<PAGE>
FORM 10-Q
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 JULY 31, 1997
-------------
- ------- 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes __ No__
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common stock as of
August 31,1997 is 8,915,000 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
First Aviation Services Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
July 31 January 31
1997 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,566 $ -
Accounts receivable, net of allowance for doubtful accounts of
$1,172 and $278, respectively 27,937 19,931
Inventories 44,662 36,323
Deferred income taxes 536 1,036
Prepaid expenses and other 2,095 1,375
-------------------------------
Total current assets 76,796 58,665
Plant and equipment, net 3,664 2,793
Other assets, primarily goodwill 2,824 914
-------------------------------
$ 83,284 $ 62,372
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,691 $ 15,104
Accrued compensation and related expenses 1,796 1,948
Other accrued liabilities 1,511 2,850
Income taxes payable 824 -
Due to shareholders 155 176
Current portion of long term debt - 1,100
-------------------------------
Total current liabilities 20,977 21,178
Long term debt, less current portion 15,216 32,794
Other non-current liabilities 2,817 2,119
Minority interest 1,006 -
Stockholders' equity:
Preferred stock, $0.01 par value, liquidation preference of $660
at January 31, 1997; 5,000,000 shares authorized; none issued
and outstanding at July 31, 1997; 33,000 shares issued and
outstanding at January 31, 1997 - 1,650
Common stock, $0.01 par value; 25,000,000 shares authorized,
8,915,000 issued and outstanding at July 31, 1997; 3,556,665
shares issued and outstanding at January 31, 1997 89 36
Additional paid in capital 38,129 2,125
Retained earnings 5,050 2,470
------------------------------
Total stockholders' equity 43,268 6,281
------------------------------
$ 83,284 $ 62,372
------------------------------
------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter ended
July 31
1997 1996
---- ----
<S> <C> <C>
Net sales $ 38,575 $ 27,772
Cost of sales 32,521 24,033
-----------------------------
Gross profit 6,054 3,739
Selling, general and administrative expenses 3,691 2,038
-----------------------------
Income from operations 2,363 1,701
Interest expense 286 921
-----------------------------
Income before provision for income taxes and extraordinary item
and preferred dividends 2,077 780
Provision for income taxes 519 -
-----------------------------
Income before extraordinary item 1,558 780
Extraordinary item:
Loss on early extinguishment of debt (net of income
tax benefit of $0) - (864)
-----------------------------
Net income (loss) 1,558 (84)
Preferred stock dividends 11 33
-----------------------------
Net income (loss) applicable to common stock $ 1,547 $ (117)
-----------------------------
-----------------------------
Net income (loss) per common share:
Income before extraordinary item applicable
to common stock $ 0.17 $ 0.14
Extraordinary item - (0.16)
-----------------------------
Net income (loss) applicable to common stock $ 0.17 $ (0.02)
-----------------------------
-----------------------------
Shares used in computation of net income (loss) applicable to
common stock 9,064,850 5,261,511
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six months ended
July 31
1997 1996
---- ----
<S> <C> <C>
Net sales $ 74,423 $ 52,354
Cost of sales 63,065 44,608
-----------------------------
Gross profit 11,358 7,746
Selling, general and administrative expenses 6,789 4,125
-----------------------------
Income from operations 4,569 3,621
Interest expense 876 1,648
-----------------------------
Income before provision for income taxes and extraordinary item
and preferred dividends 3,693 1,973
Provision for income taxes 920 -
-----------------------------
Income before extraordinary item 2,773 1,973
Extraordinary item:
Loss on early extinguishment of debt (net of income
tax benefit of $64 and $0) (193) (864)
-----------------------------
Net income 2,580 1,109
Preferred stock dividends 29 66
-----------------------------
Net income applicable to common stock $ 2,551 $ 1,043
-----------------------------
-----------------------------
Net income per common share:
Income before extraordinary item applicable
to common stock $ 0.33 $ 0.35
Extraordinary item (0.02) (0.16)
-----------------------------
Net income applicable to common stock $ 0.31 $ 0.19
-----------------------------
-----------------------------
Shares used in computation of net income applicable to common stock 8,386,272 5,395,530
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Cash Flows (Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
July 31
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,580 $ 1,109
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 508 449
Extraordinary item, loss on early extinguishment of debt 193 864
Changes in operating accounts:
Accounts receivable (2,618) 3,835
Inventories (2,411) (2,038)
Prepaid expenses and other current assets (74) (1,031)
Deferred income taxes 500 344
Other assets (442) -
Accounts payable and accrued expenses (2,257) (8,304)
Due to shareholders (21) -
Income taxes payable 824 -
Other non-current liabilities (82) (472)
----------------------------
Net cash used in operating activities (3,300) (5,244)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of assets from former owners including acquisition costs (11,214) -
Purchase of plant and equipment (693) (519)
----------------------------
Net cash used in investing activities (11,909) (519)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt 56,046 62,847
Repayments of borrowings on long-term debt (74,726) (57,084)
Proceeds from sale of preferred stock of subsidiary 1,100 -
Proceeds from issuance of common stock, net of expenses 34,514 -
Proceeds from exercise to warrants to purchase common stock 70 -
Preferred stock dividends paid (231) -
----------------------------
Net cash provided by financing activities 16,773 5,763
Net increase in cash and cash equivalents 1,566 -
Cash and cash equivalents at beginning of period - -
----------------------------
Cash and cash equivalents at end of period $ 1,566 $ -
----------------------------
----------------------------
Supplemental cash flow disclosures:
Cash interest paid $ 780 $ 904
----------------------------
----------------------------
Income taxes paid $ - $ -
----------------------------
----------------------------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
First Aviation Services Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of First
Aviation Services Inc. ("First Aviation" or the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of the
consolidated financial statements also requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements. Actual results could differ from those estimates. In
the opinion of management, all material adjustments, consisting only of
normal recurring accruals, considered necessary for a fair presentation have
been included in the accompanying unaudited consolidated financial
statements. In addition, certain amounts for prior periods have been
reclassified to be comparable with the current period presentation.
Operating results for the quarter and six months ended July 31, 1997 are not
necessarily indicative of the results that may be expected for the full year
ending January 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended January 31, 1997.
2. INITIAL PUBLIC OFFERING
The Company completed an initial public offering on March 5, 1997 of
3,900,000 shares of common stock, $0.01 par value per share ("the Offering").
The Company received proceeds of approximately $34.5 million net of expenses
of approximately $4.5 million. The net proceeds were used for, among other
things, the repayment of term and subordinated debt, and a paydown on the
Company's credit facility ($22.6 million), payment of accrued dividends on
the preferred stock ($0.2 million), and the acquisition of Aircrafts Parts
International (the "API Business") from AMR Combs Inc. ("AMR Combs") ($11.2
million) (see below).
Immediately prior to the closing of the Offering, the following transactions
were completed: (i) all outstanding shares of the Series A Preferred Stock of
the Company were converted into 165,000 shares of common stock at the
offering price, (ii) all outstanding warrants to purchase the 1,293,335
shares of the Company's common stock were exercised in full, (iii) the
Company's certificate of incorporation was amended to increase the authorized
common stock of the Company to 25,000,000 shares, and (iv) a 6.4549-to-1
stock split with respect to common stock was effected. Accordingly, all
common share amounts have been restated to give effect to the 6.4549-to-1
stock split.
The Company's common stock is quoted on The NASDAQ - National Market System
under the symbol FAVS.
3. ACQUISITION OF THE API BUSINESS
On March 5, 1997 (the "Acquisition Date"), Aircraft Parts International
Combs, Inc., a majority owned subsidiary of the Company ("API Combs"),
completed the acquisition of the API Business from AMR Combs. The purchase
price for the API Business was $11.2 million in cash, subject to further
payment or reduction on a dollar-for-dollar basis depending upon whether the
net value of the assets for the API Business as of the Acquisition Date (the
"Net Asset Value") was greater or less than $10,500,000. In conjunction with
the acquisition of the API Business, AMR Combs purchased from API Combs
11,000 shares (the "API Shares") of Series A Cumulative Convertible Preferred
Stock, $0.001 par value, of API Combs at a price of $100 per share. Such
shares were issued on the Acquisition Date. The purchase price for the API
Shares is subject to adjustment as follows: if the Net Asset Value was
greater than $10,500,000, AMR Combs will pay API Combs 10% of the amount of
such excess, and if the Net Asset Value was less than $10,500,000, API Combs
will pay AMR Combs 10% of the amount of such shortfall, and in either case,
the number of API Shares will be adjusted to maintain the $100 per share
purchase price for the API Shares.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been preliminarily allocated to the
assets acquired and liabilities assumed based on their estimated fair values,
and the balance of the purchase price has been included in other assets,
primarily goodwill, and is being amortized over 30 years. In addition, the
Company's consolidated statements of operations include the operations of the
API Business from the Acquisition Date.
6
<PAGE>
First Aviation Services Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 1997
3. ACQUISITION OF THE API BUSINESS (CONTINUED)
The following unaudited pro-forma summary has been prepared assuming that the
acquisition of the API Business had taken place at the beginning of the
respective periods after giving effect to certain pro-forma adjustments,
including, among others, amortization of intangibles arising from the
acquisition and the related income tax effects.
Quarter ended Six Months ended
July 31 July 31
IN THOUSANDS, EXCEPT SHARE AMOUNTS
(UNAUDITED)
1996 1997 1996
Net sales $ 36,974 $ 77,648 $ 71,376
--------- --------- ---------
--------- --------- ---------
Income before extraordinary item $ 728 $ 2,763 $ 1,776
--------- --------- ---------
--------- --------- ---------
Net income $ (136) $ 2,570 $ 912
--------- --------- ---------
--------- --------- ---------
Net income per share applicable to
common stock $ (0.03) $ 0.31 $ 0.17
--------- --------- ---------
--------- --------- ---------
Shares used in computation of net income
applicable to common stock 5,261,511 8,386,272 5,395,530
--------- --------- ---------
--------- --------- ---------
4. INVENTORIES
Inventories consist of the following:
JULY 31 JANUARY 31
1997 1997
-------------------------------------
(IN THOUSANDS)
Raw materials $ 21,787 $ 18,857
Work-in-process 12,064 11,067
Finished goods 10,811 6,399
---------- --------
$ 44,662 $ 36,323
---------- --------
---------- --------
5. NET INCOME PER COMMON SHARE AND SUPPLEMENTAL NET INCOME PER SHARE
Net income per common share is computed using the treasury stock method based
on the weighted average number of common shares and common stock equivalent
shares outstanding during the period, as adjusted retroactively for the
aforementioned stock split. Shares from the assumed exercise of options and
warrants granted by the Company have been included in the computations of
earnings per share for all periods unless their inclusion would be
anti-dilutive. However, for purposes of computing net income per common
share for the period prior to the Company's initial public offering, options
and warrants granted by the Company during the 12 months preceding the
initial public offering date have been included in the calculation of common
stock and common stock equivalent shares outstanding as if they were
outstanding for all periods presented using the treasury stock method and the
public offering price of $10.00 per share
Supplemental net income per share for the quarter and six months ended July
31, 1997 was $0.17 and $0.35 respectively. Supplemental net income per share
is computed using the "if converted" method based on the pro forma weighted
average number of shares of common stock and common stock equivalents as
defined above, and preferred shares that were exchanged for common stock on a
1 for 6.4549 basis upon the closing of the Company's initial public offering,
adjusted retroactively for the aforementioned stock split. Net income per
share used in the supplemental net income per share calculation was adjusted
to reduce dividends on preferred shares exchanged and decreased for interest
expense and the extraordinary item on subordinated debentures, which were
redeemed with the proceeds of the Company's initial public offering.
7
<PAGE>
First Aviation Services Inc.
Notes to Consolidated Financial Statements (Unaudited)
July 31, 1997
6. IMPACT OF NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, EARNINGS PER SHARE, which specifies a change in the
computation, presentation and disclosure requirements for earnings per share
and requires the restatement of all prior periods. The Statement is required
to be adopted for periods ending after December 15, 1997. Accordingly, the
Company will comply with the requirements of this standard; however, the
Company does not expect that the impact of applying this standard will be
material.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
First Aviation Services Inc. is a worldwide leader in providing services to
aircraft operators of some of the most widely used military, commercial, and
general aviation aircraft engines in the world. The Company's operations
include repair and overhaul of gas turbine engines and accessories,
remanufacturing of engine components and accessories, and redistribution of
new and remanufactured parts. With the acquisition of the API Business, the
Company has also become one of the leading suppliers of aircraft engine parts
and other aircraft parts to the general aviation industry worldwide.
First Aviation was formed in March 1995 to acquire all of the stock of
National Airmotive Corporation (NAC). The acquisition was completed on June
1, 1995. Through NAC, the Company provides repair and overhaul services for
several engine types, including the Allison Engine Company ("Allison"), a
subsidiary of Rolls Royce USA. The engines that NAC repairs and overhauls
include: (i) the engines that power the Lockheed Martin C-130 "Hercules"
cargo aircraft, the most popular cargo aircraft in the world; (ii) the
engines employed on most light helicopters; and (iii) industrial turbine
engines primarily used for power co-generation and gas transmission. The
Company has also established itself as a leader in the remanufacturing of
serviceable engine parts and components for use in engine overhauls.
On March 5, 1997, the Company completed an initial public offering of
3,900,000 shares of common stock, $0.01 par value per share. The Company
received proceeds of approximately $34.5 million net of expenses of
approximately $4.5 million. The net proceeds were used for, among other
things, the repayment of term and subordinated debt, and a paydown on the
Company's credit facility ($22.6 million), payment of accrued dividends on
preferred stock ($0.2 million), and the acquisition of the API Business
($11.2 million). Through the API Business, the Company supplies aircraft
parts primarily to the general aviation market.
The Company believes it is positioned to benefit from certain industry trends
that favor independent repair and overhaul and aircraft providers including:
(i) increased outsourcing of repair and overhaul services by engine operators
as engine operators seek to reduce operating costs and turnaround time; (ii)
increasing consolidation among repair and overhaul and parts providers as
engine operators reduce the number of providers used for these services;
(iii) increased emphasis on the traceability of aircraft parts which has, in
turn, increased the required sophistication of information systems used by
parts distributors; (iv) growing demand for remanufactured parts as engine
operators seek to lower costs of repair and overhaul services; (v) increasing
aviation activity which, in turn, increases the demand for repair and
overhaul services; and (vi) increased demand by aircraft operators for third
parties to manage and maintain parts inventories so that aircraft operators
may reduce their parts' inventory.
NET SALES
Net sales for the quarter ended July 31, 1997 increased by $10.8 million or
38.8% to $38.6 million from $27.8 million in the quarter ended July 31, 1996.
Net sales for the six months ended July 31, 1997 increased by $22 million or
42% to $74.4 million from $52.4 million in the six months ended July 31,
1996. Net sales from repair and overhaul activities decreased 11.7% while
revenues from parts sales increased by 275% for the quarter ended July 31,
1997 from the quarter ended July 31, 1996. However, net sales from repair
and overhaul activities increased 3.9% and revenues from parts sales
increased by 226% for the six months ended July 31, 1997 from the six months
ended July 31, 1996. The decline in revenues from the overhaul and repair
business is primarily attributable to the shifting of work into other
quarters and may not be indicative of future trends. The increase in parts
sales is primarily attributable to the acquisition of the API Business
coupled with an increase in parts sales at NAC.
COST OF SALES
Cost of sales for the quarter ended July 31, 1997 increased by $8.5 million
or 35.4% to $32.5 million from $24 million in the quarter ended July 31,
1996. This increase was due to higher sales volume. As a percentage of net
sales, cost of sales decreased by 2.1% to 84.2% from 86.3% in the quarter
ended July 31, 1996. The reduction was attributable primarily to the
increase in higher margin parts sales by API offset by an increase in the
cost of Allison gas turbine parts sold and used in engine overhauls by NAC.
Cost of sales for the six months ended July 31, 1997 increased by $18.5
million or 41.5% to $63.1 million from $44.6 million and as a percentage of
net sales remained relatively constant at 85% with that of the six months
ended July 31, 1996.
9
<PAGE>
GROSS PROFIT
Gross profit for the quarter ended July 31, 1997 increased by $2.3 million or
62% to $6.1 million and as a percentage of net sales increased to 15.8% from
13.3% in the quarter ended July 31, 1996. Gross profit for the six months
ended July 31, 1997 increased by $3.6 million or 46.6% to $11.4 million and
as a percentage of net sales increase to 15.3% from 14.7% in the six months
ended July 31, 1996. Gross profit has increased as a result of the increased
sales volume noted above. The increased percentage of gross profit was
attributable primarily to the increase in higher margin parts sales by API
which offset an increase in the cost of Allison gas turbine parts.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended July 31,
1997 increased by $1.7 million or 85% to $3.7 million from $2 million in the
quarter ended July 31, 1996. Selling, general and administrative expenses
for the six months ended July 31, 1997 increased by $2.7 million or 65.9% to
$6.8 million from $4.1 million in the quarter ended July 31, 1996. The
increases are primarily attributable to the acquisition of the API Business
and the increase in sales noted above.
INTEREST EXPENSE
Interest expense for the quarter ended July 31, 1997 decreased by $0.6
million or 66% to $0.3 million from $0.9 million in the quarter ended July
31, 1996. Interest expense for the six months ended July 31, 1997 decreased
by $0.7 million or 43.8% to $0.9 million from $1.6 million in the six months
ended July 31, 1996. The decrease was attributable to a reduction in the
average borrowings under the Company's credit facility, which was a direct
result of using a portion of the proceeds of the Company's initial public
offering to pay down such borrowings and because such proceeds were also used
to retire subordinated debentures.
PROVISION FOR INCOME TAXES
Management estimates that the Company's effective income tax rate for the
quarter and six-month periods ended July 31, 1997 is 25%. The effective
income tax rate for the corresponding periods for fiscal 1996 was 0%. The
increase in the effective rate is primarily attributable to adjustments in
the valuation allowance utilized to offset deferred tax benefits. The
Company's effective tax rate is less than statutory rates, due to benefits
that the Company expects to derive from the implementation of certain tax
saving strategies including but not limited to the use of a Foreign Sales
Corporation.
NET INCOME
Net income before extraordinary items for the quarter ended July 31, 1997
increased by 100% to $1.6 million from $0.8 million in the quarter ended July
31, 1996. Net income before extraordinary items for the six months ended July
31, 1997 increased by 40% to $2.8 million from $2 million in the six months
ended July 31, 1996. The increases in profitability reflect the increased
level of sales and gross profit, and decreased interest expense noted above,
offset by an increase in the provision for income taxes.
EXTRAORDINARY ITEM
Extraordinary charges during the quarter ended July 31, 1997 were $0 compared
to $0.9 million recorded in the quarter ended July 31, 1996. Extraordinary
charges during the six months ended July 31, 1997 declined by 78% to $0.2
million (net of income tax benefit of $0.06 million) from $0.9 million
recorded during the six months ended July 31, 1996. The extraordinary
charges reflect a write-off of costs associated with the early extinguishment
of certain debt.
NET INCOME PER COMMON SHARE
Net Income per common share is computed using the treasury stock method based
on the weighted average number of common shares and common stock equivalent
shares outstanding during the period, as adjusted for the stock split that
occurred in conjunction with the initial public offering. Shares from the
assumed exercise of options and warrants granted by the Company and shares
issuable in connection with the Company's convertible preferred stock have
been included in the computations of earnings per share for all periods
unless their inclusion would be anti-dilutive. However, for purposes of
computing net income per share, options and warrants granted by the Company
during the 12 months preceding the initial public offering date, including
those shares issuable in connection with
10
<PAGE>
the anti-dilution provisions of certain warrant agreements, have been
included in the calculation of common stock and common stock equivalent
shares outstanding as if they were outstanding for all periods presented
using the treasury stock method and the public offering price of $10.00 per
share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from its working capital
needs, principally inventory and accounts receivable.
To that end, the Company completed an initial public offering on March 5,
1997 of 3,900,000 shares of common stock, $0.01 par value per share. The
Company received proceeds of approximately $34.5 million net of expenses of
approximately $4.5 million. The net proceeds were used for, among other
things, the repayment of term and subordinated debt and a paydown on the
Company's credit facility ($22.6 million); payment of accrued dividends ($.2
million) on the preferred stock ($.2 million), and the acquisition of the API
Business ($11.2 million).
In addition, the Company's cash used in operations for the six months ended
July 31, 1997, was $3.3 million compared to $5.2 million in the six months
ended July 31, 1996. Cash used for investing activities during these same
periods was $11.9 million and $0.5 million, respectively. Cash generated by
financing activities during these same periods was $16.8 million, and $5.8
million, respectively.
Further, in connection with the acquisition of the API Business, API Combs
issued 11,000 shares (the "API Shares") of Series A Cumulative Convertible
Preferred Stock, subject to adjustment. Such shares are convertible solely
into shares of common stock of API Combs. The API Shares carry a $4.00 per
share annual dividend, payable quarterly.
The Company has not declared or paid any cash dividends or distributions on
its common stock since its inception. The Company 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. Any payment
of cash dividends in the future on the common stock will be dependent upon
the Company's financial condition, results of operations, current and
anticipated cash requirements, plans for expansions, 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
other factors that the Board of Directors deems relevant. Further, the
Company's current credit facility prohibits the payment of cash dividends,
except with the lender's consent, and contains other covenants and
restrictions.
The Company is in the process of negotiating with major institutions to
establish a larger and less restrictive revolving credit and acquisition
facility. Borrowings under the Company's current $40.0 million credit
facility were $15.2 million at July 31, 1997.
Based upon current and anticipated levels of operations and plans for
integrating the API Business, the Company believes that its cash flow from
operations, combined with borrowings available under the existing line of
credit, will be sufficient to meet its current and anticipated cash operating
requirements, including scheduled interest and principal payments, capital
expenditures, preferred dividends requirements and working capital needs for
the foreseeable future.
SAFE HARBOR STATEMENT
Statements which are not historical facts in this report are forward looking
statements, made on a good faith basis. Such forward looking statements,
including those concerning the Company's expectations, all involve risk and
uncertainties including the Company's ability to obtain parts from its
principal supplier on a timely basis, the ability to consummate suitable
acquisitions, the ability to expand its remanufacturing capabilities and
other items that are beyond the Company's control and may cause actual
results to differ from management's expectations.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN 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.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.32 Employment Agreement dated as of July 1, 1997 by and
between Gerald S. Schlesinger and the Company.
11.01 Statement re: Computation of per share earnings
(historical basis)
11.02 Statement re: Computation of per share earnings
(supplemental basis)
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
NONE
12
<PAGE>
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: September 11, 1997 /s/ Michael C. Culver
--------------------------------------
Michael C. Culver,
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: September 11, 1997 /s/ John A. Marsalisi
--------------------------------------
John A. Marsalisi,
Vice President, Secretary, Director and
Chief Financial Officer (Principal Financial
and Accounting Officer)
13
<PAGE>
EXHIBIT 10.32
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "AGREEMENT") is dated as of
July 1, 1997, between First Aviation Services Inc., a Delaware corporation (the
"COMPANY"), and Gerald E. Schlesinger, Jr., an individual (the "EXECUTIVE").
WITNESSETH:
WHEREAS, the Company believes that the Executive will be a valued
employee of the Company and wishes to secure his employment with the Company and
document the terms of the Executive's employment by the Company.
WHEREAS, the Company also has determined that it is in the best
interests of the Company and its shareholders to reinforce and encourage the
continued attention and dedication of certain key members of the Company's
management, including the Executive, to their assigned duties without
distraction in uncertain circumstances arising from the possibility of a change
in control of the Company.
NOW, THEREFORE, taking into account the foregoing and in consideration
of the mutual promises and conditions contained herein, the parties hereto agree
as follows:
I
EMPLOYMENT
.1 EMPLOYMENT. The Company employs the Executive and the Executive
hereby accepts employment as a senior vice president upon the terms and
conditions hereinafter set forth.
.2 TERM. The employment of the Executive by the Company under the terms
and conditions of this Agreement will commence on the date hereof and continue,
subject to Article IV hereof, for a period of three years ("EMPLOYMENT TERM").
<PAGE>
.3 EXECUTIVE DUTIES. As a senior vice president of the Company, the
Executive shall perform such duties as are requested by and shall report
directly to the Company's Chief Executive Officer. The Executive agrees to
devote his full business time (with allowances for vacations and sick leave) and
attention and best efforts to the affairs of the Company and its subsidiaries
and affiliates during the Employment Term. Executive shall not, while an
employee of the Company, directly or indirectly, be engaged (including as a
stockholder, proprietor, general partner, limited partner, trustee, consultant,
employee, director, officer, lender, investor or otherwise) in any business or
activity that is competitive with that of the Company or any of its
subsidiaries.
II
COMPENSATION AND BENEFITS
.1 ANNUAL SALARY. During the Employment Term, the Company shall pay to
the Executive a base salary at the rate of One Hundred Seventy Thousand Dollars
($170,000) per year (the "ANNUAL SALARY"), payable in substantially equal
biweekly installments. The Company will review annually and may, in the sole
discretion of the Board of Directors, increase such base salary in light of the
Executive's performance, inflation in cost of living or other factors.
.2 BENEFITS. Subject to the discretion of the Board of Directors, during
the Employment Term, the Executive shall be eligible for participation in and
coverage under any and all such performance, bonus, profit sharing, incentive
stock option, and other compensation plans and such medical, dental, disability,
life, and other insurance plans and such other benefits generally available to
other employees of the Company in similar employment positions, as the Board of
Directors shall determine, subject to meeting applicable eligibility
requirements (collectively referred to herein as the "COMPANY BENEFIT PLANS").
For fiscal 1998 only, First Aviation Services, Inc. will guarantee payment to
Gerald Schlesinger a minimum of sixty-six thousand dollars ($66,000) (Minimum
Amount ) for participation in the performance award program. The Minimum Amount
will be prorated for the number of months within fiscal 1998 for which Gerry
Schlesinger is employed by First Aviation Services, Inc.
.3 REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to receive
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all reasonable expenses of travel,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
.4 VACATION AND HOLIDAYS. The Executive shall be entitled to an annual
vacation leave of three (3) weeks at full pay or such greater vacation benefits
as may be provided for by the Company's vacation policies applicable to senior
executives of the Company. Up to a maximum of one week of vacation time may be
accumulated and carried over from one year to
2
<PAGE>
the next. Executive shall be entitled to such holidays as are established by
the Company for all employees.
III
CONFIDENTIALITY AND NONDISCLOSURE
.1 CONFIDENTIALITY. Executive shall not, during Executive's employment
by the Company or thereafter, at any time disclose, directly or indirectly, to
any person or entity or use for Executive's or any other person's or entity's
benefit any trade secrets or confidential information relating to the Company's
or its subsidiaries' business, operations, marketing data, business plans,
strategies, employees, products, prices, negotiations and contracts with other
companies, or any other subject matter pertaining to the business of the Company
or its subsidiaries or any of their respective clients, customers, suppliers,
consultants, or licensees, known, learned, or acquired by Executive during the
period of Executive's employment by the Company (collectively "CONFIDENTIAL
INFORMATION"), except as may be necessary in the ordinary course of performing
Executive's particular duties as an employee of the Company.
.2 RETURN OF CONFIDENTIAL MATERIAL. Executive shall promptly deliver to
the Company on termination of Executive's employment by the Company, whether or
not for Cause, or at any time the Company may so request, all memoranda, notes,
records, reports, manuals, drawings, blueprints, rolodexes, computer files and
records, Confidential Information and any other documents of a confidential
nature belonging to the Company or its subsidiaries, including all copies of
such materials which Executive may then possess or have under Executive's
control and any notes of Executive relating thereto. Upon termination of
Executive's employment by the Company, Executive shall not retain any document,
data, or other material of any nature containing or pertaining to the
proprietary information of the Company or its subsidiaries.
.3 PROHIBITION ON SOLICITATION OF CUSTOMERS; NONCOMPETITION. During the
term of Executive's employment by the Company, and for a period of six months
thereafter, Executive shall not, directly or indirectly, either for Executive or
for any other person or entity, solicit any person or entity to terminate such
person's or entity's contractual and/or business relationship with the Company
or its subsidiaries, nor shall Executive interfere with or disrupt or attempt to
interfere with or disrupt any such relationship. In addition, for a period of
twelve months following the term of Executive's employment by the Company,
Executive shall not, directly or indirectly, be engaged (including as a
stockholder, proprietor, general partner, limited partner, trustee, consultant,
employee, director, officer, lender, investor or otherwise) in any business or
activity that is competitive with that of the Company's or any of its
subsidiaries' activities within North America. None of the foregoing shall be
deemed a waiver of any rights and remedies the Company may have under applicable
law.
.4 PROHIBITION ON SOLICITATION OF EMPLOYEES, AGENTS OR INDEPENDENT
CONTRACTORS AFTER TERMINATION. During the term of Executive's employment by the
Company and for a period of six months following the termination of Executive's
employment by the
3
<PAGE>
Company, Executive will not solicit any of the employees, agents, or independent
contractors of the Company or its subsidiaries to leave the employ of the
Company or its subsidiaries. However, Executive may solicit any employee, agent
or independent contractor who voluntarily terminates his or her employment with
the Company or its subsidiaries after a period of 180 days have elapsed since
the termination date of such employee, agent or independent contractor. None of
the foregoing shall be deemed a waiver of any rights and remedies the Company
may have under applicable law.
.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. Executive's obligations not
to disclose or use Confidential Information and to refrain from the
solicitations described in this Article III are of a special and unique
character. The Company cannot be reasonably or adequately compensated for
damages in an action at law in the event Executive breaches such obligations.
Therefore, Executive expressly agrees that the Company shall be entitled to
injunctive and other equitable relief without bond or other security in the
event of such breach in addition to any other rights or remedies which the
Company may possess or be entitled to pursue. Furthermore, the obligations of
Executive and the rights and remedies of the Company under this Article III are
cumulative and in addition to, and not in lieu of, any obligations, rights, or
remedies created by applicable law relating to misappropriation or theft of
trade secrets or Confidential Information.
.6 SURVIVAL OF OBLIGATIONS. Executive agrees that the terms of this
Article III and Article V hereof shall survive the term of this Agreement and
the termination of Executive's employment by the Company.
IV
TERMINATION
.1 DEFINITIONS. For purposes of this Article IV, the following
definitions shall be applicable to the terms set forth below:
(a) CAUSE. "CAUSE" shall mean only the following: (i) failure by the
Executive to perform his duties hereunder or those duties which may, from
time to time, be reasonably requested by the Chief Executive Officer of the
Company (other than such failure resulting from the Executive's incapacity
due to physical or mental illness), as determined by the Board of Directors
in its sole discretion; (ii) misconduct by the Executive which is
materially injurious to the Company; (iii) conviction of or pleading no
contest to a felony or crime of moral turpitude; (iv) habitual drunkenness
by the Executive; (v) action by the Executive beyond the scope of his
employment, as such scope is set by the Chief Executive Officer of the
Company from time to time (vi) a material breach of this Agreement by the
Executive.
4
<PAGE>
(b) DISABILITY. "DISABILITY" shall mean a physical or mental
incapacity as a result of which the Executive becomes unable to continue
the proper performance of his duties hereunder (reasonable absences because
of sickness for up to three (3) consecutive months excepted). A
determination of Disability shall be subject to the certification of a
qualified medical doctor agreed to by the Company and the Executive or, in
the event of the Executive's incapacity to designate a doctor, the
Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical
doctor and the two doctors so nominated shall select a third doctor, who
shall make the determination as to Disability.
.2 TERMINATION BY COMPANY. The Executive's employment hereunder may be
terminated by the Company immediately for Cause. Subject to the provisions
contained in Section IV (.3) (b) of this Agreement, the Company may terminate
this Agreement at any time for any reason other than Cause upon thirty (30)
days' written notice to Executive. The effective date of termination
("EFFECTIVE DATE") shall be considered to be thirty (30) days subsequent to
written notice of termination; however, the Company may elect to have Executive
leave the Company and its subsidiaries immediately upon issuance of the
aforementioned written notice.
.3 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
(a) If at any time the Executive's employment is terminated by the
Company for Cause, the Company shall pay the Executive his annual salary
prorated through the end of the month during which such termination occurs
plus payment for any vacation earned but not taken and the Company shall
thereafter have no further obligations under this Agreement to the
Executive or his or her dependents, beneficiaries or estate; provided,
however, that the Company will continue to honor any obligations that may
have been accrued under then existing Company Benefit Plans or any other
agreements or arrangements applicable to the Executive.
(b) If at any time the Executive's employment is terminated by the
Company without Cause or as a result of death or Disability, then the
Company shall:
(1) pay to the Executive for termination of his rights hereunder
a lump sum, in cash, within seven business days following the date of
termination, an amount equal to six months salary based upon the
Executive's current "Monthly Base Salary" (defined as the Annual
Salary in effect on the date of termination divided by twelve (12)),
plus payment for any vacation earned but not taken, and in addition,
that the Company will continue to honor any obligations that may have
been accrued under then existing Company Benefit Plans or any other
agreements or arrangements applicable to the Executive.
5
<PAGE>
(2) provide Executive with such insurance coverage as is then
required by COBRA or any similar then applicable law.
.4 NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL
RIGHTS.
(a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for
under this Agreement be reduced by any compensation earned by the Executive
as the result of employment by another employer after the date of
termination, or otherwise.
(b) The provisions of this Agreement, and any payment or benefit
provided for hereunder, shall not reduce any amounts otherwise payable, or
in any way diminish the Executive's existing rights, or rights which would
accrue solely as a result of the passage of time, under any Company Benefit
Plan or other contract, plan or arrangement.
(c) Executive may terminate this Agreement upon 30 days written
notice to the Company and upon such termination the Company shall make the
payment provided for in Section IV (.3)(a) hereof and no further payments
shall be required to be made by the Company to Executive.
V
GENERAL PROVISIONS
.1 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
IF TO THE COMPANY:
First Aviation Services Inc.
15 Riverside Avenue
Westport, CT 06880
IF TO THE EXECUTIVE:
Gerald E. Schlesinger
5511 Preston Fairways Drive
Dallas, TX 75252
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
6
<PAGE>
.2 NO WAIVERS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut without regard to conflicts
of law principles. Executive hereby agrees to submit to the exclusive
jurisdiction of the courts in and of the State of Connecticut, and consents that
service of process with respect to all courts in and of the state of Connecticut
may be made by registered mail to Executive at his address for notices specified
herein.
.4 SEVERABILITY OR PARTIAL INVALIDITY. The invalidity or
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
.6 LEGAL FEES AND EXPENSES. Should any party institute any action or
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
.8 ASSIGNMENT. This Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the prior
written consent of the other party. Notwithstanding the foregoing provisions of
this Section 5.8, the Company may assign or delegate its rights, duties, and
obligations hereunder to any person or entity which succeeds to all or
substantially all of the business of the Company through merger, consolidation,
reorganization, or other business combination or by acquisition of all or
substantially all of the assets of the Company; provided that such person
assumes the Company's obligations under this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FIRST AVIATION SERVICES, INC.
A DELAWARE CORPORATION
BY: _______________________
TITLE: CHIEF EXECUTIVE OFFICER
GERALD E. SCHLESINGER
AN INDIVIDUAL
________________________
8
<PAGE>
EXHIBIT 11.01
<TABLE>
<CAPTION>
FIRST AVIATION SERVICES INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(HISTORICAL BASIS)
Quarter ended Quarter ended Six months ended Six months ended
7/31/97 7/31/96 7/31/97 7/31/96
------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE:
Net Income before extraordinary item $ 1,558,000 $ 780,000 $ 2,773,000 $ 1,973,000
Extraordinary item; loss on early
extinguishment of debt (864,000) (193,000) (864,000)
Net Income 1,558,000 (84,000) 2,580,000 1,109,000
Preferred Stock Dividends (11,000) (33,000) (29,000) (66,000)
------------- ------------- ------------ ---------------
------------- ------------- ------------ ---------------
Net Income applicable to Common Stock $ 1,547,000 $ (117,000) $ 2,551,000 $ 1,043,000
------------- ------------- ------------ ---------------
------------- ------------- ------------ ---------------
Weighted average common shares outstanding 8,915,000 3,556,665 8,021,944 3,556,665
Incremental shares due to warrants to purchase
common stock - 1,554,996 214,478 1,689,015
Incremental shares due to stock options 149,850 - 149,850 -
Incremental shares issuable pursuant to
SAB Topic 4D - 149,850 - 149,850
Total Shares 9,064,850 5,261,511 8,386,272 5,395,530
------------- ------------- ------------ ---------------
------------- ------------- ------------ ---------------
Net income per common share before
extraordinary item $ 0.17 $ 0.14 $ 0.33 $ 0.35
------------- ------------- ------------ ---------------
------------- ------------- ------------ ---------------
Extraordinary item - (0.16) (0.02) (0.16)
------------- ------------- ------------ ---------------
Net Income per common share $ 0.17 $ (0.02) $ 0.31 $ 0.19
------------- ------------- ------------ ---------------
------------- ------------- ------------ ---------------
</TABLE>
<PAGE>
EXHIBIT 11.02
<TABLE>
<CAPTION>
FIRST AVIATION SERVICES INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(SUPPLEMENTAL BASIS)
Quarter ended Six months ended
31/07/97 31/07/97
------------- ----------------
<S> <C> <C>
SUPPLEMENTAL NET INCOME PER BASIS COMMON SHARE:
Net Income $ 1,558,000 $ 2,773,000
Preferred dividends on shares not exchanged for common stock $ (11,000) (29,000)
Interest Expense recorded on long term debt extinguished 0 17,000
Extraordinary items; loss on early extinguishment of debt 0 193,000
-------------- ---------------
Net Income applicable to Common Stock $ 1,547,000 $ (2,954,000)
-------------- ---------------
-------------- ---------------
Weighted average common shares outstanding 8,915,000 8,021,944
Incremental shares due to warrants to purchase
common stock - 214,478
Incremental shares due to stock options 149,850 149,850
Shares applicable to preferred stock - 27,500
-------------- ---------------
Total Shares 9,064,850 8,413,772
-------------- ---------------
-------------- ---------------
Supplemental Net income per common share $ 0.17 $ 0.35
-------------- ---------------
-------------- ---------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL INFORMATION CONTAINED IN THE BODY OF THE ACCOMPANYING 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 1,566
<SECURITIES> 0
<RECEIVABLES> 27,937
<ALLOWANCES> (1,379)
<INVENTORY> 44,662
<CURRENT-ASSETS> 76,796
<PP&E> 3,664
<DEPRECIATION> (22,316)
<TOTAL-ASSETS> 83,824
<CURRENT-LIABILITIES> 20,997
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 43,179
<TOTAL-LIABILITY-AND-EQUITY> 83,824
<SALES> 38,575
<TOTAL-REVENUES> 38,575
<CGS> 32,521
<TOTAL-COSTS> 32,521
<OTHER-EXPENSES> 3,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286
<INCOME-PRETAX> 2,077
<INCOME-TAX> (519)
<INCOME-CONTINUING> 1,558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,558
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
