UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
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.)
4175 Guardian Street, Simi Valley, California 93063
---------------------------------------------------
(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 2,483,781 Common Shares
at November 6, 1998
TRANSITIONAL 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 Shareholders' Equity..............6
Statement of Cash Flows........................7
Notes to Financial Statements..................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................21
Part II. - Other Information
Item 1. Legal Proceedings......................................26
Item 2. Changes in Securities..................................26
Item 3. Defaults upon Senior Securities........................26
Item 4. Submission of Matters to a Vote
of Security Holders...........................26
Item 5. Other Information......................................26
Item 6. Exhibits and Reports on Form 8-K.......................26
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 2, 1998 AND DECEMBER 31, 1997
A S S E T S
1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 626,000 $ 6,071,000
Accounts receivable, less allowance for doubtful
accounts of $145,000 in 1998 and $100,000
in 1997 5,563,000 1,955,000
Inventory 16,893,000 11,058,000
Prepaid expenses 790,000 191,000
------------ ----------------
Total current assets $ 23,872,000 $ 19,275,000
------------ ----------------
LAND, BUILDING AND EQUIPMENT:
Land $ 210,000 $ 210,000
Building and building improvements 1,245,000 1,065,000
Furniture and equipment 4,172,000 565,000
------------ ----------------
Totals $ 5,627,000 $ 1,840,000
Less accumulated depreciation and amortization 2,386,000 830,000
------------ ----------------
Land, building and equipment, net $ 3,241,000 $ 1,010,000
------------ ----------------
OTHER ASSETS:
Debt issuance costs, net of accumulated
amortization $ 1,061,000 $ 1,267,000
Goodwill, net of accumulated amortization 3,286,000
Other assets 629,000
----------------
Total other assets $ 4,347,000 $ 1,869,000
------------ ----------------
Total assets $ 31,460,000 $ 22,181,000
------------ ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,454,000 $ 1,239,000
Other accrued liabilities 1,178,000 241,000
Current portion of notes and capital
leases payable 57,000 55,000
------------ ----------------
Total current liabilities $ 4,689,000 $ 1,535,000
------------ ----------------
LONG-TERM LIABILITIES: $ 19,506,000 $ 15,047,000
------------ ----------------
SHAREHOLDERS' EQUITY:
Common stock $ 371,000 $ 351,000
Additional paid-in capital 9,308,000 6,959,000
Retained deficit (2,414,000) (1,711,000)
------------ ----------------
Total shareholders' equity $ 7,265,000 $ 5,599,000
------------ ----------------
Total liabilities and shareholders'
equity $ 31,460,000 $ 22,181,000
------------ ----------------
3
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
1998 1997
---- ----
SALES $6,120,000 $3,414,000
COST OF SALES 4,028,000 2,148,000
----------
GROSS PROFIT $2,092,000 $1,266,000
OPERATING EXPENSES 1,263,000 791,000
---------- ----------
INCOME FROM OPERATIONS $ 829,000 $ 475,000
OTHER EXPENSES 585,000 307,000
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES $ 244,000 $ 168,000
PROVISION FOR INCOME TAXES 2,000 7,000
---------- ----------
NET INCOME $ 242,000 $ 161,000
========== ==========
NET INCOME PER SHARE (basic) $ .10 $ .08
========== ==========
NET INCOME PER SHARE (diluted) $ .08 $ .07
========== ==========
4
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
1998 1997
---- ----
SALES $17,510,000 $8,444,000
COST OF SALES 11,593,000 5,136,000
----------- ----------
GROSS PROFIT $5,917,000 $3,308,000
OPERATING EXPENSES 3,881,000 2,428,000
---------- ----------
INCOME FROM OPERATIONS $2,036,000 $ 880,000
OTHER EXPENSES 2,730,000 1,249,000
---------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES $ (694,000) $ (369,000)
PROVISION FOR INCOME TAXES 9,000 7,000
---------- ----------
NET LOSS $ (703,000) $ (376,000)
========== ==========
NET LOSS PER SHARE (basic) $ (.31) $ (.22)
========== ==========
NET LOSS PER SHARE (diluted) $ (.15) $ (.19)
========== ==========
5
FIELDS AIRCRAFT SPARES, INC.
UNAUDITED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
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 394,210 20,000 2,349,000 2,369,000
Net loss (703,000) (703,000)
----------------- ---------------- ----------------- ---------------- -----------------
BALANCES, OCTOBER 2, 1998 2,473,781 $371,000 $9,308,000 $(2,414,000) $7,265,000
================= ================ ================= ================ =================
BALANCES, DECEMBER 31, 1996 1,302,137 $312,000 $5,065,000 $(1,564,000) $3,813,000
Issuance of common stock 605,749 30,000 142,000 172,000
Net loss (376,000) (376,000)
----------------- ---------------- ----------------- ---------------- -----------------
BALANCES, SEPTEMBER 30, 1997 1,907,886 $342,000 $5,207,000 $(1,940,000) $3,609,000
================= ================ ================= ================ =================
6
Fields Aircraft Spares, Inc.
Unaudited Consolidated Statements of Cash Flows
For The Nine Months Ended
October 2, 1998 and September 30, 1997
1998 1997
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (703,000) $ (376,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 241,000 91,000
Amortization of goodwill and debt issuance costs 561,000 410,000
Increase in accounts receivable (3,608,000) (753,000)
Increase in inventory (5,835,000) (2,057,000)
Increase in prepaid expenses (599,000) (21,000)
Decrease (increase) in other assets 629,000 (138,000)
Increase in accounts payable 2,215,000 1,119,000
Increase in other accrued liabilities 937,000 90,000
Increase in income taxes payable 6,000
------------------ ------------------
Net cash used in operating activities $ (6,162,000) $(1,629,000)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment $ (2,658,000) $ (20,000)
Acquisition of goodwill (3,441,000)
------------------ ------------------
Net cash used in investing activities $ (6,099,000) $ (20,000)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line credit $ 3,982,000 $(6,232,000)
Principal payments on notes payable (69,000) (19,000)
Borrowings on notes payable 635,000 18,810,000
Costs associated with issuance of notes payable (200,000) (1,881,000)
Net proceeds from issuance of common stock 2,872,000 352,000
Costs associated with the issuance of common stock (404,000) (147,000)
------------------ ------------------
Net cash provided by financing activities $ 6,816,000 $10,883,000
------------------ ------------------
NET (DECREASE) INCREASE IN CASH: $ (5,445,000) $ 9,234,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, December 31, 1997 and
1996 6,071,000 88,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, October 2, 1998
and September 30, 1997 $ 626,000 $ 9,322,000
================== ==================
7
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), Skylock Industries
(Skylock) and Fields Aero Management, Inc. (FAM). All significant intercompany
accounts and activity have been eliminated.
The Group manufactures and 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 airline 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 13%
of total sales for each of the nine months ended October 2, 1998 and September
30, 1997.
For the nine months ended October 2, 1998, two customers
accounted for sales of $3,355,000 and $1,459,000. For the nine months ended
September 30, 1997, two customers accounted for sales of $1,207,000 and
$1,063,000.
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 $525,000
as of October 2, 1998.
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
8
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 as of October 2, 1998 and December 31, 1997
consisted of the following:
1998 1997
---- ----
Raw materials $ 743,000 $
Work-in-process 689,000
Finished goods 15,461,000 11,058,000
----------- -----------
Total $16,893,000 $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 nine months ended
October 2, 1998 and September 30, 1997 amounted to $241,000 and $91,000,
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 October 2,
1998 management expects these assets to be fully recoverable.
g. Debt issuance costs
Gross debt issuance costs of $1,509,000 less amortization of
$448,000 at October 2, 1998 relate to the issuance of financing. Amortization of
debt issuance costs for the nine months ended October 2, 1998 and September 30,
1997 amounted to $406,000 and $410,000, respectively. The costs are amortized
using the straight-line method over the life of the respective loans.
9
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
facilities.
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.
The Group adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." SFAS 128 requires the presentation of earnings per share
(EPS) as Basic EPS and Diluted EPS. Therefore, the EPS for the periods ended
September 30, 1997 have been restated to conform to SFAS 128. The reconciliation
of the basic and diluted EPS components as of October 2, 1998 and September 30,
1997 is as follows:
For the nine months ended,
October 2, September 30,
1998 1997
--------- ---------
Net Loss available to common stock $(703,000) $(376,000)
Interest on convertible debentures 163,000
Net Loss available to common stock $(540,000) $(376,000)
For the three months ended,
October 2, September 30,
1998 1997
---- ----
Net Income available to common stock $ 242,000 $ 161,000
Interest on convertible debentures 64,000
Net Income available to common stock $ 306,000 $ 161,000
10
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended,
October 2, September 30,
1998 1997
---- ----
Number of common shares outstanding 2,473,781 1,907,886
Weighted averages (197,659) (215,976)
Potential dilutive shares 1,363,380 290,056
------------ ----------
Dilutive number of shares 3,639,502 1,981,966
For the three months ended,
October 2, September 30,
1998 1997
Number of common shares outstanding 2,473,781 1,907,886
Weighted averages (24,039) (15,000)
Potential dilutive shares 1,325,667 431,404
--------- ---------
Dilutive number of shares 3,775,409 2,324,290
========= =========
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 October 2,
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)
Deferred tax asset resulting from
deductible temporary differences
for allowance for doubtful accounts 32,000 6,000
11
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended October 2, 1998 and September
30, 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.
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 of the calendar week (beginning on Monday
and ending on Sunday) which includes the last business day in December, with
each quarter being reported in a similar fashion. Accordingly, this financial
statement includes the balances and activities for the periods of 1998 ending on
October 2.
12
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Shareholders' equity
FASI has 50,000 shares authorized of its $.001 par value preferred
stock. At October 2, 1998 and December 31, 1997, there were no shares of
preferred stock issued or outstanding.
FASI has the following common stock as of October 2, 1998 and December
31, 1997: 1998 1997
Authorized 5,000,000 5,000,000
Issued and outstanding 2,473,781 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. In April 1998, warrants were exercised to purchase
93,413 shares of common stock for $6.25 per share. The net proceeds were
$450,000 after deducting costs of $134,000 for underwriting and issuance.
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.
The Group's wholly-owned subsidiaries have a Loan and Security
Agreement for an aggregate of up to $15,000,000 with NationsCredit Commercial
Funding ("NationsCredit") at an interest rate of prime plus 2%. 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 September 1997, FASI closed the sale of $10,000,000 Subordinated
Redeemable Debentures due 2000 issued under an Indenture with Etablissement Pour
le Placement
13
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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. No additional debentures have been converted.
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.
In April 1998, 48,015 common shares were issued to acquire Skylock
Industries. In April 1998, warrants were exercised to purchase 93,413 shares of
common stock at $6.25 per share. The net proceeds were $450,000 after deducting
costs of $134,000 for underwriting and issuance.
In July 1998, warrants were exercised to purchase 12,118 shares of
common stock at $6.25 per share. The net proceeds were $72,000 after deducting
costs of $4,000 for underwriting and issuance. In August 1998, warrants were
exercised to purchase 30,000 shares of common stock at $6.25 per share. The net
proceeds were $178,000 after deducting costs of $9,000 for underwriting and
issuance.
14
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Notes and capital leases payable
The notes and capital leases payable at October 2, 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
2.0% (11.0% at October 2, 1998), payable
monthly, due 2001 11,029,000 7,047,000
Notes and capital leases payable, secured by equipment,
monthly payments of $11,940 including
interest at rates ranging from 8.9% to 16.6%,
due through October 2002 477,000
Other notes payable 57,000 55,000
----------- -----------
Total notes and capital leases payable $19,563,000 $15,102,000
Less current portion 57,000 55,000
Notes and capital leases payable, net of
current portion $19,506,000 $15,047,000
=========== ===========
Principal payment requirements on all notes payable based on
terms explained above are as follows:
YEAR ENDING
OCTOBER 2, AMOUNT
1999 $ 57,000
2000 8,197,000
2001 11,090,000
2002 170,000
2003 49,000
Thereafter
Total interest expense including the amortization of debt issuance
costs for the nine months ended October 2, 1998 and September 30, 1997 amounted
to $1,530,000 and $1,249,000, respectively. Total interest paid for the nine
months ended October 2, 1998 and September 30, 1997 amounted to $1,114,000 and
$786,000, respectively.
15
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Other expense
During the quarter ended July 3, 1998, the Company recorded
non-recurring expenses of $1,200,000 to reflect the acquisition of a new
facility, relocation costs and the initial expansion of the newly acquired
manufacturing operations.
5. Provision for income taxes
The provision for income taxes for the nine months ended October 2,
1998 and September 30, 1997 consisted of the following:
1998 1997
---- ----
CURRENT:
State $ 9,000 $ 2,000
-------- --------
Total provision for income
taxes $ 9,000 $ 2,000
======== ========
Total income taxes paid in 1998 and 1997 amounted to $9,000 and $3,000.
The Group has net operating loss carryovers available to offset future federal
and California 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
6. Commitments
The Group leases facilities and vehicles under operating leases
expiring through October 31, 2008 and subleases a facility to a third party. The
minimum lease payments required under the leases as of October 2, 1998 are as
follows:
16
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDING OPERATING LEASE OPERATING LEASE
OCTOBER 2, EXPENSE INCOME
---------- ------- ------
1999 $ 998,000 $ 156,000
2000 955,000 39,000
2001 900,000
2002 900,000
2003 756,000
Thereafter 3,654,000
Lease expense for the nine months ended October 2, 1998 and September
30, 1997 was $413,000 and $98,000, respectively. Lease income for the nine
months ended October 2, 1998 was $136,000.
7. 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.
8. 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 vested 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 executives 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
17
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
$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 after the grant date. Half of the
options vested August 6, 1998 and the other half will vest in 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 vested 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:
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 14,
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 loss and loss per share would have
been increased to the pro forma amounts indicated below for the nine months
ended October 2, 1998 and September 30, 1997:
18
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1998 1997
---- ----
Net loss
As reported $ (703,000) $ (376,000)
================= ==============
Pro forma $ (2,175,000) $ (639,000)
================= ==============
Basic loss per share
As reported $ (.31) $ (.22)
================= ==============
Pro forma $ (.95) $ (.38)
================= ==============
Diluted loss per share
As reported $ (.15) $ (.19)
================= ==============
Pro forma $ (.55) $ (.32)
================= ==============
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 on August 6, 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.
9. 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.
10. Acquisitions
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.
19
FIELDS AIRCRAFT SPARES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 based on their estimated fair values and
liabilities assumed. The assets, liabilities and results of operations for FMI
are included with those of the Group as of October 2, 1998 and for the nine
months then ended.
The excess of the purchase price over the net assets acquired and
liabilities assumed, of $2,767,000, is being amortized over 15 years.
Amortization of goodwill for the nine months ended October 2, 1998 amounted to
$135,000.
In April 1998, the Group acquired 100% of the issued and outstanding
shares of Skylock Industries (Skylock) by paying $956,000 in cash, retiring
$101,000 in Skylock debt and issuing 60,019 common shares of FASI. In April
1998, $756,000 of the cash amount was paid and 48,015 common shares were issued
at 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 28, 1998 and April 27, 1999.
The total cost of acquisition was approximately $1,556,000. This
acquisition was accounted for as a purchase. The purchase price was allocated to
the assets acquired based on their fair market values and liabilities assumed.
The assets, liabilities and results of operations for Skylock are included with
those of the Group as of October 2, 1998 and for the nine months then ended.
The excess of the purchase price over the net assets acquired and
liabilities assumed of approximately $674,000 is being amortized over 15 years.
Amortization of goodwill for the nine months ended October 2, 1998 amounted to
$20,000.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUARTERS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
On March 30, 1998 the Company changed its fiscal year to a 52- 53 week
year ending on the Friday of the calendar week which contains the last business
day of December. This report contains financial information for the third
quarter of the fiscal year consisting of the period from July 4, 1998 to October
2, 1998. The comparable period for the prior year is the calendar quarter ended
September 30, 1997.
The Company and its subsidiaries for the quarter ended October 2, 1998
generated income from operations of $829,000, compared to operating income of
$475,000 for the comparable period of 1997, an increase of approximately 75%.
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 October 2, 1998 were $6,120,000
compared to $3,414,000 for the comparable period of 1997. This increase in net
sales of $2,706,000 or approximately 79%, was across the broad range of the
Company's products including approximately $1,532,000 as a result of the
inclusion of sales of Flightways Manufacturing, Inc ("Flightways"), a
wholly-owned company acquired in January 1998, and approximately $521,000 as a
result of the inclusion of sales of Skylock Industries, Inc. ("Skylock"), a
wholly-owned company acquired in April 1998.
Cost of sales for the quarters ended October 2, 1998 and September 30,
1997 were $4,028,000 and $2,148,000 respectively (approximately 66% and 63%
respectively). The reduction in gross margin percentage is a result of a change
in the product mix of the Company and also the inclusion of the results of
Flightways and Skylock which, as manufacturing entities, have a higher cost of
goods sold percentage than parts distribution.
Operating expenses increased to $1,263,000 for the quarter ended
October 2, 1998 from $791,000 for the quarter ended September 30, 1997. This was
principally attributable to the inclusion of the results of the newly acquired
companies.
Interest expense increased to $585,000 from $307,000 in the quarters
ended October 2, 1998 and September 30, 1997, respectively. This was
attributable to interest on increased debt amounts outstanding to finance both
growth and the acquisitions of Flightways and Skylock.
As a result of the foregoing, the Company had net income for the
quarter ended October 2, 1998 of $242,000 as compared to net income of $161,000
for the comparable period in 1997, an increase of $81,000. Net income for the
current period was $.08 per share diluted ($.10 per share basic) compared to an
income of $.07 per share diluted ($.08 per share basic) in the comparable period
of 1997.
21
NINE MONTHS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
On March 30, 1998, the Company changed its fiscal year to a 52- 53-
week year ending on the Friday of the calendar week which contains the last
business day of December. This report contains financial information for the
first nine months of the fiscal year consisting of the period from January 1,
1998 to October 2, 1998. The comparable period for the prior year is the nine
months ended September 30, 1997.
Operations of the Company and its subsidiaries for the nine months
ended October 2, 1998 generated income of $2,036,000, compared to operating
income of $880,000 for the comparable period of 1997, an increase of 131%. The
increase in income for the current nine months is attributable to an increase in
sales resulting in an increase in the dollar amount of gross profit.
Net sales for the nine months ended October 2, 1998 were $17,510,000
compared to $8,444,000 for the comparable period of 1997. This increase in net
sales of $9,066,000 or approximately 107%, was across the broad range of the
Company's products including approximately $4,520,000 as a result of the
inclusion of sales of Flightways, and approximately $1,023,000 as a result of
the inclusion of sales of Skylock.
Cost of sales for the nine months ended October 2, 1998 and September
30, 1997 were $11,593 000 and $5,136,000 respectively (approximately 66% and 61%
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 and Skylock which, as manufacturing entities, have a
higher cost of goods sold percentage than parts distribution.
Operating expenses increased to $3,881,000 for the nine months ended
October 2, 1998 from $2,428,000 for the nine months ended September 30, 1997.
This was principally attributable to the inclusion of the results of Flightways
and Skylock.
Interest expense, including the amortization of debt issuance costs,
increased to $1,530,000 from $1,249,000 in the nine months ended October 2, 1998
and September 30, 1997 respectively. This increase was attributable to interest
on increased debt amounts outstanding to finance both growth and the
acquisitions of Flightways and Skylock and was offset by a reduction in overall
interest rates and a non-recurring $340,000 accelerated write-off of loan costs
and other fees in the 1997 period.
The Company took a non-recurring charge to income in the nine months
period ended October 2, 1998 of $1,200,000 to reflect non-recurring expenses
relating to the acquisition of a new facility, relocation costs and the initial
expansion of the newly acquired manufacturing operations.
As a result of the foregoing, the Company had a net loss for the nine
months ended October 2, 1998 of $703,000 as compared to a net loss of $376,000
for the comparable period in 1997, an increase in net loss of $327,000. This was
entirely attributable to the one-time charge of $1,200,000. The net loss for the
current period
22
was $.15 per share diluted ($.31 per share basic) compared to a loss of $.19
diluted ($.22 per share basic) in the comparable period of 1997.
LIQUIDITY
As at October 2, 1998, the Company had working capital (current assets in
excess of current liabilities) of $19,183,000 compared to working capital of
$17,740,000 at December 31, 1997. Although the net result was a relatively small
reduction of $1,443,000, there were factors of substantial amounts affecting
this, the largest being the acquisitions of Flightways and Skylock.
The cost of the acquisition of Flightways 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
borrowing under the Company's line of credit with NationsCredit of approximately
$1,000,000 and cash. The total cost of acquisition of Skylock was approximately
$1,556,000 which was financed by a combination of cash of approximately $950,000
drawn from the Company's credit line with Nationscredit, an issue of common
stock (see Capital Resources) and a vendor deferred note conditional upon
certain targets being met.
Operating activities used $6,162,000 and $1,629,000 of the Company's cash
flow for the nine months ended October 2, 1998 and September 30, 1997,
respectively. There were increases in all non-cash current assets. These
increases were mostly as a result of the two acquisitions. Accounts receivable
increased by $3,608,000 entirely as a result of the acquisitions while inventory
increased by $5,835,000 of which $1,889,000 was represented by the acquisitions.
The balance of the increase in inventory was as a result of an expansion in the
Company's after-market aircraft inventory management and supply program, first
introduced in 1997.
There were increases in accounts payable of $2,215,000 of which the
acquisitions accounted for $881,000. Accrued liabilities increased by $937,000
which was as a result of the one-time charge of $1,200,000 taken in this period.
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 sale resulted in a net infusion of capital of approximately
$1,798,000. For financial accounting purposes an additional $600,000 was offset
against
23
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 $950,000 in cash, retiring
approximately $100,000 in Skylock debt and issuing 60,019 common shares of the
Company. Of these amounts $200,000 in cash and 12,004 common shares remain to be
paid over 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.
In April, July and August 1998, warrants, originally issued in 1996, were
exercised to purchase 93,413, 12,118 and 30,000 shares of common stock for $6.25
per share. The net proceeds were $450,000, $72,000 and $178,000 after deducting
costs of $134,000, $4,000 and $9,000 respectively for underwriting and issuance.
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 inventory. There is
no assurance the Company will be successful in securing additional debt and/or
capital.
YEAR 2000 ISSUE
The YEAR 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable rule. The Company is
addressing any possible liability related to this issue on its computer systems
by making system changes now and does not expect any material financial impact
to its consolidated financial position, results of operations or cash flows as a
result of making these changes.
There can be no assurance that the Company's suppliers or vendors will
be Year 2000 compliant and that their failure or any other third-party
enterprise with which the Company interacts to achieve that compliance could
have a material adverse effect on the Company, its financial condition and
results of operations.
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
24
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.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any material known litigation.
ITEM 2. CHANGES IN SECURITIES.
Issuance of Shares Without Registration
During the quarter ended October 2, 1998, the Company issued the follow
securities without registration under the Securities Act of 1933:
In July and August 1998, warrants, originally issued in the Company's
Units offering in 1996 and 1997, were exercised to purchase 42,118 common shares
for $6.25 per share. The warrants were exercised by non-United States persons
pursuant to Regulation S of the Securities Act of 1933. The net proceeds to the
Company were $250,000 after deducting accumulated offering costs of $13,000.
These costs include underwriting commissions paid to Etablissement Pour le
Placement Prive, Zurich, Switzerland.
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 October 2, 1998.
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 10.1 Sublease, dated for reference
purposes April 28, 1998, between
Sunrise Medical HHG Inc., a
California corporation, as
Sublandlord and Fields Aircraft
Spares, Incorporated, a California
corporation, as Subtenant,
26
including Consent of Master Landlord
and First Amendment to Sublease, and
Master Lease, dated for reference
purposes only, September 15, 1992,
by and between La Canada Flintridge
Development Corporation, LCF Income
Group, Jerve M. Jones and Peppertree
Corporate Business Park, Ltd., as
landlord, and Guardian Products,
Inc., as tenant, as amended by First
Amendment to Lease dated March 31,
1993. Exhibits referred to in the
Master Lease are omitted. The
Company agrees to furnish
supplementally a copy of any such
Exhibit to the Commission upon
request.
Exhibit 10.2 Guaranty of Sublease, made and
effective as of April 28, 1998, by
Fields Aircraft Spares, Inc., a Utah
corporation, in favor of Sunrise
Medical HHG Inc., a California
corporation.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the
quarter ended October 2, 1998.
27
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: November 16, 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
28