UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended January 31, 2006
Commission File Number 0-21995
First Aviation Services Inc.
(Exact name of registrant as specified in its charter)
15 Riverside Avenue
Westport, Connecticut 06880-4214
Issuer's telephone number (203) 291-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 405 of the Securities Act. Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Securities Act. Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 or for such short period that the registrant was subject to
such filing requirements. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check One:
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer 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 aggregate market value of voting common and non-voting equity held by
non-affiliates as of July 31, 2005 was approximately $13.7 million.
The number of shares outstanding of the registrant's common stock as of April
28, 2006 was 7,353,250 shares.
Documents incorporated by reference:
Portions of the Registrant's definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders is incorporated herein by reference into Part III
hereof.
First Aviation Services Inc.
TABLE OF CONTENTS
Forward Looking Statements.....................................................3
Part I
Item 1. Business..............................................................3
Item 1A. Risk Factors..........................................................6
Item 1B. Unresolved Staff Comments ............................................8
Item 2. Properties............................................................8
Item 3. Legal Proceedings.....................................................8
Item 4. Submission of Matters to a Vote of Security Holders...................8
Executive Officers of the Registrant...........................................9
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................10
Item 6. Selected Financial Data..............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........20
Item 8. Financial Statements and Supplementary Data..........................20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................20
Item 9A. Controls and Procedures..............................................20
Item 9B. Other Information....................................................20
Part III
Item 10. Directors and Executive Officers of the Registrant...................21
Item 11. Executive Compensation...............................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................21
Item 13. Certain Relationships and Related Transactions.......................21
Item 14. Principal Accountant Fees and Services...............................21
Part IV
Item 15. Exhibits and Financial Statement Schedules...........................22
Signatures....................................................................26
Index to Consolidated Financial Statements and Supplementary Data.............F1
2
First Aviation Services Inc.
Annual Report on Form 10-K
for the Fiscal Year Ended January 31, 2006
Forward-Looking Statements
- --------------------------
Certain statements discussed in Item 1, "Business", Item 3, "Legal Proceedings",
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", Item 7, "Liquidity and Capital Resources", and elsewhere in this
Annual Report on Form 10-K 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 1A, "Risk
Factors", Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and elsewhere in this Annual Report on Form 10-K.
The Company undertakes no obligation to update any forward-looking statements or
cautionary factors except as required by law.
PART I
------
Item 1. Business
- -----------------
General
First Aviation Services Inc. ("First Aviation"), together with its wholly
owned subsidiaries, Aerospace Products International, Inc. ("API"), Aircraft
Parts International, Ltd. ("API Ltd."), API Asia Pacific Inc. ("API Asia
Pacific"), and API China, Inc. ("API China"), (collectively, the "Company"), is
one of the premier suppliers of services to the aviation industry worldwide. The
services the Company provides to 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.
First Aviation was incorporated in the state of Delaware in 1995. 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 (including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K) 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, or by e-mail at
first@firstaviation.com.
Industry Overview
The market for aerospace parts and supplies consists of two market sectors,
the manufacturing parts sector and the aftermarket parts sector. These two
market sectors are related, but require different customer focus to satisfy the
needs of the market. The manufacturing parts sector caters to parts installed on
new aircraft or engine construction. Large original equipment manufacturers
("OEMs") sell directly to aircraft manufacturers and fabricators the parts and
supplies needed to manufacture new aircraft. The aftermarket parts sector caters
to the needs of aircraft and engines already in service and are typically out of
warranty, and out-of-production aircraft and engines, all of which need
maintenance, repair or modification. Typically, aircraft and engines that are
3
older or had more use require more parts and services. Furthermore, within the
aftermarket parts sector there is a market for new parts and supplies, as well
as used and refurbished parts and supplies. New and used parts and supplies can
be further categorized as consumables or repairable parts and supplies.
Therefore many companies that cater to the aftermarket parts sector sell new
parts and supplies, refurbished and repaired parts and supplies as well as
provide overhaul and repair services on parts and components, typically to the
same customers. Many suppliers and OEMs of parts and supplies have traditionally
relied on third-party distributors, such as the Company, to service the
aftermarket parts sector. Some of these suppliers now want to service this
market sector directly, but in many cases do not have the market expertise or
support infrastructure, so they turn to third party logistics ("3PL") providers
for assistance. Similarly, end-users want to outsource their buy-side supply
chain management needs and turn to 3PL providers for support. The Company
provides the aftermarket supply services including the sale of parts, repair
services and other supply chain services to end-users and suppliers.
The Company believes based on information from Overhaul and Maintenance, a
leading industry publication, that the current annual worldwide market for new
and used parts, components and consumable supplies for aircraft and engines is
estimated to be approximately $23 billion. This market has leveled out and
started to increase slowly after several years of decline. Of the worldwide
market, an estimated $2.5 billion is supplied to the general aviation category
of the aftermarket parts sector in which the Company principally operates, $5.0
billion goes through distribution to all market categories, and the balance is
supplied direct to the end user. The aviation aftermarket parts sector includes
passenger and cargo airlines, fleet and corporate aircraft operators, certified
repair facilities, governments and military services, flight training schools,
fixed base operators ("FBOs"), business aviation, helicopter and recreational
operators. The aviation aftermarket parts sector is highly-fragmented, although
there are a limited number of large, well-capitalized companies, including
original equipment manufacturers ("OEMs"), and suppliers, selling a broad range
of parts and services, as well as numerous smaller competitors serving niche
markets.
Aviation Aftermarket Parts Sector. The Company markets its supply chain
services, which includes parts sales and service contracts, to several distinct
categories of customers within the aftermarket parts sector. These categories
consist of airlines, corporate flight departments, independent airline
maintenance, repair and overhaul providers ("MROs"), large corporate MROs,
retail customers, OEMs and general aviation customers. The Company's products,
from more than 170 manufacturers and suppliers, constituting approximately
200,000 new and factory reconditioned parts and components are sold to
professional aircraft maintenance organizations, aircraft owners and operators,
including fleet operators, airlines, and FBOs. The parts and components supplied
to the marketplace by the Company are approved by the FAA and are generally
acquired from small, specialized manufacturers as well as major OEMs such as
Raytheon, Goodrich Aerospace, Champion, General Electric Lighting, Goodyear Tire
and Rubber, Marathon Power Technologies, Michelin Aircraft Tire, Parker
Hannifin, Lycoming, and Teledyne Continental Motors. The Company adds value to
commonly available products by offering immediate availability, broad product
lines, technical assistance and other value added supply chain management
services. Supply chain management services allow the Company to offer parts and
components to its customers to satisfy the customer's needs. The Company
services the aftermarket parts sector as a channel provider, whether it acts as
a supplier of parts provided by an OEM, or provides supply chain management
services to the OEM who chooses to sell directly to customers. Services
contracts are part of a continuum of product lines offered by the Company. The
terms and nature of supply chain management services are stipulated in
individualized contracts that are unique for each customer. The Company uses its
expertise gained in managing its own parts and supply business to manage its
customers' product in a seamless method to the end customer, and at less cost to
the Company's customer than if they serviced the market themselves. As part of
this process, the Company provides its internal resources, such as facilities,
personnel and systems to the customer. The Company either may supply its own
inventory for the customer, or hold its customers' inventory in its own
facility, without taking ownership of such inventory, and supply the inventory
on behalf of its customer. As an example, the Company may pick, pack and ship
product on behalf of its customer in return for a fee based upon the level of
services provided. In providing these services the Company may provide other
support services as well to its customers, including sales and billing, and the
use of the Company's call center.
Competition. Competition in the aftermarket parts sector for parts and
supplies is generally based on availability of product, customer service, price,
and quality, including parts traceability to the OEM. The Company's major
competitors include Aviall, Inc., AAR Corporation, Cessna Aircraft Company and
Satair A/S. There also is substantial competition, both domestically and
overseas, from companies who focus on secondary or regional/niche markets.
Several of the Company's competitors have faced financial difficulties over the
last several years.
Competition in supply chain management services comes from numerous
companies both within and outside of the aerospace industry, although many
competitors are specialized to a particular industry. The supply chain
management service provider market is fragmented and growing due to the trend to
outsource, as a result of the need for companies to reduce their cost
structures. Some competitors in the distribution business pay up front fees and
4
acquire their customers' inventory in exchange for supply chain contracts, a
strategy that the Company has not pursued. The Company believes that it has an
advantage in the aerospace industry due to its experience, knowledge and focus
within the industry.
Increasing Consolidation. In order to reduce the administrative costs,
lower the costs associated with carrying and managing inventory, satisfy
governmental regulatory scrutiny, streamline buying decisions, assure quality,
and reduce turnaround times, aircraft and fleet operators are seeking to reduce
their number of suppliers, including parts and component providers, and are
increasingly using third parties to manage their parts and components
inventories. As a result, the Company believes that aircraft and fleet operators
increasingly select larger, more sophisticated, technologically capable and
better-capitalized service providers that are capable of providing a range of
high quality, efficient and timely services, including supply chain management
services. Additionally, the increasing costs of technology and inventory levels
required to compete effectively has made entry into and continued success in the
industry more difficult and expensive. The Company believes that
well-capitalized, technologically sophisticated providers capable of offering a
wide range of services, like the Company, will benefit from this consolidation
trend. In addition, some OEMs have decided to by-pass wholesale distributors and
are distributing their products directly to their customers, a trend the Company
believes will continue.
Industry Conditions. The aftermarket parts sector in which the Company
operates is affected by general economic conditions and specific market activity
like flight activity, flight training, and air travel for business and pleasure.
Revenues for the year ended January 31, 2006 were higher than the prior year due
to increased demand in the corporate sector and expansion of the Company's
product line offerings. These positive influences were offset by reduced levels
of specific market activity that were caused by higher fuel prices, and in the
latter half of the year, adverse weather conditions in the Southeast. Recovery
in the market environment remains mixed. Overall business activity in the
aftermarket parts sector is improving in several of the customer segments the
Company serves. However, sales of aviation gasoline were reported down for the
year according to a petroleum industry source, which impacts the Company's
general aviation parts sales business. Some categories have improved with the
economy, for example, retail and corporate, but commercial airlines are still
vulnerable to a downturn from terrorist acts and higher fuel prices. Flight
schools continue to struggle due to record high fuel prices and recent civil
aviation flight restrictions. Bankruptcies have and may continue to occur in the
airline industry, which have reverberating effects for all market sectors. The
Company expects that the current level of business activity in the aftermarket
parts sector will continue, but the timing of any further expansion remains
uncertain. The Company continues to look for new sources of revenue, to control
its costs, and expand its offering of services both within the aftermarket parts
sector and the production environment through the use of technology and its
infrastructure.
Principal Suppliers
API has five suppliers from whom approximately 38%, 40%, and 45% of its
total purchases were made during the years ended January 31, 2006, 2005 and
2004, respectively.
The Company, in September 2005, entered into an initial parts purchase
agreement and long-term agreement to sell parts with Raytheon Aircraft Parts and
Inventory Distribution Company LLC ("Rapid"), to support Raytheon's Beechcraft
product line.
Sales and Marketing
New and serviceable parts, supplies and components are sold to professional
aircraft maintenance organizations, aircraft owners and operators, including
fleet operators and airlines, flight training schools, and FBOs. The Company
uses senior management, business development leaders, regional sales managers,
inside salespersons, outbound telephone salespersons, electronic commerce,
independent contract representatives, associated distributors, and foreign
partners in its sales and marketing efforts.
The Company sells supply chain management services by identifying potential
customers and opportunities in the industry through contacts within the
industry, advertising and targeted marketing, recommendations from current
customers, and leads from regional sales managers. Lead times for the
procurement of new contracts is effected by the long-term nature of such
contracts, relationship building with the customer and the substantial change
often required of the customer's existing business model.
5
Customers
The Company currently has approximately 7,000 customers. The Company is not
reliant upon any single customer.
Regulation
Regulatory bodies such as the FAA, the Joint Airworthiness Administration,
the Department of Defense (the "DOD"), and governments around the world require
all aircraft and engines to follow defined maintenance programs to ensure
airworthiness and safety. For parts and components distributed by the Company,
including inventory managed by the Company under supply chain management
services, the programs are developed by the original equipment manufacturer
(OEM) or customer in coordination with the regulatory body. The Company must
comply with regulations for shipping hazardous materials, and is subject to
export control regulations. The Company has received certifications from the FAA
covering its repair and overhaul facilities, and its hose shop. The DOD requires
that parties providing parts for branches of the U.S. armed services comply with
applicable government regulations, and the DOD continually reviews the
operations of the Company for compliance with applicable regulations. In
addition, the Company's Memphis, Tennessee facility is ISO/9002 certified and
subject to periodic reviews.
Environmental Matters and Proceedings
The Company's operations are subject to federal, state and local
environmental laws and related regulation by government agencies, including the
United States Environmental Protection Agency, the United States Department of
Transportation, and the United States Occupational Safety and Health
Administration. Among other matters, these regulatory authorities impose
requirements that regulate the operation, handling, transportation and disposal
of hazardous materials, the health and safety of workers, and require the
Company to obtain and maintain licenses and permits in connection with its
operations. This extensive regulatory framework imposes potentially significant
compliance burdens and risks on the Company. The Company believes that it is in
material compliance with all federal, state, and local laws and regulations
governing its operations. The Company has not had and does not anticipate that
any material capital expenditures will be required during the next fiscal year
in order to maintain compliance with the federal, state and local laws and
regulations.
Employees
As of January 31, 2006, the Company employed 204 persons on a full-time
basis. None of the Company's employees is covered by collective bargaining
agreements. The Company believes that its relationship with its employees is
good.
Geographic Areas
Sales to unaffiliated foreign customers were approximately 25%, 22%, and
22% of net sales for the years ended January 31, 2006, 2005 and 2004,
respectively. The majority of these customers were located in Canada, Southeast
Asia, Latin America and Europe.
Products and Services
The Company reports its revenue as one reportable segment and believes it
is impracticable to breakout various products and services for reporting
purposes.
Item 1A. Risk Factors
- ----------------------
Cautionary Statements
Certain statements made in Item 1 "Business", Item 1A., "Risk Factors", Item 3,
"Legal Proceeding", Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Liquidity and Capital Resources", and
elsewhere in this Annual Report on Form 10-K 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
6
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:
o The Company's continued ability to obtain parts and components from its
principal suppliers on a timely basis. The Company's distribution services
business is dependent upon the availability of parts, components and
supplies from its suppliers. API does not have any long-term agreements or
commitments from OEM's or other suppliers from whom it generally purchases
parts, and is dependent upon these manufacturers for access to parts for
resale. In addition, some OEM's, in an effort to find additional sources of
income, are attempting to distribute directly to the customer and by-pass
the Company as a distribution channel. A disruption in the Company's
ability to obtain parts, components and supplies, for any reason, and
without the ability to find alternative sources, would have an adverse
impact on the Company's business.
o Depressed domestic and international market and economic conditions,
especially those currently facing the aviation industry as a whole. The
Company is dependent upon the level of activity in the aviation industry,
including commercial and recreational flying, and flight training schools.
Economic conditions in the aviation industry, as well as any downturn in
economic conditions in general, and increases in fuel prices specifically,
will have an adverse impact on the Company's future results.
o The impact of changes in fuel and other freight related costs. Fuel is a
significant cost in the aviation industry and increases in the cost of fuel
or lack of availability of fuel could have an adverse impact on overall
flight activity levels, and the Company's business.
o Relationships with its customers. An inability to maintain good
relationships with its customers, or the inability to expand by
establishing relationships with new customers, could have an adverse impact
on the Company.
o The ability of the Company's customers to meet their financial obligations
to the Company. The inability of the Company's customers to meet their
obligations to the Company, or to meet their general financial obligations
and face financial difficulty, would adversely impact the ability of the
Company to collect on its receivables and generate future sales.
o The ability to obtain and service supply chain management contracts. Supply
chain management contracts have a long lead-time and require extensive
effort and focus to obtain. An inability to obtain such contracts, or to
service the customer appropriately, for any reason, would have an adverse
impact on the Company's future results.
o Changes in regulations or accounting standards. The Company is subject to
regulations (including income tax laws) and accounting standards that could
change in the future, and such changes could have an adverse impact on the
Company's reported results.
o The ability to consummate suitable acquisitions and expand. An inability to
expand through acquisitions or through other means of growth, including
internationally, may have an adverse impact on the Company.
o The loss of the Company's facilities and distribution hub. The Company's
distribution hub is located in Memphis and substantially all of its
inventory is stored in contiguous warehouse space. Losing access or use of
these facilities, through security concerns, natural disasters or damage to
the buildings, would interrupt the Company's business and destroy or
prevent the Company from accessing its inventory, which could significantly
affect its business and operating results.
o The significant failure of computer systems or networks that disrupt
business or operations. The Company's computer systems, internal and
external networks, and suppliers are crucial to service customers and
manage operations. Significant disruptions or malfunctions of its computer
systems or networks could have a material adverse effect on its business
and results of operations. The Company is in the late stages of installing
a new suite of enterprise resource planning software using internal
resources and consultants for implementation. Failure to achieve effective
implementation could have a material adverse effect on its business and
results of operations. Failure of implementation to achieve anticipated
results could have a material adverse effect on sales, business operations
and results of operations.
7
o The effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002
will result in additional expenses. Financial and management resources
needed for the Company and its auditors to assess internal control over
financial reporting to comply with the Sarbanes-Oxley Act of 2002 and
related regulations are expected to be significant, and our efforts to
comply will result in additional expenses. These expenses may have an
adverse impact on our business results.
The factors noted above are not all inclusive. All of the factors should be
considered carefully when reviewing the Company's current results and
forward-looking statements. The Company undertakes no obligation to update any
forward-looking statements or cautionary factors except as required by law.
Item 1B. Unresolved Staff Comments
- ----------------------------------
None.
Item 2. Properties
- --------------------
The Company leases all of its facilities, described below:
Square Lease
Location Entity Description Footage Expiration
- -------- ------ ----------- ------- ----------
Westport, CT First Aviation Executive offices 3,000 2007
Memphis, TN API Distribution/sales 204,000 2013
Calgary, Canada API Ltd. Sales 5,600 2009
Montreal, Canada API Ltd. Sales 7,270 2008
Clark Field, Pampanga,
Philippines API Asia Pacific Distribution/sales 22,235 2010
St. Charles, IL API Sales 1,000 2006
Item 3. 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 OEMs 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
8
Executive Officers of the Registrant
- ------------------------------------
The Company's executive officers, their ages and backgrounds are as
follows:
Aaron P. Hollander, 49, co-founded and has served as Chairman of the Board
of Directors of the Company since March 1995. In 1985, Mr. Hollander, along with
Mr. Culver, co-founded First Equity Group Inc. ("First Equity Group"), and has
served as its President and Co-Chief Executive Officer since that time. First
Equity Group's ownership interests, in addition to the Company, include First
Equity Development Inc., an aerospace investment and advisory firm, ("First
Equity"), Skip Barber Racing School, LLC ("Skip Barber") and Imtek, Inc.
("Imtek"), a specialty marketing and fulfillment company. Mr. Hollander is a
director and serves as the President and Chief Executive Officer of Skip Barber,
and is the Chairman of the Board of Directors of Imtek
Michael C. Culver, 55, has served as President and Chief Executive Officer
of First Aviation since March 1995. Mr. Culver has also served as Chairman of
API since 1997. In 1985, Mr. Culver co-founded First Equity Group Inc. ("First
Equity Group"). First Equity Group's interests, in addition to the Company,
include First Equity Development Inc., an aerospace investment and advisory
firm, Skip Barber Racing School, LLC and Imtek, Inc. Mr. Culver serves on the
Boards of Skip Barber Racing School, LLC and Imtek, Inc.
Robert G. Costantini, 46, became First Aviation's Chief Financial Officer,
Senior Vice President of Finance, and Corporate Secretary in October 2003. Prior
to joining First Aviation, from 1999 to 2003, Mr. Costantini was Chief Financial
Officer of FocusVision Worldwide, Inc., a technology company providing video
transmission services. From 1986 to 1989 he was first Corporate Controller, and
from 1989 to 1999 he was Vice President - Finance for M.T. Maritime Management
Corp., a global maritime transportation company. Mr. Costantini started his
career with Peat Marwick, Mitchell & Co. Mr. Costantini is a Certified Public
Accountant, Certified Management Accountant, and a member of the bar of New York
and Connecticut.
Paul J. Fanelli, 44, became President and CEO of First Aviation's principal
subsidiary Aerospace Products International Inc. on April 5, 2004. Mr. Fanelli
was hired February 16, 2004 as Senior Vice President and Chief Operating Officer
of API. From 2000 to 2003, Mr. Fanelli was President - Europe for Brightpoint,
Inc., a distributor of wireless voice and data products and a supplier of
outsourced services. Previously he was Chief Operating Officer from 1998 to 2000
for Brightpoint Europe, Middle East and Africa. Mr. Fanelli has worked for
Ericsson Mobile Communications, Texas Instruments, ITT Avionics and started his
career with Loral Electronics.
9
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
Market Information. First Aviation's common stock trades on The NASDAQ
Small Cap Market under the symbol FAVS. The table below sets forth the quarterly
high and low sales prices for the First Aviation's common stock as reported by
the NASDAQ Stock Market since February 1, 2004.
Year Ended Year Ended
January 31, 2006 January 31, 2005
- ---------------------------------------------------- ---------------------------------------------------
High Low High Low
First Quarter $4.70 $4.00 First Quarter $4.80 $3.90
Second Quarter $4.50 $3.71 Second Quarter $5.00 $4.25
Third Quarter $4.49 $3.65 Third Quarter $4.72 $3.86
Fourth Quarter $4.50 $3.71 Fourth Quarter $4.60 $3.52
Holders. As of April 27, 2006, there were 15 holders of record of First
Aviation's common stock.
Dividends. First Aviation did not pay a dividend in the fiscal years ended
January 31, 2006 and 2005. In January 2003, First Aviation paid a special cash
dividend of $1.00 per share. The total cash paid was $7.3 million. This is the
only cash dividend or distribution paid on First Aviation's common stock since
its inception. At this time, First Aviation anticipates that, for the
foreseeable future, all earnings will be retained for use in the Company's
business and no cash dividends will be paid on the common stock. In addition,
API's credit facility prohibits the payment of cash dividends from API to First
Aviation without the lender's consent. Any payment of cash dividends in the
future on the common stock will be dependent upon First Aviation's financial
condition, 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 (as described above), and
restrictions, if any, under any current or future debt obligations, as well as
other factors that the Board of Directors deems relevant.
Repurchases. In the fourth quarter of the fiscal year ended January 31,
2006, First Aviation did not purchase any shares of its Common Stock.
10
Item 6. Selected Financial Data
- --------------------------------
The selected financial data set forth below should be read in conjunction
with the "Consolidated Financial Statements", the "Notes to Consolidated
Financial Statements", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
herein.
Year Ended January 31,
(Amounts in thousands, except per share amounts) 2006 2005 2004 2003 2002
------------ -------------- ------------ ------------ ------------
Balance Sheet Summary:
Working capital $ 47,234 $ 47,179 $ 49,143 $ 47,996 $ 56,903
Total assets 73,348 65,199 64,982 65,041 80,544
Current obligations under capital leases and notes
payable 1,125 - - 4 180
Long-term debt and notes payable 15,745 14,500 14,500 14,500 14,800
Other long-term liabilities - 1,041 1,041 1,041 1,041
Total stockholders' equity $ 36,452 $ 34,634 $ 36,565 $ 36,094 $ 49,018
Book value per share outstanding (1) $ 4.96 $ 4.73 $ 5.02 $ 4.98 $ 6.79
Cash dividends paid per share - - - $ 1.00 -
Common shares outstanding 7,353 7,322 7,284 7,251 7,214
Results of Operations Summary (2):
Net sales $ 131,525 $ 124,249 $ 105,777 $ 101,737 $ 105,696
Gross profit 23,051 20,724 19,536 18,473 19,016
Income (loss) from operations 746 (2,142) (121) (1,577) 227
Income (loss) before income taxes 1,095 (2,108) (14) (1,413) 486
Provision (benefit) for income taxes 71 121 (25) 1,786 (194)
------------ -------------- ------------ ------------ ------------
Income (loss) from continuing operations before
accounting change 1,024 (2,229) 11 (3,199) 292
Cumulative effect of change in accounting (3) - - - (2,735) -
------------ -------------- ------------ ------------ ------------
Net income (loss) $ 1,024 $ (2,229) $ 11 $ (5,934) $ 1,252
============ ============== ============ ============ ============
Basic income (loss) per share from continuing $ 0.14 $ (0.31) $ 0.00 $ (0.44) $ 0.04
operations
Basic net income (loss) per share $ 0.14 $ (0.31) $ 0.00 $ (0.82) $ 0.17
Weighted average shares outstanding - basic 7,337 7,302 7,267 7,225 7,198
------------ -------------- ------------ ------------ ------------
Income (loss) per share from continuing operations
- assuming dilution $ 0.14 $ (0.31) $ 0.00 $ (0.44) $ 0.04
Net income (loss) per share - assuming dilution $ 0.14 $ (0.31) $ 0.00 $ (0.82) $ 0.17
Weighted average shares outstanding - assuming
dilution 7,341 7,302 7,282 7,225 7,209
------------ -------------- ------------ ------------ ------------
Notes to Selected Financial Data
(1) Book value per share outstanding is calculated by taking total
stockholders' equity and dividing by common shares outstanding.
(2) During the year ended January 31, 2003 the Company recorded a charge
of $0.8 million to increase its allowance for doubtful trade
receivables, recorded an income tax charge of $2.0 million to
establish a valuation allowance against its deferred income tax
assets, recorded a net charge of $2.7 million upon adoption of a new
accounting principle related to goodwill, and paid a special cash
dividend of $1.00 per share.
11
(3) Goodwill was recognized upon First Aviation's acquisition of API's
business in 1997 and upon the acquisition of Superior's distribution
business in 2001. All goodwill recorded with these acquisitions was
written off during the quarter ended April 30, 2002. Pursuant to FAS
142, goodwill is not amortized but is tested periodically for
impairment using discounted cash flows and other fair value
methodologies.
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the Notes thereto, and selected financial data
of the Company included elsewhere in this Annual Report on Form 10-K.
General
The Company is a leading supplier of products and services to the aerospace
industry worldwide, including the provisioning and the supply of aircraft parts
and components, and supply chain management services. The Company also builds
custom hose assemblies, and performs overhaul and repair services for brakes and
starters/generators.
The Company recorded an increase in revenues for the year ended January 31,
2006, as the result of an improving market in some sectors, an expanded product
line, and its ability to effectively compete. For the full year, increased gross
profit margins and effective cost controls produced quarterly and full year
profitability. Cash levels decreased primarily due to the inventory purchases to
expand the product lines, expenditures for equipment and enterprise software,
accelerated payments to obtain vendor price discounts, and repurchase of the
Company's subsidiary preferred stock. The Company believes that its results show
that it continues to take market share from its competitors, as it managed to
grow and maintain profitability in difficult markets.
Results for the three months ended January 31, 2006 produced the Company's
second highest quarterly revenues for this year and record quarterly gross
margin, while maintaining costs at prior year's levels.
Recovery in the industry has been sporadic since 2001, and overall business
activity in the aerospace industry continues to be influenced by several
factors, including higher fuel prices. Although the extent and timing of further
increases in market activity is uncertain, the Company continues to look for
opportunities for new markets and revenues, increased margins, improved cost
controls, and expanded service offerings.
Critical Accounting Policies
The Company is required to provide additional disclosure and commentary on
those accounting policies considered most critical. An accounting policy is
deemed to be critical if it is important to the Company's financial condition
and results, and requires judgment and estimates on the part of management in
its application. The process of preparing financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of judgments, estimates and assumptions to determine the measurement of
revenues and expenses, and the realizable value of certain assets and
liabilities. These estimates and assumptions are based upon information
available at the time the estimates or assumptions are made. The estimates and
assumptions could change significantly as conditions within and beyond
management's control change. Therefore, actual results could differ
significantly from the estimates. The most significant estimates made in
preparing the Company's financial statements include revenue recognition, the
determination of the allowance for doubtful trade receivables, the allowance for
excess and obsolete inventories, deferred income tax asset valuations, and the
valuation of goodwill. The following is a discussion of the critical accounting
policies and the related judgments, estimates and assumptions utilized in
preparing the Company's consolidated financial statements. A summary of
significant accounting policies is included in Note 2 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Revenue Recognition
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
12
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 fees 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 cost effective
services 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 customers'
inventory without taking ownership, can take a fee based on the cost of
providing services, and not on the sales value of the product.
Allowance for Doubtful Accounts
The allowance for doubtful trade receivables is established based on
estimates of the amount of uncollectible trade receivables, utilizing financial
formulas based principally upon historical experience, the credit worthiness of
the customer, the age of the account, the estimated risk that the account can be
collected, and specific identification. Also, receivables arising from export
activities may be supported by foreign credit insurance. Collection of trade
receivables is affected by aviation industry and market trends, overall economic
trends and conditions, and customers' credit issues and financial condition.
Changes in any of these factors may have a significant negative impact upon the
estimated allowance, and the Company's financial performance.
Allowance for Excess and Obsolete Inventories
Inventories generally consist of aircraft parts and components, and are
valued at the lower of cost or market, using the first-in, first-out method.
Provisions are made in each period for the estimated effect of excess and
obsolete inventories based upon financial formulas that take into account
quantities, costs, the age of the inventory on hand, historical and projected
sales, and other inventory movements, adjusted for known or estimated factors
such as new product lines and product return allowances. During the three months
ended July 31, 2004, as a result of normal review procedures, the Company
adjusted the methodology for estimating the Allowance for Slow Moving and
Obsolete Inventory that makes the estimate more objective, and efficient to
calculate, by applying percentages based on historical experiences of inventory
in various age classifications, and eliminating the practice of making
adjustments based on historical and projected sales, or other inventory
movements due to new product lines and product return allowances. As a result of
this review, the company increased inventory reserves. Actual excess and
obsolete inventories may differ significantly from such estimates, and such
differences could have a significant negative impact on the estimated allowance,
and the Company's financial performance.
Deferred Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are estimated using the enacted tax rates and laws that are estimated to be
in effect when the differences are expected to reverse. The realization of the
assets is subject to estimates and judgments, and may change based upon a
variety of factors, including future profitability of the Company and tax law
changes. If an asset is not deemed more likely than not to be fully realizable,
a valuation allowance must be established against all or part of the asset. In
addition, FAS 109 requires the establishment of a valuation allowance under
certain conditions.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. The cost will be measured based on the fair
value of the instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion
No. 25. As originally issued in 1995, SFAS No. 123 established as preferable the
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income (loss) would have been had the preferable
fair-value-based method been used. The Company will be required to apply SFAS
No. 123(R) at the beginning of the first fiscal year beginning after June 15,
13
2005, and plans to adopt it effective February 1, 2006. The impact of adoption
of Statement 123(R) on future periods cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. However,
had the Company adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in the Stock-Based
Compensation section of the Summary of Significant Accounting Policies Note 2.
Statement 123(R) has alternative transitional methods for adoption and the
Company has not determined which transitional alternative it will use.
Results of Operations
The following table sets forth, for the periods indicated, the percentages
of the Company's net sales that certain income and expense items represent.
Year Ended January 31,
-------------------- --------------------- --------------------
2006 2005 2004
-------------------- --------------------- --------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.5 83.3 81.5
-------------------- --------------------- --------------------
Gross profit 17.5 16.7 18.5
Selling, general and administrative expenses 15.1 16.1 16.1
Corporate expenses 1.8 2.4 2.5
-------------------- --------------------- --------------------
Income (loss) from operations 0.6 (1.8) (0.1)
Interest income 0.0 0.1 0.1
Interest and other expense (0.1) - -
Other income 0.3 - -
-------------------- --------------------- --------------------
Income (loss) before income taxes 0.8 (1.7) 0.0
(Provision) benefit for income taxes 0.0 (0.1) -
-------------------- --------------------- --------------------
Net income (loss) 0.8% (1.8)% 0.0%
-------------------- --------------------- --------------------
Year ended January 31, 2006 compared to year ended January 31, 2005
Net sales
Net sales for the year ended January 31, 2006 increased $7.3 million, or
5.9%, to $131.5 million from $124.2 million for the year ended January 31, 2005.
The increase was largely due to increases in the Company's corporate aviation
sector. The increase in sales occurred across all geographic regions with the
most significant improvement in sales growth occurring in Asia at 26.9%, and
Canada at 28.7%. European revenue growth, while positive, was relatively flat at
2.2% over the prior year. Sales to foreign customers during the year ended
January 31, 2006 was approximately 25% of the total sales of the Company during
that period.
Freight revenue is a component of net sales and it represents freight
billed to customers. Freight revenue declined for year ended January 31, 2006 by
6.9% to $2.0 million from $2.1 million for the prior year ended January 31,
2005. The decrease occurred in the first nine months of the year, while the
fourth quarter ended January 31, 2006 exhibited a positive increase over the
prior year quarter. The decline in the first nine months was due primarily to
the continuance of customer incentive programs resulting from promotional
activities and industry competition. These programs had an adverse effect on
gross profit margin as 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. Costs of
sales for the year ended January 31, 2006 increased $5.0 million, or 4.8%, to
$108.5 million from $103.5 million for the year ended January 31, 2005. The
increase in cost of sales was due primarily to the corresponding increase in net
sales of parts and components.
As a percentage of net sales, cost of sales decreased for the twelve months
ended January 31, 2006, to 82.5% from 83.3%, for the twelve month period ended
January 31, 2005. The decrease in the percentage of cost of sales compared to
14
net sales for the twelve months ended January 31, 2006, compared to the
comparable twelve month 2005 period, was due to the reasons described in the
section on net sales and the introduction of higher profit margin products to
the product mix.
Gross profit
Gross profit for the twelve months ended January 31, 2006 increased $2.3
million or 11.2% to $23.1 million, compared to gross profit for the twelve
months ended January 31, 2005. Gross profit as a percentage of net sales also
increased to 17.5% for the twelve month period ended January 31, 2006, from
16.7% for the comparable prior year twelve month period. Gross profit margin for
the twelve month period increased compared to the comparable period of the prior
year principally due to the introduction of higher profit margin products
mentioned above under the caption "Cost of Sales", as well as an increase in
gross profit margin due to strategic pricing strategies. The overall increase in
gross profit margin compared to the prior year twelve months, was negatively
impacted by an increase in net freight expense as described below.
Gross profit is impacted by net freight expense, which represents freight
expense recorded in cost of sales, less freight billed to customers in net
sales. The excess of freight expense versus freight billed to customers ("net
freight expense") reduced gross profit by 5.7% for the twelve months ended
January 31, 2006, and January 31, 2005.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the twelve months ended
January 31, 2006 decreased slightly by $40,000 to $19.9 million compared to the
expense incurred for the twelve months ended January 31, 2005. The decrease in
costs in the current year were due to lower payroll expenses, travel costs,
postage and other expenses partially offset by increases in contract labor for
IT systems maintenance, higher depreciation charges due to IT upgrades,
increased communication costs, and an increase in bad debt expense. Selling
general and administrative expense as a percentage of revenues decreased to
15.1% for the current year twelve months versus 16.1% for the twelve months
ended January 31, 2005.
Corporate Expenses
Corporate expenses for the twelve months ended January 31, 2006 decreased
$521,000, or 18.0%, to $2.4 million, from the $2.9 million incurred during the
twelve months ended January 31, 2005. The decrease in corporate expenses in the
current twelve month period resulted from substantially lower legal fees related
to corporate governance regulations and a dissident shareholder's proxy contest
incurred in the prior year period, the termination of First Equity Development's
advisory agreement with the Company on January 31, 2005, and lower costs for
other expenses partially offset by increases in salaries and related costs.
Interest income and interest and other expenses
During the twelve months ended January 31, 2006, interest income from
investing the Company's cash in short term investments, decreased by $19,000 to
$47,000 over the comparable prior year period. The decrease in income was due to
lower excess cash balances invested. Interest and other income (expense)
resulted in expense of ($105,000) for the current year twelve months versus
income of $10,000 in the prior year period due to an increase in interest
expense of ($170,000) on borrowings, reduced by an increase in foreign exchange
income of $56,000 versus the prior year.
Other Income
In July 2005, the Company recorded income of $417,000 as the result of a
$567,000 cash settlement of a distribution agreement contract dispute between
API and a vendor. The settlement consisted of $417,000 in damages recorded in
"Other Income" and $150,000 recorded as a reduction in inventory from the
repurchase of inventory held by API.
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, and federal
taxes under Alternative Minimum Tax regulations. 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. The
Company's effective tax rate for the period ended January 31, 2006 was 6.5%
versus the 34.0% statutory rate due primarily to the net operating losses
utilized.
15
Net Income (Loss) and Net Income (Loss) per Share
The Company had net income of $1.0 million or $0.14 per share for the
twelve months ended January 31, 2006, compared to a net loss of $2.2 million or
$0.31 per share for the full year ended January 31, 2005. The significant
improvement in operating results was due to the reasons described in the
preceding sections.
Year ended January 31, 2005 compared to year ended January 31, 2004
Net sales
Net sales for the year ended January 31, 2005 increased $18.5 million, or
17.5%, to $124.2 million from $105.8 million for the year ended January 31,
2004. Net sales increased in all customer sectors, as economic conditions
improved for the general economy as a whole for the year, leading to greater
flight activity than the previous year, and therefore increases in maintenance
and repairs. The increase in sales occurred across all geographic regions with
the most significant improvement in sales growth occurring in Asia and Latin
America at 31% and 38% respectively. European revenue growth, while positive,
lagged the other regions of the world at 10%.
Freight revenue is a component of net sales and it represents freight
billed to customers. Freight revenue declined for year ended January 31, 2005 by
13% to $2.1 million from $2.4 million for the prior year ended January 31, 2004.
This decline was due primarily to increased customer incentives resulting from
promotional activities and industry competition. This had an adverse effect on
gross profit margin as 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. Costs of
sales for the year ended January 31, 2005 increased $17.3 million, or 20.0%, to
$103.5 million from $86.2 million for the year ended January 31, 2004. The
increase in cost of sales was due primarily to the increase in net sales of
parts and components. In addition, a $300,000 increase to inventory reserves was
recorded in the quarter ended July 31, 2004 as described under the caption
"Critical Accounting Policies" in the section "Allowance for Excess and Obsolete
Inventories".
As a percentage of net sales, cost of sales increased for the twelve months
ended January 31, 2005, to 83.3% from 81.5%, for the twelve month period ended
January 31, 2004. The increase in the percentage of cost of sales compared to
net sales for the twelve months ended January 31, 2005 compared to the
comparable twelve month 2004 period, was due to the reasons described above, as
well as higher growth in sales of products and components supply services versus
supply chain management services contracts, the latter representing a larger
share of the revenue mix in the prior year period versus the current year
period.
Gross profit
Gross profit for the twelve months ended January 31, 2005 increased $1.2
million or 6.1% to $20.7 million, compared to gross profit for the twelve months
ended January 31, 2004. Gross profit as a percentage of net sales decreased to
16.7% for the twelve month period ended January 31, 2005, from 18.5% for the
comparable twelve month period ended January 31, 2004. Gross profit margin for
the twelve month period ended January 31, 2005, decreased compared to the
comparable period of the prior year principally due to the accrual for an
increase in the inventory reserves, as mentioned above under the caption "Cost
of Sales", as well as an increase in the mix in sales of parts and components
supply services which have a lower gross profit margin relative to supply chain
management services. The increase in net freight expense, as described below,
contributed to the reduction in gross profit for the twelve months ended January
31, 2005 compared to the twelve months ended January 31, 2004.
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 5.7% for the twelve
months ended January 31, 2005, compared to a decrease of 3.9% in the comparable
2004 period. The decrease was due primarily to increased customer incentives
from promotional activities offering customers reduced or zero freight on
shipments.
16
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended January 31,
2005 increased $3.0 million, or 17.3%, to $20.0 million from $17.0 million for
the year ended January 31, 2004. The increases for the twelve months ended
January 31, 2005, over the twelve month period ended January 31, 2004, is due
primarily to increases in salaries and payroll costs related to additional sales
personnel, higher sales commissions, sales related travel expenses, severance
and relocation expense for personnel changes, increased legal fees, the
expiration of property tax incentives, and expenses incurred for the
implementation of a new customer initiative requiring additional temporary
warehouse personnel. Offsetting these increases were reductions to bad debt
expense from a reduction in the reserves for accounts receivable, and lower
depreciation expense. The reduction in the accounts receivable reserves that
resulted during normal review procedures was due to a change in the Company's
estimate for bad debts resulting from changes in estimated collections based on
improving customer payment trends, and the overall improving economy.
Selling, general and administrative expenses as a percentage of revenues
were 16.1% for the twelve months ended January 31, 2005, unchanged from the
twelve months ended January 31, 2004.
Corporate Expenses
Corporate expenses for the twelve months ended January 31, 2005 increased
$268,000, or 10.2%, to $2.9 million, from the $2.6 million incurred during the
twelve months ended January 31, 2004. For the twelve months ended January 31,
2005 versus the prior year, the Company incurred an additional $324,000 in legal
expenses related to updating our corporate governance policies under new SEC and
NASDAQ exchange rules, responding to a dissident shareholder's proposal,
activities in connection with a proxy contest, and for the 2004 annual meeting.
Other increases in the twelve months ended January 31, 2005 versus the twelve
months ended January 31, 2004 related to salary and payroll expenses, travel
expenses, insurance charges, and consulting services related to changes in
management, which were partially offset by lower expenses in other categories
over the prior year period.
Interest income and interest and other expenses
During the twelve months ended January 31, 2005, interest income from
investing the Company's cash in short term investments, decreased by $88,000 to
$66,000 over the comparable prior year period. The decrease in income was due to
lower cash balances to invest, and lower interest rates due to a revised
investment strategy minimizing market risk for the year ended January 31, 2005
over the twelve-month period ended January 31, 2004. Interest and Other Expenses
resulted in income of $10,000 for the twelve months ended January 31, 2005
versus expense in the amount of $5,000 in the comparable prior year period due
primarily to reductions in other expenses and less foreign exchange gains.
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. 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 a net loss of $2.2 million or $0.31 per share for the
twelve months ended January 31, 2005, compared to net income of $11,000 for the
full year ended January 31, 2004. The net loss 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
17
and expansion. The Company funds its liquidity requirements with a combination
of cash on hand, cash flows from operations, and from borrowings.
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.
The reduction in cash for the year ended January 31, 2006 was principally
the result of inventory purchases to expand the company's product line
offerings, purchases of equipment and software, and the repurchase by API of
subsidiary preferred stock. The Company believes it maintains a strong balance
sheet.
The Company's cash used in operations for the years ended January 31, 2006,
2005 and 2004 was $(8.8) million, $(1.5) million, and $(0.6) million,
respectively. Cash used in operations for the year ended January 31, 2006 was
impacted by increases in inventory due to a large purchase of inventory parts
from a leading aircraft OEM, and additional inventory opportunity buys to secure
price or volume discounts, and an increase in trade receivables offset by an
increase in accounts payable. On September 20, 2005, API made an initial
inventory purchase of approximately $7.1 million. The OEM vendor agreed to
partially finance the purchase with two promissory notes from API of $2.5
million and $1.8 million, with the Company entering into a guarantee agreement
to ensure payment by API. These promissory notes were subsequently amended. The
amended promissory note for $1.6 million is for a term of 4 years, at 5.0%
interest per annum. The amended promissory note for $1.4 million is a
non-interest bearing short term note due within one year. The vendor financing
promissory notes are subordinated to the Company's revolving line of credit. In
addition, subsequent to the initial purchase and pursuant to a separate
transaction with the same OEM, API made an additional purchase of $4.8 million
of inventory to broaden the product line offering, pursuant to usual vendor
terms. Cash used in investing activities for the years ended January 31, 2006,
2005 and 2004 was $(3.2) million, $(1.0) million, and $(0.4) million,
respectively. Cash used in investing activities for these years was related to
purchases of fixed assets and enterprise software in 2006 and 2005. Cash
provided by (used in) financing activities for the years ended January 31, 2006,
2005 and 2004 was $(1.1) million, nil, and $1, respectively. Cash used in
financing activities for the year ended January 31, 2006 results from the
repurchase of the preferred stock of API held by a third party, in the second
quarter of the current year.
First Aviation's aggregate cash used for capital expenditures for the years
ended January 31, 2006, 2005 and 2004 was $3.2 million, $1.0 million, and $0.5
million, respectively. The increase in capital requirements in fiscal 2006 is
the result of current upgrades to the Company's enterprise system and equipment
to handle current requirements and support the Company's growth and expansion.
For fiscal year 2007 the amount required for capital expenditures currently is
expected to range between $1.5 million and $2.0 million. Management expects to
fund these requirements from cash on hand, cash flows from operations, and from
borrowings.
Effective July 29, 2005 API entered into 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 Facility, and First Aviation guarantees all borrowings
under the Agreement. In October 2005, the line was increased to $25 million
under provisions of the agreement as a result of a large inventory purchase made
by the Company in September 2005. At January 31, 2006, borrowings under the
facility totaled $14.5 million, at an interest rate of approximately 5.8%. Of
the $14.5 million, $0.5 million represented a draw on the Facility just prior to
January 31, 2006. The Company would regularly draw down on the Facility just
prior to quarter end and year end, hold the cash, and then repay the amount
drawn shortly thereafter. The purpose was to show cash availability for
potential acquisitions or other investment oppurtunities. The Company is
currently using the Facility more for inventory investment and working capital
requirements. This represents a more frequent use of the line that will increase
borrowing costs. Approximately $8.9 million was available under the facility at
January 31, 2006. 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.
Based upon current and anticipated levels of operations, the Company
believes that its cash on hand and cash flow from operations, combined with
borrowings available under its line of credit, will be sufficient to meet its
current and anticipated cash operating requirements through the year ending
January 31, 2007, including scheduled interest payments, working capital needs,
and capital expenditures.
18
On January 6, 2003, the Company announced that its Board of Directors, in
light of the Company's cash position, had approved a special cash dividend of
$1.00 per share. The dividend was paid on January 30, 2003. The total paid was
$7.3 million. The Company previously had not declared nor paid any cash
dividends or distributions on its common stock since its inception in 1997. In
addition, API's credit facility prohibits the payment of cash dividends from it
to First Aviation without the lender's consent. 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 (as described above), 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.
Inflation
The Company does not believe that the relatively moderate levels of
inflation that have been experienced in the United States have had a significant
impact on its revenues or operations.
Off -Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
The following table sets forth the Company's contractual obligations as of
January 31, 2006:
Payments due by period
Less than 1-3 3-5 More than
(Amounts in thousands) Total 1 year years years 5 years
------------ ------------- ----------- ----------- --------------
Long-Term Debt Obligations (1) $ 14,500 $ - $ 14,500 $ - $ -
Notes Payable (2) 2,553 1,199 1,354 - -
Operating Lease Obligations (3) 4,463 1,055 1,443 1,049 916
Purchase Obligations (4) 16,480 16,480 - - -
Total $ 37,996 $ 18,734 $ 17,297 $ 1,049 $ 916
Notes to Contractual Obligations Data:
(1) Long-term debt consists of API's revolving line of credit through a
Commercial Revolving Loan and Security Agreement as described in
Liquidity and Capital Resources, above.
(2) Notes Payable consists of vendor financing principal and interest for
inventory purchases as described in the footnotes to the consolidated
financial statements of the Company.
(3) Operating leases includes minimum rental payments under non-cancelable
leases of one year or longer.
(4) Purchase obligations represent cancelable open purchase orders in the
normal course of business for parts inventory. Although such open
purchase orders are generally cancelable, the Company intends to
execute substantially all of them.
19
Item 7A. 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 January 31,
2006, 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 $211,000 in the net liability position of financial instruments at
January 31, 2006. A 10% weakening of the Canadian dollar versus the U.S. dollar
would result in a increase of approximately $258,000 in the net liability
position of financial instruments at January 31, 2006. During the twelve months
ended January 31, 2006 the Company experienced a comprehensive gain of $126,000,
due to an increase in the value of the Canadian dollar relative to the U.S.
dollar. The Company did not experience any significant changes in market risk
during the twelve months ended January 31, 2006. 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.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See Index to Financial Statements, which appears on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
No disclosure required.
Item 9A. Controls and Procedures
- ----------------------------------
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
l5d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of January 31, 2006. Based on their evaluation, the Company's
principal executive and principal financial officer concluded that the Company's
disclosure controls and procedures were effective as of January 31, 2006.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-l5(f) and 15d-l5(f) under the Exchange Act)
that occurred during the Company's fourth fiscal quarter of the fiscal year
ended January 31, 2006, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
- ----------------------------
No disclosure required.
20
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Other than information with respect to First Aviation's executive officers,
which is set forth after Item 4 of Part I of this Form 10-K, the information
required to be disclosed pursuant to this Item 10 is incorporated in its
entirety herein by reference to the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
Item 11. Executive Compensation
- ---------------------------------
The information required to be disclosed pursuant to this Item 11 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- -----------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
The information required to be disclosed pursuant to this Item 12 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
The information required to be disclosed pursuant to this Item 13 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 14. Principal Accountant Fees and Services
- -------------------------------------------------
The information required to be disclosed pursuant to this Item 14 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
21
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements,
which appears on Page F-1 hereof.
(2) Financial Statement Schedule II - Valuation and Qualifying Accounts,
which appears on Page F-19 hereof. (All other schedules have been
omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or the Notes to
Consolidated Financial Statements.)
(3) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (No.
333-18647), as amended, filed on December 23, 1996, and incorporated
herein by reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 2001 (No. 0-21995), and incorporated herein by
reference).
10.1 Form of Director Indemnification Agreement between the Company and
each of its directors (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-18647), as amended, filed
on December 23, 1996, and incorporated herein by reference).
10.2 Asset Purchase Agreement, dated November 25, 1996, by and between AMR
Combs and API (filed as Exhibit 10.9 to the Company's Amendment No. 1
to Registration Statement on Form S-1 (No. 333-18647), as amended,
filed on January 24, 1997, and incorporated herein by reference).
10.3 * First Aviation Services Inc. Stock Incentive Plan (filed as Exhibit
10.14 to the Company's Amendment No. 3 to Registration Statement on
Form S-1 (No. 333-18647), as amended, filed on February 24, 1997, and
incorporated herein by reference).
10.4 * First Aviation Services Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.15 to the Company's Amendment No. 3 to Registration
Statement on Form S-1 (No. 333-18647), as amended, filed on February
24, 1997, and incorporated herein by reference).
10.5 Amended and Restated Registration Rights Agreement, dated as of
February 21, 1996, by and between the Company and FAS Inc. (filed as
Exhibit 10.24 to the Company's Amendment No. 3 to Registration
Statement on Form S-1 (No. 333-18647), as amended, filed on February
24, 1997, and incorporated herein by reference).
10.6 Sublease Agreement, dated as of December 31, 1996, between First
Equity and the Company (filed as Exhibit 10.30 to the Company's
Amendment No. 3 to Registration Statement on Form S-1 (No. 333-18647),
as amended, filed on February 24, 1997, and incorporated herein by
reference).
10.7 * Amendment No. 1 to the First Aviation Services Inc. Stock Incentive
Plan (filed as exhibit 10.39 to Company's Annual Report on Form 10-K
for the year ended January 31, 1998 (No. 0-21995), and incorporated
herein by reference).
10.8 Commercial Revolving Loan and Security Agreement, dated March 30,
2000, by and between Hudson United Bank and Aerospace Products
International, Inc. (filed as Exhibit 10.43 to the Company's Annual
Report on Form 10-K for the year ended January 31, 2000 (No. 0-21995),
and incorporated herein by reference).
22
10.9 Guaranty, dated as of March 30, 2000, between First Aviation Services
Inc. and Hudson United Bank (filed as Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2000 (No.
0-21995), and incorporated herein by reference).
10.10 Second Amendment to Commercial Revolving Loan and Security Agreement
dated as of April 27, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2001 (No. 0-21995), and incorporated herein by reference).
10.11 Second Reaffirmation of Guaranty dated as of April 27, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 2001 (No. 0-21995), and incorporated
herein by reference).
10.12 Third Amendment to Commercial Revolving Loan and Security Agreement
dated as of June 28, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2001(No. 0-21995), and incorporated herein by reference).
10.13 Third Reaffirmation of Guaranty dated as of June 28, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2001(No. 0-21995) , and incorporated
herein by reference).
10.14 * Amendment No. 2 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 4.5 to the Company's Form S-8 (No. 333-25915)
on September 20, 2001, and incorporated herein by reference).
10.15 Letter, effective February 1, 2002, by and between First Equity
Development Inc. and its affiliates and First Aviation Services Inc.
regarding pursuit of acquisition opportunities (filed as Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended January
31, 2002 (No. 0-21995), and incorporated herein by reference).
10.16 Engagement Letter between First Equity Development Inc. and its
affiliate, FED Securities Inc., and First Aviation Services Inc.
effective February 1, 2002 (filed as Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2002 (No.
0-21995), and incorporated herein by reference).
10.17 Fourth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2002 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2002 (No. 0-21995), and incorporated herein by reference).
10.18 Fourth Reaffirmation of Guaranty dated as of July 31, 2002 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2002 (No. 0-21995), and incorporated
herein by reference).
10.19 Fifth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2003 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.19 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2003 (No. 0-21995), and incorporated herein by reference).
10.20 Fifth Reaffirmation of Guaranty dated as of July 31, 2003 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2003 (No. 0-21995), and incorporated
herein by reference).
10.21 * Amendment No. 3 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 10.21 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended July 31, 2003 (No. 0-21995), and
incorporated herein by reference).
23
10.22 * Employment Agreement, dated as of October 7, 2003, between the
Company and Robert G. Costantini (filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended January 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.23 * Form of Incentive Stock Option Award Agreement Letter Pursuant to
the 1997 Stock Incentive Plan (filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.24 * Officer Indemnification Agreement dated as of October 27, 2003
between the Company and Robert G. Costantini (filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended January
31, 2004 (No. 0-21995), and incorporated herein by reference).
10.25 * Employment Agreement, dated as of February 2, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.26 * Amendment to Employment Agreement, dated as of April 5, 2004,
between Aerospace Products International, Inc. and Paul J. Fanelli
(filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended January 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.27 * Relocation Agreement, dated as of February 16, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.28 Sixth Amendment to Commercial Revolving Loan and Security Agreement,
dated as of July 31, 2004, between Hudson United Bank and Aerospace
Products International Inc. (filed as Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.29 Sixth Reaffirmation of Guaranty dated as of July 31, 2004, by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.30 * Amendment dated May 14, 2004 to the Relocation Agreement dated
February 16, 2004 between Aerospace Products International Inc. and
Paul J. Fanelli (filed as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.31 * Compensation Arrangements with Certain Executive Officers (filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2005 (No. 0-21995), and incorporated herein by
reference)
10.32 * Compensation of Non-Employee Directors (filed as Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended January
31, 2005 (No. 0-21995), and incorporated herein by reference)
10.33 Description of Amendment to letter regarding pursuit of Acquisition
Opportunities (filed as Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the year ended January 31, 2005 (No. 0-21995), and
incorporated herein by reference)
10.34 * 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).
10.35 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).
24
10.36 Amended and Restated Commercial 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).
10.37 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 10.4
to the Company's Current Report on Form 8-K dated July 29, 2005
(No. 0-21995), and incorporated herein by reference).
10.38 * Compensation for Aaron P. Hollander (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 2005 (No. 0-21995), and incorporated herein by reference).
10.39 * Compensation arrangements with other executive officers (effective as
of February 1, 2006).
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
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).
* Management contracts or compensatory plans or arrangements.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 1, 2006
FIRST AVIATION SERVICES INC.
By: /s/ Robert G. Costantini
------------------------
Robert G. Costantini
Chief Financial Officer
(Principal Financial and Accounting Officer)
Signature Title Date
- --------- ----- ----
/s/ Aaron P. Hollander Chairman of the Board May 1, 2006
- ------------------------
Aaron P. Hollander
/s/ Michael C. Culver Chief Executive Officer and May 1, 2006
- ------------------------
Michael C. Culver Director (Principal Executive Officer)
/s/ Stanley J. Hill Director May 1, 2006
- ------------------------
Stanley J. Hill
/s/ Robert L. Kirk Director May 1, 2006
- ------------------------
Robert L. Kirk
/s/ Joseph J. Lhota Director May 1, 2006
- ------------------------
Joseph J. Lhota
26
First Aviation Services Inc.
Consolidated Financial Statements
For the years ended January 31, 2006, 2005 and 2004
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm.....................F2
Consolidated Financial Statements:
Consolidated Balance Sheets.................................................F3
Consolidated Statements of Operations.......................................F4
Consolidated Statements of Stockholders' Equity.............................F5
Consolidated Statements of Cash Flows.......................................F6
Notes to Consolidated Financial Statements..............................F7-F18
Schedule II - Valuation and Qualifying Accounts............................F19
F1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Aviation Services Inc.
We have audited the accompanying consolidated balance sheets of First Aviation
Services Inc. as of January 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2006. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)2. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Aviation
Services Inc. at January 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
April 21, 2006
F2
First Aviation Services Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
January 31,
Assets 2006 2005
------------- --------------
Current assets:
Cash and cash equivalents $ 9,488 $ 22,584
Trade receivables, net 18,737 14,563
Inventories, net 38,809 24,156
Prepaid expenses and other 1,351 900
------------- --------------
Total current assets 68,385 62,203
Plant and equipment, net 4,963 2,996
------------- --------------
Total Assets $ 73,348 $ 65,199
============= ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,441 $ 10,495
Accrued compensation and related expenses 1,823 1,205
Other accrued liabilities 1,750 2,424
Notes payable 1,125 -
Income taxes payable 1,012 900
------------- --------------
Total current liabilities 21,151 15,024
Long-term debt 14,500 14,500
Notes payable, less current portion 1,245
Minority interest in subsidiary - 1,041
------------- --------------
Total liabilities 36,896 30,565
Stockholders' equity
Common stock, $0.01 par value, 25,000,000
shares authorized, 9,135,699
shares issued 91 91
Additional paid-in capital 38,799 38,318
Retained earnings 6,349 5,325
Accumulated other comprehensive income 500 374
------------- --------------
45,739 44,108
Less: Treasury stock, at cost, 1,782,449
and 1,814,191 shares, respectively (9,287) (9,474)
------------- --------------
Total stockholders' equity 36,452 34,634
------------- --------------
Total liabilities and stockholders' equity $ 73,348 $ 65,199
============= ==============
See accompanying notes.
F3
First Aviation Services Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year ended January 31,
----------------------------------------------
2006 2005 2004
-------------- -------------- --------------
Net sales $ 131,525 $ 124,249 $ 105,777
Cost of sales 108,474 103,525 86,241
-------------- -------------- --------------
Gross profit 23,051 20,724 19,536
Selling, general and administrative expenses 19,933 19,973 17,032
Corporate expenses 2,372 2,893 2,625
-------------- -------------- --------------
Income (Loss) from operations 746 (2,142) (121)
Interest income 47 66 154
Net interest income (expense) and other (105) 10 (5)
Other income 417 - -
Minority interest in subsidiary (10) (42) (42)
-------------- -------------- --------------
Income (Loss) before income taxes 1,095 (2,108) (14)
(Provision) benefit for income taxes (71) (121) 25
-------------- -------------- --------------
Net income (loss) $ 1,024 $ (2,229) $ 11
============== ============== ==============
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution:
Basic net income (loss) per share $ 0.14 $ (0.31) $ -
-------------- -------------- --------------
Net income (loss) per share - assuming dilution $ 0.14 $ (0.31) $ -
============== ============== ==============
Weighted average shares outstanding - basic 7,336,925 7,301,751 7,267,368
============== ============== ==============
Weighted average shares outstanding - assuming dilution 7,341,007 7,301,751 7,281,598
============== ============== ==============
See accompanying notes.
F4
First Aviation Services Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
Common Stock Accumulated
------------------- Additional Other
As of January 31, 2006 Number Paid-in Retained Comprehensive Treasury
of Shares Amount Capital Earnings Income (Loss) Sub-Total Stock Total
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Balances at January 31, 2003 7,250,710 $ 91 $ 38,445 $ 7,543 $ (96) $ 45,983 $ (9,889) $ 36,094
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Shares issued under qualified plans
and to directors 33,383 - (70) - - (70) 196 126
Other comprehensive income - - - - 334 334 - 334
Net Income - - - 11 - 11 - 11
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Balances at January 31, 2004 7,284,093 $ 91 $ 38,375 $ 7,554 $ 238 $ 46,258 $ (9,693) $ 36,565
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Shares issued under qualified plans 37,415 - (57) - - (57) 219 162
and to directors
Other comprehensive income - - - - 136 136 - 136
Net Loss - - - (2,229) - (2,229) - (2,229)
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Balances at January 31, 2005 7,321,508 $ 91 $ 38,318 $ 5,325 $ 374 $ 44,108 $ (9,474) $ 34,634
=========== ======= =========== ========= =========== ========== =========== ==========
Shares issued under qualified plans
and to directors 31,742 - (60) - - (60) 187 127
Repurchase of preferred stock
of subsidiary - - 541 - - 541 - 541
Other comprehensive income - - - - 126 126 - 126
Net Income - - - 1,024 - 1,024 - 1,024
----------- ------- ----------- --------- ----------- ---------- ----------- ----------
Balances at January 31, 2006 7,353,250 $ 91 $ 38,799 $ 6,349 $ 500 $ 45,739 $ (9,287) $ 36,452
=========== ======= =========== ========= =========== ========== =========== ==========
See accompanying notes.
F5
First Aviation Services Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year ended January 31,
-----------------------------------------------
2006 2005 2004
-------------- -------------- ---------------
Cash flows from operating activities
Net income (loss) $ 1,024 $ (2,229) $ 11
Adjustments to reconcile net income (loss) to net cash from
operating activities - non cash expense (income):
Depreciation and amortization 1,255 1,011 1,101
Compensation paid through issuance of stock 127 162 121
(Increase) decrease in working capital assets:
Trade receivables (4,049) (990) 416
Inventories (11,596) (1,717) (1,561)
Prepaid expenses and other assets (444) 150 10
Increase (decrease) in working capital liabilities:
Accounts payable 4,917 930 (775)
Other accrued liabilities (165) 1,206 188
Income taxes payable 110 (32) (70)
-------------- -------------- ---------------
Net cash used in operating activities (8,821) (1,509) (559)
Cash flows from investing activities
Purchases of plant and equipment and other assets (3,208) (1,039) (484)
Proceeds from disposals of plant and equipment and other assets - 3 70
-------------- -------------- ---------------
Net cash used in investing activities (3,208) (1,036) (414)
Cash flows from financing activities
Borrowings on revolving line of credit 46,400 56,150 58,000
Repayments on revolving line of credit and capital lease obligations (46,400) (56,150) (58,004)
Repayments on notes payable (600) - -
Repurchase of Minority Interest in Subsidiary (500) - -
Repurchases of common stock for treasury and other - - 5
-------------- -------------- ---------------
Net cash provided by (used in) financing activities (1,100) - 1
Effect of exchange rate changes on cash and cash equivalents 33 (15) 103
-------------- -------------- ---------------
Net change in cash and cash equivalents $ (13,096) $ (2,560) $ (869)
Cash and cash equivalents at the beginning of the year 22,584 25,144 26,013
-------------- -------------- ---------------
Cash and cash equivalents at the end of the year $ 9,488 $ 22,584 $ 25,144
============== ============== ===============
Supplemental cash flow disclosures
Cash paid for:
Interest $ 218 $ 46 $ 61
============== ============== ===============
Income taxes paid, net $ 59 $ 145 $ 124
============== ============== ===============
See accompanying notes.
F6
First Aviation Services Inc.
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Business and Basis of Presentation
First Aviation Services Inc. ("First Aviation"), through its wholly-owned
subsidiaries, Aerospace Products International, Inc. ("API"), Aircraft Products
International, Ltd. ("API Ltd."), API Asia Pacific, Inc. ("API Asia Pacific"),
and API China, Inc. ("API China"), (collectively the "Company"), is one of the
leading suppliers of products and services to the aerospace industry worldwide,
including the provisioning of aircraft parts and components, and supply chain
management services. The Company also performs overhaul and repair services for
brakes and starter/generators, and builds custom hose assemblies. The Company
has its headquarters in Westport, Connecticut.
The accompanying consolidated financial statements include the accounts of First
Aviation and its subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation.
First Aviation was formed in March 1995 to acquire the capital stock of National
Airmotive Corporation ("NAC"). On March 5, 1997, the Company completed an
initial public offering of its common stock. A portion of the proceeds was used
to acquire API's business from AMR Combs, Inc. ("AMR Combs").
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates, and the differences may be significant.
Net Sales, Cost of Sales, and Trade Receivables
The Company's net sales consist of sales of services to the aviation industry,
including parts and components suppply 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
overhaul and repair services are completed and the item is shipped back to the
customer, or when supply chain management services have been provided to the
customer. Shipping and handling fees billed to customers are included in net
sales. The terms and nature of supply chain management services provided are
stipulated in a long-term contract between the Company and the customer. The
Company provides its facilities, personnel and systems to provide cost effective
services 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 customers'
inventory without taking ownership, can take a fee based on the cost of
providing services, and not on the sales value of the product.
Cost of sales consists of costs of inventory sold, 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. API has five
suppliers from whom approximately 38%, 40%, and 45% of it's total purchases were
made during the years ended January 31, 2006, 2005, and 2004, respectively.
F7
Sales to unaffiliated foreign customers were approximately 25%, 22% and 22% of
net sales for the years ended January 31, 2006, 2005 and 2004, respectively. The
majority of these customers were located in Canada, Southeast Asia, Latin
America, and Europe.
The Company provides credit in the form of trade accounts receivable to its
customers. The Company generally does not require collateral to support domestic
customer receivables. Receivables arising from export activities may be
supported by foreign credit insurance. The Company performs ongoing credit
evaluations of its customers and maintains allowances that management believes
are adequate for potential credit losses. The allowance for doubtful accounts
was $596 and $806, at January 31, 2006 and 2005, respectively.
Shipping and Handling Revenues and Costs
Fees billed to customers associated with shipping and handling activities are
classified as revenue, and costs associated with shipping and handling, are
classified as part of cost of sales.
Stock Based Compensation and 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 are paid for in stock as part of their annual
compensation.
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 years
ending January 31, 2006, 2005 and 2004 since 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.
F8
The fair value of each option issued was estimated at the date of grant using
the following assumptions for the years ended January 31:
2006 2005 2004
---------------- ---------------- ---------------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.3% 3.6% 1.9%
Expected volatility 31.0% 32.3% 37.8%
Expected life of option 5.0 years 5.0 years 5.0 years
Weighted-average fair value
of options granted during
the year $ 1.40 $ 1.55 $ 1.15
Using the above noted assumptions and the weighted-average fair value of each
option granted, the following shows the Company's results if the fair value of
options issued had been recorded as an expense.
2006 2005 2004
------------ ------------ -------------
Net income (loss) as reported $ 1,024 $ (2,229) $ 11
Pro forma net compensation expense
for issuance of stock options 13 57 42
------------ ------------ -------------
Pro forma net income (loss) $ 1,011 $ (2,286) $ (31)
============ ============ =============
Basic net income (loss) per share,
and net income (loss) per share
- assuming dilution as reported $ 0.14 $ (0.31) $ (0.00)
============ ============ =============
Pro forma basic net income (loss)
per share, and net income (loss)
per share - assuming dilution $ 0.14 $ (0.31) $ (0.00)
============ ============ =============
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. The cost will be measured based on the fair value of the
instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25.
As originally issued in 1995, SFAS No. 123 established as preferable the
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income (loss) would have been had the preferable
fair-value-based method been used. The Company will be required to apply SFAS
No. 123(R) at the beginning of the first fiscal year beginning after June 15,
2005, and plans to adopt it effective February 1, 2006. The impact of adoption
of Statement 123(R) on future periods cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. However,
had the Company adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in the table above.
Statement 123(R) has alternative transitional methods for adoption and the
Company has not determined which transitional alternative it will use.
Cash and Cash Equivalents
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 purchased with original maturities of less than three
months.
F9
Inventories
Inventories generally consist of aircraft parts and components and are stated at
the lower of cost or market, using the first-in, first-out method. Provisions
are made in each period for the estimated effect of obsolete and slow moving
inventories. During the three months ended July 31, 2004, as a result of normal
review procedures, the Company adjusted the methodology for estimating the
Allowance for Slow Moving and Obsolete Inventory that makes the estimate more
objective, and efficient to calculate, by applying percentages based on
historical experiences of inventory in various age classifications, and
eliminating the practice of making adjustments based on historical and projected
sales, or other inventory movements due to new product lines and product returns
and allowances. Actual obsolete and slow moving inventories may differ
significantly from such estimates, and such differences could be material to the
financial statements. The allowance for obsolete and slow moving inventory was
$1,709 and $1,656, at January 31, 2006 and 2005, respectively.
Fair Value of Financial Instruments
The carrying values of current assets and liabilities approximate fair value due
to the short-term maturities of these assets and liabilities. The carrying
amount of the Company's borrowings under its revolving credit agreements
approximates fair value, as these obligations have interest rates which vary in
conjunction with current market conditions. The carrying amount of the minority
interest in subsidiary at January 31, 2005 represented API preferred stock, at
face value, prior to repurchase by API pursuant to an agreement dated June 20,
2005 (See Note 6).
Plant and Equipment
Plant and equipment are stated at cost, less an allowance for depreciation.
Additions and improvements that materially increase the productive capacity or
extend the useful life of an asset are added to the cost of the asset.
Expenditures for normal maintenance and repairs are charged to expense as
incurred.
Depreciation of plant and equipment is computed using the straight-line method
over the estimated useful lives of the assets, which range from 3 to 15 years.
Leasehold improvements are amortized over the shorter of the estimated life of
the improvement or the term of the related lease.
Long-Lived Assets
During the year ended January 31, 2003, the Company adopted FAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". Under FAS 144, an
impairment loss must be recognized when the carrying amount of a long-lived
asset exceeds its fair value. In the event that the carrying amounts of
long-lived assets may be impaired, an assessment of recoverability must be
performed. The assessment process consists of comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down is required. If this review process indicates that
the asset will not be recoverable, the carrying value of the asset must be
reduced to its estimated realizable value. The adoption of FAS 144 had no effect
on the consolidated financial position of the Company. No asset impairments were
recorded during the years ended January 31, 2006, 2005 and 2004.
Principal Suppliers
API has five suppliers of parts and components from which approximately 38%, 40%
and 45% of its total purchases were made during the years ended January 31,
2006, 2005 and 2004, respectively. Accounts payable to these vendors totaled
$4,279 and $1,803 at January 31, 2006 and 2005, respectively. An inability to
maintain timely access to parts and components from these vendors on
commercially reasonable terms would have a material adverse effect on the
Company's consolidated business, financial condition and results of operations.
Income Taxes
The Company uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company records valuation allowances
against deferred tax assets as it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
F10
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) arose from the translation of
accounts into U.S. dollars where the functional currency is the Canadian dollar.
The increase in other comprehensive income during the years ended January 31,
2006, 2005, respectively, was due to an increase in the value of the Canadian
dollar relative to the U.S. dollar. Comprehensive income (loss) for the years
ended January 31, 2006, 2005 and 2004, respectively, was as follows:
2006 2005 2004
------------ ------------ ------------
Net income (loss) as reported $ 1,024 $ (2,229) $ 11
Net impact of foreign currency
translation adjustments - gain 126 136 334
------------ ------------ ------------
Comprehensive income (loss) $ 1,150 $ (2,093) $ 345
============ ============ ============
3. Plant and Equipment
Plant and equipment consist of the following:
January 31,
2006 2005
----------- -----------
Machinery and equipment $ 2,488 $ 2,183
Buildings and leasehold improvements 1,242 1,239
Computer equipment, software, office furniture,
fixtures and other office equipment 8,965 6,628
Construction-in-process 1,085 508
----------- -----------
13,780 10,558
Less: accumulated depreciation (8,817) (7,562)
----------- -----------
$ 4,963 $ 2,996
=========== ===========
4. Long-Term Debt
January 31,
2006 2005
----------- -----------
Long-term debt - revolving line of credit $ 14,500 $ 14,500
=========== ===========
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").
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. In October 2005, the lender
approved the increase in the facility to $25 million after the Company made a
F11
large initial inventory purchase in September 2005 from a leading aircraft OEM.
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. There are no
outstanding amounts under Facility II at January 31, 2006.
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. At January 31, 2006, borrowings
under the facility totaled $14.5 million, at an interest rate of approximately
5.8%. Approximately $8.9 million was available under the facility at January 31,
2006.
5. Notes Payable
January 31,
2006 2005
--------------- ---------------
Notes Payable $ 2,370 $ -
=============== ===============
Less : Current Portion (1,125) -
================ ===============
Long-term portion of notes payable $ 1,245 $ -
=============== ===============
API entered into an initial parts purchase agreement on September 20, 2005 with
a leading aircraft original equipment manufacturer ("OEM") to purchase $8.3
million of inventory, including a long-term agreement to sell parts. API
received approximately $7.1 million of this inventory, and the original
agreement was subsequently amended to reflect the actual amount of inventory
received. The OEM vendor agreed to partially finance the purchase with two
promissory notes from API of $2.5 million and $1.8 million, with the Company
entering into a guarantee agreement to ensure payment by API. These promissory
notes were also subsequently amended to reflect the lower amount of inventory
actually received. The amended promissory note for $1.6 million is for a term of
4 years, at 5.0% interest per annum. The amended promissory note for $1.4
million is a non-interest bearing short-term note due within one year. The
vendor financing promissory notes are subordinated to the Company's revolving
line of credit. The Company purchased an additional $4.8 million of inventory
from the OEM in October of 2005. This additional purchase and subsequent
purchases from this OEM were on standard vendor terms. Future principal payments
on the notes are $1,073, $340, $511, and $446 for the years ended January 31,
2007, 2008, 2009, and 2010, respectively.
6. Stockholders' Equity
The Company has an Employee Stock Purchase Plan ("ESPP"). Under the ESPP,
250,000 shares of common stock have been reserved for issuance. With certain
limitations, the plan allows for eligible employees to purchase stock through
payroll deductions at 85% of the lower of the fair market value of the Company's
common stock as of the first day of each semi-annual offering period or the fair
market value of the stock at the end of the offering period. The Company issued
5,249 and 2,682 shares from treasury stock to employees under the ESPP during
the years ended January 31, 2006 and 2005, respectively. At January 31, 2006,
179,914 shares were available for purchase under the ESPP.
The Company also has a Stock Incentive Plan (the "Plan"). The Plan provides for
the grant of incentive stock options, nonqualified stock options, stock
appreciation rights, stock grants and stock purchase rights. The Company's
shareholders voted at the 2003 annual meeting to approve the increase in the
number of shares available under the Plan. On September 12, 2003, the Company
filed a registration statement on Form S-8 to register 200,000 additional shares
of common stock, for issuance pursuant to awards under the Plan. Subsequently, a
F12
total of 1,200,000 shares of common stock have been reserved for issuance under
the Plan. Only employee stock options and shares issued to directors have been
issued under the Plan.
All of the stock options vest ratably over two to five-year periods, beginning
one year after the date of the grant, and expire ten years after issuance. Since
the exercise price of all of the options granted during the years ended January
31, 2006, 2005 and 2004 was at or above the fair market value per share of the
Company's common stock at the dates of grant, no compensation expense relating
to stock options was recorded. At January 31, 2006, options for 206,350 shares
(after forfeitures) had been issued under the Plan. The following table is a
summary of activity related to stock options for the respective years ended
January 31:
2006 2005 2004
--------------------------- -------------------------- -----------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
Of Exercise Of Exercise Of Exercise
Options Price Options Price Options Price
----------- ------------ ---------- ----------- ------------ -------------
Outstanding at
beginning of year 223,350 $ 4.41 592,700 $ 4.94 598,200 $ 5.18
Granted 10,000 4.00 101,100 4.49 115,000 3.21
Exercised - - - - - -
Forfeited (27,000) 4.54 (470,450) 5.09 (120,500) 4.49
----------- ------------ ---------- ----------- ------------ -------------
Outstanding at end of year 206,350 $ 4.37 223,350 $ 4.41 592,700 $ 4.94
=========== ============ ========== =========== ============ =============
Exercisable at end of year 133,252 $ 4.42 90,866 $ 4.50 314,368 $ 5.59
=========== ============ ========== =========== ============ =============
The following table is a summary of information about stock options outstanding
at January 31, 2006:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ----------------------------------
Weighted-
Range of Number Average Weighted- Weighted-
Exercise Of Remaining Average Number of Average
Prices Options Contractual Life Exercise Price Options Exercise Price
- ------------------ ----------------- ------------------ ---------------- ------------- ----------------
$3.83 - 5.00 206,350 7.2 years $ 4.37 133,252 $ 4.42
- ------------------ ----------------- ------------------ ---------------- ------------- ----------------
All of the Company's current directors elected to receive a portion of their
compensation for the years ended January 31, 2006, 2005 and 2004 paid in the
form of shares of the Company's common stock. The fair market value of the
Company's common stock at the date of issuance was charged to expense with a
corresponding decrease to treasury stock and additional paid-in capital. Such
compensation expense totaled $108, $153 and $121, and the number of shares
issued was 26,493, 34,733 and 32,100 for the years ended January 31, 2006, 2005
and 2004, respectively. A total of 178,630 shares have been issued to directors
under the Plan.
At January 31, 2006, 654,220 shares were available to be issued under the Plan.
In a series of authorizations commencing November 3, 1999, the Company's Board
of Directors authorized a repurchase program of up to 2,118,817 shares of the
Company's common stock. The repurchases have been funded from a portion of the
proceeds from the sale of its previously owned subsidiary National Airmotive
Corp., and were made from time to time in open market transactions, block
purchases, privately negotiated transactions or otherwise at prices prevailing
at the time of the repurchase. The aggregate share repurchases since the
repurchase program began totaled 2,024,498 shares through January 31, 2002 at an
aggregate cost of $10,708 or $5.29 per share. There have been no repurchases
since that time. Approximately 94,000 shares remain available for repurchase
under this program.
F13
In conjunction with the API acquisition, AMR Combs purchased 10,407 shares of
API Series A Cumulative Convertible Preferred Stock, $0.001 par value (the
"Preferred Stock"), at a price of $100 per share. Total adjusted proceeds to the
Company were $1,041. This transaction had been accounted for as minority
interest in subsidiary in the accompanying consolidated balance sheets.
Dividends were payable on a quarterly basis on the Preferred Stock at an annual
rate of $4.00 per share; accordingly, dividends of $10, $42, and $42 were paid
during each of the years ended January 31, 2006, 2005 and 2004, respectively,
and have been reflected as minority interest in subsidiary in the accompanying
consolidated statements of operations. Pursuant to an agreement dated June 20,
2005, API repurchased the outstanding shares of the Convertible Preferred Stock
from Signature Combs, Inc. (f/k/a AMR Combs, Inc.) for an aggregate purchase
price of $500. 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.
7. Income Taxes
The provision (benefit) for income taxes on continuing operations is as follows:
Year ended January 31,
-------------------------------------------------
2006 2005 2004
-------------- -------------- --------------
Current:
Federal & Foreign $ 71 $ 121 $ 68
State - - -
-------------- -------------- --------------
71 121 68
Deferred:
Federal $ - $ - $ (93)
State - - -
-------------- -------------- --------------
- - (93)
-------------- -------------- --------------
Total provision (benefit) $ 71 $ 121 $ (25)
============== ============== ==============
A reconciliation between the income tax provision (benefit) computed at the U.S.
federal statutory rate and the effective rate reflected in the consolidated
statements of operations is as follows:
Year ended January 31,
------------------------------------------
2006 2005 2004
------------ -------------- -------------
Provision (benefit) at federal
statutory rate 34.0% (34.0)% (34.0)%
State tax (benefit), net of federal - - (29.3)
Foreign tax provision, net of federal 4.7 3.8 314.1
Net operating loss utilized (32.2) - -
Non-deductible items - 2.5 328.3
Prior year and other items 1.4 5.0 (2,743.4)
Deferred tax valuation allowance (1.4) 28.4 1,985.7
------------ -------------- -------------
6.5% 5.7% (178.6)%
============ ============== =============
Deferred tax assets result from temporary differences in the recognition of
income and expenses for tax and financial statement purposes. These differences
are set forth below:
January 31,
--------------------------------
2006 2005
-------------- --------------
Financial statement accruals not currently
deductible for income tax purposes:
Bad debt $ 215 $ 290
Inventory reserve 683 596
Amortization of tax goodwill 642 709
Net operating loss carryforwards 764 1,087
Other 333 187
--------------------------------
2,637 2,869
Valuation allowance $ (2,637) $ (2,869)
-------------- --------------
Net deferred income tax assets $ - $ -
============== ==============
F14
For the fiscal year ended January 31, 2006, the Company recorded a net expense
from income taxes of $71. The expense is $19 for federal due to federal
alternative minimum tax and $52 of foreign income tax expense for operations in
Canada. The effective rate of 6.5% for the year ended January 31, 2006 is the
result of the federal and state tax benefits from the utilization of the
Company's net operating loss carryforward offset by the federal alternative
minimum tax. The Company decreased the valuation reserve for the year ended
January 31, 2006 by $232, against deferred tax assets resulting from temporary
differences. The Company has net operating loss carryforwards totaling
approximately $1,756 for federal income tax purposes, and various state net
operating loss carryforwards. The carryforwards expire between 2023 and 2025.
For the fiscal year ended January 31, 2005, the Company recorded a net expense
from income taxes of $121. The expense is foreign income tax expense, for
operations in Canada and the Philippines. The effective rate of 5.7% for the
year ended January 31, 2005 is the result of the federal tax benefits, foreign
taxes, state tax benefits and changes in the deferred tax valuation allowance.
The Company also increased the valuation allowance for the year ended January
31, 2006, by $598, against deferred tax assets resulting from temporary
differences.
For the fiscal year ended January 31, 2004, the Company recorded a net benefit
from income taxes of $25. The benefit was from a $93 credit from a U.S. federal
refund received that is offset by foreign income tax expense of $68, for
operations in Canada and the Philippines. The accrual for the refund received
was offset in its entirety by the valuation reserve that had been recorded by
the Company during the prior year, but changes to U.S. federal income tax
regulations during the fiscal year ended January 31, 2004 allowed the Company to
carry back the benefit to prior years, and receive a refund. The effective rate
of (178.6%) for the year ended January 31, 2004 is the result of the tax benefit
from the U.S. federal refund received, state tax benefits and changes in the
deferred tax valuation allowance due primarily to depreciation expenses. The
Company also increased the valuation reserve for the year ended January 31,
2004, by $278, against deferred tax assets resulting from temporary differences.
8. Employee Benefits Plan
API maintains a defined contribution savings plan, qualified under Section
401(k) of the Internal Revenue Code, that covers substantially all of its
full-time employees. The savings plan allows employees to defer up to 15 percent
of their salary, with the Company partially matching employee contributions.
Employees vest in the Company contribution ratably over three years. The Company
expensed $164, $206 and $167 related to the savings plan in the years ended
January 31, 2006, 2005 and 2004, respectively. Employees do not have an option
to invest in the Company's stock under the savings plan.
9. Related Parties
The Company and First Equity Development Inc. ("First Equity") the wholly-owned
subsidiary of First Equity Group, Inc., 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 terminated by First
Equity on January 1, 2005. The advisory agreement had been 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
F15
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. During the three years ended January 31, 2006, 2005, and
2004, the Company paid First Equity retainer fees of $0, $360, and $360,
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 were also
terminated by First Equity with the expiration of the advisory agreement on
January 31, 2005, as described above.
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 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 $93, $84, and
$80, for the years ended January 31, 2006, 2005, and 2004, respectively.
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, $52, $53, and $67 in 2006, 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 by agreement are paid through the payroll
of API, the Company's principal subsidiary.
The Company paid Imtek, an affiliate of First Equity, approximately $29 for
printing, insertion, and mailing services, for the year ended January 31, 2004,
and reimbursed Imtek for actual expenses incurred. These services were cancelled
during the year ended January 31, 2004.
The Company paid Skip Barber Racing Inc., an affiliate of First Equity, during
the year ended January 31, 2004, $22 to reimburse such affiliate for the use of
the affiliate's in-house counsel, for services performed exclusively for the
Company.
F16
10. Interest and Other Income (Expense)
The components relate to interest expense on external debt, realized and
unrealized foreign exchange gain (loss) on Canadian dollar transactions by the
Canadian operations, and other charges.
Year ended January 31,
-----------------------------------------------------
2006 2005 2004
----------------- ------------------ --------------
Interest expense $ (234) $ (64) $ (67)
Foreign exchange gain 130 74 98
Other income (expense) (1) - (36)
----------------- ------------------ --------------
$ (105) $ 10 $ (5)
================= ================== ==============
11. 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 $150 recorded as a reduction in
inventory from the repurchase of inventory held by API.
12. Net Income (Loss) per Share
The following sets forth the denominator used in the computation of basic
earnings per share and earnings per share - assuming dilution.
Years ended January 31,
-------------------------------------
2006 2005 2004
----------- ------------ -----------
Denominator for basic net income (loss)
per share - weighted average shares 7,336,925 7,301,751 7,267,368
Effect of dilutive employee
stock options 4,082 N/A 14,230
----------- ------------ -----------
Denominator for net income (loss)
per share - assuming dilution
- adjusted weighted average shares
and assumed conversions 7,341,007 7,301,751 7,281,598
=========== ============ ===========
For the year ended January 31, 2005, 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 anti-dilutive. The number of potential shares of common stock
that were excluded from the computation of diluted earnings per share because
their effect was anti-dilutive for the years ended January 31, 2005 was 8,072.
13. Commitments and Contingencies
Commitments
The Company leases certain warehouse facilities, equipment and office space.
Certain of the Company's operating leases have options which allow the Company,
at the end of the initial lease term, to renew the leases for periods ranging
from three to five years. Certain leases also allow for cancellation of the
lease upon payment of a penalty. Certain lease agreements also contain
escalation clauses that are based on the consumer price index. Future minimum
rental payments under operating leases that have initial noncancelable lease
terms in excess of one year as of January 31, 2006 are as follows:
Year ending January 31, 2007 $ 1,055
Year ending January 31, 2008 824
Year ending January 31, 2009 619
Year ending January 31, 2010 573
Year ending January 31, 2011 476
Thereafter 916
-------------------
$ 4,463
===================
F17
Rental expense under noncancelable operating leases amounted to $1,129, $1,148,
and $1,031 for the years ended January 31, 2006, 2005 and 2004, respectively.
Contingencies
In the ordinary course of business, the Company is subject to many levels of
governmental inquiry and investigation. Among the agencies that oversee the
Company's business activities are the Federal Aviation Administration, the
Department of Transportation and the Environmental Protection Agency. The
Company does not anticipate that any action as a result of such inquiries and
investigations would have a material adverse affect on its consolidated
financial position, results of operations or its ability to conduct business.
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.
16. Quarterly Financial Information (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------ ------- -------
Year ended January 31, 2006
Net sales $ 31,981 $ 32,706 $ 33,611 $ 33,227
Gross profit 5,654 5,542 5,642 6,213
Net income (loss) 153 432 90 349
Basic and diluted net income (loss) per share $ 0.02 $ 0.06 $ 0.01 $ 0.05
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year ended January 31, 2005
Net sales $ 30,215 $ 31,072 $ 32,050 $ 30,912
Gross profit 5,612 4,769 5,352 4,991
Net income (loss) (410) (833) (130) (856)
Basic and diluted net income (loss) per share $ (0.06) $ (0.11) $ (0.02) $ (0.12)
F18
Schedule II - Valuation and Qualifying Accounts
First Aviation Services Inc. and Consolidated Subsidiaries
(amounts in thousands)
Balance at
beginning of Balance as of
period Additions Deductions end of period
------------ --------- ---------- --------------
Description:
Year ended January 31, 2004
Allowance for doubtful accounts $ 1,656 106 344 (a) $ 1,418
Year ended January 31, 2005
Allowance for doubtful accounts $ 1,418 (79) (c) 533 (a) $ 806
Year ended January 31, 2006
Allowance for doubtful accounts $ 806 179 389 (a) $ 596
Year ended January 31, 2004
Slow moving and obsolete inventory $ 997 41 25 (b) $ 1,013
Year ended January 31, 2005
Slow moving and obsolete inventory $ 1,013 754 111 (b) $ 1,656
Year ended January 31, 2006
Slow moving and obsolete inventory $ 1,656 280 227 (b) $ 1,709
(a) Write off of uncollectible accounts, net of recoveries.
(b) Write off of excess and obsolete inventory.
(c) Net reversal of excess reserve balance for doubtful accounts.
F19
First Aviation Services Inc.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (No.
333-18647), as amended, filed on December 23, 1996, and incorporated
herein by reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 2001 (No. 0-21995), and incorporated herein by
reference).
10.1 Form of Director Indemnification Agreement between the Company and
each of its directors (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-18647), as amended, filed
on December 23, 1996, and incorporated herein by reference).
10.2 Asset Purchase Agreement, dated November 25, 1996, by and between AMR
Combs and API (filed as Exhibit 10.9 to the Company's Amendment No. 1
to Registration Statement on Form S-1 (No. 333-18647), as amended,
filed on January 24, 1997, and incorporated herein by reference).
10.3 * First Aviation Services Inc. Stock Incentive Plan (filed as Exhibit
10.14 to the Company's Amendment No. 3 to Registration Statement on
Form S-1 (No. 333-18647), as amended, filed on February 24, 1997, and
incorporated herein by reference).
10.4 * First Aviation Services Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.15 to the Company's Amendment No. 3 to Registration
Statement on Form S-1 (No. 333-18647), as amended, filed on February
24, 1997, and incorporated herein by reference).
10.5 Amended and Restated Registration Rights Agreement, dated as of
February 21, 1996, by and between the Company and FAS Inc. (filed as
Exhibit 10.24 to the Company's Amendment No. 3 to Registration
Statement on Form S-1 (No. 333-18647), as amended, filed on February
24, 1997, and incorporated herein by reference).
10.6 Sublease Agreement, dated as of December 31, 1996, between First
Equity and the Company (filed as Exhibit 10.30 to the Company's
Amendment No. 3 to Registration Statement on Form S-1 (No. 333-18647),
as amended, filed on February 24, 1997, and incorporated herein by
reference).
10.7 * Amendment No. 1 to the First Aviation Services Inc. Stock Incentive
Plan (filed as exhibit 10.39 to Company's Annual Report on Form 10-K
for the year ended January 31, 1998 (No. 0-21995), and incorporated
herein by reference).
10.8 Commercial Revolving Loan and Security Agreement, dated March 30,
2000, by and between Hudson United Bank and Aerospace Products
International, Inc. (filed as Exhibit 10.43 to the Company's Annual
Report on Form 10-K for the year ended January 31, 2000 (No. 0-21995),
and incorporated herein by reference).
10.9 Guaranty, dated as of March 30, 2000, between First Aviation Services
Inc. and Hudson United Bank (filed as Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2000 (No.
0-21995), and incorporated herein by reference).
10.10 Second Amendment to Commercial Revolving Loan and Security Agreement
dated as of April 27, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2001 (No. 0-21995), and incorporated herein by reference).
10.11 Second Reaffirmation of Guaranty dated as of April 27, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 2001 (No. 0-21995), and incorporated
herein by reference).
10.12 Third Amendment to Commercial Revolving Loan and Security Agreement
dated as of June 28, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2001(No. 0-21995), and incorporated herein by reference).
10.13 Third Reaffirmation of Guaranty dated as of June 28, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2001(No. 0-21995) , and incorporated
herein by reference).
10.14 * Amendment No. 2 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 4.5 to the Company's Form S-8 (No. 333-25915)
on September 20, 2001, and incorporated herein by reference).
10.15 Letter, effective February 1, 2002, by and between First Equity
Development Inc. and its affiliates and First Aviation Services Inc.
regarding pursuit of acquisition opportunities (filed as Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended January
31, 2002 (No. 0-21995), and incorporated herein by reference).
10.16 Engagement Letter between First Equity Development Inc. and its
affiliate, FED Securities Inc., and First Aviation Services Inc.
effective February 1, 2002 (filed as Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2002 (No.
0-21995), and incorporated herein by reference).
10.17 Fourth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2002 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2002 (No. 0-21995), and incorporated herein by reference).
10.18 Fourth Reaffirmation of Guaranty dated as of July 31, 2002 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2002 (No. 0-21995), and incorporated
herein by reference).
10.19 Fifth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2003 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.19 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2003 (No. 0-21995), and incorporated herein by reference).
10.20 Fifth Reaffirmation of Guaranty dated as of July 31, 2003 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2003 (No. 0-21995), and incorporated
herein by reference).
10.21 * Amendment No. 3 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 10.21 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended July 31, 2003 (No. 0-21995), and
incorporated herein by reference).
10.22 * Employment Agreement, dated as of October 7, 2003, between the
Company and Robert G. Costantini (filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended January 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.23 * Form of Incentive Stock Option Award Agreement Letter Pursuant to
the 1997 Stock Incentive Plan (filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.24 * Officer Indemnification Agreement dated as of October 27, 2003
between the Company and Robert G. Costantini (filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended January
31, 2004 (No. 0-21995), and incorporated herein by reference).
10.25 * Employment Agreement, dated as of February 2, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.26 * Amendment to Employment Agreement, dated as of April 5, 2004,
between Aerospace Products International, Inc. and Paul J. Fanelli
(filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended January 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.27 * Relocation Agreement, dated as of February 16, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.28 Sixth Amendment to Commercial Revolving Loan and Security Agreement,
dated as of July 31, 2004, between Hudson United Bank and Aerospace
Products International Inc. (filed as Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.29 Sixth Reaffirmation of Guaranty dated as of July 31, 2004, by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.30 * Amendment dated May 14, 2004 to the Relocation Agreement dated
February 16, 2004 between Aerospace Products International Inc. and
Paul J. Fanelli (filed as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.31 * Compensation Arrangements with Certain Executive Officers (filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2005 (No. 0-21995), and incorporated herein by
reference)
10.32 * Compensation of Non-Employee Directors (filed as Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended January
31, 2005 (No. 0-21995), and incorporated herein by reference)
10.33 Description of Amendment to letter regarding pursuit of Acquisition
Opportunities (filed as Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the year ended January 31, 2005 (No. 0-21995), and
incorporated herein by reference)
10.34 * 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).
10.35 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).
10.36 Amended and Restated Commercial 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).
10.37 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 10.4
to the Company's Current Report on Form 8-K dated July 29, 2005
(No. 0-21995), and incorporated herein by reference).
10.38 * Compensation for Aaron P. Hollander (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 2005 (No. 0-21995), and incorporated herein by reference).
10.39 * Compensation arrangements with other executive officers (effective as
of February 1, 2006.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
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).
* Management contracts or compensatory plans or arrangements.