UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended _________________
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from January 1, 1998 to April 3, 1998
Commission file number 0-27100
FIELDS AIRCRAFT SPARES, INC.
----------------------------
(Exact 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 93005
---------------------------------------------------
(Address of principal executive offices)
(805) 583-0080
------------------------------------------------
(Issuer's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class of Stock Amount Outstanding
- ---------------------------- ------------------------
$.05 par value Common Shares 2,383,648 Common Shares
at May 12, 1998
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes _____ No X
FIELDS AIRCRAFT SPARES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet....................................3
Statement of Operations..........................4
Statement of Cash Flows..........................5
Statement of Shareholders' Equity................6
Notes to Financial Statements....................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................20
Part II. - Other Information
Item 1. Legal Proceedings........................................23
Item 2. Changes in Securities....................................23
Item 3. Defaults upon Senior Securities..........................23
Item 4. Submission of Matters to a Vote
of Security Holders.............................23
Item 5. Other Information........................................24
Item 6. Exhibits and Reports on Form 8-K.........................24
2
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 3, 1998 AND DECEMBER 31, 1997
A S S E T S
1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 3,720,000 $ 6,071,000
Accounts receivable, less allowance for doubtful
accounts of $160,000 in 1998 and $100,000
in 1997 3,641,000 1,955,000
Inventory 12,319,000 11,058,000
Prepaid expeses 239,000 191,000
------------ -----------
Total current assets $ 19,919,000 $19,275,000
------------ -----------
LAND, BUILDING AND EQUIPMENT:
Land $ 210,000 $ 210,000
Building and building improvements 1,079,000 1,065,000
Furniture and equipment 1,798,000 565,000
------------ -----------
Totals $ 3,087,000 $ 1,840,000
Less accumulated depreciation and amortization 1,293,000 830,000
------------ -----------
Land, building and equipment, net $ 1,794,000 $ 1,010,000
------------ -----------
OTHER ASSETS:
Debt issuance costs, net of accumulated
amortization $ 1,145,000 $ 1,267,000
Goodwill, net of accumulated amortization 2,715,000
Other assets 43,000 629,000
------------ -----------
Total other assets $ 3,903,000 $ 1,869,000
------------ -----------
Total assets $ 25,616,000 $22,181,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,844,000 $ 1,239,000
Other accrued liabilities 638,000 241,000
Current portion of notes and capital
leases payable 40,000 55,000
------------ -----------
Total current liabilities $ 2,522,000 $ 1,535,000
------------ -----------
LONG-TERM LIABILITIES $ 16,188,000 $15,047,000
------------ -----------
SHAREHOLDERS= EQUITY:
Common stock $ 362,000 $ 351,000
Additional paid-in capital 8,145,000 6,959,000
Retained deficit (1,601,000) (1,711,000)
------------ -----------
Total shareholders' equity $ 6,906,000 $ 5,599,000
------------ -----------
Total liabilities and shareholders'
equity $ 25,616,000 $22,181,000
============ ===========
3
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND MARCH 31, 1997
1998 1997
---- ----
SALES $ 5,596,000 $ 2,089,000
COST OF SALES 3,775,000 1,235,000
--------------- ----------------
GROSS PROFIT $ 1,821,000 $ 854,000
OPERATING EXPENSES 1,235,000 844,000
--------------- ----------------
INCOME FROM OPERATIONS $ 586,000 $ 10,000
INTEREST EXPENSE, NET 473,000 664,000
--------------- ----------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES $ 113,000 $ (654,000)
PROVISION FOR INCOME TAXES 3,000 -
--------------- ----------------
NET INCOME (LOSS) $ 110,000 $ (654,000)
=============== ================
NET INCOME (LOSS) PER SHARE (fully-diluted
basis) $ .06 $ (.29)
=============== ================
NET INCOME (LOSS) PER SHARE (primary basis) $ .04 $ (.29)
=============== ================
4
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND MARCH 31, 1997
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 110,000 $ (654,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 71,000 31,000
Amortization of goodwill and debt issuance costs 167,000 230,000
(Increase) decrease in accounts receivable (1,686,000) 129,000
Increase in inventory (1,261,000) (289,000)
(Increase) decrease in prepaid expenses (48,000) 19,000
Increase in other assets (15,000)
Increase in accounts payable 605,000 526,000
Increase in other accrued liabilities 397,000 343,000
--------------- ---------------
Net cash (used in) provided by operating activities $ (1,660,000) $ 335,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment $ (855,000) $ (1,000)
Acquisition of goodwill (2,760,000)
--------------- ---------------
Net cash used in investing activities $ (3,615,000) $ (1,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit $ 1,041,000 $ (89,000)
Principal payments on notes and capital leases
payable (50,000) (35,000)
Costs associated with issuance of notes payable (115,000)
Borrowing on notes and capital leases payable 135,000
Proceeds from issuance of common stock 2,055,000 81,000
Costs associated with the issuance of common stock (257,000) (132,000)
--------------- ---------------
Net cash provided by (used in) financing activities $ 2,924,000 $ (290,000)
--------------- ---------------
NET (DECREASE) INCREASE IN CASH $ (2,351,000) $ 44,000
CASH AND CASH EQUIVALENTS, December 31, 1997
and 1996 6,071,000 88,000
--------------- ---------------
CASH AND CASH EQUIVALENTS, April 3, 1998 and
March 31, 1997 $ 3,720,000 $ 132,000
=============== ===============
5
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND MARCH 31, 1997
COMMON STOCK
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN RETAINED SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL DEFICIT EQUITY
----------- ------ ------- ------- ------
BALANCES, December 31, 1997 2,079,571 $ 351,000 $ 6,959,000 $ (1,711,000) $ 5,599,000
Issuance of common stock 210,664 11,000 1,186,000 1,197,000
Net income 110,000 110,000
--------- ---------- ------------ ------------- ------------
BALANCES, April 3, 1998 2,290,235 $ 362,000 $ 8,145,000 $ (1,601,000) $ 6,906,000
========= ========== ============ ============= ============
BALANCES, December 31, 1996 1,302,137 $ 312,000 $ 5,065,000 $ (1,564,000) $ 3,813,000
Issuance of common stock 10,781 1,000 (101,000) (100,000)
Net loss (654,000) (654,000)
--------- ---------- ------------ ------------- ------------
BALANCES, March 31, 1997 1,312,918 $ 313,000 $ 4,964,000 $ (2,218,000) $ 3,059,000
========= ========== ============ ============= ============
6
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED 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, Flightways Manufacturing, Inc. (FMI) 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 14%
and 17% of total sales for the three months ended April 3, 1998 and March 31,
1997, respectively.
For the three months ended April 3, 1998, two customers
accounted for sales of $582,000 and $768,000. For the three months ended March
31, 1997, two customers accounted for sales of $273,000 and $135,000.
d. Cash and cash equivalents
For purposes of the statement of cash flows, the Group
considers all highly liquid investments purchased with an original 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 were approximately
$2,888,000 as of April 3, 1998.
7
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED 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.
Inventory consisted of the following as of April 3, 1998 and
December 31, 1997:
1998 1997
---- ----
Raw materials $ 389,000 $
Work-in-process 218,000
Finished goods 11,712,000 11,058,000
------------ ----------
Totals $ 12,319,000 $ 11,058,000
================= ==========
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 three months ended
April 3, 1998 and March 31, 1997 amounted to $71,000 and $31,000, respectively.
Long-term assets of the Company are reviewed annually as to
whether their carrying value has income impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of April 3, 1998
management expects these assets to be fully recoverable.
8
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
g. Debt issuance costs
Gross debt issuance costs of $1,459,000 less amortization of
$314,000 at April 3, 1998 relate to the issuance of new financing. Amortization
of debt issuance costs for the three months ended April 3, 1998 and March 31,
1997 amounted to $122,000 and $230,000, 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.
Fully-diluted earnings per share was computed using 3,506,323
and 2,249,589 shares for the three months ended April 3, 1998 and March 31,
1997, 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, 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 April
3, 1998 and December 31, 1997 consisted of the following:
1998 1997
Deferred tax liability resulting from
taxable temporary differences for
accounting for inventory $ (314,000) $ (314,000)
Deferred tax liability resulting from
taxable temporary differences for
accounting for depreciation (19,000)
9
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
j. Income taxes (continued)
1998 1997
----
Deferred tax asset resulting from
deductible temporary differences
for allowance for doubtful accounts $ 32,000 $ 6,000
Deferred tax asset resulting from
deductible temporary differences for
product warranty costs 3,000
Deferred tax asset resulting from deductible
temporary differences for accrued
expenses 5,000
Deferred tax asset resulting from
deductible temporary differences
for utilization of net operating loss
carryforwards for income tax purposes 1,078,000 1,078,000
Valuation allowance resulting from the
potential nonutilization of net operating
loss carryforwards for income tax
purposes (785,000) (770,000)
---------- ----------
Total deferred income taxes $ - $ -
========== ==========
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 three months ended April 3, 1998 and March 31,
1997.
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.
10
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
m. Change in accounting period
In March 1998, the Company elected to change its reporting
year to a 52-53 week year ending on the Friday which includes the last business
day in December, with each quarter being reported in a similar fashion.
Accordingly, this financial statement includes the activities for the first
quarter of 1998 ending on April 3.
2. Shareholders' equity
FASI has 50,000 shares authorized of its $.001 par value
preferred stock. At April 3, 1998 and December 31, 1997, there were no shares of
preferred stock issued or outstanding.
FASI has the following common stock as of April 3, 1998 and
December 31, 1997:
1998 1997
---- ----
Authorized 5,000,000 5,000,000
Issued and outstanding 2,290,235 2,079,571
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.
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.
11
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Shareholders' equity (continued)
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.
In February 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. 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
12
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Shareholders' equity (continued)
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.
In February 1998, the Group received and accepted subscription
agreements for the sale of 210,664 shares of common stock and 52,666 warrants
for approximately $2,055,000. 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.
3. Notes and capital leases payable
The notes and capital leases payable at April 3, 1998 and
December 31, 1997 consisted of the following:
1998 1997
---- ----
Subordinated debenture with fixed interest at 8.50%
per annum, payable semi-annually, due 2000 $ 8,000,000 $ 8,000,000
Note payable to NationsCredit, secured by all
assets of the Group, interest at prime plus 3.0%
(11.5% at March 31, 1998 and December 31, 1997),
payable monthly, due 2000 8,088,000 7,047,000
Capital lease payable, secured by equipment, monthly
payments of $841 including interest at 16.6%, due
May 2002 31,000
Capital lease payable, secured by equipment, monthly
payments of $1,176 including interest at 9.5%, due
June 2001 40,000
Capital lease payable, secured by equipment, monthly
payments of $1,313 including interest at 9.6%, due
August 2002 56,000
Other notes payable 13,000 55,000
------------- -------------
Total notes and capital leases payable $ 16,228,000 $ 15,102,000
Less current portion 40,000 55,000
------------- -------------
Notes and capital leases payable, net of
current portion $ 16,188,000 $ 15,047,000
============= =============
13
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Notes and capital leases payable (continued)
Principal payment requirements on all notes payable based on
terms explained above are as follows:
YEAR ENDING
MARCH 31, AMOUNT
1999 $ 40,000
2000 16,119,000
2001 34,000
2002 27,000
2003 8,000
Thereafter -
Total interest expense including the amortization of debt
issuance costs for the three months ended April 3, 1998 and March 31, 1997
amounted to $481,000 and $664,000, respectively. Total interest paid for the
three months ended April 3, 1998 and March 31, 1997 amounted to $525,000 and
$434,000, respectively.
4. Provision for income taxes
The provision for income taxes for the three months ended
April 3, 1998 and March 31, 1997 consisted of the following:
1998 1997
CURRENT:
State $ 3,000 $ -
------------- -----------
Total provision for income
taxes $ 3,000 $ -
============= ===========
Total income taxes paid in 1998 and 1997 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:
14
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Provision for income taxes (continued)
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 facilities and vehicles under operating
leases and subleases a facility to a third party. The minimum lease payments
required under the leases as of April 3, 1998 are as follows:
YEAR ENDING OPERATING LEASES OPERATING LEASES
MARCH 31, EXPENSE INCOME
1999 $ 789,000 $ 156,000
2000 900,000 78,000
2001 900,000
2002 900,000
2003 756,000
Lease expense for the three months ended April 3, 1998 and
March 31, 1997 was $73,000 and $34,000, respectively. Lease income for the three
months ended April 3, 1998 was $39,000.
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.
15
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
In August 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 conditions;
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.
Half of the options will vest no earlier than August 1998 with the other half
vesting no earlier than August, 1999. The conditions must be met by June 30,
1999 and the options will expire three years after the vesting date.
In August 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 Company granted share options to certain key employees and
executives on the following dates:
16
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Stock option plans (continued)
On January 16, 1998, Group A: 10,000 common shares at a price
of $8.35 per share. Half of the options will vest on January 15, 1999 and the
remainder will vest on January 14, 2000. The options will expire January 16,
2003 and Group B: 40,000 common shares at a price of $8.35 per share subject to
certain vesting requirements. Subject to satisfaction of performance conditions,
half of the options vest on January 15, 1999, and the remainder vest on January
15, 2000. The options expire three years after vesting.
On February 13, 1998, 119,600 common shares at a price of
$10.00 per share subject to vesting requirements. Subject to satisfaction of
performance conditions, half of the options vest on February 12, 1999, and the
remainder vest on February 11, 2000. The options expire on February 13, 2003.
On March 16, 1998, 5,000 options of which half vest on March
15, 1999 and the remainder vest on March 15, 2000, subject to performance and
expire March 16, 2003.
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 three months ended April 3, 1998 (March 31, 1997 amounts are not
affected):
Net income (loss) As reported $ 110,000
==========
Pro forma $ (330,000)
==========
Primary earnings
per share As reported $ .04
==========
Pro forma $ (.11)
==========
Fully-diluted earnings
per share As reported $ .06
==========
Pro forma $ (.07)
==========
17
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Stock option plans (continued)
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. For
all the 1998 grants, risk-free interest rates ranging from 5.3% to 5.6% were
used, with expected lives of two years and volatility of 73% for all grants.
The first condition for vesting of the August 7, 1997 option
grant was met in September 1997. The Group met the second vesting condition of
sales of $14,000,000 in any 12-month period in March 1998. Accordingly, it is
assumed these options will vest at the earliest possible date.
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. Acquisition
In January 1998, the Group completed the acquisition of
Flightways Manufacturing, Inc. (FMI). FMI is a manufacturer of plastic
replacement components for commercial aircraft seats and interiors.
Each share of FMI tendered into the offer was exchanged for
cash. The total cost of the acquisition excluding liabilities assumed was
approximately $2,866,000. The acquisition was accounted for as a purchase. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The assets, liabilities and results of
operations for FMI is included with those of the Group as of April 3, 1998 and
for the three months then ended.
18
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Acquisition (continued)
The excess of the purchase price over the net assets acquired
and liabilities assumed, of approximately $2,760,000 is being amortized over 15
years. Amortization of goodwill for the three months ended April 3, 1998
amounted to $45,000.
10. Subsequent event
In April 1998, the Group acquired 100% of the issued and
outstanding shares of Skylock Industries, Inc. (Skylock) by paying approximately
$750,000 in cash, retiring approximately $100,000 in Skylock debt and issuing
approximately 60,000 common shares of FASI. Eighty percent of the cash amount
was paid and eighty percent of the shares were issued at the closing. The
remainder will be paid in one year, with the cash amount to be paid and the
number of shares to be issued based on Skylock's customer order volume between
April 1, 1998 and March 31, 1999.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUARTERS ENDED APRIL 3, 1998 AND MARCH 31, 1997
On March 30, 1998, the Company changed its fiscal year to a 52- or
53-week year ending on Friday of the calendar week which contains the last
business day of December. This report contains financial information for the
first quarter of the fiscal year consisting of the transition period from
January 1, 1998 to April 3, 1998. The comparable period for the prior year is
the calendar quarter ended March 31, 1997.
Operations of the Company and its subsidiaries for the quarter ended
April 3, 1998 generated income of $586,000, compared to operating income of
$10,000 for the comparable period of 1997. The increase in income for the
current quarter is attributable to an increase in sales resulting in an increase
in the dollar amount of gross profit.
Net sales for the quarter ended April 3, 1998 were $5,596,000 compared
to $2,089,000 for the comparable period of 1997, an increase of $3,507,000 or
approximately 168%. This increase in sales included an increase of $1,944,000
across the broad range of the Company's products and $1,563,000 as a result of
the inclusion of sales of Flightways Manufacturing, Inc. ("Flightways"), a
wholly-owned Company acquired in January 1998.
Flightways' firm backlog at April 3, 1998 was approximately $3,400,000,
compared to approximately $1,200,000 at March 31, 1997.
Cost of sales for the quarter ended April 3, 1998 and March 31, 1997
were $3,775,000 and $1,235,000 respectively (approximately 67% and 59% of sales
respectively). The reduction in gross margin percentage is a result of a change
in the product mix of sales of the Company and also the inclusion of the results
of Flightways which, as a manufacturing entity, has a higher cost of goods sold
percentage than parts distribution.
Operating expenses increased to $1,235,000 for the quarter ended April
3, 1998 from $844,000 for the quarter ended March 31, 1997. This was principally
attributable to the inclusion of the results of Flightways.
Interest expense decreased to $473,000 from $664,000 in the quarters
ended April 3, 1998 and March 31, 1997, respectively. This was attributable to a
reduction in overall interest rate, a non-recurring $340,000 accelerated
write-off of loan costs and other fees in the 1997 period and was offset by
interest on increased debt amounts outstanding to finance both growth and the
acquisition of Flightways.
As a result of the foregoing, the Company had net income for the
quarter ended April 3, 1998 of $110,000 as compared to a net loss of $654,000
for the comparable period in 1997, an increase in net income of $764,000. On a
per-share basis, net income for the current period was $.06 per share fully
diluted ($.04 per share primary) compared to a loss of $.29 per share (primary
and fully diluted) in the comparable period of 1997. Fully diluted net income
per share is higher than primary net income due to adjustment in interest
payable on convertible debt.
20
LIQUIDITY
As at April 3, 1998, the Company had working capital (current assets in
excess of current liabilities) of $17,397,000 compared to working capital of
$17,740,000 at December 31, 1997. Although the net result was a small reduction
of only $343,000 there were factors of substantial amounts affecting this, the
largest being the acquisition of Flightways.
The cost of the acquisition was approximately $2,866,000 with a further
approximately $1,100,000 being used to retire debt. The acquisition was
partially funded by an issue of common shares (see CAPITAL RESOURCES) which
produced net cash proceeds of $1,798,000, an increase in borrowings under the
Company's line of credit with Nationscredit of $1,041,000 and cash.
Operating activities used $1,660,000 and generated $335,000 of the
Company's cash flow for the quarters ended April 3, 1998, and March 31, 1997,
respectively. Other than cash, there were increases in all current assets. These
increases were mostly as a result of the Flightways acquisition. Accounts
receivable and inventory increased by $1,686,000 and $1,261,000 respectively,
and of these increases, the Flightways acquisition represented $1,474,000 and
$673,000 respectively.
Similarly, there were increases in accounts payable of $605,000 and
accrued liabilities of $397,000, of which the Flightways acquisition represented
$288,000 and $407,000, respectively.
CAPITAL RESOURCES
On February 20, 1998, the Company completed a private placement to
non-United States persons pursuant to Regulation S of the Securities Act of
1933, as amended. The Company issued 26,333 units consisting of 210,664 common
shares and warrants to acquire 52,666 common shares at $13 per share (the
"Warrants"). The units were sold for $2,053,974. The warrants are exercisable at
any time 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
$1,798,000. For financial accounting purposes at April 3, 1998, an additional
$600,000 has been offset against the proceeds of the placement as additional
costs in connection with the issuance of securities.
In April 1998, the Company acquired 100% of the issued and outstanding
shares of Skylock by paying approximately $750,000 in cash, retiring
approximately $100,000 in Skylock debt and issuing approximately 60,000 common
shares of the Company. Eighty percent of the cash amount was paid and
approximately 80% of the shares were issued at the closing. The remainder will
be paid in one year, with the cash amount to be paid and the number of shares to
be issued based on Skylock's customer order volume between April 1, 1998 and
March 31, 1999.
The Company will continue to actively seek debt and/or equity capital
infusions. The Company intends to use a substantial portion of any additional
capital to pursue potential acquisitions and the purchase of distributorship
inventory. There is no assurance the Company will be successful in securing
additional capital.
21
Forward-Looking Statements
Statements regarding the Company's expectations as to its capital
resources, its use of additional capital raised and certain other information
presented in this Form 10-QSB constitute forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. 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 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 financing may be
adversely affected by its past technical defaults on its debt financing and 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 or locate other suitable
businesses 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
aviation industry, (vi) the price and availability of aircraft parts and other
materials, (vii) the Company's ability to maintain existing customer or vendor
relationships, (viii) successful execution of the Company's expansion plans,
(ix) the Company's ability to service its debt financing and (x) competitive and
pricing pressures.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any known litigation.
ITEM 2. CHANGES IN SECURITIES.
Issuance of Shares Without Registration
During the quarter ended April 3, 1998, the Company issued the
following securities without registration under the Securities Act of 1933:
During the quarter, the Company issued options to employees and
directors of the Company and its subsidiaries entitling such persons to acquire
up to a total of 174,600 common shares, subject to vesting requirements. The
exercise terms of such options are described in Note 7 to the unaudited
consolidated financial statements bound herein. The Company did not receive any
cash consideration for such issuance, and paid no commissions. The Company
believes such issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
On February 20, 1998, the Company completed a private placement to
non-United States persons pursuant to Regulation S of the Securities Act of
1933, as amended. The Company issued 26,333 units consisting of 210,664 common
shares and warrants to acquire 52,666 common shares at $13 per share (the
"Warrants"). The units were sold for $2,053,974. The warrants are exercisable at
any time 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
$1,798,000. For financial accounting purposes at March 31, 1998, an additional
$600,000 has been offset against the proceeds of the placement as additional
costs in connection with the issuance of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the quarter ended April 3, 1998.
23
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities
and Exchange Commission as required by Item 601 of
Regulation S-K, are incorporated herein by reference
in accordance with the provisions of Rule 12b-32.
Exhibit 11 Statement re computation of per share
earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Forms 8-K during the
quarter ended April 3, 1998:
1. The Company filed a Form 8-K dated January 16,
1998 reporting the acquisition of Flightways pursuant
to Item 2 and 7. The Form 8-K was amended on March
30, 1998 to include financial statements of
Flightways for the year ended December 31, 1997 and
pro forma financial information.
2. The Company filed a Form 8-K dated February 20,
1998 reporting in Items 7 and 9 the sale of
securities pursuant to Regulation S. No financial
statements were filed with the report.
3. The Company filed a Form 8-K dated March 30, 1998
reporting in Item 8 the change in the Company's
fiscal year to a 52- 53-week year. No financial
statements were filed with the report.
24
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 1998
FIELDS AIRCRAFT SPARES, INC.
By:/s/ Alan M. Fields
---------------------------------------
Alan M. Fields, President and Principal
Executive Officer
By:/s/ Lawrence J. Troyna
---------------------------------------
Lawrence J. Troyna, Principal Financial
Officer
25