<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997
REGISTRATION NO. 333-18647
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST AVIATION SERVICES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3724 06-1419064
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
ONE OMEGA DRIVE
STAMFORD, CONNECTICUT 06907
(203) 359-7733
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
MICHAEL C. CULVER
ONE OMEGA DRIVE
STAMFORD, CONNECTICUT 06907
(203) 359-7733
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
J. JAY HERRON, ESQ. DAVID J. JOHNSON, ESQ.
KAREN CRAIG POLTROCK, ESQ. CHARLES G. KLINK, ESQ.
O'MELVENY & MYERS LLP ANDREWS & KURTH L.L.P.
610 NEWPORT CENTER DRIVE, SUITE 1700 601 SOUTH FIGUEROA STREET, SUITE 4200
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90017
(714) 760-9600 (213) 896-3100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
FIRST AVIATION SERVICES INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF INFORMATION REQUIRED BY PART 1 OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION OR LOCATION
------------------------------------------------ ------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Risk Factors; Underwriting
6. Dilution........................................ Dilution
7. Selling Security Holders........................ Principal and Selling Stockholder
8. Plan of Distribution............................ Outside Front and Inside Front Cover
Pages; Underwriting
9. Description of Securities to be Registered...... Description of Capital Stock
10. Interests of Named Experts and Counsel.......... *
11. Information with Respect to the Registrant...... Outside Front and Inside Front Cover
Pages; Prospectus Summary; The Company;
The Offering; Summary Historical and Pro
Forma Financial Data; Risk Factors; API
Combs Acquisition; Use of Proceeds;
Dividend Policy; Dilution;
Capitalization; Unaudited Pro Forma
Combined Financial Information; Selected
Financial Information; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Underwriting;
Legal Matters; Experts; Additional
Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... *
</TABLE>
- ---------------
* Not Applicable
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1997
PROSPECTUS
3,900,000 SHARES
FIRST AVIATION SERVICES INC.
COMMON STOCK
------------------
All of the 3,900,000 shares of common stock ("Common Stock") offered hereby
(the "Offering") are being sold by First Aviation Services Inc. ("First
Aviation" or the "Company"). Prior to the Offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price of the Common Stock will be between $10.00 and
$12.00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "FAVS."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- ------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY (2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share $ $ $
- ------------------------------------------------------------------------------------------------
Total(3) $ $ $
- ------------------------------------------------------------------------------------------------
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at
$ .
(3) The minority stockholder of First Aviation (the "Selling Stockholder")
has granted the Underwriters a 30-day option to purchase up to 585,000
additional shares of Common Stock solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to the
Company and Proceeds to the Selling Stockholder will be $ ,
$ , $ and $ , respectively.
------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about ,
1997, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
SMITH BARNEY INC. DILLON, READ & CO. INC.
, 1997
<PAGE> 4
[A total of 4 pages of photographs appear. Twenty-two photographs in total
displaying individuals performing maintenance or services, products or
components and product applications. The photographs and their captions are as
follows: (1) photograph of workshop floor with caption reading "NAC overhauls
some of the most popular turbine engines in military, cargo, industrial,
helicopter and general aviation applications;" (2) photograph of computer screen
with caption reading "NAC utilizes its proprietary CARS advanced integrated
computer system for the management and scheduling of its overhaul and
remanufacturing process;" (3) photograph of airplane with caption reading "NAC
overhauls the T-56 turbine engine on such aircraft as the C-130 "Hercules", one
of the most widely used cargo aircraft in the world;" (4) photograph of workman
with caption reading "Restoration of high value components to specified
tolerance is maximized through the application of flame spray coatings;" (5)
photograph of workman conducting product inspection with caption reading "NAC's
technicians inspect components to ensure the highest level of safety and
reliability;" (6) photograph of workman with caption reading "A compressor
section is carefully torqued during final assembly on a 501DT56 engine
compressor assembly;" (7) photograph of shop floor with caption reading "The
Company's extensive remanufacturing capabilities enable it to provide its
customers with complete maintenance and repair programs with reduced turnaround
times;" (8) photograph of portion of turbine engine with caption reading "A
501-K rear turbine bearing and support assembly is inspected prior to rotor
installation and final assembly;" (9) photograph of computer controlled boring
machine with caption reading "Computer controlled boring is just one of many
capabilities at NAC's Oakland facility;" (10) photograph of two persons
inspecting a part with caption reading "The Company has developed FAA approved
proprietary repair schemes that can maintain or increase the quality of work and
reduce cost and turnaround times;" (11) photograph of offshore natural gas
pumping station with caption reading "One of NAC's major businesses is the
overhaul of industrial gas turbine engines used for such applications as
offshore natural gas pumping;" (12) photograph of API representative with
caption reading "API representatives provide 24 hours per day, seven days a week
service to their customers;" (13) photograph of part with caption reading "API
carries a wide variety of replacement brakes for piston and turbine aircraft and
is a distributor for BF Goodrich, Cleveland and ABS;" (14) photograph of workman
with caption reading "API overhauls brakes for customers in under three days and
offers overnight exchange units for many models;" (15) photograph of plane with
caption reading "API is an FAA Certified Repair Station for the overhaul of
starter/generators for turbine powered aircraft;" (16) photograph of part with
caption reading "Quick response to customer needs is a primary component of
API's service reputation;" (17) photograph of workman with caption reading "API
has over 80,000 parts readily available for general aviation repair facilities
throughout the United States;" (18) photograph of three workman with caption
reading "Model 250 turboshaft and turboprop engine's exterior components are
installed in preparation for post-overhaul/repair test and shipment to the
operator;" (19) photograph of helicopter with caption reading "NAC is a leader
in the overhaul of Allison 250 helicopter engines. It has also expanded into the
Pratt & Whitney PT6 helicopter engine market;" (20) photograph of workman with
caption reading "Use of the coordinate measuring machine permits three axis
dimensional inspection of parts to a very high degree of accuracy;" (21)
photograph of workman with caption reading "Quality control is built into every
facet of NAC's production;" and (22) photograph of workman with caption reading
"The final quality stamp of approval does not go on the product until
satisfactory completion of acceptance testing." Logos shown include FAVS, NAC
and API - AMR COMBS.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, including "Risk Factors" and
Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the "Company"
are to First Aviation Services Inc. ("First Aviation") and its subsidiaries,
National Airmotive Corporation ("NAC") and Aircraft Parts International Combs,
Inc. ("API Combs"). "Old API" refers to the assets of Aircraft Parts
International, a division of AMR Combs, Inc. ("AMR Combs") to be acquired by API
Combs concurrently with the closing of the Offering (the "API Combs
Acquisition"). All references to "Allison" refer to the Allison Engine Company,
a subsidiary of Rolls Royce USA. Unless otherwise indicated, the information in
this Prospectus (i) reflects a 6.4549 to 1 stock split to be effected as a stock
dividend in February 1997, (ii) assumes all currently outstanding warrants to
purchase the Company's Common Stock have been exercised in full, (iii) gives
effect to the API Combs Acquisition, and (iv) assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
First Aviation 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.
The Company is one of the leading suppliers of aircraft engine and other
aircraft parts to the general aviation industry in the U.S. On a pro forma
basis, including the API Combs Acquisition, the Company had net sales of $105.9
million and income before extraordinary item of $4.4 million for the nine month
period ended October 31, 1996, and net sales of $122.6 million and income before
extraordinary item of $0.8 million for the twelve month period ended January 31,
1996. See " -- Summary Historical and Pro Forma Financial Data."
Through NAC, the Company provides repair and overhaul services for several
engine types, including: (i) the Allison 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 cogeneration and gas transmission.
Management believes that the Company has also established itself as an industry
leader in the remanufacturing of serviceable engine parts and components for use
in engine overhauls.
The API Combs Acquisition is an initial step in meeting the Company's goal
of participating in the consolidation of the aviation services industry. See
"Business -- Industry Trends." The API Combs Acquisition expands the Company's
services by focusing on supplying aircraft parts to the general aviation market,
thereby allowing the Company to leverage its repair and overhaul and
remanufacturing expertise through new product lines and new customer base and by
expanding API Combs' geographic coverage.
The four principal components of the Company's growth strategy are to: (i)
increase net sales and operating income through the successful marketing of its
products and services to its new customers, cross-selling of its product lines
to new and existing customers and the extension of its product lines; (ii)
capitalize on consolidation trends within the industry by pursuing strategic
acquisitions of companies with a customer base, product line or technology which
complements or expands those of the Company; (iii) increase the amount of
remanufacturing of accessories and engine components that it performs since this
work typically generates higher margins; and (iv) focus on profitable earnings
growth through the implementation of strategic initiatives which include
continued cost management and the addition of significant throughput in its
repair and overhaul services without substantial capital investment.
The Company believes it is positioned to benefit from certain industry
trends that favor independent repair and overhaul and aircraft providers
including:
- Increased outsourcing of repair and overhaul services by engine operators
as engine operators seek to reduce operating costs and turnaround time
- Increasing consolidation among repair and overhaul and parts providers as
engine operators reduce the number of providers used for these services
- Increased emphasis on the traceability of aircraft parts which has, in
turn, increased the required sophistication of information systems used
by parts distributors
- Growing demand for remanufactured parts as engine operators seek to lower
costs of repair and overhaul services
- Increasing aviation activity which, in turn, increases the demand for
repair and overhaul services
- Increased demand by aircraft operators for third parties to manage and
maintain parts inventories so that aircraft operators may reduce their
parts inventory
3
<PAGE> 6
NAC
NAC is a world leader in the servicing of certain types of engines and
components. The Company believes that it has developed this leading position in
the aircraft gas turbine engine repair and overhaul market based largely upon
the fact that it has: (i) more than 30 years of experience in the aircraft
engine repair and overhaul market; (ii) superior technical expertise and
turnaround time; (iii) a customer base comprised of more than 300 corporate and
government aircraft operators located in over 45 countries; (iv) extensive
experience in the production of remanufactured components, which deliver
performance comparable to new parts at much lower cost; and (v) a proprietary,
state-of-the-art computer system critical to managing the multitude of
simultaneous and sequential tasks necessary to repair and overhaul engines.
Since the Company's acquisition of NAC in June 1995 and the installation of
new management, NAC has initiated certain changes to its operations to improve
its financial performance. Some of these changes implemented by new management
include:
- Expansion of a foreign and domestic direct sales effort
- Rationalization of its operations under its cost containment program
- Increased efficiency through leveling of production schedules
The first elements of these changes have been implemented and further
efforts are ongoing. The Company believes that the benefits of these changes are
reflected in its improved financial performance during the nine months ended
October 31, 1996, during which overhaul and repair revenues increased 26.6%,
gross profit increased 46.0% and operating income increased 377.0%, to $5.0
million, as compared to the corresponding period in the prior year.
API COMBS
API Combs was formed to acquire Old API. API Combs signed a definitive Asset
Purchase Agreement with AMR Combs on November 25, 1996 to purchase certain
assets of and assume certain liabilities of Old API. Based upon the September
30, 1996 balance sheet of Old API, the purchase price of the specific net assets
acquired, as defined in the Asset Purchase Agreement, is estimated to be $9.7
million. The Company will make a cash payment to AMR Combs equal to 90% of the
purchase price for Old API, or $8.8 million, while the remaining 10% of the
purchase price will be satisfied through the issuance to AMR Combs of 9,727
shares of API Combs' Series A Cumulative Convertible Preferred Stock (the "API
Combs Preferred Stock"). The final purchase price is subject to adjustment based
upon the closing balance sheet and the appraisal of the fair value of certain
assets acquired. See "API Combs Acquisition."
With API Combs, the Company will have acquired an aircraft parts distributor
with more than 100 major product lines. Old API's centralized distribution
facility is located in Memphis, Tennessee. Old API provides aircraft parts and
services to more than 3,000 customers per year, including fixed base operators
("FBOs"), certified repair stations, engine and component overhaulers, fleet
operators, government agencies, air cargo operators, regional air carriers and
major airlines primarily located in North America. Old API's licensed repair
station offers brake and starter generator overhaul services and is an
authorized hose assembly manufacturing facility.
The Company believes that Old API is an attractive acquisition because of a
number of characteristics and opportunities the Company believes that Old API
provides, including:
- An efficient centralized parts distribution system
- Historically high revenue growth
- Opportunities to cross-market NAC's and Old API's products and services
both domestically and internationally
First Aviation is headquartered at One Omega Drive, Stamford, Connecticut
06907. Its telephone number is 203/359-7733. In March 1997, the Company will
relocate its headquarters to 15 Riverside Avenue, Westport, Connecticut 06880.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 3,900,000 shares
Common Stock to be outstanding after the Offering... 8,900,000 shares(1)
Use of Proceeds..................................... To repay indebtedness, to fund the cash portion of the
API Combs Acquisition, to pay accumulated and unpaid
dividends on the Series A Preferred Stock and for
general corporate purposes. See "Use of Proceeds."
Risk Factors........................................ For a discussion of certain material factors that
should be considered in connection with an investment
in the Common Stock, see "Risk Factors."
Proposed Nasdaq National Market symbol.............. FAVS
</TABLE>
- ---------------
(1) Excludes 150,000 shares of Common Stock of the Company which are subject to
options granted to Rajesh Sharma, the Chief Operating Officer of NAC, which
are exercisable as of the date hereof, 250,000 shares reserved for future
grants under the Company's Stock Option Plan, and 250,000 shares reserved
for future grants under the Company's Employee Stock Purchase Plan.
4
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(Amounts in thousands, except per share amounts)
The Company's fiscal year end is January 31. The Company acquired NAC on
June 1, 1995 and, consequently, the Statement of Operations Data for the ten
months ended January 31, 1996 and the nine months ended October 31, 1995 include
two months and four months, respectively, during which NAC was owned and
operated by its former sole shareholder (the "Predecessor"). The Statement of
Operations Data for the fiscal years ended March 27, 1992 through March 31, 1995
cover periods during which NAC was owned and operated by the Predecessor. The
Statement of Operations Data for the twelve months ended January 31, 1996 are
presented to facilitate comparisons with the prior fiscal years and include four
months during which NAC was owned by the Predecessor and eight months by the
Company. The results of Old API are not included in the historical financial
information of the Company presented below. See "Unaudited Pro Forma Combined
Financial Information," "Selected Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JANUARY 31, 1996 NINE MONTHS ENDED OCTOBER 31, 1996
------------------------------------------ -------------------------------------------
PRO FORMA(1) PRO FORMA(1)
HISTORICAL --------------------- HISTORICAL ---------------------
------------------- AS -------------------- AS
COMPANY(2) OLD API ADJUSTMENTS ADJUSTED COMPANY OLD API ADJUSTMENTS ADJUSTED
---------- ------- ----------- -------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $ 92,857 $29,676 $ 99 $122,632 $ 76,776 $29,078 $ 49 $105,903
Cost of sales............ 81,199 24,748 -- 105,947 65,606 24,333 -- 89,939
Gross profit............. 11,658 4,928 99 16,685 11,170 4,745 49 15,964
Selling, general and
administrative
expenses............... 8,578 4,836 545 13,959 6,163 4,258 669 11,090
Income (loss) from
operations............. 3,080 92 (446) 2,726 5,007 487 (620) 4,874
Income (loss) before
extraordinary item..... $ (1,060) $ (548) $ 2,438 $ 830 $ 2,388(4) $ (61) $ 2,122 $ 4,449
Income before
extraordinary item per
common share(3)........ $ 0.09 $ 0.43 $ 0.49
Weighted average number
of shares.............. 9,044(5) 5,291 9,044(5)
</TABLE>
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------------
TEN MONTHS NINE MONTHS ENDED
FISCAL YEAR ENDED TWELVE MONTHS ENDED
-------------------------------------------- ENDED JANUARY OCTOBER 31,
MARCH 27, APRIL 2, APRIL 1, MARCH 31, JANUARY 31, 31, -----------------
1992 1993 1994 1995 1996(2) 1996(2) 1995(2) 1996
--------- -------- -------- --------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $88,600 $ 97,427 $ 92,513 $83,091 $92,857 $ 79,415 $67,171 $76,776
Cost of sales............ 81,249 86,006 79,315 72,796 81,199 67,853 59,522 65,606
Gross profit............. 7,351 11,421 13,198 10,295 11,658 11,562 7,649 11,170
Selling, general and
administrative
expenses............... 9,528 9,721 8,536 9,362 8,578 6,509 6,600 6,163
Income (loss) from
operations............. (2,177) 1,700 4,662 933 3,080 5,053 1,049 5,007
Income (loss) before
extraordinary item..... (5,620) (3,023)(6) 2,021 (1,291) (1,060) 861 (1,699) 2,388(4)
Net income (loss)(3)..... $(5,620) $ (2,690) $ 2,021 $(1,291) $(1,060) $ 861 $(1,699) $ 1,524
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
OCTOBER 31, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(7)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................ $38,770 $ 47,500
Total assets............................................................... 59,036 72,002
Current portion of long-term debt.......................................... 1,105 --
Long-term debt, less current portion....................................... 33,643 5,912
API Combs Preferred Stock.................................................. -- 973
Series A Preferred Stock................................................... 1,650 --
Total stockholders' equity................................................. $ 5,710 $ 43,086
</TABLE>
- ---------------
(1) On November 25, 1996, API Combs entered into a definitive agreement to
acquire Old API for cash and API Combs Preferred Stock. See "API Combs
Acquisition," "Use of Proceeds," "Unaudited Pro Forma Combined Financial
Information" and "Business." The pro forma operating data gives effect to
the Offering and the application of net proceeds therefrom, the API Combs
Acquisition, and the exchange of the Company's Series A Preferred Stock,
face value $1,650, for shares of Common Stock at an exchange rate equal to
the initial public offering price per share (the "Series A Preferred Stock
Exchange Price") (150,000 shares assuming an initial public offering price
of $11.00 per share, the midpoint of the estimated initial public offering
price range) as if each had occurred as of the first day of the period
presented. Such pro forma financial information is not necessarily
indicative of the results of operations as they may be in the future or as
they might have been had the API Combs Acquisition been effected on the
assumed date.
(2) The financial information presented for the twelve months ended January 31,
1996, the ten months ended January 31, 1996 and the nine months ended
October 31, 1995 include four months, two months and four months,
respectively, during which NAC was owned by the Predecessor. This
information also includes the eight months, eight months and five months,
respectively, during which NAC was owned by the Company. The results of
operations for these periods are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TEN MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1996 JANUARY 31, 1996 OCTOBER 31, 1995
--------------------------- ----------------------------- ----------------------------
FIRST FIRST FIRST
NAC AVIATION NAC AVIATION NAC AVIATION
2/1/95- 6/1/95- 4/1/95- 6/1/95- 2/1/95- 6/1/95-
5/31/95 1/31/96 TOTAL 5/31/95 1/31/96 TOTAL 5/31/95 10/31/95 TOTAL
------- ------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $24,338 $68,519 $92,857 $10,896 $68,519 $79,415 $24,338 $42,833 $67,171
Cost of sales......................... 23,809 57,390 81,199 10,463 57,390 67,853 23,809 35,713 59,522
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 529 11,129 11,658 433 11,129 11,562 529 7,120 7,649
Selling general and administrative
expenses............................ 3,229 5,349 8,578 1,160 5,349 6,509 3,229 3,371 6,600
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations......... (2,700) 5,780 3,080 (727) 5,780 5,053 (2,700) 3,749 1,049
Interest expense...................... 644 2,605 3,249 287 2,605 2,892 644 1,659 2,303
Other income (expense)................ (801) -- (801) -- -- -- (801) -- (801)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) before tax.......... (4,145) 3,175 (970) (1,014) 3,175 2,161 (4,145) 2,090 (2,055)
Income tax expense (benefit).......... (1,210) 1,300 90 -- 1,300 1,300 (1,210) 854 (356)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $(2,935) $ 1,875 $(1,060) $(1,014) $ 1,875 $ 861 $(2,935) $ 1,236 $(1,699)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(3) Due to the change in ownership and equity structure, income (loss) per share
data for these periods cannot be presented meaningfully.
(4) Excludes (i) the effect of an extraordinary charge of $864 due to the
write-off of prepaid financing costs and early extinguishment charges
incurred in connection with the early extinguishment of debt and (ii)
dividends of $99 on the Company's outstanding Series A Preferred Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(5) Excludes warrants to purchase 538,890 shares of Common Stock that were
cancelled in June 1996 in connection with the repayment of a portion of the
subordinated debt held by the warrant holder.
(6) Excludes the effect of an extraordinary benefit of $333 due to the
utilization of net operating loss carry forwards.
(7) Gives effect to (i) the sale of shares offered hereby by the Company at an
assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom; (ii) the API Combs
Acquisition as if it had occurred as of October 31, 1996; and (iii) the
exchange of the Company's Series A Preferred Stock, $1,650 for 150,000
shares of Common Stock based on the Series A Preferred Stock Exchange Price.
See "API Combs Acquisition," "Use of Proceeds" and "Unaudited Pro Forma
Combined Financial Information."
6
<PAGE> 9
RISK FACTORS
Investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider carefully the following
factors in evaluating the Company and its business before purchasing any Common
Stock offered hereby.
RELIANCE ON ALLISON ENGINE COMPANY, A SUBSIDIARY OF ROLLS ROYCE U.S.A.
NAC principally services gas turbine engines manufactured by Allison and
derived more than 92% of its revenues from the repair and overhaul of Allison
engines and Allison part sales in each of the last five years. NAC is an Allison
Authorized Maintenance Center ("AMC") and pursuant to the three Authorized
Maintenance Center Agreements (the "AMC Agreements") with Allison, NAC is
authorized to purchase parts from Allison and service designated Allison Model
501 flight engines, Model 250 engines and Model 501/570/571-K industrial
engines. Allison ceased the production of new Model 501 flight engines at the
end of 1996 but will continue to manufacture the engine on a special order
basis. The Company has had contracts or AMC Agreements with Allison since 1970.
The AMC Agreements with Allison each expire by their terms on December 31, 1997,
except that the 570/571 AMC Agreement expires December 31, 1998. The AMC
Agreements, other than the 570/571 agreement, provide that qualifying AMCs will
be permitted to renew the agreements for an additional three year period.
Renewal of the 570/571 agreement is subject to Allison's sole unilateral
decision. The Company has no reason to believe that the current AMC Agreements
with Allison will not be renewed or extended. The failure of Allison to renew or
extend the AMC Agreements would, however, have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Substantial Competition" and "Business -- Relationship with Allison."
NAC has from time to time, including during 1995 and 1996, experienced
difficulty in obtaining certain parts from Allison because of parts shortages
and inventory fluctuations at Allison. The shortage or unavailability of Allison
parts can and has from time to time caused delays in the timely completion of
repair and overhaul production schedules. Such delays may adversely affect the
Company's relationship with its customers and could adversely affect the
Company's commitments to customers and its work-in-process inventory levels. An
inability to maintain timely access to Allison parts and components on
commercially reasonable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Relationship with Allison."
RELIANCE ON OTHER SUPPLIERS
NAC services certain McDonnell Douglas helicopter components and recently
commenced the servicing of Pratt & Whitney Canada PT6 engines. In addition, the
Company may commence the servicing of other gas turbine engines in the future.
Although the Company has an agreement with McDonnell Douglas, it does not have
an agreement with Pratt & Whitney Canada and is dependent on such parties for
parts required to work on their respective parts and engines. The Company,
through API Combs, purchases aircraft parts for resale from a wide range of
manufacturers. An inability to maintain timely access to parts for resale and to
parts and components on any such other engines serviced by the Company could
have a material adverse effect on the Company's business, financial condition,
and results of operations. API Combs' single largest supplier is The New Piper
Aircraft Company ("Piper"). The sale of new Piper parts accounted for
approximately 7.0% and 17.0% of API Combs' revenues in 1995 and the first nine
months of 1996, respectively. API Combs maintains an inventory of Piper parts
equivalent to approximately two month's sales. Upon the completion of the API
Combs Acquisition, API Combs will distribute Piper parts under the existing
distribution agreement between Piper and AMR Combs. AMR Combs is not obligated
to maintain or renew its Piper distribution agreement and there is no assurance
that, in the event that the agreement between Piper and AMR Combs is terminated
or not renewed for any reason, API Combs would be able to obtain a distribution
agreement from Piper. The loss of the Piper distributorship or a decline in the
availability of Piper parts would have a material adverse effect on the
Company's business, financial condition and results of operation.
7
<PAGE> 10
GROWTH STRATEGY AND RISKS RELATING TO ACQUISITIONS
A key element of the Company's strategy involves growth through the
acquisition of other independent service and parts providers whose assets or
product lines would complement or expand the Company's existing repair and
overhaul and spare parts businesses. The API Combs Acquisition is an example of
such an acquisition. The Company's ability to grow by acquisition is dependent
upon, and may be limited by, the availability of suitable acquisition candidates
and capital resources available to the Company. In addition, acquisitions
involve risks that could adversely affect the Company's operating results,
including the assimilation of the operations and personnel of acquired
companies, the potential amortization of acquired intangible assets and the
potential loss of key employees of acquired companies. In addition, costs and
charges, including legal and accounting fees and reserves and write-downs
relating to the actual acquisition, may be incurred by the Company or may be
reported in connection with any such acquisition, including the API Combs
Acquisition. There can be no assurance that the Company will be able to
consummate acquisitions on satisfactory terms or that the Company will be
successful in integrating any such acquisitions, including that of Old API, into
its operations. The Company evaluates acquisition opportunities from time to
time but no commitments or binding agreements have been entered into to date,
except with respect to the API Combs Acquisition. No assurance can be given that
any acquisitions will be consummated by the Company. See "Business -- Company
Strategy."
RISKS REGARDING THE COMPANY'S INVENTORY
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft engine parts and other aircraft parts that
are purchased principally from Allison and from parts resellers and customers.
Before any part may be installed in an aircraft, such part must meet certain
standards of condition established by the U.S. Federal Aviation Administration
("FAA"), the U.S. Department of Defense ("DOD"), or the equivalent regulatory
agencies in other countries. Specific regulations vary from country to country,
although regulatory requirements in other countries generally coincide with
applicable U.S. requirements. Parts must also be traceable to sources deemed
acceptable by such agencies. Parts owned or acquired by the Company may not meet
applicable standards or standards may change in the future, causing parts which
are already contained in the Company's inventory to be scrapped or modified.
Aircraft engine manufacturers may also develop new parts to be used in lieu of
parts already contained in the Company's inventory. In all such cases, to the
extent that the Company has such parts in its inventory, their value may be
reduced.
CUSTOMER CONCENTRATION
NAC has historically derived approximately 70% of its revenues from the
repair and overhaul of engines. Of the $64.1 million, $59.7 million, and $63.3
million of repair and overhaul revenues generated in fiscal 1995, the ten month
period ended January 31, 1996, and the nine month period ended October 31, 1996,
19.7%, 33.4%, and 15.6%, respectively, were attributable to military contracts
with agencies of the U.S. government, including work performed for foreign
militaries through the U.S. government's military support of its allies through
the Foreign Military Services ("FMS") program. A majority of the U.S. government
revenues in the periods identified above were attributable to a five year FMS
contract for the support of Allison Model 501 engines that expired in October
1995. Work performed by NAC for the U.S government as a percentage of its total
revenues has declined and is expected to decline further in future periods. See
"-- Defense Spending Reductions."
Apart from the U.S. government, NAC's top five customers accounted for
22.2%, 10.3%, and 34.9% of NAC's revenues from the repair and overhaul of
engines during fiscal 1995, the ten month period ended January 31, 1996, and the
nine month period ended October 31, 1996, respectively. The identity and mix of
NAC's customers changes as significant contracts are obtained and fulfilled. The
majority of NAC's revenues are derived from short-term contracts with its
customers.
8
<PAGE> 11
DEFENSE SPENDING REDUCTIONS
There has been and there continues to be a reduction in defense spending by
the U.S. government. These reductions, including reductions in the DOD's
military support of U.S. allies, may adversely affect demand for the Company's
services. While recent closings of U.S. military aircraft bases and reductions
in military personnel have led to decisions by the military to outsource, in
certain instances, engine repairs and overhauls to commercial suppliers, which
may increase the number of military gas turbine engines available to be serviced
by independent contractors such as the Company, there can be no assurance that
such outsourcing will take place or that the Company will be successful in
obtaining any such work. Moreover, the Company cannot predict whether reductions
in defense and government spending in general will adversely affect the
Company's results of operations in the future.
SUBSTANTIAL COMPETITION
Engine Repair and Overhaul. The Company is subject to substantial
competition in providing engine repair and overhaul services on the engine lines
that it currently services from other Allison AMCs and, with respect to
McDonnell Douglas helicopter components and Pratt & Whitney Canada engines,
numerous other domestic and foreign manufacturers and independent service
centers, many of which competitors have substantially greater capital and other
resources than the Company. In addition to NAC, there are eight other Allison
Model 501 AMCs, twenty-five other Model 250 AMCs and one other Allison Model
570/571 AMC, each of which is unrestricted in geographic territory and each of
which may purchase parts for resale and use in engine repair from Allison on
substantially the same terms as the Company. The Company's agreements with
Allison do not restrict Allison from increasing the number or geographic
location of AMCs authorized by it. In addition, certain foreign competitors have
a monopoly on their country's military contracts for repair and overhaul of
engines such as those serviced by the Company. These monopolies limit the
potential market for the Company's services in these jurisdictions. Neither
Rolls Royce nor Allison is, at present, a significant factor in the repair and
overhaul of Allison gas turbine engines. Rolls Royce has publicly stated that
its future strategy for competing in the aircraft engine business includes
active competition in the aftermarket. In addition, other major aircraft engine
companies, such as General Electric and Pratt & Whitney, are beginning to
compete aggressively in the aftermarket. There can be no assurance that Rolls
Royce, its affiliates, or perhaps another engine manufacturer, all of which have
greater size and financial resources than the Company, will not enter or
substantially increase their presence in the aftermarket in the Company's
product lines.
Allison Engine Parts Sales. Prior to 1994, Allison maintained a more
limited system of authorized distributors of its parts. Under the old system,
independent overhaul centers that were not authorized distributors of Allison
engine parts were required to purchase needed parts from an authorized
distributor, such as the Company. Under the current system, independent overhaul
centers may purchase parts directly from Allison for resale instead of being
obligated to purchase parts from an authorized distributor. As a result, the
Company's parts sales of Allison engine parts over-the-counter has declined.
During fiscal 1995, the ten months ended January 31, 1996 and the nine months
ended October 31, 1996, parts sales, excluding parts embodied in overhaul
operations, were $18.0 million, $17.6 million and $11.2 million, respectively.
The Company expects the level of its over-the-counter Allison parts sales to
continue at reduced levels. See "Business -- Relationship with Allison."
Other Parts Sales. API Combs competes with several aviation parts
distributors who, in the aggregate, offer most of the same product lines to the
same customers. Most aviation manufacturers appoint between two and fifteen
distributors. Such appointments are typically contracted on an annual basis, can
be terminated at any time, and, in many cases, are not evidenced by a formal
contract. There is little or no exclusivity given by manufacturers and no
assurance of contract renewals and no assurance that any such contract or
relationship will not be terminated with little or no notice to the Company. The
loss or non-renewal of one or more product lines could have a material adverse
effect on the Company's business, financial condition and results of operations.
9
<PAGE> 12
GOVERNMENT REGULATION AND RELATED LEGAL PROCEEDINGS
FAA regulations require that aircraft engines operated commercially in the
U.S. be serviced by a certified provider such as NAC. NAC is also required to
maintain certifications from foreign governments in order to service their
aircraft engines. Although the Company believes that NAC possesses all required
domestic and foreign governmental certifications, including FAA certifications
entitling it to service all gas turbine aircraft engine lines and models and
aircraft currently serviced by NAC, the revocation or limitation of its FAA
certification would have a material adverse effect on the Company's operations.
The DOD requires that parties servicing aircraft engines and aircraft for
branches of the U.S. armed services comply with applicable government
regulations and the DOD continually reviews operations for compliance with
applicable regulations. See "Business -- Government Regulation" and "-- Legal
Proceedings."
In June 1993, prior to the acquisition by the Company, NAC entered into an
Administrative Settlement Agreement (the "Settlement Agreement") with the U.S.
Air Force as lead agency for the DOD. The Settlement Agreement arose from an
investigation conducted by the U.S. Department of Justice ("DOJ") and DOD
concerning the dealings of certain defense contractors, including NAC, with
representatives of the Israeli Air Force. Under the terms of the Settlement
Agreement, NAC pleaded guilty to allegations of fraud and false claims
submissions and paid $3 million in fines and penalties to the U.S. government
and agreed to a higher level of reporting regarding compliance with NAC's ethics
program and an increased level of scrutiny of its operations by the DOD for
three years. Under the Settlement Agreement, the DOD agreed not to limit NAC's
ability to obtain government contracts or subcontracts on account of NAC's past
dealings with the Israeli Air Force. The Settlement Agreement has expired.
In April 1994, NAC acquired certain assets of Heli-Dyne, Inc.
("Heli-Dyne"). In October 1994, NAC made a formal voluntary disclosure to the
DOD Inspector General concerning apparent impermissible product substitutions
made by employees of Heli-Dyne prior to NAC's acquisition of its assets and very
limited product substitutions made after the acquisition but prior to NAC's
identification of the problem. While the government may assert otherwise, the
Company does not believe it is responsible for the conduct of Heli-Dyne that
occurred prior to the acquisition of its assets. To date, there has not been any
disposition of this matter. See "Business -- Government Regulation" and
"-- Legal Proceedings."
Since 1993, the U.S. government, through the DOD and other agencies, has
questioned other matters concerning the operations of NAC. In 1995 and during
1996, the Office of Special Investigations of the U.S. Air Force has conducted
an investigation concerning NAC's use of government surplus parts without prior
government approval in repairing aircraft engines pursuant to FMS contracts with
the U.S. Air Force from 1987 through 1995 in violation of the FMS contracts. The
Company does not believe that any Company employee knowingly violated the FMS
contracts and the Company believes that the U.S. Air Force knew of NAC's
utilization of surplus parts and in some cases requested that the Company use
certain government surplus parts under the FMS contracts. To date, there has not
been any disposition of this matter. See "Business -- Government Regulation" and
"-- Legal Proceedings."
The U.S. government has considerable discretion regarding compliance with
its rules, regulations and procedures. Although the Company undertakes to comply
with all applicable government rules, regulations and procedures, the U.S.
government and its agencies have substantial latitude in determining whether
their regulations and policies have been upheld. The operations of the Company
have and may continue to come under the close scrutiny of the U.S. government
and its agencies, and U.S. government approvals of the Company's operations and
output may be given or withheld based upon subjective criteria. If any of the
pending matters described above is determined in a manner adverse to the
Company, such determination could have a material adverse impact on the
Company's business, financial condition or results of operations. See
"Business -- Government Regulation" and "-- Legal Proceedings."
FLUCTUATIONS IN QUARTERLY RESULTS; PRICE VOLATILITY
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including, among others, the
timing and receipt of orders for the repair and overhaul of engines and
fulfillment of such contracts, parts shortages that delay completion of work in
progress, general
10
<PAGE> 13
economic conditions or other factors. These factors or market conditions in
general may cause the market price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years, the stock market has experienced
significant price and volume fluctuations. These fluctuations, which are often
unrelated to the operating performances of specific companies, have had a
substantial effect on the market price of stocks, particularly for many lower
capitalization companies. Factors such as those cited above, as well as other
factors may be unrelated to the operating performance of the Company, and may
adversely affect the price of the Common Stock.
ENVIRONMENTAL REGULATION
The Company's business operations and facilities are subject to a number of
federal, state and local environmental laws and regulations including
requirements under the Clean Air Act Amendments of 1990 relating to the
discharge of air pollutants into the environment and the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). NAC
has been designated as a potentially responsible party by the Environmental
Protection Agency for costs associated with the cleanup of a superfund site, and
as such as with each of the other potentially responsible parties, is
potentially liable on a joint and severable basis for the entire clean-up cost
of the superfund site. NAC has denied any responsibility in such action, and the
Company believes that its current operations and facilities are in material
compliance with all federal, state and local environmental laws and regulations.
However, no assurance can be given that changes in such laws, regulations or
interpretations thereof or in the nature of the Company's operations will not
require the Company to make significant additional capital expenditures in order
to maintain or effect compliance. See "Business -- Environmental Matters and
Proceedings."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Revenues attributable to foreign customers represented approximately 31.6%
and 34.8% of total revenues for the ten month period ended January 31, 1996 and
the nine month period ended October 31, 1996, respectively. The Company's
contracts are all denominated in U.S. dollars and all of such revenues were paid
in U.S. dollars. International sales are subject to inherent risks, including
variations in local economies, fluctuating exchange rates which may tend to make
the Company's services more expensive to foreign customers, greater difficulty
in accounts receivable collection, costs and risks associated with changes in
tariffs and other trade barriers, adverse foreign tax consequences, cultural
differences and burdens of complying with a variety of foreign laws. There is no
assurance that these factors will not have a material adverse impact on the
Company's ability to maintain or increase the level of its international
revenues.
AVIATION INDUSTRY RISKS
A substantial percentage of the Company's revenues and operating income is
derived from services and parts it provides to its customers in the aviation
industry, including the U.S. and foreign governments and militaries. Therefore,
the Company's business is directly affected by economic factors and other trends
that affect its customers in the aviation industry, including a possible
decrease in outsourcing by aircraft operators or projected market growth that
may not materialize or continue. When such economic and other factors adversely
affect the aviation industry, they tend to reduce the overall customer demand
for the Company's products and services, thereby decreasing the Company's
revenues and operating income. There can be no assurance that economic and other
factors that might affect the aviation industry will not adversely affect the
Company's results of operations. See "Business -- Industry Overview" and
"-- Industry Trends."
PRODUCT LIABILITY RISKS
The Company's business exposes it to possible claims for personal injury,
death or property damage which may result from the failure or malfunction of
engines serviced by the Company or aircraft spare parts sold by the Company. The
Company currently has in force aviation products, premises and hangarkeepers
insurance, which the Company believes provides coverage in amounts and on terms
that are generally consistent with industry practice. The Company also has
insurance coverage for liability in connection with the industrial or marine gas
turbine engines that it services. During the last five years, the Company has
not
11
<PAGE> 14
experienced any material product liability claims related to its products.
However, the Company is subject to a material loss to the extent that a claim is
made against the Company which is not covered in whole or in part by insurance
and for which any third-party indemnification is not possible. In addition,
there can be no assurance that insurance coverages can be maintained in the
future at an acceptable cost.
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company is dependent to a significant degree
upon the services of its executive officers and upon the Company's ability to
attract and retain qualified personnel experienced in the various phases of the
Company's business. Loss of the services of such employees, particularly Michael
Culver, Chief Executive Officer of the Company and API Combs; John F. Risko,
Chief Operating Officer of the Company and Chief Executive Officer of NAC; or
John A. Marsalisi, Chief Financial Officer of the Company and NAC could
adversely affect the operations of the Company. The Company does not maintain
key man life insurance for any of its executive officers or key employees.
RELIANCE ON SKILLED PERSONNEL
From time to time the Company has experienced difficulty in attracting and
retaining skilled personnel to perform some of its repair and overhaul
operations on sophisticated engines and components. The ability of the Company
to operate and grow successfully could be jeopardized if the Company is unable
to attract and retain a sufficient number of skilled personnel.
CONCENTRATION OF SHARE OWNERSHIP AND CONTROL OF COMPANY
Approximately 73.3% of the Company's outstanding Common Stock is owned by
FAS Inc. ("FAI"), a subsidiary of First Equity Development, Inc., an aerospace
investment and advisory firm ("First Equity"). Upon consummation of the
Offering, FAI will own in the aggregate approximately 41.6% of the outstanding
Common Stock, and by virtue of such ownership will have effective control over
all matters requiring a vote of stockholders, including the election of
directors. See "Principal Stockholders" and "Description of Capital Stock."
BENEFITS OF OFFERING TO EXISTING STOCKHOLDERS; IMMEDIATE AND SUBSTANTIAL
DILUTION
The existing stockholders of the Company will receive certain benefits from
the sale of the Common Stock offered hereby. The Offering will establish a
public market for the Common Stock and provide increased liquidity to the
existing stockholders for the shares of Common Stock they will own after the
Offering, subject to certain limitations. See "Shares Eligible For Future Sale."
The Company intends to use $1.9 million of the net proceeds from the Offering to
repay the outstanding balance of 15% subordinated debt owed to the Selling
Stockholder, $231,000 in payment of accumulated and unpaid dividends on the
outstanding Series A Preferred Stock of the Company held by FAI, $350,000 to pay
a fee to First Equity for assistance with the Offering and $250,000 to pay a fee
to First Equity for assistance rendered in connection with the API Combs
Acquisition. See "Use of Proceeds." Assuming that the over-allotment option
granted to the Underwriters is exercised in full, the Selling Stockholder will
sell 585,000 shares of Common Stock in the Offering and will receive
approximately $6.0 million in net proceeds, based upon an initial public
offering price of $11.00 per share (the midpoint of the estimated initial public
offering price range) and after deducting the estimated underwriting discounts
and commission, reflecting a net gain of $10.18 per share over the original cost
of the shares and an aggregate net gain of approximately $6.0 million. See
"Principal Stockholders." Additionally, immediately following the Offering, the
existing stockholders will have an average unrealized gain over the original
cost of the shares that will continue to be held by them of $10.55 per share,
based upon the assumed initial public offering price of $11.00 per share, or an
aggregate unrealized gain of approximately $52.7 million. In addition, Mr.
Sharma, the Chief Operating Officer of NAC, will have fully vested options to
purchase 150,000 shares of the Company's Common Stock with an exercise price of
$.01 per share. Such options will, based on an assumed initial public offering
price of $11.00 per share, represent an aggregate unrealized gain of $1,648,500.
In connection with the closing of the Offering, the Company's Series A Preferred
Stock, face value $1,650,000, held by FAI will be exchanged for 150,000 shares
of Common Stock
12
<PAGE> 15
based on the Series A Preferred Stock Exchange Price. See "Dilution" and
"Principal Stockholders." Purchasers of the Common Stock offered hereby will
incur immediate and substantial dilution of $6.16 in the net tangible book value
per share of Common Stock. See "Dilution."
ANTI-TAKEOVER PROTECTIONS; BLANK CHECK PREFERRED STOCK
The Company's Certificate of Incorporation and Bylaws contain provisions
that may have the effect of discouraging certain transactions involving an
actual or threatened change of control of the Company. See "Description of
Capital Stock -- Certain Provisions of the Certificate and Bylaws" for a
description of these provisions. In addition, the Board of Directors of the
Company has the authority to issue up to 5,000,000 shares of preferred stock in
one or more series and to fix the preferences, rights and limitations of any
such series without stockholder approval. See "Description of Capital
Stock -- Preferred Stock." The ability to issue preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company, or otherwise could
adversely affect the market price of the Common Stock.
OFFERING PRICE DETERMINATION; ABSENCE OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock offered hereby and there can be no assurance that an active trading
market will develop or be sustained subsequent to the Offering. The initial
public offering price of the Common Stock will be determined in negotiations
among the Company, the Selling Stockholder and the representatives of the
Underwriters and may not be indicative of the prices that may prevail in the
public market. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that
the market price of the Common Stock will not decline below the initial public
offering price.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. Except with respect to the dividends on the
preferred stock of API Combs to be issued in connection with the API Combs
Acquisition, the Company intends to retain profits, if any, to fund growth and
expansion. The terms of NAC's bank credit facility currently prohibit its
payment of cash dividends except with the lender's consent. See "Dividend
Policy" and "Description of Capital Stock."
13
<PAGE> 16
API COMBS ACQUISITION
API Combs was formed to acquire Old API. API Combs signed a definitive
Asset Purchase Agreement with AMR Combs on November 25, 1996 to purchase certain
assets and assume certain liabilities of Old API. The closing of the acquisition
will occur concurrent with the closing of the Offering.
The purchase price for Old API is $11,000,000, subject to further payment
or reduction on a dollar-for-dollar basis depending upon whether the net value
of assets as of the acquisition closing (as determined in accordance with GAAP
principles) is greater or less than $10,500,000, respectively. Ninety percent of
the purchase price is payable to AMR Combs in cash, and 10% by means of the
issuance to AMR Combs of API Combs Preferred Stock at a face value of $100 per
share. The shares of API Combs Preferred Stock will be entitled to an annual
dividend of $4.00 per share, payable quarterly.
If the API Combs Acquisition had occurred as of September 30, 1996, based
upon Old API's net asset value as of that date, the purchase price would have
been $9.7 million, of which $8.8 million would have been payable in cash and the
balance by the issuance of 9,727 shares of API Combs Preferred Stock. The actual
purchase price will be determined within 90 days after the consummation of the
API Combs Acquisition, and may be more or less than the amount set forth above.
In connection with the API Combs Acquisition, First Aviation, API Combs and
AMR Combs will enter into a Stockholders Agreement. Pursuant to the Stockholders
Agreement, AMR Combs will agree that it will not sell the shares of API Combs
Preferred Stock received by AMR Combs or the shares of API Combs common stock
into which such shares are convertible (collectively the "API Combs Acquisition
Shares") for a minimum period of three years. API Combs has the right to redeem
the API Combs Acquisition Shares at any time and AMR Combs has the right to
cause the Company to redeem the API Combs Acquisition Shares commencing three
years after the closing of the API Combs Acquisition. The redemption price is
equal to the fair market value of the API Combs Acquisition Shares as determined
by independent appraisal. In accordance with generally accepted accounting
principles, the Company will be required to estimate the fair market value of
the API Combs Acquisition Shares on a quarterly basis. As a result, the Company
may be required to adjust net earnings available to common stockholders to
reflect any change in the value of such shares. The Stockholders Agreement will
also contain certain other rights including: (i) a right of first refusal on the
part of First Aviation with respect to any proposed sale of the API Combs
Acquisition Shares; (ii) the right of First Aviation to require AMR Combs to
participate, on a pro rata basis, with it in the sale of the capital stock of
API Combs to a third party; (iii) the right of AMR Combs to elect to
participate, on a pro rata basis, in the sale of the capital stock of API Combs
to a third party; and (iv) piggyback and demand registration rights granted to
AMR Combs with respect to the API Combs Acquisition Shares. The demand
registration rights are not exercisable until three years after the closing of
the API Combs Acquisition, and, if API Combs has not previously closed an
underwritten public offering of its common stock at the time AMR Combs elects to
exercise its demand registration rights, API Combs may elect to treat the demand
as an exercise by AMR Combs of its put option with respect to the API Combs
Acquisition Shares. There are no plans to cause API Combs to conduct a public
offering of its securities.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,900,000 shares of Common
Stock offered hereby, assuming an offering price of $11.00 per share (the
midpoint of the estimated initial public offering price range), are estimated to
be $37.9 million, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, including a $350,000 fee
payable to First Equity for assistance rendered in connection with the Offering
and a $250,000 fee payable to First Equity for assistance rendered in connection
with the API Combs Acquisition. See "Certain Transactions." Concurrently with
the closing of the Offering, the Selling Stockholder will be exercising warrants
for 1,293,335 shares of Common Stock at a price of $0.05 per share.
The Company intends to use $8.8 million (subject to adjustment) of the net
proceeds to acquire Old API, $1.9 million to repay the outstanding balance of
15% subordinated debenture owed to the Selling Stockholder, Canpartners
Investments IV, LLC ("Canpartners"), $2.8 million to repay term debt outstanding
under NAC's credit facility and $231,000 in payment of accumulated and unpaid
dividends on the Company's Series A Preferred Stock held by FAI. See "API Combs
Acquisition" and "Certain Transactions." Approximately $24.2 million will be
used to reduce the outstanding balance under NAC's credit facility. The total
balance outstanding under the credit facility was $32.9 million as of October
31, 1996. Advances under the revolving portion of the credit facility bear
interest at the LIBOR rate plus 3.0% and on the term debt portion of the credit
facility bear interest at the LIBOR rate plus 3.5% and 4.5%, and have been used
primarily to finance inventory purchases and accounts receivable.
The Company intends to use any remaining net proceeds for working capital
and general corporate purposes, including the possible investment in or
strategic acquisition of other complementary businesses. Although the Company is
continually evaluating potential acquisitions, the Company currently has no
agreements, understandings or commitments with respect to any acquisition other
than Old API, nor is the Company engaged in negotiations with respect to any
acquisition.
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. Government securities, short term certificates of
deposit, money market funds or other short term, interest bearing securities.
DIVIDEND POLICY
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. NAC's credit facility prohibits the payment of cash
dividends by it except with the lender's consent.
15
<PAGE> 18
DILUTION
The difference between the public offering price per share of Common Stock
and the net tangible book value per share of the Company after the Offering
constitutes the dilution to investors in the Offering. Net tangible book value
per share is determined by dividing the net tangible book value of the Company
(tangible assets less total liabilities) by the applicable number of shares of
Common Stock.
At October 31, 1996, the net tangible book value of the Company
attributable to its Common Stock was $5,189,000, or $1.04 per share of Common
Stock. See footnote (1) below. After giving effect to the sale by the Company of
the 3,900,000 shares of Common Stock offered by the Company in the Offering
(less underwriting discounts and commissions and estimated expenses of the
Offering) at an assumed initial public offering price per share of $11.00 (the
midpoint of the estimated initial public offering price range), the net tangible
book value of the Company attributable to its Common Stock at October 31, 1996,
as adjusted for the Offering, would have been $43,086,000 or $4.84 per share,
representing an immediate increase in net tangible book value of $3.80 per share
to existing stockholders and an immediate dilution of $6.16 per share to new
investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price............................................. $11.00
Net tangible book value before the Offering..................... $1.04(1)
Increase in net tangible book value attributable to new
investors.................................................... 3.80
-----
Pro forma net tangible book value after the Offering............ 4.84
-----
Dilution to new investors......................................... $ 6.16
=====
</TABLE>
- ---------------
(1) Computed by reducing total assets of $59,036,000 at October 31, 1996 by
$360,000 (the amount of intangible assets), subtracting total liabilities of
$53,326,000, assuming the exchange of the Company's Series A Preferred
Stock, face value $1,650,000, for 150,000 shares of Common Stock based on
the Series A Preferred Stock Exchange Price, subtracting the accumulated and
unpaid dividends on the Series A Preferred Stock of $231,000, adding the
proceeds from the exercise of the outstanding warrants, $70,000, and then
dividing by 5,000,000 (the number of shares outstanding immediately prior to
the Offering).
The following table sets forth, with respect to existing stockholders and
new investors, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid, the percentage of total consideration paid and the average
price per share. The calculations are based on an assumed initial public
offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)......... 5,000,000 56.2% $ 2,271,000 5.0% $ 0.45
New investors.................... 3,900,000 43.8% 42,900,000 95.0% $ 11.00
--------- ----- ----------- -----
Total.................. 8,900,000 100.0% $45,171,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(2) Includes 150,000 shares of Common Stock to be issued in exchange for the
Company's Series A Preferred Stock, face value $1,650,000.
The foregoing table assumes no exercise of the 150,000 outstanding stock
options. If all such options had been exercised, there would have been an
immediate dilution of $6.24 per share. See "Management -- Executive Compensation
and Employment Agreements."
16
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of October 31, 1996: (i) the actual
capitalization of the Company as of such date; and (ii) the capitalization of
the Company on a pro forma as adjusted basis, giving effect to (a) the API Combs
Acquisition; (b) the sale by the Company of 3,900,000 shares of Common Stock in
the Offering at an assumed offering price of $11.00 per share (the midpoint of
the estimated initial public offering price range) and the application of the
net proceeds therefrom; and (c) the exchange of the Company's Series A Preferred
Stock, face value $1,650,000 for 150,000 shares of Common Stock based on the
Series A Preferred Stock Exchange Price, as if each had occurred on October 31,
1996. See "Use of Proceeds." This table assumes that all outstanding warrants to
purchase the Company's Common Stock have been exercised in full. The number of
outstanding shares of Common Stock reflected in the table excludes 150,000
shares of Common Stock of the Company which are subject to options exercisable
as of the date hereof, 250,000 shares reserved for future grants under the
Company's Stock Option Plan, and 250,000 shares reserved for future grants under
the Company's Employee Stock Purchase Plan. This table should be read in
conjunction with information contained under the caption "Unaudited Pro Forma
Combined Financial Information" and the Financial Statements and the Notes
thereto of each of the Company and API Combs included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1996
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Current portion of long-term debt................................ $ 1,105 $ --
Long-term debt, less current portion............................. 33,643 5,912
API Combs Preferred Stock........................................ -- 973
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized;
33,000 shares issued and outstanding actual; none
outstanding,
pro forma as adjusted....................................... 1,650 --
Common Stock, $0.01 par value; 25,000,000 shares authorized,
4,850,000 shares issued and outstanding actual; 8,900,000
shares
issued and outstanding, pro forma as adjusted............... 49 89
Additional paid-in capital....................................... 612 40,189
Retained earnings................................................ 3,399 2,808
------- -------
Total stockholders' equity..................................... 5,710 43,086
------- -------
Total capitalization........................................ $40,458 $49,971
======= =======
</TABLE>
17
<PAGE> 20
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following sets forth the Company's Unaudited Pro Forma Combined Income
Statement for the twelve months ended January 31, 1996, and the nine months
ended October 31, 1996, and the Company's Unaudited Pro Forma Combined Balance
Sheet at October 31, 1996, in each case giving effect to: (i) the API Combs
Acquisition using the "purchase" method of accounting; (ii) the Offering and the
application of the net proceeds therefrom assuming an initial public offering
price of $11.00 per share (the midpoint of the estimated initial public offering
price range); and (iii) the exchange of the Company's Series A Preferred Stock,
face value $1,650,000, for 150,000 shares of Common Stock based on the Series A
Preferred Stock Exchange Price. The Company's Unaudited Pro Forma Combined
Income Statements present such events in each case, as if each had been
consummated at the beginning of the periods presented. The Company's Unaudited
Pro Forma Combined Balance Sheet presents such events in each case, as if each
had been consummated on October 31, 1996. The Unaudited Pro Forma Combined
Financial Information of the Company is presented for illustrative purposes
only, and does not purport to present the financial position or results of
operations of the Company had the API Combs Acquisition, the Offering and such
exchange occurred on the dates indicated, nor are they necessarily indicative of
the results of operations which may be expected to occur in the future.
The results of Old API are not included in the historical financial
information of the Company presented below. The pro forma adjustments relating
to allocation of the purchase price of Old API represent the Company's
preliminary determinations of the purchase accounting and other adjustments and
are based upon available information and certain assumptions the Company
considers reasonable under the circumstances. Final amounts could differ from
those set forth therein.
The following unaudited pro forma combined financial information should be
read in connection with the more detailed information, including the Financial
Statements and Notes thereto, included elsewhere in this Prospectus.
18
<PAGE> 21
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
INCOME STATEMENT
TWELVE MONTHS ENDED JANUARY 31, 1996
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(1) -------------------------
------------------------------------------- ACQUISITION,
FIRST OFFERING
NAC AVIATION AND
2/1/95- 6/1/95- EXCHANGE AS
5/31/95 1/31/96 COMPANY OLD API ADJUSTMENTS ADJUSTED
------- -------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $24,338 $68,519 $92,857 $29,676 $ 99(2a) $122,632
Cost of sales.................. 23,809 57,390 81,199 24,748 -- 105,947
------- ------- ------- -------- ------- ---------
Gross profit................... 529 11,129 11,658 4,928 99 16,685
Selling, general and
administrative expenses...... 3,229 5,349 8,578 4,836 545(2b) 13,959
------- ------- ------- -------- ------- ---------
Income (loss) from
operations................... (2,700) 5,780 3,080 92 (446) 2,726
------- ------- ------- -------- ------- ---------
Other (income) expense:
Interest expense............. 644 2,605 3,249 643 (3,222)(2c) 670
Other........................ 801 -- 801 (3) -- 798
------- ------- ------- -------- ------- ---------
Total other (income)
expense.............. 1,445 2,605 4,050 640 (3,222) 1,468
------- ------- ------- -------- ------- ---------
Income (loss) before provision
for income taxes............. (4,145) 3,175 (970) (548) 2,776 1,258
Income tax expense (benefit)... (1,210) 1,300 90 -- 338(2d) 428
------- ------- ------- -------- ------- ---------
Income (loss) before
extraordinary item........... $(2,935) $ 1,875 $(1,060) $ (548) $ 2,438 $ 830
======= ======= ======= ======== ======= =========
Income per share............... $ 0.09
=========
Shares used in computation of
net income per share......... 9,044
=========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information.
19
<PAGE> 22
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
INCOME STATEMENT
NINE MONTHS ENDED OCTOBER 31, 1996
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------
ACQUISITION,
OFFERING
HISTORICAL(1) AND
------------------- EXCHANGE
COMPANY OLD API ADJUSTMENTS AS ADJUSTED
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................... $76,776 $29,078 $ 49(2a) $105,903
Cost of sales............................... 65,606 24,333 -- 89,939
------- ------- ------- --------
Gross profit................................ 11,170 4,745 49 15,964
Selling, general and administrative
expenses.................................. 6,163 4,258 669(2b) 11,090
------- ------- ------- --------
Income from operations...................... 5,007 487 (620) 4,874
------- ------- ------- --------
Other expense:
Interest expense.......................... 2,619 548 (2,742)(2c) 425
Other..................................... -- -- -- --
------- ------- ------- --------
Total other expense............... 2,619 548 (2,742) 425
------- ------- ------- --------
Income (loss) before provision for income
taxes..................................... 2,388 (61) 2,122 4,449
Income tax expense.......................... -- -- -- --
------- ------- ------- --------
Income (loss) before extraordinary item..... $ 2,388 $ (61) $ 2,122 $ 4,449
======= ======= ======= ========
Income per share............................ $ 0.49
========
Shares used in computation of net income per
share..................................... 9,044
========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information.
20
<PAGE> 23
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BALANCE SHEET
OCTOBER 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
ACQUISITION,
OFFERING
HISTORICAL AND
----------------------- EXCHANGE
COMPANY OLD API(1) ADJUSTMENTS AS ADJUSTED
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ -- $ 3,699 $ (3,553)(3a) $ 146
Restricted cash........................... 544 -- -- 544
Trade and other receivables, net.......... 17,937 6,676 -- 24,613
Inventories............................... 34,645 4,273 (300)(3b) 38,618
Deferred income taxes..................... 1,036 -- -- 1,036
Prepaid expenses and other................ 1,763 418 (135)(3c) 2,046
------- ------- -------- -------
Total current assets.............. 55,925 15,066 (3,988) 67,003
Other assets.............................. 282 -- (225)(3c) 57
Plant and equipment, net.................. 2,829 653 75(3b) 3,557
Excess of cost over net assets acquired... -- -- 1,385(3b) 1,385
------- ------- -------- -------
Total assets...................... $59,036 $15,719 $ (2,753) $72,002
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $11,729 $ 2,592 $ -- $14,321
Accrued liabilities....................... 4,321 448 413(3b) 5,182
Due to affiliates......................... -- 14,340 (14,340)(3d) --
Current portion of long-term debt......... 1,105 -- (1,105)(3e) --
------- ------- -------- -------
Total current liabilities......... 17,155 17,380 (15,032) 19,503
------- ------- -------- -------
Long-term debt less current portion......... 33,643 -- (27,731)(3e) 5,912
Other long-term liabilities................. 2,528 -- -- 2,528
------- ------- -------- -------
Total liabilities................. 53,326 17,380 (42,763) 27,943
API Combs Preferred Stock................... -- -- 973(3f) 973
AMR Combs' net investment in Old API........ -- (1,661) 1,661(3g) --
Stockholders' equity:
Preferred stock........................... 1,650 -- (1,650)(3f) --
Common stock.............................. 36 -- 53(3f) 89
Additional paid-in capital................ 625 -- 39,564(3f) 40,189
Retained earnings (deficit)............... 3,399 -- (591)(3h) 2,808
------- ------- -------- -------
Total stockholders' equity........ 5,710 -- 37,376 43,086
------- ------- -------- -------
Total liabilities and
stockholders' equity............ $59,036 $15,719 $ (2,753) $72,002
======= ======= ======== =======
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information.
21
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(Amounts in thousands, except share and per share data)
1. The pro forma periods for the twelve months ended January 31, 1996 and
for the nine months ended October 31, 1996 are the Company's historical
financial reporting periods. For the pro forma period ended January 31, 1996,
Old API has been included for the twelve months ended December 31, 1995 because
as a division of AMR Combs it had historically reported on a calendar year end.
Historical financial information of Old API for the nine months ended September
30, 1996 is included in the pro forma financial information for the nine months
ended October 31, 1996. The Company believes the effect of the difference in
these reporting periods is not significant and it is not reflected in the
Unaudited Pro Forma Combined Financial Information. The final purchase price of
the assets to be acquired in the API Combs Acquisition will be determined based
upon the balance sheet at the date of closing. Based upon Old API's September
30, 1996 balance sheet, the purchase price would be $9,727 and the allocation
would be:
<TABLE>
<S> <C>
Current assets..................................................... $11,078
Plant and equipment................................................ 728
Excess of purchase price over net assets acquired.................. 1,385
Accounts payable and accrued expenses.............................. (3,464)
-------
Total purchase price..................................... $ 9,727
=======
</TABLE>
Total cash consideration paid by the Company will be 90% of the total
purchase price or $8,754. The remaining 10% of the purchase price will be
reflected by the Company as a minority interest in the form of API Combs
Preferred Stock issued to AMR Combs. The foregoing purchase price and
allocations are based on the September 30, 1996 Old API balance sheet and
preliminary estimates of fair value. The final purchase price determination and
amount of preferred stock to be issued and cash to be paid are contingent upon
final assessment or appraisal of the fair value of certain assets to be
acquired.
2. The Company's pro forma income statement adjustments for the twelve
months ended January 31, 1996 and the nine months ended October 31, 1996 present
the effects on the historical combined financial statements of: the API Combs
Acquisition; the Offering and the application of the net proceeds therefrom; and
the exchange of the Company's Series A Preferred Stock, face value $1,650, for
150,000 shares of Common Stock based on the Series A Preferred Stock Exchange
Price, in each case as if they occurred as of the beginning of such periods,
including:
(a) To reflect sales made by Old API to an affiliated company at
intercompany prices that management believes were not reflective
of third party sales. The adjustments are calculated to reflect
the difference between such intercompany sales and the gross
margin stipulated in the Asset Purchase Agreement for such sales
during the periods reflected.
(b) To include certain amounts, aggregating $825 and $634 for the
twelve months ended January 31, 1996 and the nine months ended
October 31, 1996, respectively, for selling, general and
administrative expenses to properly reflect costs the company
would have borne as a public entity. Selling, general and
administrative expenses for the twelve months ended January 31,
1996 have been reduced by $326 to reflect the reduced depreciation
expense resulting from the write-down of fixed assets in the NAC
acquisition as if it had occurred at the beginning of the year. In
addition, the adjustment reflects amortization of $46 and $35 for
the twelve months ended January 31, 1996 and the nine months ended
October 31, 1996, respectively, calculated on a straight line
basis over thirty years of the $1,385 excess of cost over net
assets acquired in the API Combs Acquisition.
(c) To record the reduction in interest expense totalling $3,222 and
$2,742 for the periods ended January 31, 1996 and October 31, 1996,
respectively, reflecting the application of the net proceeds from
the Offering, consisting of: (i) $192 and $160, respectively,
related to the repayment of $2,800 of the Company's term debt; (ii)
$503 and $315, respectively, related to the repayment of $1,845 of
subordinated debt; (iii) $1,850 and $1,690, respectively, related to
22
<PAGE> 25
the repayment of $24,191 of NAC's credit facility; (iv) $637 and $547,
respectively related to interest paid by Old API to AMR Combs, and includes $40
and $30 related to dividends on the API Combs Preferred Stock, .
(d) To record the income tax provision arising from the pro forma
adjustments discussed above based on the Company's estimated
effective tax rate of 34% for the twelve months ended January 31,
1996.
3. For purposes of preparing the Unaudited Pro Forma Combined Balance
Sheet, Old API's assets and liabilities acquired or assumed have been recorded
at their estimated fair values. A final determination of the required purchase
price accounting adjustments and of the fair value of the assets acquired or
assumed has not yet been finalized. Accordingly, the purchase accounting
adjustments made in connection with the development of the unaudited pro forma
financial information reflects the Company's best estimate based upon currently
available information.
(a) Adjustments reflect: (i) net cash proceeds generated from the sale
of 3,900,000 shares at $11.00 per share, net of expenses and
underwriting discounts and commissions of approximately $5,003;
(ii) cash generated from the exercise of warrants for 1,293,335
shares of Common Stock at $0.05 per share; (iii) the repayment of
$2,800 of term debt, the repayment of $1,845 of subordinated debt,
and the pay down of $24,191 of NAC's credit facility; (iv) the
repayment of accumulated and unpaid dividends on the Series A
Preferred Stock of $231; (v) the $8,800 cash consideration for the
API Combs Acquisition; and (vi) cash not contractually acquired in
the API Combs Acquisition.
(b) The historical financial position of Old API has been adjusted to
include: (i) the write-up of fixed assets of $75 to estimated fair
value; (ii) $1,385 relating to the excess of cost over net assets
acquired; (iii) $300 relating to the write-down of inventory; and
(iv) the increase in accrued liabilities to record costs related
to the acquisition.
(c) Adjustment reflects the write-off of deferred financing costs for
debt which has been repaid.
(d) Reflects liabilities not contractually assumed in the API Combs
Acquisition.
(e) Adjustments to long-term debt reflect: (i) the repayment of the
Company's term debt by $2,800; (ii) the repayment of the Company's
subordinated debt by $1,845; and (iii) the pay down of NAC's
credit facility by $24,191.
(f) Adjustments reflect: (i) the exchange by FAI of the Company's
Series A Preferred Stock owned by FAI, face value $1,650 for
150,000 shares of Common Stock based on the Series A Preferred
Stock Exchange Price; (ii) the issuance of API Combs Preferred
Stock to AMR Combs, which represents 10% of the purchase price of
Old API, resulting in a minority interest of $973; (iii) the
effect of the sale of 3,900,000 shares of Common Stock at $11.00
per share, net of expenses and underwriting discounts and
commissions of approximately $5,003; and (iv) the exercise of
warrants for 1,293,335 shares of Common Stock at $0.05 per share.
(g) Adjustment to reflect the elimination of $1,661 of AMR Combs
investment in and advances to Old API.
(h) Adjustments to retained earnings reflect (i) the write-off of $360
for deferred financing costs and (ii) the $231 of accumulated
dividends paid to FAI as the holder of the Company's Series A
Preferred Stock.
23
<PAGE> 26
SELECTED FINANCIAL INFORMATION
(Amounts in thousands, except per share amounts)
The selected financial data set forth below should be read in conjunction
with the Financial Statements and related Notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included herein.
The selected financial data of the Company as of and for the ten month
period ended January 31, 1996 has been derived from the consolidated financial
statements of First Aviation, audited by Ernst & Young LLP, independent
accountants. These financial statements and the notes thereto appear elsewhere
in this Prospectus.
The selected financial data of the Company for the nine month periods ended
October 31, 1995 and October 31, 1996 has been derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for the fair presentation of the financial position and results of operations
for those periods. These financial statements and the notes thereto appear
elsewhere in this Prospectus. Results of operations for the nine month period
ended October 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending January 31, 1997.
The selected financial data as of and for the years ended March 27, 1992,
April 2, 1993, April 1, 1994 and March 31, 1995 has been derived from the
financial statements of NAC, audited by Price Waterhouse LLP, independent
accountants. The NAC balance sheet as of March 31, 1995 and the related
statements of operations and cash flows for the two years then ended and notes
thereto appear elsewhere in this Prospectus.
The historical data of NAC and the Company are not comparable in all
respects. The results of Old API are not included in the financial information
of the Company presented below.
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------------------
TWELVE TEN
FISCAL YEAR ENDED MONTHS MONTHS NINE MONTHS
---------------------------------------------- ENDED ENDED ENDED OCTOBER 31,
MARCH 27, APRIL 2, APRIL 1, MARCH 31, JANUARY 31, JANUARY 31, ------------------
1992 1993 1994 1995 1996(1) 1996(1) 1995(1) 1996
--------- ----------- -------- --------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $88,600 $97,427 $92,513 $83,091 $92,857 $79,415 $67,171 $76,776
Cost of sales................ 81,249 86,006 79,315 72,796 81,199 67,853 59,522 65,606
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 7,351 11,421 13,198 10,295 11,658 11,562 7,649 11,170
Selling, general and
administrative expenses.... 9,528 9,721 8,536 9,362 8,578 6,509 6,600 6,163
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. (2,177) 1,700 4,662 933 3,080 5,053 1,049 5,007
Interest expense............. 2,857 1,390 1,076 1,807 3,249 2,892 2,303 2,619
Other income (expense)....... (1,307) (3,000) (519) (1,302) (801) -- (801) --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes
and extraordinary items.... (6,341) (2,690) 3,067 (2,176) (970) 2,161 (2,055) 2,388
Income tax expense
(benefit).................. (721) 333 1,046 (885) 90 1,300 (356) --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item......... (5,620) (3,023) 2,021 (1,291) (1,060) 861 (1,699) 2,388
Extraordinary item........... -- 333(2) -- -- -- -- -- (864)(3)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $(5,620) $(2,690) $ 2,021 $(1,291) $(1,060) $ 861 $(1,699) $ 1,524
======= ======= ======= ======= ======= ======= ======= =======
Dividend on preferred
stock(4)................... 99
-------
Net income (loss) applicable
to common stockholder...... 1,425
=======
Net income per common share:
Income before extraordinary
item per common share.... $ 0.43
Extraordinary item per
common share............. $ (0.16)(3)
-------
Net income per common
share.................... $ 0.27
=======
Weighted average number of
shares..................... 5,291
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
COMPANY
-------------------------------------------------------------------------
MARCH 27, APRIL 2, APRIL 1, MARCH 31, JANUARY 31, OCTOBER 31,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $43,138 $ 37,739 $ 30,379 $35,560 $31,413 $38,770
Total assets............................. 77,231 69,649 65,059 64,074 60,384 59,036
Current portion of long-term
debt................................... 151 244 289 379 1,970 1,105
Long-term debt, less current portion..... 24,011 21,005 10,963 18,660 27,005 33,643
Other long-term liabilities.............. 1,681 1,322 2,243 2,168 3,601 2,528
Series A Preferred Stock................. -- -- -- -- 1,650 1,650
Total stockholders' equity............... 36,984 34,294 36,315 35,024 4,186 5,710
</TABLE>
- ---------------
(1) The financial information presented for the twelve months ended January 31,
1996, the ten months ended January 31, 1996 and the nine months ended
October 31, 1995 include four months, two months and four months,
respectively, during which NAC was owned by the Predecessor. This
information also includes the eight months, eight months and five months,
respectively, during which NAC was owned by the Company. The results of
operations for these periods are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TEN MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1996 JANUARY 31, 1996 OCTOBER 31, 1995
----------------------------- ----------------------------- ----------------------------
FIRST FIRST FIRST
NAC AVIATION NAC AVIATION NAC AVIATION
2/1/95- 6/1/95- 4/1/95- 6/1/95- 2/1/95- 6/1/95-
5/31/95 1/31/96 TOTAL 5/31/95 1/31/96 TOTAL 5/31/95 10/31/95 TOTAL
------- --------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... $24,338 $68,519 $92,857 $10,896 $68,519 $79,415 $24,338 $42,833 $67,171
Cost of sales....................... 23,809 57,390 81,199 10,463 57,390 67,853 23,809 35,713 59,522
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................ 529 11,129 11,658 433 11,129 11,562 529 7,120 7,649
Selling general and administrative
expenses.......................... 3,229 5,349 8,578 1,160 5,349 6,509 3,229 3,371 6,600
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....... (2,700) 5,780 3,080 (727) 5,780 5,053 (2,700) 3,749 1,049
Interest expense.................... 644 2,605 3,249 287 2,605 2,892 644 1,659 2,303
Other income (expense).............. (801) -- (801) -- -- -- (801) -- (801)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before tax and
extraordinary item................ (4,145) 3,175 (970) (1,014) 3,175 2,161 (4,145) 2,090 (2,055)
Income tax expense (benefit)........ (1,210) 1,300 90 -- 1,300 1,300 (1,210) 854 (356)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item.............................. $(2,935) $ 1,875 $(1,060) $(1,014) $ 1,875 $ 861 $(2,935) $ 1,236 $(1,699)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Due to the change in ownership and equity structure, income (loss) per
share data for these periods cannot be presented meaningfully.
(2) Represents an extraordinary benefit of $333 due to the utilization of net
operating loss carry forwards.
(3) Represents an extraordinary charge of $864, or $0.16 per share, due to the
write-off of prepaid financing costs and early extinguishment charges
incurred in connection with the early extinguishment of debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(4) The calculation of net income per common share requires the deduction from
net income of cumulative but undeclared preferred stock dividends.
Accumulated but undeclared preferred stock dividends were $88 during each of
the twelve months and ten months ended January 31, 1996 respectively. Net
income per common share for all periods, except as shown, cannot be
presented meaningfully due to the change in ownership and equity structure.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the Notes thereto, pro forma financial
information and selected financial data of the Company included elsewhere in
this Prospectus. The results of Old API are not included in the financial
information of the Company presented and discussed below.
OVERVIEW
First Aviation was formed in March 1995 to acquire the stock of NAC. The
acquisition of NAC was completed on June 1, 1995 and has been accounted for
under the purchase method of accounting. Net sales for NAC consist of revenues
derived from the overhaul and repair of aircraft engines, engine components and
industrial turbines as well as the sales of parts and components. Net sales are
generally recorded when repaired or overhauled engines and components are
completed, tested and shipped. In the ten month period ended January 31, 1996
and the nine month period ended October 31, 1996, revenues from the servicing,
repair and overhaul of gas turbine engines and original aircraft components
accounted for approximately 74.6% and 82.4% of net sales, respectively, with
revenue from the sale of spare parts accounting for the remaining 25.4% and
17.6%, respectively.
On November 25, 1996, API Combs signed a definitive agreement to acquire
Old API, a division of AMR Combs, which acquisition will close concurrently with
the closing of the Offering. Old API is an aircraft parts distributor of more
than 100 major product lines of aircraft parts. API Technologies, Old API's
licensed repair station, offers brake and starter generator overhaul services
and is an authorized hose assembly manufacturing facility. Net sales for Old API
represent the sales of parts and components, which are recorded when products
are shipped.
The API Combs Acquisition is an initial step in meeting the Company's goal
of participating in the consolidation of the aviation services industry. The API
Combs Acquisition expands the Company's services by focusing on supplying
aircraft parts to the general aviation market, thereby allowing the Company to
leverage its repair and overhaul and remanufacturing expertise through new
product lines and a new customer base and by expanding API Combs' geographic
coverages.
Since the acquisition of NAC in June 1995 and the installation of new
senior management, NAC has initiated certain changes to its operations to
improve its financial performance. The first elements of these changes,
including expansion of its foreign and domestic direct sales effort,
rationalization of its operations under its cost containment program and
increasing efficiency through the leveling of production schedules, have been
implemented and further efforts are ongoing. The Company believes that the
benefits of these changes are reflected in its improved financial performance
during the nine months ended October 31, 1996 as compared to the comparable
period in the prior fiscal year.
The Company analyzes its profit margins by, among other methods, product
line, and in doing so excludes certain other costs of goods sold, including
inventory obsolescence, warranty and related costs, production variances and
scrap costs. These other costs of goods sold are included in determining the
Company's total gross profit. Beginning in 1994, when Allison changed its
authorized distribution agreements, Allison significantly reduced the discounts
off of list price, both for parts for over-the-counter sales and parts embedded
in overlands and repairs. As a result, the Company's profit margins for parts
for a portion of 1995 and 1996 have been adversely impacted. Nonetheless, the
Company's profit margins increased for overhauls and repairs during these
periods.
The Company intends to pursue tax planning and related strategies,
including the formation of a Foreign Sales Corporation through which the Company
will make certain of its export sales. As a result of the anticipated
implementation of these strategies, the Company believes that it can reduce its
effective tax rate from statutory levels. No assurance can be given that the
Company's tax planning strategies will be successful.
The Company's fiscal year ends January 31. Prior to its acquisition, NAC's
fiscal year ended on the Saturday closest to March 31.
26
<PAGE> 29
RESULTS OF OPERATIONS-FIRST AVIATION
The following table sets forth, for the periods indicated, the percentages
of the Company's net sales that certain income and expense items represent. The
results of Old API are not included in the financial information presented and
discussed below. For information relating to the results of operations and
financial condition of Old API, see the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED, NINE MONTHS ENDED,
---------------------------------- -------------------------
APRIL 1, MARCH 31, JANUARY 31, OCTOBER 31, OCTOBER 31,
1994 1995 1996 1995 1996
-------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 85.7 87.6 87.4 88.6 85.5
----- ----- ----- ----- -----
Gross profit.................................. 14.3 12.4 12.6 11.4 14.5
Selling, general and administrative
expenses.................................... 9.2 11.3 9.2 9.8 8.0
----- ----- ----- ----- -----
Income from operations........................ 5.1 1.1 3.4 1.6 6.5
Interest expense.............................. 1.2 2.2 3.5 3.4 3.4
Other income (expense)........................ (0.6) (1.6) (0.9) (1.2) --
----- ----- ----- ----- -----
Income (loss) before taxes and extraordinary
item........................................ 3.3 (2.7) (1.0) (3.0) 3.1
Income tax expense (benefit).................. 1.1 (1.1) 0.1 (0.5) --
----- ----- ----- ----- -----
Net income (loss) before extraordinary item... 2.2% (1.6)% (1.1)% (2.5)% 3.1%
===== ===== ===== ===== =====
</TABLE>
Nine months ended October 31, 1996 compared with nine months ended October 31,
1995
Net sales for the nine months ended October 31, 1996 increased $9.6
million, or 14.3%, to $76.8 million from $67.2 million during the comparable
period ended October 31, 1995. The growth in net sales was primarily due to the
$13.8 million, or 26.6%, increase in revenue from repair and overhaul. This
increase was offset in part by a $3.6 million, or 21.4%, decrease in the level
of parts sold directly to customers due primarily to larger than normal parts
orders from one customer in the nine months ended October 31, 1995.
Cost of sales increased $6.1 million during the nine months ended October
31, 1996 due to the increase in sales during that period. As a percentage of net
sales, cost of sales decreased 3.1% to 85.5% during the nine months ended
October 31, 1996 from 88.6% during the comparable period in the prior year. This
decrease was due primarily to charges incurred during the nine months ended
October 31, 1995 of $1.0 million for inventory obsolescence and $0.9 million for
warranty and other accruals. Additionally, cost of sales for the nine months
ended October 31, 1996 reflect $0.5 million reduced depreciation expense as
compared to the same period in the prior year, due to purchase accounting
adjustments for the acquisition of NAC by the Company in June 1995.
The Company's total gross profit increased $3.5 million, or 46%, to $11.2
million for the nine months ended October 31, 1996. As a percentage of sales,
total gross profit increased 3.1% from 11.4% to 14.5% for the nine months ended
October 31, 1996. The profit margins of the repair and overhaul product line
increased from 14.6% to 16.4% for the nine months ended October 31, 1996, while
profit margins on part sales declined from 16.2% to 14.7%. Profit margins for
the nine months ended October 31, 1996 for repair and overhaul and part sales
product lines reflect the full implementation of changes in Allison's
arrangements with its AMCs. For parts ordered after September 1994, Allison
reduced the Company's discount off of list price on over-the-counter parts sales
from 25% to 10% for the 501 product line and from 40% to 15% on the 250 product
line. For parts embodied in overhauls, Allison reduced the discount off of list
price from 25% to 20% for the 501 engine, and from 40% to 32% for the 250
engine. The decrease in profit margins on over-the-counter part sales for the
nine months ended October 31, 1996 was largely due to the change in Allison's
arrangements with its AMCs. Profit margins of the repair and overhaul product
line increased during the nine months ended October 31, 1996 despite the adverse
effect of the change in Allison's parts pricing.
The Company's total gross profit margins for the nine months ended October
31, 1996 reflect a reduction of $1.3 million of other cost of goods sold
compared to the same period in the prior year, primarily due to $1.0 million
inventory obsolescence charge and $0.9 million recorded for warranty and related
expenses
27
<PAGE> 30
incurred in the nine months ended October 31, 1995. Additionally, total gross
margins for the nine months ended October 31, 1996 reflect $0.5 million reduced
depreciation expense as compared to the same period in the prior year, due to
purchase accounting adjustments for the acquisition of NAC by the Company in
June 1995.
Selling, general and administrative expenses for the nine months ended
October 31, 1996 decreased $0.4 million, or 6.6%, to $6.2 million from $6.6
million for the comparable period ended October 31, 1995. As a percentage of
sales, selling, general and administrative expenses decreased from 9.8% to 8.0%.
The reduction was due primarily to a one-time charge of $0.6 million incurred in
1995 for the lump sum settlement to eliminate longevity pay to certain
personnel.
Interest expense for the nine month period ended October 31, 1996 increased
$0.3 million to $2.6 million from $2.3 million for the nine months ended October
31, 1995. This increase was due to an increase in the average borrowings under
the Company's credit facilities as a result of the Company's need for increased
working capital and indebtedness incurred in connection with the acquisition of
NAC in June 1995.
Other expenses decreased $0.8 million for the nine months ended October 31,
1996. During the nine months ended October 31, 1995, the Company incurred $0.8
million of expenses, representing the write-off of a marine gas turbine engine
joint venture investment, including related advances, and professional fees
incurred in connection with the sale of NAC by the Predecessor.
Net income increased by $3.2 million to $1.5 million for the nine months
ended October 31, 1996, compared to a loss of $1.7 million for the nine months
ended October 31, 1995.
Twelve months ended January 31, 1996 compared to the Fiscal Year ended March
31, 1995
The twelve months ended January 31, 1996 is comprised of three separate
periods of time and operation. The initial two months of the period, February
and March of 1995, are also reported as part of fiscal year ended March 31,
1995. During these two months, NAC incurred after tax losses of $1.9 million.
April and May of 1995 represent the two months immediately preceding the
acquisition of NAC by the Company. Under the ownership management of the
Predecessor, NAC incurred after tax losses of $1.0 million during this two month
period. The Company acquired NAC on June 1, 1995 and installed new senior
management during the last eight months of this period. During this period, the
Company generated net income of $1.9 million.
Net sales for the twelve months ended January 31, 1996 were $92.9 million,
an increase of $9.8 million, or 11.8%, over the fiscal year ended March 31,
1995. Repair and overhaul revenues were $70.0 million in the twelve months ended
January 31, 1996, an increase of $5.6 million, or 8.7%, over fiscal 1995. The
increase was due largely to increased sales under the FMS contract. During the
twelve months ended January 31, 1996, parts sales were $22.9 million as compared
to $18.7 million during the fiscal year 1995.
Cost of sales increased $8.4 million, or 11.5%, to $81.2 million during the
twelve months ended January 31, 1996. As a percentage of net sales, cost of
sales for the twelve months ended January 31, 1996 decreased slightly to 87.4%
compared to 87.6% in fiscal 1995.
Total gross profit for the twelve months ended January 31, 1996 increased
$1.4 million, or 13.2%, to $11.7 million from $10.3 million for the fiscal year
ended March 31, 1995. As a percentage of net sales, gross profits increased
slightly to 12.6% from 12.4% in the fiscal year ended March 31, 1995. Profit
margins of the repair and overhaul product line for the twelve months ended
January 31, 1996 increased to 14.7% from 13.6%. Profit margins of the parts
sales product line increased to 16.1% from 14.0% during fiscal 1995, due largely
to higher margin sales on greater than normal part sales to one customer during
the twelve months ended January 31, 1996. These improvements in both profit
margins of the repair and overhaul and parts products lines for the twelve
months ended January 31, 1996 were largely offset by an increase of $1.7 million
of other cost of sales during that period compared to fiscal 1995, primarily
relating to inventory obsolescence and warranty and related expenses. In
addition, profit margins were negatively affected by the change in Allison's
arrangements with its AMCs as discussed above under "- Results of
Operations - First Aviation - Nine months ended October 31, 1996 compared with
nine months ended October 31, 1995."
28
<PAGE> 31
Selling, general and administrative expenses for the twelve months ended
January 31, 1996 were $8.6 million, a decrease of $0.8 million, or 8.4%, from
the $9.4 million incurred during fiscal 1995. The Company's selling, general and
administrative expenses are primarily associated with its repair and overhaul
activities. As a percentage of net sales, selling, general and administrative
expenses decreased to 9.2% from 11.3% in fiscal 1995. This decrease was
primarily due to the freezing of NAC's pension plan, a reduction in management
fees and a company-wide effort to lower controllable costs, partially offset by
increased contributions to NAC's 401(k) plan and greater direct sales and
marketing efforts and related costs.
Interest expense during the twelve months ended January 31, 1996 increased
by $1.4 million from $1.8 million to $3.2 million as compared to the fiscal year
ended March 31, 1995. The increase was due to the increase in the level of
borrowings under NAC's credit facility and subordinated debenture and term loan
indebtedness incurred in connection with the acquisition of NAC in June 1995.
Other expenses declined during the twelve months ended January 1996 by $0.5
million, or 38.5%, to $0.8 million compared to $1.3 million incurred during
fiscal 1995. Both periods include the write-off of a marine gas turbine engine
joint venture investment, including related advances. During fiscal 1995, the
Company also incurred $0.7 million in professional fees incurred in connection
with efforts to sell NAC by its former shareholder.
The loss before taxes for the twelve months ended January 31, 1996 was $1.0
million, a $1.2 million improvement compared to the loss of $2.2 million
incurred during the fiscal year ended March 31, 1995. During the last eight
months of the period ended January 31, 1996, when NAC was under current
management, the Company earned $3.2 million on a pretax basis. The pretax loss
for the four months immediately preceding the ownership change was $4.2 million.
Income taxes for the twelve months ended January 31, 1996 were $0.1 million
compared to a tax benefit of $0.9 million for fiscal 1995. The charge for the
twelve months ended January 31, 1996 is due to the incurrence of state franchise
taxes.
As a result of the factors described above, the net loss of $1.1 million
incurred during the twelve months ended January 31, 1996 represents a decline of
$0.2 million from the $1.3 million loss reported during the fiscal year ended
March 31, 1995.
Fiscal 1995 compared to Fiscal 1994
Net sales for fiscal 1995 declined 10.2%, or $9.4 million, to $83.1 million
from $92.5 million for fiscal 1994. Overhaul revenues declined 4.5% to $64.1
million in fiscal 1995 due primarily to $13.0 million in reduced revenues under
the FMS contract offset to a large extent by increased revenues in most of the
Company's product lines. Parts sales decreased 25.2%, or $6.3 million, due to a
shortage of parts supplied by Allison and weak industry conditions.
Cost of sales declined $6.5 million from $79.3 million for fiscal 1994 to
$72.8 million for fiscal 1995, due primarily to the decrease in sales. As a
percentage of net sales, cost of sales increased to 87.6% in fiscal 1995 from
85.7% in fiscal 1994.
Total gross profit decreased $2.9 million to $10.3 million for fiscal 1995.
As a percentage of sales, the Company's gross profit declined to 12.4% in fiscal
1995 from 14.3% in fiscal 1994. Profit margins of the repair and overhaul
product line decreased from 19.6% to 13.6% in fiscal 1995 due primarily to a
33.8% decline in revenue in the Company's largest product line, the 501 flight
engine. Profit margins of parts sales increased from 13.2% to 14.0% in fiscal
1995. Other cost of goods sold decreased from $3.3 million in fiscal 1994 to
$1.1 million in fiscal 1995 due primarily to large production variances in
fiscal year 1994.
Selling, general and administrative expenses increased $0.9 million to $9.4
million for fiscal 1995 from $8.5 million for fiscal 1994. The increase was due
to several factors including increases in management fees, the termination of a
lease and increased investments in business development programs.
Interest expenses increased $0.7 million in fiscal 1995 to $1.8 million
from $1.1 million in fiscal 1994. The increase was due to increased borrowing
under NAC's credit facility in order to finance a dividend to the
29
<PAGE> 32
Predecessor. In addition, interest rates paid on the credit lines increased from
an average of 7.185% to 9.625% in fiscal 1995.
Other expenses increased in fiscal 1995 by $0.8 million to $1.3 million
from $0.5 million in fiscal 1994. This was due to the write-off of a joint
venture investment in connection with a marine gas turbine engine joint venture
investment, including related advances, and professional fees incurred in
connection with efforts to sell NAC by the Predecessor.
Income before taxes declined from $3.1 million in fiscal 1994 to a loss of
$2.2 million for fiscal 1995 due to the factors discussed above.
In fiscal 1995, NAC had an income tax benefit of $0.9 million compared to
income taxes of $1.0 million for fiscal 1994. The tax benefit resulted from the
Company's loss from operations in fiscal 1995.
NAC incurred a loss of $1.3 million in fiscal 1995 compared to income of
$2.0 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
First Aviation's aggregate capital expenditures for fiscal 1995, the ten
months ended January 31, 1996, and the first nine months ended October 31, 1996
were $2.5 million, $1.1 million and $0.8 million, respectively. Management
anticipates that capital expenditures for the balance of fiscal 1997 and fiscal
1998 will be, in the aggregate, approximately $3.5 million, exclusive of the
costs of acquiring Old API. These expenditures will be used to fund the purchase
of tooling, test equipment, and data processing equipment. Management expects to
fund these capital expenditures from cash flow from operations and, if
necessary, from borrowings.
The Company's cash flow (deficit) from operations for the nine months ended
October 31, 1996, the eight months ended January 31, 1996, the fiscal year ended
March 31, 1995 and the two months ended May 31, 1995 was $(4.2) million, $0.8
million, $(3.9) million and $1.8 million, respectively. Cash used for investing
during these same periods was $1.0 million, $13.6 million, $3.3 million and $0.3
million, respectively. Cash generated (utilized) by financing activities during
these same periods was $5.2 million, $12.9 million, $7.2 million and $(1.5)
million, respectively.
Concurrently with the consummation of the Offering, the Company will use
the net proceeds from the Offering to complete the API Combs Acquisition and to
pay down a portion of the credit facility presently in place at NAC. The Company
will also retire the $1.9 million of 15% subordinated debenture due to
Canpartners and will use $231,000 in payment of accumulated and unpaid dividends
on the Series A Preferred Stock. The balance of the funds will be held for
general corporate purposes including potential acquisitions.
In June 1996, NAC entered into a new credit facility. Borrowings under this
$40.0 million credit facility were used to retire the outstanding debt under
NAC's then-existing $30.0 million revolving credit line and term loan.
Additionally, the new facility provided funds needed to finance the Company's
expansion plans by enabling the Company to acquire an adequate supply of
inventory and to finance receivables. In connection with the refinancing, the
Company recorded an extraordinary charge of $864,000 for prepayment penalties
and the write-off of the unamortized balance of loan fees.
The new credit facility provides NAC with a revolving credit facility that
allows for borrowings of up to $37.0 million and $3.0 million of term loans.
Advances under the revolving portion of the credit facility bear interest at
LIBOR plus 3.0%. The revolving portion of the credit facility also allows for
the issuance of letters of credit up to an aggregate of $1.5 million. At October
31, 1996, borrowings under the revolving portion of the credit facility,
including outstanding letters of credit, amounted to $30.1 million and carried
an interest rate of 8.38%. The credit facility expires on May 15, 1999.
As part of the credit facility, NAC has borrowed $1.0 million and $2.0
million, respectively, under two term loans. The term loans bear interest at a
variable rate of LIBOR plus 3.50% and 4.50%, respectively. At October 31, the
interest rates on these two term loans were 8.88% and 9.88%, respectively.
30
<PAGE> 33
This new credit facility contains a number of covenants, including
restrictions on mergers, consolidations and acquisitions, the incurrence of
indebtedness, transactions with affiliates, the creation of liens, capital
expenditures and management fees. The covenants also require NAC to maintain
defined minimum levels of net worth as well as certain interest coverage ratios
and minimum backlog levels. The Company is currently in compliance with all such
covenants. However, there can be no assurance that the Company will continue to
be in compliance with such covenants, or that such covenants will not restrict
the types of business or level of growth the Company can undertake.
At October 31, 1996, letters of credit issued under the prior credit
facility and still outstanding amounted to $494,000. These letters of credit are
currently collateralized by cash in the amount of $0.5 million. Of this amount,
$468,000 will expire prior to March 3, 1997, at which time, the cash collateral
will be returned to NAC. One letter of credit in the amount of $26,000 does not
expire until October 1999.
In connection with the acquisition of Old API, API Combs will issue 9,727
shares of API Combs Preferred Stock. Such preferred stock is convertible solely
into common stock of API Combs. The API Combs Preferred Stock will carry a $4.00
per share annual dividend, payable quarterly.
Based upon current and anticipated levels of operations and plans for
integrating Old API's 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 through
the end of fiscal 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 31, 1995. The Company adopted SFAS 121 on February 1, 1996 and
there was no effect of adoption.
31
<PAGE> 34
BUSINESS
GENERAL
First Aviation 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 API Combs Acquisition, the Company will be one of the leading suppliers
of aircraft engine and other aircraft parts to the general aviation industry
worldwide. On a pro forma basis, including the API Combs Acquisition, the
Company had net sales of $105.9 million and income before extraordinary item of
$4.4 million for the nine month period ended October 31, 1996, and net sales of
$122.6 million and income before extraordinary item of $0.8 million for the
twelve month period ended January 31, 1996.
Through NAC, the Company provides repair and overhaul services for several
engine types, including: (i) the Allison 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 cogeneration and gas transmission. The
Company has also established itself as an industry leader in the remanufacturing
of serviceable engine parts and components for use in engine overhauls.
The API Combs Acquisition is an initial step in meeting the Company's goal
of participating in the consolidation of the aviation services industry. The API
Combs Acquisition expands the Company's services by focusing on supplying
aircraft parts to the general aviation market, thereby allowing the Company to
leverage its repair and overhaul and remanufacturing expertise through new
product lines and a new customer base and by expanding API Combs' geographic
coverage.
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.
INDUSTRY OVERVIEW
Engine Repair and Overhaul. The Company believes that the current annual
worldwide market for gas turbine engine repair and overhaul services is
approximately $6.5 billion. Gas turbine engines are used to power aircraft and
marine vessels and to generate electricity for industrial applications. Repair
and overhaul services are performed by engine operators, engine manufacturers,
and independent operators such as the Company. The engine repair and overhaul
market is highly fragmented with over 1,800 service providers, competing
primarily on the basis of price, quality and turnaround time. The repair and
overhaul of aircraft engines and engine components is regulated by governmental
agencies throughout the world, including the FAA and the DOD, and is
supplemented by engine manufacturers' guidelines which generally require that
engines be overhauled and certain engine components be replaced after a certain
number of flight hours and/or cycles (take-offs and landings).
Aviation Parts Sales. The Company believes that the current annual
worldwide market for new and used spare engine parts and spare aircraft engines
is approximately $10.0 billion of which $1.3 billion is supplied by the
aftermarket. The aviation parts market is highly-fragmented with a limited
number of large, well-capitalized companies selling a broad range of aircraft
spare parts and numerous smaller competitors serving niche markets. Through API
Combs, the Company serves the general aviation sector of this market, which
includes regional airlines, business aviation and helicopter and recreational
operators. In the general aviation sector FBOs play an integral role in aircraft
servicing and maintenance by providing a broad range of
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<PAGE> 35
services to general aviation aircraft operators on an as needed basis. FBOs and
other maintenance operators continue to consolidate and are dependent on a
limited number of aftermarket suppliers to provide the parts and customer
service necessary to support general aviation aircraft.
INDUSTRY TRENDS
Increased Outsourcing of Repair and Overhaul Services. In recent years,
many engine operators have recognized outsourcing of repair and overhaul
services as an opportunity to reduce operating costs and turnaround time.
Outsourcing allows engine operators to benefit from the expertise of service
providers such as the Company who have developed proprietary repair schemes and
achieved economies of scale unavailable to individual operators. Additionally,
outsourcing allows engine operators to limit their capital investment in
infrastructure and personnel by eliminating the need for the remanufacturing
equipment, sophisticated information systems technology and inventory required
to effectively repair and overhaul engines. As engine operators continue to
become more cost and value conscious, and as modern aircraft engines become
increasingly more sophisticated, the Company expects the trend to outsourcing to
continue.
Increasing Consolidation. The Company believes that customers are
increasingly seeking the services of larger, more sophisticated and better
capitalized service providers. In order to reduce costs, satisfy increased
governmental regulatory scrutiny, streamline buying decisions and assure
quality, engine operators are seeking to reduce the number of providers that are
used both for repair and overhaul and parts supply services. As modern aircraft
engines become more sophisticated, so do the repairs and parts requirements for
such engines. At the same time, engine operators have become more sensitive to
quick turnaround times. As a result, the Company believes that engine operators
increasingly select those service providers which have made a significant
capital commitment toward developing proprietary repair schemes and acquiring
remanufacturing equipment and inventories, and therefore are capable of
providing higher quality and more timely services than under-capitalized
competitors can offer. Additionally, the increasing costs of technology and
inventory levels required to compete effectively has made entry into and
continued success in the industry more difficult and expensive. The Company
believes that well-capitalized, technologically sophisticated providers capable
of offering a wide breadth of services will benefit from this consolidation
trend.
Greater Emphasis on Traceability. Due to concerns regarding unapproved
aircraft spare parts, regulatory authorities have increased the level of
documentation which must be maintained on aircraft spare parts. This requirement
has, in turn, been extended by end-users to the vendors of the parts. The
sophistication required to track the history of an inventory consisting of
thousands of aircraft spare parts is considerable and has required companies to
invest significantly in information systems technology.
Growing Demand for Remanufactured Parts. During the course of an engine
overhaul or a repair, engine components are replaced using either new parts or
aftermarket parts that are of FAA-certified "overhauled" or "serviceable"
condition. As engine operators seek to lower costs related to overhaul and
repair services, they have focused on engine component costs, which comprise a
majority of the engine overhaul expense. Increasingly, these operators are using
high quality remanufactured parts instead of new parts supplied by the original
equipment manufacturer since aftermarket parts are frequently sold at a 30-40%
discount to new parts.
Increasing Aviation Activity. Aviation activity is expected to increase
significantly over the next ten years. According to the 1996 Boeing Current
Market Outlook, global commercial air travel is expected to increase 70% through
the year 2005, while the number of passenger and cargo aircraft deliveries is
expected to increase by 47%. According to the FAA, U.S. turbine powered general
and business aviation will increase 28% by the year 2006. Production of general
aviation aircraft has risen by 10% in the first half of 1996, after a 16%
increase in 1995. The Company believes that the growth in aviation activity will
result in increased utilization of existing aircraft and increase the demand for
repair and overhaul services and aircraft and engine components.
Inventory Management by Third Parties. Aircraft operators, FBOs and other
maintenance providers are increasingly seeking to lower costs through the
reduction of their parts inventory. The Company believes that these parties seek
well-capitalized and technologically sophisticated parts redistributors who have
a broad availability of inventory which can be delivered on a next-day basis to
reduce their inventory carrying needs.
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<PAGE> 36
COMPETITIVE STRENGTHS
The Company believes that it is well positioned to take advantage of
positive trends in the marketplace based upon the following competitive
strengths:
Worldwide Leader. The Company is the worldwide leader in engine repair,
overhaul and support for each of the Allison engines that it services, which
includes the engine that powers the C-130 "Hercules," and has more than 30 years
of experience. The Company provides repair and overhaul services to more than
300 customers located in more than 45 countries. The Company believes that its
customers select it based on its quality of service, superior turnaround time
and price competitiveness.
Remanufacturing and Engineering Expertise. Through the development of
proprietary remanufacturing and repair techniques, the Company is able to
provide its customers with low cost overhaul and repair services. The Company
believes that its ability to provide in-house remanufacturing capabilities
enables it to offer complete maintenance programs while maintaining higher
quality standards and faster turnaround times than other service providers who
rely on third party providers to remanufacture parts. To demonstrate its
commitment to excellence in the quality of its services, the Company is seeking
to have its repair and overhaul processes and inspection procedures certified to
internationally recognized ISO 9001 Quality Standards and expects certification
to be completed in 1997. The Company believes that it will be the only engine
repair and overhaul provider in the world designated at this highest ISO
standard, a standard generally reserved for manufacturing concerns.
Computer-based Advanced Remanufacturing System ("CARS"). The Company has
developed a proprietary, advanced integrated computer system for the management
and scheduling of the sequential and simultaneous tasks that are required to
overhaul engines and components. CARS substantially reduces engine and parts
inspection time, reduces required inventory levels and expedites preparation of
customer work orders and cost estimates. Moreover, the system provides real-time
information that permits management to optimize and automate the daily
deployment of personnel and materials among the Company's product lines, manage
inventory, perform costs analysis and prepare customer estimates, reports and
billing.
Unique Approach to Aviation Parts Distribution. API Combs seeks to
differentiate itself to customers through the combination of superior customer
service, just-in-time delivery and broad product offerings at competitive
prices. By maintaining a single warehouse and shipping center in Memphis,
Tennessee, API Combs is able to provide real-time quotes and next day delivery
for over 100 product lines and 80,000 parts and the Company believes it is able
to receive and fulfill customer orders later in the day than any other national
competitor. API Combs' centralized distribution center further allows it to
eliminate the duplication of inventories, branch overhead expenses prevalent
with competitors which operate in multiple locations and offer its products at
competitive prices. API Combs' extensive inventory and same-day shipping
capabilities enable customers to reduce their inventory by relying on API Combs
to be their third party inventory manager.
Sophisticated Information Systems. API Combs' management information
systems track inventory on a real-time basis and capture and report data
regarding customer records, quotations, lost sales, inventory traceability,
pricing, market availability, payment performance, shipping records, and other
critical information relating to both inventory and customers. This data is used
to forecast demand, maximize inventory turns, provide quick and accurate
customer service and to assist in marketing strategies.
Partnership Approach to Customers. API Combs enjoys substantial repeat
sales to established customers and actively seeks opportunities to develop
closer linkages with its customers. While API Combs maintains a central
warehouse, it fields a national and international network of field
representatives to maintain and develop relationships. Common practices at API
Combs include stocking specially requested items, providing customized price
books, and locating hard-to-find parts. API Combs also offers an extensive
cooperative marketing program designed to help API Combs customers attract
business to their facilities.
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BUSINESS STRATEGY
The Company is committed to providing total maintenance solutions to its
customers. The Company believes that its competitive strengths place it in a
unique position to capitalize on the industry trend toward expanded outsourcing
of repair and overhaul work and increased use of remanufactured parts to reduce
maintenance costs. In addition, the centralized distribution structure of API
Combs allows it to focus resources into a more efficient, lower cost
distribution center that provides high order fill rates and superior customer
service so that it can compete favorably with traditional distributors that
service customers through branch operations. The key components of the Company's
business strategy include the following:
Internal Growth. The Company's strategy is to increase net sales and
operating income through the successful marketing of its products and services
to new customers, cross-selling of its product lines to new and existing
customers and the extension of its product lines. The Company believes its
commitment to an increased direct sales effort will play an integral role in
generating internal growth. An example of the Company's success in developing
new product lines is the Pratt & Whitney Canada PT6 engine, used to power
aircraft and helicopters, for which the Company has recently signed two new
contracts scheduled to commence in early 1997. The Company's new contracts for
repair and overhaul of the PT6 engine are with AGES (relating to overhaul of PT6
engines for the U.S. Government's C-12 program) and the Saudi Ministry of
Defense, and are for terms of five and three years, respectively, although there
are no minimum volume commitments from the respective customers in either
contract. The Company seeks to demonstrate to its customers and potential
customers how the Company is able to provide total maintenance solutions for
their engines by combining technical support, inventory pools, customized
engineering services and assistance in arranging financing. The Company believes
that providing a total maintenance solution will lead to closer and longer term
relationships with customers that should provide a more predictable flow of
business.
Growth by Acquisitions. In order to capitalize on the consolidation trends
within the industry, the Company pursues strategic acquisitions of companies
with a customer base, product line or technology which complements or expands
the Company's existing operations. The API Combs Acquisition is an example of an
acquisition which allows the Company to expand its product and service lines.
The Company believes that strategic acquisitions will help the Company achieve
its goal of providing total maintenance support to its customers as a large,
sophisticated, fully-integrated service provider.
Expand Accessory and Component Remanufacturing. The Company is committed
to increasing the amount of remanufacturing of accessories and engine components
that it performs since this work typically generates higher margins for the
Company. The Company's remanufacturing business serves both the Company's
existing repair and overhaul customers, where embodied engine parts are
remanufactured at a significantly lower cost than the cost of new parts, as well
as third party customers which do not possess the capability to remanufacture
serviceable parts. The Company has experienced significant customer demand for
its remanufacturing services and has dedicated a portion of its production
capacity and plans to dedicate additional production capacity to the
remanufacturing of accessories and engine components.
Operating Efficiencies. The Company's management will continue to focus on
profitable earnings growth through the continued implementation of several
strategic initiatives which include continued cost management and the addition
of significant throughput in its repair and overhaul services without
substantial capital investment. An example of the Company's ability to manage
operating efficiencies is API Combs' centralized distribution center, which
allows the Company to eliminate the duplication of inventories and branch
overhead expenses prevalent with competitors which operate in multiple
locations.
OPERATIONS
NAC Repair and Overhaul. The three primary reasons for removing an engine
from an aircraft for servicing are: (i) the number of engine hours since its
last overhaul have reached the engine's "life limit" and its parts must be
replaced; (ii) the engine has been damaged; and (iii) the aircraft
instrumentation system indicates that the engine is not performing optimally in
its operating environment. The cost of servicing an engine that has been removed
varies depending upon the age, size and model of engine and the extent of the
repairs being performed.
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The following table sets forth: (i) the lines of gas turbine engines and
components the Company services; (ii) the Company's estimate of the number of
such engines produced; (iii) the typical cost of the overhaul of such engines;
(iv) the estimated cost of a new engine/component, and (v) the principal
applications of such engines.
<TABLE>
<CAPTION>
TYPICAL COST ESTIMATED
NUMBER OF COMPLETE COST OF NEW
LINES PRODUCED OVERHAUL ENGINE/COMPONENTS PRINCIPAL ENGINE APPLICATIONS
- ------------------------ -------- ------------------- ------------------ -------------------------------------
<S> <C> <C> <C> <C>
ALLISON ENGINE COMPANY
Model 501/T56 15,660 $450,000 $1.2-$1.7 million Fixed wing commercial and military
aircraft, including the Lockheed
C-130 "Hercules," Lockheed Electra,
Lockheed P3, Convair 580, and Grumman
C2/E2
Model A250 23,860 $90,000 $240,000-$400,000 Rotary and fixed wing commercial and
military aircraft, including Bell
helicopter models 206, 407 and 430,
and McDonnell Douglas MD500 and MD600
helicopters
Model 501, 570/571-K 1,800 $350,000 $750,000+ Industrial and electric power,
cogeneration, marine propulsion and
gas compression
PRATT & WHITNEY CANADA
PT6 25,960 $100,000-$180,000 $250,000-$400,000 Beech King Air, Beech 1900, Cessna
Caravan and other fixed wing and
helicopter applications
MCDONNELL DOUGLAS
MD-500 (Helicopter
components) 4,650 Varies depending Varies depending Not applicable
upon specific upon specific
components components
</TABLE>
Description of an Overhaul -- Model 501 Flight Engine Example. The
following discussion describes the range of work hours and procedures scheduled
for the repair and overhaul of a representative Model 501 engine. The repair and
overhaul process for other engine types which the Company services are broadly
similar to those of the Model 501.
<TABLE>
<CAPTION>
RANGE OF HOURS
SCHEDULED
ACTIVITY FOR COMPLETION
---------------------------------------------------------------------- -----------------
<S> <C> <C> <C>
Disassemble, clean and reassemble..................................... 300 - 450
Inspection............................................................ 300 - 450
Remanufacturing....................................................... 650 - 850
----- -----
Total hours per engine........................................... 1,250 - 1,750
===== =====
</TABLE>
Each overhaul can involve 8,000 or more parts and 150 separate work orders.
Nonetheless, the Company currently performs some Model 501 overhauls in less
than 30 days. In order to achieve this throughput, many parallel processes must
be performed, with numerous components coming together just before final
assembly. The nature of this overhaul process requires a highly managed
systems-driven environment, which is facilitated by the Company's specialized
object-oriented software described in more detail below.
Disassembly, Cleaning and Inspection. Upon the receipt of an engine or
module, technicians disassemble the unit into its components. In the case of a
complete flight engine, the unit is initially broken down into its three major
modules: the turbine, the compressor and the gearbox. These modules are then
disassembled further into their components, a process which requires special
tooling and expertise. Each component and part is completely cleaned to allow
for comprehensive inspection. The inspection involves testing and evaluating
part size, structural integrity and material tolerances. There are thousands of
individual parts in an Allison Model 501 flight engine, all of which are subject
to inspection. A detailed checklist and reporting procedure is used to create a
"condition report" documenting the state of each part inspected. Inspectors tag
all parts which need to be replaced or reworked, and electronically prepare, but
do not submit at this stage, work orders and requisitions to the Company's parts
and production departments for inventory and scheduling purposes. The Company
utilizes its CARS system throughout this process to significantly reduce the
amount of detailed inspection time required. See "Computer-based Advanced
Remanufacturing System."
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As a result of the work completed in the disassembly and inspection
process, the Company obtains detailed information concerning which engine parts
can be reused or repaired and which must be replaced, as well as the approximate
labor needed to complete the job. The inspector and the sales and customer
support personnel covering the customer account evaluate the parts and
production orders, prepare a detailed cost estimate and send the price estimate
with the condition report to the customer typically within a week. Upon receipt
of the customer's approval of the estimate, the Company releases the
requisitions and work orders into the workflow. The Company's computer system
identifies and tracks the parts and associated work orders from each individual
engine throughout the overhaul process in order to maintain the integrity of the
engines it services. During the overhaul process, if additional repairs or work
are deemed necessary, the Company's customer support personnel become actively
involved in negotiating pricing, scheduling and logistical issues with the
customer.
Parts Remanufacturing, Replacement and Reassembly. The parts
remanufacturing process involves reworking existing parts to original
specifications. This entails a combination of machining, parts coating, welding,
heat treatment, metalizing, metal reshaping and deposition. Although the Company
subcontracts a limited number of functions, such as plating, to outside parties,
the majority of work is done in the Company's facilities. The Company has
developed significant expertise in performing Allison authorized repairs and
modifications and has also developed, with appropriate oversight of the FAA or
DOD, its own proprietary repair schemes, sometimes referred to as Engineering
Authorizations or "EAs." The development of EAs is important to the Company's
competitive position because the use of a proprietary repair scheme can maintain
or increase the quality of work performed and significantly reduce cost and
turnaround time relative to the Company's competitors. If a part cannot be
reclaimed, the Company may install either a new part or a previously-reworked
part from inventory. The Company maintains an inventory of serviceable parts
that it has reworked for this purpose. By either remanufacturing parts or using
serviceable parts from inventory in lieu of new parts the Company is generally
able to lower customer costs for parts by more than 25% in comparison to an
overhaul in which only new parts are used. After the engine is completely
reassembled, it is ready for diagnostic testing and shipping.
Engine Testing and Shipping. The reassembled engine is taken to one of the
Company's seven test cell facilities adjacent to the main plant. At these
facilities, the engine is mounted in a stand and run in order to test for
functionality, seal leaks, fuel efficiency, operating temperature ranges and
maximum horsepower. At this stage, the engine must meet the manufacturer's
original performance and safety specifications. The result is a "zero time"
engine which is the performance equivalent of a new engine. Upon successful
completion of testing, the engine is rated for horsepower and specific fuel
consumption, and is then packaged and shipped back to the customer.
Pricing. NAC offers its customers two alternative arrangements for pricing
of repair and overhaul services: time and material based arrangements and flat
rate fixed price arrangements. Under the time and materials fee arrangement,
customers receive a detailed price estimate and condition report from NAC after
completion of the disassembly, cleaning and initial inspection process, at which
time NAC has substantial information about the extent of necessary repair and
replacement and the amount of labor needed to complete such work. Pursuant to
this arrangement, following approval from the customer of the estimate, NAC
releases work orders and requisitions into the work flow and continues the
overhaul process. NAC's customer support personnel involve themselves in the
overhaul process and negotiate with the customer any additional pricing,
scheduling and logistical issues which arise during the overhaul process.
Under the flat rate fixed pricing contracts, NAC establishes a set price
prior to undertaking an overhaul based upon estimates made either before or
after inspection of a unit. NAC's flat rate fixed price estimates made prior to
inspection of a unit are based upon standard labor and materials requirements
and typically include provisions for adjustments based upon conditions of the
engine. Under flat rate fixed price arrangements, NAC benefits to the extent
that efficiencies in labor hours and material usage can be achieved relative to
the estimate on which the flat rate price was based.
The entire overhaul and repair process typically takes about two to six
weeks from the receipt of engine to final testing, depending on the type of
engine and extent of work required.
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<PAGE> 40
API Combs Component Overhaul and Assembly. API Combs operates an FAA
certified repair station which provides component overhaul, assembly and
maintenance services to its customers nationwide. This division, API Combs
Technologies, currently offers three lines of service: hose assembly,
starter/generator overhauls and brake overhauls. More than 90% of API Combs
Technologies' work is performed on components for piston and turbine powered
general aviation aircraft and the balance is related to helicopters and
scheduled air carriers. API Combs maintains an inventory of overhauled units
ready for immediate shipment.
Parts Distribution
General. Aircraft spare parts conditions are classified within the
industry as (i) factory new, (ii) new surplus, (iii) remanufactured, (iv)
serviceable, and (v) as removed. A factory new or new surplus part is one that
has never been installed or used. Factory new parts are purchased from
manufacturers or their authorized distributors. New surplus parts are purchased
from excess stock of airlines, repair facilities or other redistributors. A
remanufactured part has been disassembled, inspected, repaired, reassembled and
tested by a licensed repair facility. An aircraft spare part is classified
serviceable if it is repaired by a licensed repair facility rather than
completely disassembled as in an overhaul. A part may also be classified
serviceable if it is removed by the operator from an aircraft or engine while
operating under an approved maintenance program and is functional and meets any
manufacturer or time and cycle restrictions applicable to the part. A factory
new, new surplus, remanufactured or serviceable part designation indicates that
the part can be immediately utilized on an aircraft. A part in as removed
condition requires functional testing, repair or overhaul by a licensed facility
prior to being returned to service in an aircraft.
API Combs Parts Sales. API Combs sells new and factory reconditioned parts
representing more than 100 product lines and 80,000 parts to professional
aircraft maintenance organizations. The parts are all FAA approved and are
acquired from small, specialized manufacturers as well as major original
equipment manufacturers such as Champion Aviation Products, Goodyear, Michelin,
B.F. Goodrich, General Electric, Textron Lycoming, Teledyne Continental, Parker
Hannifin, AlliedSignal, Piper and Cessna. Most of API Combs' suppliers are
committed to servicing aftermarket customers solely through wholesale
distributors such as API Combs. The distributors add value to commonly available
products by offering immediate availability, broad product lines, technical
assistance and additional services. API Combs does not have any long-term
agreements or commitments from the original equipment manufacturers from whom it
purchases parts and is dependent on these manufacturers for access to parts for
resale.
NAC Sales of Remanufactured Engine Components and Accessories. The
Company's expertise in remanufacturing aircraft engine components as an element
of performing engine overhauls has positioned it to take advantage of the
increasing demand for remanufactured components and accessories. As described
earlier, one-half of the hours spent in overhauling a Model 501 engine may be
dedicated to remanufacturing components in the engine so that their performance
is equivalent to that of a new part. Traditionally, overhaul companies have used
these techniques to repair components from a particular engine for reinsertion
into the same engine. In recent years, however, a market for rotable
remanufactured parts has emerged, due primarily to engine owners becoming more
price-sensitive and more willing to purchase a remanufactured part at a 30-40%
discount to the cost of a new part. The Company has, because of the developments
described above, increased its focus on the remanufacture of components and
accessories as a separate segment of its business, apart from its overhaul
business. The Company currently is dedicating shop capacity and labor to
remanufacturing operations for third party sales.
NAC Sale of Allison New Parts. The Company sells new Allison spare parts
to engine owners and independent overhaulers. The Allison spare parts
distributed by the Company are Allison approved and source controlled parts, and
the Company maintains an inventory of complete Allison engines, components and
accessories ready for immediate delivery around the world. The sale of Allison
spare parts represents a diminishing portion of the Company's business. NAC
intends to focus its efforts on the sale of remanufactured parts.
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<PAGE> 41
COMPUTER-BASED ADVANCED REMANUFACTURING SYSTEM
The Company has made substantial expenditures to develop CARS. CARS has
been in use for approximately two years to shorten turnaround times for customer
orders, increase output, improve inventory management and reduce costs by
eliminating duplication of work and reducing errors in ordering of parts. The
system consists of two parts: an automated inspection and routing system; and a
remanufacturing variable control system.
CARS enables NAC to shorten lead times, increase output and improve
inventory management by allowing NAC to manage and control the process of
detailed parts inspection, material requisitioning, and work order scheduling
and release. The system's database contains much of the information required to
perform engine inspection activities, including illustrated parts catalogues.
This has largely eliminated the need to manually update parts catalogues and
allows an engine inspector using a personal computer located at his workstation
to (i) refer to computer based parts manuals and catalogues to identify needed
parts, (ii) access and check on the availability in inventory of needed parts,
(iii) requisition needed parts from inventory and schedule the time for delivery
of the parts to repair and overhaul mechanics and (iv) create and record an
audit trail for all inspected parts and processes. These features of the system
have substantially reduced total detailed engine inspection time required in the
overhaul process.
Using the system, all materials and labor associated with the work order is
recorded using bar code scanners located throughout NAC's Oakland and Long Beach
facilities. This function allows NAC to provide more accurate cost and timing
estimates to customers and the faster and more accurate preparation of customer
invoices. In addition, planners (shoploading and material requisition personnel)
receive more accurate planning data. Using the system, management can plan based
upon sales forecasts and actual orders, and optimize on a daily basis manpower
and material utilization.
RELATIONSHIP WITH ALLISON
NAC's relationship with Allison began over 30 years ago when NAC expanded
its overhaul and repair operations to include support of the Allison turbine
engine. In 1970, NAC became a direct service dealer franchise for the Model 501
flight engine and the Model 501-K industrial engine, and thereafter grew to
become one of the largest independent commercial overhaul facilities in the
world for Allison engines. In 1982, NAC was appointed as an Authorized
Distributor for the Model 250, pursuant to which it was given an exclusive
territory in which to operate.
Allison modified its aftermarket support system for the Model 250 and Model
501 engines in 1994. Under the current system, Allison appoints as AMCs
independent service providers, such as the Company, who satisfy Allison's
technical and quality standards and pay a one-time "technical fee" for such
appointment. Although each AMC is assigned a non-exclusive region of
responsibility in which such AMC undertakes to provide repair and overhaul
services, component repair, warranty work and other customer support functions,
Allison permits all AMCs to market such services throughout the world. All AMCs
are permitted to purchase parts directly from Allison rather than having to
purchase parts from an Authorized Distributor, as was required under the
previous system. The AMC Agreements restrict the establishment of an AMC's
repair and marketing facilities to specific sites identified in its AMC
Agreement. As of September 30, 1996, in addition to NAC, there are eight other
AMCs for the Model 501, 25 other AMCs for the Model 250, and one other AMC for
the Model 570/571-K industrial engine. In addition, for parts ordered after
September 1994, Allison reduced the Company's discounts off list prices on parts
other than with respect to certain specified items, including the FMS Contract,
as to which reductions in discounts were phased in over time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company is party to an AMC Agreement with Allison for each of the three
Allison model lines it services. Each of the AMC Agreements between Allison and
NAC: (i) entitles NAC to purchase engine parts from Allison or certain approved
vendors; (ii) specifies the terms on which the Company purchases engines and
engine parts from Allison, which include a discount from list price and the
ability to attain credits upon embodiment of parts into a customer's engine;
(iii) requires NAC to provide aftermarket support for the Allison engines in
specified regions identified in the AMC Agreement; (iv) delineates the permitted
physical
39
<PAGE> 42
sites at which NAC is permitted to perform repair and overhaul services, store
parts and inventory and maintain marketing offices; and (v) defines the working
relationship between the two companies in a number of areas, including technical
training, quality systems, inventory planning and management, exchange of
customer and marketing information, and other administrative matters.
The AMC Agreements with Allison for the Model 501 and Model 250 each expire
by their terms on December 31, 1997 except that the AMC Agreement for the Model
570/571-K expires by its terms on December 31, 1998. The AMC Agreements for the
Model 501 and Model 250 provide, however, that qualifying AMCs who have adhered
to the terms and conditions of their AMC Agreements and who have the "ability
and desire" to continue through a three year renewal period may renew the AMC
agreements for an additional three year period for a renewal fee of $1. Renewal
of the 570/571 AMC Agreement is subject to Allison's sole unilateral decision.
The Company has no reason to believe that these agreements with Allison will not
be extended. The failure of Allison to renew or extend the contracts would have
an adverse and material impact on the Company and its operations.
SALES AND MARKETING
Overhaul and Repair. Since the acquisition of NAC in June 1995, the
Company's new management team has implemented several sales and marketing
initiatives, including the expansion of its direct sales effort, aimed at
increasing the Company's net sales from its existing customer base as well
attracting new customers. The Company believes that the implementation of these
initiatives contributed significantly to its ability to generate 26.6% growth in
overhaul and repair revenues for the nine months ended October 31, 1996 versus
the comparable period in the prior year.
The Company uses direct sales personnel for all product lines. The Vice
President of Sales and Marketing supervises the Company's sales professionals,
whose sales efforts are supported by the quality assurance and engineering
departments to aid in customer support. Additionally, as a result of the
initiatives implemented by the Company's new management, senior management plays
an active role in marketing several of the Company's product lines. The sales
and marketing efforts of the Company differ for each of its business segments
and within each of the engine lines it services.
The Company's sales professionals work closely with engineering and
customer support to provide cost effective solutions to maintaining engines,
stressing the Company's repair and overhaul engineering expertise, turnaround
times and component remanufacturing capabilities.
The Company actively participates in many of the major industry gatherings
and air shows globally, as well as hosts group of engine operators at technical
and other meetings. In certain instances, the Company actively bids on
government contracts for certain lines through a separate government contracts
department, which coordinates with the sales and marketing team.
NAC Parts Distribution. New and serviceable parts are sold primarily to
existing overhaul customers and parts resellers. These sales are handled by the
Company's material department, and in the case of accessories and components, a
separate sales group.
API Combs Parts Distribution. API Combs uses regional sales managers,
inside salespersons, outbound telephone salespersons, independent contract
representative and associated distributors in its sales and marketing efforts.
CUSTOMERS
NAC. NAC provides repair and overhaul services to more than 300 customers,
which include militaries (both foreign and U.S.), air cargo carriers, major
industrial corporations and others. During the ten month period ended January
31, 1996 and the nine month period ended October 31, 1996, NAC's top 10
customers accounted for approximately 45% of operating revenues. During the ten
month period ended January 31, 1996, revenues from the FMS program administered
by the U.S. government represented 18% of NAC's operating revenues. During the
nine month period ended October 31, 1996, revenues from System Control
Technologies represented 15% of NAC's operating revenues. System Control
Technologies administers contracts on behalf of many of the same foreign
governments for which NAC previously did work under NAC's contract with the
40
<PAGE> 43
U.S. government pursuant to the FMS program prior to the expiration of the
contract in October 1995. Except for the aforementioned, no single customer
accounted for more than 10% of its net sales.
API Combs. API Combs services over 3,000 customers per year representing
almost every segment of the aviation industry including: FBOs, certified repair
stations, engine and component overhaulers, fleet operators, government
agencies, air cargo operators, regional air carriers and major airlines. During
the first nine months of 1996, API Combs' top 10 and top 100 customers accounted
for approximately 12.0% and 38.0%, respectively, of its operating revenues, and
no single customer accounted for more than 3.0% of its operating revenues.
COMPETITION
Repair and Overhaul. In the repair and overhaul market for Allison Models
250 or 501, NAC competes primarily with other independent operators, including
the other Allison AMCs, located throughout the world. Management believes that
its most significant competitors in this market include: UNC Incorporated and
Dallas Airmotive in the United States; Standard Aero of Winnipeg, Canada;
Hunting of Manchester, United Kingdom; and Singapore Aerospace of Singapore,
each of which is an AMC in one or more product lines. Certain international
competitors of the Company have the advantage of a monopoly on their country's
military contracts for repair and overhaul of the engines serviced by the
Company. In the market for repair and overhaul of other lines serviced by the
Company, including Pratt & Whitney Canada and McDonnell Douglas, the Company
competes against the original equipment manufacturers as well as other
independent operators. Many of the Company's competitors have financial
resources substantially greater than those of the Company, and have a longer and
more extensive record of repair and overhaul work on the Pratt & Whitney Canada
engine lines and McDonnell Douglas helicopter lines relative to the Company.
Spare Parts. Competition in the parts distribution market is generally
based on price, availability of product and quality, including traceability.
NAC's major competitors include Allison, Rolls Royce and other AMCs. API Combs'
major competitors include Aviall, Inc., Aviation Service Corporation ("Avsco"),
Cooper Aviation Industries, Inc. and Cessna Aircraft Company (a subsidiary of
Textron). There is also substantial competition, both domestically and overseas,
from larger and smaller companies who focus on regional/niche markets or on
market segments of secondary interest. Examples of these companies include AAR
Corp., Aviation Sales Company, Satair A/S, Superior Air Parts, Inc., Avteam and
Omaha Aircraft Supply.
Accessory and Engine Component Remanufacturing. NAC's significant
competitors in this market include Standard Aero, Dallas Airmotive and UNC
Incorporated. The Company believes that the primary competitive factors in this
marketplace are price, quality, engineering and customer service. The Company
has engineered and developed a significant number of EAs, which are proprietary
in nature. Due to its advanced systems, technology and years of expertise in
Allison component remanufacturing, the Company believes its competes favorably
with regard to such factors.
BACKLOG
As of October 31, 1996, the total contract price of the backlog of orders
for repair and overhaul services, was approximately $38.3 million and
approximately $17.0 million of the orders represented thereby are expected to be
filled in fiscal 1997.
REGULATION
Governments around the world, through regulatory bodies such as the FAA and
DOD, require all aircraft and engines to follow a defined maintenance program to
ensure airworthiness and safety. Such programs are developed by the original
equipment manufacturer in coordination with the regulatory body. The DOD's
regulatory program for engines used by the armed services is separate and apart
from the FAA procedures. The maintenance of industrial engines used in power
plants is relatively unregulated, except when such maintenance is performed for
the government. The Company has certificates from the FAA and the Joint Aviation
Authority (the European regulatory body similar to the FAA) covering its repair
and overhaul facilities. Under the authority of these certifications, the
Company is permitted to service all Allison engine
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<PAGE> 44
lines, the Pratt & Whitney Canada PT6 and its other product lines. The DOD
requires that parties servicing aircraft engines for branches of the U.S. armed
services comply with applicable government regulations, and the DOD continually
reviews the operations for compliance with applicable regulations.
All aircraft must be maintained under a continuous condition monitoring
program and must periodically undergo thorough inspection and maintenance. The
inspection, maintenance and repair procedures for the various types of aircraft
and equipment are prescribed by regulatory authorities and can be performed only
by certified repair facilities and/or certified technicians. Certification and
conformance is required prior to installation of any part on an aircraft.
Presently, whenever necessary with respect to a particular part, the Company
utilizes FAA certified repair stations to repair and certify parts to ensure
marketability. The operations of the Company may in the future be subject to new
and more stringent regulatory requirements. In that regard, the Company closely
monitors the FAA and industry trade groups in an attempt to better understand
how possible future regulations might impact the Company. See "Risk
Factors-Risks Regarding the Company's Inventory" and "-- Government Regulation."
The documentation or traceability that is supplied with an aircraft spare part
is an important factor in the aircraft spare parts distribution market. The
Company requires all of its suppliers to provide adequate documentation as
dictated by the appropriate regulatory authority.
The U.S. government has considerable discretion regarding compliance with
its rules, regulations and procedures. Although the Company undertakes to comply
with all applicable government rules, regulations and procedures, the U.S.
government and its agencies have substantial latitude in determining whether
their regulations and policies have been upheld. The operations of the Company
have and may continue to come under the close scrutiny of the U.S. government
and its agencies, and U.S. government approvals of the Company's operations and
output may be given or withheld based upon subjective criteria. See "Risk
Factors -- Government Regulations." The Company believes it is in material
compliance with applicable regulations. See "-- Legal Proceedings."
EMPLOYEES
As of October 31, 1996, approximately 492 persons were employed on a
full-time basis by the Company of which 91 were employed by API Combs. None of
the Company's employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are good.
PROPERTIES
The Company leases the following facilities:
<TABLE>
<CAPTION>
SQUARE LEASE
LOCATION ENTITY DESCRIPTION FOOTAGE EXPIRATION
- -------------------- --------------- ------------------------------------------ ------- ----------
<S> <C> <C> <C> <C>
Stamford, CT(1) First Aviation Executive offices 1,000 1997
Oakland, CA(2) NAC Allison engine repair and overhaul shop 157,000 2015
and offices
Long Beach, CA NAC Allison engine and Pratt & Whitney PT6 28,500 1999
repair and overhaul
Long Beach, CA NAC Maintenance of McDonnell Douglas 3,000 1997
helicopter components
San Leandro, CA NAC Warehouse 8,900 1999
Houston, TX NAC Repair of industrial engines 5,800 monthly
Indianapolis, IN(3) NAC Overhaul center 12,800 1998
Indianapolis, IN(3) NAC Overhaul center 12,300 1999
Indianapolis, IN(3) NAC Overhaul center 19,200 1998
Memphis, TN API Combs Distribution/sales 30,250 monthly
</TABLE>
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<PAGE> 45
- ---------------
(1) On December 13, 1996, the Company entered into a new sublease for
approximately 2,000 square feet of office space in Westport, Connecticut,
commencing on approximately March 1, 1997. This sublease will replace the
current lease. See "Certain Transactions."
(2) NAC owns the buildings at this location but leases the land on which the
structures are located.
(3) Pursuant to the agreement between Allison and NAC under which these
facilities are made available to Allison, Allison has "deemed it necessary
to overhaul and repair some products in Indianapolis for the purpose of
maturing the product sooner, reducing direct operating cost to the customer,
gaining product knowledge more rapidly, improving engineering awareness,
providing improved reliability data and reducing warranty, policy and
campaign cost." This agreement limits the number of personnel that are to be
employed at the facility. NAC is reimbursed its direct cost for the
facilities as well as the labor pool provided.
ENVIRONMENTAL MATTERS AND PROCEEDINGS
The Company's operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the United States Environmental Protection
Agency (the "EPA"), the California Environmental Protection Agency (the "Cal
EPA") and the United States Occupational Safety and Health Administration. Among
other matters, these regulatory authorities impose requirements that regulate
the operation, handling, transportation, and disposal of hazardous materials,
the health and safety of workers, and require the Company to obtain and maintain
licenses and permits in connection with its operations. This extensive
regulatory framework imposes significant compliance burdens and risks on the
Company. Notwithstanding these burdens, the Company believes that it is in
material compliance with all federal, state, and local laws and regulations
governing its operations.
The Company is principally subject to the requirements of the Clean Air Act
of 1970 (the "CAA"), as amended in 1990, the Clean Water Act of 1977; CERCLA;
the Resource Conservation Recovery Act of 1976 (the "RCRA"); and the Hazardous
and Solid Waste Amendments of 1984 ("HSWA"). The following is a summary of the
material regulations that are applicable to the Company:
The CAA imposes significant requirements upon owners and operators of
facilities that discharge air pollutants into the environment. The CAA mandates
that facilities which emit air pollutants comply with certain operational
criteria and secure appropriate permits. Additionally, authorized states such as
California develop their own regulations for air pollution control.
CERCLA, as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), is designed to respond to the release of hazardous substances.
CERCLA's most notable objectives are to provide criteria and funding for the
cleanup of sites contaminated by hazardous substances and impose strict
liability on parties responsible for such contamination namely, owners and
operators of facilities or vessels from which such releases or threatened
releases occur, and persons who generated, transported, or arranged for the
transportation of hazardous substances to a facility from which such release or
threatened release occurs. California law is similar to CERCLA in that it
imposes strict liability for releases of hazardous substances on owners and
operators of contaminated sites. RCRA and the EPA's implementing regulations
establish the basic framework for federal regulation of hazardous waste. RCRA
governs the generation, transportation, treatment, storage and disposal of
hazardous waste through a comprehensive system of hazardous waste management
techniques and requirements. RCRA requires facilities such as the Company's that
treat, store, or dispose of hazardous waste to comply with enumerated operating
standards. The Company believes that its facilities are in material compliance
with all currently applicable RCRA requirements, hold all applicable permits
required under RCRA, and are operating in material compliance with the terms of
all such permits. California law concerning the control of hazardous waste
parallels, and is in some ways stricter than, RCRA. Cal EPA has been authorized
to implement portions of RCRA on behalf of the EPA.
As part of the HSWA which amended RCRA, Congress enacted federal
regulations governing the underground storage of petroleum products and
hazardous substances. The federal underground storage tank
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<PAGE> 46
("UST") regulatory scheme mandates that the EPA establish requirements for leak
detection, construction standards for new USTs, reporting of releases,
corrective actions, on-site practices and record-keeping, closure standards, and
financial responsibility. Some states, including California, have promulgated
their own performance criteria for new USTs, including requirements for spill
and overfill protection, UST location, as well as primary and secondary
containment. The Company believes that its facilities are in material compliance
with the federal and state UST regulatory requirements and performance criteria.
The Company is also subject to a variety of environmental-related worker
and community safety laws. The Occupational Safety and Health Act of 1970
("OSHA") mandates general requirements for safe workplaces for all employees. In
particular, OSHA provides special procedures and measures for the handling of
certain hazardous and toxic substances. In addition, specific safety standards
have been promulgated for workplaces engaged in the treatment, disposal or
storage of hazardous waste. Requirements under state law, in some circumstances,
may mandate additional measures for facilities handling materials specified as
extremely dangerous. The Company believes that its operations are in material
compliance with OSHA's health and safety requirements.
In October 1995, a committee comprised of a group of companies and
individuals responsible for the cleanup of the Petroleum Products corporation
Superfund Site in Pembroke Park, Florida (the "Superfund Site") contacted NAC
and alleged that NAC was responsible for a share of the clean-up costs pursuant
to CERCLA. NAC has been designated as a potentially responsible party by the EPA
for costs associated with cleanup of the Superfund Site, and as such, as with
each of the other potentially responsible parties, is potentially liable on a
joint and several basis for the entire clean-up cost for the Superfund Site. The
committee demanded that NAC pay approximately $70,000 to join the committee
handling the clean-up and threatened to add NAC as a defendant to an existing
lawsuit regarding the site if NAC declined to pay. The committee alleges that
NAC is responsible to pay a portion of the cleanup costs due to its status as
the successor of Design Engineering Company ("DEC"), which the committee alleges
sent waste oil to the Petroleum Products Superfund Site between approximately
1969 and 1973 from property located in Miami, Florida (the "Miami Property").
The committee alleges that DEC sent approximately 194,500 gallons of waste oil
to the Petroleum Products Superfund Site and has estimated that total clean-up
costs for the Petroleum Products Superfund Site allocable to the Company could
range from $.75 to $1.25, per gallon. At this time, the Company is unable to
determine the accuracy of the committee's clean-up cost estimates or the
likelihood that NAC will be required to contribute a portion of such clean-up
costs. NAC has not joined the committee and intends to vigorously contest the
committee's allegations regarding the amount of waste oil allegedly shipped by
DEC to the Petroleum Products Superfund Site.
In February 1996, NAC and several other past and present owners/operators
of the Miami Property were served with a complaint filed in the Florida District
Court of the 11th Judicial Circuit in and for Dade County, Florida, wherein the
owners of certain property adjacent to the Miami Property allege that
contamination at the Miami Property has migrated to and/or impacted their
adjacent property. The complaint seeks unspecified damages for cleanup costs,
loss of property value and attorneys' fees. Although NAC believes it divested
all its interest in the Miami Property in June 1975, at this time, it is unclear
if and to what extent any contamination was caused or present during the time
that it owned the property. NAC has answered the complaint and is vigorously
contesting the plaintiffs' allegations.
In October 1994, NAC entered into a Stipulation with the office of the
District Attorney for the County of Alameda resulting in the entry of a civil
Consent Order by the Superior Court of California for the County of Alameda.
This Consent Order resolved issues arising out of an investigation by various
agencies of the State of California involving environmental compliance at the
Company's Oakland facility. This investigation focused primarily on three
issues: (i) a spill of approximately 1,100 gallons of Jet-A fuel at NAC's
Oakland test cell facility in September 1992, (ii) the historical discharge of
wastewater from the test cell facility to adjacent fields owned by the Port of
Oakland, and (iii) the circumstances and effect of an alleged discharge of
materials into a storm drain opening at NAC's headquarters. Pursuant to the
Consent Order, NAC has made payments and incurred related expenses aggregating
approximately $425,000 including payment of fines and fees of approximately
$221,000 to certain agencies of the State of California, and payment for
remediation projects enumerated in the Consent Order at a cost of approximately
$161,000. These projects include
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<PAGE> 47
investigation and monitoring of soil and groundwater conditions in various areas
on or adjacent to NAC's facilities, completion of an environmental compliance
audit, and implementation of an environmental training program for employees.
Pursuant to the terms of the Consent Order, the Court retains jurisdiction to
ensure NAC's compliance with and completion of the obligations specified in the
Consent Order. NAC believes that it is in compliance with the terms and
conditions of the Consent Order. In connection with these events, NAC has become
a zero discharge facility at its site in Oakland.
LEGAL PROCEEDINGS
The Company's business exposes it to possible claims for personal injury,
death or property change which may result from a failure of engines serviced by
the Company or spare parts sold by it. 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 spare parts which it sells. The Company maintains
what it believes is adequate liability insurance to protect it from such claims.
In 1995 and early 1996, the Office of Special Investigations ("OSI") of the U.S.
Air Force conducted an investigation concerning NAC's use of government surplus
parts in repairing aircraft engines pursuant to FMS contracts with the Air Force
from 1987 through 1995. OSI investigated whether NAC used government surplus
parts, knowing that doing so was in violation of the FMS contracts. Such a
knowing and intentional violation of a government contract could constitute a
criminal false statement or a criminal or civil false claim. The Company does
not believe that any Company employee knowingly violated the FMS contracts and
the Company believes that the U.S. Air Force knew of NAC's utilization of
surplus parts and in some cases requested that the Company use certain
government surplus parts under the FMS contracts. Although NAC has been informed
that the government has determined not to pursue this matter criminally, it is
not clear whether or to what extent the government will pursue a civil
complaint. The U.S. Air Force also may claim a breach of contract if government
surplus parts were used in violation of the FMS contracts, even if it was not a
knowing violation. It is unclear what, if any, damages would be awarded for such
a breach. The Company believes, however, that the amount of damages, if any,
that might be awarded for such a breach would not have a material adverse effect
on the Company's business, financial condition or results of operations.
In November 1994, NAC made a formal voluntary disclosure to the DOD
Inspector General concerning apparent product substitution by employees of
Heli-Dyne prior to the Company's acquisition of the assets of Heli-Dyne in April
1994. NAC was accepted into the voluntary disclosure program and in early 1995
executed a written agreement with the DOD Inspector General and DOJ. In August
1995, NAC submitted a written report to the DOD Inspector General concerning the
relevant facts and detailing the corrective actions taken. On behalf of the DOD
Inspector General, the Defense Contract Audit Agency and the Army Criminal
Investigative Division conducted audit and verification investigations
concerning the Company's written report, and NAC believes that the results of
such investigations were forwarded to the civil division of the DOJ for a
determination of whether NAC bears any financial responsibility for damages
caused by Heli-Dyne. It is management's position that NAC bears no
responsibility for such damages. Management believes that the damages, if any,
that might be awarded in connection with this matter would not be material to
the Company's business, financial condition or results of operations. See "Risk
Factors -- Governmental Regulations."
The Company is also involved in various matters relating to compliance with
DOD regulations governing services performed for U.S. military aircraft and
environmental regulations. See "-- Environmental Matters and Proceedings."
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers (the "Named Executive Officers") and directors of
the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Aaron P. Hollander....... 40 Chairman of the Board
Michael C. Culver........ 46 Chief Executive Officer and Director of the Company;
Chief Executive Officer of API Combs
John F. Risko............ 45 Chief Operating Officer and Director of the Company;
President and Chief Executive Officer of NAC
John A. Marsalisi........ 41 Chief Financial Officer, Secretary and Director of the
Company; Chief Financial Officer of NAC
Joshua S. Friedman....... 40 Director(1)
Robert L. Kirk........... 67 Director(1)
Charles Ryan............. 46 Director(1)
</TABLE>
- ---------------
(1) Messrs. Friedman, Kirk and Ryan have agreed to become Directors upon
consummation of the Offering.
Aaron P. Hollander has served as Chairman of the Company since March 1995.
Mr. Hollander became a director of NAC in June 1995. Mr. Hollander co-founded
First Equity, an aerospace investment and advisory firm, in 1985 and has served
as Co-Managing Director since that time.
Michael C. Culver became a Director of the Company and has served as Chief
Executive Officer of the Company since March 1995. Mr. Culver became a director
of NAC in June 1995 and Chairman in August 1996. Following the consummation of
the API Combs Acquisition, Mr. Culver will serve as Chairman and Chief Executive
Officer of API Combs. Mr. Culver co-founded First Equity, an aerospace
investment and advisory firm, in 1985 and has served as Co-Managing Director
since that time.
John F. Risko became a Director and has served as Chief Operating Officer
of the Company since March 1995 and has served as Chief Executive Officer of NAC
since January 1996 and as its President since August 1996. From July 1995 to
August 1996, Mr. Risko served as Chairman of NAC. Since 1993, he has been and is
an officer of First Equity, an aerospace investment and advisory firm. From 1990
to 1993, Mr. Risko was Managing Director and a member of the Board of Directors
of Burns Fry, Ltd. of Toronto, an investment banking firm. From 1988 to 1990, he
was a Managing Director at Bankers Trust Company. From 1980 to 1988, Mr. Risko
was with Morgan Stanley & Co. Incorporated, where he was a Principal in Mergers
and Acquisitions.
John A. Marsalisi became a Director and has served as Chief Financial
Officer and Secretary of the Company since March 1995. Mr. Marsalisi has served
as a director of NAC since June 1995 and as its Chief Financial Officer and
Secretary since August 1996. Since 1996, he has been and is an officer of First
Equity. From 1991 to May 1996, Mr. Marsalisi was Director of Taxes for Omega
Engineering. Prior to joining Omega Engineering, Mr. Marsalisi was Director of
Taxes for the Entrepreneurial Services Group of Ernst & Young's Stamford,
Connecticut office. Mr. Marsalisi is a Certified Public Accountant.
Joshua S. Friedman is and has been a Director of NAC since June 1995. Since
its inception in 1990, Mr. Friedman has been an executive officer of Canyon
Partners Incorporated, a merchant banking and money management firm which Mr.
Friedman co-founded and which is an affiliate of Canpartners, a subordinated
creditor and warrant holder of the Company. See "Certain Transactions." From
1984 to 1990, Mr. Friedman was Executive Vice President and Co-Director, Capital
Markets of Drexel Burnham Lambert Incorporated. Mr. Friedman currently serves as
a member of the Board of Directors of Signature Resorts, Inc., a publicly traded
developer and operator of timeshare resorts, and several privately held
companies and charitable organizations.
Robert L. Kirk is and has been since 1992 the Chairman of British Aerospace
Holdings, Inc., an international aerospace corporation. Mr. Kirk served as
Chairman and Chief Executive Officer of CSX
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Transportation, Inc., the railroad subsidiary of CSX Corporation, from 1990 to
1992, and was Chairman and Chief Executive Officer of Allied-Signal Aerospace
Co. from 1986 to 1989. Mr. Kirk is a director of United Defense L.P., a defense
contractor, and Harsco Corporation, a diversified industrial company.
Charles Ryan is and has been since 1986 the President and Chief Operating
Officer, of Nordam Group Inc., a manufacturer and overhaul agency of airframes,
nacelles and thrust reversers. Mr. Ryan has been associated with Nordam Group
Inc. since 1976.
The officers of the Company are elected by the Board of Directors to serve
until their successors are elected and qualified. The directors of the Company
are elected at the annual meeting of the stockholders. The Certificate of
Incorporation and Bylaws of the Company provide for a Board of Directors divided
into three classes, as nearly equal in size as possible, with staggered terms of
three years. As a result, approximately one-third of the Board will be elected
each year. Messrs. Hollander and Kirk will serve until the 1997 Annual Meeting
of Stockholders, Messrs. Culver and Friedman will serve until the 1998 Annual
Meeting of Stockholders, and Messrs. Marsalisi, Ryan and Risko will serve until
the 1999 Annual Meeting of Stockholders. If the Company issues a series of
preferred stock, the holders thereof may be entitled to elect additional
directors who shall not be divided into classes.
Additional officers of NAC and API Combs are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Lorne C. Dyke................. 38 Vice President, Remanufacturing, Engineering and
Test Facility -- NAC
Joseph E. Ghantous............ 51 Vice President, Sales, Marketing and
Customer Support -- NAC
Peter LaSalle................. 38 President -- API Combs
Rajesh Sharma................. 38 Chief Operating Officer -- NAC
</TABLE>
Lorne C. Dyke has been NAC's Vice President, Remanufacturing, Engineering
and Test Facility since January 1996. Mr. Dyke joined NAC in December 1995,
initially serving as Vice President Quality and Engineering. Prior to joining
NAC, Mr. Dyke held progressive engineering and operations management positions
with Aviall Inc. and its successor in general aviation engines, Dallas Airmotive
Inc., from 1990 to 1995, culminating in the position of Director of Engineering.
From 1983 through 1990, Mr. Dyke was with Standard Aero Ltd. of Canada, in
senior engineering and product line management positions.
Joseph E. Ghantous has served as NAC's Vice President, Sales, Marketing and
Customer Support since 1992. Prior to joining NAC, Mr. Ghantous worked at Aviall
Inc. and Ryder Airline Services from 1972 to 1992 during which time he held the
positions of Program Manager, Customer Support Manager and Customer Service
Manager.
Peter LaSalle has been Old API's Vice President and General Manager since
August 1993, and will serve as President of API Combs following the consummation
of the API Combs Acquisition. Prior to joining Old API, Mr. LaSalle was
Executive Vice President and General Manager of Edge Productions, Inc. from 1991
to 1993. Mr. LaSalle was a Manager in the Dallas Management Consulting Practice
of Price Waterhouse from 1990 to 1991. Prior to that time, Mr. LaSalle was the
President of Aviation Systems and Programs, a division of Duncan Aviation, Inc.,
from 1985 to 1988, and served as the Executive Vice President and General
Manager of Pelican Aviation Corporation from 1981 to 1985.
Rajesh Sharma has been NAC's Chief Operating Officer since January 1996.
From 1994 to August 1996, he also served as NAC's Chief Financial Officer. From
April 1994 to December 1995, Mr. Sharma was Vice President-Finance and
Operations for NAC. Between September 1991 and April 1994, Mr. Sharma served as
Controller of NAC.
BOARD COMMITTEES
In December 1996, the Board of Directors established an Audit Committee, a
Compensation Committee and an Executive Committee. The Audit Committee will be
initially composed of Messrs. Hollander, Friedman and Ryan. The Audit Committee
reviews the Company's annual audit and meets with the
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<PAGE> 50
Company's independent auditors to review the Company's internal controls and
financial management practices. The Compensation Committee will be initially
composed of Messrs. Friedman, Hollander and Kirk. The primary function of the
Compensation Committee is to review and make recommendations to the Board with
respect to the compensation, including bonuses, of the Company's officers. The
Company's Executive Committee is composed of Messrs. Culver, Hollander and
Risko. The Executive Committee has and may exercise all of the powers and
authority of the Board of Directors in the management of the business affairs of
the Company except that it does not have the power and authority to: (i) amend
the Certificate of Incorporation or Bylaws of the Company; (ii) adopt an
agreement of merger or consolidation or to recommend to stockholders the sale,
lease or exchange of all or substantially all of the Company's property and
assets; (iii) recommend to stockholders a dissolution of the Company or a
revocation of the dissolution; or (iv) declare a dividend or authorize the
issuance of stock of the Company unless expressly authorized by a resolution of
the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an employee of the
Company.
DIRECTOR COMPENSATION
Each of the Company's non-employee directors is entitled to receive an
annual fee of $20,000 in cash or stock. No director of the Company receives any
directors' fees for attendance at meetings of the Board of Directors or
committees thereof, although non-employee members of the Board do receive
reimbursement for actual expenses of such attendance.
STOCK PLANS
Stock Option Plan. The Company has adopted a Stock Option Plan (the
"Plan") which will become effective upon the closing of the Offering. The Plan
is intended to provide a means to attract and retain key employees (including
officers, whether or not directors) of the Company and its subsidiaries and
promote the success of the Company.
Under the Plan, awards may consist of any combination of stock options
(incentive or nonqualified), restricted stock, stock appreciation rights
("SARs") and performance share awards. The number of shares of Common Stock that
may be issued under the Plan is 400,000. Awards under the Plan may be made to
any director, officer, or key employee of the Company, including directors who
serve on the Compensation Committee of the Board of Directors.
Participants in the Plan are selected by the Compensation Committee. The
Compensation Committee is appointed by the Board of Directors and is empowered
to determine the terms and conditions of each award made under the Plan, subject
to the limitations that the exercise price of incentive stock options cannot be
less than the fair market value of the Common Stock on the date of grant (110%
if granted to an employee who owns 10% or more of the Common Stock), and no
incentive stock option can be granted to anyone other than a full-time employee
of the Company or its subsidiaries. Non-qualified stock options may be granted
under the Plan with an exercise price determined by the Compensation Committee.
Options granted under the Plan may be exercised as determined by the
Compensation Committee, but in no event after ten years from the date of grant.
Restricted stock awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Each restricted stock award agreement
shall specify the number of shares of Common Stock to be issued, the date of
such issuance, the price, if any, to be paid for such shares by the participant,
whether and to what extent the cash consideration paid for such shares shall be
returned upon a forfeiture and the restrictions imposed on such shares. Shares
subject to restricted stock awards are nontransferable until such shares have
vested and are subject to a risk of forfeiture unless certain conditions are
satisfied.
SARs may be granted in connection with stock options or separately. SARs
granted in connection with stock options will provide for payments to the holder
based upon increases in the price of the Common Stock over the exercise price of
the related option on the exercise date. The SARs may provide that the holder of
the
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<PAGE> 51
SARs may exercise the SARs or the option in whole or in part. The Compensation
Committee may elect to pay SARs in cash or in Common Stock or in a combination
of cash and Common Stock.
Performance share awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Generally, these awards will be based
upon specific agreements and will specify the number of shares of Common Stock
subject to the award, the price, if any, to be paid for such shares by the
participant and the conditions upon which the issuance to the participant will
be based.
Options and SARs which have not yet become exercisable will lapse upon the
date a participant is no longer employed by the Company for any reason. Options
and SARs which have become exercisable must be exercised within 30 days after
such date if the termination of employment was for any reason other than
retirement, total disability, death or discharge for cause. In the event a
participant is discharged for cause, all options and SARs shall lapse
immediately upon such termination of employment. If the termination of
employment was due to retirement, total disability or death, the options and
SARs, which are exercisable on the date of such termination, must be exercised
within three months of the date of such termination or such shorter period
provided in the award agreement. Shares subject to restricted stock awards that
have not become vested upon the date a participant is no longer employed by the
Company for any reason will be forfeited in accordance with the terms of the
related award agreements. Shares subject to performance share awards that have
not been issued or become issuable upon the date a participant is no longer
employed by the Company for any reason shall similarly be forfeited.
In the event the stockholders of the Company approve the dissolution or
liquidation of the Company, certain mergers or consolidations, or the sale of
substantially all of the business assets of the Company, unless prior to such
event the Board of Directors determines that there shall be either no
acceleration or limited acceleration of awards, each option and related SAR
shall become immediately exercisable, restricted stock shall immediately vest
and the number of shares covered by each performance share award shall be issued
to the participant.
Section 423 Plan. The Company has adopted an Employee Stock Purchase Plan
(the "Stock Purchase Plan") effective as of April 1, 1997. Under the Stock
Purchase Plan, 250,000 shares of the Company's Common Stock would be available
for purchase by eligible employees of the Company and its subsidiaries electing
to participate in the Stock Purchase Plan. Such employees would be entitled
annually to purchase Common Stock of the Company, by means of payroll
deductions, at a 15% discount from the market price of the Company's Common
Stock. The Stock Purchase Plan provides incentive to employees (i) to achieve
business goals of the Company that would increase stock values and (ii) to
remain in the employment of the Company.
Under the Stock Purchase Plan, Qualified Employees (as such term is defined
below) are given the opportunity prior to each January 1 (May 1, 1997 in the
case of calendar 1997) to participate in the Stock Purchase Plan by designating
a certain amount of their after-tax base salary to be set aside over the next
twelve months (the "Plan Year") to purchase the Company's Common Stock. On the
last day of each Plan Year (the "Exercise Date"), the total amount set aside by
each participant is used to purchase Common Stock. The purchase price of each
share of Common Stock is 85% of the closing price of a share of Common Stock on
the Nasdaq National Market on the first day of the Plan Year or the Exercise
Date, whichever is lower.
Only Qualified Employees are eligible to participate in the Stock Purchase
Plan. The Stock Purchase Plan defines a "Qualified Employee" as an employee of
the Company or any of its subsidiaries who has completed twelve months of
continuous service with the Company or such subsidiary as of the grant date and
who is customarily employed for more than twenty hours per week and more than
five months in a calendar year. Employees of API Combs will receive service
credit for their tenure as employees of Old API. The term "Qualified Employee"
does not include any employee who, after giving effect to his or her
participation in the Stock Purchase Plan, owns or would own stock representing
5% or more of the total combined voting power or value of all classes of stock
of the Company or any of its subsidiaries or any employee covered a collective
bargaining agreement. As of November 30, 1996, there were approximately 400
Qualified Employees eligible to participate in the Stock Purchase Plan.
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The fair market value of stock purchased by any participant cannot exceed
$25,000 in any calendar year. In addition, the maximum amount that a participant
may elect to set aside under the Stock Purchase Plan in each Plan Year is 10% of
his or her base salary. The minimum amount that a participant may elect to set
aside each pay period is $10.00.
The Stock Purchase Plan has no definite term and will terminate when all of
the shares subject to the Stock Purchase Plan have been purchased unless
terminated sooner by the Board of Directors. The Stock Purchase Plan does not
restrict the Company's right to terminate the employment of participants. The
Stock Purchase Plan provides that upon termination of a participant's employment
due to death, disability or retirement, the participant or his or her personal
representative may elect to either (i) purchase Common Stock under the Stock
Purchase Plan using the funds credited to the participant's account as of the
date of death, disability or retirement, or (ii) receive a refund of the balance
of the participant's account. Upon termination of employment for a reason other
than death, disability or retirement, the participant will be deemed to have
withdrawn from the Stock Purchase Plan and all amounts credited to his or her
account will be refunded to him or her without interest. Termination of
employment has no effect on shares previously purchased under the Stock Purchase
Plan.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger, or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of all or substantially all of the property of the Company to
another corporation, the Stock Purchase Plan will terminate and the rights of
participants to purchase shares under the Stock Purchase Plan will terminate and
the Company thereupon will refund the balance of a participant's accounts to the
participant, without interest, unless (i) the administrating committee of the
Board of Directors determines that the rights of participants to purchase shares
should accelerate or (ii) provision is made in connection with such transaction
for the assumption of the Stock Purchase Plan or the substitution of rights to
purchase the Company's Common Stock with rights to purchase stock of a successor
employer corporation or an affiliate thereof, with appropriate adjustments as to
number and kind of shares and prices.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages arising from a breach
of their fiduciary duty as directors to the fullest extent permitted by Delaware
law as it now exists or may in the future be amended. The Company's Bylaws
provide that indemnification will not extend in the event that the person's
conduct was intentional or was a knowing and culpable violation of the law.
Moreover, the right to indemnification conferred by the Company includes the
right to be paid by the Company for any expenses incurred in defending any
proceeding in advance of its final disposition.
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company was formed in March 1995 to acquire NAC and each of the
executive officers of the Company became an officer at the time of its
formation. None of the executive officers of the Company received any employment
compensation from the Company or NAC during the ten month period ended January
31, 1996, except Mr. Risko. Mr. Risko has been paid a salary at the rate of
$180,000 per annum by NAC since becoming its President and Chief Executive
Officer in January 1996. The salary payments to Mr. Risko have reduced, dollar
for dollar, the amount of the $300,000 annual management fee NAC pays to First
Equity for management services. The obligation to pay a management fee to First
Equity terminates upon consummation of the Offering. See "Certain Transactions."
In December 1996, First Aviation entered into employment agreements with
Michael C. Culver, John F. Risko, and John A. Marsalisi. Mr. Culver's, Mr.
Risko's and Mr. Marsalisi's employment agreements are each for terms of three
years which expire on December 31, 1999, and provide for an annual base salary
of $180,000, $180,000 and $155,000, respectively. In addition, each of the three
employment agreements provides for: (i) benefits which are also generally
available to other employees of First Aviation in similar employment positions;
(ii) reimbursement of reasonable business related expenses; (iii) three weeks
paid
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vacation a year; and (iv) a severance payment, upon termination without cause or
for death or disability, equal to six months base salary. Each of the agreements
may be terminated by First Aviation without cause at any time upon 30 days
notice or by the executive for any reason upon 30 days notice.
Mr. Culver, Mr. Risko and Mr. Marsalisi each have, as part of their
respective employment agreements, agreed not to compete with First Aviation for
a period of six months following the end of their employment by First Aviation
and not to solicit employees or customers of First Aviation for a period of six
months following the end of their employment with First Aviation.
NAC has entered into a Post-Employment Consulting Agreement with Mr.
Sharma. The agreement requires Mr. Sharma to provide specified consulting
services to NAC following a termination of Mr. Sharma's employment by (i) NAC
without "Cause" or (ii) by Mr. Sharma for "Good Reason" (either, a "Qualifying
Termination") as these terms are defined. "Cause" is defined to include
misappropriation of funds, acts of fraud or gross misconduct, conviction of a
felony, disclosure of confidential information, misappropriation of business
opportunities and competitive behavior against NAC. "Good Reason" is defined as
a reduction in Mr. Sharma's base salary or benefits other than in connection
with an across-the-board reduction in salaries and/or benefits for similarly
situated employees of the Company or pursuant to the Company's standard
retirement policies. The agreement provides that following a Qualifying
Termination, Mr. Sharma shall thereafter provide consulting services to NAC for
12 months, or if sooner, until such date as Mr. Sharma is entitled to receive
full retirement benefits under NAC's applicable retirement plans. In exchange
for his services, Mr. Sharma is entitled to receive a fee, payable in equal
monthly installments, equal to his annual base salary as in effect prior to the
Qualifying Termination. The agreement also obligates NAC to continue medical,
dental, vision and life insurance for Mr. Sharma to the extent such were
provided to him prior to his termination of employment. Mr. Sharma is obligated
to pay 50% of NAC's cost for all such insurance. If Mr. Sharma enters into new
employment during the consulting period, the agreement provides that the
consulting fee and benefits otherwise payable to Mr. Sharma shall be reduced or
terminated by specified amounts depending upon the terms and conditions of his
new employment.
The Company has granted to Mr. Sharma, the Chief Operating Officer of NAC,
options to purchase 3% of the outstanding capital stock of NAC. Subject to
consummation of the Offering, these options will be deemed to have been granted
under the Company's Plan and may be exercised to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $.01 per share. Mr. Sharma has
agreed that he will not sell any shares of Common Stock acquired upon the
exercise of his options for a period of 180 days following the Offering and
that, thereafter, he will not, during any three month period sell a number of
shares that exceeds (i) 1% of the number of shares of Common Stock then
outstanding (approximately 89,000 shares immediately after the Offering) or (ii)
the average weekly trading volume of the Company's Common Stock in the NASDAQ
National Market during the four weeks preceding the sale. The Company will pay
Mr. Sharma a bonus of $200,000 upon consummation of the Offering.
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CERTAIN TRANSACTIONS
On June 1, 1995, in connection with the acquisition of NAC by the Company
from Triton Group Ltd., the Company issued 33,000 shares of its Series A
Preferred Stock to FAI for an aggregate price of $1,650,000 and 3,556,665 shares
of its Common Stock at an aggregate price of $551,000. In connection with the
closing of the Offering, the Company's Series A Preferred Stock, face value
$1,650,000, held by FAI will be exchanged for 150,000 shares of Common Stock
based on the Series A Preferred Stock Exchange Price. Messrs. Culver, Hollander
and Risko beneficially own substantially all of the equity interests in FAI, and
each of them, as well as Mr. Marsalisi, is an officer of FAI.
On June 1, 1995, NAC entered into the Loan and Security Agreement (the
"Loan Agreement") between NAC and Canpartners (as assignee of Canpartners
Investments III, L.P.). Mr. Friedman, a director of the Company, is affiliated
with Canpartners. See "Management -- Executive Officers and Directors." Pursuant
to the Loan Agreement, Canpartners made a $3,000,000 loan (the "Subordinated
Debt") to NAC which is subordinated in right of payment to NAC's credit
facility. The Subordinated Debt bears interest at the rate of 15% per year,
requires scheduled prepayments of principal and interest, and initially was due
no later than July 5, 1997. On June 13, 1996, in connection with a refinancing
of NAC's credit facility, NAC repaid $1,000,000 in principal to Canpartners and
made certain modifications to the Loan Agreement, including an extension of the
final maturity date of the Subordinated Debt to June 13, 1999. In connection
with the execution of the Loan Agreement, NAC and Canpartners entered into a
Warrant Agreement (the "Warrant Agreement"), pursuant to which NAC issued
warrants to purchase 1,832,225 shares of its Common Stock at an exercise price
of $0.05 per share to Canpartners. In connection with the repayment of
$1,000,000 of the Subordinated Debt in June 1996, 538,890 of the warrants held
by Canpartners were cancelled. Pursuant to the Second Amendment to Warrant
Agreement, dated December 20, 1996, the remaining NAC warrants held by
Canpartners became exercisable for and are deemed to be exercised for shares of
the Company's Common Stock at an exercise price of $0.05 per share in the event
of a "Qualified IPO" as defined therein. A "Qualified IPO" is defined as an
initial public offering of the Company's Common Stock pursuant to a registration
statement filed with the Securities and Exchange Commission, that yields at
least $10.0 million in net proceeds to the Company. The Company granted
Canpartners certain registration rights in the Warrant Agreement. See "Use of
Proceeds" and "Description of Capital Stock -- Registration Rights."
Pursuant to a Shareholders Agreement entered into among NAC, the Company
and Canpartners in connection with the execution of the Loan Agreement (the
"Shareholders Agreement"), NAC agreed to pay a management fee to the Company (or
First Equity) in the amount of $300,000 per year, payable quarterly. NAC reduces
payment of this management fee to the Company by the amount of compensation paid
to Mr. Risko in connection with his services as an officer of the Company and
NAC. The obligation to pay a management fee to First Equity terminates upon
consummation of the Offering. Pursuant to the Shareholders Agreement, NAC agreed
to pay an annual management fee of $50,000 per year to Canpartners for each of
the four years commencing June 1, 1995, which fee is payable quarterly. The
Shareholders Agreement provides for accelerated payment to Canpartners of all
remaining annual management fees upon the occurrence of certain events specified
in the Warrant Agreement, including: (i) the consummation of a public offering
of the Company's Common Stock or the common stock of NAC; (ii) the transfer by
the Company of any of its stock in NAC to an entity not controlled by, under
common control with, or controlling the Company; and (iii) the sale of
substantially all of the assets of NAC.
On September 30, 1996, the Company entered into two agreements with First
Equity whereby First Equity is to provide certain investment advisory services
in connection with the Offering as well as to provide advice with respect to and
negotiate for the API Combs Acquisition. Upon the closing of the Offering, First
Equity will be paid a fee of $350,000 for assistance rendered in connection with
the Offering and $250,000 for its services with regard to the API Combs
Acquisition. First Equity may render other investment advisory services to the
Company in the future. If it does so, any investment advisory fees paid to it
would not exceed customary fees for such services.
On December 20, 1996, the Company and First Equity entered into an
agreement allocating potential investment and acquisition opportunities in the
global aircraft engine repair and overhaul market. Pursuant to
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the agreement, First Equity has agreed that commencing with the consummation of
the Offering, neither First Equity nor any of its majority-owned subsidiaries
will, as a principal, consummate any acquisition of a majority interest in any
business that is engaged in the repair and overhaul of military and commercial
aircraft engines anywhere in the world (a "Covered Acquisition"), without first
notifying the Company and providing the Company with the opportunity to choose
to effect the Covered Acquisition for its own account. The Company's decision as
to whether to effect the Covered Acquisition will be made by the directors of
the Company that have no affiliation with First Equity. The agreement will
remain in effect for a five-year term, subject to earlier termination in the
event First Equity reduces its ownership interest in the Company to less than
10% of the Company's outstanding voting securities. In addition, the agreement
does not apply to any proposed acquisition by First Equity of any business that
generates less than 15% of its aggregate net sales from the repair and overhaul
of military and commercial aircraft engines nor to any advisory services
performed by First Equity on behalf of third parties.
The Company leases approximately 1,000 square feet of office space from
First Equity under a month to month sublease. Monthly payments under the
sublease are $2,500. On December 13, 1996, the Company entered into a new
sublease with First Equity which will replace the current lease. Under the new
sublease, the Company will lease approximately 2,000 square feet of office space
in Westport, Connecticut for a period of ten years with options for two
additional five year periods commencing on approximately March 1, 1997. Monthly
payments under this sublease currently are $5,000, subject to increase on an
annual basis.
The Company believes that the terms of the two advisory services agreements
and the sublease agreement between the Company and First Equity are at least as
favorable as the terms which would have been obtained by the Company from an
unaffiliated third-party.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 30, 1996, and as adjusted
to give effect to the sale of shares offered hereby (i) by each person who is
known by the Company to own beneficially 5% or more of the outstanding shares of
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property laws
where applicable, and are located at One Omega Drive, Stamford, Connecticut
06907.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING(1)
-------------------------- SHARES ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(2) BEING OFFERED NUMBER PERCENT(2)
- ---------------------------------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
FAS Inc., a wholly owned subsidiary of
First Equity Development, Inc......... 3,556,665(3) 73.3% -- 3,706,665 41.6%
One Omega Drive
Box 4660
Stamford, Connecticut 06907
Canpartners Investments IV, LLC......... 1,293,335 26.7% --(1) 1,293,335 14.5%
9665 Wilshire Boulevard
Suite 200
Beverly Hills, California 90212
Aaron P. Hollander...................... --(3) -- -- -- --
Michael C. Culver....................... --(3) -- -- -- --
John F. Risko........................... --(3) -- -- -- --
John A. Marsalisi....................... -- -- -- -- --
Joshua S. Friedman...................... --(4) -- -- -- --
Robert L. Kirk.......................... -- -- -- -- --
Charles Ryan............................ -- -- -- -- --
All directors and executive officers as
a group (7 persons)................... --(3)(4) -- -- -- --
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, Canpartners will
sell 585,000 shares of Common Stock, thereby reducing its holdings to
708,335 shares, or 8.0%. Canyon Partners Incorporated is the Managing Member
of Canpartners. Mr. Friedman, Mitchell R. Julis and R. Christian B. Evenson
are the sole shareholders and directors of Canyon Partners Incorporated and
such individuals may be deemed to share beneficial ownership of the shares
shown as owned by Canpartners. Such persons disclaim beneficial ownership of
such shares.
(2) Percentage calculation is based upon 4,850,000 shares outstanding (8,900,000
shares following the Offering, based on the proposed issuance of 3,900,000
shares by the Company in the Offering and the exchange of the Company's
Series A Preferred Stock, face value $1,650,000, for 150,000 shares of
Common Stock based on the Series A Preferred Stock Exchange Price).
(3) Messrs. Risko, Culver and Hollander own, in the aggregate, substantially all
of the outstanding shares of First Equity.
(4) Excludes 1,293,335 shares shown as owned by Canpartners. Mr. Friedman is a
Vice President of Canpartners and is a shareholder and director of Canyon
Partners Incorporated, the Managing Member of Canpartners, and, as such, may
be deemed to have voting and investment power over such shares. Mr. Friedman
disclaims any beneficial ownership of such shares.
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DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Offering, the Company's authorized capital stock
will consist of 25,000,000 shares of Common Stock, par value $0.01 per share,
and 5,000,000 shares of undesignated preferred stock, par value $0.01 per share
(the "Preferred Stock") after giving effect to the redemption of the Series A
Preferred Stock which will occur upon the consummation of the Offering.
COMMON STOCK
Prior to the Offering, there were 3,556,665 shares of Common Stock issued
and outstanding, held by one entity. Canpartners owns warrants to purchase up to
1,293,335 shares of Common Stock at $0.05 per share. Canpartners will exercise
the warrants concurrent with the closing of the Offering. See "Certain
Transactions." Accordingly, total shares outstanding immediately prior to the
Offering are 4,850,000 before giving effect to the exchange of the Company's
Series A Preferred Stock for 150,000 shares of Common Stock.
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters presented to stockholders, including the election of
directors. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share equally and ratably
in the assets of the Company, if any, remaining after paying all debts and
liabilities of the Company and the liquidation preferences of any outstanding
Preferred Stock. The Common Stock has no preemptive rights or cumulative voting
rights and no redemption, sinking fund or conversion provisions.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefore,
subject to the dividend and liquidation rights of any Preferred Stock that may
be issued and outstanding and subject to any dividend restrictions in any of the
Company's outstanding debt and credit facilities. See "Dividend Policy."
All of the shares offered hereby, when issued and sold, will be validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder action,
to issue any or all shares of the authorized Preferred Stock in one or more
series and to fix and determine the designations, preferences and relative
rights and qualifications, limitations or restrictions thereon of any series so
established, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. The issuance of Preferred Stock
with voting rights or conversion rights may adversely affect the voting power of
the Common Stock, including the loss of voting control to others. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company presently has no plans, agreements
or understandings for the authorization or issuance of any shares of Preferred
Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE AND BYLAWS
General. A number of provisions of the Company's Restated Certificate of
Incorporation ("Certificate") and Bylaws ("Bylaws") concern matters of corporate
governance and the rights of stockholders. These provisions, among other things,
(i) classify those members of the Board of Directors elected by the holders of
Common Stock into three classes of directors with each class serving staggered
three-year terms, with the initial Class I, Class II and Class III directors'
terms ending in 1997, 1998 and 1999, respectively, and (ii) grant the Board of
Directors the right to issue shares of Preferred Stock and to set the voting
rights, preference and other terms thereof. These provisions may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
Common Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the classified Board of Directors and
the ability of the Board to issue Preferred Stock without further stockholder
action, also could delay or frustrate the removal of incumbent directors or the
assumption of control by stockholders, even if such removal or assumption would
be beneficial to stockholders of the Company. These provisions also could
discourage or
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make more difficult a merger, tender offer or proxy contest, even if they could
be favorable to the interests of stockholders, and could potentially depress the
market price of the Common Stock. The Board of Directors believes that these
provisions are appropriate to protect the interests of the Company and all of
its stockholders.
Meetings of Stockholders. The Certificate provides that a special meeting
of stockholders may be called only by the Board of Directors. The Bylaws provide
that only those matters set forth in the notice of a special meeting may be
considered or acted upon at that special meeting, unless otherwise provided by
law. In addition, the Bylaws set forth certain advance notice and informational
requirements and time limitations on any director nomination or any new business
which a stockholder wishes to propose for consideration at an annual meeting of
stockholders.
No Stockholder Action by Written Consent. The Certificate provides that
any action required or permitted to be taken by the stockholders of the Company
at an annual or special meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
Indemnification and Limitation of Liability. The Bylaws provide that
directors of the Company shall be, and, in the discretion of the Board of
Directors, officers and non-officer employees may be, indemnified by the Company
to the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Bylaws also provide
that the right of directors to indemnification shall be a contract right and
shall not be exclusive of any other right possessed or hereafter acquired under
any bylaw, agreement, vote of stockholders or otherwise. The Certificate
contains a provision permitted by Delaware law that generally eliminates the
personal liability of directors for monetary damages for breaches of their
fiduciary duty, including breaches involving negligence or gross negligence in
business combinations, unless the director has breached his or her duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or a
knowing violation of law, paid a dividend or approved a stock repurchase in
violation of the Delaware General Corporation Law or obtained an improper
personal benefit. This provision does not alter a director's liability under the
federal securities laws. In addition, this provision does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.
STATUTORY BUSINESS COMBINATION PROVISION
Section 203 of the Delaware General Corporation Law ("Section 203")
provides, with certain exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations with a person or affiliate, or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes it an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. Under Section 203, an "interested stockholder" is defined (with
certain limited exceptions) as any person that is (i) the owner of 15% or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
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REGISTRATION RIGHTS
Pursuant to the terms of the Warrant Agreement, dated June 1, 1995, between
the Company and Canpartners, as amended on June 13, 1996, Canpartners was
granted certain registration rights with respect to the shares of Common Stock
issuable upon exercise of its 1,293,335 common stock purchase warrants (the
"Registrable Securities"). If the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other securityholders (excluding registrations on Forms S-4 and S-8),
Canpartners is entitled to include the Registrable Securities in the
registration statement, subject to reduction by the managing underwriter, if
any. Canpartners' right to sell securities not included in the Offering is
subject to the lock-up agreement restricting sale for a period of 180 days after
the date of this Prospectus and applicable securities laws. See "Shares Eligible
for Future Sale."
Pursuant to a Registration Rights Agreement, dated December 20, 1996,
between the Company and FAI, FAI was granted certain registration rights with
respect to the 3,706,665 shares of Common Stock it will hold immediately after
the Offering. Specifically, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other securityholders, FAI is entitled to include its shares of
Common Stock in the registration statement, subject to certain conditions and
limitations. This right to include shares of Common Stock will not apply to
registration statements of the Company relating to certain stock option,
purchase or incentive plans, any dividend reinvestment plan, or certain merger
or exchange transactions. In addition, FAI has the right at any time subsequent
to the consummation of the Offering, to require the Company to register its
shares of Common Stock under the Securities Act. FAI is entitled to six such
requested registrations. The right of FAI to sell securities immediately after
the Offering is subject to the lock-up agreement restricting sale for 180 days
after the date of this Prospectus. See "Shares Eligible For Future Sale" and
"Underwriting."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
LISTING
Application has been made to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the trading symbol "FAVS."
57
<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities. Upon the closing of the Offering, the Company will have outstanding
8,900,000 shares of Common Stock. Of these shares, the 3,900,000 shares sold in
the Offering will be freely tradeable without restriction under the Securities
Act, unless purchased by "affiliates" of the Company.
The remaining 5,000,000 shares of Common Stock held by existing
stockholders will be "restricted" shares under the Securities Act (the
"Restricted Shares"). Upon the expiration of lock-up agreements between the
stockholders and the Underwriters, which will occur 180 days after the effective
date of this Prospectus (the "Effective Date"), the 3,706,665 Restricted Shares
held by FAI will become eligible for sale under Rule 144, subject to the volume
limitations described below, and the 1,293,335 Restricted Shares held by
Canpartners will become eligible for sale under Rule 144 upon the second
anniversary of the consummation of the Offering.
An aggregate of 150,000 shares of Common Stock are subject to outstanding
options granted to Mr. Sharma. See "Management -- Executive Compensation and
Employment Agreements." Pursuant to Rule 701 promulgated under the Securities
Act, the shares of Common Stock currently subject to such options will be
available for sale in the public market upon exercise. Mr. Sharma has, however,
agreed that he will not sell any shares of Common Stock acquired upon the
exercise of his options to purchase shares of the Company's Common Stock for a
period of 180 days following the Offering and that, thereafter, he will not,
during any three month period sell a number of shares that exceeds (i) 1% of the
number of shares of Common Stock then outstanding (approximately 89,000 shares
immediately after the Offering) or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four weeks
preceding the sale.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the number of shares of
Common Stock then outstanding (approximately 89,000 shares immediately after the
Offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned Restricted Shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations and requirements
described above. The Securities and Exchange Commission has proposed to reduce
the Rule 144 holding periods. If enacted, such modification could have an impact
on the timing of when shares of Common Stock become eligible for resale.
The Company, its executive officers, directors and stockholders have agreed
that, for a period of 180 days from the Effective Date, they will not, without
the prior written consent of Smith Barney Inc., sell, offer to sell, solicit an
offer to buy, contract to sell, grant any option to purchase or otherwise
transfer or dispose of, any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, shares of Common Stock, subject to
certain exceptions. See "Underwriting."
58
<PAGE> 61
UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement,
dated the date hereof, each of the Underwriters named below has severally agreed
to purchase from the Company, and the Company has agreed to sell to such
Underwriter, the respective number of shares of Common Stock set forth opposite
the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------------------------- ---------
<S> <C>
Smith Barney Inc. .................................................................
Dillon, Read & Co. Inc. ...........................................................
---------
Total....................................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and part of the shares to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. Smith
Barney Inc, and Dillon, Read & Co. Inc., as representatives of the several
underwriters (the "Representatives"), have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Canpartners has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 585,000 shares of the
Common Stock at the price to public set forth on the cover page of this
Prospectus minus the underwriting discount and commissions. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
in connection with the Offering of the shares of Common Stock offered hereby. To
the extent such option is exercised, each Underwriter will be obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares set forth opposite each Underwriter's
name in the preceding table bears to the total number of shares listed in such
table.
The Company, its executive officers, directors and stockholders have agreed
with the Representatives that until 180 days after the Effective Date they will
not sell, offer to sell, contract to sell or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of Common Stock, any
options or grants to purchase shares of Common Stock, or any securities
convertible or exchangeable for shares of Common Stock owned directly by such
holders or with respect to which they have power of disposition. The Company has
also agreed not to sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any rights
to acquire Common Stock for a period of 180 days after the Effective Date
without the prior written consent of Smith Barney Inc., subject to certain
limited exceptions including grants of options and sales of shares under the
Company's stock benefit plans. The lock-up agreements with the Representatives
may be released at any time as to all or any portion of the shares subject to
such agreements at the sole discretion of Smith Barney Inc.
59
<PAGE> 62
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations among the Company and the Representatives. Among the factors
considered in determining such price were the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for the
growth of the Company's revenues and earnings, the current state of the economy
in the United States and the current level of economic activity in the industry
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies that are comparable to the
Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by O'Melveny & Myers LLP. Andrews & Kurth L.L.P., Los Angeles,
California will act as counsel to the Underwriters.
EXPERTS
The consolidated balance sheets of First Aviation Services Inc. at January
31, 1996 and July 31, 1996, and the consolidated statements of operations,
stockholders' equity, and cash flows for the two-month period ended May 31,
1995, the eight-month period ended January 31, 1996 and the six-month period
ended July 31, 1996 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of NAC as of March 31, 1995 and for each of the
two years in the period ended March 31, 1995 included in this Prospectus and
Registration Statement have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The balance sheet of Aircraft Parts International at September 30, 1996 and
December 31, 1995 and the Statements of Operations and Division Equity for the
nine month period ended September 30, 1996, and the year ended December 31, 1995
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
60
<PAGE> 63
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. Certain items are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and, in each instance, if
such contract or document is field as an exhibit, reference is made to the copy
of such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference to such
exhibit. Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
except the proxy requirements, and in accordance therewith, will file reports
and other information with the Commission. The Registration Statement, including
exhibits thereto, as well as the reports and other information filed by the
company with the Commission, may be inspected without charge at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic filings
made through the Electronic Data Gathering Analysis and Retrieval System are
publicly available thought the Commission's Web Site (http://www.sec.gov).
The Company will issue to its stockholders annual reports and unaudited
quarterly reports for the first three quarters of each fiscal year. Annual
reports will include audited financial statements and a reports of its
independent auditors with respect to the examination of such financial
statements.
61
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
FIRST AVIATION SERVICES INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
NATIONAL AIRMOTIVE CORPORATION
Report of Price Waterhouse LLP, Independent Accountants............................... F-18
Balance Sheet......................................................................... F-19
Statement of Operations............................................................... F-20
Statement of Stockholder's Equity..................................................... F-21
Statement of Cash Flows............................................................... F-22
Notes to Financial Statements......................................................... F-23
AIRCRAFT PARTS INTERNATIONAL
Report of Ernst & Young LLP, Independent Auditors..................................... F-34
Balance Sheets........................................................................ F-35
Statements of Operations and Division Equity.......................................... F-36
Statement of Cash Flows............................................................... F-37
Notes to Financial Statements......................................................... F-38
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Aviation Services Inc.
We have audited the accompanying consolidated balance sheets of First
Aviation Services Inc. as of January 31, 1996 and July 31, 1996, and the
consolidated statements of operations, stockholders' equity, and cash flows for
the two month period ended May 31, 1995, the eight month period ended January
31, 1996 and the six month period ended July 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Aviation Services Inc. as of January 31, 1996 and July 31, 1996, and the
consolidated results of its operations and its cash flows for the two month
period ended May 31, 1995, the eight month period ended January 31, 1996 and the
six month period ended July 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Francisco, California
September 12, 1996,
except Note 12, as to which the date is
December 20, 1996
------------------------
The foregoing report is in the form that will be signed upon completion of
stockholder approval of the 6.4549 to 1 stock split and stock option and stock
purchase plans described in Note 12 to the consolidated financial statements.
San Francisco, California
February 3, 1997
F-2
<PAGE> 66
FIRST AVIATION SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31, OCTOBER 31,
1996 1996 1996
----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful accounts of
$278 at January 31, 1996, $316 at July 31, 1996 and $259
at October 31, 1996....................................... $23,388 $19,553 $17,937
Inventories.................................................. 31,207 33,245 34,645
Restricted cash.............................................. -- 1,039 544
Deferred income taxes........................................ 1,036 1,036 1,036
Prepaid expenses and other................................... 1,374 1,354 1,763
------- ------- -------
Total current assets........................................... 57,005 56,227 55,925
Plant and equipment, net....................................... 2,706 2,776 2,829
Other assets................................................... 673 392 282
------- ------- -------
$60,384 $59,395 $59,036
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $18,167 $10,987 $11,729
Accrued compensation and related expenses.................... 1,116 1,235 1,178
Accrued reorganization expenses.............................. 1,021 511 459
Accrued liabilities.......................................... 2,685 2,589 2,558
Income taxes payable......................................... 507 4 --
Due to stockholders.......................................... 126 126 126
Current portion of long-term debt............................ 1,970 1,100 1,105
------- ------- -------
Total current liabilities...................................... 25,592 16,552 17,155
Long-term debt, less current portion........................... 27,005 35,087 33,643
Other noncurrent liabilities................................... 3,601 2,723 2,528
------- ------- -------
Total liabilities.............................................. 56,198 54,362 53,326
------- ------- -------
Stockholders' equity:
Preferred stock, $0.01 par value, liquidation preference of
$330, $660 and $660 at January 31, 1996, July 31, 1996 and
October 31, 1996, respectively, 5,000,000 shares
authorized, 33,000 shares issued and outstanding.......... 1,650 1,650 1,650
Common stock, $0.01 par value, 25,000,000 shares authorized,
3,556,665 shares issued and outstanding................... 36 36 36
Additional paid-in capital................................... 625 625 625
Retained earnings............................................ 1,875 2,722 3,399
------- ------- -------
Total stockholders' equity..................................... 4,186 5,033 5,710
------- ------- -------
$60,384 $59,395 $59,036
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 67
FIRST AVIATION SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
------------ -----------
TWO-MONTH EIGHT-MONTH SIX-MONTH FOUR-MONTH FIVE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, JANUARY 31, JULY 31, MAY 31, OCTOBER 31, OCTOBER 31,
1995 1996 1996 1995 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. $10,896 $ 68,519 $ 52,354 $24,338 $ 42,833 $ 76,776
Cost of sales......................... 10,463 57,390 44,608 23,809 35,713 65,606
------- --------- --------- ------- --------- ---------
Gross profit.......................... 433 11,129 7,746 529 7,120 11,170
Selling, general and administrative
expenses............................ 1,160 5,349 4,186 3,229 3,371 6,163
------- --------- --------- ------- --------- ---------
Income (loss) from operations......... (727) 5,780 3,560 (2,700) 3,749 5,007
Interest expenses..................... 287 2,605 1,849 644 1,659 2,619
Other expenses........................ -- -- -- 801 -- --
------- --------- --------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
extraordinary item.................. (1,014) 3,175 1,711 (4,145) 2,090 2,388
Provision (benefit) for income
taxes............................... -- 1,300 -- (1,210) 854 --
------- --------- --------- ------- --------- ---------
Income (loss) before extraordinary
item................................ (1,014) 1,875 1,711 (2,935) 1,236 2,388
Extraordinary item:
Loss on early extinguishment of
debt............................. -- -- (864) -- -- (864)
------- --------- --------- ------- --------- ---------
Net income (loss)..................... (1,014) 1,875 847 (2,935) 1,236 1,524
Dividends on preferred stock.......... -- 88 66 -- 55 99
------- --------- --------- ------- --------- ---------
Net income (loss) applicable to common
stockholders........................ $(1,014) $ 1,787 $ 781 $(2,935) $ 1,181 $ 1,425
======= ========= ========= ======= ========= =========
Net income (loss) per common share:
Income (loss) before extraordinary
item applicable to common
stockholders..................... $ 0.32 $ 0.30 $ 0.21 $ 0.43
Extraordinary item.................. -- (0.16) -- (0.16)
--------- --------- --------- ---------
Net income (loss) applicable to
common stockholders.............. $ 0.32 $ 0.14 $ 0.21 $ 0.27
========= ========= ========= =========
Shares used in computation of net
income (loss) applicable to common
stockholders........................ 5,529,721 5,440,349 5,529,721 5,291,395
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 68
FIRST AVIATION SERVICES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ -------------------- ADDITIONAL
NUMBER NUMBER PAID-IN RETAINED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1995
(predecessor)................... -- $ -- 4,750,000 $ 4,750 $ 27,385 $ 2,889 $ 35,024
Net loss for the two-month
period ended May 31, 1995.... -- -- -- -- -- (1,014) (1,014)
------ ------ ---------- ------- -------- ------- --------
Balances at May 31, 1995
(predecessor)................... -- -- 4,750,000 4,750 27,385 1,875 34,010
Elimination of predecessor
divisional equity upon
acquisition on June 1,
1995......................... -- -- (4,750,000) (4,750) (27,385) (1,875) (34,010)
Common stock and preferred stock
issued for cash on June 1,
1995......................... 33,000 1,650 3,556,665 36 515 -- 2,201
Warrants issued in connection
with subordinated note
payable...................... -- -- -- -- 110 -- 110
Net income for the eight-month
period ended January 31,
1996......................... -- -- -- -- -- 1,875 1,875
------ ------ ---------- ------- -------- ------- --------
Balances at January 31, 1996...... 33,000 1,650 3,556,665 36 625 1,875 4,186
Net income for the six-month
period ended July 31, 1996... -- -- -- -- -- 847 847
------ ------ ---------- ------- -------- ------- --------
Balances at July 31, 1996......... 33,000 1,650 3,556,665 36 625 2,722 5,033
Net income for the three-month
period ended October 31, 1996
(unaudited).................. -- -- -- -- -- 677 677
------ ------ ---------- ------- -------- ------- --------
Balances at October 31, 1996
(unaudited)..................... 33,000 $1,650 3,556,665 $ 36 $ 625 $ 3,399 $ 5,710
====== ====== ========== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 69
FIRST AVIATION SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
------------ EIGHT-MONTH -----------
TWO-MONTH PERIOD SIX-MONTH FOUR-MONTH FIVE-MONTH NINE-MONTH
PERIOD ENDED ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, JANUARY 31, JULY 31, MAY 31, OCTOBER 31, OCTOBER 31,
1995 1996 1996 1995 1995 1996
------------ ----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (1,014) $ 1,875 $ 847 $ (2,935) $ 1,236 $ 1,524
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 400 947 577 1,056 612 800
Extraordinary item, loss on early
extinguishment of debt................ -- -- 864 -- -- 864
Deferred income taxes................... 129 664 -- (911) 282 --
Termination of executive defined benefit
plan.................................. -- (548) -- -- (548) --
Changes in assets and liabilities:
Receivables........................... 1,860 (13,460) 3,835 3,236 (10,518) 5,451
Inventories........................... (605) (1,744) (2,038) 2,081 (2,522) (3,438)
Prepaid expenses and other assets..... (341) 947 (691) 630 1,044 (758)
Accounts payable...................... 821 12,587 (7,180) (1,843) 11,107 (6,438)
Accrued liabilities................... 578 58 (990) 403 752 (1,134)
Other noncurrent liabilities.......... (10) (567) (878) 358 (664) (1,073)
-------- --------- -------- -------- -------- ---------
Net cash provided by (used in) operating
activities.............................. 1,818 759 (5,654) 2,075 781 (4,202)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets from former owners
including acquisition costs............. -- (12,397) -- -- (12,397) --
Purchase of plant and equipment........... (282) (862) (519) (442) (688) (777)
Payment for license rights................ -- (375) -- -- (375) (250)
Proceeds from disposal of plant and
equipment............................... 6 13 -- 6 -- --
-------- --------- -------- -------- -------- ---------
Net cash used in investing activities..... (276) (13,621) (519) (436) (13,460) (1,027)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash........................... -- -- (1,039) -- -- (544)
Borrowings on long-term debt.............. 10,703 103,891 95,351 24,489 28,737 121,138
Payments on long-term debt................ (12,191) (92,955) (87,979) (26,000) (18,091) (115,267)
Sale of preferred stock................... -- 1,650 -- -- 1,650 --
Sale of common stock...................... -- 551 -- -- 551 --
Repayment of other noncurrent
liabilities............................. (54) (275) (160) (128) (168) (98)
-------- --------- -------- -------- -------- ---------
Net cash (used in) provided by financing
activities.............................. (1,542) 12,862 6,173 (1,639) 12,679 5,229
-------- --------- -------- -------- -------- ---------
Net change in cash........................ -- -- -- -- -- --
Cash, beginning of period................. -- -- -- -- -- --
-------- --------- -------- -------- -------- ---------
Cash, end of period....................... $ -- $ -- $ -- $ -- $ -- $ --
======== ========= ======== ======== ======== =========
Supplemental cash flow disclosures:
Cash paid for:
Interest.............................. $ 154 $ 2,322 $ 1,513 $ 631 $ 982 $ 2,330
======== ========= ======== ======== ======== =========
Income taxes.......................... $ -- $ 129 $ 545 $ -- $ 108 $ 545
======== ========= ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 70
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. BUSINESS AND BASIS OF PRESENTATION
First Aviation Services Inc. ("First Aviation" or the "Company") through
its wholly owned subsidiary, National Airmotive Corporation ("NAC") repairs and
overhauls commercial and military aircraft engines, and industrial turbines and
parts. The Company is headquartered in Stamford, Connecticut. Customers of the
Company include airlines, foreign governments, U.S. and foreign military
services and industrial companies.
The accompanying consolidated financial statements include the accounts of
First Aviation and its wholly owned subsidiary, NAC.
First Aviation was formed in March 1995 to acquire the capital stock of
NAC. On June 1, 1995, Triton Group, Ltd. ("Triton"), former parent company of
NAC, sold its ownership interest in the capital stock of the NAC to First
Aviation pursuant to the Agreement and Plan of Merger dated March 3, 1995. The
acquisition has been accounted for under the purchase method of accounting as of
the closing date. The gross purchase price of $30,355 includes debt assumed of
$17,958, transaction-related fees and expenses amounting to $1,147, and a net
cash payment to Triton of $11,250. The purchase price, including acquisition
costs, was allocated to the assets and liabilities of the NAC based on their
relative fair values.
In connection with the allocation of the purchase price and in order to
implement plans and actions designed to streamline operations, the Company
recorded a reorganization accrual to cover the estimated costs of employee
separations and other employee incentive programs. The Company incurred and
charged against accrued reorganization costs was $1,400 and $500 during the
eight month period ended January 31, 1996 and the six month period ended July
31, 1996, respectively. The Company also recorded accruals for various
liabilities including pension plan termination (Note 9), environmental matters
(Note 11) and legal matters. The remaining accruals as of July 31, 1996 total
$2,948 and are included in accrued liabilities and other noncurrent liabilities
in the accompanying balance sheet.
The financial statements for the two month period ended May 31, 1995,
represent the operations of the NAC when NAC was owned by Triton
("Predecessor"). The financial statements of the Company since June 1, 1995
("Successor Business") reflect the impact of indebtedness incurred in the
acquisition of the Company as well as the impact of the purchase price
allocation. Accordingly, the financial statements of the Successor Business are
not directly comparable to those of the Predecessor.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if the Predecessor had been acquired as of
April 1, 1995 and 1994, after including the impact of certain adjustments, such
as reduced depreciation expense due to asset write-downs, increased interest
expense due to acquisition financing and the tax benefit resulting from
utilization of the Predecessor net operating loss:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 1, 1995 TO
MARCH 31, 1995 JANUARY 31, 1996
-------------- ----------------
<S> <C> <C>
Sales............................................ $ 83,091 $ 79,415
Net income....................................... 1,517 1,156
Net income applicable to common stockholders..... 1,517 1,068
Net income per common share...................... 0.30 0.21
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and is not intended to be a projection of future results.
F-7
<PAGE> 71
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
Revenue related to the repair and overhaul of engines is recorded upon
completion of repair and overhaul services. Revenue for parts and engine
components sold is recorded when the product is shipped.
The Company provides credit in the form of trade accounts receivable to its
customers. The Company generally does not require collateral to support domestic
customer receivables. Receivables arising from export activities are supported
by letters of credit or foreign credit insurance. The Company performs ongoing
credit evaluations of its customers and maintains allowances which management
believes are adequate for potential credit losses.
Combined sales to agencies of the U.S. government represented 25%, 27% and
16% of net sales for the two month period ended May 31, 1995, the eight month
period ended January 31, 1996 and the six month period ended July 31, 1996,
respectively. The combined accounts receivable from agencies of the United
States Government represented 13%, 17% and 25% of total accounts receivable for
the two month period ended May 31, 1995, the eight month period ended January
31, 1996 and the six month period ended July 31, 1996, respectively. Sales to
one customer who acts as agent for a number of foreign governments accounted for
11.8% of total net sales for the six month period ended July 31, 1996.
The Company has no foreign operations; however, export sales were
approximately 26%, 32% and 35% of net sales in the two month period ended May
31, 1995, the eight month period ended January 31, 1996 and the six month period
ended July 31, 1996, respectively. The majority of export sales activities were
to the following geographic areas: Central America, Middle East, Far East,
Canada, and Europe.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out ("FIFO") and specific identification methods.
Costs include direct material, direct labor and applicable manufacturing
overhead.
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft engine parts that are purchased principally
from Allison Engine Company ("Allison"), a subsidiary of Rolls Royce Ltd., and
from parts resellers and customers. Before any part may be installed in an
aircraft, it must meet certain standards of condition established by the Federal
Aviation Administration, the U.S. Department of Defense, or the equivalent
regulatory agencies in other countries whose engines are being serviced by the
Company. Specific regulations vary from country to country, although regulatory
requirements in other countries generally coincide with applicable U.S.
requirements. Parts must also be traceable to sources deemed acceptable by such
agencies. Parts owned or acquired by the Company may not meet applicable
standards prior to remanufacturing or standards may change in the future,
causing parts which are already contained in the Company's inventory to be
scrapped or modified. Aircraft engine manufacturers may also develop new parts
to be used in lieu of parts already contained in the Company's inventory.
Provisions are made in each period for the estimated effect of excess and
obsolete inventories. Actual excess and obsolete inventories may differ
significantly from such estimates and such differences could be material to the
financial statements.
F-8
<PAGE> 72
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
Plant and Equipment
Plant and equipment are stated at cost, less allowance for accumulated
depreciation. Additions and improvements that materially increase the productive
capacity or extend the useful life of an asset are added to its cost.
Expenditures for normal maintenance and repairs are charged to expense as
incurred.
Depreciation of plant and equipment is computed using the straight-line
method over the estimated lives of the assets which range from 3 to 30 years.
Leasehold improvements are amortized over the shorter of the estimated life of
the improvement or the terms of the related lease.
In 1995, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. The Company adopted SFAS 121 on February 1, 1996 and
there was no effect of adoption.
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Major Suppliers
Historically, the Company's primary supplier has been Allison. The Company
is an Authorized Maintenance Center for Allison's product lines. During the six
month period ended July 31, 1996, the Company purchased $21,870 in parts and
engine components from Allison and at July 31, 1996 accounts payable to Allison
totaled $4,447. The Company is also an authorized distributor for Bendix, AC and
several suppliers of accessories that compliment the Allison commercial engine.
The Company is an authorized service center for both Lockheed Hercules QEC's and
McDonnell Douglas Helicopter Systems' dynamic components.
NAC has from time to time, experienced difficulty in obtaining certain
parts because of parts shortages and inventory fluctuations at Allison. The
shortage or unavailability of Allison parts can and has from time to time caused
delays in the timely completion of repair and overhaul production schedules.
Such delays may adversely affect the Company's relationship with its customers
and could adversely affect the Company's commitments to customers and its
work-in-process inventory levels. An inability to maintain timely access to
Allison parts and components on commercially reasonable terms would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Net Income (Loss) Per Common Share
Except as noted below, net income (loss) per common share has been computed
based upon the weighted average number of common shares outstanding including
dilutive common equivalent shares from stock warrants, using the treasury stock
method. Common shares to be issued in exchange for the Company's Series A
Preferred Stock have been excluded from the calculation of net income (loss) per
common share as the effect of their inclusion would be anti-dilutive. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletins rules, common
and common equivalent shares issued by the Company at prices below the
anticipated public offering price during the twelve months immediately preceding
the Company's proposed initial public offering are included in the calculation
(using the treasury stock method and the anticipated initial public offering
price) as if they were outstanding for all periods prior to the offering date.
F-9
<PAGE> 73
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
Net income (loss) per common share is not presented for the two month
period ended May 31, 1995 and the four month period ended May 31, 1995 since
such amounts are not deemed meaningful as a result of the change in ownership
and capital stock structure of NAC that occurred on June 1, 1995.
Interim Financial Information (Unaudited)
The balance sheet as of October 31, 1996 and statements of operations and
cash flows for the nine month period ended October 31, 1996, the four month
period ended May 31, 1995 and the five month period ended October 31, 1995, as
well as the statement of stockholders' equity for the three month period ended
October 31, 1996 are unaudited but include all adjustments (consisting only of
normal, recurring adjustments) which, in the opinion of the management of the
Company, considers necessary for a fair presentation of the financial position
at such dates and the operating results and cash flows for those periods. The
results for the interim periods are not necessarily indicative of results for
the entire year.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31, OCTOBER 31,
1996 1996 1996
----------- ------- -----------
<S> <C> <C> <C>
Raw materials...................................... $16,493 $14,900 $16,993
Work-in-process.................................... 8,958 12,585 10,674
Finished goods..................................... 5,756 5,760 6,978
------- ------- -------
$31,207 $33,245 $34,645
======= ======= =======
</TABLE>
4. PLANT AND EQUIPMENT
The cost and accumulated depreciation of plant and equipment are as
follows:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31, OCTOBER 31,
1996 1996 1996
----------- ------- -----------
<S> <C> <C> <C>
Machinery and equipment............................. $1,338 $1,456 $ 1,546
Building and other leasehold improvements........... 976 976 1,027
Office furniture, fixtures and equipment............ 575 725 797
Construction-in-process............................. 551 586 619
------ ------ -------
3,440 3,743 3,989
Less accumulated depreciation....................... (734) (967) (1,160)
------ ------ -------
$2,706 $2,776 $ 2,829
====== ====== =======
</TABLE>
5. RELATED PARTIES
The Company has agreed to pay a management fee to a stockholder in the
amount of $300,000 per year, payable quarterly. The Company reduces payment of
this management fee by the amount of compensation paid to certain employees in
connection with their services as officers of the Company and its subsidiaries.
The Company has also agreed to pay an annual management fee of $50,000 per year
to the subordinated debtholder for each of the four years commencing June 1,
1995, which fee is payable quarterly. This agreement with the subordinated
debtholder also provides for accelerated payment of all remaining annual
management fees upon the occurrence of certain events, including the
consummation of a public offering of the Company's Common Stock; and the sale of
substantially all of the assets of the Company.
F-10
<PAGE> 74
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
Fees under the agreement totalling $133 and $85 were included in selling,
general and administrative expenses in the accompanying statements of operations
for the eight month period ended January 31, 1996 and the six month period ended
July 31, 1996, respectively. There were no such fees for the two month period
ended May 31, 1995.
The Company leases office space from a stockholder under a month to month
sublease. Monthly payments under the lease are three thousand dollars.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
Borrowings under revolving line of credit...................... $24,123 $31,285
Term loans..................................................... 1,767 2,950
Subordinated note payable...................................... 2,925 1,952
Note payable................................................... 160 --
------- -------
Total.......................................................... 28,975 36,187
Less current portion........................................... (1,970) (1,100)
------- -------
$27,005 $35,087
======= =======
</TABLE>
On June 13, 1996, the Company entered into a new credit facility.
Borrowings under this facility were used to retire the outstanding borrowings
under the Company's existing revolving line of credit and term loan and also to
reduce the Company's subordinated note by $1,000. In connection with this
refinancing, the Company recorded an extraordinary charge of $864, for
prepayment penalty fees and the write-off of unamortized loan fees.
This new credit agreement consists of a revolving credit facility that
allows for borrowings of up to $37,000 and two term loans in the amounts of
$2,000 and $1,000, respectively. Borrowings under the revolving credit facility
are further limited to specified percentages of eligible accounts receivable and
inventories. The revolving line of credit expires May 15, 1999. Management
believes that the borrowing base under this credit facility will exceed the
outstanding borrowings for at least the next twelve months, and has classified
these outstanding borrowings as long-term debt in the accompanying balance
sheet. Borrowings under the revolving credit facility bear interest at the LIBOR
rate plus 3.0% (8.45% at July 31, 1996). The credit agreement also allows for
the issuance of letters of credit not to exceed an aggregate of $1,500. Such
letters of credit reduce the availability of borrowings under the facility. At
July 31, 1996, standby letters of credit totaling $944 were outstanding on the
prior credit agreement against which the Company has provided $1,039 in cash
collateral. This deposit is included in restricted cash in the accompanying
balance sheet at July 31, 1996.
The term loans mature May 15, 1999 and bear interest at a variable rate of
the LIBOR rate plus either 3.50% or 4.50% (8.95% and 9.95% at July 31, 1996,
respectively).
The credit agreement contains a number of covenants, including among other
provisions restrictions on mergers, consolidations and acquisitions, the
incurrence of indebtedness, transactions with affiliates, the creation of liens,
capital expenditures, and management fees. The credit agreement also requires
the Company to maintain minimum levels of net worth and requires certain
interest expense coverage ratios and minimum backlog levels. The terms of the
Company's credit agreement currently restrict the payment of dividends except
with the lender's consent.
The subordinated note bears interest at 15%, payable monthly and is due in
quarterly installments through June 1999. The subordinated note agreement
requires the Company to maintain certain levels of net worth, limits capital
expenditures and requires certain interest expense coverage ratios.
F-11
<PAGE> 75
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
The revolving line of credit, term loans and subordinated debt are
collateralized by substantially all of the Company's assets.
Aggregate annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
August 1, 1996 to January 31, 1997................................. $ 524
Fiscal year 1998................................................... 1,078
Fiscal year 1999................................................... 1,100
Fiscal year 2000................................................... 33,485
-------
$36,187
=======
</TABLE>
Management believes that the carrying amounts of the Company's borrowings
under its revolving credit facility and term loans approximate their fair values
because the interest rate is variable and resets frequently. Management also
believes that the carrying value of the Company's subordinated notes
approximates its fair value based upon the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
7. STOCKHOLDERS' EQUITY
The preferred stock bears cumulative annual dividends of $4.00 per share,
has a liquidation preference that increases annually in $10.00 per share
increments up to $50.00 per share in 1999, and has no voting rights. No
dividends shall be paid on common shares until all preferred stock dividends
have been paid. All preferred stock dividends shall be paid in shares of
preferred stock until the subordinated debt has been fully repaid. Total
cumulative dividends earned but not yet declared at October 31, 1996 were $187.
In connection with the issuance of the subordinated note on June 1, 1995,
the Company issued to the debtholder warrants to purchase up to 1,832,225 shares
of the Company's common stock at $.05 per share. In connection with the debt
transactions discussed in Note 6, the number of shares eligible for purchase
under this warrant was reduced to 1,293,335. The warrants were valued at the
time of issuance by management at $110 and the resulting discount on the
subordinated debt is being amortized over the term of the debt. The Company has
reserved 1,293,335 shares of common stock for the exercise of these warrants.
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
TWO MONTH EIGHT MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, JANUARY 31, JULY 31,
1995 1996 1996
------------ ------------- ------------
<S> <C> <C> <C>
Current tax provision:
Federal......................................... $ -- $ 523 $ --
State........................................... -- 113 --
------ ------ ------
-- 636 --
Deferred tax provision:
Federal......................................... -- 529 --
State........................................... -- 135 --
------ ------ ------
-- 664 --
------ ------ ------
$ -- $1,300 $ --
====== ====== ======
</TABLE>
F-12
<PAGE> 76
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the statements of operations
is as follows:
<TABLE>
<CAPTION>
TWO MONTH EIGHT MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, JANUARY 31, JULY 31,
1995 1996 1996
------------ ------------- ------------
<S> <C> <C> <C>
Provision (benefit) at statutory rate............. 34.0% 34.0% 34.0%
State tax provision, net of Federal benefit....... 6.6 6.6 6.6
Effect of losses of predecessor business.......... (41.0) -- --
Change in valuation allowance..................... -- -- (41.0)
Other............................................. 0.4 0.4 0.4
------ ------- -------
0.0% 41.0% 0.0%
====== ======= =======
</TABLE>
Deferred tax assets and liabilities result from temporary differences in
the recognition of income and expenses for tax and financial statement purposes.
The principal sources of these differences include state net operating loss
carryforwards, financial accruals, and differences in the income tax and
financial statement asset bases due to purchase accounting. These differences
are set forth below:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
Financial statement accruals not currently deductible for
income tax purposes.......................................... $ 4,755 $ 4,046
Differences in the financial statement and income tax basis of
fixed assets................................................. 2,441 2,304
Attributes subject to IRC sec. 382............................. 503 377
Net operating loss carryforwards............................... 251 191
Other.......................................................... 222 210
------- -------
8,172 7,128
Valuation allowance............................................ (7,136) (6,092)
------- -------
Net deferred tax assets........................................ $ 1,036 $ 1,036
======= =======
</TABLE>
The Company has net operating loss carryforwards available for California
state tax reporting purposes of approximately $2,700 which will expire in the
years 1997 through 1999. Because of the "change of ownership" provision of the
Tax Reform Act of 1986, and applicable state statutes, utilization of the
Company's federal and state tax "net unrealized built-in losses" and state net
operating loss carryforwards which existed as of the acquisition date are
subject to an annual limitation in current and future periods. As a result of
the annual limitation, a portion of the net operating loss carryforwards may
expire unused.
The Company believes that based on a number of factors, including its
recent history of operating losses, substantial uncertainty exists as to the
realization of its deferred tax assets. Accordingly, a valuation allowance has
been provided on the deferred tax assets. The Company will continue to assess
the realizability of the deferred tax assets in future periods and make such
adjustments to the valuation allowance as it considers appropriate. The
valuation allowance was unchanged in the eight month period ended January 31,
1996, and decreased $1,044 in the six month period ended July 31, 1996.
The Company files a consolidated federal tax return with its parent
company, First Equity Group, Inc. The Company's federal income tax provision has
been based on the tax sharing agreement between the companies which stipulates
that the Company is liable for federal taxes as if it filed on a separate
company
F-13
<PAGE> 77
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
basis subject to certain limitations and adjustments. The federal taxes payable
account primarily relates to the intercompany liability under the tax sharing
agreement.
Prior to June 1, 1995, the Company was a party to a tax sharing agreement
with Triton. In accordance with the terms of the tax sharing agreement, federal
income taxes for the two month period ended May 31, 1995 were calculated on a
stand-alone basis. For the two month period ended May 31, 1995, a valuation
allowance was established for the Company's net operating loss carryforwards due
to uncertainties as to the realization of these amounts and as a result, no
income tax benefit or expense was recorded.
9. EMPLOYEE BENEFIT PLANS
Profit Sharing
The Company maintains a discretionary non-qualified profit sharing plan
covering substantially all of its employees. The Company expensed approximately
$216 and $214 in the eight month period ended January 31, 1996 and the six month
period ended July 31, 1996, respectively, related to this plan. The Company
recorded no profit sharing expense for the two month period ended May 31, 1995.
The Company maintains a 401(k) savings plan that covers substantially all
full-time employees. The plan allows employees to defer up to 15 percent of
their salary. In addition, the Company partially matches employee contributions.
The Company's contributions to the plan were $13, $236 and $270, in the two
month period ended May 31, 1995, the eight month period ended January 31, 1996
and the six month period ended July 31, 1996, respectively.
Pension Plans
On June 1, 1995, the Company decided to terminate its qualified defined
benefit retirement plan. In connection with the termination of the plan, the
Company amended the plan agreement to provide 100% vesting for all participants,
and freeze further benefit accruals for participants. At that date, the Company
recorded $1,000 in other noncurrent liabilities to cover the cost of settling
the obligations under this plan. Prepaid pension costs of $287 and $451 at
January 31, 1996 and July 31, 1996, respectively, are netted against this
accrued pension obligation in the accompanying balance sheets.
Substantially all employees of the Company are covered by this
noncontributory retirement plan. The Company's funding policy was to contribute
annually the amount required by ERISA as determined by the plan's actuaries. All
of the qualified plan's assets are held by, and invested in, investment funds of
Principal Mutual Life Insurance Company, a qualified insurance company.
F-14
<PAGE> 78
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
Net periodic pension cost for the retirement plan calculated under the
projected unit credit cost method includes the following components:
<TABLE>
<CAPTION>
TWO MONTH EIGHT MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, JANUARY 31, JULY 31,
1995 1996 1996
------------ ------------- ------------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period........................................... $ 115 $ -- $ --
Interest cost on projected benefit obligation...... 133 448 390
Actual return on plan assets....................... (123) (845) (317)
Net amortization and deferral...................... 22 240 (237)
----- ------ -----
Net periodic pension cost (credit)................. $ 147 $ (157) $(164)
===== ====== =====
</TABLE>
The following table sets forth the plan's funded status:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
Vested accumulated benefit obligation......................... $(10,212) $(10,350)
======== ========
Projected benefit obligation for service rendered to date..... $(10,212) $(10,350)
Plan assets at fair value -- listed debt securities........... 10,867 10,940
-------- --------
Funded status................................................. 655 590
Unrecognized net loss subsequent to transition................ (368) (139)
-------- --------
Prepaid pension cost-netted against accrued pension
obligation.................................................. $ 287 $ 451
======== ========
Significant actuarial assumptions:
Discount rate............................................... 6.75% 6.75%
======== ========
Rates of increase in compensation levels.................... 5.40% 5.40%
======== ========
Expected long-term rate of return on plan assets............ 9.00% 9.00%
======== ========
</TABLE>
At June 1, 1995, the Company had an accrued liability of $870 for a
nonqualified defined benefit pension plan that was terminated in January 1991.
In July 1995, annuities were purchased for $870 to settle vested benefits in the
nonqualified defined benefit pension plan.
10. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain land, plant facilities, and equipment. Many of
the Company's operating leases have options which allow the Company, at the end
of the initial lease term, to renew the leases for periods ranging from three to
five years. Certain lease agreements also contain escalation clauses which are
based on the consumer price index. Future minimum rental payments under
operating leases that have initial noncancellable lease terms in excess of one
year as of July 31, 1996 are as follows:
<TABLE>
<S> <C>
August 1 to January 31, 1997...................................... $ 533
Fiscal year 1998.................................................. 1,052
Fiscal year 1999.................................................. 894
Fiscal year 2000.................................................. 796
Fiscal year 2001.................................................. 637
Fiscal year 2002 and thereafter................................... 2,569
------
$6,481
======
</TABLE>
F-15
<PAGE> 79
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
Rental expense under all short-term and noncancellable operating leases
amounted to $79, $316 and $450, net of sublease rental income of $39, $193 and
$133 for the two month period ended May 31, 1995, the eight month period ended
January 31, 1996 and the six month period ended July 31, 1996, respectively.
The Company has post-employment consulting agreements with certain of its
management personnel which may require the Company to make post-employment
payments of up to $254 in the event that employment is terminated under
specified circumstances.
Contingencies
In the ordinary course of business, the Company is involved in many levels
of governmental inquiry and investigation. Among the agencies which oversee the
Company's business activities are: the Federal Aviation Administration, the
Department of Defense, the Department of Justice, the Environmental Protection
Agency and the Defense Contract Audit Agency. The Company does not anticipate
that any action as a result of such inquiries and investigations would have a
material adverse affect on its financial position, results of operations or its
ability to conduct business. In the normal conduct of its business, the Company
is also 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 financial position or results of operations. However, depending on the
amount and timing, unfavorable resolution of these matters could have a material
effect on the Company's financial position and results of operations in a
particular period.
11. ENVIRONMENTAL
Liabilities are recorded when environmental claims for remedial efforts are
probable and the cost can be reasonably estimated. As of July 31, 1996, the
Company has provided for environmental remediation costs in the amount of $307
and such amounts are included in other noncurrent liabilities in the
accompanying consolidated balance sheet. Environmental expenditures that relate
to current operations are expensed.
The Company is a potentially responsible party to certain properties that
are contaminated and will require remediation. The exact extent of the Company's
liability, if any, has not yet been determined but, in the opinion of
management, these matters will not have a material adverse impact on the
Company's financial position or results of operations. However, depending on the
amount and timing, unfavorable resolution of these matters could have a material
effect on the Company's financial position and results of operations in a
particular period.
12. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
On October 15, 1996, the Company announced the termination of its qualified
defined benefit retirement plan (the "Qualified Plan"). The settlement will be
conducted in accordance with the requirements of ERISA, upon regulatory approval
of the Qualified Plan's termination. In addition, on October 7, 1996, an
agreement was signed by the Company to purchase annuities for retirees who were
receiving benefits from the Qualified Plan.
On November 25, 1996, Aircraft Parts International Combs, Inc. ("API
Combs"), a subsidiary of the Company, entered into an agreement to acquire
certain assets and liabilities of Aircraft Parts International ("Old API"), a
division of AMR Combs, Inc. ("AMR Combs"). The acquisition of Old API (the "API
Combs Acquisition"), is expected to close concurrently with the closing of the
Company's proposed initial public offering of its common stock. Based upon the
September 30, 1996 balance sheet of API Combs, the purchase price of the
specific net assets acquired as defined in the contract is estimated to be
$9,727. The Company will make a cash payment equal to 90% of the purchase price,
while the remaining 10% will be settled via the issuance of 9,727 shares of API
Combs Series A cumulative convertible redeemable preferred
F-16
<PAGE> 80
FIRST AVIATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share amounts)
stock. The final purchase price is contingent upon the closing balance sheet
and, if necessary, the appraisal of the fair value of certain assets acquired.
On December 20, 1996, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock in an
initial public offering.
On December 20, 1996, the Board of Directors approved, subject to
stockholder approval, a 6.4549 to 1 stock split of issued and outstanding common
stock effected as a stock dividend. All common shares in the accompanying
consolidated financial statements have been retroactively adjusted to reflect
the stock split.
On December 20, 1996, a Stock Option Plan was adopted by the Board of
Directors, subject to stockholder approval. The Plan provides for the grant of
incentive stock options, nonqualifying stock options, stock appreciation rights
and stock purchase rights. A total of 400,000 shares of common stock have been
reserved for issuance under the plan.
On December 20, 1996, an Employee Stock Purchase Plan was adopted by the
Board of Directors, subject to stockholder approval. Under the Plan, 250,000
shares of common stock have been reserved for issuance. The Plan allows for
eligible employees to purchase stock at 85% of the lower of the fair market
value of the Company's common stock as of the first day of each offering year or
the fair market value of the stock at the end of the offering period. The
initial offering period will commence concurrent with its initial public
offering of common stock.
On September 30, 1996, the Company entered into two agreements with a
stockholder whereby the stockholder is to provide certain investment advisory
services in connection with the proposed public offering as well as to provide
advice and negotiate for the Old API acquisition. Upon closing of the proposed
public offering, the stockholder will be paid a fee of $350 for assistance
rendered in connection with the offering and $250 for its services with regard
to the Old API acquisition.
In January 1997, the Company expects to grant a key employee of NAC,
options to acquire 150,000 shares of NAC's common stock. Subject to consummation
of an initial public offering by the Company, these options may be exercised to
acquire 150,000 shares of the Company's common stock. The options carry an
exercise price of $.01 per share, vest immediately, and expire ten years from
the date of grant. In addition to the option grant, the employee will also
receive a bonus of $200 upon consummation of an initial public offering. The
Company expects to record a pre-tax charge of approximately $1,850 in January
1997 as a result of the above transaction.
On January 31, 1997, the Company and the holder of the Series A Preferred
Stock agreed to exchange the Company's Series A Preferred Stock, face value
$1,650, for shares of Common Stock at an exchange rate equal to the initial
public offering price per share. Assuming an initial public offering price of
$11.00 per share, the midpoint of the estimated initial public offering price
range, 150,000 shares of common stock would be issued. Cumulative dividends with
respect to the Series A Preferred Stock at the date of the public offering will
be paid in cash.
F-17
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
National Airmotive Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of National Airmotive Corporation, a
wholly-owned subsidiary of Triton Group Ltd. ("Triton"), at March 31, 1995 and
the results of its operations and its cash flows for each of the two years in
the period then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
These financial statements are presented under the historical cost basis
and as discussed in Notes 1 and 11 do not give effect to the adjustments
recorded by Triton in connection with its emergence from bankruptcy in fiscal
year 1994 or purchase accounting adjustments resulting from Triton's sale of its
ownership interest in the Company on June 1, 1995.
PRICE WATERHOUSE LLP
San Francisco, California
June 14, 1995
F-18
<PAGE> 82
NATIONAL AIRMOTIVE CORPORATION
BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful accounts of $460................ $11,788
Inventories...................................................................... 28,858
Prepaid expenses and other....................................................... 1,490
Deferred income taxes............................................................ 1,447
Advances to parent............................................................... 199
-------
Total current assets..................................................... 43,782
Plant and equipment, net........................................................... 10,362
Excess of cost over net assets acquired, net....................................... 6,920
Other assets....................................................................... 3,010
-------
$64,074
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................. $ 4,758
Accrued liabilities.............................................................. 3,085
Current portion of capital lease obligation...................................... 379
-------
Total current liabilities................................................ 8,222
Note payable to bank............................................................... 18,499
Capital lease obligation, less current portion..................................... 161
Deferred income taxes.............................................................. 1,124
Other long-term liabilities........................................................ 1,044
-------
Total liabilities........................................................ 29,050
-------
Commitments and contingencies: (Note 9)
Shareholder's equity:
Common stock, $1 par value, 10,000,000 shares authorized, 4,750,000 shares issued
and outstanding............................................................... 4,750
Additional paid-in capital....................................................... 27,385
Retained earnings................................................................ 2,889
-------
Total shareholder's equity.................................................... 35,024
-------
$64,074
=======
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-19
<PAGE> 83
NATIONAL AIRMOTIVE CORPORATION
STATEMENT OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
APRIL 1, MARCH 31,
1994 1995
--------- ---------
<S> <C> <C>
Net sales (Note 10)................................................... $ 92,513 $ 83,091
Cost of sales......................................................... 79,315 72,796
--------- ---------
Gross profit.......................................................... 13,198 10,295
Selling, general and administrative expenses (Note 5)................. 8,536 9,362
--------- ---------
Income from operations................................................ 4,662 933
Interest expense...................................................... 1,076 1,807
Other expense (Note 5)................................................ 519 1,302
--------- ---------
Income (loss) before income taxes..................................... 3,067 (2,176)
(Provision) benefit for income taxes.................................. (1,046) 885
--------- ---------
Net income (loss)..................................................... $ 2,021 $ (1,291)
========= =========
Net income (loss) per common share.................................... $ 0.43 $ (0.27)
========= =========
Weighted average common shares outstanding............................ 4,750,000 4,750,000
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-20
<PAGE> 84
NATIONAL AIRMOTIVE CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at April 2, 1993......................... 4,750,000 $4,750 $27,385 $2,159 $34,294
Net income....................................... -- -- -- 2,021 2,021
--------- ------ ------- ------ -------
Balance at April 1, 1994......................... 4,750,000 4,750 27,385 4,180 36,315
Net loss......................................... -- -- -- (1,291) (1,291)
--------- ------ ------- ------ -------
Balance at March 31, 1995........................ 4,750,000 $4,750 $27,385 $2,889 $35,024
========= ====== ======= ====== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-21
<PAGE> 85
NATIONAL AIRMOTIVE CORPORATION
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
APRIL 1, MARCH 31,
1994 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................... $ 2,021 $(1,291)
Adjustments to net income (loss):
Depreciation and amortization...................................... 2,394 2,508
Deferred income taxes.............................................. 718 (1,041)
Net (gain) loss on disposal of plant and equipment................. (41) 123
Accrued interest on long-term debt................................. (177) --
Changes in other assets and liabilities:
Receivables..................................................... (1,800) 6,902
Inventories..................................................... 7,346 (4,457)
Prepaid expenses and other assets............................... (933) 493
Accounts payable................................................ 6,367 (6,822)
Accrued liabilities and other long-term liabilities............. (3,885) (319)
-------- -------
Net cash flows from operating activities................... 12,010 (3,904)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of plant and equipment................................. (1,794) (2,469)
Payment for license rights and other intangibles................... -- (800)
Proceeds from disposal of plant and equipment...................... 52 --
-------- -------
Net cash flows from investing activities................... (1,742) (3,269)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital lease obligation.................................. (191) (359)
Advances to parent................................................... (212) (4)
Net borrowings (repayments) of note payable to bank.................. (9,865) 7,536
-------- -------
Net cash flows from financing activities................... (10,268) 7,173
-------- -------
Net change in cash and cash equivalents.............................. -- --
Cash and cash equivalents, beginning of year......................... -- --
-------- -------
Cash and cash equivalents, end of year............................... $ -- $ --
======== =======
Supplemental cash flow disclosures
Amounts paid for:
Interest paid................................................... $ 869 $ 1,745
Income taxes.................................................... 524 160
Acquisition of equipment under capital lease obligation............ -- 303
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-22
<PAGE> 86
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FORMATION, HISTORY AND OPERATIONS
Formation and History
National Airmotive Corporation ("Company"), a California corporation, was
incorporated in 1960. In 1969, the Company's outstanding shares of common stock
were sold to Republic Corporation ("Republic"). On January 31, 1985, Triton
Group Ltd. ("Old Triton"), a majority-owned subsidiary of Intermark, Inc.
("Intermark"), acquired Republic in a transaction which was accounted for as a
purchase. Consequently, the net assets of Republic (including its investment in
the Company) were revalued to reflect the Old Triton purchase price. On August
30, 1990, Old Triton became a wholly-owned subsidiary of Intermark pursuant to
an Agreement and Plan of Merger dated March 2, 1990.
On October 19, 1992, Intermark and Old Triton filed separate voluntary
petitions in the United States Bankruptcy Court for the Southern District of
California seeking protection under Chapter 11 of the U.S. Bankruptcy Code. On
June 25, 1993, Intermark and Old Triton emerged from bankruptcy as a single
restructured company known as Triton Group Ltd. ("Triton").
In connection with its emergence from bankruptcy, Triton announced a plan
to liquidate its assets within a targeted two year time frame. In accordance
with that plan, Triton sold its ownership interest in the Company on June 2,
1995 to First Aviation Services, Inc., a holding company owned by First Equity
Development, Inc. (Note 11).
Operations
The Company specializes in overhaul, repair, service, and parts support for
the entire Allison Engine Company ("Allison") commercial engine line including
the 501/T56, 250, 501K and 570/571 models. Based in Oakland, California, the
Company was one of only three companies worldwide approved by Allison to repair
and overhaul the Allison prop-jet 501/T56 engine, which is used on thousands of
Lockheed C130's and several other aircraft. The Company was the sole distributor
for Allison's largest turbine engine, the 570/571, used in marine and industrial
applications. Substantially all of fiscal 1995 and 1994 revenues relate to the
Allison products. Customers of the Company include airlines, foreign
governments, U.S. and foreign military services and industrial companies. In
addition to Allison, the Company is an authorized distributor for Bendix, AC and
several suppliers of accessories that complement the Allison commercial engine.
The Company is also an authorized Lockheed Hercules QEC Repair Center.
In April 1994, the Company acquired the net assets of Heli-Turbine
International ("Heli-Turbine") and Heli-Dyne Incorporated ("Heli-Dyne"), both of
Long Beach, California, for $1,300,000 in cash. Heli-Turbine is an authorized
overhaul and maintenance center for Allison 250 Engines as well as a service
center of the Turbomeca/Arriel engines. Heli-Dyne is a service center for both
McDonnell Douglas and Schweizer Helicopters, specializing in the overhaul and
sale of dynamic components. As a result of this acquisition, the Company
transferred its operations located in LaVerne, California to the Heli-Dyne and
Heli-Turbine operations in Long Beach, California (Note 5). Pro forma
information for fiscal year 1994 related to revenues and net income is not
presented since the acquisition was not material.
The Company's T56/501D Flight Distributor, 501K Major Repair Center
Agreement and 250 Allison Distributor agreements with Allison ("Allison
Agreements") expired September 30, 1994. In November 1994 the Allison Agreements
and other existing agreements related to the Company's Allison business were
replaced with the Authorized Maintenance Center ("AMC") agreement. The new AMC
network, among other things, expands the opportunities for some of the Company's
existing customers to become an AMC and purchase parts directly from Allison and
it also reduces the Company's discounts provided by Allison for parts sold over
the counter and the parts embodied in the overhaul, repair and service
activities. Management anticipates a reduction in parts sales and increased cost
of sales from that historically experienced by the Company as a result of these
changes in Allison business arrangements. In March 1995, Allison was acquired
F-23
<PAGE> 87
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
by Rolls-Royce. Although there can be no assurance, management believes the AMC
agreements will not be materially affected as a result of this change in
ownership.
Liquidity and capital resources
Management believes that the Company's equity contributions obtained, and
financing arrangements executed, in connection with the change in ownership
transaction, discussed more fully in Note 11, will provide sufficient funds to
finance the Company's working capital and capital resource requirements
throughout fiscal 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements of the Company have been prepared on an historical
cost basis based on Old Triton's purchase price and its related investment in
the Company. As permitted under generally accepted accounting principles, these
stand-alone financial statements of a wholly-owned subsidiary do not reflect
adjustments which were made by Triton to adjust the carrying values of its
consolidated assets and liabilities in connection with its emergence from
bankruptcy. The adjustments made by Triton adjusted the historical cost amounts
of consolidated assets and liabilities to reorganization value (also referred to
as "fresh start accounting"). Reorganization value is defined as the amount of
value available, and to become available, for the satisfaction of postpetition
liabilities and allowed claims and interest, as negotiated or litigated between
the debtor-in-possession or trustee and the creditors and holders of equity
interests.
Fiscal year
The Company's fiscal year is a fifty-two or fifty-three week period ending
the Friday nearest March 31. This resulted in a fifty-two week year in both
fiscal 1994 and fiscal 1995.
Revenue recognition
Revenue for engines and parts sold is recorded when the product is shipped.
Revenue related to the repair and overhaul of engines is recorded after
completion and upon shipment.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out ("FIFO") and specific identification
methods. Costs include direct material, direct labor and applicable
manufacturing overhead.
Plant and equipment
Plant and equipment includes the cost of machinery and equipment,
buildings, furniture and fixtures, leasehold improvements and that amount of Old
Triton's purchase price that was allocated to plant and equipment based upon
estimated fair values at the date of acquisition. Additions and improvements
that materially increase the productive capacity or extend the useful life of an
asset are added to its cost. Expenditures for normal maintenance and repairs are
charged to expense as incurred.
When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of income.
F-24
<PAGE> 88
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Depreciation of plant and equipment is computed using the straight-line
method over the estimated lives of the assets which range from four to thirty
years. Leasehold improvements are amortized over the shorter of the estimated
life of the improvement or the term of the related lease.
Excess of cost over net assets acquired
The excess of Old Triton's purchase price for the Company over the fair
value of the net assets acquired has been included in the balance sheet under
the caption "Excess of cost over net assets acquired, net" and is being
amortized under the straight-line method over a forty year period. The
accumulated amortization was $2,250,000 at March 31, 1995.
Impairment of long-lived assets
Management of the Company assesses the recoverability of its long-lived
assets by determining whether the amortization of the asset's balance over its
remaining life can be recovered through projected undiscounted future cash
flows. Management of the Company continually evaluates the existence of
impairment of its long-lived assets and takes into consideration operating
results, trends and prospects of the Company, including comparison to the
Company's competitors, and the impact of potential changes to its distribution
and repair center agreements. Management of the Company believes no impairment
of the Company's intangible and tangible assets has occurred and, for purposes
of fairly presenting the Company's financial position under the historical cost
basis of accounting, adjustments to the amortization period or the unamortized
balance of intangible and other long-lived assets are not required.
The Company's methodology is substantially consistent with the provisions
of Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting
for the Impairment of Long-Lived Assets and Assets to be Disposed of" which must
be adopted in fiscal year 1996. The adoption of FAS 121 is therefore not
expected to have any material effect to the Company's results of operations or
financial position.
License rights
The cost of license rights purchased from Allison is amortized using the
straight-line method over the period of minimum expected benefit of fifteen
years.
Income taxes
The Company uses the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109
("FAS 109"), "Accounting for Income Taxes." The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities.
Accounts payable
The Company has reclassified checks outstanding in excess of bank balances
of $1,498,000 to accounts payable at March 31, 1995.
Concentration of credit risk
The Company provides credit in the form of trade accounts receivable to its
customers. The Company generally does not require collateral to support customer
receivables although letters of credit may be required prior to shipment. The
Company performs ongoing credit evaluations of its customers and maintains
allowances which management believes are adequate for potential credit losses.
F-25
<PAGE> 89
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings (loss) per share
Earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. There were no common stock equivalents
required to be included in the calculation.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Raw materials...................................................... $14,932
Work-in-process.................................................... 7,874
Finished goods..................................................... 6,052
-------
$28,858
=======
</TABLE>
4. PLANT AND EQUIPMENT
The cost and accumulated depreciation of plant and equipment are as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Machinery and equipment............................................ $16,846
Building and other leasehold improvements.......................... 6,610
Furniture and fixtures............................................. 677
-------
24,133
Less accumulated depreciation and amortization..................... 14,261
-------
9,872
Construction-in-progress........................................... 490
-------
$10,362
=======
</TABLE>
Depreciation and amortization expense for plant and equipment was
$2,162,000 and $2,240,000 for the years ended April 1, 1994 and March 31, 1995.
At March 31, 1995, plant and equipment includes assets under capital lease (Note
9) of approximately $1,644,000 with accumulated amortization of $1,122,000 at
March 31, 1995.
F-26
<PAGE> 90
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Accrued wages and employee benefits................................ $ 907
Accrued vacation................................................... 591
Accrued license rights............................................. 375
Accrued warranty................................................... 151
Customer and vendor deposits....................................... 148
Accrued severance.................................................. 134
Accrued insurance.................................................. 73
Other.............................................................. 706
------
$3,085
======
</TABLE>
In connection with the new AMC agreement with Allison, the Company agreed
to pay $1,500,000 to Allison to become an AMC for a period of up to fifteen
years (including renewal options). The Company paid $750,000 of this amount in
fiscal 1995, with the remaining balance due in two installments of $375,000 each
in November 1995 and November 1996. Accrued license rights represents the
current portion of this obligation. The long-term portion at March 31, 1995 of
$375,000 is included in "Other long-term liabilities."
"Other expenses" in the fiscal 1995 statement of operations include
approximately $636,000 for fees and other expenses paid to investment bankers in
connection with the Company's efforts to locate a buyer of Triton's equity
interest in the Company. "Selling, general and administrative expenses" in
fiscal 1995 include early lease termination charges aggregating $329,000
applicable to the relocation of the La Verne facilities to Long Beach.
During fiscal 1994, the Company pursued an acquisition of selected net
assets of the Business Aviation Division of Aviall, Inc., a subsidiary of Ryder
System, Inc. ("Ryder"). Ryder did not accept the Company's offer and all
acquisition due diligence costs and expenses incurred by the Company
(approximately $443,000) are included in "Other expenses" in the fiscal 1994
statement of operations. In addition, "Selling, general and administrative
expenses" in the fiscal 1995 and 1994 statements of operations include
approximately $125,000 and $287,000, respectively, of severance and other
related costs and expenses incurred in connection with a reduction in workforce.
6. LONG-TERM DEBT
Until June 1, 1995, the Company had a $30,000,000 senior secured credit
facility with a bank consisting of a $25,000,000 revolving line-of-credit and a
loan commitment of $5,000,000 for the purchase of new equipment ("Credit
Facility"). The Credit Facility was replaced in June 1995 in connection with the
change in ownership (Note 11) and amounts outstanding were repaid. The Credit
Facility, as amended, would have expired in November 1997 and was renewable
annually thereafter. Advances under the revolving line-of-credit were limited to
the lesser of $25,000,000 or a stipulated percentage of eligible accounts
receivable and inventory and were payable the earlier of five years from the
date of funding or the expiration date of the Credit Facility. Under these
limitations, advances available under the revolving line-of-credit were
$20,959,000 at March 31, 1995, while actual outstanding borrowings under the
revolving line-of-credit amounted to $18,499,000 at March 31, 1995. Outstanding
letters of credit issued in favor of the Company were approximately $184,000 at
March 31, 1995. Under the equipment loan commitment, the Company could fund 75%
of the equipment's purchase price to a maximum of $2,800,000 in any one fiscal
year. There were no outstanding borrowings under the equipment loan commitment
at March 31, 1995.
F-27
<PAGE> 91
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Interest on all outstanding borrowings was based on LIBOR plus 3.5%, or
9.625%, at March 31, 1995 and 7.185% at April 1, 1994 and was payable monthly.
Outstanding borrowings under the Credit Facility were collateralized by
substantially all the assets of the Company and were guaranteed by Triton.
The Credit Facility included certain financial covenants with respect to
net worth, limitations on borrowings and leases, working capital, and
profitability, among others. Although the Company was not in compliance with
certain of these financial covenants at March 31, 1995, for purposes of the
historical cost, stand-alone financial statement presentation, this debt amount
has been classified as a non-current liability since it was refinanced with
another long-term credit facility in connection with the change in ownership
transaction discussed in Note 11.
7. INCOME TAXES
The Company and Triton are parties to a tax sharing agreement. The
agreement was amended for fiscal 1994 only to provide that the Company (whose
income is consolidated with that of Triton for federal and, to the extent
permitted, state income tax reporting purposes) record amounts representing
federal and state income taxes calculated on a "stand-alone basis." In
connection with this amendment, the Company agreed to reimburse Triton in the
event of any adjustment (including interest or penalties) to its consolidated
federal and state income tax returns based upon the Company's obligations with
respect thereto. Accordingly, amounts paid could exceed the Company's actual tax
liability on a "stand-alone basis."
In fiscal 1995, federal income taxes are calculated on a stand-alone basis
and all refundable income taxes are calculated on an "incremental" basis in
accordance with the terms of the original tax sharing agreement. The Company is
not required to pay state income taxes if Triton has a consolidated net
operating loss or utilizes a consolidated net operating loss carryforward that
eliminates Triton's consolidated state taxable income. Refundable federal and
state income taxes can be recorded by the Company related to its net operating
losses only when the net operating losses of the Company are utilized by Triton
to reduce the consolidated federal or state tax liability of the Group. In
connection with Triton's emergence from bankruptcy, consolidated net operating
losses and other tax benefit attributes of Triton and its subsidiaries were
substantially reduced and/or eliminated pursuant to statutory limitations for
both federal and state income tax reporting purposes.
Under the tax sharing agreement and solely for purposes of calculating the
Company's federal income tax provision on a stand-alone basis, all deductible
temporary differences which were eliminated with Triton's emergence from
bankruptcy remain available to reduce the Company's taxable income. Accordingly,
these temporary differences have been included as a reduction of the calculated
deferred income tax liability at March 31, 1995. Because of the extent of these
limitations, the tax sharing agreement results in the Company recording a tax
benefit for temporary differences that are not available to Triton. In addition,
these limitations, and potentially further limitations, would carry-over in the
event of a change in ownership.
The income tax provision and related deferred tax assets and liabilities do
not give effect to the limitations applicable to the future deductibility of
related temporary differences resulting from the change in ownership discussed
in Note 11.
F-28
<PAGE> 92
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The (provision) benefit for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 1, MARCH 31,
1994 1995
-------- ---------
<S> <C> <C>
Federal:
Current............................................... $ (292) $(135)
Deferred.............................................. (442) 815
------- -----
(734) 680
------- -----
State:
Current............................................... (36) (21)
Deferred.............................................. (276) 226
------- -----
(312) 205
------- -----
$(1,046) $ 885
======= =====
</TABLE>
The gross deferred tax assets and liabilities at March 31, 1995 consist of
the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Gross deferred tax assets:
Inventory reserve.................................................. $2,092
Accrued liabilities................................................ 474
Provision for doubtful accounts.................................... 199
Other.............................................................. 275
------
3,040
------
Gross deferred tax liabilities:
Prepaid expenses................................................... 219
Depreciation and amortization...................................... 1,042
Other assets....................................................... 426
Other.............................................................. 1,030
------
2,717
------
Net deferred tax asset............................................... $ 323
======
</TABLE>
There were no valuation allowances on deferred tax assets as future taxable
income on a stand-alone basis as determined under the tax sharing arrangement
was expected to be sufficient to allow realization of recorded tax assets.
A reconciliation of the federal statutory rate to the effective rate
follows (in percent):
<TABLE>
<CAPTION>
APRIL 1, MARCH 31,
1994 1995
-------- ---------
<S> <C> <C>
Federal statutory rate................................... 34.0 (34.0)
State taxes, net of federal benefit...................... 6.7 (6.2)
Department of Justice settlement liability............... (9.6) 3.9
Goodwill amortization.................................... 2.6 (3.6)
Other, net............................................... .4 (.8)
---- -----
Effective rate........................................... 34.1 (40.7)
==== =====
</TABLE>
F-29
<PAGE> 93
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
Profit Sharing and Bonus Plans
The Company has contractual and discretionary profit sharing and bonus
arrangements with certain officers and key employees. The Company charged to
expense approximately $857,000 and $451,000 in the years ended April 1, 1994 and
March 31, 1995, respectively, for these arrangements.
The Company established a 401(k) salary deferral savings plan on November
1, 1987. The plan covers all full time employees. The plan allows employees to
defer up to fifteen percent of their salary with partially matching Company
contributions. The Company's contributions to the plan were $201,000 and
$185,000 in the years ended April 1, 1994 and March 31, 1995, respectively.
Pension plans
Substantially all employees of the Company are covered by a qualified
noncontributory defined benefit pension plan. The Company also had an unfunded,
nonqualified defined benefit pension plan for certain management employees which
supplemented the qualified pension plan. Benefits under the plans become fully
vested after 5 years of service. The Company's funding policy is to contribute
annually the amount required by ERISA as determined by the Plans' actuaries. All
of the qualified plan's assets are held by, and invested in various investment
funds of Principal Mutual Life Insurance Company, a qualified insurance company.
In January 1991, the Company terminated participation by nonretired
participants in the nonqualified defined benefit pension plan. These nonretired
participants now participate in a defined contribution plan in which the Company
contributes amounts equal to the premiums on participants' life insurance
policies. There was no material settlement/curtailment gain (loss) from this
transaction. The Company's contribution related to the defined contribution plan
totaled $102,000 in fiscal 1994 and $103,000 in fiscal 1995.
Net periodic pension cost for the defined benefit plans calculated under
the projected unit credit cost method for the years ended April 1, 1994 and
March 31, 1995 included the following components (in thousands):
<TABLE>
<CAPTION>
APRIL 1, MARCH 31,
1994 1995
-------- ---------
<S> <C> <C>
Qualified Plan
Service cost -- benefits earned during the period............. $ 613 $ 677
Interest cost on projected benefit obligation................. 694 818
Actual return on plan assets.................................. (1,085) 61
Net amortization and deferral................................. 643 (738)
------- -----
Net periodic pension cost..................................... $ 865 $ 818
======= =====
Nonqualified Plan
Service cost -- benefits earned during the period............. $ -- $ --
Interest cost on projected benefit obligation................. 56 56
Net amortization and deferral................................. 9 9
------- -----
Net periodic pension cost..................................... $ 65 $ 65
======= =====
</TABLE>
Amortization of prior service cost included in net periodic pension cost
was calculated using the straight-line method over the average remaining service
period of participants expected to receive benefits under the plans.
F-30
<PAGE> 94
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheet at March 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Qualified Plan
Accumulated benefit obligation:
Vested.................................................................. $ (8,929)
Not yet vested.......................................................... (164)
--------
$ (9,093)
========
Projected benefit obligation for service rendered to date................. $(13,088)
Plan assets at fair value -- listed debt securities....................... 9,526
--------
Excess of projected benefit obligation over plan assets................... (3,562)
Unrecognized net loss subsequent to transition............................ 4,979
Prior service costs not recognized in net periodic pension costs.......... (44)
Unrecognized net asset at February 1, 1988 being amortized over 15
years................................................................... (367)
--------
Prepaid pension cost included in prepaid expenses and other assets........ $ 1,006
========
Nonqualified Plan
Accumulated benefit obligation:
Vested.................................................................. $ (775)
========
Projected benefit obligation for service rendered to date................. $ (726)
Plan assets............................................................... --
--------
Accrued pension cost included in accrued liabilities and other long-term
liabilities............................................................. $ (726)
========
</TABLE>
Significant Actuarial Assumptions
<TABLE>
<CAPTION>
APRIL 1, MARCH 31,
1994 1995
-------- ---------
<S> <C> <C>
Qualified Plan:
Discount rate.................................................. 6.75% 7.25%
----- -----
Rates of increase in compensation levels....................... 5.50% 5.36%
----- -----
Expected long-term rate of return on plan assets............... 9.00% 9.00%
----- -----
Nonqualified Plan:
Discount rate.................................................. 6.75% 7.50%
----- -----
Rates of increase in compensation levels....................... N/A N/A
----- -----
Expected long-term rate of return on plan assets............... 9.00% 9.00%
----- -----
</TABLE>
During fiscal 1995, the discount rate used to determine the projected
benefit obligation was increased from 6.75% to 7.25% for the qualified plan and
from 6.75% to 7.50% for the non-qualified plan, in order to more closely
approximate rates on high-quality, long-term obligations. Additionally,
actuarial assumptions with respect to rates of salary increase and withdrawal,
disability and spouse's age were revised for the qualified plan to more closely
reflect the actual status of the plan's participants. During fiscal 1994,
actuarial assumptions with respect to mortality were revised to consider the
longer life expectancy of the plan participants. The effect to the accumulated
and projected benefit obligations as a result of these assumption changes for
both plans is included in "Unrecognized net loss subsequent to transition" and
will be amortized
F-31
<PAGE> 95
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as a component of net periodic pension cost. Accordingly, the net effect of
these changes in actuarial assumptions on the Company's results of operations
and financial condition was not material.
The fiscal 1994 workforce reductions discussed in Note 5 resulted in a
curtailment of plan benefits with a corresponding reduction in the projected
benefit obligation of approximately $669,000. This curtailment gain was recorded
as a reduction in "Unrecognized net loss subsequent to transition" and will be
amortized as a component of periodic pension cost. Accordingly, there was no
effect to the Company's fiscal 1994 results of operations.
Subsequent to March 31, 1995 and the June 1, 1995 change in ownership
transaction discussed in Note 11, the Company's new parent announced its
intention to terminate the qualified defined benefit pension plan. In connection
with the termination of the plan, the Company will amend the plan agreement to
provide 100% vesting for all participants, freeze further benefit accruals for
participants and settle the related obligations upon regulatory approval of the
plan's termination. The Company anticipates a material curtailment gain and
settlement loss from this termination event. The determination of the amount of
the curtailment gain and settlement loss is to be made by the Company's actuary
and the related calculation has not been performed.
9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain land, plant facilities and equipment under
operating leases and certain equipment under capital leases. Many of the
Company's operating leases have options which allow the Company, at the end of
the initial lease term, to renew the leases for periods ranging from three to
five years. The lease agreements contain certain escalation clauses which are
based on the consumer price index. Future minimum rental payments under
operating leases, before sublease rental income, that have initial or remaining
noncancellable lease terms in excess of one year and future minimum payments for
capital leases as of March 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING: CAPITAL OPERATING
---------------------------------------------------------- ------- ---------
<S> <C> <C>
1996.................................................... $427 $ 578
1997.................................................... 99 504
1998.................................................... 93 485
1999.................................................... -- 273
2000.................................................... -- 181
2001 and thereafter..................................... -- 2,691
---- ------
619 $4,712
======
Less amounts representing interest........................ 79
----
Net present value of future minimum lease payments........ 540
Less current portion...................................... 379
----
$161
====
</TABLE>
Rental expense under all short-term and noncancellable operating leases
amounted to $405,000 and $509,000, net of sublease rental income of $165,000 and
$226,000, for the years ended April 1, 1994 and March 31, 1995, respectively.
F-32
<PAGE> 96
NATIONAL AIRMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Contingencies
In the ordinary course of business, the Company is subject to many levels
of governmental inquiry and investigation. Among the agencies which oversee the
Company's business activities are: the Federal Aviation Administration, the
Department of Defense, the Department of Justice, the Environmental Protection
Agency and the Defense Contract Audit Agency. The Company does not anticipate
that any action as a result of such inquiries and investigations would have a
material adverse affect on its financial position, results of operations or its
ability to conduct business. In the normal conduct of its business, the Company
is also subject to various claims and lawsuits, none of which, in the opinion of
the Company's management, will have a material adverse affect on the Company's
financial position or results of operations.
10. SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company operates in one industry (Note 1). Combined sales to agencies
of the United States Government represented 28% and 15% of total net sales for
the years ended April 1, 1994 and March 31, 1995, respectively.
The Company has no foreign operations. However, export sales were
approximately $31,000,000 or 33% of total net sales in the year ended April 1,
1994 and $26,000,000 or 31% of total net sales in the year ended March 31, 1995.
The majority of export activities for the years ended April 1, 1994 and March
31, 1995 were to the following geographic areas: United Kingdom, Middle East,
Far East and Canada.
11. SUBSEQUENT EVENTS
On June 1, 1995, Triton sold its ownership interest in the capital stock of
the Company for cash of $11,250,000 to First Aviation Services Inc. ("First
Aviation"). First Aviation and its parent company, First Equity Development,
Inc. ("First Equity"), funded this acquisition with the proceeds from the sale
of common and preferred stock (approximately $1,700,000 and $550,000,
respectively) and borrowings under a credit facility (see below). The
transaction is to be accounted for as a purchase. The amount paid by First
Equity is less than the historical cost basis of the assets acquired and
liabilities assumed.
First Aviation and its parent, First Equity, obtained debt financing for
the acquisition of the Company, and to provide additional funds for working
capital purposes pursuant to a senior credit facility with a bank and a
subordinated term loan from an investment group. The Company's outstanding
advances under its Credit Facility were repaid with a portion of the proceeds of
these credit facilities.
The senior credit facility aggregates $30,000,000 and consists of revolving
lines-of-credit of $28,000,000 and a term loan of $2,000,000. Advances under the
revolving line-of-credit are limited to a stipulated percentage of eligible
accounts receivable and inventory and are payable at the expiration of the
agreement on June 1998 or one year renewal periods thereafter. The senior term
loan is payable monthly over a five year period. Borrowings under the credit
facility bear interest at the Company's option of either the lending bank's
prime rate plus 1.25% per annum or the Eurodollar rate plus 3.5% per annum, and
are secured by substantially all assets of the Company. The subordinated term
loan amounts to $3,000,000 and is payable quarterly over a two year period, with
interest accruing at an annual rate of 15%.
F-33
<PAGE> 97
REPORT OF INDEPENDENT AUDITORS
The Shareholder
AMR Combs, Inc.
We have audited the accompanying balance sheets of Aircraft Parts International
(the "Company"), a division of AMR Combs, Inc., as of December 31, 1995, and
September 30, 1996, and the related statements of operations and division equity
and cash flows for the year and nine months then ended, respectively. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1995, and September 30, 1996, and the results of its operations and its cash
flows for the year and nine months then ended, respectively, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
November 15, 1996, except for Note 7, as
to which the date is November 25, 1996
F-34
<PAGE> 98
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash............................................................ $ -- $ 3,698,800
Accounts receivable, net of allowance for doubtful accounts..... 5,327,100 6,222,000
Accounts receivable from affiliates............................. 534,500 454,400
Inventories, net of allowance for excess and obsolete
inventory.................................................... 6,099,400 4,272,600
Prepaid expenses and other...................................... 86,900 418,100
----------- -----------
Total current assets.............................................. 12,047,900 15,065,900
Plant and equipment, net.......................................... 674,500 652,700
----------- -----------
$12,722,400 $15,718,600
=========== ===========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable................................................ $ 2,215,800 $ 2,591,600
Accrued liabilities............................................. 329,200 219,600
Accrued compensation and related benefits....................... 142,900 228,900
Amounts due affiliates.......................................... 11,634,600 14,339,700
----------- -----------
Total current liabilities......................................... 14,322,500 17,379,800
----------- -----------
Division equity................................................... (1,600,100) (1,661,200)
----------- -----------
$12,722,400 $15,718,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 99
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
STATEMENTS OF OPERATIONS AND DIVISION EQUITY
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Sales:
Non-affiliates.................................................. $27,896,100 $27,813,700
Affiliates...................................................... 1,779,800 1,263,900
----------- -----------
Total sales....................................................... 29,675,900 29,077,600
Cost of sales..................................................... 24,748,000 24,332,900
----------- -----------
Gross profit...................................................... 4,927,900 4,744,700
Selling, general and administrative expenses...................... 4,835,600 4,257,900
----------- -----------
Income from operations............................................ 92,300 486,800
Interest expense.................................................. 643,000 547,800
Other expenses, net............................................... (2,400) 100
----------- -----------
Loss before income taxes.......................................... (548,300) (61,100)
Provision for income taxes........................................ -- --
----------- -----------
Net loss.......................................................... (548,300) (61,100)
Division equity at the beginning of the period.................... (1,051,800) (1,600,100)
----------- -----------
Division equity at the end of the period.......................... $(1,600,100) $(1,661,200)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 100
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................... $ (548,300) $ (61,100)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation.................................................... 154,000 154,900
Provision for doubtful accounts................................. 114,800 13,100
Provision for excess and obsolete inventory..................... 132,900 87,500
Changes in assets and liabilities:
Accounts receivable.......................................... (1,564,600) (827,900)
Inventories.................................................. (955,600) 1,739,300
Prepaid expenses and other assets............................ (52,900) (331,200)
Accounts payable............................................. 764,100 375,800
Accrued liabilities.......................................... 163,400 (23,600)
Other, net................................................... -- 2,000
----------- ----------
Net cash flows provided by (used in) operating activities......... (1,792,200) 1,128,800
INVESTING ACTIVITIES:
Acquisition of plant and equipment................................ (475,700) (156,900)
Proceeds from disposal of plant and equipment..................... -- 21,800
----------- ----------
Net cash flows used in investing activities....................... (475,700) (135,100)
FINANCING ACTIVITIES:
Change in amounts due affiliates.................................. 2,267,900 2,705,100
----------- ----------
Net change in cash................................................ -- 3,698,800
Cash at the beginning of the period............................... -- --
----------- ----------
Cash at the end of the period..................................... $ -- $3,698,800
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 101
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
1. BUSINESS AND BASIS OF PRESENTATION
Aircraft Parts International (the "Company") is a division of AMR Combs,
Inc. ("AMR Combs"), a wholly-owned subsidiary of AMR Services Corporation ("AMR
Services"), and has no separate legal status or existence. Transactions with AMR
Services, American Airlines, Inc. ("American"), and AMR Eagle, Inc. ("AMR
Eagle"), all wholly owned subsidiaries of AMR Corporation ("AMR"), are described
in Note 3. The financial position, results of operations, and cash flows
reflected in the accompanying financial statements are not necessarily
indicative of the financial position, results of operations, or cash flows that
would have been obtained had the Company operated as a separate legal entity.
The Company is an aircraft parts distributor for more than 100 major
product lines of aircraft parts. API Technologies, the Company's licensed repair
station, offers brake and starter generator overhaul services and is an
authorized hose assembly manufacturing facility. The Company's centralized
distribution facility is located in Memphis, Tennessee.
The Company provides aircraft parts and services to over 3,000 customers
per year, including fixed base operators, certified repair stations, engine and
component overhaulers, fleet operators, government agencies, air cargo
operators, regional air carriers, and major airlines, primarily located in North
America. The Company is not dependent upon any single customer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of average cost or market, cost being
determined using first-in, first-out ("FIFO") method. Provisions are made in
each period for the estimated effect of excess and obsolete inventories. The
allowance for excess and obsolete inventory was $350,700, and $429,700 as of
December 31, 1995, and September 30, 1996, respectively. Such allowance was
based on management's best estimate, which is subject to change. Actual results
could differ significantly from this estimate.
Component Inventory Sales
The Company, through its licensed repair station, API Technologies, and
arrangements with third-party vendors, provides overhaul services on certain
core aircraft components, including brake and starter generator components. As
part of these services, a customer generally sends to the Company a used core
component of the same type that the customer is purchasing from the Company.
The Company records a sale for the value of the core and build-up of the
component at the time the component is shipped to the customer. No profit margin
is recognized on the sale of the core portion of the component sale as the
customer is granted a credit on return of a used core component. Profit is
recognized on any core sold when it is determined that the customer will not
send the Company a used core in exchange.
Plant and Equipment
Plant and equipment is stated at original cost less allowance for
accumulated depreciation. Plant and equipment transferred from affiliates is
recorded at the affiliate's net book value on the date of the transfer.
Expenditures for normal maintenance and repairs are charged to expense as
incurred.
F-38
<PAGE> 102
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
Depreciation of plant and equipment is computed using the straight-line
method over the estimated lives of the assets which range from three to ten
years. Equipment and property transferred from affiliates is depreciated over
the remainder of its original estimated useful life. Leasehold improvements are
amortized over the estimated life of the improvement.
Income Taxes
AMR Combs is included in AMR's consolidated United States federal income
tax return. Under the terms of AMR's tax-sharing policy, income taxes are
allocated to AMR subsidiaries and divisions as if the subsidiaries and divisions
were separate taxable entities. As such, amounts due affiliates would be charged
an amount equal to the income tax payments that the Company would have been
obligated to pay if it had filed separate income tax returns.
The Company computes its provision for deferred income taxes using the
liability method as if it were a separate taxpayer. Under this method, deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$234,000 and $108,800 for the year ended December 31, 1995, and the nine months
ended September 30, 1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. TRANSACTIONS WITH RELATED PARTIES
As a result of its relationship with AMR and its affiliates, including AMR
Combs and American, the Company has extensive related party transactions. These
transactions have been recognized on a basis determined by the parties, which
may not be representative of the terms the Company might have negotiated with
third parties.
The Company generally does not maintain separate cash deposits. American
funds disbursements on behalf of the Company and cash receipts by the Company
are generally transferred to American immediately, with a corresponding increase
or decrease in amounts due affiliates. In addition, amounts due affiliates is
immediately credited or charged upon the recording of certain transactions,
including the recognition of certain sales to affiliates and the payment of
certain expenses on behalf of the Company by American. Accordingly, no
receivables or payables for these transactions are reflected on the Company's
balance sheet. To the extent that American has provided funds to the Company and
paid expenses on behalf of the Company in excess of the amounts transferred to
American, the Company is charged interest at the average rate that American
earns on its short-term investments portfolio. The interest rate, which is reset
monthly, was 5.9% and 5.7% as of December 31, 1995, and September 30, 1996,
respectively.
F-39
<PAGE> 103
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
Interest expense on the amounts due affiliates was $636,600, and $546,600
for the year ended December 31, 1995, and the nine months ended September 30,
1996, respectively, and was charged directly to amounts due affiliates.
Sales to affiliates consist of aircraft parts sales to AMR Combs, AMR
Eagle, and American. Sales to affiliated companies are typically made on terms
and conditions similar to those of transactions with non-affiliates, except for
sales to AMR Combs which are made on a cost plus basis. Accounts receivable from
affiliates represent amounts owed to the Company for aircraft parts sales and
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Accounts receivable from:
AMR Combs....................................... $277,500 $ 196,500
AMR Eagle....................................... 101,400 64,900
American........................................ 62,800 85,600
Others.......................................... 92,800 107,400
-------- ---------
$534,500 $ 454,400
======== =========
</TABLE>
The Company is covered under the general and product liability insurance
programs of AMR Combs. The Company is allocated a portion of the premiums paid
by AMR Combs under its insurance programs utilizing a formula based on sales and
determined by AMR Combs. During the year ended December 31, 1995, and the nine
months ended September 30, 1996, the Company recognized expenses of $144,700 and
$112,800, respectively, related to its coverage under the AMR Combs general and
product liability insurance programs.
The Company's employees are covered under the AMR Services group health
insurance plan. The costs associated with the Company's participation in the AMR
Services group health plan are reimbursed to AMR Services by the Company. During
the year ended December 31, 1995, and the nine months ended September 30, 1996,
the Company recognized expenses of $143,300, and $111,300, respectively, related
to its participation in the AMR Services health plan.
The Company's employees are eligible for business travel on American and
AMR Eagle at rates stipulated by American and AMR Eagle. During the year ended
December 31, 1995, and the nine months ended September 30, 1996, the Company
recognized expenses of $53,500 and $45,400, respectively, for travel charges
from American and AMR Eagle.
The rates for a significant portion of the Company's shipping and
distribution costs are based on American's contracts with certain shipping and
distribution providers. During the year ended December 31, 1995, and the nine
months ended September 30, 1996, charges for such services totaled $1,101,300
and $1,226,200, respectively, of which $525,500 and $662,100 were billed to
customers. There can be no assurances that the Company would be able to obtain
similar rates for these services were it to cease being covered under American's
agreements.
4. CONCENTRATIONS OF RISK
The Company does not believe it has significant concentrations of credit
risk in its accounts receivable, which are unsecured. The Company performs
ongoing credit evaluations of its customers and maintains
F-40
<PAGE> 104
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
allowances which management believes are adequate for potential credit losses.
The allowance for doubtful accounts was $275,900 and $283,100 as of December 31,
1995, and September 30, 1996, respectively.
The Company's single largest supplier is The New Piper Aircraft Company
("Piper"). The Company has direct access to Piper parts because AMR Combs is one
of thirteen factory authorized domestic distributors of Piper parts. The sale of
Piper parts accounted for approximately seventeen percent of the Company's sales
to non-affiliates during the nine months ended September 30, 1996. The loss of
the Piper distributorship by AMR Combs or a decline in the availability of Piper
parts could have a material adverse impact on the Company's business, financial
condition, and results of operations.
The Company competes with several aviation parts distributors who, in the
aggregate, offer most of the same product lines to the same customers. Most
aviation manufacturers appoint two to fifteen parts distributors. Such
appointments are typically contracted on an annual basis and most can be
terminated at any time. There is little or no exclusivity given by manufacturers
and there are no assurances of contract renewals.
The Company has no foreign operations; however, export sales were
$3,590,100 and $2,485,600 for the year ended December 31, 1995, and the nine
months ended September 30, 1996, respectively. Accounts receivable from foreign
customers, all denominated in U.S. dollars, were $1,148,600 and $960,200 as of
December 31, 1995, and September 30, 1996, respectively. The majority of export
sales activities were in Canada and Central and South America.
5. PLANT AND EQUIPMENT
The cost and accumulated depreciation of plant and equipment were:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Office furniture, fixtures and equipment.......... $ 583,900 $ 641,900
Machinery and equipment........................... 502,100 534,000
Leasehold improvements............................ 205,200 205,200
---------- ----------
1,291,200 1,381,100
Less accumulated depreciation..................... 616,700 728,400
---------- ----------
$ 674,500 $ 652,700
========== ==========
</TABLE>
Rent expense was $167,100 and $128,400 for the year ended December 31,
1995, and the nine months ended September 30, 1996, respectively. The lease on
the Company's distribution facility contains a three year renewal option at
rates consistent with those paid during the nine months ended September 30,
1996.
6. INCOME TAXES
The Company has been included in AMR's consolidated United States federal
income tax return since its inception. Under the terms of AMR's tax sharing
policy, the Company computes its provision for income taxes as if it were a
separate taxpayer. Accordingly, the deferred tax assets and liabilities included
in these financial statements may not represent the deferred tax assets and
liabilities that the Company would retain were it to cease being included in the
consolidated federal income tax return of AMR.
The Company did not record an income tax provision for the year ended
December 31, 1995 or the nine months ended September 30, 1996, as the Company
incurred net operating losses in each period and recorded a valuation allowance
for the benefit of those net operating losses. As of September 30, 1996, the
Company
F-41
<PAGE> 105
AIRCRAFT PARTS INTERNATIONAL
(A DIVISION OF AMR COMBS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
had available under the terms of AMR's tax sharing policy approximately $667,000
of net operating loss carryforwards expiring in the years 2004 through 2110
available to reduce future federal taxable income.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 234,800 $ 226,600
Provision for excess and obsolete inventory..... 119,200 146,100
Accounts receivable............................. 97,500 58,400
Allowance for doubtful accounts................. 93,800 96,300
Accrued liabilities............................. 23,100 55,000
Other........................................... 43,700 46,500
Valuation allowance............................. (575,600) (589,000)
--------- ---------
Total deferred tax assets......................... 36,500 39,900
Deferred tax liability -- depreciation............ (36,500) (39,900)
--------- ---------
Net deferred tax asset............................ $ -- $ --
========= =========
</TABLE>
During the year ended December 31, 1995, and the nine months ended
September 30, 1996, the Company's valuation allowance for deferred tax assets
increased by $161,700 and $13,400 respectively.
7. SUBSEQUENT EVENT
On November 25, 1996, AMR Combs and First Aviation Services Inc. ("First
Aviation") entered into an asset purchase agreement providing for the
acquisition of certain assets and liabilities of the Company by a subsidiary of
First Aviation. The closing of the transaction will occur simultaneously with
the completion of an initial public offering by First Aviation of its Common
Stock.
F-42
<PAGE> 106
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 3
Summary Historical and Pro Forma
Financial Data...................... 5
Risk Factors.......................... 7
API Combs Acquisition................. 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Unaudited Pro Forma Combined Financial
Information......................... 18
Selected Financial Information........ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 32
Management............................ 46
Certain Transactions.................. 52
Principal Stockholders................ 54
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 58
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Additional Information................ 61
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,900,000 SHARES
FIRST AVIATION
SERVICES INC.
COMMON STOCK
[LOGO]
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
DILLON, READ & CO. INC.
------------------------------------------------------
------------------------------------------------------
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the
issuance and distribution of the Common Stock being registered. All amounts are
estimates except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...................... $ 16,310
NASD filing fee..........................................................
Nasdaq listing fee.......................................................
Accounting fees and expenses.............................................
Legal fees and expenses..................................................
Blue Sky qualification fees and expenses.................................
Printing and engraving expenses..........................................
Transfer agent and registrar fees........................................
D&O Insurance............................................................
Miscellaneous............................................................
----------
Total.......................................................... $
==========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the provisions of Section 145(a) of the Delaware General
Corporation Law, the Company has the power to indemnify anyone made or
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Company) because such person is
or was a director or officer of the Company against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in the defense or settlement of such action, suit, or
proceeding, provided that (i) such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the Company's best interest and
(ii) in the case of a criminal proceeding such person had no reasonable cause to
believe his conduct was unlawful.
With respect to an action or suit by or in the right of the Company to
procure a judgment in its favor, Section 145(b) of the Delaware General
Corporation Law provides that the Company shall have the power to indemnify
anyone who was, is, or is threatened to be made a party to any threatened,
pending, or completed action or suit brought by or in the right of the Company
to procure a judgment in its favor because such person is or was a director or
officer of the Company against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, provided that such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the Company's best interests,
except that no indemnification shall be made in a case in which such person
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall have determined upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses.
Indemnification as described above shall only be granted in a specific case
upon a determination that indemnification is proper under the circumstances
using the applicable standard of conduct which is made by (a) a majority of a
quorum of directors who were not parties to such proceeding, (b) independent
legal counsel in a written opinion if such quorum cannot be obtained or if a
quorum of disinterested directors so directs, or (c) the shareholders of the
Company.
II-1
<PAGE> 108
Section 145(g) of the Delaware General Corporation Law permits the purchase
and maintenance of insurance to indemnify directors and officers against any
liability asserted against or incurred by them in any such capacity, whether or
not the Company itself would have the power to indemnify such director or
officer against such liability. The Company has obtained such insurance and the
premiums therefor are paid by the Company.
The Certificate of Incorporation of the Company provides for the
indemnification of directors of the Company to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as the same may be amended
or supplemented. The Certificate of Incorporation further provides that the
indemnification provided for therein shall not be exclusive of any rights to
which those indemnified may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise.
The Certificate of Incorporation also contains a provision that eliminates
the personal liability of the Company's directors to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director.
The provision does not limit a director's liability for (i) breaches of duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith, involving intentional misconduct or involving knowing violations of law,
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law, or (iv)
transactions in which the director received an improper personal benefit.
Depending on judicial interpretation, the provision may not affect liability for
violations of the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company has entered into indemnification agreements with certain of its
directors that require the Company to indemnify such directors to the fullest
extent permitted by applicable provisions of law, provided that any settlement
of a third party action against a director or officer is approved by the
Company, and subject to limitations for actions initiated by the director or
officer, penalties paid by insurance and violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and similar laws.
The Form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters of the
Company and its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Act.
In March 1995, the Company made the following issuances:
1) 5 shares of its then-existing Series A Common Stock to First Equity
at a price of $200 per share; and
2) 500 shares of its then-existing Series A Preferred Stock to
Holladay-Tyler Printing Inc. ("Holladay") at a price of $500 per share.
In May 1995, the Company issued 500 shares of its then-existing Series A
Preferred Stock to Holliday at a price of $500 per share.
II-2
<PAGE> 109
In June 1995, the Company made the following issuances:
1) 2,495 shares of its then-existing Series A Common Stock to Holladay
at $200.40 per share;
2) 1,800 shares of its then-existing Series A Preferred Stock to
Holladay at $500 per share; and
3) 500 shares of its then-existing Series A Preferred Stock to First
Equity at $500 per share.
In connection with a recapitalization of the Company on December 20, 1996,
all of the Company's outstanding shares of Series A Common Stock and Series A
Preferred Stock were contributed to FAI, who then exchanged 2,500 shares of
then-existing Series A Common Stock and 3,300 shares of Series A Preferred Stock
for 551,000 shares of new Common Stock and 33,000 shares of new Series A
Preferred.
The Company relied on Section 4(2) of the Securities Act of 1933 with
respect to the private sales of its Series A Common Stock and Series A Preferred
Stock for the exemption from the registration requirements of such Act. The
Company relied on Section 3(a)(9) of the Securities Act of 1933 for the
exemption from the registration requirements of such Act with respect to the
recapitalization of the Company.
In June 1995, NAC issued warrants to purchase its common stock to
Canpartners. On December 20, 1996, the Company authorized an amendment to the
Warrant Agreement between NAC and Canpartners providing that the subject
warrants to purchase shares of NAC's Common Stock will become exercisable for
shares of the Company's Common Stock in the event of a public offering of the
Company's Common Stock which yields at least $10 million in proceeds to the
Company.
The Company relied on Section 4(2) of the Securities Act of 1933 for the
exemption from the registration requirements of such act with respect to the
warrants.
On January 31, 1997, the Company and the holder of the Company's
outstanding shares of Series A Preferred Stock agreed to the exchange of such
shares for shares of the Company's Common Stock concurrent with the closing of
an initial public offering at an exchange rate equal to the initial public
offering price per share of Common Stock. The Company is relying on Section
3(a)(9) of the Securities Act of 1933 for the exemption from the registration
requirements of such act with respect to the exchange of the Series A Preferred
Stock for shares of Common Stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------------------
<C> <S>
1.1 * Form of Underwriting Agreement
3.1 + Restated Certificate of Incorporation of the Company
3.2 + Restated Bylaws of the Company
4.1 * Specimen stock certificate
5.1 * Opinion of O'Melveny & Myers LLP
10.1 + Form of Director Indemnification Agreement between the Company and each of its
directors
10.2 + Loan and Security Agreement, dated June 13, 1996, by and between NAC and Fleet
Capital Corporation
10.3 + Amendment Number One to Loan and Security Agreement, dated September 1, 1996, by
and between NAC and Fleet
10.4 + Loan and Security Agreement, dated June 1, 1995, by and between NAC and
Canpartners Investments IV, LLC (as successor in interest to Canpartners
Investments III, L.P.) ("Canpartners")
10.5 + First Amendment to Loan and Security Agreement, dated June 13, 1996, by and
between NAC and Canpartners
</TABLE>
II-3
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------------------
<C> <S>
10.6 + Warrant Agreement, dated June 1, 1995, by and between NAC and Canpartners
10.7 + First Amendment to Warrant Agreement, dated June 13, 1996, by and between NAC and
Canpartners
10.8 + Second Amendment to Warrant Agreement, dated December 20, 1996, by and between NAC
and Canpartners
10.9 + Asset Purchase Agreement, dated November 25, 1996, by and between AMR Combs and
API Combs.
10.10+ Authorized Maintenance Center Agreement, effective as of November 14, 1994, by and
between NAC and Allison Engine Company (Model 501)
10.11+ Employment Agreement, dated as of December 20, 1996, by and between John F. Risko
and the Company
10.12+ Employment Agreement, dated as of December 20, 1996, by and between John Marsalisi
and the Company
10.13+ Post-Employment Consulting Agreement, dated January 17, 1992, by and between
Rajesh Sharma and NAC
10.14* 1996 Stock Option Plan
10.15+ 1996 Employee Stock Purchase Plan
10.16+ Lease, dated January 23, 1991, by and between NAC and the City of Oakland (main
building lease)
10.17+ First Supplement to lease, dated November 22, 1991, by and between NAC and the
City of Oakland (main building lease)
10.18+ Lease, dated January 23, 1991, by and between NAC and the City of Oakland (test
cells lease)
10.19+ Standard Industrial Lease-Net, dated November 26, 1996, by and between NAC (as
assignee) and Pacific Energy Resources, as amended
10.20+ Employment Agreement, dated as of December 20, 1996, by and between Michael C.
Culver and the Company
10.21+ Investment Advisory Services Agreement Relating to the API Combs Acquisition,
dated as of September 30, 1996, by and between First Equity and First Aviation
10.22+ Investment Advisory Services Agreement Relating to the Offering, dated as of
September 30, 1996, by and between First Equity and First Aviation
10.23+ Letter, dated as of December 20, 1996, by and between First Equity and First
Aviation regarding pursuit of acquisition opportunities
10.24+ Registration Rights Agreement, dated as of December 20, 1996, by and between the
Company and FAI
10.25+ Agreement and Plan of Merger, dated as of March 3, 1995, by and among the Company,
FE Acquisition Subsidiary, Triton Group Ltd. and NAC
10.26+ Amendment No. 1 to Agreement and Plan of Merger, dated as of June 1, 1995, by and
among the Company, FE Acquisition Subsidiary, Triton Group Ltd. and NAC
10.27+ Authorized Maintenance Center Agreement, effective as of November 30, 1994, by and
between NAC and Allison Engine Company (Model 250)
10.28+ Authorized Maintenance Center Agreement, effective as of December 31, 1995, by and
between NAC and Allison Engine Company (Model 570/571)
11.1 + Statement re: Computation of Earnings Per Share
21.1 + List of Subsidiaries
</TABLE>
II-4
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Ernst & Young LLP
23.2 Consent of Price Waterhouse LLP
23.3 * Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
24.1 + Power of Attorney
27.1 + Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
Set forth below is the financial statement schedule included as part of the
Registration Statement:
Schedule II
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
the registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Stamford, County of Fairfield, State of Connecticut, on the 4th day of
February, 1997.
FIRST AVIATION SERVICES INC.
By: JOHN A. MARSALISI
--------------------------------------
John A. Marsalisi
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------- --------------------------------------------------------
<S> <C> <C>
* Chairman of the Board February 4, 1997
-----------------------------------
Aaron P. Hollander
* Chief Executive Officer and Director February 4, 1997
----------------------------------- (Principal Executive Officer)
Michael C. Culver
* Chief Operating Officer and Director February 4, 1997
-----------------------------------
John F. Risko
JOHN A. MARSALISI Chief Financial Officer and Director February 4, 1997
----------------------------------- (Principal Financial and Accounting
John A. Marsalisi Officer)
*By: JOHN A. MARSALISI
-----------------------------------
John A. Marsalisi
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 113
SCHEDULE II
FIRST AVIATION SERVICES INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AS OF CHARGES TO CHARGES TO BALANCE
BEGINNING COSTS AND OTHER AS OF END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Year ended April 1, 1994
Allowance for Doubtful Trade
Receivables.......................... $500,000 $ 30,600 -- $ 30,600 $500,000
Year ended March 31, 1995
Allowance for Doubtful Trade
Receivables.......................... 500,000 132,000 -- 172,000 460,000
Two months ended May 31, 1995
Allowance for Doubtful Trade
Receivables.......................... 460,000 -- -- -- 460,000
Eight months ended January 31, 1996
Allowance for Doubtful Trade
Receivables.......................... 460,000 55,000 -- 237,000 278,000
Six months ended July 31, 1996
Allowance for Doubtful Trade
Receivables.......................... 278,000 38,000 -- -- 316,000
</TABLE>
S-1
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 * Form of Underwriting Agreement...........................................
3.1 + Restated Certificate of Incorporation of the Company.....................
3.2 + Restated Bylaws of the Company...........................................
4.1 * Specimen stock certificate...............................................
5.1 * Opinion of O'Melveny & Myers LLP.........................................
10.1 + Form of Director Indemnification Agreement between the Company and each
of its directors.........................................................
10.2 + Loan and Security Agreement, dated June 13, 1996, by and between NAC and
Fleet Capital Corporation................................................
10.3 + Amendment Number One to Loan and Security Agreement, dated September 1,
1996, by and between NAC and Fleet.......................................
10.4 + Loan and Security Agreement, dated June 1, 1995, by and between NAC and
Canpartners Investments IV, LLC (as successor in interest to Canpartners
Investments III, L.P.) ("Canpartners")...................................
10.5 + First Amendment to Loan and Security Agreement, dated June 13, 1996, by
and between NAC and Canpartners..........................................
10.6 + Warrant Agreement, dated June 1, 1995, by and between NAC and
Canpartners..............................................................
10.7 + First Amendment to Warrant Agreement, dated June 13, 1996, by and between
NAC and Canpartners......................................................
10.8 + Second Amendment to Warrant Agreement, dated December 20, 1996, by and
between NAC and Canpartners..............................................
10.9 + Asset Purchase Agreement, dated November 25, 1996, by and between AMR
Combs and API Combs. ....................................................
10.10+ Authorized Maintenance Center Agreement, effective as of November 14,
1994, by and between NAC and Allison Engine Company (Model 501)..........
10.11+ Employment Agreement, dated as of December 20, 1996, by and between John
F. Risko and the Company.................................................
10.12+ Employment Agreement, dated as of December 20, 1996, by and between John
Marsalisi and the Company................................................
10.13+ Post-Employment Consulting Agreement, dated January 17, 1992, by and
between Rajesh Sharma and NAC............................................
10.14* 1996 Stock Option Plan...................................................
10.15+ 1996 Employee Stock Purchase Plan........................................
10.16+ Lease, dated January 23, 1991, by and between NAC and the City of Oakland
(main building lease)....................................................
10.17+ First Supplement to lease, dated November 22, 1991, by and between NAC
and the City of Oakland (main building lease)............................
10.18+ Lease, dated January 23, 1991, by and between NAC and the City of Oakland
(test cells lease).......................................................
10.19+ Standard Industrial Lease-Net, dated November 26, 1996, by and between
NAC (as assignee) and Pacific Energy Resources, as amended...............
10.20+ Employment Agreement, dated as of December 20, 1996, by and between
Michael C. Culver and the Company........................................
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
10.21+ Investment Advisory Services Agreement Relating to the API Combs
Acquisition, dated as of September 30, 1996, by and between First Equity
and First Aviation.......................................................
10.22+ Investment Advisory Services Agreement Relating to the Offering, dated as
of September 30, 1996, by and between First Equity and First Aviation....
10.23+ Letter, dated as of December 20, 1996, by and between First Equity and
First Aviation regarding pursuit of acquisition opportunities............
10.24+ Registration Rights Agreement, dated as of December 20, 1996, by and
between the Company and FAI..............................................
10.25+ Agreement and Plan of Merger, dated as of March 3, 1995, by and among the
Company, FE Acquisition Subsidiary, Triton Group Ltd. and NAC............
10.26+ Amendment No. 1 to Agreement and Plan of Merger, dated as of June 1,
1995, by and among the Company, FE Acquisition Subsidiary, Triton Group
Ltd. and NAC.............................................................
10.27+ Authorized Maintenance Center Agreement, effective as of November 30,
1994, by and between NAC and Allison Engine Company (Model 250)..........
10.28+ Authorized Maintenance Center Agreement, effective as of December 31,
1995, by and between NAC and Allison Engine Company (Model 570/571)......
11.1 + Statement re: Computation of Earnings Per Share..........................
21.1 + List of Subsidiaries.....................................................
23.1 Consent of Ernst & Young LLP.............................................
23.2 Consent of Price Waterhouse LLP..........................................
23.3 * Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)...............
24.1 + Power of Attorney........................................................
27.1 + Financial Data Schedule..................................................
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our Firm under the caption "Experts" and to the
use of our report on the financial statements of Aircraft Parts International
dated November 15, 1996 (except Note 7 as to which the date is November 25,
1996) in Amendment 2 to the Registration Statement (Form S-1, No. 333-18647)
and related Prospectus of First Aviation Services Inc. for the registration of
4,485,000 shares of its common stock.
We consent to the reference of our Firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report on the financial statements of
First Aviation Services Inc. dated September 12, 1996 (except Note 12 as to
which the date is December 20, 1996), in Amendment 2 to the Registration
Statement (Form S-1, No. 333-18647) and related Prospectus of First Aviation
Services Inc. for the registration of 4,485,000 shares of its common stock.
Our audits also included the financial statement schedule of First Aviation
Services Inc. listed in Item 16 of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Ernst & Young LLP
San Francisco, California
February 4, 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
stockholder approval of the 6.4549 to 1 stock split and stock option and stock
purchase plans described in Note 12 to the consolidated financial statements.
/s/ Ernst & Young LLP
San Francisco, California
February 4, 1997
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to the Registration Statement on Form S-1 of our report dated
June 14, 1995 relating to the financial statements of National Airmotive
Corporation, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the years
ended March 31, 1994 and 1995 listed under item 16(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the references to us under the
heading "Experts" and "Selected Financial Information" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Information."
/s/ PRICE WATERHOUSE LLP
San Francisco, California
February 4, 1997
