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, 2007
Commission File Number 0-21995
First Aviation Services Inc.
www.favs.com
www.apiworldwide.com
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
------------------- -------------------
Common Stock, $0.01 Par Value The NASDAQ Stockmarket LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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, 2006 was approximately $12.7 million.
The number of shares outstanding of the registrant's common stock as of April
27, 2007 was 7,378,851 shares.
Documents incorporated by reference:
Portions of the Registrant's definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders are 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....................................................9
Executive Officers of the Registrant..................................................................10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.....................................................................................11
Item 6. Selected Financial Data...............................................................................12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................21
Item 8. Financial Statements and Supplementary Data...........................................................21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................21
Item 9A. Controls and Procedures...............................................................................21
Item 9B. Other Information.....................................................................................21
PART III
Item 10. Directors, Executive Officers and Corporate Governance................................................22
Item 11. Executive Compensation................................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........22
Item 13. Certain Relationships and Related Transactions, and Director Independence.............................22
Item 14. Principal Accountant Fees and Services................................................................22
PART IV
Item 15. Exhibits and Financial Statement Schedule.............................................................23
Signatures
......................................................................................................27
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, 2007
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 THE COMPANY'S
FACILITIES AND DISTRIBUTION HUB IN MISSISSIPPI, SIGNIFICANT FAILURE OF OUR
COMPUTER SYSTEMS, TELEPHONE 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"), API Europe Ltd. ("API Europe"), 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 wheels, 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
typically out of warranty, and out-of-production aircraft and engines, all of
3
which need maintenance, repair or modification. Typically, aircraft and engines
that are 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 may also 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 would like 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.
Based on information from a leading industry publication, Overhaul and
Maintenance, the Company believes 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 directly 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
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.
4
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.
Overall business activity in the aftermarket parts sector is improving in the
airline and corporate aviation sectors the Company serves, while the piston and
general aviation sectors and corporate flight schools continue to struggle due
to record high fuel prices and 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 focus on
its core business, to control its costs, investigate new sources of revenue, 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 34%, 38%, and 40% of its
total purchases were made during the years ended January 31, 2007, 2006 and
2005, respectively.
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, implementation resource availability, relationship building with the
customer and the substantial change often required of the customer's existing
business model. The Company had a backlog of customer orders at January 31,
2007. The Company believes that the dollar value of these backlog orders is not
significant. The Company is confident in its ability to fill the majority of
these orders during its subsequent fiscal year ending January 31, 2008.
5
CUSTOMERS
The Company currently has approximately 6,000 active 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 and Southaven,
Mississippi facilities are 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, 2007, the Company employed 212 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 28%, 25%,
and 22% of net sales for the years ended January 31, 2007, 2006 and 2005,
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 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:
6
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 OEMs 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 PRICES. 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 Mississippi and substantially
all of its inventory is stored in a single warehouse facility. Losing
access or use of this facility, through security concerns, natural
disasters or damage to the building, 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, TELEPHONE SYSTEMS OR
NETWORKS THAT DISRUPT BUSINESS OR OPERATIONS. The Company's computer
systems, telephone systems and internal and external networks, and
suppliers are crucial to service customers and manage operations.
Significant disruptions or malfunctions of its computer and telephone
systems or networks could have a material adverse effect on its
business 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.
o THE COMPANY'S DISTRIBUTION MODEL RELIES HEAVILY ON THE USE OF FREIGHT
CARRIERS SUCH AS FEDEX AND UPS FOR BOTH INBOUND SHIPMENTS OF PRODUCTS
AND SUPPLIES AS WELL AS OUTBOUND CUSTOMER SHIPMENT VIA BOTH AIR AND
GROUND TRANSPORTATION. Disruption or outages of these services or
significant increases in freight costs that cannot be passed on to the
customer could have a material adverse effect on sales, business
operations and results of operations.
o CHANGES IN REGULATIONS. The company is subject to FAA regulations.
The FAA is considering changes in user fees for air traffic
activity. An increase in user fees for the general aviation sector may
adversely impact the operating results of the Company. The ultimate
outcome and the impact on the Company cannot be determined at this
time.
o LOAN COVENANT RESTRICTIONS. The Company's debt includes restrictive
and financial covenants. Changes in these covenants or the Company's
inability to comply with these covenants could have a significant
impact on business operations and results of operations.
o COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. The Company's inability to
comply with changes in environmental regulations could have a material
adverse effect on business operations.
o PRODUCT LIABILITY CLAIMS. Product liability claims and claims not
covered by insurance could have a material adverse effect on business
operations.
o 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 2012
Southaven, MS API Distribution 172,000 2012
Memphis, TN API Technologies/sales 35,500 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
Shanghai, China API Shanghai Ltd. Distribution/sales 16,960 2011
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.
8
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.
9
Supplemental Item:
Executive Officers of the Registrant
The Company's executive officers, their ages and backgrounds are as
follows:
AARON P. HOLLANDER, 50, co-founded and has served as Chairman of the
Board of Directors of the Company since March 1995. In October 2006, Mr.
Hollander succeeded Michael Culver as Chief Executive Officer of the Company. 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 Chief Executive Officer
of Skip Barber, and is the Chairman and CEO of the Board of Directors of Imtek.
BILL REZNICEK, 47, became First Aviation's Vice President and Chief
Financial Officer in January 2007. Mr. Reznicek previously served as Vice
President of Finance and IT for Lancaster Colony Automotive Products Division
from June 2000 until January 2007. Prior to his position at Lancaster Colony
Automotive Products, Mr. Reznicek held various other executive and financial
management positions with public and privately held companies. Mr. Reznicek
received his CPA certification from the state of Tennessee in 1993.
10
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 closing market sales prices for First Aviation's common stock as
reported by the NASDAQ Stock Market.
Year Ended Year Ended
January 31, 2007 January 31, 2006
- ---------------------------------------------------- -------------------------------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $4.35 $3.90 First Quarter $4.70 $4.00
Second Quarter $4.80 $3.69 Second Quarter $4.50 $3.71
Third Quarter $3.93 $3.32 Third Quarter $4.49 $3.65
Fourth Quarter $3.93 $3.45 Fourth Quarter $4.50 $3.71
HOLDERS. As of April 27, 2007, 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, 2007 and 2006. 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,
2007, First Aviation did not purchase any shares of its common stock.
11
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) 2007 2006 2005 2004 2003
--------- -------- --------- --------- ---------
BALANCE SHEET SUMMARY:
Working capital (1) $ 17,906 $ 47,234 $ 47,179 $ 49,143 $ 47,996
Total assets 62,235 73,348 65,199 64,982 65,041
Current obligations under capital leases and notes payable 340 1,125 -- -- 4
Revolving line of credit 22,100 -- -- -- --
Long-term debt and notes payable 956 15,745 14,500 14,500 14,500
Other long-term liabilities -- -- 1,041 1,041 1,041
Total stockholders' equity $ 22,045 $ 36,452 $ 34,634 $ 36,565 $ 36,094
Book value per share outstanding (2) $ 2.99 $ 4.96 $ 4.73 $ 5.02 $ 4.98
Cash dividends paid per share -- -- -- -- $ 1.00
Common shares outstanding 7,379 7,353 7,322 7,284 7,251
RESULTS OF OPERATIONS SUMMARY (3):
Net sales $ 119,361 $131,525 $ 124,249 $ 105,777 $ 101,737
Gross profit 12,806 23,051 20,724 19,536 18,473
Income (loss) from operations (14,299) 746 (2,142) (121) (1,577)
Income (loss) before income taxes (15,189) 1,095 (2,108) (14) (1,413)
Provision (benefit) for income taxes (695) 71 121 (25) 1,786
--------- -------- --------- --------- ---------
Income (loss) from continuing operations before (14,494) 1,024 (2,229) 11 (3,199)
accounting change
Cumulative effect of change in accounting (4) -- -- -- -- (2,735)
--------- -------- --------- --------- ---------
Net income (loss) $ (14,494) $ 1,024 $ (2,229) $ 11 $ (5,934)
========= ======== ========= ========= =========
Basic income (loss) per share from continuing $ (1.97) $ 0.14 $ (0.31) $ 0.00 $ (0.44)
operations
Basic net income (loss) per share $ (1.97) $ 0.14 $ (0.31) $ 0.00 $ (0.82)
Weighted average shares outstanding - basic 7,362 7,337 7,302 7,267 7,225
--------- -------- --------- --------- ---------
Income (loss) per share from continuing operations $ (1.97) $ 0.14 $ (0.31) $ 0.00 $ (0.44)
- assuming dilution
Net income (loss) per share - assuming dilution $ (1.97) $ 0.14 $ (0.31) $ 0.00 $ (0.82)
Weighted average shares outstanding - assuming
dilution 7,362 7,341 7,302 7,282 7,225
--------- -------- --------- --------- ---------
NOTES TO SELECTED FINANCIAL DATA
(1) Includes revolving line of credit at January 31, 2007 scheduled to expire
on September 1, 2008.
(2) Book value per share outstanding is calculated by taking total
stockholders' equity and dividing by common shares outstanding.
(3) During the year ended January 31, 2007, the Company recorded charges of
$4.5 million and $2.6 million, respectively to increase its inventory
valuation allowance and its allowance for doubtful accounts. During the
year ended January 31, 2006, the Company recorded $0.4 million of
litigation income. 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.
(4) 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.
12
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 wheels, brakes and starters/generators.
The Company's revenues decreased for the year ended January 31, 2007. Customer
service issues during the fiscal year, primarily the result of issues with the
installation of new ERP systems and a telephone system upgrade, and weakening
markets in the general aviation and aviation maintenance sectors were the major
reasons for the decrease in revenue. Decreased gross profit, increased overhead
and increases in bad debt reserves resulted in a loss for the year. Cash
levels decreased primarily due to payments to vendors to ensure
uninterrupted supplies of saleable product, expenditures for equipment and
enterprise software, and expenditures related to the relocation of the
Company's primary distribution center to Southaven, MS. The Company believes
that while we feel we have recovered from the customer service issues that
adversely impacted revenues and gross profit, it will take some time to fully
restore customer confidence.
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 historically high 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 the determination of the
allowance for doubtful accounts, the allowance for excess and obsolete
inventories, and deferred income tax asset valuations. The Company also has
other policies that it considers key accounting policies such as revenue
recognition, however this policy typically does not require the Company to make
estimates or assumptions regarding the recognition of revenue. 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.
13
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
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 the 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, the Company takes 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 accounts 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. Collection of trade receivables is
affected by aviation industry and market trends, overall economic trends and
conditions, and customers' credit issues and financial condition. A change in
any of these factors may have a significant negative impact upon the estimated
allowance, and the Company's financial performance. As the result of normal
review procedures, in the three months ended January 31, 2007, the Company
revised the percentage it uses to calculate reserves on overdue accounts to
bring the allowance more in line with historical collection realizations.
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.
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.
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 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 SFAS 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
First Aviation beginning on February 1, 2007. The Company at this time is still
evaluating the impact, if any, that the adoption of FIN 48 will have on its
financial statements.
14
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,
------------ ------------ ------------
2007 2006 2005
------------ ------------ ------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.3 82.5 83.3
------------ ------------ ------------
Gross profit (a) 10.7 17.5 16.7
Selling, general and administrative expenses 20.6 15.1 16.1
Corporate expenses 2.0 1.8 2.4
------------ ------------ ------------
Income (loss) from operations (11.9) 0.6 (1.8)
Interest income 0.0 0.0 0.1
Interest expense and other expense, net (0.8) (0.1) -
Other income 0.0 0.3 -
------------ ------------ ------------
Income (loss) before income taxes (12.7) 0.8 (1.7)
(Provision) benefit for income taxes 0.6 0.0 (0.1)
------------ ------------ ------------
Net income (loss) (12.1)% 0.8% (1.8)%
------------ ------------ ------------
(A) GROSS PROFIT MARGIN IN 2007 WAS IMPACTED BY THE INCREASE IN INVENTORY
RESERVES DURING THE QUARTER ENDED OCTOBER 31, 2006.
YEAR ENDED JANUARY 31, 2007 COMPARED TO YEAR ENDED JANUARY 31, 2006
NET SALES
Net sales for the year ended January 31, 2007 decreased $12.2 million,
or 9.2%, to $119.4 million from $131.5 million for the year ended January 31,
2006. The decrease was largely due to market weakness in the general aviation
and the aviation maintenance sectors that were impacted by the record high
prices of gasoline, and customer service issues. The decreases were partially
offset by increased revenue in the Company's corporate aviation sector. The
revenue decreases occurred across all geographic regions. Sales to unaffiliated
foreign customers during the year ended January 31, 2007 was approximately
28% 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, 2007 by
15.0% to $1.7 million from $2.0 million for the prior year ended January 31,
2006. The decrease was primarily the result of reduced freight charges to
customers on larger orders that qualified for freight incentives in the third
and fourth quarters of the fiscal year ended January 31, 2007. The decrease in
freight billed to customers in the current fiscal year 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. Cost of sales for the year ended January 31, 2007 decreased $1.9
million, or 1.8%, to $106.6 million from $108.5 million for the year ended
January 31, 2006. During the year ended January 31, 2007, cost of sales
increased due to a $4.0 million charge increasing reserves in the third quarter
due to an increase in the allowance for excess and obsolete inventory for an
inventory purchase in October 2005 from an aircraft OEM. The additional reserve
was derived from data that became available during the quarter ended October 31,
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. The
decrease in cost of sales for the twelve months ended January 31, 2007 versus
2006 was due primarily to the corresponding decrease in net sales of parts and
components described in net sales, offset by the impact of the increase in
inventory reserves of $4.0 million in the third quarter ended October 31, 2006
described above.
15
As a percentage of net sales, cost of sales increased for the year
ended January 31, 2007, to 89.3% from 82.5%, for the year ended January 31,
2006. The increase in the percentage of cost of sales compared to net sales for
the twelve months ended January 31, 2007, compared to 2006, was due primarily to
the increase in inventory reserves described above and a decrease in revenue
derived from the higher profit margin services sector.
GROSS PROFIT
Gross profit for the year ended January 31, 2007 decreased $10.2
million or 44.4% to $12.8 million, compared to gross profit for the year ended
January 31, 2006. Gross profit as a percentage of net sales also decreased to
10.7% for the year ended January 31, 2007, from 17.5% for the comparable prior
year period. Gross profit margin for the twelve month period decreased compared
to the prior year principally due to the $4.0 million increase in the allowance
for excess and obsolete inventory mentioned above under the caption "Cost of
Sales", the decrease in revenue described above under the caption "Net Sales",
and was also 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 11.1% and 5.7% for the year
ended January 31, 2007 and 2006, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the twelve months
ended January 31, 2007 increased by $4.7 million to $24.7 million compared to
the expense incurred for the twelve months ended January 31, 2006. The increase
in costs in the current year were primarily due to a $2.4 million increase in
bad debt expense, a $1.0 million increase in payroll costs resulting from the
required capitalization of prior year salary charges related to IT development
costs, $0.4 million in additional IT related amortization expense in the current
year, and costs related to the relocation of the Memphis, TN distribution hub to
Southaven, MS. Selling, general and administrative expense as a percentage of
revenues increased to 20.6% for the current year versus 15.1% for the year ended
January 31, 2006.
CORPORATE EXPENSES
Corporate expenses for the twelve months ended January 31, 2007 were flat at
$2.4 million versus the prior year twelve month period.
INTEREST INCOME AND INTEREST EXPENSE AND OTHER EXPENSES, NET
During the year ended January 31, 2007, interest income from investing
the Company's cash in short term investments, decreased by $46,000 to $1,300
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 $961,000 for the current year twelve months versus expense of
$105,000 in the prior year period principally due to an increase in interest
expense of $948,000 on borrowings, reduced by an increase in foreign exchange
income of $67,000 versus the prior year.
16
BENEFIT (PROVISION) FOR INCOME TAXES
The Company recorded a net tax benefit of $695,000 for the current year
ended January 31, 2007 primarily as the result of recording federal and state
tax benefits of $756,000 that arose due to a change in facts and circumstances
that related to 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, partially reduced by a provision for income
taxes related to foreign income tax expense for operations in 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 the deferred tax asset will not be realized. The
Company's effective tax rate for the period ended January 31, 2007 was (4.7%)
versus the 34.0% statutory rate due primarily to the valuation allowance on US
losses incurred and the benefit provided by the reversal of prior period tax
liabilities.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The Company recognized a net loss of $14.5 million or $1.97 per share
for the year ended January 31, 2007, compared to net income of $1.0 million or
$0.14 per share for the year ended January 31, 2006. The decline in operating
results was due to the reasons described in the preceding sections.
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. Cost 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 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.
17
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 EXPENSE AND OTHER EXPENSES, NET
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.
18
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise principally from its working
capital needs. In addition, the Company has liquidity requirements to fund
capital expenditures to support its current operations, and facilitate growth
and expansion. The Company funds its liquidity requirements with a combination
of cash on hand, cash flows from operations, and from borrowings under a secured
revolving credit facility and certain notes.
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, 2007 was
principally the result of an increase in customer trade receivables, payments to
principal vendors for product purchases, purchases of equipment and software,
and expenditures related to the relocation of the Company's primary distribution
facility to Mississippi.
The Company's cash used in operations for the years ended January 31,
2007, 2006 and 2005 was $(13.0) million, $(8.8) million, and $(1.5) million,
respectively. Cash used in operations for the year ended January 31, 2007 was
primarily due to the loss incurred, an increase in trade receivables and a
decrease in accounts payable for payments to vendors for product puchases. Cash
used in investing activities for the years ended January 31, 2007, 2006 and 2005
was $(1.5) million, $(3.2) million, and $(1.0) million, respectively. Cash used
in investing activities for these years was related to purchases of fixed assets
and enterprise software and ecommerce initiatives and facilities enhancements.
Cash provided by (used in) financing activities for the years ended January 31,
2007, 2006 and 2005 was $6.5 million, $(1.1) million, and nil, respectively.
Cash provided by financing activities for the year ended January 31, 2007
resulted from borrowings against the revolver to fund operations offset by
payments on notes payable.
First Aviation's aggregate cash used for capital expenditures for the
years ended January 31, 2007, 2006 and 2005 was $1.6 million, $3.2 million, and
$1.0 million, respectively. The capital requirements in fiscal 2007 were the
result of current upgrades to the Company's enterprise system and equipment to
handle current requirements and support the Company's move to a state of the art
distribution facility in Southaven, MS. For fiscal year 2008 the amount required
for capital expenditures currently is expected to range between $.5 million and
$1.0 million. Management expects to fund these requirements from cash on hand,
cash flows from operations, and from borrowings under its revolving credit
facility.
On January 11, 2007, API and API Ltd. entered into a Second Amended
and Restated Loan and Security Agreement (the Agreement) with TD Banknorth, NA.
This Agreement, which expires on September 1, 2008, replaces the Company's
previously existing $25 million revolving credit facility with the
Lender's predecessor-in-interest, which was scheduled to expire September 1,
2007. The Agreement provides for a 21 month senior revolving credit facility
(the Revolving Loan Facility) in the amount of $25 million, subject to a
borrowing base based on a formula of qualifying assets as well as outstanding
letters of credit. The proceeds of any loans made under the Revolving Loan
Facility will be used for working capital purposes in the ordinary course of
business.
The Agreement also provides for a Line of Credit/Term Facility (the
Term Loan Facility) in an amount up to $3 million, subject to borrowing
availability. The proceeds of this advance under the Term Loan Facility will be
used for the purpose of purchasing certain equipment for use in the ordinary
course of business. There were no borrowings outstanding under the Term Loan
Facility at January 31, 2007.
The Revolving Loan Facility bears interest at the option of the
Borrower (i) at the prime rate in effect from time to time, (ii) at the adjusted
LIBOR for the applicable interest period plus 150 or 175 basis points depending
upon financial ratios of the Borrower, or (iii) at the FHLB Rate (Federal Home
Loan Bank Rate). 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 the Company's common stock is prohibited,
except with the lender's consent, and the Company is required to maintain
minimum levels of Tangible Capital Base and specified Debt Service Coverage.
Substantially all of the Company's Domestic and Canadian assets are pledged as
collateral under the Agreement, and the Company guarantees all borrowings under
the Agreement.
19
On April 27, 2007, the Company entered into an amendment to the Second
Amended and Restated Loan and Security Agreement dated January 11, 2007. The
amendment provides for a waiver from the lender of the Company's violation of it
financial covenants for the three months ended January 31, 2007. Pursuant to the
amendment, the Company also agrees to immediately repay any balances owing under
the Term Loan Facility and that the Term Loan Facility agreement would terminate
immediately. Changes to the debt services coverage ratios, the minimum Tangible
Capital Base, and interest rate pricing were also modified as a result of the
amendment.
The amendment further allows the Company to select an interest period
of twelve months for up to $15 million of the outstanding Revolving Loan
Facility. Interest rate pricing under the amendment ranges from LIBOR plus 1.5%
to LIBOR plus 2.25%, depending on debt service coverage ratios.
The entire Revolving Loan Facility is classified as current debt based
upon the subjective acceleration clause and required lockbox cash management
agreement. At January 31, 2007, borrowings under the Revolving Loan Facility
totaled $22.1 million, at an interest rate of approximately 6.8%. Approximately
$0.3 million was available under the Revolving Loan Facility at January 31,
2007.
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 the revolving loan facility will be sufficient to
meet its current and anticipated cash operating requirements through the
year ending January 31, 2008, including scheduled interest payments, working
capital needs, and capital expenditures.
INFLATION
The Company does not believe that the relatively moderate levels of
inflation that have been experienced in the United States, Canada and Asia 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, 2007:
Payments due by period
Less than 1-3 3-5 More than
(AMOUNTS IN THOUSANDS) TOTAL 1 year years years 5 years
----------------------------------- --------------------------------------------------
Revolving Line of Credit (1) $ 22,100 $ - $ 22,100 $ - $ -
Notes Payable (2) 1,296 340 956 - -
Operating Lease Obligations (3) 5,624 1,177 2,735 1,712 -
Purchase Obligations (4) 21,217 21,217 - - -
Total $ 50,237 $ 22,734 $ 25,791 $ 1,712 $ -
Notes to Contractual Obligations Data:
(1) Revolving line of credit consists of API's revolving loan facility
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.
20
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,
2007, 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 $202,000 in the net liability position of financial instruments at
January 31, 2007. A 10% weakening of the Canadian dollar versus the U.S. dollar
would result in an increase of approximately $246,000 in the net liability
position of financial instruments at January 31, 2007. During the year ended
January 31, 2007 the Company experienced a comprehensive loss of $51,000, due to
a decrease 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, 2007. 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, 2007. 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,
2007.
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, 2007, 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.
21
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
AND CORPORATE GOVERNANCE
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, AND
DIRECTOR INDEPENDENCE
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.
22
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(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-20 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 dated as of December 31, 2003, to Sublease Agreement
dated as of December 31, 1996, between First Equity and the Company.
10.8 * 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).
23
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
24
10.19 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 10.1 to the
Company's Current Report on Form 8-K dated July 29, 2005 (No. 0-21995),
and incorporated herein by reference).
10.20 * 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).
10.21 * Compensation arrangements with other executive officers (effective as
of February 1, 2006).
10.22 Second Amended and Restated Loan and Security Agreement, dated as of
January 11, 2007, by and among Aerospace Products International Inc.
and Aerospace Produits International LTEE (d/bla Aerospace Products
International Ltd.) (each direct wholly-owned subsidiaries of First
Aviation Services Inc.) and TD Bankworth, N.A.
10.23 Ratification Confirmation and Amendment, dated as of January 11, 2007
entered into by First Aviation Services Inc. (on hehalf of Aerospace
Products International Inc. and Aerospace Products International LTEE
(d/bla Aerospace Products International Ltd.) and TD Bankworth, N.A.
10.24 * Employment Agreement, dated as of January 12, 2007, by and between
Bill Reznieck and Aerospace Products International Inc.
10.25 * Compensation arrangements with named certain executive officers as of
February 1, 2007.
25
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and
18 U.S.C. Section 1350 (furnished herewith).
* Management contracts or compensatory plans or arrangements.
26
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 4, 2007
FIRST AVIATION SERVICES INC.
By: /S/ BILL L. REZNIECK
----------------------------------------------------
Bill L. Reznieck
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE/CAPACITY DATE
--------- ----------------- ----
/S/ AARON P. HOLLANDER President and Chief Executive Officer May 4, 2007
-------------------------- (Principal Executive Officer and Director)
Aaron P. Hollander
/S/ MICHAEL C. CULVER Vice Chairman and Director May 4, 2007
--------------------------
Michael C. Culver
/S/ STANLEY J. HILL Director May 4, 2007
--------------------------
Stanley J. Hill
/S/ ROBERT L. KIRK Director May 4, 2007
--------------------------
Robert L. Kirk
/S/ JOSEPH J. LHOTA Director May 4, 2007
--------------------------
Joseph J. Lhota
/S/ BILL L. REZNICEK Chief Financial Officer May 4, 2007
--------------------------- (Principal Financial and
BILL L. REZNICEK Accounting Officer)
27
FIRST AVIATION SERVICES INC.
Consolidated Financial Statements
For the years ended January 31, 2007, 2006 and 2005
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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-F19
Schedule II - Valuation and Qualifying Accounts.................................................................F20
F-1
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, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2007. 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, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2007, 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
May 3, 2007
F-2
FIRST AVIATION SERVICES INC.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 31,
Assets 2007 2006
------------------- -------------------
Current assets:
Cash and cash equivalents $ 1,745 $ 9,488
Trade receivables, net 20,847 18,737
Inventories, net 33,069 38,809
Prepaid expenses and other 1,479 1,351
------------------- -------------------
Total current assets 57,140 68,385
Plant and equipment, net 5,095 4,963
------------------- -------------------
Total Assets $ 62,235 $ 73,348
=================== ===================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,880 $ 15,441
Accrued compensation and related expenses 845 1,823
Other accrued liabilities 2,880 1,750
Revolving line of credit 22,100 -
Notes payable 340 1,125
Income taxes payable 189 1,012
------------------- -------------------
Total current liabilities 39,234 21,151
Long-term debt - 14,500
Notes payable, less current portion 956 1,245
------------------- -------------------
Total liabilities 40,190 36,896
Commitments and contingencies (Note 13) - -
Stockholders' equity
Common stock, $0.01 par value, 25,000,000 shares authorized, 91 91
9,135,699 shares issued
Additional paid-in capital 38,787 38,799
(Accumulated deficit) retained earnings (8,145) 6,349
Accumulated other comprehensive income 449 500
------------------- -------------------
31,182 45,739
Less: Treasury stock, at cost, 1,756,848 and 1,782,449 (9,137) (9,287)
shares, respectively
------------------- -------------------
Total stockholders' equity 22,045 36,452
------------------- -------------------
Total liabilities and stockholders' equity $ 62,235 $ 73,348
=================== ===================
See accompanying notes.
F-3
FIRST AVIATION SERVICES INC.
Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year ended January 31,
-------------------------------------------------------------
2007 2006 2005
------------------ ------------------ ------------------
Net sales $ 119,361 $ 131,525 $ 124,249
Cost of sales 106,555 108,474 103,525
------------------ ------------------ ------------------
Gross profit 12,806 23,051 20,724
Selling, general and administrative expenses 24,655 19,933 19,973
Corporate expenses 2,380 2,372 2,893
------------------ ------------------ ------------------
Income (loss) from operations (14,229) 746 (2,142)
Interest income 1 47 66
Interest expense and other, net (961) (105) 10
Other income - 417 -
Minority interest in subsidiary - (10) (42)
------------------ ------------------ ------------------
Income (Loss) before income taxes (15,189) 1,095 (2,108)
(Provision) benefit for income taxes 695 (71) (121)
------------------ ------------------ ------------------
Net income (loss) $ (14,494) $ 1,024 $ (2,229)
================== ================== ==================
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution:
Basic net income (loss) per share $ (1.97) $ 0.14 $ (0.31)
------------------ ------------------ ------------------
Net income (loss) per share - assuming dilution $ (1.97) $ 0.14 $ (0.31)
================== ================== ==================
Weighted average shares outstanding - basic 7,362,125 7,336,925 7,301,751
================== ================== ==================
Weighted average shares outstanding - assuming dilution 7,362,125 7,341,007 7,301,751
================== ================== ==================
See accompanying notes.
F-4
FIRST AVIATION SERVICES INC.
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock
-------------------------------------- Additional
Number Paid-in Retained
of Shares Amount Capital Earnings
-------------------- --------------- ------------------- -----------------
Balances at January 31, 2004 7,284,093 $ 91 $ 38,375 $ 7,554
Shares issued under qualified plans 37,415 - (57) -
and to directors
Other comprehensive income - - - -
Net loss - - - (2,229)
-------------------- --------------- ------------------- -----------------
Balances at January 31, 2005 7,321,508 $ 91 $ 38,318 $ 5,325
-------------------- --------------- ------------------- -----------------
Shares issued under qualified plans 31,742 - (60) -
and to directors
Repurchase of preferred stock of subsidiary - - 541 -
Other comprehensive income - - - -
Net income - - - 1,024
-------------------- --------------- ------------------- -----------------
Balances at January 31, 2006 7,353,250 $ 91 $ 38,799 $ 6,349
==================== =============== =================== =================
Shares issued under qualified plans 25,601 - (56) -
and to directors
Equity based compensation - - 44 -
Other comprehensive income - - - -
Net loss - - - (14,494)
-------------------- --------------- ------------------- -----------------
Balances at January 31, 2007 7,378,851 $ 91 $ 38,787 $ (8,145)
==================== =============== =================== =================
See accompanying notes.
Accumulated
Other
Comprehensive Treasury
Income (Loss) Sub-Total Stock Total
------------------------- ------------------ ------------------ -----------------
Balances at January 31, 2004 $ 238 $ 46,258 $ (9,693) $ 36,565
Shares issued under qualified plans - (57) 219 162
and to directors
Other comprehensive income 136 136 - 136
Net loss - (2,229) - (2,229)
------------------------- ------------------ ------------------ -----------------
Balances at January 31, 2005 $ 374 $ 44,108 $ (9,474) $ 34,634
------------------------- ------------------ ------------------ -----------------
Shares issued under qualified plans - (60) 187 127
and to directors
Repurchase of preferred stock of subsidiary - 541 - 541
Other comprehensive income 126 126 - 126
Net income - 1,024 - 1,024
------------------------- ------------------ ------------------ -----------------
Balances at January 31, 2006 $ 500 $ 45,739 $ (9,287) $ 36,452
========================= ================== ================== =================
Shares issued under qualified plans - (56) 150 94
and to directors
Equity based compensation - 44 - 44
Other comprehensive loss (51) (51) - (51)
Net loss - (14,494) - (14,494)
------------------------- ------------------ ------------------ -----------------
Balances at January 31, 2007 $ 449 $ 31,182 $ (9,137) $ 22,045
========================= ================== ================== =================
See accompanying notes.
F-5
FIRST AVIATION SERVICES INC.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
Year ended January 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Cash flows from operating activities
Net income (loss) $(14,494) $ 1,024 $ (2,229)
Adjustments to reconcile net income (loss) to net cash used in
operating activities - non cash expense (income):
Depreciation and amortization 1,614 1,255 1,011
Equity based compensation 138 127 162
Provision for bad debts 2,555 179 (79)
Provision for excess and obsolete inventory 4,487 280 754
Gain on sale of plant and equipment (135) -- --
Other 57 -- --
(Increase) decrease in working capital assets:
Trade receivables (4,783) (4,228) (911)
Inventories 964 (11,876) (2,471)
Prepaid expenses and other assets (155) (444) 150
Increase (decrease) in working capital liabilities:
Accounts payable (2,544) 4,917 930
Other accrued liabilities 107 (165) 1,206
Income taxes payable (824) 110 (32)
-------- -------- --------
Net cash used in operating activities (13,013) (8,821) (1,509)
Cash flows from investing activities
Purchases of plant and equipment and other assets (1,604) (3,208) (1,039)
Proceeds from disposals of plant and equipment and other assets 142 -- 3
-------- -------- --------
Net cash used in investing activities (1,462) (3,208) (1,036)
Cash flows from financing activities
Borrowings on revolving line of credit 8,100 46,400 56,150
Repayments on revolving line of credit (500) (46,400) (56,150)
Repayments on notes payable (1,074) (600) --
Repurchase of Minority Interest in Subsidiary -- (500) --
-------- -------- --------
Net cash provided by (used in) financing activities 6,526 (1,100) --
Effect of exchange rate changes on cash and cash equivalents 206 33 (15)
-------- -------- --------
Net change in cash and cash equivalents $ (7,743) $(13,096) $ (2,560)
Cash and cash equivalents at the beginning of the year 9,488 22,584 25,144
-------- -------- --------
Cash and cash equivalents at the end of the year $ 1,745 $ 9,488 $ 22,584
======== ======== ========
Supplemental cash flow disclosures
Cash paid for:
Interest $ 1,181 $ 218 $ 46
======== ======== ========
Income taxes paid, net $ 40 $ 59 $ 145
======== ======== ========
See accompanying notes.
F-6
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"),
API Europe, Ltd. ("API Europe"), 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 wheels, brakes and
starter/generators, and builds custom hose assemblies. The Company has its
headquarters in Westport, CT.
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 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
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. The
Company, when providing services to handle customers' inventory without taking
ownership, takes 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 34%, 38%, and 40% of its total purchases were
made during the years ended January 31, 2007, 2006, and 2005, respectively.
F-7
Sales to unaffiliated foreign customers were approximately 28%, 25% and 22% of
net sales for the years ended January 31, 2007, 2006 and 2005, 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 $2,015 and $596, at January 31, 2007 and 2006, 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. 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.
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 years ended January 31, 2006 and 2005, because all grants
were issued at the fair market value of the Company's common stock at the date
of grant.
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.
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.
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. The allowance for obsolete and slow moving
inventory was $6,402 and $1,709, at January 31, 2007 and 2006, respectively.
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.
F-8
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.
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
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. No asset impairments were recorded
during the years ended January 31, 2007, 2006 and 2005.
Principal Suppliers
API has five suppliers of parts and components from which approximately 34%, 38%
and 40% of its total purchases were made during the years ended January 31,
2007, 2006 and 2005, respectively. Accounts payable to these vendors totaled
$3,129 and $4,279 at January 31, 2007 and 2006, respectively.
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 the deferred tax
asset will not be realized.
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 SFAS 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
First Aviation beginning on February 1, 2007. The Company at this time is still
evaluating the impact, if any, that the adoption of FIN 48 will have on its
financial statements.
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 decrease in other comprehensive income during the year ended January 31,
2007 was due to a decrease in the value of the Canadian dollar relative to the
U.S. dollar. The increase in other comprehensive income during the years ended
January 31, 2006 and 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, 2007, 2006 and 2005, respectively, was as follows:
F-9
2007 2006 2005
--------------- --------------- -----------------
Net income (loss), as reported $ (14,494) $ 1,024 $ (2,229)
Net impact of foreign currency translation
adjustments - gain (loss) (51) 126 136
--------------- --------------- -----------------
Comprehensive income (loss) $ (14,545) $ 1,150 $ (2,093)
=============== =============== =================
Reclassifications
Certain amounts have been reclassified to conform to the current year
presentation. The effect of the reclassifications did not impact the financial
position or results of operations.
3. Plant and Equipment
Plant and equipment consist of the following:
January 31,
2007 2006
------------- -------------
Machinery and equipment $ 2,255 $ 2,488
Buildings and leasehold improvements 932 1,242
Computer equipment, software, office furniture, fixtures and
other office equipment 11,765 8,965
Construction-in-process 70 1,085
------------- -------------
15,022 13,780
Less: accumulated depreciation (9,927) (8,817)
------------- -------------
$ 5,095 $ 4,963
============= =============
The amount of the unamortized capitalized software at January 31, 2007 and 2006
was $2,318 and $1,607, respectively. The related amortization expense during the
year ended January 31, 2007 and 2006 was $1,414 and $119, respectively.
4. Revolving Line of Credit
January 31,
2007 2006
----------- -----------
Revolving line of credit $ 22,100 $ 14,500
=========== ===========
On January 11, 2007, API and API Ltd. entered into a Second Amended and
Restated Loan and Security Agreement (the Agreement) with TD Banknorth, NA. This
Agreement, which expires on September 1, 2008, replaces the Company's previously
existing $25 million revolving credit facility with the Lender's
predecessor-in-interest, which was scheduled to expire September 1, 2007. The
Agreement provides for a 21 month senior revolving credit facility (the
Revolving Loan Facility) in the amount of $25 million, subject to a borrowing
base based on a formula of qualifying assets as well as outstanding letters of
credit. The proceeds of any loans made under the Revolving Loan Facility will be
used for working capital purposes in the ordinary course of business.
The Agreement also provides for a Line of Credit/Term Facility (the
Term Loan Facility) in an amount up to $3 million, subject to borrowing
availability. The proceeds of this advance under the Term Loan Facility will be
used for the purpose of purchasing certain equipment for use in the ordinary
course of business. There were no borrowings outstanding under the Term Loan
Facility at January 31, 2007.
The Revolving Loan Facility bears interest at the option of the
Borrower (i) at the prime rate in effect from time to time, (ii) at the adjusted
LIBOR for the applicable interest period plus 150 or 175 basis points depending
upon financial ratios of the Borrower, or (iii) at the FHLB Rate (Federal Home
Loan Bank Rate). 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 the Company's common stock is prohibited,
except with the lender's consent, and the Company is required to maintain
minimum levels of Tangible Capital Base and specified Debt Service Coverage.
Substantially all of the Company's Domestic and Canadian assets are pledged as
collateral under the Agreement, and the Company guarantees all borrowings under
the Agreement.
F-10
On April 27, 2007, API and API Ltd. entered into an amendment to the
Second Amended and Restated Loan and Security Agreement dated January 11,
2007. The amendment provides for a waiver from the lender of the Company's
violation of it financial covenants for the three months ended January 31, 2007.
Pursuant to the amendment, the Company also agrees to immediately repay any
balances owing under the Term Loan Facility and that the Term Loan Facility
agreement would terminate immediately. Changes to the debt services coverage
ratios, the minimum Tangible Capital Base, and interest rate pricing were also
modified as a result of the amendment.
The amendment further allows the company to select an interest period
of twelve months for up to $15 million of the outstanding Revolving Loan
Facility. Interest rate pricing under the amendment ranges from LIBOR plus 1.5%
to LIBOR plus 2.25%, depending on debt service coverage ratios.
The entire Revolving Loan Facility is classified as current debt based
upon the subjective acceleration clause and required lockbox cash management
agreement. At January 31, 2007, borrowings under the Revolving Loan Facility
totaled $22.1 million, at an interest rate of approximately 6.8%. Approximately
$0.3 million was available under the Revolving Loan Facility at January 31,
2007.
5. Notes Payable
January 31,
2007 2006
------------ ------------
Notes Payable $ 1,296 $ 2,370
Less : Current Portion (340) (1,125)
============ ============
Long-term portion of notes payable $ 956 $ 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 payable quarterly through 2010. 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 $340, $511, and $445 for the years ended
January 31, 2008, 2009, and 2010, respectively.
F-11
6. 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. 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 $75, $108 and
$153, and the number of shares issued was 19,641, 26,493 and 34,733 for the
years ended January 31, 2007, 2006 and 2005, respectively. A total of 198,271
shares have been issued to directors under the Plan.
The Company also has a Stock Incentive Plan (the "Plan") with a total of
1,200,000 shares of common stock reserved for issuance. The Plan provides for
the grant of incentive stock options, nonqualified stock options, stock
appreciation rights, stock grants and stock purchase rights. Only employee stock
options and shares issued to directors have been issued under the Plan. At
January 31, 2007, 763,779 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 $44 expense in corporate expenses for options
vested during the year ended January 31, 2007. The fair value of each option
issued was estimated at the date of grant. There were no options granted during
the year ended January 31, 2007. 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 years ended January 31, 2006 and
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.
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.
The fair value of each option granted was estimated at the date of grant using
the following assumptions for the years ended January 31, 2006 and 2005. No
options were issued during the year ended January 31, 2007.
F-12
2006 2005
----------- ----------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 4.3% 3.6%
Expected volatility 31.0% 32.3%
Expected life of option 5.0 years 5.0 years
Weighted-average fair value
of options granted during
the year $ 1.40 $ 1.55
Using the assumptions under the Black-Scholes option-pricing model above, 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 during the years ended January
31, 2006 and 2005, prior to adoption of FAS 123(R) on February 1, 2006, was:
2006 2005
------------- --------------
Net income (loss) as reported $ 1,024 $ (2,229)
Pro forma compensation expense for issuance of
stock options, net of tax effect 13 57
------------- ---------------
Pro forma net income (loss) $ 1,011 $ (2,286)
Basic net income per share, and net income per
share - assuming dilution as reported $ 0.14 $ (0.31)
Pro forma basic net income per share, and net
income per share - assuming dilution $ 0.14 $ (0.31)
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
January 31, 2007, options for 237,950 shares (after forfeitures) had been issued
under the Plan. The following table is a summary of activity related to stock
options for the year ended January 31, 2007:
2007
------------------------
Weighted-
Number Average
of Exercise
Options Price
------------ ----------
Outstanding at
beginning of year 206,350 $4.37
Granted - -
Exercised - -
Forfeited (129,200) 4.33
------------ ----------
Outstanding at end of year 77,150 $4.44
============ ==========
Exercisable at end of year 59,268 $4.50
============ ==========
The aggregate intrinsic value of options outstanding and exercisable at January
31, 2007 was $-0-. The weighted average remaining contractual term of options
outstanding and exercisable at January 31, 2007 is 6.0 years.
F-13
Weighted-
Number Average
of Exercise
Options Price
---------- ----------
Nonvested at February 1, 2006 73,098 $ 4.42
Granted - -
Vested (27,553) 4.42
Forfeited (27,663) 4.12
---------- ----------
Nonvested at January 31, 2007 17,882 $ 4.25
========== ==========
The total fair value of options which vested during the year ended January 31,
2007, was approximately $78 (27,553 shares). As of January 31, 2007, $33 of
unrecognized compensation cost related to non-vested stock options is expected
to be recognized over a weighted average period of approximately one year.
The fair value of options which vested during the year ended January 31, 2007,
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), "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. The Company has not recognized and does not expect to
recognize in the foreseeable future any tax benefit related to employee
stock-based compensation expense as a result of the full valuation allowance on
its net deferred tax assets and its net operating loss carryforwards.
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 5,959 shares
of stock under the ESPP plan during the year ended January 31, 2007.
At January 31, 2007, 173,955 shares were available to be issued under the ESPP
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.
F-14
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 $-0-, $10, and $42 were paid
during each of the years ended January 31, 2007, 2006 and 2005, 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,
--------------------------------------------
2007 2006 2005
------------- ------------- ---------------
Current:
Federal & Foreign $ (695) $ 71 $ 121
State - - -
------------- ------------- ---------------
(695) 71 121
Deferred:
Federal $ - $ - $ -
State - - -
------------- ------------- ---------------
- - -
------------- ------------- ---------------
Total provision (benefit) $ (695) $ 71 $ 121
============= ============= ===============
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,
----------------------------------------
2007 2006 2005
------------ ----------- -----------
Provision (benefit) at federal statutory rate (34.0)% 34.0% (34.0)%
State tax (benefit), net of federal - - -
Foreign tax provision, net of federal 0.4 4.7 3.8
Net operating loss utilized - (32.2) -
Non-deductible items 0.2 - 2.5
Prior year and other items - 1.4 5.0
Adjustments to tax liabilities (5.1) - -
Deferred tax valuation allowance 33.9 (1.4) 28.4
------------ ----------- -----------
(4.6)% 6.5% 5.7%
============ =========== ===========
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,
----------------------------------
2007 2006
---------------- -----------------
Deferred tax assets (liabilities):
Bad debt $ 791 $ 215
Inventory reserve 2,428 683
Amortization of tax goodwill 607 642
Net operating loss carryforwards 4,430 764
Other, net (18) 333
---------------- -----------------
8,238 2,637
Valuation allowance $ (8,238) $ (2,637)
---------------- -----------------
Net deferred income tax assets $ - $ -
================ =================
F-15
For the fiscal year ended January 31, 2007, the Company recorded a net benefit
from income taxes of $695. The Company recorded federal and state tax benefits
in the amount of $756. The benefits arose due to a change in facts and
circumstances and assumptions that generated the establishment of federal and
state tax liabilities in prior periods. These liabilities which were recorded in
income taxes payable, have been reversed in the current year. The benefit is
offset in part by the provision for foreign income taxes for operations in the
Philippines and Canada. The Company increased the valuation reserve for the year
ended January 31, 2007 by $5,601, against net deferred tax assets resulting from
temporary differences. The Company has net operating loss carryforwards totaling
approximately $11,504 for federal income tax purposes, and various state net
operating loss carryforwards. The carryforwards expire between 2023 and 2027.
For the fiscal year ended January 31, 2006, the Company recorded a provision for
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
Company decreased the valuation reserve for the year ended January 31, 2006 by
$232, against deferred tax assets resulting from temporary differences.
For the fiscal year ended January 31, 2005, the Company recorded a provision for
income taxes of $121. The expense is foreign income tax expense, for operations
in Canada and the Philippines. The Company also increased the valuation
allowance for the year ended January 31, 2006, by $598, 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 $181, $164 and $206 related to the savings plan in the years ended
January 31, 2007, 2006 and 2005, 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, President & Chief Executive Officer and Vice Chairman of the Company,
respectively. 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
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 year ended January 31, 2005, the Company paid
First Equity a retainer fee of $360, and no Success Fee.
F-16
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, CT. 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. First
Equity has renewed the lease for an additional five-year period beginning in
April 2007. Lease payments under this sublease totaled approximately $115, $93,
and $84, for the years ended January 31, 2007, 2006, and 2005, 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, $50, $52, and $53 in 2007, 2006 and 2005, 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 an employee of First Equity $50 for consulting services
performed exclusively for the Company's benefit during the year ended January
31, 2007, and reimbursed First Equity for actual travel expenses incurred.
10. Interest expense and other income (expense), net
The components relate to interest expense on third-party debt, realized and
unrealized foreign exchange gain (loss) on Canadian dollar transactions by the
Canadian operations, and other charges.
Year ended January 31,
-------------------------------------------------
2007 2006 2005
-------------- -------------- -----------------
Interest expense $ (1,182) $ (234) $ (64)
Foreign exchange gain 197 130 74
Other income (expense) 23 (1) -
-------------- -------------- -----------------
$ (961) $ (105) $ 10
============== ============== =================
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.
F-17
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,
---------------------------------------
2007 2006 2005
------------ ----------- -----------
Denominator for basic net income (loss) per share - weighted
average shares 7,362,125 7,336,925 7,301,751
Effect of dilutive employee stock options - 4,082 N/A
------------ ----------- -----------
Denominator for net income (loss) per share - assuming dilution
- adjusted weighted average shares and assumed conversions 7,362,125 7,341,007 7,301,751
============ =========== ===========
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 due to the loss incurred for the year ended
January 31, 2005 was 8,072. There were no potentially dilutive common shares for
the year ended January 31, 2007.
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, 2007 are as follows:
Year ending January 31, 2008 $ 1,177
Year ending January 31, 2009 1,031
Year ending January 31, 2010 901
Year ending January 31, 2011 803
Year ending January 31, 2012 856
Thereafter 856
------------------
$ 5,624
==================
Rental expense under noncancelable operating leases amounted to $1,212, $1,129,
and $1,148 for the years ended January 31, 2007, 2006 and 2005, 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.
F-18
16. Quarterly Financial Information (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ -------------
Year ended January 31, 2007
Net sales $ 29,242 $ 29,665 $ 32,358 $ 28,096
Gross profit 5,727 4,979 1,241 (1) 859
Net loss (266) (1,906) (4,241)(2) (8,081)(3)
Basic and diluted net loss per share $ (0.04) $ (0.26) $ (0.58) $ (1.10)
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 153 432 (4) 90 349
Basic and diluted net income per share $ 0.02 $ 0.06 $ 0.01 $ 0.05
(1) Includes a $4.0 million increase in inventory reserves in the third quarter of fiscal year 2007.
(2) Includes a $0.8 million tax benefit from a reversal of a tax reserve in the third quarter of fiscal year 2007.
(3) Includes a $1.9 million increase in bad debt allowance in the fourth quarter of fiscal year 2007.
(4) Includes $0.4 million in income from a litigation settlement.
F-19
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, 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, 2007
Allowance for doubtful accounts $ 596 2,555 1,136 (a) $2,015
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 $1,656 489 227 (b) $1,918
Year ended January 31, 2007
Slow moving and obsolete inventory $1,918 4,487 3 (b) $6,402
(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.
F-20
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 dated as of December 31, 2003, to Sublease Agreement
dated as of December 31, 1996, between First Equity and the Company.
10.8 * 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).
10.9 * 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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
10.1 to the Company's Current Report on Form 8-K dated July 29, 2005
(No. 0-21995), and incorporated herein by reference).
10.20 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).
10.21 Compensation arrangements with other executive officers (effective as
of February 1, 2006).
10.22 Second Amended and Restated Loan and Security Agreement, dated as of
January 11, 2007, by and among Aerospace Products International Inc.
and Aerospace Produits International LTEE (d/bla Aerospace Products
International Ltd.) (each direct wholly-owned subsidiaries of First
Aviation Services Inc.) and TD Bankworth, N.A.
10.23 Ratification Confirmation and Amendment, dated as of January 11, 2007
entered into by First Aviation Services Inc. (on hehalf of Aerospace
Products International Inc. and Aerospace Products International LTEE
(d/bla Aerospace Products International Ltd.) and TD Bankworth, N.A.
10.24 * Employment Agreement, dated as of January 12, 2007, by and between
Bill Reznieck and Aerospace Products International Inc.
10.25 * Compensation arrangements with named certain executive officers as
of February 1, 2007.
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.