United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2006
----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to ____________
Commission File Number 0-21995
FIRST AVIATION SERVICES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1419064
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 RIVERSIDE AVENUE, WESTPORT, CONNECTICUT, 06880-4214
------------------------------------------------------
(Address of principal executive offices)
(203) 291-3300
(Registrant's telephone number)
N/A
-----------------------------------------------------------------
(Former name, former address and formal
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is 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 number of shares outstanding of the registrant's common stock as of December
1, 2006 is 7,370,176
FIRST AVIATION SERVICES INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets..................................................................3
Consolidated Condensed Statements of Operations......................................................4-5
Consolidated Condensed Statements of Cash Flows........................................................6
Notes to Consolidated Condensed Financial Statements................................................7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............14-18
Item 3. Quantitative and Qualitative Disclosures about Market Risks...........................................19
Item 4. Controls and Procedures...............................................................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................20
Item 1A. Risk Factors..........................................................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................................20
Item 3. Defaults Upon Senior Securities.......................................................................20
Item 4. Submission of Matters to a Vote of Security Holders...................................................20
Item 5. Other Information ....................................................................................20
Item 6. Exhibits .............................................................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AVIATION SERVICES INC.
Consolidated Condensed Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
October 31, January 31,
2006 2006
-------------- --------------
(Unaudited) *
Assets
Current assets:
Cash and cash equivalents $ 1,146 $ 9,488
Trade receivables, net of allowance for doubtful 23,047 18,737
accounts of $1,394 and $596, respectively
Inventory, net of allowance for obsolete and slow moving 34,047 38,809
inventory of $5,867 and $1,709, respectively
Prepaid expenses and other 1,242 1,351
-------------- --------------
Total current assets 59,482 68,385
Plant and equipment, net 5,154 4,963
-------------- --------------
Total Assets $ 64,636 $ 73,348
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 15,289 $ 15,441
Accrued compensation and related expenses 1,295 1,823
Other accrued liabilities 1,511 1,750
Revolving line of credit 14,800 -
Notes payable 636 1,125
Income taxes payable 229 1,012
-------------- --------------
Total current liabilities 33,760 21,151
Long-term debt - 14,500
Notes payable, less current portion 694 1,245
-------------- --------------
Total liabilities 34,454 36,896
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized, 91 91
9,135,699 shares issued
Additional paid-in capital 38,806 38,799
(Accumulated deficit) retained earnings (65) 6,349
Accumulated other comprehensive income 538 500
-------------- --------------
39,370 45,739
Less: Treasury stock, at cost, 1,765,523 and 1,782,449 (9,188) (9,287)
shares, respectively
-------------- --------------
Total stockholders' equity 30,182 36,452
-------------- --------------
Total liabilities and stockholders' equity $ 64,636 $ 73,348
============== ==============
See accompanying notes.
* Balances were derived from the audited balance sheet as of January 31, 2006.
3
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Ended
October 31,
2006 2005
-------------- --------------
Net sales $ 32,358 $ 33,611
Cost of sales 31,117 27,969
-------------- --------------
Gross profit 1,241 5,642
Selling, general and administrative expenses 5,352 4,971
Corporate expenses 670 557
-------------- --------------
Income (loss) from operations (4,781) 114
Net interest income (expense) and other (232) 5
-------------- --------------
Income (loss) before income taxes (5,013) 119
(Provision) benefit for income taxes 772 (29)
-------------- --------------
Net income (loss) $ (4,241) $ 90
============== ==============
Basic net income (loss) per share, and net income (loss) per share - assuming
dilution:
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution $ (0.58) $ 0.01
============== ==============
Weighted average shares outstanding - basic 7,365,037 7,341,451
============== ==============
Weighted average shares outstanding - assuming dilution 7,365,037 7,343,852
============== ==============
See accompanying notes.
4
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Nine Months Ended
October 31,
2006 2005
-------------- --------------
Net sales $ 91,265 $ 98,297
Cost of sales 79,318 81,459
-------------- --------------
Gross profit 11,947 16,838
Selling, general and administrative expenses 16,296 14,760
Corporate expenses 1,896 1,744
-------------- --------------
Income (loss) from operations (6,245) 334
Net interest income (expense) and other (837) 4
Minority interest in subsidiary - (10)
Other income - 417
-------------- --------------
Income (loss) before income taxes (7,082) 745
(Provision) benefit for income taxes 669 (71)
-------------- --------------
Net income (loss) $ (6,413) $ 674
============== ==============
Basic net income (loss) per share, and net income (loss) per share - assuming
dilution:
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution $ (0.87) $ 0.09
============== ==============
Weighted average shares outstanding - basic 7,357,881 7,333,249
============== ==============
Weighted average shares outstanding - assuming dilution 7,357,881 7,337,331
============== ==============
See accompanying notes.
5
FIRST AVIATION SERVICES INC.
Consolidated Condensed Statements of Cash Flows (Unaudited)
(IN THOUSANDS)
Nine Months Ended
October 31,
2006 2005
----------- -----------
Cash flows from operating activities
Net income (loss) $ (6,413) $ 674
Adjustments to reconcile net income (loss) to net
cash used in operating activities - non-cash charges:
Depreciation and amortization 1,180 860
Compensation paid through issuance of stock 107 99
Effect of reserve adjustment on inventory 3,968 530
(Increase) decrease in current assets:
Trade receivables (4,425) (3,651)
Inventory 802 (9,971)
Prepaid expenses and other 137 (107)
Increase (expenses) in current liabilities:
Accounts payable (25) 4,920
Accrued compensation and related expenses, and other accrued liabilities (785) (404)
Income taxes payable (783) 132
----------- -----------
Net cash used in operating activities (6,237) (6,918)
Cash flows from investing activities
Purchases of plant and equipment (1,369) (2,247)
----------- -----------
Net cash used in investing activities (1,369) (2,247)
Cash flows from financing activities
Borrowings on revolving line of credit 800 41,500
Repayments on revolving line of credit (500) (41,500)
Repayments on notes payable (1,040) -
Repurchase of preferred stock of subsidiary - (500)
----------- -----------
Net cash used in financing activities (740) (500)
----------- -----------
Net decrease in cash and cash equivalents (8,346) (9,665)
Effect of exchange rates on cash 4 18
Cash and cash equivalents at beginning of period 9,488 22,584
----------- -----------
Cash and cash equivalents at end of period $ 1,146 $ 12,937
=========== ===========
See accompanying notes.
6
FIRST AVIATION SERVICES INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
October 31, 2006
1. BASIS OF PRESENTATION
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries Aerospace Products International, Inc. ("API"), Aerospace Products
International, Ltd. ("API Ltd."), API Asia Pacific Inc. ("API Asia Pacific"),
API China, Inc. ("API China"), and API Europe Ltd ("API Europe") (collectively,
the "Company"), is one of the leading suppliers of services to the aviation
industry worldwide. The services the Company provides the aviation industry
include the sale of aircraft parts and components, the provision of supply chain
management services, overhaul and repair services for brakes and
starter/generators, and the assembly of custom hoses. The Company's principal
executive offices are located at 15 Riverside Avenue, Westport, Connecticut
06880. Customers of the Company include original equipment manufacturers,
aircraft manufacturers, passenger and cargo airlines, fleet operators, corporate
aircraft operators, flight training schools, fixed base operators, certified
repair facilities, governments and military services. The accompanying unaudited
consolidated condensed financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all material adjustments, including the elimination of intercompany
balances and transactions, and normal recurring accruals considered necessary
for a fair presentation, have been included in the accompanying unaudited
consolidated condensed financial statements. Operating results for the three and
nine months ended October 31, 2006 are not necessarily indicative of the results
that may be expected for the full fiscal year ending January 31, 2007. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended January
31, 2006.
2. WEIGHTED AVERAGE SHARES OUTSTANDING - ASSUMING DILUTION
The following sets forth the denominator used in the computation of net income
(loss) per share - for basic and assuming dilution:
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2006 2005 2006 2005
------------- ------------ ------------- -------------
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 7,365,037 7,341,451 7,357,881 7,333,249
Effect of dilutive employee stock options - -
2,401 4,082
------------- ------------ ------------- -------------
Denominator for net income (loss) per
share - assuming dilution, adjusted
weighted average shares and assumed
dilutions 7,365,037 7,343,852 7,357,881 7,337,331
============= ============ ============= =============
For the three and nine months ended October 31, 2006, the denominator used in
the calculation of loss per share - assuming dilution, was the same as the
denominator used for basic loss per share because the effect of options would
have been antidilutive. There were no potential shares of common stock that were
excluded from the computation of diluted earnings per share because their effect
was antidilutive for the three and nine months ended October 31, 2006.
7
3. SHARE BASED PAYMENTS
The Company's non-employee directors receive a portion of their annual
compensation in the Company's stock. The value of stock issued is equivalent to
the compensation expense, and the number of shares issued is based upon the fair
market value per share at the date issued. The Company's non-employee directors
receive compensation in cash for committee meetings and special board meetings,
excluding the four regularly scheduled board meetings and the annual
shareholders' meeting that is paid in stock as part of their annual
compensation. For the three months ended October 31, 2006 and October 31, 2005,
the Company issued 5,139 and 4,617 shares respectively, to directors in lieu of
board fees. For the nine months ended October 31, 2006 and October 31, 2005, the
Company issued 14,403 and 21,828 shares respectively, to directors in lieu of
board fees.
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. A 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. At October 31, 2006, 639,817 shares were available to be issued
under the Plan.
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. In December 2004, the FASB issued Statement No. 123 (Revised
2004), or Statement 123(R), Share-Based Payment, which is a revision of
Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
amends Statement No. 95, Statement of Cash Flows. The approach in Statement
123(R) is similar to the approach described in Statement 123; however, Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the statement of operations based on
their fair values. Pro forma disclosure, as allowed under Statement No. 123, is
no longer an alternative.
The Company adopted FAS 123(R) on February 1, 2006. As required under FAS
123(R), the Company recognized a $13 expense in corporate expenses for options
vested for the three month period ended October 31, 2006, and $40 expense in
corporate expenses for options vested for the nine month period ended October
31, 2006. The fair value of each option issued was estimated at the date of
grant. There were no options issued for the three and nine months ended October
31, 2006 and 2005. Prior to adoption of FAS 123 (R), as permitted under
Statement of Financial Accounting Standard No. ("FAS") 123, "Accounting for
Stock-Based Compensation", the Company elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for stock awards to employees. No compensation
expense was recognized during the three and nine months ending October 31, 2005
because all grants were issued at the fair market value of the Company's common
stock at the date of grant.
The Company has elected the modified-prospective transition method as permitted
by FAS 123(R) and, therefore, prior periods have not been restated to reflect
the impact of stock option expense. Stock option expense will be recorded for
all new and unvested stock options that are expected to vest over the service
period beginning on February 1, 2006. Under FAS 123(R) stock option expense is
generally recognized on a straight line basis over the stated vesting period.
The impact of adopting FAS 123(R) increased the Company's basic net loss per
share by $0.01 for the nine months ended October 31, 2006. There was no impact
on the Company's net loss per share for the three months ended October 31, 2006.
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. Upon the adoption of FAS 123(R) the
Company changed the accounting for forfeitures and estimates forfeitures when
calculating the compensation expense. The forfeitures did not have a material
impact on the estimated fair value of the stock options. Prior to the adoption
of FAS 123(R), for purposes of pro-forma disclosures under FAS 123, the Company
did not make an estimate of forfeitures, but instead subsequently reversed
pro-forma compensation costs for forfeited awards when the awards were actually
forfeited.
8
Using the assumptions under the Black-Scholes option-pricing model, and the
weighted-average fair value of each option granted, the net income and earnings
per share that would have been recorded if the estimated fair value of options
granted had been recorded as an expense for the three and nine months ended
October 31, 2005, prior to adoption of FAS 123(R) on February 1, 2006, was:
Three Months Ended Nine Months Ended
October 31, 2005 October 31, 2005
------------------ -----------------
Net income, as reported $ 90 $ 674
Pro forma compensation expense for issuance of
stock options, net of tax effect (13) (39)
------- --------
Pro forma net income $ 77 $ 635
BASIC NET INCOME PER SHARE, AND NET INCOME PER
SHARE - ASSUMING DILUTION AS REPORTED $0.01 $0.09
PRO FORMA BASIC NET INCOME PER SHARE, AND NET
INCOME PER SHARE - ASSUMING DILUTION $0.01 $0.09
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. At
October 31, 2006, options for 102,150 shares (after forfeitures) had been issued
under the Plan. The following table is a summary of activity related to stock
options for the nine month period ended October 31, 2006:
WEIGHTED-
NUMBER AVERAGE AVERAGE
OF EXERCISE REMAINING
OPTIONS PRICE LIFE
----------- ------------ ------------
Outstanding at February 1, 2006 206,350 $ 4.37 7.2 YEARS
Granted - - -
Exercised - - -
Forfeited 104,200 4.28 6.7
----------- ------------ ------------
Outstanding at October 31, 2006 102,150 $ 4.47 6.9 YEARS
=========== ============
Exercisable at October 31, 2006 75,936 $ 4.51
=========== ============
9
NUMBER WEIGHTED-
OF AVERAGE
OPTIONS EXERCISE
PRICE
----------- ----------
Nonvested at February 1, 2006 73,098 $ 4.42
Granted - -
Vested (27,553) 4.42
Forfeited (19,331) 3.93
----------- ----------
Nonvested at October 31, 2006 26,214 $ 4.35
=========== ==========
The total fair value of options which vested during the three and nine months
ended October 31, 2006, was approximately $4 (8,333 shares) and $78 (27,553
shares), respectively. As of October 31, 2006 $25 of unrecognized compensation
cost related to non-vested stock options is expected to be recognized over a
weighted average period of approximately 1.00 year.
The fair value of options which vested during the nine months ended October 31,
2006, was estimated assuming that no dividends will be declared and using
risk-free rates ranging from 1.75% to 4.25%. Additionally, the Company assumed
that the expected term of share options would be 5.0 years with volatility
ranging from 0.31% to 0.37% based on historical prices of the Company's stock.
The weighted average volatility was 0.33%.
In November 2005, the FASB issued FSP No. FAS 123(R)-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards". This
FSP provides an elective alternative simplified method for calculating the pool
of excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of FAS 123(R) and reported in the consolidated
statements of cash flows. Companies can take up to one year from the effective
date of the FSP to evaluate the available transition alternatives and make a
one-time election as to which method to adopt. The Company will complete the
process of evaluating the alternative methods during the fourth quarter of
fiscal year 2007.
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. Under FAS 123(R),
compensation charges are recorded for the ESPP. The Company issued 2,523 shares
of stock under the ESPP plan during the nine months ended October 31, 2006. The
compensation recorded for the nine months ended October 31, 2006 for the ESPP
Shares was not significant.
4. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income results from the translation of accounts
into U.S. dollars where the functional currency is the Canadian dollar. The
increase to net (loss) to arrive at comprehensive income (loss) during the three
months ended October 31, 2006 was due to an increase in the value of the U.S.
dollar relative to the Canadian dollar. The decrease to net (loss) to arrive at
comprehensive income (loss) during the nine months ended October 31, 2006 was
due to a decrease in the value of the U.S. dollar relative to the Canadian
dollar. Comprehensive income (loss) for the periods shown was as follows:
10
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2006 2005 2006 2005
------------- ------------ -------------- ----------
Net income (loss) as reported $ (4,241) $ 90 $ (6,413) $ 674
Net impact of foreign currency translation
adjustments - gain (loss) (53) 63 38 83
------------- ------------ -------------- ----------
Comprehensive income (loss) $ (4,294) $ 153 $ (6,375) $ 757
============= ============ ============== ==========
5. INCOME TAXES
The Company recorded a (provision) benefit for income taxes related to foreign
income tax expense estimates for operations in Canada and the Philippines. No
provision is made for U.S. taxation because the Company has sufficient net
operating loss carryforwards that would be utilized to offset any provision for
pre-tax income. No deferred tax provision is recorded because it would be offset
by a change in the deferred tax valuation allowance. The Company does not record
a tax benefit for U.S. tax purposes due to the deferred tax valuation allowance
recorded, as it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
In the three months ended October 31, 2006, the Company recorded federal and
state tax benefits in the amount of $810,000. The benefits arose due to a change
in facts and circumstances and released assumptions that generated the
establishment of federal and state tax liabilities in prior periods leading to
the reversal of the liabilities in the current periods.
6. RELATED PARTIES
The Company and First Equity Development Inc. ("First Equity"), the wholly-owned
subsidiary of First Equity Group, Inc., and the majority stockholder of the
Company, have an agreement relating to the allocation of potential investment
and acquisition opportunities in the aerospace parts distribution and logistics
businesses. The agreement was approved by the independent members of the Board
of Directors on a month-to-month basis effective February 1, 2004. First Equity
Group, Inc. is beneficially owned by Mr. Aaron P. Hollander and Mr. Michael C.
Culver, respectively Chief Executive Officer and Vice Chairman of the Board 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 subleases from First Equity approximately 3,000 square feet of
office space in Westport, Connecticut. The leased space is utilized by the
Company as its corporate headquarters. First Equity also utilizes space in the
same premises. The sublease, which became effective on April 21, 1997, is for a
period of ten years, and is cancelable by either party with six months notice.
The Company has the option to renew the sublease for two additional five-year
periods. Lease payments under this sublease totaled approximately $36 and $22,
for the three months ended October 31, 2006, and 2005, and $92 and $67, for the
nine months ended October 31, 2006, and 2005. 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 and the Controller of First
Equity each month. In addition, a member of the Company's audit committee
reviews the allocation of expenses quarterly. Some business development
expenses, such as joint marketing expense and business organizational dues, are
shared on an equal basis. Management believes this method of allocation is
reasonable. In addition, the amounts reimbursed by the Company are the actual
costs incurred for the expense. The Company reimbursed First Equity, $10 and
$12, for the three months ended October 31, 2006, and 2005, respectively, and
$35 and $32 for the nine months ended October 31, 2006, and 2005, respectively.
11
In order to simplify the administration of payroll, certain employees of the
Company who are authorized to perform services for both the Company and First
Equity are paid through the payroll of First Equity. Employees of the Company
who work exclusively for the Company are paid through the payroll of API, the
Company's principal subsidiary.
7. INTEREST INCOME (EXPENSE) AND OTHER
The components relate to interest income on investments, interest expense on
external debt, realized and unrealized foreign exchange loss on foreign
denominated transactions by our Canadian subsidiary.
Three months ended Nine Months ended
October 31, October 31,
2006 2005 2006 2005
-------- ------ -------- --------
Interest income $ - $ 4 $ 1 $ 45
Interest expense (293) (53) (847) (116)
Other gains (losses) 61 54 9 75
-------- ------ -------- --------
$ (232) $ 5 $(837) $ 4
======== ====== ======== ========
8. REVOLVING LINE OF CREDIT
Aerospace Products International Inc., (the "Borrower") a direct wholly-owned
subsidiary of First Aviation Services, Inc. (the "Guarantor") has a revolving
line of credit under a Commercial Revolving Loan and Security Agreement (the "
Agreement") and Guaranty Agreement (the "Guaranty") by and among the Borrower,
Guarantor and TD Banknorth, the successor to Hudson United Bank (the "Lender")
dated July 29, 2005.
The Agreement has a commitment expiration date of September 1, 2007. The Company
is in the process of negotiating an amendment to the Agreement, under
substantially the same terms, with TD Banknorth the successor to the Lender, to
extend the expiration date of the facility to September 1, 2008.
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
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.
12
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 October 31, 2006 or 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. For the three months ended October
31, 2006, API failed to maintain the specified trailing 12 month debt service
coverage ratio for the quarter. The Company obtained a waiver from the Lender
for the violation of the covenant. Substantially all of API's domestic assets
are pledged as collateral under the Agreement, and First Aviation guarantees all
borrowings under the Agreement. Based upon the terms in the proposed amendment
at October 31, 2006, borrowings under the facility totaled $14.8 million at an
interest rate of approximately 7.1%. Approximately $9.1 million was available
under the facility at October 31, 2006.
9. NOTES PAYABLE
OCTOBER 31, January 31,
2006 2006
-------------- ---------------
Notes Payable $ 1,330 $ 2,370
Less : Current Portion (636) (1,125)
--------------- ----------------
Long-term portion of notes payable $ 694 $ 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. As of
October 31, 2006, API had received approximately $7.1 million of this inventory.
The OEM vendor agreed to partially finance the purchase with two amended
promissory notes from API of $1.6 million and $1.4 million, with the Company
entering into a guarantee agreement to ensure payment by API. 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
10. RESERVE FOR EXCESS AND OBSOLETE INVENTORY
The Company increased the allowance for excess and obsolete inventory by $4.0
million during the three months ended October 31, 2006 for an inventory purchase
in October 2005 from an aircraft OEM. The additional reserve was derived from
the data that became available during the quarter ended October 2006, and was
used to calculate the estimate of the effect of excess and obsolete inventories.
As the result of normal review procedures, during the three months ended October
31, 2006, the Company started using an adjusted methodology for calculating the
effect of slow moving and obsolete inventory. The adjusted methodology estimates
the provision for excess and obsolete inventory 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. This method differs from the previous method which was based on
historical aging. The impact of the change in methodology was not material to
the Company's Operating results.
As a result of this review, the Company will continue to monitor the results of
this method of estimating inventory reserves, however actual excess and obsolete
inventories could differ significantly from such estimates and have a
significant negative impact on the estimated allowance and the Company's
financial performance.
11. RECENT ACCOUNTING ANNOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for the Company beginning on February 1, 2007. The Company is
currently reviewing this new standard to determine its effects, if any, on the
Company's financial position or results of operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM OF ACT
1995.
CERTAIN STATEMENTS DISCUSSED IN ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS", ITEM 3, "QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISKS", ITEM 1 OF PART II, "LEGAL
PROCEEDINGS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE NOT STATEMENTS OF
HISTORICAL FACTS, BUT RATHER REFLECT THE COMPANY'S CURRENT EXPECTATIONS
CONCERNING FUTURE EVENTS AND RESULTS. SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
THOSE CONCERNING THE COMPANY'S EXPECTATIONS, INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, OR
INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS INCLUDE, THE
COMPANY'S ABILITY TO OBTAIN PARTS AND COMPONENTS FROM ITS PRINCIPAL SUPPLIERS ON
A TIMELY BASIS, DEPRESSED DOMESTIC AND INTERNATIONAL MARKET AND ECONOMIC
CONDITIONS, ESPECIALLY THOSE CURRENTLY FACING THE AVIATION INDUSTRY AS A WHOLE,
THE IMPACT OF CHANGES IN FUEL AND OTHER FREIGHT-RELATED COSTS, RELATIONSHIPS
WITH ITS CUSTOMERS, THE ABILITY OF THE COMPANY'S CUSTOMERS TO MEET THEIR
FINANCIAL OBLIGATIONS TO THE COMPANY, THE ABILITY TO OBTAIN AND SERVICE SUPPLY
CHAIN MANAGEMENT CONTRACTS, CHANGES IN REGULATIONS OR ACCOUNTING STANDARDS, THE
ABILITY TO CONSUMMATE SUITABLE ACQUISITIONS AND EXPAND, THE LOSS OF THE USE OF
FACILITIES AND DISTRIBUTION HUB IN MEMPHIS, SIGNIFICANT FAILURE OF OUR COMPUTER
SYSTEMS OR NETWORKS, EFFORTS TO COMPLY WITH SECTION 404 OF THE SARBANES-OXLEY
ACT OF 2002, AND OTHER ITEMS THAT ARE BEYOND THE COMPANY'S CONTROL AND MAY CAUSE
ACTUAL RESULTS TO DIFFER FROM MANAGEMENT'S EXPECTATIONS. IN ADDITION, SPECIFIC
CONSIDERATION SHOULD BE GIVEN TO THE VARIOUS FACTORS DESCRIBED IN ITEM 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
JANUARY 31, 2006, AND ITEM 3, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS", IN THIS REPORT FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31,
2006. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENTS OR CAUTIONARY FACTORS, EXCEPT AS REQUIRED BY LAW.
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"),
API China, Inc. ("API China") and API Europe Ltd. ("API Europe") (collectively,
the "Company"), is one of the leading suppliers of services to the aviation
industry worldwide. The services the Company provides the aviation industry
include the sale of aircraft parts and components, the provision of supply chain
management services, overhaul and repair services for brakes and
starter/generators, and the assembly of custom hoses.
The Company's principal executive offices are located at 15 Riverside Avenue in
Westport, Connecticut 06880. Certain filings that First Aviation makes with the
U.S. Securities and Exchange Commission are available on First Aviation's
corporate website at WWW.FAVS.COM. These public filings also can be obtained by
calling our investor relations department, by e-mail at first@firstaviation.com,
or on the SEC website at WWW.SEC.GOV.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in those accounting policies the Company
considers critical from those described under the caption "Critical Accounting
Policies", included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in the Company's Annual Report
on Form 10-K for the year ended January 31, 2006, except for the expensing of
stock options as required by FAS 123(R) and the adjusted methodology the company
uses for estimating the provision for excess and obsolete inventory described
below. Prior to adoption of FAS 123(R) on February 1, 2006, the Company 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. As a result, no compensation expense was recognized because all
grants were issued at the fair market value of the Company's common stock at the
date of the grant. As the result of normal review procedures, during the three
months ended October 31, 2006, the Company started using an adjusted methodology
for calculating the effect of slow moving and obsolete inventory. The adjusted
methodology estimates the provision for excess and obsolete inventory 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. This method differs from the previous method which
was based on historical aging. The impact of the change in methodology was not
material to the Company's operating results.
14
RESULTS OF OPERATIONS
NET SALES
The Company's net sales consist of sales of services to the aviation industry,
including parts and components supply services, supply chain management
services, and component overhaul and repair services. Net sales are recorded
when parts and components are shipped and title transfers to the customer, when
supply chain management services have been provided to the customer, or when
overhauled and repaired items are completed and shipped back to the customer.
Shipping and handling billed to customers are included in net sales. The terms
and nature of supply chain management services are stipulated in a long-term
contract between the Company and the customer. The Company provides its
facilities, personnel and systems to provide the services at less cost to the
customer. In providing services where the Company distributes inventory on
behalf of its customer, the Company may use its own inventory or hold its
customers' inventory without taking ownership of such inventory. In cases where
the Company does not take ownership of its customers' inventory, net sales
generally are recognized as a fee based on the sales value of the product
shipped through the Company's facilities, and not the sales value of the product
itself. Alternatively, the Company, when providing services to handle customer's
inventory without taking ownership, can take a fee based on the cost of
providing services, and not on the sales value of the product.
Net sales for the three months ended October 31, 2006 decreased $1.3 million, or
3.7%, to $32.4 million from $33.6 million for the three months ended October 31,
2005. The decrease was largely due to weakening markets in certain sectors. The
decrease mainly reflected lower revenues to general aviation, retail, and
aviation maintenance providers, offset by increased revenues in the airline and
corporate sectors.
Net sales for the nine months ended October 31, 2006 versus the nine month
period ended October 31, 2005 decreased $7.0 million or 7.2% to $91.3 million in
2006 versus $98.3 million in the comparable 2005 period. The reasons for the
decrease in net sales for the nine months ended October 31, 2006 versus the nine
months ended October 31, 2005, were due to weakening markets in the general
aviation and aviation maintenance sectors and customer credits processed in the
second quarter of the current fiscal year due to customer service issues.
In the four foreign geographic regions the Company serves, revenues decreased in
the three months ended October 31, 2006 versus the comparable prior year period
due to the reasons described above. The Company continues to be cautious with
respect to providing credit to customers in the Latin American region, and this
has had a negative impact on sales.
Freight revenue is a component of net sales and represents freight billed to
customers. Freight revenue for the three months ended October 31, 2006 decreased
17.1%, to $397,000 from $479,000 for the prior year three month period ended
October 31, 2005. For the nine month period ended October 31, 2006, freight
revenue decreased 2.0% to $1,411,000 from $1,440,000 in the prior year nine
month period. The decrease in the three and nine month periods ended October 31,
2006 was primarily due to reduced freight charges on large orders that qualified
for freight incentives in the current three month period. The decrease in the
three and nine month periods had a negative 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.
Cost of sales for the three months ended October 31, 2006 increased $3.1
million, or 11.3%, to $31.1 million from $28.0 million for the three months
ended October 31, 2005. Cost of sales for the nine month period ended October
31, 2006 decreased $2.1 million, or 2.6%, to $79.3 million from $81.5 million
for the nine months ended October 31, 2005. Cost of sales for the three months
ended October 31, 2006 increased due to a $4.0 million charge increasing
inventory reserves in the quarter resulting due to an increase in the allowance
for excess and obsolete inventory of $4.0 million during the three months ended
October 31, 2006 for an inventory purchase in October 2005 from an aircraft OEM.
The additional reserve was derived from the data that became available during
the quarter ended October 2006, and was used to calculate the estimate of the
effect of excess and obsolete inventories, as described in the notes to the
financial statements. Cost of sales for the nine months ended October 31, 2006
decreased $2.1 million as the result of the decrease in revenues described in
net sales offset by the impact of the increase in inventory reserves.
15
As a percentage of net sales, cost of sales increased to 96.2% versus 83.2% for
the three month period ended October 31, 2006 versus 2005. The increase in the
percentage of cost of sales compared to net sales for the three months ended
October 31, 2006 compared to the three months ended October 31, 2005, was
primarily due to the impact of the $4.0 million charge to reserves in the
current year quarter.
Cost of sales as a percentage of net sales in the nine month period ended
October 31, 2006 increased to 86.9% versus 82.9% in the nine month period ended
October 31, 2005. The increase in the percentage of cost of sales compared to
net sales for the nine months ended October 31, 2006 compared to the nine months
ended October 31, 2005, was due to the $4.0 million inventory reserve charge in
the current year three month period.
GROSS PROFIT
Gross profit for the three months ended October 31, 2006 of $1.2 million,
decreased $4.4 million or 78.0% over the prior year gross profit. Gross profit
as a percentage of net sales decreased to 3.8% due to the inventory reserve
described above. For the nine month period ended October 31, 2006,
gross profit decreased $4.9 million or 29.1% versus the nine month period ended
October 31, 2005. Gross profit as a percentage of net sales decreased to 13.1%
versus 17.1% for the comparable period ended October 31, 2005, due primarily to
the $4.0 million inventory reserve charge described above in the current year
quarter.
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 12.2% and 9.2% for the
three and nine month period ended October 31, 2006, compared to a decrease of
6.6% and 6.5%, respectively, in the comparable 2005 periods, due primarily to
the amount of net freight expense in relation to total net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended October
31, 2006 increased by $381,000, or 7.7% to $5.4 million as compared to $5.0
million for the three months ended October 31, 2005. The increase for the three
months ended October 31, 2006, over the comparable prior year period is due
primarily to a $422,000 increase in bad debt expense due to an increase in the
age of outstanding receivables and specific accounts placed in collections, and
an increase in depreciation costs of $151,000 resulting from technology related
expenditures reduced by a $136,000 gain on the sale of an airplane in the
current quarter. Selling general and administrative expense as a percentage of
revenues increased to 16.5% for the three months ended October 31, 2006 versus
14.8% for the three months ended October 31, 2005.
Selling, general and administrative expenses for the nine months ended October
31, 2006 increased by $1.5 million, or 10.4% to $16.3 million as compared to
$14.8 million for the three months ended October 31, 2005. The increase for the
nine months ended October 31, 2006, over the comparable prior year period is due
primarily to an increase in salaries and related expense for operational
personnel and IT, higher depreciation charges, an increase in bad debt expense
due to the reasons cited in the three months above, and a one-time $250,000
lease termination penalty. Selling general and administrative expense as a
percentage of revenues increased to 16.3% for the nine months ended October 31,
2006 versus 15.0% for the nine months ended October 31, 2005.
CORPORATE EXPENSES
Corporate expenses increased by $113,000 or 20.3% to $670,000 for the three
months ended October 31, 2006 from $557,000 incurred during the three months
ended October 31, 2005. The increase in corporate expenses in the quarter ended
October 31, 2006 resulted primarily from a $62,000 increase in franchise tax
expense due to refunds and adjustments in the prior year three month period, a
$22,000 increase in outside service costs related to the bank financings and a
$24,000 increase in travel related costs due to the China and Europe facilities.
Corporate expenses in the nine month period ended October 31, 2006 increased by
$152,000 or 8.7% to $1,896,000 from the $1,744,000 incurred during the nine
months ended October 31, 2005. The increase in corporate expenses in the nine
months ended October 31, 2006 resulted primarily from a $102,000 increase in
franchise tax expense referred to above, a $79,000 increase in travel related
costs partially offset by a $52,000 reduction in costs related to the Board of
Directors and corporate governance charges.
16
NET INTEREST INCOME (EXPENSE) AND OTHER
During the three months ended October 31, 2006, net interest income (expense)
and other increased as an expense of $232,000 versus income of $5,000 in the
three months ended October 31, 2005, principally due to a $240,000 increase in
interest expense for the three months ended October 31, 2005. This increase was
the result of financings outstanding for product line expansion, capital
expenditures and working capital needs.
For the nine months ended October 31, 2006, net interest income (expense) and
other increased as an expense of $837,000, principally due to a $731,000
increase in interest expense and a foreign exchange loss of $14,000 versus
income of $76,000 in the nine months ended October 31, 2005. The increase was
primarily the result of the increase in interest costs for the reasons described
above and rising interest rates in the three month period.
BENEFIT (PROVISION) FOR INCOME TAXES
The Company recorded a provision for income taxes related to foreign income tax
expense estimates for operations in the Philippines. No provision is made for
U.S. taxation because the Company has sufficient net operating loss
carryforwards that would be utilized to offset any provision for pre-tax income.
No deferred tax provision is recorded because it would be offset by a change in
the deferred tax valuation allowance. The Company does not record a tax benefit
for U.S. tax purposes on any operating losses incurred due to the deferred tax
valuation allowance recorded as it is more likely than not that some portion or
all of the net deferred tax asset will not be realized.
In the three and nine months ended October 31, 2006, the Company recorded
federal and state tax benefits in the amount of $810,000. The benefits arose due
to a change in facts and circumstances that released in assumptions that
generated the establishment of federal and state tax liabilities in prior
periods leading to the reversal of the liabilities in the current periods.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The Company incurred a net loss of ($4,241,000), or ($0.58) per share for the
three months ended October 31, 2006, compared to net income of $90,000, or $0.01
per share for the three months ended October 31, 2005, and a net loss of
($6,413,000) or ($0.87) per share for the nine months ended October 31, 2006
versus net income of $674,000 or $0.09 per share for the nine months ended
October 31, 2005. The loss in the current year periods versus the income in the
prior year periods was due to the reasons described in the preceding sections.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise principally from its working capital
needs. In addition, the Company has liquidity requirements to fund capital
expenditures to support its current operations, and facilitate growth and
expansion. The Company funds its liquidity requirements with a combination of
cash on hand 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.
For the nine months ended October 31, 2006 the Company utilized $6.2 million in
cash for operating activities, compared to $6.9 million cash used in operating
activities for the nine months ended October 31, 2005. The use of cash in the
nine months ended October 31, 2006 was principally due to the loss incurred, and
an increase in trade receivables. Cash used in investing activities for the six
months ended October 31, 2006, and 2005 was $1.4 million, and $2.2 million,
respectively. Cash used in investing activities for the periods ended October
31, 2006 and 2005, respectively, was related to purchases of fixed assets and
information technology costs. Cash used in financing activities for the nine
months ended October 31, 2006, and 2005 was $740,000, and $500,000,
respectively. Cash used in financing activities for the period ended October 31,
2006, is due to payments on notes payable issued during the fiscal year ended
January 31, 2006, versus cash used to repurchase preferred stock of API of
$500,000 during the quarter ended October 31, 2005.
First Aviation's aggregate cash used for capital expenditures for the nine
months October 31, 2006, and 2005 was $1.4 million, and $2.2 million,
respectively. The use of cash for capital requirements in the first nine months
of fiscal 2007 is the result of expenditures for the Company's enterprise
technology systems 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.
17
API has a a new $20 million revolving line of credit facility which was
increased to $25 million due to satisfying certain conditions regarding asset
purchases, through a Commercial Revolving Loan and Security Agreement
("Agreement"). This Agreement expires on September 1, 2007. The Company is in
the process of negotiating an amendment to the Agreement under substantially the
same terms with the sucessor to the original lender, to extend the expiration
date of the facility to September 1, 2008. 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. API failed to maintain the specified trailing 12 month debt service
ratio for the quarter. The Company obtained a waiver from the lender for the
violation of the covenant. 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 the result of a large inventory
purchase made by the Company in September 2005. At October 31, 2006, borrowings
under the facility totaled $14.8 million, at an interest rate of approximately
7.1%. Of the $14.8 million, $0.3 million represented a draw on the facility just
prior to October 31, 2006. The Company would regularly draw down on the facility
just prior to quarter 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 opportunities. 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 have increased borrowing
costs. Approximately $9.1 million was available under the facility at October
31, 2006. At October 31, 2006, borrowings under the facility have been
reclassified as current. 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 cash flow from operations, combined with cash on hand, and the availability
under the facility, will be sufficient to meet its current and anticipated
operating cash requirements for the foreseeable future, including scheduled
interest and principal payments, working capital needs, and capital
expenditures.
At this time, the Company anticipates that all future earnings will be retained
for use in the Company's business. Any payment of cash dividends in the future
on the Company's common stock will be dependent upon the Company's financial
condition, its results of operations, current and anticipated cash requirements,
plans for expansion, the ability of its subsidiaries to pay dividends or
otherwise make cash payments or advances to it, and restrictions under debt
obligations, as well as any other factors that the Board of Directors deems
relevant.
CONTRACTUAL OBLIGATIONS
As of October 31, 2006, there have been no material changes outside the ordinary
course of the Company's business in the Company's specified contractual
obligations disclosed in the Company's Annual Report on Form 10-K for the year
ended January 31, 2006.
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.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's Canadian operations utilize the Canadian dollar as their
functional currency, while the Company's Asian operation utilizes the U.S.
dollar as its functional currency. The Company has transactions denominated in
Canadian dollars and Philippine pesos. The Company is exposed to market risk
from foreign exchange rates. Foreign currency transaction exposure principally
arises from the transfer of foreign currency to and/or from U.S. dollars from
one subsidiary to another within the Company, and from foreign currency
denominated trade receivables. Currency transaction and translation exposures
are not hedged. Foreign currency transaction gains and losses are included in
earnings, and gains or losses will increase in significance with the growth of
the Canadian operations. Unrealized currency translation gains and losses
resulting from the translation of foreign subsidiaries balance sheets to U.S.
dollars are not recorded as income or expense, but are recognized in the Balance
Sheet as other comprehensive income or loss as a component of Stockholder's
Equity. The Company does have risk principally relating to the translation of
accounts in which the Canadian dollar is the functional currency. Sensitivity
analysis of foreign currency exchange rate risk assumes an instantaneous 10%
change in the foreign currency exchange rates from their level at October 31,
2006, with all other variables held constant. A 10% strengthening of the
Canadian dollar versus the U.S. dollar would result in an increase of
approximately $291,000 in the net asset position of financial instruments at
October 31, 2006. A 10% weakening of the Canadian dollar versus the U.S. dollar
would result in a decrease of approximately $353,000 in the net asset position
of financial instruments at October 31, 2006. During the three months ended
October 31, 2006 the Company experienced foreign currency translation losses of
($53,000) due to a decrease in the value of the Canadian dollar relative to the
U.S. dollar. For the nine months ended October 31, 2006, the Company experienced
foreign currency translation gains of $38,000, due to an increase in the value
of the Canadian dollar relative to the U.S. dollar.
Borrowings of the Company are denominated in U.S. dollars. Management believes
that the carrying amount of the Company's borrowings approximates fair value
because the interest rates are variable and reset frequently.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of October 31, 2006. Based on their evaluation, the Company's
principal executive and principal financial officers concluded that the
Company's disclosure controls and procedures were effective as of October 31,
2006.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended October 31, 2006, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business exposes it to possible claims for personal injury, death
or property damage that may result from a failure of certain parts serviced by
the Company or spare parts and components sold by it, or in connection with the
provision of its supply chain management services. The Company takes what it
believes to be adequate precautions to ensure the quality of the work it
performs and the traceability of the aircraft parts and components that it
sells. The original equipment manufacturers that manufacture the parts,
components and supplies that the Company sells carry liability insurance on the
products they manufacture. In addition, the Company maintains what it believes
is adequate liability insurance to protect it from any claims.
In the normal conduct of its business, the Company also is involved in various
claims and lawsuits, none of which, in the opinion of the Company's management,
will have a material, adverse impact on the Company's consolidated financial
position. The Company maintains what it believes is adequate liability and other
insurance to protect it from such claims. However, depending on the amount and
timing, unfavorable resolution of any of these matters could have a material
effect on the Company's consolidated financial position, results of operations
or cash flows in a particular period.
ITEM 1A. RISK FACTORS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
31.1 Certification of Principal Executive Officer required by Rule 13a-14(a).
31.2 Certification of Principal Financing Officer required by Rule 13a-14(a).
32.1 Certification of Principal Executive Officer required by Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Principal Financial Officer required by Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST AVIATION SERVICES INC.
(Registrant)
Date: December 15, 2006 /s/ Aaron P. Hollander
-------------------------------------------
Aaron P. Hollander,
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: December 15, 2006 /s/ Bobbie Espitia
-------------------------------------------
Bobbie Espitia
Principal Accounting Officer
21
INDEX TO EXHIBITS
Exhibit No. Description
31.1 Certification of Principal Executive Officer required by Rule 13a-14(a).
31.2 Certification of Principal Financial Officer required by Rule 13a-14(a).
32.1 Certification of Principal Executive Officer required by Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Principal Financial Officer required by Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
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