United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 2005
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to ____________
Commission File Number 0-21995
FIRST AVIATION SERVICES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1419064
- ----------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 RIVERSIDE AVENUE, WESTPORT, CONNECTICUT, 06880-4214
------------------------------------------------------
(Address of principal executive offices)
(203) 291-3300
(Registrant's telephone number)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of
September 1, 2005 is 7,341,451
FIRST AVIATION SERVICES INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets....................................................................3
Consolidated Condensed Statements of Operations........................................................4-5
Consolidated Condensed Statements of Cash Flows..........................................................6
Notes to Consolidated Condensed Financial Statements..................................................7-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................13-17
Item 3. Quantitative and Qualitative Disclosures about Market Risks.............................................17
Item 4. Controls and Procedures.................................................................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................................19
Item 3. Defaults Upon Senior Securities.........................................................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................................................19
Item 5. Other Information ......................................................................................20
Item 6. Exhibits................................................................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AVIATION SERVICES INC.
Consolidated Condensed Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 31, January 31,
2005 2005
------------- -----------
(unaudited) *
Assets
Current assets:
Cash and cash equivalents $ 19,516 $ 22,584
Trade receivables, net of allowance for doubtful 17,210 14,563
accounts of $651 and $806, respectively
Inventory, net of allowance for slow moving and obsolete 26,881 24,156
inventory of $1,740 and $1,656, respectively
Prepaid expenses and other 1,166 900
-------- --------
Total current assets 64,773 62,203
Plant and equipment, net 3,346 2,996
-------- --------
Total Assets $ 68,119 $ 65,199
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,100 $ 10,495
Accrued compensation and related expenses 1,254 1,205
Other accrued liabilities 2,380 2,424
Income taxes payable 1,026 900
-------- --------
Total current liabilities 17,760 15,024
Revolving line of credit 14,500 14,500
Minority interest in subsidiary -- 1,041
-------- --------
Total liabilities 32,260 30,565
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized, 91 91
9,135,699 shares issued
Additional paid-in capital 38,822 38,318
Retained earnings 5,909 5,325
Accumulated other comprehensive income 394 374
-------- --------
45,216 44,108
Less: Treasury stock, at cost, 1,794,248 and 1,814,191 (9,357) (9,474)
shares, respectively
-------- --------
Total stockholders' equity 35,859 34,634
-------- --------
Total liabilities and stockholders' equity $ 68,119 $ 65,199
======== ========
See accompanying notes.
* Balances were derived from the audited balance sheet as of January 31, 2005.
3
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three months ended
July 31,
2005 2004
----------- -----------
Net sales $ 32,706 $ 31,072
Cost of sales 27,164 26,303
----------- -----------
Gross profit 5,542 4,769
Selling, general and administrative expenses 4,928 4,759
Corporate expenses 583 845
----------- -----------
Income (loss) from operations 31 (835)
Net interest income (expense) and other 36 36
Other income 417 --
Minority interest in subsidiary -- (11)
----------- -----------
Income (loss) before income taxes 484 (810)
Provision for income taxes (52) (23)
----------- -----------
Net income (loss) $ 432 $ (833)
=========== ===========
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution:
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution $ 0.06 $ (0.11)
=========== ===========
Weighted average shares outstanding - basic 7,333,457 7,298,069
=========== ===========
Weighted average shares outstanding - assuming dilution 7,337,753 7,298,069
=========== ===========
See accompanying notes.
4
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Six months ended
July 31,
2005 2004
----------- -----------
Net sales $ 64,687 $ 61,287
Cost of sales 53,491 50,906
----------- -----------
Gross profit 11,196 10,381
Selling, general and administrative expenses 9,788 9,749
Corporate expenses 1,187 1,775
----------- -----------
Income (loss) from operations 221 (1,143)
Net interest income (expense) and other (2) (46)
Other income 417 --
Minority interest in subsidiary (10) (21)
----------- -----------
Income (loss) before income taxes 626 (1,210)
Provision for income taxes (42) (33)
----------- -----------
Net income (loss) $ 584 $ (1,243)
=========== ===========
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution:
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution $ 0.08 $ (0.17)
=========== ===========
Weighted average shares outstanding - basic 7,329,077 7,294,102
=========== ===========
Weighted average shares outstanding - assuming dilution 7,333,590 7,294,102
=========== ===========
See accompanying notes.
5
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Cash Flows (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Six months ended
July 31,
2005 2004
-------- --------
Cash flows from operating activities
Net income (loss) $ 584 $ (1,243)
Adjustments to reconcile net income (loss) to net
cash from operating activities - non-cash charges:
Depreciation and amortization 538 455
Compensation paid through issuance of stock 80 90
(Increase) decrease in current assets:
Trade receivables (2,642) (2,533)
Inventory (2,720) 430
Prepaid and other (253) 207
Increase (decrease) in current liabilities:
Accounts payable 2,599 624
Accrued compensation and related expenses, and other accrued liabilities 3 517
Income taxes payable 125 6
-------- --------
Net cash used in operating activities (1,686) (1,447)
Cash flows from investing activities
Purchases of plant and equipment (885) (415)
Proceeds from disposals of plant and equipment -- 3
-------- --------
Net cash used in investing activities (885) (412)
Cash flows from financing activities
Borrowings on revolving line of credit 29,000 27,150
Repayments on revolving line of credit (29,000) (27,150)
Repurchase of preferred stock of subsidiary (500) --
-------- --------
Net cash used in financing activities (500) --
-------- --------
Net decrease in cash and cash equivalents (3,071) (1,859)
Effect of exchange rates on cash 3 3
Cash and cash equivalents at beginning of period 22,584 25,144
-------- --------
Cash and cash equivalents at end of period $ 19,516 $ 23,288
======== ========
Supplemental cash flow disclosures:
Interest paid $ 63 $ 19
Income taxes paid $ 12 $ 41
See accompanying notes.
6
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 31, 2005
1. BASIS OF PRESENTATION
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries Aerospace Products International, Inc. ("API"), Aircraft Products
International, Ltd. ("API Ltd."), and API Asia Pacific Inc. ("API Asia Pacific")
(collectively, the "Company"), is one of the premier suppliers of services to
the aviation industry worldwide. The services the Company provides the aviation
industry include the sale of aircraft parts and components, the provision of
supply chain management services, overhaul and repair services for brakes and
starter/generators, and the assembly of custom hoses. The Company's principal
executive offices are located at 15 Riverside Avenue, Westport, Connecticut
06880. Customers of the Company include original equipment manufacturers,
aircraft manufacturers, passenger and cargo airlines, fleet operators, corporate
aircraft operators, flight training schools, fixed base operators, certified
repair facilities, governments and military services. The accompanying unaudited
consolidated condensed financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all material adjustments, including the elimination of intercompany
balances and transactions, and normal recurring accruals considered necessary
for a fair presentation, have been included in the accompanying unaudited
consolidated condensed financial statements. Operating results for the three
months and six months ended July 31, 2005 are not necessarily indicative of the
results that may be expected for the full fiscal year ending January 31, 2006.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended January
31, 2005.
2. WEIGHTED AVERAGE SHARES OUTSTANDING - ASSUMING DILUTION
The following sets forth the denominator used in the computation of net income
(loss) per share - assuming dilution:
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
--------- --------- --------- ---------
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 7,333,457 7,298,069 7,329,077 7,294,102
Effect of dilutive employee stock options 4,296 n/a 4,513 n/a
--------- --------- --------- ---------
Denominator for net income (loss) per
share - assuming dilution, adjusted
weighted average shares and assumed
dilutions 7,337,753 7,298,069 7,333,590 7,294,102
========= ========= ========= =========
For the three and six months ended July 31, 2004, the denominator used in the
calculation of loss per share from continuing operations - assuming dilution,
was the same as the denominator used for basic loss per share because the effect
of options would have been antidilutive. The number of potential shares of
common stock that were excluded from the computation of diluted earnings per
share because their effect was antidilutive for the three and six months ended
July 31, 2004, were 11,882, and 10,910 shares, respectively.
7
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Continued)
July 31, 2005
3. STOCK OPTIONS ISSUED TO EMPLOYEES
The Company's non-employee directors receive a portion of their annual
compensation in the Company's stock. The value of stock issued is equivalent to
the compensation expense, and the number of shares issued is based upon the fair
market value per share at the date issued. The Company's non-employee directors
receive compensation in cash for committee meetings and special board meetings,
excluding the four regularly scheduled board meetings and the annual
shareholders' meeting that is paid in stock as part of their annual
compensation. For the three months ended July 31, 2005 and 2004, the Company
issued 5,837 and 6,128 shares respectively, to directors for board fees. For the
six months ended July 31, 2005 and 2004, the Company issued 17,211 and 18,995
shares respectively, to directors for board fees.
The Company generally grants stock options to its employees for a fixed number
of shares with an exercise price equal to the fair market value of the stock on
the date of grant. As permitted under Statement of Financial Accounting Standard
No. ("FAS") 123, "Accounting for Stock-Based Compensation", the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for stock
awards to employees. No compensation expense was recognized during the three and
six months ending July 31, 2004 because all grants were issued at the fair
market value of the Company's common stock at the date of grant.
The Company is required to disclose the fair value, as defined, of options
granted to employees and the related compensation expense. The fair value of the
stock options granted was estimated at the date of grant using a Black-Scholes
option-pricing model. The Black-Scholes option-pricing model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. In management's opinion, because the Company's employee stock
options are not publicly traded, and have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
The fair value of each option issued was estimated at the date of grant. No
options were issued for the three or six months ended July 31, 2005. The
following assumptions were used for options issued during the six months ended
July 31, 2004:
2004
------------
Expected dividend yield 0.0%
Risk-free interest rate 3.6%
Expected volatility 31.9%
Expected life of option 5.0 years
Weighted-average fair value of
options granted $ 1.56
8
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Continued)
July 31, 2005
Using the above noted assumptions and the weighted-average fair value of each
option granted, the net income (loss) and earnings (loss) per share that would
have been recorded if the estimated fair value of options granted had been
recorded as an expense was:
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
------- ------- ------- --------
Net income (loss) as reported $ 432 $ (833) $ 584 $(1,243)
Pro forma net compensation expense for issuance of
stock options 13 12 26 31
------- ------- ------- -------
Pro forma net income (loss) $ 419 $ (845) $ 558 $(1,274)
======= ======= ======= =======
Basic net income (loss) per share, and net income
(loss) per share - assuming dilution as reported
$ 0.06 $ (0.11) $ 0.08 $ (0.17)
Pro forma basic net income (loss) per share, and
net income (loss) per share - assuming dilution
$ 0.06 $ (0.12) $ 0.08 $ (0.17)
======= ======= ======= =======
In December 2004, the FASB issued Statement No. 123 (Revised 2004), or Statement
123(R), SHARE-BASED PAYMENT, which is a revision of Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and amends Statement No. 95,
STATEMENT OF CASH FLOWS. The approach in Statement 123(R) is similar to the
approach described in Statement 123; however, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure, as allowed under Statement No. 123, will no longer be an
alternative.
In April 2005, the Securities and Exchange Commission ("SEC") announced the
adoption of a new rule that amends the compliance dates for Statement 123(R).
The SEC's new rule allows companies to implement Statement No. 123(R) at the
beginning of their next fiscal year, instead of the reporting period that begins
after June 15, 2005. The Company plans to adopt Statement 123(R) for the period
beginning February 1, 2006.
The impact of adoption of Statement 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future,
among other factors. The Company is currently evaluating the impact that the
adoption of Statement 123(R) will have on its consolidated results of
operations, financial position and cash flows.
4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The accumulated other comprehensive income (loss) resulted from the translation
of accounts into U.S. dollars where the functional currency is the Canadian
dollar. The increase to net income to arrive at comprehensive income during the
three and six months ended July 31, 2005 was due to a decrease in the value of
the U.S. dollar relative to the Canadian dollar. Comprehensive income (loss) for
the periods shown was as follows:
9
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Continued)
July 31, 2005
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
------- ------- ------- -------
Net income (loss) as reported $ 432 $ (833) $ 584 $(1,243)
Net impact of foreign currency translation
adjustments - gain 43 60 20 33
------- ------- ------- -------
Net comprehensive income (loss) $ 475 $ (773) $ 604 $(1,210)
======= ======= ======= =======
5. INCOME TAXES
The Company recorded a provision (benefit) for income taxes related to foreign
income tax expense estimates for operations in Canada and the Philippines. No
provision is made for U.S. taxation because the Company has sufficient net
operating loss carryforwards that would be utilized to offset any provision for
pre-tax income. No deferred tax provision is recorded because it would be offset
by a change in the deferred tax valuation allowance. The Company does not record
a tax benefit for U.S. tax purposes due to the deferred tax valuation allowance
recorded, as it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
6. RELATED PARTIES
The Company and First Equity Development Inc. ("First Equity"), the wholly-owned
subsidiary of First Equity Group, Inc., and the majority stockholder of the
Company, have an agreement relating to the allocation of potential investment
and acquisition opportunities in the aerospace parts distribution and logistics
businesses. The agreement was approved by the independent members of the Board
of Directors on a month-to-month basis effective February 1, 2004. First Equity
Group, Inc. is beneficially owned by Mr. Aaron P. Hollander and Mr. Michael C.
Culver, respectively Chairman of the Board and Chief Executive Officer of the
Company. Pursuant to the agreement, neither First Equity nor any of its
majority-owned subsidiaries will consummate any acquisition of a majority
interest in any aerospace parts distribution and logistics business anywhere in
the world (a "Covered Acquisition"), without first notifying the Company and
providing the Company with the opportunity to effect the Covered Acquisition for
its own account. The Company's decision as to whether to effect the Covered
Acquisition will be made by the independent members of the Board of Directors of
the Company. The agreement can be terminated by either party upon 30 days
written notice to the other party. The agreement does not apply to any proposed
acquisition by First Equity of any business that generates less than 15% of its
aggregate net sales from aerospace parts distribution or logistics, or to any
advisory services performed by First Equity on behalf of third parties.
The Company and First Equity also had an advisory agreement, approved by the
independent members of the Board of Directors on a month-to-month basis
effective February 1, 2004. Pursuant to the terms of this agreement, First
Equity provided the Company with investment and financial advisory services
relating to potential acquisitions and other financial transactions. The
agreement could be terminated by either party upon 30 days' written notice to
the other party. The Company paid First Equity a $30 monthly retainer, and
reimbursed First Equity for its out-of-pocket expenses. In addition, upon the
successful completion of certain transactions, the Company would pay a fee to
First Equity (the "Success Fee"). The amount of any Success Fee would be
established by the independent members of the Board of Directors and would be
dependent upon a variety of factors, including, but not limited to, the services
provided and the size and the type of transaction. Up to one year's worth of
retainer fees paid could be applied as a credit against any Success Fee, subject
to certain limitations. The advisory agreement terminated on January 31, 2005.
During the three and six months ended July 31, 2005, and 2004, the Company paid
First Equity retainer fees of $0 and $90, and $0 and $180, respectively, and no
Success Fee.
The Company and First Equity had entered into an arrangement whereby First
Equity provided the Company with various additional services to assist the
Company. These services were not part of the advisory agreement, described
above, but derived from the work First Equity performed under the agreement.
Therefore, First Equity did not charge the Company additional fees in connection
with providing such services under the advisory agreement, because the services
were derived from the work First Equity performed under the advisory agreement
consistent with their role as financial advisor. The advisory agreement expired
on January 31, 2005. These services included (i) detailed financial modeling for
new business proposals, (ii) Board of Directors presentation analysis, (iii)
investor relations marketing and presentations, (iv) various analysis for API,
including benchmarking, financial analysis, and competitive market analyses, and
(v) other financial analyses for the Company, including stock buy-back,
valuations, and capital structure analyses. The Company's CEO and CFO had
unlimited access to these resources when requested. These services also
terminated with the expiration of the advisory agreement on January 31, 2005, as
described above.
10
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Continued)
July 31, 2005
The Company subleases from First Equity approximately 3,000 square feet of
office space in Westport, Connecticut. The leased space is utilized by the
Company as its corporate headquarters. First Equity also utilizes space in the
same premises. The sublease, which became effective on April 21, 1997, is for a
period of ten years, and is cancelable by either party with six months notice.
The Company has the option to renew the sublease for two additional five-year
periods. Lease payments under this sublease totaled approximately $22 and $20,
for the three months ended July 31, 2005, and 2004 and $45 and $40, for the six
months ended July 31, 2005, and 2004. The Company and First Equity also share
certain common expenses that arise from sharing office space in Westport, CT.
The Company reimburses First Equity and vice versa, for expenses each entity
incurs related to the common usage of the office space. The amounts are included
in the Company's corporate expenses, and include expenses such as telephone,
computer consulting, office cleaning, office supplies and utilities. The
expenses are allocated based on base salaries of the Company's and First
Equity's personnel working in the shared space. Common expenses are approved by
the Company and First Equity, prior to expenditure, when not of a recurring
nature. The allocations are reviewed by the Company's CFO and the Controller of
First Equity each month. In addition, a member of the Company's audit committee
reviews the allocation of expenses quarterly. Some business development
expenses, such as joint marketing expense and business organizational dues, are
shared on an equal basis. Management believes this method of allocation is
reasonable. In addition, the amounts reimbursed by the Company are the actual
costs incurred for the expense. The Company reimbursed First Equity, $10 and
$16, for the three months ended July 31, 2005, and 2004, respectively, and $20
and $26, for the six months ended July 31, 2005, and 2004, respectively.
In order to simplify the administration of payroll, certain employees of the
Company who are authorized to perform services for both the Company and First
Equity are paid through the payroll of First Equity. Employees of the Company
who work exclusively for the Company are paid through the payroll of API, the
Company's principal subsidiary.
7. INTEREST INCOME (EXPENSE) AND OTHER
The components relate to interest income on investments, interest expense on
external debt, realized and unrealized foreign exchange gain (loss) on Canadian
dollar transactions by the Canadian operations, and other charges.
Three months ended Six months ended
July 31, July 31,
2005 2004 2005 2004
---- ---- ---- ----
Interest income $ 14 $ 12 $ 41 $ 22
Interest expense (29) (13) (63) (29)
Foreign exchange gain (loss) 51 37 20 (39)
---- ---- ---- ----
$ 36 $ 36 $ (2) $(46)
---- ---- ---- ----
8. REPLACEMENT OF REVOLVING LINE OF CREDIT
On July 29, 2005, Aerospace Products International Inc., (the "Borrower") a
direct wholly-owned subsidiary of First Aviation Services, Inc. (the
"Guarantor") entered into a Commercial Revolving Loan and Security Agreement
(the "Agreement") and Guaranty Agreement (the "Guaranty") by and among the
Borrower, Guarantor and Hudson United Bank (the "Lender").
11
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Continued)
July 31, 2005
The facility created by the Agreement replaces the Borrower's previously
existing $20 million revolving credit facility scheduled to expire July 31,
2006. The Agreement has a commitment expiration date of September 1, 2007. The
Guaranty replaces the previously existing guaranty agreement that existed on the
previous credit facility.
The Agreement provides a 25 month senior revolving credit facility (the
"Facility I") to the Borrower in the amount of $20 million, subject to terms and
conditions set forth in the Agreement. The facility may be increased by $5
million to $25 million should the Company make an acquisition of assets of
another company, subject to the Lender's approval. The proceeds of any loans
made under the Agreement will be used for working capital purposes in the
ordinary course of business of the Borrower.
The Agreement also provides for a one-time advance (the "Facility II") in an
amount up to $3 million, subject to borrowing availability. The Facility II
advance is repaid over 60 months at a fixed rate determined at the time of the
drawdown of the advance, with the portion of the advance to be repaid within one
year reported in current liabilities on the balance sheet.
Borrowings under Facility I bear interest equal to LIBOR plus 1.5% and are
limited to specified percentages of eligible trade receivables and inventories
of API. The Agreement contains a number of covenants, including restrictions on
mergers, consolidations and acquisitions, the incurrence of indebtedness,
transactions with affiliates, the creation of liens, and limitations on capital
expenditures. Pursuant to the terms and conditions of the Agreement, the payment
of dividends on API's common stock is prohibited, except with the lender's
consent, and API is required to maintain minimum levels of net worth and
specified interest expense coverage ratios. Substantially all of API's domestic
assets are pledged as collateral under the Agreement, and First Aviation
guarantees all borrowings under the Agreement.
9. REPURCHASE OF PREFERRED STOCK OF SUBSIDIARY
Per agreement dated June 20, 2005, API repurchased 10,407 shares of API Series
A Cumulative Convertible Preferred Stock (Preferred Stock) for an aggregate
purchase price of $500, from Signature Combs, Inc. (f/k/a AMR Combs, Inc.). The
Preferred Stock was all the issued and outstanding preferred stock of API,
issued in conjunction with the Company's purchase of API in 1997 from AMR Combs,
Inc. The difference between the repurchase price of the Preferred Stock and the
book value of $541 was credited to Paid-in Capital in June 2005.
10. OTHER INCOME
In July 2005, the Company received $567 in settlement of a distribution
agreement contract dispute between API and a vendor. The settlement consisted of
$417 in damages recorded in other income, and the remainder to repurchase
inventory held by API.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM OF ACT
1995.
CERTAIN STATEMENTS DISCUSSED IN ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS", ITEM 3, "QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISKS", ITEM 1 OF PART II, "LEGAL
PROCEEDINGS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE NOT STATEMENTS OF
HISTORICAL FACTS, BUT RATHER REFLECT THE COMPANY'S CURRENT EXPECTATIONS
CONCERNING FUTURE EVENTS AND RESULTS. SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
THOSE CONCERNING THE COMPANY'S EXPECTATIONS, INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, OR
INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS INCLUDE, THE
COMPANY'S ABILITY TO OBTAIN PARTS AND COMPONENTS FROM ITS PRINCIPAL SUPPLIERS ON
A TIMELY BASIS, DEPRESSED DOMESTIC AND INTERNATIONAL MARKET AND ECONOMIC
CONDITIONS, ESPECIALLY THOSE CURRENTLY FACING THE AVIATION INDUSTRY AS A WHOLE,
THE IMPACT OF CHANGES IN FUEL AND OTHER FREIGHT-RELATED COSTS, RELATIONSHIPS
WITH ITS CUSTOMERS, THE ABILITY OF THE COMPANY'S CUSTOMERS TO MEET THEIR
FINANCIAL OBLIGATIONS TO THE COMPANY, THE ABILITY TO OBTAIN AND SERVICE SUPPLY
CHAIN MANAGEMENT CONTRACTS, CHANGES IN REGULATIONS OR ACCOUNTING STANDARDS, THE
ABILITY TO CONSUMMATE SUITABLE ACQUISITIONS AND EXPAND, THE LOSS OF THE USE OF
FACILITIES AND DISTRIBUTION HUB IN MEMPHIS, SIGNIFICANT FAILURE OF OUR COMPUTER
SYSTEMS OR NETWORKS, EFFORTS TO COMPLY WITH SECTION 404 OF THE SARBANES-OXLEY
ACT OF 2002, AND OTHER ITEMS THAT ARE BEYOND THE COMPANY'S CONTROL AND MAY CAUSE
ACTUAL RESULTS TO DIFFER FROM MANAGEMENT'S EXPECTATIONS. IN ADDITION, SPECIFIC
CONSIDERATION SHOULD BE GIVEN TO THE VARIOUS FACTORS DESCRIBED IN ITEM 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
JANUARY 31, 2005, AND ITEM 3, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS", IN THIS REPORT FOR THE QUARTER AND SIX MONTHS ENDED JULY 31,
2005. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENTS OR CAUTIONARY FACTORS.
GENERAL
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries, Aerospace Products International, Inc. ("API"), Aircraft Parts
International, Ltd. ("API Ltd."), and API Asia Pacific Inc. ("API Asia
Pacific") (collectively, the "Company"), is one of the premier suppliers of
services to the aviation industry worldwide. The services the Company provides
the aviation industry include the sale of aircraft parts and components, the
provision of supply chain management services, overhaul and repair services for
brakes and starter/generators, and the assembly of custom hoses.
The Company's principal executive offices are located at 15 Riverside Avenue in
Westport, Connecticut 06880. Certain filings that First Aviation makes with the
U.S. Securities and Exchange Commission are available on First Aviation's
corporate website at WWW.FAVS.COM. These public filings also can be obtained by
calling our investor relations department, by e-mail at
first@firstaviation.com, or on the SEC website at WWW.SEC.GOV.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in those accounting policies the Company
considers critical from those described under the caption "Critical Accounting
Policies", included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in the Company's Annual Report
on Form 10-K for the year ended January 31, 2005.
RESULTS OF OPERATIONS
NET SALES
The Company's net sales consist of sales of services to the aviation industry,
including parts and components supply services, supply chain management
services, and component overhaul and repair services. Net sales are recorded
when parts and components are shipped and title transfers to the customer, when
supply chain management services have been provided to the customer, or when
overhauled and repaired items are completed and shipped back to the customer.
Shipping and handling billed to customers are included in net sales. The terms
and nature of supply chain management services are stipulated in a long-term
contract between the Company and the customer. The Company provides its
facilities, personnel and systems to provide the services at less cost to the
customer. In providing services where the Company distributes inventory on
behalf of its customer, the Company may use its own inventory or hold its
customers' inventory without taking ownership of such inventory. In cases where
the Company does not take ownership of its customers' inventory, net sales
generally are recognized as a fee based on the sales value of the product
shipped through the Company's facilities, and not the sales value of the product
itself. Alternatively, the Company, when providing services to handle customer's
inventory without taking ownership, can take a fee based on the cost of
providing services, and not on the sales value of the product.
Net sales for the three months ended July 31, 2005 increased $1.6 million, or
5.3%, to $32.7 million from $31.1 million for the three months ended July 31,
2004. The corporate, retail, and corporate maintenance repair and overhaul
facilities sectors were largely responsible for the increase in sales in the
quarter, offset by general aviation sales that were impacted by rising fuel
prices. The increases are attributable to increased levels of global air traffic
leading to increases in maintenance and repairs, and the corresponding parts and
services the Company provides.
13
Net sales for the six months ended July 31, 2005 increased $3.4 million, or
5.5%, to $64.7 million from $61.3 million for the six months ended July 31,
2004. The reasons for the increase in net sales for the six months ended July
31, 2005, compared to the comparable period of the prior year, was due to the
reasons described above.
Sales increased in the three and six months ended July 31, 2005 versus the prior
year periods in two of the four foreign geographic regions the Company serves.
Sales in Asia improved for the three and six months ended July 31, 2005 over the
similar periods ended July 31, 2004 due to increases in airline sales. Sales in
Canada for the three and six months ended July 31, 2005 improved in the general
aviation and retail customer sectors, compared to the three and six month
periods ended July 31, 2004. Sales in Europe for the three and six months ended
July 31, 2005, decreased in the airline and general aviation customer sectors,
versus the comparable periods ended July 31, 2004. The Company's sales in the
Latin America region decreased, for the three and six month period ended July
31, 2005 over the same periods ended July 31, 2004. The Company continues to be
cautious with respect to providing credit to customers in the Latin American
region, and this has a negative impact on sales.
Freight revenue is a component of net sales and represents freight billed to
customers. Freight revenue for the three and six months ended July 31, 2005
decreased 7.6%, to $473,000 from $512,000 for the prior year three month period
ended July 31, 2004, and decreased 13.2% or $146,000 to $962,000 for the
comparable six month period. These decreases were primarily due to increases in
customer incentives resulting from promotional activities and industry
competition. This had an adverse effect on gross profit margin explained below
under the caption "Gross Profit".
COST OF SALES
Cost of sales consists of costs of inventory sold, direct costs to overhaul and
repair parts and components, and direct costs of providing services. Freight
costs for parts and components sold are also included in cost of sales.
Cost of sales for the three months ended July 31, 2005 increased $0.9 million,
or 3.3%, to $27.2 million from $26.3 million for the three months ended July 31,
2004. Cost of sales for the six months ended July 31, 2005 increased $2.6
million, or 5.1%, to $53.5 million from $50.9 million in the prior year period
ended July 31, 2004. Cost of sales for the three and six months ended July 31,
2005 increased compared to the prior year principally due to the increase in net
sales, and a marginal increase in freight expense. An increase in the inventory
reserve incurred in the prior year quarter ended July 31, 2004 offset the effect
of increases to cost of sales for the three and six months ended July 31, 2005.
As a percentage of net sales, cost of sales decreased for the periods ended July
31, 2005, to 83.1% from 84.7%, and 82.7% from 83.1%, for the three and six
months, respectively, over the three and six month periods ended July 31, 2004.
The decrease in the percentage of cost of sales compared to net sales for the
three and six months ended July 31, 2005 compared to the three and six months
ended July 31, 2004, was primarily due to the reasons described above.
GROSS PROFIT
Gross profit for the three months ended July 31, 2005 of $5.5 million exceeded
the prior year quarter gross profit by $773,000 or 16.2% With the increase in
gross profit in the current year quarter versus the prior year quarter, gross
profit as a percentage of net sales increased to 16.9% for the three months
ended July 31, 2005, from 15.3% for the three months ended July 31, 2004, due to
charges in the prior period described above, in the discussion of cost of sales
for the adjustments to the inventory reserve.
Gross profit for the six months ended July 31, 2005 of $11.2 million was
increased by $815,000, or 7.9% compared to gross profit for the six months ended
July 31, 2004. Gross profit as a percentage of net sales increased
correspondingly to 17.3% for the six months ended July 31, 2005, from 16.9% for
the six months ended July 31, 2004. Gross profit margin for the six months ended
July 31, 2005 increased compared to the comparable period of the prior year
principally due to the adjustments to the inventory reserve described above in
the cost of sales.
Gross profit is also impacted by net freight expense, which represents freight
expense recorded in cost of sales, less freight billed to customers in net
sales. Net freight expense decreased gross profit by 6.5% and 6.3%, respectively
for the three and six months ended July 31, 2005, compared to decreases of 6.4%
and 4.9% respectively in the comparable 2004 periods. These decreases were due
primarily to increased customer incentives from promotional activities offering
customers reduced freight on shipments.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended July 31,
2005 increased $0.1 million, or 3.6% to $4.9 million from $4.8 million for the
three months ended July 31, 2004. The increase for the three months ended July
31, 2005, over the comparable prior year period is due to increases in contract
labor for IT systems maintenance, higher depreciation charges, and charges
related to bad debt reserves, offset by lower payroll costs, travel and legal
charges. Selling general and administrative expense as a percentage of revenues
was 15.1% for the three months ended July 31, 2005 versus 15.3% for the three
months ended July 31, 2004.
Selling, general and administrative expenses for the six months ended July 31,
2005 of $9.8 million was substantially on par with the expense incurred in the
prior year period. Increases in contract labor for IT systems maintenance,
higher depreciation charges, property taxes, and bad debt reserves, were offset
by lower payroll costs, travel, and legal charges. Selling general and
administrative expense as a percentage of revenues decreased to 15.1% for the
six months ended July 31, 2005 versus 15.9% for the six months ended July 31,
2004.
CORPORATE EXPENSES
Corporate expenses for the three months ended July 31, 2005 decreased $262,000,
or 31.0%, to $583,000, from the $845,000 incurred during the three months ended
July 31, 2004. The decrease in corporate expenses in the quarter ended July 31,
2005 resulted primarily from reductions in legal fees related to corporate
governance regulations and a dissident shareholder's proxy contest incurred in
the prior year period, First Equity Development's termination of an advisory
agreement January 31, 2005, and lower franchise taxes that were incurred in the
prior year quarter ended July 31, 2004 and not incurred in the current year
quarter. The expense reductions in the quarter ended July 31, 2005 described
above, were offset by increases in payroll costs.
Corporate expenses for the six months ended July 31, 2005 decreased $588,000, or
33.1%, to $1.2 million, from the $1.8 million incurred during the six months
ended July 31, 2004. The decrease in corporate expenses in the six months ended
July 31, 2005 resulted from the reductions cited for the quarter above.
NET INTEREST INCOME (EXPENSE) AND OTHER
During the three months ended July 31, 2005, Net Interest Income (Expense) and
Other increased $14,000 as a result of gains on foreign currency transactions in
the quarter, due primarily to a strengthening Canadian dollar that is used as
the functional currency of the Canadian subsidiary. Interest expense for the
three months ended July 31, 2005 was $29,000 or $16,000 higher than the amounts
recorded in the three months ended July 31, 2004.
During the six months ended July 31, 2005, interest income from investing the
Company's cash in short term investments, increased by $19,000 to $41,000 in the
current year over the comparable prior year period. The increase was due to
higher interest rates, and a revised investment strategy maximizing investment
yield while minimizing market risk for the current year ended July 31, 2005. Net
Interest Income (Expense) and Other increased $44,000 in the six months ended
July 31, 2005, as gains on foreign currency transactions of $20,000, for the six
months ended July 31, 2005, replaced a loss on foreign currency transactions of
($39,000), due primarily to the strengthening Canadian dollar that is used as
the functional currency of the Canadian subsidiary. Interest expense for the six
months ended July 31, 2005 increased by $34,000 in the current six month period
versus the prior year period.
15
OTHER INCOME
During the quarter and six months ended July, 31, 2005, the Company recorded
income of $417,000 as the result of a cash settlement from a distribution
agreement contract dispute between API and a vendor.
PROVISION FOR INCOME TAXES
The Company recorded a provision for income taxes related to foreign income tax
expense estimates for operations in Canada and the Philippines. No provision is
made for U.S. taxation because the Company has sufficient net operating loss
carryforwards that would be utilized to offset any provision for pre-tax income.
No deferred tax provision is recorded because it would be offset by a change in
the deferred tax valuation allowance. The Company does not record a tax benefit
for U.S. tax purposes on any operating losses incurred due to the deferred tax
valuation allowance recorded, as it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The Company had net income of $432,000, or $0.06 per share for the three months
ended July 31, 2005, compared to a net loss of ($833,000), or ($0.11) per share
for the three months ended July 31, 2004 and net income of $584,000, or $0.08
per share for the six months ended July 31, 2005, compared to a net loss of
($1.2) million, or ($0.17) per share for the comparable prior year period ended
July 31, 2004. The income in the current year periods versus the losses in the
prior year periods was due to the reasons described in the preceding sections.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise principally from its working capital
needs. In addition, the Company has liquidity requirements to fund capital
expenditures to support its current operations, and facilitate growth and
expansion. The Company funds its liquidity requirements with a combination of
cash on hand, cash flows from operations and from borrowings. The Company
manages its cash and debt to minimize its interest expense.
Cash and cash equivalents at any time may consist of a combination of demand
deposits, money market or short-term, high-grade bond funds, and short-term
certificates of deposit.
For the six months ended July 31, 2005 the Company used $1.7 million in cash for
operating activities, compared to $1.4 million cash used for operating
activities for the six months ended July 31, 2004. The use of cash in the six
months ended July 31, 2005 versus the cash used in the prior year six month
period was due to an increase in inventory and other working capital needs. The
Company continues to focus on managing its overall working capital. Cash used in
investing activities was $0.9 million and $0.4 million during the six months
ended July 31, 2005 and 2004, respectively, due primarily to purchases of plant
and equipment. The Company expects that its aggregate capital expenditure
requirements for the year ending January 31, 2006 will range from approximately
$2.5 million to $3.0 million. Management expects to fund these requirements from
cash on hand, cash flows from operations, and from borrowings. Net cash used in
financing activities during the six months ended July 31, 2005 was $500,000
compared to zero for the six months ended July 31, 2004, as the Company borrowed
$29.0 million and repaid $29.0 million, and repurchased preferred stock of API
for $500,000 during the quarter ended July 31, 2005.
Effective July 29, 2005 API has a new $20 million revolving line of credit
facility which under certain conditions may be increased to $25 million, through
a Commercial Revolving Loan and Security Agreement ("Agreement"). This Agreement
which expires on September 1, 2007 replaces The Company's prior facility which
was scheduled to expire July 1, 2006. Borrowings under this facility bear
interest equal to LIBOR plus 1.5% and are limited to specified percentages of
eligible trade receivables and inventories of API. The Agreement contains a
number of covenants, including restrictions on mergers, consolidations and
acquisitions, the incurrence of indebtedness, transactions with affiliates, the
creation of liens, and limitations on capital expenditures. Pursuant to the
terms and conditions of the Agreement, the payment of dividends on API's common
stock is prohibited, except with the lender's consent, and API is required to
maintain minimum levels of net worth and specified interest expense coverage
ratios. Substantially all of API's domestic assets are pledged as collateral
under the Agreement, and First Aviation guarantees all borrowings under the
facility. At July 31, 2005, borrowings under the facility totaled $14.5 million,
at an interest rate of approximately 4.8%. This amount represented a draw on the
facility just prior to July 31, 2005, and shortly after the quarter end, the
Company repaid $13.5 million of the borrowings that were outstanding at
quarter-end. The Company regularly draws down on the facility just prior to
quarter end, holds this cash, and then repays some or all of the amount drawn
shortly after the quarter end. The purpose of these draw downs is to indicate
that the Company has access to cash for potential acquisitions or other
investment opportunities that may arise. Approximately $2.4 million was
available under the facility at July 31, 2005. The new facility extended the
maturity to September 1, 2007, therefore, borrowings under the facility are
classified as long term. Management believes that the carrying amount of the
Company's borrowings approximates fair market value because the interest rate is
variable and resets frequently.
16
At this time, the Company anticipates that all future earnings will be retained
for use in the Company's business. Any payment of cash dividends in the future
on the Company's common stock will be dependent upon the Company's financial
condition, its results of operations, current and anticipated cash requirements,
plans for expansion, the ability of its subsidiaries to pay dividends or
otherwise make cash payments or advances to it, and restrictions, if any, under
any future debt obligations, as well as any other factors that the Board of
Directors deems relevant.
In conjunction with the Company's acquisition of API in 1997, AMR Combs, Inc.
("AMR Combs") purchased 10,407 shares of API Series A Convertible Preferred
Stock, $0.001 par value, with annual dividends of $4.00 per share, payable
quarterly (the "Convertible Preferred Stock"). On March 5, 1999, AMR Combs was
acquired by Signature Flight Support, an affiliate of BBA Group Plc. On June 20,
2005, all of the outstanding shares of Preferred Stock were repurchased by the
Company for $500,000. The difference between the carrying value and the purchase
price was recorded as additional paid-in capital.
Based upon current and anticipated levels of operations, the Company believes
that cash flow from operations, combined with cash on hand, and the availability
under the Facility, will be sufficient to meet its current and anticipated
operating cash requirements for the foreseeable future, including scheduled
interest and principal payments, capital expenditures, minority interest
requirements, working capital needs, and cash required for acquisitions that the
Company may pursue.
CONTRACTUAL OBLIGATIONS
As of July 31, 2005, there have been no material changes outside the ordinary
course of the Company's business in the Company's specified contractual
obligations disclosed in the Company's Annual Report on Form 10-K for the year
ended January 31, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's Canadian operations utilize the Canadian dollar as their
functional currency, while the Company's Asian operation utilizes the U.S.
dollar as its functional currency. The Company has transactions denominated in
Canadian dollars and Philippine pesos. The Company is exposed to market risk
from foreign exchange rates. Foreign currency transaction exposure principally
arises from the transfer of foreign currency to and/or from U.S. dollars from
one subsidiary to another within the Company, and from foreign currency
denominated trade receivables. Currency transaction and translation exposures
are not hedged. Foreign currency transaction gains and losses are included in
earnings, and gains or losses will increase in significance with the growth of
the Canadian operations. Unrealized currency translation gains and losses
resulting from the translation of foreign subsidiaries balance sheets to U.S.
dollars are not recorded as income or expense, but are recognized in the Balance
Sheet as other comprehensive income or loss as a component of Stockholder's
Equity. The Company does have risk principally relating to the translation of
accounts in which the Canadian dollar is the functional currency. Sensitivity
analysis of foreign currency exchange rate risk assumes an instantaneous 10%
change in the foreign currency exchange rates from their level at July 31, 2005,
with all other variables held constant. A 10% strengthening of the Canadian
dollar versus the U.S. dollar would result in a decrease of approximately
$183,000 in the net liability position of financial instruments at July 31,
2005. A 10% weakening of the Canadian dollar versus the U.S. dollar would result
in an increase of approximately $221,000 in the net liability position of
financial instruments at July 31, 2005. During the three months ended July 31,
2005, the Company experienced a foreign currency translation gain of $43,000,
due to an increase in the value of the Canadian dollar relative to the U.S.
dollar. During the six months ended July 31, 2005 the Company experienced a
foreign currency translation gain of $20,000, due to an increase in the value of
the Canadian dollar relative to the U.S. dollar.
Borrowings of the Company are denominated in U.S. dollars. Management believes
that the carrying amount of the Company's borrowings approximates fair value
because the interest rates are variable and reset frequently.
17
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of July 31, 2005. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of July 31, 2005.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended July 31, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business exposes it to possible claims for personal injury, death
or property damage that may result from a failure of certain parts serviced by
the Company or spare parts and components sold by it, or in connection with the
provision of its supply chain management services. The Company takes what it
believes to be adequate precautions to ensure the quality of the work it
performs and the traceability of the aircraft parts and components that it
sells. The original equipment manufacturers that manufacture the parts,
components and supplies that the Company sells carry liability insurance on the
products they manufacture. In addition, the Company maintains what it believes
is adequate liability insurance to protect it from any claims.
In the normal conduct of its business, the Company also is involved in various
claims and lawsuits, none of which, in the opinion of the Company's management,
will have a material, adverse impact on the Company's consolidated financial
position. The Company maintains what it believes is adequate liability and other
insurance to protect it from such claims. However, depending on the amount and
timing, unfavorable resolution of any of these matters could have a material
effect on the Company's consolidated financial position, results of operations
or cash flows in a particular period.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 7, 2005, in
Memphis, Tennessee, for the purpose of (i) electing one Class III Director for a
term to expire at the Annual Meeting of Stockholders in the year 2008, and (ii)
ratifying the appointment of Ernst & Young LLP, as independent auditors for the
year ending January 31, 2006. The stockholder proposal regarding cumulative
voting for director elections was not presented at the meeting. Proxies were
solicited from holders of 7,332,882 outstanding shares of Common Stock as of the
close of business on May 3, 2005, as described in the Company's Definitive Proxy
Statement dated May 10, 2005. The Inspectors of Election, IVS Associates Inc.,
certified the election results for the Annual Meeting. Joseph J. Lhota, the
nominee for director, was elected, and the appointment of Ernst & Young LLP was
ratified by the following votes:
(1) To elect one director for a three-year term to expire at the
Annual Meeting of Shareholders in the year 2008 (Class III).
VOTES VOTES BROKER
NAME FOR WITHHELD NON-VOTES
--------------- --------- -------- ---------
Joseph J. Lhota 7,192,312 51,771 -0-
Aaron P. Hollander, Stanley J. Hill, Michael C. Culver, and Robert L. Kirk
continue to serve as directors of the Company after the Annual Meeting of
Stockholders.
(2) To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending January 31, 2006.
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED NON-VOTES
--------- ------- --------- ---------
7,236,235 3,900 3,948 -0-
19
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
10.1 Compensation for Services of the Board of Directors of First Aviation
Services Inc. (filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated June 7, 2005 (No. 0-21995), and incorporated herein by
reference).
10.2 Preferred Stock Purchase Agreement, dated as of June 20, 2005, between
Signature Combs, Inc. (f/k/a AMR Combs, Inc.) and Aerospace Products
International, Inc. (filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated June 20, 2005 (No. 0-21995), and incorporated herein by
reference).
10.3 Amended and Restated Commerical Revolving Loan and Security Agreement,
dated as of July 29, 2005, entered into by Aerospace Products
International, Inc., a direct wholly-owned subsidiary of First Aviation
Services, Inc. and Hudson United Bank (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 29, 2005 (No. 0-21995), and
incorporated herein by reference).
10.4 Amended and Restated Guaranty, dated as of July 29, 2005, entered into by
First Aviation Services, Inc. (on behalf of Aerospace Products
International, Inc., a direct wholly-owned subsidiary of First Aviation
Services, Inc.) and Hudson United Bank (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated July 29, 2005 (No. 0-21995), and
incorporated herein by reference).
10.5 Compensation for Aaron P. Hollander.
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b) and 18
U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b) and 18
U.S.C. Section 1350 (furnished herewith).
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST AVIATION SERVICES INC.
(Registrant)
Date: September 14, 2005 /s/ Michael C. Culver
-------------------------------------------
Michael C. Culver,
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: September 14, 2005 /s/ Robert G. Costantini
-------------------------------------------
Robert G. Costantini,
Chief Financial Officer (Principal Financial
and Accounting Officer)
21
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
10.1 Compensation for Services of the Board of Directors of First Aviation
Services Inc. (filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated June 7, 2005 (No. 0-21995), and incorporated herein by
reference).
10.2 Preferred Stock Purchase Agreement, dated as of June 20, 2005, between
Signature Combs, Inc. (f/k/a AMR Combs, Inc.) and Aerospace Products
International, Inc. (filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated June 20, 2005 (No. 0-21995), and incorporated herein by
reference).
10.3 Amended and Restated Commerical Revolving Loan and Security Agreement,
dated as of July 29, 2005, entered into by Aerospace Products
International, Inc., a direct wholly-owned subsidiary of First Aviation
Services, Inc. and Hudson United Bank (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 29, 2005 (No. 0-21995), and
incorporated herein by reference).
10.4 Amended and Restated Guaranty, dated as of July 29, 2005, entered into by
First Aviation Services, Inc. (on behalf of Aerospace Products
International, Inc., a direct wholly-owned subsidiary of First Aviation
Services, Inc.) and Hudson United Bank (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated July 29, 2005 (No. 0-21995), and
incorporated herein by reference).
10.5 Compensation for Aaron P. Hollander.
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b) and 18
U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b) and 18
U.S.C. Section 1350 (furnished herewith).
22