UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934 For the fiscal year ended January 31, 2005
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from___________ to ____________
Commission File Number 0-21995
First Aviation Services Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1419064
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Riverside Avenue
Westport, Connecticut 06880-4214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 291-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
The aggregate market value of voting common and non-voting equity held by
non-affiliates as of July 31, 2004 was approximately $16.3 million.
The number of shares outstanding of the registrant's common stock as of April
12, 2005 was 7,327,206 shares.
Documents incorporated by reference:
Portions of the Registrant's definitive Proxy Statement for the
2005 Annual Meeting of Stockholders is incorporated
herein by reference into Part III hereof
First Aviation Services Inc.
TABLE OF CONTENTS
Forward Looking Statements.....................................................3
Part I
Item 1. Business..............................................................3
Item 2. Properties............................................................7
Item 3. Legal Proceedings.....................................................7
Item 4. Submission of Matters to a Vote of Security Holders...................8
Executive Officers of the Registrant...........................................8
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.................................9
Item 6. Selected Financial Data..............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........23
Item 8. Financial Statements and Supplementary Data..........................24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................24
Item 9A. Controls and Procedures..............................................24
Item 9B. Other Information....................................................24
Part III
Item 10. Directors and Executive Officers of the Registrant...................25
Item 11. Executive Compensation...............................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................25
Item 13. Certain Relationships and Related Transactions.......................25
Item 14. Principal Accountant Fees and Services...............................25
Part IV
Item 15. Exhibits and Financial Statement Schedules...........................26
Signatures....................................................................30
Index to Consolidated Financial Statements and Supplementary Data.............F1
Exhibit Index.................................................................
2
First Aviation Services Inc.
Annual Report on Form 10-K
for the Fiscal Year Ended January 31, 2005
Forward-Looking Statements
- --------------------------
Certain statements discussed in Item 1, "Business", Item 3, "Legal
Proceedings", Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", Item 7, "Liquidity and Capital Resources",
and elsewhere in this Annual Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are not statements of historical facts, but
rather reflect the Company's current expectations concerning future events and
results. Such forward-looking statements, including those concerning the
Company's expectations, involve known and unknown risks, uncertainties and other
factors, some of which are beyond the Company's control, that may cause the
Company's actual results, performance or achievements, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, the Company's ability to
obtain parts and components from its principal suppliers on a timely basis,
depressed domestic and international market and economic conditions, especially
those currently facing the aviation industry as a whole, the impact of changes
in fuel and other freight related costs, relationships with its customers, the
ability of the Company's customers to meet their financial obligations to the
Company, the ability to obtain and service supply chain management contracts,
changes in regulations or accounting standards, the ability to consummate
suitable acquisitions and expand, the loss of the use of facilities and
distribution hub in Memphis, significant failure of our computer systems or
networks, efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002
and other items that are beyond the Company's control and may cause actual
results to differ from management's expectations. In addition, specific
consideration should be given to the various factors described in Item 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.
PART I
------
Item 1. Business
- -----------------
General
First Aviation Services Inc. ("First Aviation"), together with its wholly
owned subsidiaries, Aircraft Parts International, Ltd. ("API Ltd."), and API
Asia Pacific Inc. ("API Asia Pacific"), and its majority-owned subsidiary,
Aerospace Products International, Inc. ("API"), (collectively, the "Company"),
is one of the premier suppliers of services to the aviation industry worldwide.
The services the Company provides to the aviation industry include the sale of
aircraft parts and components, the provision of supply chain management
services, overhaul and repair services for brakes and starter/generators, and
the assembly of custom hoses.
First Aviation was incorporated in the state of Delaware in 1995. The
Company's principal executive offices are located at 15 Riverside Avenue in
Westport, Connecticut 06880. Certain filings that First Aviation makes with the
U.S. Securities and Exchange Commission (including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K) are available on
First Aviation's corporate website at www.favs.com. These public filings also
can be obtained by calling our investor relations department, or by e-mail at
first@firstaviation.com.
Industry Overview
The market for aerospace parts and supplies consists of two market sectors,
the manufacturing parts sector and the aftermarket parts sector. These two
market sectors are related, but require different customer focus to satisfy the
needs of the market. The manufacturing parts sector caters to parts installed on
new aircraft or engine construction. Large original equipment manufacturers
("OEMs") sell directly to aircraft manufacturers and fabricators the parts and
supplies needed to manufacture new aircraft. The aftermarket parts sector caters
to the needs of aircraft and engines already in service and are typically out of
warranty, and out-of-production aircraft and engines, all of which need
3
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 supplies as well as
provide overhaul and repair services on parts and components, typically to the
same customers. Many suppliers and OEMs of parts and supplies have traditionally
relied on third-party distributors, such as the Company, to service the
aftermarket parts sector. Some of these suppliers now want to service this
market sector directly, but in many cases do not have the market expertise or
support infrastructure, so they turn to third party logistics ("3PL") providers
for assistance. Similarly, end-users want to outsource their buy-side supply
chain management needs and turn to 3PL providers for support. The Company
provides the aftermarket supply services including the sale of parts, repair
services and other supply chain services to end-users and suppliers.
The Company believes that the current annual worldwide market for new and
used parts, components and consumable supplies for aircraft and engines is
approximately $25.0 - $35.0 billion. This market has leveled out and started to
increase after several years of decline. Of the worldwide market, an estimated
$2.5 billion is supplied to the general aviation category of the aftermarket
parts sector in which the Company principally operates, $5.0 billion goes
through distribution to all market categories, and the balance is supplied
direct to the end user. The aviation aftermarket parts sector includes passenger
and cargo airlines, fleet and corporate aircraft operators, certified repair
facilities, governments and military services, flight training schools, fixed
base operators ("FBOs"), business aviation, helicopter and recreational
operators. The aviation aftermarket parts sector is highly-fragmented, although
there are a limited number of large, well-capitalized companies, including
original equipment manufacturers ("OEMs"), and suppliers, selling a broad range
of parts and services, as well as numerous smaller competitors serving niche
markets.
Aviation Aftermarket Parts Sector. The Company markets its supply chain
services, which includes parts sales and service contracts, to several distinct
categories of customers within the aftermarket parts sector. These categories
consist of airlines, corporate flight departments, independent airline
maintenance, repair and overhaul providers ("MROs"), large corporate MROs,
retail customers, OEMs and general aviation customers. The Company's products,
from more than 150 manufacturers and suppliers, constituting approximately
80,000 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
Goodrich Aerospace, Champion, General Electric Lighting, Goodyear Tire and
Rubber, Lord Corporation, Marathon Power Technologies, Michelin Aircraft Tire,
Parker Hannifin, Scott Aviation, 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 as a result of the
growing trend to outsource, a trend that is increasing due to economic
conditions and the need for companies to reduce their cost structures. Some
4
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, focus, and contacts within
the industry.
Increasing Consolidation. In order to reduce the costs associated with
carrying and managing inventory, satisfy governmental regulatory scrutiny,
streamline buying decisions and assure quality, aircraft and fleet operators are
seeking to reduce their number of suppliers, including parts and component
providers, and are using third parties to manage their parts and components
inventories. Operators also have become more sensitive to quick turnaround
times. 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, at a reasonable price. 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. During the past few years, a number of service
providers have consolidated or combined their operations. A number have faced
moderate to severe financial difficulties. In addition, some OEMs have decided
to by-pass wholesale distributors and are distributing their products directly
to their customers. This is a trend that the Company believes will continue, and
is another reason for the Company's focus on services, as some potential
customers for the Company's supply chain management services include those OEMs
who have decided to sell their products themselves, directly to the end
customer.
Industry Conditions. The aftermarket parts sector in which the Company
operates is affected by general economic conditions and specific market activity
like flight activity, flight training, and air travel for business and pleasure.
Revenues for the year ended January 31, 2005 were higher than the prior year due
to an improving economy, but were adversely effected by reduced levels of
specific market activity that were caused by higher fuel prices, and in the
latter half of the year adverse weather conditions in significant markets.
Recovery in the market environment has been increasing gradually. Overall
business activity in the aftermarket parts sector continues to be improving in
several customer segments the Company serves. Some categories have improved with
the economy, like general aviation and commercial airlines, but they are still
vulnerable to a downturn from terrorist acts and higher fuel prices. Flight
schools have not fully recovered to the level of pre-recession operating levels,
and certain flight zones remain restricted for general aviation flights.
Bankruptcies have and may continue to occur in the aerospace industry, which
have reverberating effects for all market sectors. The Company expects that the
current level of business activity in the aftermarket parts sector will
continue, but the timing of any further expansion remains uncertain. The Company
continues to look for new sources of revenue, to control its costs, and expand
its offering of services both within the aftermarket parts sector and beyond.
Principal Suppliers
API has five suppliers from whom approximately 40%, 45%, and 49% of its
total purchases were made during the years ended January 31, 2005, 2004 and
2003, respectively.
The Company has entered into a service arrangement with an authorized Piper
distributor pursuant to which the Company provides services, including parts
supply services and logistics services, enabling the Company to continue to
service this customer base. This arrangement has mitigated the effect of the
December 31, 2003 termination of the Company's distributorship with New Piper
Aircraft, Inc.
5
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, 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, the relationship building with the customer that is required, and the
substantial change it often requires of the customer's existing business
infrastructure.
Customers
The Company currently has approximately 7,000 customers. The Company is not
reliant upon any single customer.
Regulation
Regulatory bodies such as the FAA, the Joint Airworthiness Administration,
the Department of Defense (the "DOD"), and governments around the world require
all aircraft and engines to follow defined maintenance programs to ensure
airworthiness and safety. For parts and components distributed by the Company,
including inventory managed by the Company under supply chain management
services, the programs are developed by the OEM or customer in coordination with
the regulatory body. The Company has received certifications from the FAA
covering its repair and overhaul facilities, and its hose shop. The DOD requires
that parties providing parts for branches of the U.S. armed services comply with
applicable government regulations, and the DOD continually reviews the
operations of the Company for compliance with applicable regulations. In
addition, the Company's Memphis, Tennessee facility is ISO/9002 certified and
subject to periodic reviews.
Environmental Matters and Proceedings
The Company's operations are subject to federal, state and local
environmental laws and related regulation by government agencies, including the
United States Environmental Protection Agency, the United States Department of
Transportation, and the United States Occupational Safety and Health
Administration. Among other matters, these regulatory authorities impose
requirements that regulate the operation, handling, transportation and disposal
of hazardous materials, the health and safety of workers, and require the
Company to obtain and maintain licenses and permits in connection with its
operations. This extensive regulatory framework imposes potentially significant
compliance burdens and risks on the Company. The Company believes that it is in
material compliance with all federal, state, and local laws and regulations
governing its operations. The Company has not had and does not anticipate that
any material capital expenditures will be required during the next fiscal year
in order to maintain compliance with the federal, state and local laws and
regulations.
Employees
As of January 31, 2005, the Company employed 196 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.
6
Geographic Areas
Sales to unaffiliated foreign customers were approximately 22%, 22%, and
18% of net sales for the years ended January 31, 2005, 2004 and 2003,
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 2. Properties
- -------------------
The Company leases all of its facilities, described below:
Square Lease
Location Entity Description Footage Expiration
- -------- ------ ----------- ------- ----------
Westport, CT First Aviation Executive offices 3,000 2007
Memphis, TN API Distribution/sales 157,000 2013
Calgary, Canada API Ltd. Sales 5,600 2009
Montreal, Canada API Ltd. Sales 7,270 2008
Clark Field, Pampanga,
Philippines API Asia Pacific Distribution/sales 22,235 2010
St. Charles, IL API Sales 1,000 2006
Item 3. Legal Proceedings
- --------------------------
The Company's business exposes it to possible claims for personal injury,
death or property damage that may result from a failure of certain parts
serviced by the Company or spare parts and components sold by it, or in
connection with the provision of its supply chain management services. The
Company takes what it believes to be adequate precautions to ensure the quality
of the work it performs and the traceability of the aircraft parts and
components that it sells. The OEMs that manufacture the parts, components and
supplies that the Company sells carry liability insurance on the products they
manufacture. In addition, the Company maintains what it believes is adequate
liability insurance to protect it from any claims.
In the normal conduct of its business, the Company also is involved in
various claims and lawsuits, none of which, in the opinion of the Company's
management, will have a material, adverse impact on the Company's consolidated
financial position. The Company maintains what it believes is adequate liability
and other insurance to protect it from such claims. However, depending on the
amount and timing, unfavorable resolution of any of these matters could have a
material effect on the Company's consolidated financial position, results of
operations or cash flows in a particular period.
7
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Executive Officers of the Registrant
- ------------------------------------
The Company's executive officers, their ages and backgrounds are as
follows:
Michael C. Culver, 54, has served as President and Chief Executive Officer
of First Aviation since March 1995. Mr. Culver has also served as Chairman of
API since 1997. In 1985, Mr. Culver co-founded First Equity Group Inc. ("First
Equity Group"). First Equity Group's interests, in addition to the Company,
include First Equity Development Inc., an aerospace investment and advisory
firm, Skip Barber Racing School, LLC and Imtek, Inc. Mr. Culver serves on the
Boards of Skip Barber Racing School, LLC and Imtek, Inc.
Robert G. Costantini, 45, became First Aviation's Chief Financial Officer,
Senior Vice President of Finance, and Corporate Secretary in October 2003. Prior
to joining First Aviation, from 1999 to 2003, Mr. Costantini was Chief Financial
Officer of FocusVision Worldwide, Inc., a technology company providing video
transmission services. From 1986 to 1989 he was first Corporate Controller, and
from 1989 to 1999 he was Vice President - Finance for M.T. Maritime Management
Corp., a global maritime transportation company. Mr. Costantini started his
career with Peat Marwick, Mitchell & Co. Mr. Costantini is a Certified Public
Accountant, Certified Management Accountant, and a member of the bar of New York
and Connecticut.
Paul J. Fanelli, 43, became President and CEO of First Aviation's principal
subsidiary Aerospace Products International Inc. on April 5, 2004. Mr. Fanelli
was hired February 16, 2004 as Senior Vice President and Chief Operating Officer
of API. From 2000 to 2003, Mr. Fanelli was President - Europe for Brightpoint,
Inc., a distributor of wireless voice and data products and a supplier of
outsourced services. Previously he was Chief Operating Officer from 1998 to 2000
for Brightpoint Europe, Middle East and Africa. Mr. Fanelli has worked for
Ericsson Mobile Communications, Texas Instruments, ITT Avionics and started his
career with Loral Electronics.
8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
Market Information. First Aviation's common stock trades on The NASDAQ
Small Cap Market under the symbol FAVS. The table below sets forth the quarterly
high and low sales prices for the First Aviation's common stock as reported by
the NASDAQ Stock Market since February 1, 2003.
Year Ended Year Ended
January 31, 2005 January 31, 2004
- ---------------------------------------------------- ---------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $4.80 $3.90 First Quarter $3.72 $2.62
Second Quarter $5.00 $4.25 Second Quarter $4.00 $2.95
Third Quarter $4.72 $3.86 Third Quarter $3.99 $3.36
Fourth Quarter $4.60 $3.52 Fourth Quarter $4.79 $3.36
Holders. As of April 22, 2005, there were 17 holders of record of the First
Aviation's common stock.
Dividends. First Aviation did not pay a dividend in the fiscal years ended
January 31, 2005 and 2004. 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 it 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,
2005, First Aviation did not purchase any shares of its Common Stock.
9
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) 2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- ----------
Balance Sheet Summary:
Working capital $ 47,179 $ 49,143 $ 47,996 $ 56,903 $ 42,673
Cash per share outstanding (1) 3.08 3.45 3.59 4.31 4.43
Total assets 65,199 64,982 65,041 80,544 80,714
Current debt and obligations under capital leases - - 4 180 11,757
Long-term debt 14,500 14,500 14,500 14,800 -
Other long-term liabilities 1,041 1,041 1,041 1,041 1,188
Total stockholders' equity $ 34,634 $ 36,565 $ 36,094 $ 49,018 $ 47,832
Book value per share outstanding (2) $ 4.73 $ 5.02 $ 4.98 $ 6.79 $ 6.65
Cash dividends paid per share - - $ 1.00 - -
Common shares outstanding 7,322 7,284 7,251 7,214 7,185
Results of Operations Summary (3):
Net sales $ 124,249 $ 105,777 $ 101,737 $ 105,696 $ 97,550
Gross profit 20,724 19,536 18,473 19,016 18,543
Income (loss) from operations (2,142) (121) (1,577) 227 (2,300)
Income (loss) before income taxes (2,108) (14) (1,413) 486 (925)
Provision (benefit) for income taxes 121 (25) 1,786 (194) (349)
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing operations before
accounting change (2,229) 11 (3,199) 292 (576)
Cumulative effect of change in accounting - - (2,735) - -
----------- ----------- ----------- ----------- ----------
Net income (loss) $ (2,229) $ 11 $ (5,934) $ 1,252 $ (1,830)
=========== =========== =========== =========== ==========
Basic income (loss) per share from continuing
operations $ (0.31) $ 0.00 $ (0.44) $ 0.04 $ (0.08)
Basic net income (loss) per share $ (0.31) $ 0.00 $ (0.82) $ 0.17 $ (0.24)
Weighted average shares outstanding - basic 7,302 7,267 7,225 7,198 7,721
----------- ----------- ----------- ----------- ----------
Income (loss) per share from continuing
operations -- assuming dilution $ (0.31) $ 0.00 $ (0.44) $ 0.04 $ (0.08)
Net income (loss) per share -- assuming dilution $ (0.31) $ 0.00 $ (0.82) $ 0.17 $ (0.24)
Weighted average shares outstanding - assuming
dilution 7,302 7,282 7,225 7,209 7,721
----------- ----------- ----------- ----------- ----------
10
Notes to Selected Financial Data
(1) Cash per share outstanding is calculated by taking the cash balance
and dividing by common shares outstanding. The Company repurchased for
treasury 1.2 million shares for $4.8 million during the year ended
January 31, 2001. The Company believes this disclosure is pertinent to
investors because it indicates the Company has financial resources to
pursue its strategy. Cash per share outstanding does not represent
funds that are available for management's discretionary use due to
legal or functional requirements to conserve cash for capital
replenishment, expansion, debt service, or other commitments and
uncertainties.
(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, 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. In fiscal year 2001, the Company
discontinued its e-commerce subsidiary, AeroV Inc. ("AeroV"). As a
result of the discontinuance, AeroV has been accounted for as
discontinued operations, and the results of operations and were
condensed and reported separately from continuing operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Cautionary Statements
Certain statements made in Item 1 "Business", Item 3, "Legal Proceedings", this
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:
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 purchases parts, and is dependent upon these manufacturers for
access to parts for resale. 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. 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.
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. Continued depressed conditions in the aviation
industry, as well as any downturn in economic conditions, will have an
adverse impact on the Company's future results.
o The impact of changes in fuel and other freight related costs. Fuel is
a significant cost in the aviation industry and increases in the cost
of fuel or lack of availability of fuel could have an adverse impact
on overall flight activity levels, and the Company's business.
o Relationships with its customers. An inability to maintain good
relationships with its customers, or the inability to expand by
establishing relationships with new customers, could have an adverse
impact on the Company.
11
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, will have an adverse impact on the
Company.
o The Company's facilities and distribution hub is in Memphis and most
of its inventory is stored in contiguous warehouse space. Losing
access or use of these facilities, through security concerns, natural
disasters or damage to the buildings, would interrupt the Company's
business, which would adversely affect its business and operating
results.
o The significant failure of computer sustems or networks that disrupt
business or operations. The Company's computer systems, internal and
external networks, and suppliers are crucial to service customers and
manage operations. Significant disruptions or malfunctions of its
computer systems or networks could have a material adverse effect on
its business and results of operations. During 2005, the Company plans
to install a new suite of enterprise resource planning software using
internal resources and consultants for implementation. Failure to
achieve effective implementation could have a material adverse effect
on its business and results of operations.
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.
12
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.
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 one of the premier suppliers of products and services to the
aerospace industry worldwide, including the provisioning and the supply of
aircraft parts and components, and supply chain management services. The Company
also builds custom hose assemblies, and performs overhaul and repair services
for brakes and starters/generators.
The Company recorded an increase in revenues for the year ended
January 31, 2005. For the full year, despite higher revenues, the Company
experienced an operating loss resulting from declining gross margins, lower
freight billings, and increased expenses to effect significant changes in the
way the business is managed. The Company believes it maintains a strong balance
sheet, although cash levels decreased primarily due to the operating losses
experienced during the year, expenditures for equipment and enterprise software,
and making accelerated payments to obtain vendor price discounts. The Company
believes that its results show that it continues to take market share from its
competitors, as it managed to grow even though the industry outlook remains
cautious for growth.
Results for the three months ended January 31, 2005 were mixed as the
Company increased revenue due to an improved economy, but experienced lower
gross margins. The Company also experienced higher expenses and charges,
primarily due to changes in operations initiated by management that are not
anticipated to recur.
Recovery in the industry has been gradual, and overall business activity in
the aerospace industry continues to be influenced by several factors, including
higher fuel prices. Although the extent and timing of further increases in
market activity is uncertain, the Company continues to look for opportunities
for new markets and revenues, increased margins, improved cost controls, and
expanded service offerings.
The Company has entered into a service arrangement with an authorized Piper
distributor pursuant to which the Company provides services, including parts
supply services and logistics services. This has mitigated the effect of the
December 31, 2003 termination of the Company's distributorship with New Piper
Aircraft, Inc.
During the year ended January 31, 2003 the Company, due to the loss
incurred for the year, and in accordance with requirements of Statement of
Financial Accounting Standards No. ("FAS") 109, "Accounting for Income Taxes",
recorded a non-cash deferred income tax charge of $2.0 million to establish a
full valuation allowance against its net deferred income tax assets as it was
more likely than not that some portion or all of the deferred tax asset will not
be realized. The establishment of the valuation allowance is not a reflection of
the future or long-term profitability of the Company, and the Company expects
that it will reverse in future years if financial results increase sufficiently
to support the value of the assets.
During the first quarter ended April 30, 2002, the Company adopted FAS No.
142, "Goodwill and Other Intangible Assets". Pursuant to FAS 142, goodwill is
not amortized but is tested periodically for impairment using discounted cash
flows and other fair value methodologies. Upon adoption of FAS 142, the Company
was required to perform transitional impairment tests relating to its goodwill
existing as of February 1, 2002, the date of adoption. As a result, upon
adoption of FAS 142, the Company took a non-cash charge of $2,735,000 net of
applicable income tax benefit of $922,000 or $0.38 per share, to write-off the
carrying value of its goodwill. No charge was required under previous generally
accepted accounting principles, which were based upon undiscounted cash flows.
The adoption of FAS 142 represented a change in accounting principle, and the
cumulative effect, net of the applicable income tax benefit, has been shown on a
separate line in the consolidated statements of operations.
13
Critical Accounting Policies
The Company is required to provide additional disclosure and commentary on
those accounting policies considered most critical. An accounting policy is
deemed to be critical if it is important to the Company's financial condition
and results, and requires judgment and estimates on the part of management in
its application. The process of preparing financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of judgments, estimates and assumptions to determine the measurement of
revenues and expenses, and the realizable value of certain assets and
liabilities. These estimates and assumptions are based upon information
available at the time the estimates or assumptions are made. The estimates and
assumptions could change significantly as conditions within and beyond
management's control change. Therefore, actual results could differ
significantly from the estimates. The most significant estimates made in
preparing the Company's financial statements include revenue recognition, the
determination of the allowance for doubtful trade receivables, the allowance for
excess and obsolete inventories, deferred income tax asset valuations, the
valuation of goodwill, and, in prior years, estimates made relating to
discontinued operations, including the determination of the amount of gain or
loss upon disposition. The following is a discussion of the critical accounting
policies and the related judgments, estimates and assumptions utilized in
preparing the Company's consolidated financial statements. A summary of
significant accounting policies is included in Note 2 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Revenue Recognition
The Company's net sales consist of sales of services to the aviation
industry, including parts and components supply services, supply chain
management services, and component overhaul and repair services. Net sales are
recorded when parts and components are shipped and title transfers to the
customer, when supply chain management services have been provided to the
customer, or when overhauled and repaired items are completed and shipped back
to the customer. Shipping and handling billed to customers are included in net
sales. The terms and nature of supply chain management services are stipulated
in a long-term contract between the Company and the customer. The Company
provides its facilities, personnel and systems to provide the services at less
cost to the customer. In providing services where the Company distributes
inventory on behalf of its customer, the Company may use its own inventory or
hold its customers' inventory without taking ownership of such inventory. In
cases where the Company does not take ownership of its customers' inventory, net
sales generally are recognized as a fee based on the sales value of the product
shipped through the Company's facilities, and not the sales value of the product
itself. Alternatively, the Company, when providing services to handle customer's
inventory without taking ownership, can take a fee based on the cost of
providing services, and not on the sales value of the product.
Allowance for Doubtful Accounts
The allowance for doubtful trade receivables is established based on
estimates of the amount of uncollectible trade receivables, utilizing financial
formulas based principally upon historical experience, the credit worthiness of
the customer, the age of the account, the estimated risk that the account can be
collected, and specific identification. Collection of trade receivables is
affected by aviation industry and market trends, overall economic trends and
conditions, and customers' credit issues and financial condition. Changes in any
of these factors may have a significant negative impact upon the estimated
allowance, and the Company's financial performance.
Allowance for Excess and Obsolete Inventories
Inventories generally consist of aircraft parts and components, and are
valued at the lower of cost or market, using the first-in, first-out method.
Provisions were made in each period for the estimated effect of excess and
obsolete inventories based upon financial formulas that took into account
quantities, costs, the age of the inventory on hand, historical and projected
sales, and other inventory movements, adjusted for known or estimated factors
such as new product lines and product return allowances. During the three months
ended July 31, 2004, as a result of normal review procedures, the Company
adjusted the methodology for estimating the Allowance for Slow Moving and
Obsolete Inventory that makes the estimate more objective, and efficient to
calculate, by applying percentages based on historical experiences of inventory
in various age classifications, and eliminating the practice of making
adjustments based on historical and projected sales, or other inventory
movements due to new product lines and product return allowances. Actual excess
and obsolete inventories may differ significantly from such estimates, and such
differences could have a significant negative impact on the estimated allowance,
and the Company's financial performance.
14
Goodwill
Goodwill arises from the excess of the purchase price paid over the
underlying fair value of assets acquired in transactions accounted for under the
purchase method of accounting for business combinations. 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. A significant amount of
judgment is used to estimate the fair value of assets acquired and to allocate
the purchase price to the underlying assets and liabilities, including the
recognition of liabilities incurred directly as a result of the acquisition.
Most of the assumptions and estimates utilized in this process were based upon
known factors and exposures, historical information and management's experience.
Deferred Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are estimated using the enacted tax rates and laws that are estimated to be
in effect when the differences are expected to reverse. The realization of the
assets is subject to estimates and judgments, and may change based upon a
variety of factors, including future profitability of the Company and tax law
changes. If an asset is not deemed more likely than not to be fully realizable,
a valuation allowance must be established against all or part of the asset. In
addition, FAS 109 requires the establishment of a valuation allowance under
certain conditions.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. The cost will be measured based on the fair
value of the instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion
No. 25. As originally issued in 1995, SFAS No. 123 established as preferable the
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income (loss) would have been had the preferable
fair-value-based method been used. The Company will be required to apply SFAS
No. 123(R) at the beginning of the first fiscal year beginning after June 15,
2005, and we plan to adopt it effective January 1, 2006.
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.
15
Year Ended January 31,
---------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 83.3 81.5 81.8
-------------------- --------------------- --------------------
Gross profit 16.7 18.5 18.2
Selling, general and administrative expenses 16.1 16.1 17.4
Corporate expenses 2.4 2.5 2.4
-------------------- --------------------- --------------------
Income (loss) from operations (1.8) (0.1) (1.6)
Interest income 0.1 0.1 0.3
Interest and other expenses - - (0.1)
-------------------- --------------------- --------------------
Income (loss) before income taxes (1.7) 0.0 (1.4)
(Provision) benefit for income taxes (0.1) 0.0 (1.7)
-------------------- --------------------- --------------------
Income (loss) from continuing operations (1.8) 0.0 (3.1)
Cumulative effect of accounting change - - (2.7)
-------------------- --------------------- --------------------
Net income (loss) (1.8)% 0.0% (5.8)%
-------------------- --------------------- --------------------
Year ended January 31, 2005 compared to year ended January 31, 2004
Net sales
Net sales for the year ended January 31, 2005 increased $18.5 million, or
17.5%, to $124.2 million from $105.8 million for the year ended January 31,
2004. Net sales increased in all customer sectors, as economic conditions
improved for the general economy as a whole for the year, leading to greater
flight activity than the previous year, and therefore increases in maintenance
and repairs. The increase in sales occurred across all geographic regions with
the most significant improvement in sales growth occurring in Asia and Latin
America at 31% and 38% respectively. European revenue growth, while positive,
lagged the other regions of the world at 10%.
Freight revenue is a component of net sales and it represents freight
billed to customers. Freight revenue declined for year ended January 31, 2005 by
13% to $2.1 million from $2.4 million for the prior year ended January 31, 2004.
This decline was due primarily to increased customer incentives resulting from
promotional activities and industry competition. This had an adverse effect on
gross profit margin as explained below under the caption "Gross Profit".
Cost of sales
Cost of sales consists of costs of inventory sold, direct costs to overhaul
and repair parts and components, and direct costs of providing services. Freight
costs for parts and components sold are also included in cost of sales. Costs of
sales for the year ended January 31, 2005 increased $17.3 million, or 20.0%, to
$103.5 million from $86.2 million for the year ended January 31, 2004. The
increase in cost of sales was due primarily to the increase in net sales of
parts and components. In addition, a $300,000 increase to inventory reserves was
recorded in the quarter ended July 31, 2004 as described under the caption
"Critical Accounting Policies" in the section "Allowance for Excess and Obsolete
Inventories".
As a percentage of net sales, cost of sales increased for the twelve months
ended January 31, 2005, to 83.3% from 81.5%, for the twelve month period ended
January 31, 2004. The increase in the percentage of cost of sales compared to
net sales for the twelve months ended January 31, 2005 compared to the
comparable twelve month 2004 period, was due to the reasons described above, as
well as higher growth in sales of products and components supply services versus
supply chain management services contracts, the latter representing a larger
share of the revenue mix in the prior year period versus the current year
period.
Gross profit
16
Gross profit for the twelve months ended January 31, 2005 increased $1.2
million or 6.1% to $20.7 million, compared to gross profit for the twelve months
ended January 31, 2004. Gross profit as a percentage of net sales decreased to
16.7% for the twelve month period ended January 31, 2005, from 18.5% for the
comparable twelve month period ended January 31, 2004. Gross profit margin for
the twelve month period ended January 31, 2005, decreased compared to the
comparable period of the prior year principally due to the accrual for an
increase in the inventory reserves, as mentioned above under the caption "Cost
of Sales", as well as an increase in the mix in sales of parts and components
supply services which have a lower gross profit margin relative to supply chain
management services. The increase in net freight expense, as described below,
contributed to the reduction in gross profit for the twelve months ended January
31, 2005 compared to the twelve months ended January 31, 2004.
Gross profit is also impacted by net freight expense, which represents
freight expense recorded in cost of sales, less freight billed to customers in
net sales. Net freight expense decreased gross profit by 5.7% for the twelve
months ended January 31, 2005, compared to a decrease of 3.9% in the comparable
2004 period. The decrease was due primarily to increased customer incentives
from promotional activities offering customers reduced or zero freight on
shipments.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended January 31,
2005 increased $3.0 million, or 17.3%, to $20.0 million from $17.0 million for
the year ended January 31, 2004. The increases for the twelve months ended
January 31, 2005, over the twelve month period ended January 31, 2004, is due
primarily to increases in salaries and payroll costs related to additional sales
personnel, higher sales commissions, sales related travel expenses, severance
and relocation expense for personnel changes, increased legal fees, the
expiration of property tax incentives, and expenses incurred for the
implementation of a new customer initiative requiring additional temporary
warehouse personnel. Offsetting these increases were reductions to bad debt
expense from a reduction in the reserves for accounts receivable, and lower
depreciation expense. The reduction in the accounts receivable reserves that
resulted during normal review procedures was due to a change in the Company's
estimate for bad debts resulting from changes in estimated collections based on
improving customer payment trends, and the overall improving economy.
Selling, General and Administrative expenses as a percentage of revenues
were 16.1% for the twelve months ended January 31, 2005, unchanged from the
twelve months ended January 31, 2004.
17
Corporate Expenses
Corporate expenses for the twelve months ended January 31, 2005 increased
$268,000, or 10.2%, to $2.9 million, from the $2.6 million incurred during the
twelve months ended January 31, 2004. For the twelve months ended January 31,
2005 versus the prior year, the Company incurred an additional $324,000 in legal
expenses related to updating our corporate governance policies under new SEC and
NASDAQ exchange rules, responding to a dissident shareholder's proposal,
activities in connection with a proxy contest, and for the 2004 annual meeting.
Other increases in the twelve months ended January 31, 2005 versus the twelve
months ended January 31, 2004 related to salary and payroll expenses, travel
expenses, insurance charges, and consulting services related to changes in
management, which were partially offset by lower expenses in other categories
over the prior year period.
Interest income and interest and other expenses
During the twelve months ended January 31, 2005, interest income from
investing the Company's cash in short term investments, decreased by $88,000 to
$66,000 over the comparable prior year period. The decrease in income was due to
lower cash balances to invest, and lower interest rates due to a revised
investment strategy minimizing market risk for the year ended January 31, 2005
over the twelve-month period ended January 31, 2004. Interest and Other Expenses
resulted in income of $10,000 for the twelve months ended January 31, 2005
versus expense in the amount of $5,000 in the comparable prior year period due
primarily to reductions in other expenses and less foreign exchange gains.
Provision for Income Taxes
The Company recorded a provision for income taxes related to foreign income
tax expense estimates for operations in Canada and the Philippines. The Company
does not record a tax benefit for U.S. tax purposes on any operating losses
incurred due to the deferred tax valuation allowance recorded as it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
Net Income (Loss) and Net Income (Loss) per Share
The Company had a net loss of $2.2 million or $0.31 per share for the
twelve months ended January 31, 2005, compared to net income of $11,000 for the
full year ended January 31, 2004. The net loss was due to the reasons described
in the preceding sections.
Year ended January 31, 2004 compared to year ended January 31, 2003
Net sales
Net sales for the year ended January 31, 2004 increased $4.0 million, or
4.0%, to $105.8 million from $101.7 million for the year ended January 31, 2003.
Net sales increased primarily due to increased sales of parts and components to
general aviation customers, as economic conditions improved slightly for the
general economy as a whole for the year, leading to slightly more flight
activity than the previous year, and increases in maintenance and repairs. Sales
to airlines were still affected by depressed industry conditions, and continued
additional security measures that especially affected the commercial airline
markets. In addition, as a result of economic and industry conditions, the
Company previously had tightened its credit policies, and this further
contributed to the decline in airline sales. The majority of the increase in
sales occurred in the U.S. market, but a significant improvement in sales growth
occurred in Asia, Europe and Canada. Sales to the Latin America region continued
to decline, partially due to continued economic weakness in that region, as well
as maintaining previously tightened credit policies toward customers in that
region.
Freight revenue is a component of net sales and it represents freight
billed to customers. Freight revenue for the year ended January 31, 2004
declined 15% to $2.4 million from $2.8 million for the year ended January 31,
2003. This was due to increased customer incentives resulting from promotional
activities and industry competition. This had an adverse effect on Gross Profit
as explained below in the section "Gross profit".
Sales to Original Equipment Manufacturers (OEM's) also increased over
the prior year as the Company continues to increase sales of supply chain
18
management services. The increase in revenues from supply chain management
services, is due to expanded offerings to existing customers for the year. These
contracts often are based upon a fee relative to the services provided, so the
impact on sales is less than if the Company was also selling the product itself.
However, the Company's investment in its personnel, facilities and systems are
scalable, so as services contracts increase throughput the Company's capacity
utilization will improve.
Cost of sales
Cost of sales consists of costs of inventory sold, direct costs to overhaul
and repair parts and components, and direct costs of providing services. Freight
costs for parts and components sold are also included in cost of sales. Costs of
sales for the year ended January 31, 2004 increased $3.0 million, or 3.6%, to
$86.2 million from $83.3 million for the year ended January 31, 2003. The
increase in cost of sales is due primarily to the increase in net sales of parts
and components. In addition, the increase in cost of sales was due to an
increase in freight expenses, and an increase in services contracts.
Gross profit
Gross profit for the year ended January 31, 2004 increased $1.0 million, or
5.8%, to $19.5 million from $18.5 million for the year ended January 31, 2003.
Gross profit margin increased to 18.5% from 18.2%. The increase in gross profit
was due principally to the increase in net sales, due to the reasons described
above under Net sales. Adding to this increase, which also was the reason for
the increase in the gross profit margin, was an increase in gross profit from
services contracts, which have a higher gross margin, as explained below.
A significant portion of the costs relating to services contracts are
indirect costs, including indirect personnel, warehouse and related, and
systems, and these costs are included in selling, general and administrative
expenses. Therefore, gross profit margins for services sales will be higher than
for product sales.
Gross profit is also impacted by net freight expenses, which represents
freight expense recorded in cost of sales, less freight billed to customers in
net sales. Net freight expenses decreased gross profit by 3.9% for the year
ended January 31, 2004, compared to a decrease of 1.8% in the prior year ended
January 31, 2003, due primarily to increased customer incentives from
promotional activities offering customers reduced, or eliminated, freight on
shipments. These promotional activities related to e-commerce sales and matching
industry competitors offering freight incentives to customers.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended January 31,
2004 decreased $0.6 million, or 3.5%, to $17.0 million from $17.6 million for
the year ended January 31, 2003. The decrease is due principally to decreases in
charges for estimated bad debts, offset by increases in charges for legal fees
due to increased litigation, insurance rate increases, expiration of local
government property tax incentives, and increased advertising expenses.
Corporate expenses
Corporate expenses for the year ended January 31, 2004 increased $0.2
million to $2.6 million from $2.4 million for the year ended January 31, 2003.
The increase was due principally to legal expenses related to general corporate
matters, and costs associated with the proxy contest conducted by a large
shareholder for the 2003 Annual Meeting.
Interest income and interest and other expenses
Interest income of $0.2 million earned during the year ended January 31,
2004 was derived from investing the Company's cash in short term investments.
The decrease from the $0.3 million earned during the year ended January 31,
2003, was due principally to lower cash balances in fiscal year 2004 as a result
of a cash dividend paid by the Company on January 31, 2003. Interest and other
expense was nil for the year ended January 31, 2004, from $0.1 million for the
year ended January 31, 2003, due to exchange gains on foreign currency
19
transactions by the Canadian subsidiary offsetting expenses for interest and
other expenses that were essentially unchanged from the amounts recorded for
prior year ended January 31, 2003.
(Provision) benefit for income taxes
For the fiscal year ended January 31, 2004, the Company recorded a benefit
from income taxes of $25,000. The benefit was from a $93,000 credit from a U.S.
federal refund received that is offset by foreign income tax expense estimates
for operations in Canada and the Philippines. The accrual for the refund
received was offset in its entirety by the valuation reserve that had been
recorded by the Company during the prior year, but changes to U.S. federal
income tax regulations during the year just ended allowed the Company to carry
back the benefit to prior years, and receive a refund. The effective benefit
rate of 178.6% for the year ended January 31, 2004 is the result of the tax
benefit from the U.S. federal refund received, state tax benefits, and changes
in the deferred tax valuation allowance due primarily to depreciation expenses.
Income (loss) from continuing operations
For the year ended January 31, 2004 the Company earned $11,000 from
continuing operations, compared to a loss of $3.2 million for the year ended
January 31, 2003. The increase in income is primarily the result of higher sales
and gross profit, and reductions in selling, general and administrative expenses
as described in the foregoing paragraphs, as well as the recording of the tax
valuation reserve in the prior year.
Net income (loss) and Net income (loss) per share
The Company earned $11,000, which is $0.00 per share for the year ended
January 31, 2004, as compared to a net loss of $5.9 million, or $0.82 per share
for the year ended January 31, 2003. The net income and increase in net income
are due principally to the reasons described above.
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.
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, 2005 was principally
the result of the operating loss, purchases of equipment and software, and
making accelerated payments to obtain vendor price discounts. The Company
believes it maintains a strong balance sheet.
The Company's cash provided by (used in) operations for the years ended
January 31, 2005, 2004 and 2003 was $(1.5) million, $(0.6) million, and $3.4
million, respectively. Cash used in operations for the year ended January 31,
2005 was impacted by the operating losses, an increase in accounts receivable
due to the increase in sales for the year, and the reduction in payables
resulting from the Company pursuing vendor price discounts aggressively in the
fourth quarter. Cash used in investing activities for the years ended January
31, 2005, 2004 and 2003 was $(1.0) million, $(0.4) million, and $(0.9) million,
respectively. Cash used in investing activities for the years ended January 31,
2005, 2004, and 2003 was related to purchases of fixed assets. Cash provided by
(used in) financing activities for the years ended January 31, 2005, 2004 and
2003 was nil, $1,000, and $(7.7) million, respectively. Cash used in financing
activities for the year ended January 31, 2003 includes $7.3 million to pay
stockholders a special cash dividend of $1.00 per share, and $0.5 million to pay
down long-term debt and capital lease obligations.
First Aviation's aggregate cash used for capital expenditures for the years
ended January 31, 2005, 2004 and 2003 was $1.0 million, $0.5 million, and $0.9
million, respectively. The increase in capital requirements in fiscal 2005 and
planned expenditures in fiscal 2006 is the result of current upgrades to the
Company's systems and equipment to handle current requirements and support the
Company's growth and expansion. For fiscal year 2006 the amount required for
20
capital expenditures currently is expected to range between $2.5 million and
$3.0 million. Management expects to fund these requirements from cash on hand,
cash flows from operations, and from borrowings.
API has a $20 million revolving line of credit through a Commercial
Revolving Loan and Security Agreement (the "Facility"). Borrowings under this
Facility bear interest equal to the LIBOR rate plus 1.5% and are limited to
specified percentages of eligible trade receivables and inventories of API. The
Facility 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 Facility, the payment of dividends
on API's common stock is prohibited, except with the lender's consent, and API
is required to maintain minimum levels of net worth and specified interest
expense coverage ratios. For the three months ended January 31, 2005, API failed
to maintain the specified interest expense coverage ratios, which were adversely
impacted by charges for the three months ended January 31, 2005 (charges which
the Company does not anticipate to recur). The Company obtained a waiver from
the borrower for the violation of the covenant. Substantially all of API's
domestic assets are pledged as collateral under the Facility, and First Aviation
guarantees all borrowings under the Facility. Borrowings under the Facility were
$14.5 million at January 31, 2005, at an interest rate of approximately 4.1%. Of
the $14.5 million, $10.5 million represented a draw on the Facility just prior
to January 31, 2005, and in February and March 2005 the Company repaid all of
the borrowings that were outstanding at year-end. The Company regularly draws
down on the Facility just prior to quarter end and year end, holds the cash, and
then repays the amount drawn shortly after the quarter end or year end. The
purpose of these draw downs is to indicate that the Company has access to cash
for potential acquisitions or other investment opportunities that may arise. An
additional total of approximately $2.0 million was available to borrow under the
Facility at January 31, 2005. During the quarter ended July 31, 2004, API
extended the maturity date of the Facility to July 1, 2006 from July 1, 2005.
The extension of the agreement was on the same terms and conditions as the prior
Facility. As a result of the extension, borrowings under the Facility continue
to be classified as long-term. Management believes that the carrying amount of
the Company's borrowings approximates fair market value because the interest
rate is variable and resets frequently.
Based upon current and anticipated levels of operations, the Company
believes that its cash on hand and cash flow from operations, combined with
borrowings available under its line of credit, will be sufficient to meet its
current and anticipated cash operating requirements through the year ending
January 31, 2006, including scheduled interest payments, working capital needs,
capital expenditures and subsidiary preferred dividend requirements.
On January 6, 2003, the Company announced that its Board of Directors, in
light of the Company's cash position, had approved a special cash dividend of
$1.00 per share. The dividend was paid on January 30, 2003. The total paid was
$7.3 million. The Company previously had not declared nor paid any cash
dividends or distributions on its common stock since its inception in 1997. In
addition, API's credit facility prohibits the payment of cash dividends from it
to First Aviation without the lender's consent. At this time, the Company
anticipates that all future earnings will be retained for use in the Company's
business. Any payment of cash dividends in the future on the Company's common
stock will be dependent upon the Company's financial condition, its results of
operations, current and anticipated cash requirements, plans for expansion, the
ability of its subsidiaries to pay dividends or otherwise make cash payments or
advances to it (as described above), and restrictions, if any, under any future
debt obligations, as well as any other factors that the Board of Directors deems
relevant.
In 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 were made from time to time in open
market transactions, block purchases, and privately negotiated transactions or
otherwise at prices prevailing at the time of the repurchase.
During the years ended January 31, 2002 and 2001, respectively, the Company
repurchased 1,100 and 1,023,398 shares of its common stock. No shares of common
stock have since been repurchased by the Company. Common stock reacquired to
date under the Company's share repurchase program totaled 2,024,498 shares at
January 31, 2005, with an aggregate cost of approximately $10.7 million, or
$5.29 per share. Approximately 94,000 shares still may be repurchased under this
program.
The Company acquired API's domestic distribution business from AMR Combs,
Inc. ("AMR Combs") in 1997. In conjunction with this acquisition, AMR Combs
purchased preferred stock of API, convertible into ten percent of the common
stock of API as of the date of conversion, prior to any dilution (the "Preferred
Stock"). In addition, First Aviation, API and AMR Combs entered into a
Stockholders Agreement. Pursuant to this agreement, API has the right to redeem
the Preferred Stock at any time. AMR Combs has the right to cause the Company to
repurchase the Preferred Stock. The redemption price is equal to the fair market
21
value of the Preferred Stock as determined by an independent appraisal. The
Stockholders Agreement also contains certain other rights, including: (i) a
right of first refusal on the part of First Aviation with respect to any
proposed sale of the Preferred Stock; (ii) the right of First Aviation to
require AMR Combs to participate, on a pro rata basis, with it in the sale of
the capital stock of API to a third party; (iii) the right of AMR Combs to elect
to participate, on a pro rata basis, in the sale of the capital stock of API to
a third party; and (iv) piggyback and demand registration rights granted to AMR
Combs with respect to the Preferred Stock. The demand registration rights became
exercisable in March 2000. If API has not previously closed an underwritten
public offering of its common stock at the time AMR Combs elects to exercise its
demand registration rights, API may elect to treat the demand as an exercise by
AMR Combs of its put option with respect to the Preferred Stock. There are no
plans to cause API to conduct a public offering of its securities.
On March 5, 1999, AMR Combs was acquired by Signature Flight Support, an
affiliate of BBA Group Plc.
Inflation
The Company does not believe that the relatively moderate levels of
inflation that have been experienced in the United States have had a significant
impact on its revenues or operations.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K.
22
Contractual Obligations
The following table sets forth the Company's contractual obligations as of
January 31, 2005:
Payments due by period
Less than 1-3 3-5 More than
(Amounts in thousands) Total 1 year years years 5 years
------------ ------------- ------------ ----------- ------------
Long-Term Debt Obligations (1) $ 14,500 $ - $ 14,500 $ - $ -
Capital Lease Obligations - - - - -
Operating Lease Obligations (2) 5,178 927 1,698 1,178 1,375
Purchase Obligations (3) 15,841 15,841 - - -
Other Long-Term Liabilities (4) 1,041 - - - 1,041
Total $ 36,560 $ 16,768 $ 16,198 $ 1,178 $ 2,416
Notes to Contractual Obligations Data:
(1) Long-term debt consists of API's revolving line of credit
through a Commercial Revolving Loan and Security Agreement as
described in Liquidity and Capital Resources, above.
(2) Operating leases includes minimum rental payments under noncancellable
operating leases of one year or longer.
(3) 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.
(4) Other long-term liabilities represent a minority interest in
subsidiary consisting of preferred stock, at face value, in the
Company's principal subsidiary, Aerospace Products International,
Inc., which was purchased by AMR Combs Inc. and is now held by
Signature Flight Support, an affiliate of BBA Group Plc., the acquirer
of AMR Combs, Inc. as described in Liquidity and Capital Resources,
above.
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,
2005, with all other variables held constant. A 10% strengthening of the
Canadian dollar versus the U.S. dollar would result in a decrease of
approximately $81,000 in the net liability position of financial instruments at
January 31, 2005. A 10% weakening of the Canadian dollar versus the U.S. dollar
would result in a increase of approximately $87,000 in the net liability
position of financial instruments at January 31, 2005. During the twelve months
ended January 31, 2005 the Company experienced a comprehensive gain of $136,000,
due to an increase in the value of the Canadian dollar relative to the U.S.
dollar. The Company did not experience any significant changes in market risk
during the twelve months ended January 31, 2005. 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.
23
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 officers, 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, 2005. 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, 2005.
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, 2005, 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.
24
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Other than information with respect to First Aviation's executive officers,
which is set forth after Item 4 of Part I of this Form 10-K, the information
required to be disclosed pursuant to this Item 10 is incorporated in its
entirety herein by reference to the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
Item 11. Executive Compensation
- ---------------------------------
The information required to be disclosed pursuant to this Item 11 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 12. Security Ownership of Certain Beneficial Owners and Management, and
- ------------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
The information required to be disclosed pursuant to this Item 12 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
The information required to be disclosed pursuant to this Item 13 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last fiscal
year.
Item 14. Principal Accountant Fees & 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.
25
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules, and Reports on Form 8-K
- ----------------------------------------------------------------------------
(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 to the First Aviation Services Inc. Stock Incentive
Plan (filed as exhibit 10.39 to Company's Annual Report on Form 10-K
for the year ended January 31, 1998 (No. 0-21995), and incorporated
herein by reference).
10.8 Commercial Revolving Loan and Security Agreement, dated March 30,
2000, by and between Hudson United Bank and Aerospace Products
International, Inc. (filed as Exhibit 10.43 to the Company's Annual
Report on Form 10-K for the year ended January 31, 2000 (No. 0-21995),
and incorporated herein by reference).
26
10.9 Guaranty, dated as of March 30, 2000, between First Aviation Services
Inc. and Hudson United Bank (filed as Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2000 (No.
0-21995), and incorporated herein by reference).
10.10 Second Amendment to Commercial Revolving Loan and Security Agreement
dated as of April 27, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2001 (No. 0-21995), and incorporated herein by reference).
10.11 Second Reaffirmation of Guaranty dated as of April 27, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 2001 (No. 0-21995), and incorporated
herein by reference).
10.12 Third Amendment to Commercial Revolving Loan and Security Agreement
dated as of June 28, 2001 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2001(No. 0-21995), and incorporated herein by reference).
10.13 Third Reaffirmation of Guaranty dated as of June 28, 2001 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2001(No. 0-21995) , and incorporated
herein by reference).
10.14 * Amendment No. 2 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 4.5 to the Company's Form S-8 (No. 333-25915)
on September 20, 2001, and incorporated herein by reference).
10.15 Letter, effective February 1, 2002, by and between First Equity
Development Inc. and its affiliates and First Aviation Services Inc.
regarding pursuit of acquisition opportunities (filed as Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended January
31, 2002 (No. 0-21995), and incorporated herein by reference).
10.16 Engagement Letter between First Equity Development Inc. and its
affiliate, FED Securities Inc., and First Aviation Services Inc.
effective February 1, 2002 (filed as Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2002 (No.
0-21995), and incorporated herein by reference).
10.17 Fourth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2002 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2002 (No. 0-21995), and incorporated herein by reference).
10.18 Fourth Reaffirmation of Guaranty dated as of July 31, 2002 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2002 (No. 0-21995), and incorporated
herein by reference).
10.19 Fifth Amendment to Commercial Revolving Loan and Security Agreement
dated as of July 31, 2003 between Hudson United Bank and Aerospace
Products International, Inc. (filed as Exhibit 10.19 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2003 (No. 0-21995), and incorporated herein by reference).
10.20 Fifth Reaffirmation of Guaranty dated as of July 31, 2003 by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2003 (No. 0-21995), and incorporated
herein by reference).
10.21 Amendment No. 3 to the First Aviation Services Inc. Stock Incentive
Plan (filed as Exhibit 10.21 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended July 31, 2003 (No. 0-21995), and
incorporated herein by reference).
27
10.22 * Employment Agreement, dated as of October 7, 2003, between the
Company and Robert G. Costantini (filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended January 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.23 * Form of Incentive Stock Option Award Agreement Letter Pursuant to
the 1997 Stock Incentive Plan (filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.24 * Officer Indemnification Agreement dated as of October 27, 2003
between the Company and Robert G. Costantini (filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended January
31, 2004 (No. 0-21995), and incorporated herein by reference).
10.25 * Employment Agreement, dated as of February 2, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.26 * Amendment to Employment Agreement, dated as of April 5, 2004,
between Aerospace Products International, Inc. and Paul J. Fanelli
(filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended January 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.27 * Relocation Agreement, dated as of February 16, 2004, between
Aerospace Products International, Inc. and Paul J. Fanelli (filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 (No. 0-21995), and incorporated herein by
reference).
10.28 Sixth Amendment to Commercial Revolving Loan and Security Agreement,
dated as of July 31, 2004, between Hudson United Bank and Aerospace
Products International Inc. (filed as Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 31,
2004 (No. 0-21995), and incorporated herein by reference).
10.29 Sixth Reaffirmation of Guaranty dated as of July 31, 2004, by First
Aviation Services Inc. and in favor of Hudson United Bank (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2004 (No. 0-21995), and incorporated
herein by reference).
10.30 * Amendment dated May 14, 2004 to the Relocation Agreement dated
February 16, 2004 between Aerospace Products International Inc. and
Paul J. Fanelli (filed as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 31, 2004 (No.
0-21995), and incorporated herein by reference).
10.31 * Compensation Arrangements with Certain Executive Officers
10.32 * Compensation of Non-Employee Directors
10.33 Description of Amendement to Letter Regarding Pursuit of Acquistion
Opportunities.
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).
28
* Management contracts or compensatory plans or arrangements.
29
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 2, 2005
FIRST AVIATION SERVICES INC.
By: /s/ Robert G. Costantini
------------------------
Robert G. Costantini
Chief Financial Officer
(Principal Financial and Accounting Officer)
Signature Title Date
- --------- ----- ----
/s/ Aaron P. Hollander Chairman of the Board May 2, 2005
- --------------------------
Aaron P. Hollander
/s/ Michael C. Culver Chief Executive Officer and May 2, 2005
- -------------------------- Director (Principal Executive Officer)
Michael C. Culver
/s/ Stanley J. Hill Director May 2, 2005
- --------------------------
Stanley J. Hill
/s/ Robert L. Kirk Director May 2, 2005
- --------------------------
Robert L. Kirk
/s/ Joseph J. Lhota Director May 2, 2005
- --------------------------
Joseph J. Lhota
30
First Aviation Services Inc.
Consolidated Financial Statements
For the years ended January 31, 2005, 2004 and 2003
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm.......................F2
Consolidated Financial Statements:
Consolidated Balance Sheets...................................................F3
Consolidated Statements of Operations.........................................F4
Consolidated Statements of Stockholders' Equity...............................F5
Consolidated Statements of Cash Flows.........................................F6
Notes to Consolidated Financial Statements................................F7-F20
Schedule II -- Valuation and Qualifying Accounts.............................F20
F1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Aviation Services Inc.
We have audited the accompanying consolidated balance sheets of First Aviation
Services Inc. as of January 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2005. 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 audit
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
Conmpany'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, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2005, 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.
As discussed in Note 9 to the consolidated financial statements, the Company
changed its method of accounting for goodwill effective February 1, 2002.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 31, 2005
F2
First Aviation Services Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
January 31,
Assets 2005 2004
---------- ----------
Current assets:
Cash and cash equivalents $ 22,584 $ 25,144
Trade receivables, net 14,563 13,499
Inventories, net 24,156 22,344
Prepaid expenses and other 900 1,032
---------- ----------
Total current assets 62,203 62,019
Plant and equipment, net 2,996 2,963
---------- ----------
Total Assets $ 65,199 $ 64,982
========== ==========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 10,495 $ 9,561
Accrued compensation and related expenses 1,205 1,116
Other accrued liabilities 2,424 1,260
Income taxes payable 900 939
---------- ----------
Total current liabilities 15,024 12,876
Long-term debt 14,500 14,500
Minority interest in subsidiary 1,041 1,041
---------- ----------
Total liabilities 30,565 28,417
Stockholders' equity
Common stock, $0.01 par value, 25,000,000 shares
authorized, 9,135,699 shares issued 91 91
Additional paid-in capital 38,318 38,375
Retained earnings 5,325 7,554
Accumulated other comprehensive income 374 238
---------- ----------
44,108 46,258
Less: Treasury stock, at cost, 1,814,191 and
1,851,606 shares, respectively (9,474) (9,693)
---------- ----------
Total stockholders' equity 34,634 36,565
---------- ----------
Total liabilities and stockholders' equity $ 65,199 $ 64,982
========== ==========
See accompanying notes.
F3
First Aviation Services Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year ended January 31,
--------------------------------
2005 2004 2003
---------- ---------- ----------
Net sales $ 124,249 $ 105,777 $ 101,737
Cost of sales 103,525 86,241 83,264
---------- ---------- ----------
Gross profit 20,724 19,536 18,473
Selling, general and administrative expenses 19,973 17,032 17,656
Corporate expenses 2,893 2,625 2,394
---------- ---------- ----------
Loss from operations (2,142) (121) (1,577)
Interest income 66 154 273
Interest and other income (expense) 10 (5) (67)
Minority interest in subsidiary (42) (42) (42)
---------- ---------- ----------
Loss before income taxes (2,108) (14) (1,413)
(Provision) benefit for income taxes (121) 25 (1,786)
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of accounting change (2,229) 11 (3,199)
Cumulative effect of accounting change