the NationsCredit loan facility, FASI issued
NationsCredit an option to acquire 40,000 common shares of FASI at a price of
$6.25 per share.
In addition, during 1997, FASI issued 31,574 shares of common
stock and 41,128 warrants. Each warrant allows the holder to purchase one share
of common stock for $6.25. FASI issued another 15,000 of common stock in
association with the issue of $10,000,000 at 8.50% subordinated debentures.
In September 1997, FASI closed the sale of these $10,000,000
Subordinated Redeemable Debentures due 2000 issued under an Indenture with
Etablissement Pour le Placement Prive as Trustee. The Securities were sold in
reliance on Regulation S of the Securities Act of 1933 to entities which
represented to FASI to be accredited non-U.S. persons.
The Debenture holders have a one-time right at any time
between December 29, 1997 and September 27, 2000, subject to prior redemption or
repurchase, to convert up to 30% of the principal amount of such holder's
Debentures into Common Shares at a conversion price equal to 85% of the average
closing price of the Common Shares during the 20-trading day period ending on
the date of notice of conversion, but in no event less than $12.00 per share. In
the event that during any 20-day trading period, the average closing price of
the Common Shares equals or exceeds $12.00 per share, FASI may require the
conversion of up to 20% of the principal amount of outstanding Debentures at the
Conversion Price. Pursuant to this, in November 1997, FASI required the
conversion of $2,000,000 of Debentures in exchange for 166,666 of common shares
at $12.00 per share.
The Debentures are redeemable, in whole or in part, at the
option of the Group, at any time on or after March 31, 1999 at 100% of the
principal amount plus accrued interest.
F-10
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
3. Notes payable
-------------
The notes payable at December 31, 1997 and 1996 consisted of
the following:
1997 1996
---- ----
Subordinated debenture with fixed interest at 8.50%
per annum, payable semi-annually, due 2000 $ 8,000,000 $ -
Note payable to NationsCredit, secured by all
assets of the Group, interest at prime plus 3.0%
(11.5% at December 31, 1997), payable monthly,
due 2000 7,047,000
Line of credit from Norwest, secured by all assets
of the Group, interest at prime plus 7.0%
(15.25% at December 31, 1996), payable monthly 6,232,000
Note payable to bank, secured by land and building,
payable monthly at $2,396 plus interest at prime
plus 2% (10.25% at December 31, 1996) 331,000
Other notes payable 55,000 28,000
---------------- -----------------
Total notes payable $ 15,102,000 $ 6,591,000
Less current portion 55,000 6,323,000
---------------- -----------------
Notes payable, net of current portion $ 15,047,000 $ 268,000
================ =================
Principal payment requirements on all notes payable based on terms
explained above are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
1998 $ 55,000
1999 -
2000 15,047,000
Thereafter -
Total interest expense including the amortization of debt
issuance costs for the years ended December 31, 1997, 1996 and 1995 amounted to
$1,676,000, $1,338,000 and $1,163,000, respectively. Total interest paid for the
years ended December 31, 1997, 1996 and 1995 amounted to $1,048,000, $1,706,000
and $936,000, respectively.
F-11
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
4. Provision (credit) for income taxes
-----------------------------------
The provision (credit) for income taxes for the years ended December 31
consisted of the following:
1997 1996 1995
---- ---- ----
CURRENT:
Federal $ $ $ (55,000)
State 9,000 4,000
-------- -------- ----------
Total provision (credit) for
income taxes $ 9,000 $ 4,000 $ (55,000)
======== ======== ==========
Total income taxes paid in 1997, 1996 and 1995 amounted to
$3,000 each year. The Group has net operating loss carryovers available to
offset future taxable income. The amount and expiration date of the carryovers
are as follows:
YEAR ENDING
DECEMBER 31, FEDERAL STATE
------------ ------- -----
1998 $ $ 750,000
1999 580,000
2000 126,000
2001 110,000
2008 942,000 70,000
2009 1,161,000
2010 255,000
2011 225,000
2012 140,000
5. Commitments
-----------
The Group leases a warehouse and office facility under an
operating lease. The minimum lease payments required under operating leases as
of December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
1998 $160,000
1999 144,000
2000 144,000
2001 144,000
2002 84,000
Thereafter -
F-12
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
5. Commitments (continued)
-----------------------
The Group subleases the warehouse and office facility under an
operating lease. As of December 31, 1997, the minimum lease payments to be
received under this agreement total $687,500.
Lease expense for the years ended December 31, 1997, 1996 and 1995 was
$150,000, $102,000 and $84,000, respectively. Lease income for the year ended
December 31, 1997 was $34,000.
6. Related party transactions
--------------------------
The Group leases a small overseas office facility on a month to month
basis from an entity owned by certain officers of the Group.
7. Stock option plans
------------------
In November 1995, FASI adopted a Management Stock Option Plan
("Management Plan") and Employee Stock Option Plan ("Employee Plan"). Pursuant
to the Management Plan, FASI has issued options to five individuals involved in
the management of FASI to acquire up to 69,025 common shares of FASI at a
purchase price of $3.00 per share subject to vesting requirements, which
includes FASI obtaining sales during a 12-month period of $7,500,000 and an
average closing price for FASI's Common Shares for a three-month period of
$6.00, $9.00 and $12.00, respectively, for each one-third of the options to
vest. The options must vest by November 1998 and must be exercised within three
years of vesting. Pursuant to the Employee Plan, FASI has issued options to
acquire 13,500 common shares of FASI to 20 employees of FASI at a purchase price
of $3.00 per share subject to vesting requirements, which include FASI obtaining
sales during a 12-month period of $7,500,000 and at least one year continued
employment after the grant of the option. The options must vest by November 1998
and must be exercised within two years of vesting.
In April 1997, FASI issued options to employees of the Group to acquire
up to 100,000 common shares of FASI at an exercise price of $6.25 per share.
Half of the options will vest in April 1998 and the remaining half will vest in
April 1999. The options expire in April 2000.
On August 7, 1997 FASI issued options to employees of the Group to
acquire up to 270,000 common shares of FASI at an exercise price of $10.00 per
share. The options will vest if the Group meets the following two conditions;
F-13
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
7. Stock options plans (continued)
-------------------------------
the Group must raise at least $7,500,000 in additional debt or equity capital
and the Group must have sales of at least $14,000,000 in any 12-month period.
The options must vest by June 30, 1999 and will expire three years after the
vesting date.
On August 28, 1997, FASI issued options to employees of the Group to
acquire up to 89,500 common shares of FASI at an exercise price of $8.25 per
share. Half of the options will vest in August 1998 and the remaining half will
vest in August 1999. The options expire in August 2002.
The Group accounts for stock options under the provision of APB Opinion
25 "Accounting for Stock Issued to Employees". Accordingly, no compensation cost
has been recognized for its stock option grants. Had compensation cost for the
Group's stock option grants been determined based on the fair value at the grant
dates consistent with the method of FASB Statement 123 "Accounting for
Stock-Based Compensation", the Group's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
For the year ended
December 31, 1997
-----------------
Net loss As reported $ (147,000)
==============
Pro forma $ (1,136,000)
==============
Primary earnings
per share As reported $ (.07)
==============
Pro forma $ (.55)
==============
Fully-diluted earnings
per share As reported $ (.06)
==============
Pro forma $ (.49)
==============
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
the April 1997, August 7, 1997 and August 28, 1997 grants, respectively:
risk-free interest rates of 6.4%, 5.7% and 6.0%; expected lives of two years for
all three grants; and volatility of 78% for all three grants.
F-14
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
7. Stock options plans (continued)
-------------------------------
The first condition for vesting of the August 7, 1997 option grant was
met in September 1997. The Group anticipates meeting the second vesting
conditions of sales of $14,000,000 in any 12-month period in March 1998.
Accordingly, the effect of these options on the above pro forma amounts was
determined under the assumption that the options will vest in March 1998.
The fair value of the November 1995 option grant was determined to be
immaterial. Accordingly, the effect of these options on income is not included
in the above pro forma amounts.
8. Contingency
-----------
In the event of the death of a Director or Officer of the Group, the
Group is obligated to pay up to 100% of the Director's or Officer's annual
compensation to their beneficiary within the twelve months subsequent to their
death.
9. Casualty gain
-------------
In April 1996, the Group reached a final settlement with its insurance
company. Management elected to record a casualty gain as a result of the January
1994 earthquake. A gain of $949,000 was recorded in the financial statements in
1996 as a result of this transaction.
10. Subsequent events
-----------------
In January 1998, the Group completed the acquisition of Flightways
Manufacturing, Inc. Flightways Manufacturing, Inc. is a manufacturer of plastic
replacement components for commercial aircraft seats and interiors.
Each share of Flightways Manufacturing, Inc. tendered into the offer
was exchanged for cash. The total cost of the acquisition excluding liabilities
assumed was approximately $2,866,000.
The acquisition will be accounted for as a purchase in 1998. The
purchase price will be allocated to the assets acquired and liabilities assumed
based on their estimated fair values. Results of operations for Flightways
Manufacturing, Inc. will be included with those of the Group for periods
subsequent to the date of acquisition.
F-15
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
10. Subsequent events (continued)
-----------------------------
The excess of the purchase price over net assets acquired,
which is expected to exceed $2,500,000, will be amortized over a period not
exceeding 15 years.
The following unaudited pro forma data presents the
consolidated results of operations as if the acquisition had been completed at
January 1, 1997 and does not purport to be indicative of what would have
occurred had the acquisition actually been made of that date or of results which
may occur in the future.
(UNAUDITED) 1997
----------- ----
Net sales $ 16,091,000
Net income $ 123,000
Earnings per share:
Fully diluted $ .05
Primary $ .06
On February 20, 1998, the Group received and accepted subscription
agreements for the sale of 210,664 shares of common stock and 52,666 warrants
for approximately $2,054,000. Each warrant allows the holder to purchase one
share of common stock for $13.00. The Securities were sold in reliance on
Regulation S of the Securities Act of 1933 to entities which represented to FASI
to be accredited non-U.S. persons.
On February 20, 1998, the Group entered into a Supplemental Indenture
to the Indenture with Etablissement Pour le Placement Prive as trustee, relating
to the 8.5% Subordinated Redeemable Debenture due 2000 described in Note 2. The
Supplemental Indenture provides that the Debenture holders have the following
additional rights: at any time between February 20, 1998 and June 30, 1998, each
holder may convert 20% of the original principal amount of such holder's
Debentures into Common Shares at a conversion price of $9.75 per share; at any
time between February 20, 1998 and September 30, 1998, each holder may convert
an additional 20% of the original principal amount of such holder's Debentures
into Common Shares at a conversion price of $11.00 per share; at any time
between February 20, 1998 and December 31, 1998, each holder may convert an
additional 20% of the original principal amount of such holder's Debentures into
Common Shares at a conversion price of $13.00 per share.
F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
- --------------------------------------------------------------------------------
WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------
Information regarding directors, executive officers, promoters and
control persons of the Company and Management's compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, appears under the sections
"Executive Officers," "Election of Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" in the Company's Proxy Statement to be
filed within 120 days after December 31, 1997, with the Securities and Exchange
Commission relating to the Company's Annual Meeting of Shareholders and is
incorporated herein by reference thereto.
ITEM 10. EXECUTIVE COMPENSATION
- -------- ----------------------
Information regarding the compensation of the Company's executives
appears under the section "Management Compensation" in the Company's Proxy
Statement to be filed within 120 days after December 31, 1997, with the
Securities and Exchange Commission relating to the company's Annual Meeting of
Shareholders and is incorporated herein by reference thereto.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information regarding beneficial security ownership of the Company's
equity securities appears under the section "Security Ownership of Directors,
Nominees and Principal Security Holders" in the Company's Proxy Statement to be
filed within 120 days after December 31, 1997, with the Securities and Exchange
Commission relating to the Company's Annual Meeting of Shareholders and is
incorporated herein by reference thereto.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
- -------- ----------------------------------------------------
Information regarding certain relationships and related transactions
appears under the section "Transactions With Related Parties" in the Company's
Proxy Statement to be filed within 120 days after December 31, 1997, with the
Securities and Exchange Commission relating to the Company's Annual Meeting of
Shareholders and is incorporated herein by reference thereto.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Index to Exhibits
-----------------
The following documents are included as exhibits.
SEC Exhibit Sequential
No. No. Description Page No.
--- --- ----------- --------
2 2.1 Stock Purchase Agreement by and among the Company
and Sellers listed in Exhibit A to the agreement dated
January 2, 1998 (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K dated
January 16, 1998 (the "January 1998 8-K"))
22
SEC Exhibit Sequential
No. No. Description Page No.
--- --- ----------- --------
3 3.1 Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement on Form 10-SB, filed October 30, 1995 (the
"Form 10-SB") and Exhibit 3.1.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter
ended June 30, 1997)
3 3.2 Amended and Restated By-laws 27
4 4.1 Form of Warrant Agreement (1996-97 Regulation S
Private Placement) (Incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB/A for the fiscal year ended December
31, 1996 (the "1996 10-KSB/A"), filed April 29, 1997)
4 4.2 Form of Option Agreement to NationsCredit Commercial
Funding (Incorporated by reference to Exhibit 4.2 to the
1996 10-KSB/A)
4 4.3 Indenture for the 8.5% Subordinated Redeemable
Debentures Due 2000, dated as of September 30, 1997,
between the Company and Etablissement Pour le
Placement Prive, as Trustee (the "Indenture").
(Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated September
30, 1997 (the "September 1997 8-K"))
4 4.4 Form of 8.5% Subordinated Redeemable Debentures Due
2000 (included in Exhibit A to Exhibit 4.3 above)
(Incorporated by reference to Exhibit 4.2 to the September
1997 8-K)
4 4.5 First Supplemental Indenture, dated February 20, 1998, to
the Indenture (Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated
February 20, 1998)
4 4.6 Form of Warrant Agreement (1998 Regulation S Private
Placement) 50
9 9.1 Voting Agreement dated February 7, 1995, among
McDonnell Douglas Corporation, the Registrant, Peter
Frohlich, Alan Fields, and Lawrence Troyna (Incorporated
by reference to Exhibit 5.1 to the Form 10-SB)
10 10.1 Debt Restructure Agreement dated February 7, 1995
between McDonnell Douglas Corporation and the
Registrant (Incorporated by reference to Exhibit 6.1 to the
Form 10-SB)
23
SEC Exhibit Sequential
No. No. Description Page No.
--- --- ----------- --------
10 10.2 Securities Exchange Agreement dated February 7, 1995,
between McDonnell Douglas Corporation and the
Registrant (Incorporated by reference to Exhibit 6.2 to the
Form 10-SB)
10 10.3 Discretionary Revolving Credit Facility and Credit and
Security Agreement dated February 9, 1995, between
Fields Aircraft Spares, Inc., a California corporation and
Norwest Business Credit, Inc. (Incorporated by reference
to Exhibit 6.3 to the Form 10-SB)
10 10.4 First Amendment to Credit Agreement, dated November
20, 1995 (Incorporated by reference to Exhibit
6.4 to Amendment No. 1 to the Company's
Registration Statement on Form 10-SB ("Form
10-SB/A"), filed
January 29, 1996)
10 10.5 Second Amendment to Credit Agreement, dated February
19, 1996 (Incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996 (the "1996 10-KSB), filed
March 28, 1997)
10 10.6 Third Amendment to Credit Agreement, dated June 30,
1996 (Incorporated by reference to Exhibit 10.6 to the
1996 10-KSB)
10 10.7 Fourth Amendment to Credit Agreement, dated August
1996 (Incorporated by reference to Exhibit 10.7 to the
1996 10-KSB)
10 10.8 Fifth Amendment to Credit Agreement, dated January 1,
1997 (Incorporated by reference to Exhibit 10.8
to the 1996 10-KSB)
10 10.9 Sixth Amendment to Credit Agreement, dated February 1,
1997 (Incorporated by reference to Exhibit 10.9 to the
1996 10-KSB)
10 10.10 Seventh Amendment to Credit Agreement, dated March 1,
1997 (Incorporated by reference to Exhibit 10.10 to the
1996 10-KSB)
10 10.11 Eighth Amendment to Credit Agreement, dated March
1997 (Incorporated by reference to Exhibit 10.11 to the
1996 10-KSB)320
10 10.12 1995 Management Stock Option Plan (Incorporated by
reference to Exhibit 6.5 to Form 10-SB/A)
10 10.13 1995 Employee Stock Option Plan (Incorporated by
reference to Exhibit 6.6 to Form 10-SB/A)
24
SEC Exhibit Sequential
No. No. Description Page No.
--- --- ----------- --------
10 10.14 Lease dated May 16, 1994, by and between Harold Pease 64
and Flightways Manufacturing, Inc.
10 10.15 Loan Agreement between Fields Aircraft Spares
Incorporated and NationsCredit Commercial Funding,
dated April 18, 1997 (Incorporated by reference to Exhibit
10.14 to 1996 Form 10-KSB/A)
10 10.16 Loan Agreement between Fields Aero Management, Inc.
and NationsCredit Commercial Funding, dated April 18,
1997 (Incorporated by reference to Exhibit 10.15 to 1996
Form 10-KSB/A)
10 10.17 Covenant not to Compete dated as of January 2, 1998, by
and among the Company, Flightways Manufacturing, Inc.
and Yung Ford (Incorporated by reference to Exhibit 10.1
to January 1998 8-K)
10 10.18 Covenant not to Compete dated as of January 2, 1998, by
and among the Company, Flightways Manufacturing, Inc.
and Frank Scalise (Incorporated by reference to Exhibit
10.2 to January 1998 8-K)
10 10.19 Covenant not to Compete dated as of January 2, 1998, by
and among the Company, Flightways Manufacturing, Inc.
and Christian J. Luhnow (Incorporated by reference to
Exhibit 10.3 to January 1998 8-K)
11 11.1 Statement re: Computation of Per Share Earnings 80
21 21.1 Subsidiaries of Registrant 81
27 27.1 Financial Data Schedule LAST
(b) Reports on Form 8-K
-------------------
The Company filed a Report on Form 8-K, dated November 13, 1997,
covering Item 5, Other Events, with respect to the mandatory conversion of
approximately $2,000,000 principal amount of its 8.5% Subordinated Redeemable
Debentures Due 2000.
The Company filed a Report on Form 8-K, dated January 16, 1998,
covering Item 2, Acquisition or Disposition of Assets.
The Company filed a Report on Form 8-K, dated February 20, 1998,
covering Item 9, Sales of Equity Securities Pursuant to Regulation S.
25
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 7, 1998
FIELDS AIRCRAFT SPARES, INC.
By /s/ Alan M. Fields
-----------------------
Alan M. Fields
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alan M. Fields Principal Executive
- ------------------------------- Officer April 7, 1998
Alan M. Fields President and Director
/s/ Lawrence J. Troyna Principal Financial April 6, 1998
- ------------------------------- Officer
Lawrence J. Troyna Secretary and Director
/s/ Peter Frohlich Chairman and Director April 6, 1998
- -------------------------------
Peter Frohlich
/s/ Leonard I. Fields Director April 7, 1998
- -------------------------------
Leonard I. Fields
/s/ Rt. Hon. Sir Jeremy Hanley Director April 7, 1998
- -------------------------------
Rt. Hon. Sir Jeremy Hanley
/s/ Mary L. Sprouse Director April 6, 1998
- -------------------------------
Mary L. Sprouse
26