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FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Quarterly or Transitional Report
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended April 30, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________ to ____________
Commission File Number 0-21995
-------
FIRST AVIATION SERVICES INC.
(Exact name of registrant as
specified in its charter)
Delaware 06-1419064
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Riverside Avenue, Westport, Connecticut, 06880-4214
------------------------------------------------------
(Address of principal executive offices)
(203) 291-3300
--------------
(Issuer's telephone number)
_________________________________________________________________
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
The number of shares outstanding of the registrant's common stock as of June 1,
2004 is 7,296,960 shares.
First Aviation Services Inc.
Index
Part I - Financial Information
------------------------------
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets.................................3
Consolidated Condensed Statements of Operations.......................4
Consolidated Condensed Statements of Cash Flows.......................5
Notes to Consolidated Condensed Financial Statements................6-8
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Liquidity and Capital Resources..........9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risks..........13
Item 4. Controls and Procedures..............................................13
Part II - Other Information
----------------------------
Other Information.............................................................14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
First Aviation Services Inc.
Consolidated Condensed Balance Sheets
(in thousands, except share amounts)
April 30, January 31,
2004 2004
----------- ------------
(unaudited) *
Assets
Current assets:
Cash and cash equivalents $23,745 $25,144
Trade receivables, net of allowance for doubtful
accounts of $1,411 and $1,418, respectively 15,164 13,499
Inventory, net of allowance for obsolete and slow
moving
inventory of $938 and $1,013, respectively 21,492 22,344
Prepaid expenses and other 1,001 1,032
----------- ------------
Total current assets 61,402 62,019
Plant and equipment, net 3,019 2,963
----------- ------------
$64,421 $64,982
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $11,331 $9,561
Accrued compensation and related expenses 861 1,116
Other accrued liabilities 1,409 1,260
Income taxes payable 942 939
----------- ------------
Total current liabilities 14,543 12,876
Revolving line of credit 12,650 14,500
Minority interest in subsidiary 1,041 1,041
----------- ------------
Total liabilities 28,234 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 38,358 38,375
Retained earnings 7,144 7,554
Accumulated other comprehensive income
(loss) 211 238
----------- ------------
45,804 46,258
Less: Treasury stock, at cost, 1,838,739 and
1,851,606
shares, respectively (9,617) (9,693)
----------- ------------
Total stockholders' equity 36,187 36,565
----------- ------------
Total liabilities and stockholders' equity $64,421 $64,982
=========== ============
See accompanying notes.
* Balances were derived from the audited balance sheet as of January 31, 2004.
3
First Aviation Services Inc.
Consolidated Condensed Statements of Operations (Unaudited)
(in thousands, except share amounts)
Three months ended
April 30,
2004 2003
----------- -----------
Net sales $30,215 $25,605
Cost of sales 24,603 20,731
----------- -----------
Gross profit 5,612 4,874
Selling, general and administrative expenses 4,990 4,266
Corporate expenses 930 490
----------- -----------
Income (loss) from operations (308) 118
Net interest income (expense) and other (82) 89
Minority interest in subsidiary (10) (10)
----------- -----------
Income (loss) before income taxes (400) 197
Provision for income taxes (10) (77)
----------- -----------
Net income (loss) $(410) $120
=========== ===========
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution:
Basic net income (loss) per share, and net income (loss)
per share - assuming dilution $(0.06) $0.02
=========== ===========
Weighted average shares outstanding - basic 7,290,048 7,251,355
=========== ===========
Weighted average shares outstanding - assuming
dilution n/a 7,258,903
=========== ===========
See accompanying notes.
4
First Aviation Services Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)
(in thousands)
Three months ended
April 30,
2004 2003
--------- ---------
Cash flows from operating activities
Net income (loss) $(410) $120
Adjustments to reconcile net income (loss) to net
cash from operating activities - non-cash charges:
Depreciation and amortization 232 339
Compensation paid through issuance of stock 58 4
(Increase) decrease in current assets:
Trade receivables (1,708) 395
Inventory 816 368
Prepaid and other 28 (417)
Increase (decrease) in current liabilities:
Accounts payable 1,771 447
Accrued compensation and related expenses, and other
accrued liabilities (32) (151)
Income taxes payable (4) 75
--------- ---------
Net cash provided by operating activities 751 1,180
Cash flows from investing activities
Purchases of plant and equipment (292) (127)
Disposals of plant and equipment 2 -
--------- ---------
Net cash used in investing activities (290) (127)
Cash flows from financing activities
Borrowings on revolving line of credit 12,650 14,500
Repayments on revolving line of credit (14,500) (14,500)
Principal payments on capital lease obligations and other - (6)
--------- ---------
Net cash used in financing activities (1,850) (6)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,389) 1,047
Effect of exchange rates on cash (10) 35
Cash and cash equivalents at beginning of period 25,144 26,013
--------- ---------
Cash and cash equivalents at end of period $23,745 $27,095
========= =========
Supplemental cash flow disclosures:
Interest paid $14 $13
Income taxes paid $19 $-
See accompanying notes.
5
First Aviation Services Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(in thousands, except share amounts)
April 30, 2004
1. Basis of Presentation
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries Aircraft Products 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 the aviation industry include the sale of aircraft
parts and components, the provision of supply chain management services,
overhaul and repair services for brakes and starter/generators, and the assembly
of custom hoses. The Company's principal executive offices are located at 15
Riverside Avenue, Westport, Connecticut 06880. Customers of the Company include
original equipment manufacturers, aircraft manufacturers, passenger and cargo
airlines, fleet operators, corporate aircraft operators, flight training
schools, fixed base operators, certified repair facilities, governments and
military services. The accompanying unaudited consolidated condensed financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information, and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required for complete financial statements. In the opinion of management, all
material adjustments, including the elimination of intercompany balances and
transactions, and normal recurring accruals considered necessary for a fair
presentation, have been included in the accompanying unaudited consolidated
condensed financial statements. Operating results for the three months ended
April 30, 2004 are not necessarily indicative of the results that may be
expected for the full fiscal year ending January 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended January 31, 2004.
2. Weighted Average Shares Outstanding - Assuming Dilution
The following sets forth the denominator used in the computation of net income
(loss) per share - assuming dilution:
Three months ended
April 30,
2004 2003
------------ ------------
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 7,290,048 7,251,355
Effect of dilutive employee stock options 9,122 7,548
------------ ------------
Denominator for net income (loss) per
share - assuming dilution, adjusted
weighted average shares and assumed 7,299,170 7,258,903
dilutions
============ ============
3. Stock Options Issued to Employees
In lieu of cash, the Company's directors elect to receive their compensation in
the form of the Company's stock. The value of stock issued is equivalent to the
compensation expense, and the number of shares issued is based upon the fair
market value per share at the date issued. For the three months ended April 30,
2004 and April 30, 2003, the Company issued 12,867 and 880 shares respectively,
to directors in lieu of board fees.
6
The Company generally grants stock options to its employees for a fixed number
of shares with an exercise price equal to the fair market value of the stock on
the date of grant. As permitted under Statement of Financial Accounting Standard
No. ("FAS") 123, "Accounting for Stock-Based Compensation", the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for stock
awards to employees. No compensation expense was recognized during the three
months ending April 30, 2004 and 2003 since all grants were issued at the fair
market value of the Company's common stock at the date of grant.
The Company is required to disclose the fair value, as defined, of options
granted to employees and the related compensation expense. The fair value of the
stock options granted was estimated at the date of grant using a Black-Scholes
option-pricing model. The Black-Scholes option-pricing model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. In management's opinion, because the Company's employee stock
options are not publicly traded, and have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
The fair value of each option issued was estimated at the date of grant using
the following assumptions for the three months ended April 30:
2004 2003
----------------- ---------------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 3.6% 2.0%
Expected volatility 31.9% 37.8%
Expected life of option 5.0 years 5.0 years
Weighted-average fair value of
options granted during the quarter $ 1.56 $ 0.99
Using the above noted assumptions and the weighted-average fair value of each
option granted, the net income (loss) and earnings (loss) per share that would
have been recorded if the estimated fair value of options granted had been
recorded as an expense was:
Three months ended
April 30,
2004 2003
--------------- --------------
Net income (loss) as reported $ (410) $ 120
Pro forma net compensation expense for
issuance of stock options 19 30
--------------- --------------
Pro forma net income (loss) $ (429) 90
=============== ==============
Basic net income (loss) per share, and net
income (loss) per share - assuming dilution
as reported $ (0.06) $ 0.02
Pro forma basic net income (loss) per share,
and net income (loss) per share - assuming
dilution $ (0.06) $ 0.01
=============== ==============
7
4. Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) resulted from the translation
of accounts into U.S. dollars where the functional currency is the Canadian
dollar. The decrease during the three months ended April 30, 2004 was due to an
increase in the value of the U.S. dollar relative to the Canadian dollar.
Comprehensive income (loss) for the periods shown was as follows:
Three months ended
April 30,
2004 2003
-------------- --------------
Net income (loss) as reported $ (410) $ 120
Pro forma net impact of foreign currency
translation adjustments - gain (loss) (27) 180
-------------- --------------
Comprehensive net income (loss) $ (437) $ 300
============== ==============
5. 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 and the uncertainty
involving the future use of these tax benefits. If the Company did not record
the deferred tax valuation allowance, the effective income tax rate (benefit)
for the three months ended April 30, 2004 would be 39%. The effective income tax
rate for the three months ended April 30, 2003 was 39%. Management will evaluate
the Company's income tax position as the year progresses and expects to adjust
the rate as necessary.
6. Related Parties
The Company and First Equity Development Inc. ("First Equity"), the wholly-owned
subsidiary of First Equity Group, Inc., the majority stockholder of the Company,
have an advisory agreement on a month-to-month basis effective February 1, 2004.
Pursuant to the terms of this agreement, First Equity provides the Company with
investment and financial advisory services relating to potential acquisitions
and other financial transactions. The agreement can be terminated by either
party upon 30 days written notice to the other party. During each of the three
months ended April 30, 2004, and 2003, the Company paid First Equity retainer
fees of $90, and no Success Fee.
The Company and First Equity have entered into an arrangement whereby First
Equity provides the Company with various additional services to assist the
Company. These services are not part of the advisory agreement, described above,
but derive from the work First Equity performs under the agreement. Therefore,
First Equity does not charge the Company additional fees in connection with the
provision of such services. These services include (i) detailed financial
modeling for new business proposals, (ii) Board of Directors presentation
analysis, (iii) investor relations marketing and presentations, (iv) various
analysis for API, including benchmarking, financial analysis, and competetive
market analyses, and (v) other financial analyses for the Company, including
stock buy-back, valuations, and capital structure analyses. The Company's CEO
and CFO have unlimited access to these resources when requested.
The Company subleases from First Equity approximately 3,000 square feet of
office space in Westport, Connecticut. The leased space is utilized by the
Company as its corporate headquarters. First Equity also utilizes space in the
same premises. The sublease, which became effective April 21, 1997, is for a
period of ten years, and is cancelable by either party with six months notice.
The Company has the option to renew the sublease for two additional five-year
periods. Lease payments under this sublease totaled approximately $20, for each
of the three months ended April 30, 2004, and 2003.
The Company and First Equity share certain common expenses that arise from
sharing office space in Westport, CT. The amounts are included in the Company's
corporate expenses, and include expenses such as telephone, computer consulting,
office cleaning, office supplies and utilities. The allocations are reviewed by
the Company's CFO and the Controller of First Equity each month. In addition, a
member of the Company's Audit Committee reviews the allocation of expenses
quarterly. In addition, the amounts reimbursed by the Company are the actual
costs incurred for the expense. The Company reimbursed First Equity, $11, and
$16, for the three months ended April 30, 2004, and 2003 respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition, Results
- --------------------------------------------------------------------------------
of Operations and Liquidity and Capital Resources
- -------------------------------------------------
Safe Harbor Statement Under the Private Securities Litigation Reform of
Act 1995.
Certain statements discussed in Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", Item 3, "Quantitative and
Qualitative Disclosures about Market Risks", Item 1 of Part II, "Legal
Proceedings" and elsewhere in this this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
statements of historical facts, but rather reflect the Company's current
expectations concerning future events and results. Such forward-looking
statements, including those concerning the Company's expectations, involve
known and unknown risks, uncertainties and other factors, some of which are
beyond the Company's control, that may cause the Company's actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, at a minimum, 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, and other items that are beyond the Company's control
and may cause actual results to differ from management's expectations. In
addition, specific consideration should be given to the various factors
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in the Company's Annual Report on Form
10-K for the year ended January 31, 2004. We disclaim any obligation or
undertaking to provide any updates or revisions to any forward-looking
statement to reflect any change in our expectations or any change in events,
conditions, or circumstances on the which the forward-looking statement is
based.
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 the aviation industry include the sale of aircraft
parts and components, the provision of supply chain management services,
overhaul and repair services for brakes and starter/generators, and the assembly
of custom hoses.
The Company's principal executive offices are located at 15 Riverside Avenue in
Westport, Connecticut 06880. Certain filings that First Aviation makes with the
U.S. Securities and Exchange Commission are available on First Aviation's
corporate website at www.favs.com. These public filings also can be obtained by
calling our investor relations department, or by e-mail at
first@firstaviation.com.
Critical Accounting Policies
There have been no significant changes in those accounting policies the Company
considers critical from those described under the caption "Critical Accounting
Policies", included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in the Company's Annual Report
on Form 10-K for the year ended January 31, 2004.
Results of Operations
Net Sales
The Company's net sales consist of sales of services to the aviation industry,
including parts and components supply services, supply chain management
services, and component overhaul and repair services. Net sales are recorded
when parts and components are shipped and title transfers to the customer, when
9
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.
Net sales for the three months ended April 30, 2004 increased $4.6 million, or
18.0%, to $30.2 million from $25.6 million for the three months ended April 30,
2003. During the three months ended April 30, 2004 net sales of parts and
components increased in a majority of the customer sectors the Company serves,
compared to the comparable period of the prior year, with general aviation,
corporate flight departments, large corporate maintenance, repair and overhaul
facilities, retail, and airline sectors mainly contributing to the increase. The
increases are attributable to the rebound of global air traffic in the latter
half of 2003 from depressed levels as well as an improving overall economy,
leading to increases in the corresponding need for maintenance and repairs.
Sales to airlines, while improving over previously low levels, are still
affected by difficult industry conditions, and continued additional security
measures that especially affected the commercial airline markets. Sales of
services to customers for providing supply chain management services were flat
compared to the prior year period.
The majority of the increase in sales occurred in the U.S. market, although
increases in sales growth also occurred for various customer sectors served in
Asia and Canada. Sales in Asia to all customer sectors served improved for the
three months ended April 30, 2004 over the prior year period ended April 30,
2003. Leading the increases were general aviation and airlines sales due to
improving market conditions for general aviation and more airline activity in
the Asia region, than existed in the prior year period. Sales in Canada improved
primarily in the general aviation customer sector, which represents the bulk of
sales in Canada, but there were also improvements in the airline customer
sector. Sales in Europe improved in the customer sectors for general aviation
and large corporate maintenance, repair and overhaul, but were offset by
reductions in the airline customer sector. The Latin America region also had
sales increases in the airline customer sector, over the prior period, but this
was offset by declines in the general aviation customer sectors. The Company
continues to be cautious with respect to providing credit to customers in the
Latin American region, and this has a negative impact on sales.
Freight revenue is a component of net sales and it represents freight billed to
customers. Freight revenue for the three months ended April 30, 2004 increased
4% to $596,000 from $572,000 for the three months ended April 30, 2003. This
increase was primarily due to the increase in sales, however at a
disproportionately lower rate of increase, due to increases in customer
incentives resulting from promotional activities and industry competition.
Sales to Original Equipment Manufacturers (OEM's) were level for the three
months ended April 30, 2004 over the prior year period ended April 30, 2003, as
the Company did not add to its existing customer contracts.
Cost of Sales
Cost of sales consists of costs of inventory sold, direct costs to overhaul and
repair parts and components, and direct costs of providing services. Freight
costs for parts and components sold are also included in cost of sales.
Cost of sales for the three months ended April 30, 2004 increased $3.9 million,
or 18.7%, to $24.6 million from $20.7 million for the three months ended April
30, 2003. Cost of sales for the three months ended April 30, 2004 increased
compared to the prior year principally due to the increase in net sales. In
addition, the increase in cost of sales was due to an increase in freight
expenses for products delivered to customers.
The increase in the percentage of cost of sales compared to net sales for the
three months ended April 30, 2004 compared to the three months ended April 30,
2003, was due to the increase in sales of products and components versus supply
chain management services contracts, the latter representing a larger share of
the mix in the prior year period versus the current year period.
10
Gross Profit
Gross profit for the three months ended April 30, 2004 increased $0.7 million,
or 15.1%, to $5.6 million from $4.9 million for the three months ended April 30,
2003, due to the increase in sales in the current year quarter versus the prior
year quarter. Gross profit as a percentage of net sales decreased to 18.6% for
the three months ended April 30, 2004, from 19.0% for the three months ended
April 30, 2003. Gross profit margin for the three months ended April 30, 2004
decreased compared to the comparable period of the prior year principally due to
an increase in the mix in sales of parts and components which have a lower gross
profit margin relative to supply chain management contracts.
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 3.6% for the three months
ended April 30, 2004, compared to a decrease of 2.7% in the three month period
ended April 30, 2003, due primarily to increased customer incentives from
promotional activities offering customers reduced freight on shipments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended April
30, 2004 increased $0.7 million, or 17.0% to $5.0 million from $4.3 million for
the three months ended April 30, 2003. The increase is primarily due to
increases in salaries and payroll costs related to increases in sales personnel,
and the implementation of a new customer initiative requiring additional
temporary warehouse personnel costs. Other expenses contributing to the increase
in expenses for the three months ended April 30, 2004 over the three months
ended April 30, 2003, include sales related travel expenses, expenses related to
the departure of personnel, and legal expenses related to general legal matters
and ongoing litigation.
Corporate Expenses
Corporate expenses for the three months ended April 30, 2004 increased $0.4
million, or 89.8%, to $0.9 million, from $0.5 million incurred during the three
months ended April 30, 2003. For the three months ended April 30, 2004 over the
prior year quarter, the Company incurred an additional $208,000 in legal
expenses related to updating our corporate governance policies under new SEC and
NASDAQ exchange rules, responding to a dissident shareholder's proposal, and
activities in connection with a proxy contest for the 2004 annual meeting. Other
increases in the current year quarter over the prior year quarter related to
salary and payroll expenses of $84,000, travel expense of $16,000, consulting
services related to changes in management $73,000, and general legal expenses of
$13,000.
Net Interest Income (Expense) and Other
During the three months ended April 30, 2004, interest income from investing the
Company's cash in short term investments, decreased $71,000 to $10,000, compared
to $81,000 in the comparable period of the prior year. The decrease was due to
an adjustment to invested cash equivalent balances in the quarter ended April
30, 2003. In addition, the decrease was also due to lower cash balances to
invest, and lower interest rates, in the current year quarter ended April 30,
2004 over the prior year quarter ended April 30, 2003. Other expense increased
$97,000 in the three months ended April 30, 2004 to $76,000, as a gain on
foreign currency exchange of $21,000, in the three months ended April 30, 2003,
moved to a loss on foreign currency exchange of $76,000, due primarily to a
weakening Canadian dollar that is used as the functional currency of the
Canadian subsidiary. Interest expenses for the three months ended April 30, 2004
were essentially unchanged from the amounts recorded in the three months ended
April 30, 2003.
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 and the uncertainty
involving the future use of these tax benefits.
If the Company did not record the deferred tax valuation allowance, the
effective income tax rate (benefit) for the three months ended April 30, 2004
would be 39%. The effective income tax rate for the three months ended April 30,
2003 was 39%. Management will evaluate the Company's income tax position as the
year progresses and expects to adjust the rate as necessary.
11
Net Income (Loss) and Net Income (Loss) per Share
The Company had a net loss of $0.4 million, or $(0.06) per share for the three
months ended April 30, 2004, compared to net income of $0.1 million, or $0.02
per share for the three months ended April 30, 2003. The decrease in net income
was due to the reasons described in the preceding sections.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity requirements arise principally from its working capital
needs. In addition, the Company has liquidity requirements to fund capital
expenditures to support its current operations, and facilitate growth and
expansion. The Company funds its liquidity requirements with a combination of
cash on hand, cash flows from operations and from borrowings. The Company
manages its cash and debt to minimize its interest expense.
Cash and cash equivalents at any time may consist of a combination of demand
deposits, money market or short-term, high-grade bond funds, and short-term
certificates of deposit.
The reduction in cash for the three months ended April 30, 2004 principally was
the result of a net reduction in long-term debt during the three months ended
April 30, 2004 over the prior year three months ended April 30, 2003.
For the three months ended April 30, 2004 the Company generated $751,000 of cash
from operating activities, compared to $1.2 million for the three months ended
April 30, 2003. The decrease in cash generated in the current year compared to
the comparable period of the prior year was due to the net loss for the quarter,
and an increase in receivables on the increase in sales for the three months
ended April 30, 2004, offset by increases in cash due to inventory reductions
during the current year compared to the comparable period of the prior year, as
inventory levels were reduced due to more optimal levels, and increases in
accounts payable due to increased sales activity in the current year quarter.
The Company continues to focus on managing its overall working capital. Cash
used in investing activities was $0.3 million and $0.1 million during the three
months ended April 30, 2004 and 2003, respectively, due primarily to purchases
of plant and equipment. The Company expects that its aggregate capital
expenditure requirements for the year ending January 31, 2005 will range from
approximately $0.9 million to $1.0 million. Management expects to fund these
requirements from cash on hand, cash flows from operations, and from borrowings.
Net cash used in financing activities during the three months ended April 30,
2004 was $1.9 million, compared to $-0- financing activity for the three months
ended April 30, 2003, as the Company utilized cash to reduce a portion of its
outstanding debt in the current year quarter.
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. 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 totaled $12.7 million at April
30, 2004 at an interest rate of approximately 2.6%. These borrowings were drawn
down in April 2004. Approximately $5.5 million was available under the Facility
at April 30, 2004. In May 2004, the Company repaid all $12.7 million of the debt
outstanding. The Facility expires July 1, 2005; therefore, borrowings under the
Facility are classified as long term. Management believes that the carrying
amount of the Company's borrowings approximates fair market value because the
interest rate is variable and resets frequently.
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 to the
stockholders 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. 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
12
future on the Company's common stock will be dependent upon the Company's
financial condition, its results of operations, current and anticipated cash
requirements, plans for expansion, the ability of its subsidiaries to pay
dividends or otherwise make cash payments or advances to it, and restrictions,
if any, under any future debt obligations, as well as any other factors that the
Board of Directors deems relevant.
In conjunction with the Company's acquisition of API in 1997, AMR Combs, Inc.
("AMR Combs") purchased 10,407 shares of API Series A Convertible Preferred
Stock, $0.001 par value, with annual dividends of $4.00 per share, payable
quarterly (the "Convertible Preferred Stock"). API has the right to redeem the
Convertible Preferred Stock at any time. AMR Combs has the right to cause API to
repurchase the Convertible Preferred Stock. The Company has, under certain
circumstances, the ability to defer AMR Combs' ability to cause API to
repurchase the Convertible Preferred Stock. The redemption price is equal to the
fair market value of the Convertible Preferred Stock as determined by an
independent appraisal.
On March 5, 1999, AMR Combs was acquired by Signature Flight Support, an
affiliate of BBA Group Plc.
Based upon current and anticipated levels of operations, the Company believes
that cash flow from operations, combined with cash on hand, and the availability
under the Facility, will be sufficient to meet its current and anticipated
operating cash requirements for the foreseeable future, including scheduled
interest and principal payments, capital expenditures, minority interest
requirements, working capital needs, and cash required for acquisitions that the
Company may pursue.
Contractual Obligations
- -----------------------
There have been no material changes outside the ordinary course of the Company's
business in the Company's specified contractual obligations disclosed in the
Company's Annual Report on Form 10-K for the year ended January 31, 2004.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
- -------------------------------------------------------------------
The Company's Canadian operations utilize the Canadian dollar as their
functional currency, while the Company's Asian operation utilizes the U.S.
dollar as its functional currency. The Company has transactions denominated in
Canadian dollars and Philippine pesos. 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.
During the three months ended April 30, 2004, the Company experienced a
comprehensive loss of $27,000, due to a decrease in the value of the Canadian
dollar relative to the U.S. dollar.
Borrowings of the Company are denominated in U.S. dollars. Management believes
that the carrying amount of the Company's borrowings approximates fair value
because the interest rates are variable and reset frequently.
Item 4. Controls and Procedures
- -------------------------------
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of April 30, 2004. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of April 30, 2004.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended April 30, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
The Company's business exposes it to possible claims for personal injury, death
or property damage that may result from a failure of certain parts serviced by
the Company or spare parts and components sold by it, or in connection with the
provision of its supply chain management services. The Company takes what it
believes to be adequate precautions to ensure the quality of the work it
performs and the traceability of the aircraft parts and components that it
sells. The original equipment manufacturers that manufacture the parts,
components and supplies that the Company sells carry liability insurance on the
products they manufacture. In addition, the Company maintains what it believes
is adequate liability insurance to protect it from any claims.
In the normal conduct of its business, the Company also is involved in various
claims and lawsuits, none of which, in the opinion of the Company's management,
will have a material, adverse impact on the Company's consolidated financial
position. The Company maintains what it believes is adequate liability and other
insurance to protect it from such claims. However, depending on the amount and
timing, unfavorable resolution of any of these matters could have a material
effect on the Company's consolidated financial position, results of operations
or cash flows in a particular period.
The Company previously disclosed a lawsuit, filed on June 28, 2000, by BE
Aerospace (formerly known as SMR Technologies, Inc.), as plaintif, against API
in the U.S. District Court for the Western District of Tennessee, Western
Division at Memphis, alleging breach of a distribution agreement. This lawsuit
was dismissed in March 2004 for lack of subject matter jurisdiction. The
plaintiff filed for breach of contract on June 28, 2000 and was awarded partial
summary judgment in the amount of $77,000 plus interest, totaling approximately
$94,000. The plaintiff was then granted permission in April 2003 to amend its
pleadings for damages to sue for approximately $13.1 million. In March 2004, API
was able to have the entire lawsuit dismissed. API has filed a motion to recover
its costs. On June 2, 2004, the plaintiff re-filed its lawsuit in the Circuit
Court of Tennessee for Shelby County, Tennessee, against API, claiming
unspecified damages for breach of a distribution agreement, and $77,295 for
parts delivered to API, plus interest.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
- -----------------------------------------------------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
NONE
Item 5. Other Information
- -------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits.
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).
(b) Reports on Form 8-K.
NONE
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
First Aviation Services Inc.
----------------------------
(Registrant)
Date: June 14, 2004 /s/ Michael C. Culver
--------------------------------------------
Michael C. Culver,
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: June 14, 2004 /s/ Robert G. Costantini
--------------------------------------------
Robert G. Costantini,
Chief Financial Officer (Principal Financial
and Accounting Officer)
15
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
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).
16