UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 (No Fee Required)
For the fiscal year ended January 31, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
For the transition period from___________ to ____________
Commission File Number 0-2199
First Aviation Services Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1419064
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Riverside Avenue
Westport, Connecticut 06880-4214
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (203) 291-3300
(Office of the Secretary)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days or for such short period that the registrant was subject to such filing
requirements. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates as of
April 24, 1998 was approximately $24,984,368.
The number of shares outstanding of the registrant's common stock as of April
24, 1998 is 8,971,592 shares.
Documents incorporated by reference: None
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PART I
Item 1. Business
General
First Aviation Services, Inc. ("First Aviation" or the "Company") is a
worldwide leader in providing services to aircraft operators of some of the most
widely used military, commercial, and general aviation aircraft engines in the
world. The Company's operations include repair and overhaul of gas turbine
engines and accessories, remanufacturing of engine components and accessories,
and redistribution of new and remanufactured parts. With the acquisition of
Aircraft Parts International ("API") from AMR Combs, Inc. ("AMR Combs") (see
below), the Company has become one of the leading suppliers of aircraft engine
parts and other aircraft parts to the general aviation industry worldwide.
First Aviation was formed in March 1995 to acquire all of the stock of
National Airmotive Corporation (NAC). The acquisition was completed on June 1,
1995, and was accounted for under the purchase method of accounting. Through
NAC, the Company provides repair and overhaul services for several aircraft
engine types, including: (i) engines manufactured by the Allison Engine Company
("Allison"), a subsidiary of Rolls Royce USA, 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 used primarily for power co-generation and gas transmission. The
Company also is an industry leader in the remanufacture of serviceable engine
parts and components for use in engine overhauls, and, through API, as a general
aircraft parts supplier.
On March 5, 1997, Aircraft Parts International Combs, Inc., a majority
owned subsidiary of the Company ("API Combs"), completed the acquisition of API.
API distributes more than 100 major product lines of aircraft parts. API
Technologies, API's licensed repair station, offers brake and starter generator
overhaul services, and is an authorized hose assembly manufacturing facility.
The API acquisition was an initial step in meeting the Company's goal of
participating in the consolidation of the aviation services industry. API
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 to a new customer base.
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 and engine overhaul shops; (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.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
Statements which are not historical facts in this report constitute
forward looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements, including those
concerning the Company's expectations, all involve risk and uncertainties, which
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. Such factors include,
among others, the Company's ability to obtain parts from its principal supplier
on a timely basis, the ability to consummate suitable acquisitions, the ability
to expand its remanufacturing capabilities, and other items that are beyond the
Company's control and may cause actual results to differ from management's
expectations.
Industry Overview
Engine Repair and Overhaul. The Company believes that the current annual
worldwide market for gas turbine engine repair and overhaul services is in
excess of $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 numerous 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 U.S. Federal Aviation Administration (the
"FAA"), the Joint Airworthiness Administration (the "JAA") and the U.S.
Department of Defense (the "DOD"), and is supplemented by engine manufacturers'
guidelines which generally require that engines be
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overhauled and certain engine components be replaced after a certain number of
flight hours and/or cycles (take-offs and landings). 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. 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.
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 to the general
aviation market. 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. The
Company, through API, serves the general aviation sector of this market, which
includes regional airlines, business aviation, helicopter and recreational
operators.
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 that 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 range of services will benefit from this consolidation trend.
During the past year, a number of service providers have consolidated or
combined their operations. This is a trend that the Company believes will
continue.
Competition
Engine Repair and Overhaul. In the repair and overhaul market for Allison
Models 250 or T56/501, NAC competes primarily with other independent operators,
including the other Allison Authorized Maintenance Centers (each an "AMC")
located throughout the world. Management believes that its most significant
competitors in this market include: Standard Aero of Winnipeg, Canada; UNC
Airwork and Dallas Airmotive in the United States; Hunting of Manchester, United
Kingdom; and Singapore Aerospace of Singapore, each of which is an AMC in one or
more product lines. In addition, OEM's may establish joint ventures to compete
for large contracts that are subject to bid. 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.
Aviation Parts Sales. 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's major competitors include Aviall, Inc., AAR Corporation and Cessna
Aircraft Company (a subsidiary of Textron). There is also substantial
competition, both domestically and overseas, from companies who focus on
regional/niche markets, or on market segments of secondary interest. Examples of
these companies include 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
Airwork. The Company believes that the primary competitive factors in this
marketplace are price, quality, engineering and availability. The Company has
engineered and developed a significant number of Engineering Authorities, 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.
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Parts Distribution
Parts Sales. The Company, principally through API, sells more than 100
product lines and 80,000 new and factory reconditioned parts to professional
aircraft maintenance organizations. The parts are FAA approved and are acquired
from small, specialized manufacturers as well as major original equipment
manufacturers such as Allison, Champion Aviation Products, Goodyear, Michelin,
B.F. Goodrich, General Electric, Textron Lycoming, Teledyne Continental, Parker
Hannifin, AlliedSignal, Piper and Cessna. Most of the aforementioned suppliers
are committed to servicing aftermarket customers solely through wholesale
distributors such as API. Distributors add value to commonly available products
by offering immediate availability, broad product lines, technical assistance
and additional services. API 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.
Traditionally, overhaul companies remanufactured select 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 substantial discount to the cost of a new part. The
Company has increased its focus on the remanufacture of components and
accessories as a separate segment of its business, apart from its overhaul
business.
Computer-based Advanced Remanufacturing System (CARS)
The Company has made substantial expenditures to develop CARS. CARS has
been in use for approximately three 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. The Company has copyrighted its
self-developed software.
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 update parts catalogues manually 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.
Principal Supplier
During the year ended January 31, 1998 the Company derived more than 66%
of its revenues from the repair and overhaul of Allison engines and Allison part
sales. In prior years, the Company derived greater than 90% of its revenues from
Allison related services and parts sales. Allison continues limited production
of new Model T56/501 flight engines.
NAC principally services gas turbine engines manufactured by 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 T56/501
flight engine and the Model T56/501-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 AMC for the Model
250, pursuant to which it was given an exclusive territory in which to operate.
In 1983, NAC was appointed as an AMC for the Allison 570/571-K industrial
engines.
Allison modified its aftermarket support system for the Model 250 and
Model T56/501 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 "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 terms of
an agreement between Allison and the AMC (the "AMC Agreement") restrict the
establishment of an AMC's repair and marketing facilities to specific sites
identified in its AMC Agreement.
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NAC, pursuant to its three AMC Agreements with Allison, is authorized to
purchase parts from Allison and service designated Allison Model T56/501 flight
engines, Model 250 engines and Model 570/571-K industrial engines. The AMC
Agreements with Allison for the Model T56/501 and Model 250 were scheduled to
expire on December 31, 1997 and the AMC Agreement for the Model 570/571-K
expires on December 31, 1998. The AMC Agreements for the Model T56/501 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 three, three year renewal periods may renew the AMC agreements
for each of the additional three year periods for a renewal fee of $1 per three
year period. Renewal of the 570/571 AMC Agreement is subject to Allison's
discretion. 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 a material and adverse impact on the Company and its
operations.
On November 16 and 17, 1997 Allison notified NAC that it would extend the
term of the existing AMC Agreements for the Model T56/501 and Model 250 engines
to March 31, 1998. On March 16, 1997, Allison and NAC further agreed to extend
the term of such agreements until April 30, 1998.
In May 1998, Allison provided NAC, and all other "AMC's in good standing",
with proposed amendments to the AMC Agreements for the 250 and T56/501 engines.
As an "AMC in good standing", NAC has, in accordance with the terms of the
existing AMC Agreement of 1994, elected not to amend its existing AMC Agreements
for the Model 250 and Model T56/501 engines, but rather to exercise its option
to renew such agreements each for a period of three years. NAC notified Allison
on March 19, 1998 of its decision to renew the existing AMC Agreement for the
250 engine, and on April 22, 1998 of its decision to renew the existing AMC
Agreement for the T56/501 engines. Discussions between NAC and Allison are
continuing with respect to possible future amendments to these agreements as
well as to the AMC Agreement for the Model 570/571-K engines.
Sales and Marketing
Overhauls and Repairs. NAC uses direct sales personnel and agents for all
product lines. The Vice Presidents of each of the product lines supervise their
sales professionals, whose sales efforts are supported by the quality assurance
and engineering departments to aid in customer support. Senior management plays
an active role in marketing several of the Company's product lines. NAC's
professionals provide cost effective solutions to maintaining engines, stressing
NAC'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, and serves as host to groups
of engine operators at technical and other meetings.
Parts Distribution. New and serviceable parts are sold to overhaul
customers, parts resellers, regional airlines, FBO's, and business aviation,
helicopter and recreational operators. The Company uses regional sales managers,
inside salespersons, outbound telephone salespersons, independent contract
representatives, and associated distributors in its sales and marketing efforts.
ISO/9001 Certification. During the fiscal year, the Company's Oakland,
California facility became the first independent repair and overhaul facility in
the world to receive ISO/9001 certification. NAC has also been certified by the
DOD to the ISO/9001 standard for performance of work on DOD contracts.
Customers
The Company provides repair and overhaul services and sells parts to more
than 300 customers, which include both foreign and U.S. militaries, air cargo
carriers, major industrial corporations and others.
During the year ended January 31, 1998 and 1997, and the eight months
ended January 31, 1996, respectively, the Company's top 10 customers accounted
for approximately 31%, 45% and 45% of revenues. During the year ended January
31, 1998, no single customer's purchases exceeded 10% of the Company's revenues.
During the year ended January 31, 1997, revenues from System Control
Technologies represented 12.3% of Company's operating revenues. During the eight
months ended January 31, 1996, revenues from the U.S. government represented 18%
of the Company's operating revenues.
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Backlog
As of January 31, 1998, the total contract price of the backlog of orders
for repair and overhaul services was approximately $20.3 million.
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
JAA covering its repair and overhaul facilities. Under the authority of these
certifications, the Company is permitted to service all Allison engine 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 periodically must 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. The Company believes it is in
material compliance with applicable regulations. See Item 3, "Legal
Proceedings".
Environmental Matters and Proceedings
The Company's operations are subject to extensive federal, state and local
environmental laws and 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. The Company
believes that it is in material compliance with all federal, state, and local
laws and regulations governing its operations. The Company does not anticipate
that any material capital expenditures will be required during fiscal 1999 in
order to maintain compliance with the federal, state and local laws and
regulations.
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 cleanup costs pursuant
to Comprehensive Environmental Response, Compensation and Liability Act of 1980.
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 cleanup cost for the Superfund Site. The committee
demanded that NAC pay approximately $70,000 to join the committee handling the
cleanup 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 from property located in Miami, Florida (the "Miami Property") to
the Superfund Site between approximately 1969 and 1973. The Committee alleges
that DEC sent approximately 194,500 gallons of waste oil to the Superfund Site
and has estimated that the total cleanup costs for the Superfund Site allocable
to the Company could range from $0.75 to $1.25, per gallon. At this time, the
Company is unable to determine the accuracy of the Committee's cleanup cost
estimates or the likelihood that NAC will be required to contribute a portion of
such cleanup costs. In mid 1997 the Company advised the committee that it would
not join in funding cleanup of the site. Since then, neither the Company nor NAC
have received any communication from the committee. The Company will vigorously
contest the committee's allegations regarding the amount of waste oil allegedly
shipped by DEC to the Superfund Site.
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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. NAC has answered the complaint and
continues to contest the plaintiffs' allegations.
Employees
As of January 31, 1998, approximately 541 persons were employed on a
full-time basis by the Company. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that its relations with
its employees are good.
Item 2. Properties
The Company operates within the following facilities:
<TABLE>
<CAPTION>
Square Lease
Location Entity Description Footage Expiration
- -------- ------ ----------- ------- ----------
<S> <C> <C> <C> <C>
Westport, CT First Aviation Executive offices 2,000 2007
Oakland, CA (1) NAC Allison engine repair and
overhaul shop and offices 157,000 2015
Long Beach, CA NAC Allison engine and Pratt
& Whitney PT6 repair and
overhaul 28,500 1999
Long Beach, CA NAC Maintenance of McDonnell
Douglas helicopter components 3,000 Monthly
San Leandro, CA NAC Warehouse 8,900 1999
Indianapolis, IN (2) NAC Overhaul center 12,800 1998
Indianapolis, IN (2) NAC Overhaul center 12,300 1999
Indianapolis, IN (2) NAC Overhaul center 19,200 1998
Houston, TX (3) NAC Repair of industrial engines 15,000 Owned
Memphis, TN API Distribution/sales 80,000 2013
</TABLE>
(1) NAC owns the buildings at this location but leases the land on which
the structures are located.
(2) 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. The arrangement is
expected to terminate in May 1998. The Company will not be renewing
the leases.
(3) In November 1997, the Company purchased a 15,000 sq. foot facility
in Houston Texas. The property includes a two bay test cell that the
Company is in the process of outfitting with the appropriate test
equipment. The facility will
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support the Company's capabilities in the industrial engine market.
The Company is presently using the facility to support staff in
Houston who provide field and overhaul services to gas turbine users
for engines manufactured by Allison Engine Co. and other original
equipment manufacturers.
Item 3. Legal Proceedings
The Company's business exposes it to possible claims for personal injury,
death or property damage 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 March 1998, the Company's NAC subsidiary, along with a number of other
entities, was served with complaints asserting wrongful death claims deriving
from the crash of a Nomad 24 type aircraft on February 12, 1996 in
Port-au-Prince, Haiti. NAC was named as a defendant along with seven other
companies. The lawsuits assert claims for unspecified damages based on, as they
pertain to NAC, its alleged negligence, breach of implied warranty and failure
to warn in connection with an aircraft which NAC allegedly serviced, repaired or
maintained. The Company's insurance underwriter is coordinating the response to
these claims.
In December 1997, NAC was added as a defendant to an amended complaint
filed in Superior Court Los Angeles County, California by plaintiffs H.S.
Hubschrauberservice et. al. wherein they assert claims based upon fraud and
breach of express and implied warranty against non-NAC defendants deriving from
the sale of an allegedly defective helicopter. Plaintiffs have asserted that NAC
is liable as a successor in interest to California Airmotive Group and other
non-NAC corporate defendants. NAC has filed an answer denying the allegations of
the amended complaint applicable to NAC.
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 new
government surplus parts in repairing aircraft engines pursuant to FMS contracts
with the Air Force from 1987 through 1995. OSI investigated whether NAC used new
government surplus parts with knowledge that doing so was in violation of the
FMS contracts. Such a knowing and intentional violation of a government contract
could create a criminal or civil liability. 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 new surplus parts
and in some cases requested that the Company use certain new 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 new 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.
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 the Department
of Justice ("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. 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.
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 also Item 1, "Business-Environmental Matters and
Proceedings."
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In 1997, a former director and officer of the Company initiated litigation
in the Alameda County Superior Court, California, against the Company, NAC,
Aaron P. Hollander, Michael C. Culver, First Equity Development Inc. ("First
Equity") and First Equity Group Inc. This litigation alleges wrongful
termination, breach of contract, and various acts of fraud, deceit and
misrepresentation and seeks various damages, as well as common shares of the
Company. This litigation relates to the termination of the employment of the
plaintiff by the Company, NAC and First Equity, compensation matters relating to
employment of plaintiff and the claim by plaintiff of entitlement to a portion
of the outstanding shares of the Company.
The Company is involved in certain claims and lawsuits relating to
personnel matters which are incidental to its operations.
The Company is vigorously contesting each of the claims mentioned.
Management does not believe that the ultimate resolution of any of such claims
will have a material adverse effect on the Company's business, financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market Information. The Company's common stock trades on The NASDAQ Stock
Market under the symbol FAVS. The table below sets forth the quarterly high and
low sales prices for the Company's common stock as reported on the NASDAQ
Composite Tape since March 5, 1997, the date public trading commenced.
High Low
---- ---
First Quarter 11 3/4 8
Second Quarter 11 1/8 8 1/4
Third Quarter 11 7 5/8
Fourth Quarter 8 3/4 5 7/8
Holders. As of April 24, 1998, there were approximately eighteen holders
of record of the Company's common stock.
Dividends. 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 current or future debt obligations, as well
as other factors that the Board of Directors deems relevant. API's and NAC's
credit facilities prohibit the payment of cash dividends except with the
applicable lender's consent.
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<PAGE>
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and related Notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.
<TABLE>
<CAPTION>
Predecessor (2)
Twelve -------------------------
Fiscal Year Fiscal Year Months Fiscal Year Fiscal Year
(All amounts in thousands, except per share amounts) Ended Ended Ended Ended Ended
January 31, January 31, January 31, March 31, April 1,
1998 (1) 1997 1996 (2) 1995 1994
---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 153,642 $ 104,236 $ 92,857 $ 83,091 $ 92,513
Cost of sales 130,433 89,426 81,199 72,796 79,315
--------- --------- --------- --------- ---------
Gross profit 23,209 14,810 11,658 10,295 13,198
Selling, general and administrative expenses 14,827 9,881 8,578 9,362 8,536
--------- --------- --------- --------- ---------
Income from operations 8,382 4,929 3,080 933 4,662
Interest expense 1,842 3,470 3,249 1,807 1,076
Interest Income (357) -- -- -- --
Other expense 38 -- 801 1,302 519
--------- --------- --------- --------- ---------
Income (loss) before taxes and extraordinary items 6,859 1,459 (970) (2,176) 3,067
Income tax expense (benefit) 1,500 -- 90 (885) 1,046
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 5,359 1,459 (1,060) (1,291) 2,021
Extraordinary item (3) (108) (864) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 5,251 $ 595 $ (1,060) $ (1,291) $ 2,021
========= ========= ========= ========= =========
Dividends on preferred stock (4) 11 132
--------- ---------
Net income available to common stockholders $ 5,240 $ 463
========= =========
Net income (loss) per common share:
Basic net income per common share before
extraordinary item $ 0.63 $ 0.37
Extraordinary item (0.01) (0.24)
--------- ---------
Basic net income per common share $ 0.62 $ 0.13
========= =========
Weighted average shares outstanding 8,432 3,557
Net income (loss) per common
share - assuming dilution - before extraordinary item $ 0.61 $ 0.26
Extraordinary item (0.01) (0.17)
--------- ---------
Adjusted net income per common
share - assuming dilution $ 0.60 $ 0.09
========= =========
Weighted average shares
outstanding and assumed
conversions 8,698 5,194
Balance Sheet Data:
Working capital $ 53,735 $ 37,487 $ 31,413 $ 35,560 $ 30,379
Total assets 82,523 62,372 60,384 64,074 65,059
Current portion of long-term
debt -- 1,100 1,970 379 289
Long-term debt, less current
portion 13,866 32,794 27,005 18,660 10,963
Other long-term liabilities 1,041 2,119 3,601 2,168 2,243
Series A Preferred Stock -- 1,650 1,650 -- --
Total stockholders' equity $ 45,957 $ 6,281 $ 4,186 $ 35,024 $ 36,315
</TABLE>
11
<PAGE>
Notes to Selected Financial Data
(1) The financial information for the year ended January 31, 1998 includes the
results of API, which was acquired on March 5, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations".
(2) The historical data of NAC and the Company are not comparable in all
respects. The financial information presented for the twelve months ended
January 31, 1996 includes four months during which NAC was owned by its
former shareholder (the "Predecessor"). This information also includes the
eight months during which NAC was owned by the Company. The results of
operations for this period are as follows:
<TABLE>
<CAPTION>
Predecessor First Aviation Twelve-months
2/1/95 - 6/1/95 - Ended
5/31/95 1/31/96 January 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 24,338 $ 68,519 $ 92,857
Cost of sales 23,809 57,390 81,199
---------------- ---------------- ----------------
Gross profit 529 11,129 11,658
Selling general and
administrative expenses 3,229 5,349 8,578
---------------- ---------------- ----------------
Income (loss) from operations (2,700) 5,780 3,080
Interest expense 644 2,605 3,249
Other expense 801 -- 801
---------------- ---------------- ----------------
Income (loss) before tax and
extraordinary item (4,145) 3,175 (970)
Income tax expense (benefit) (1,210) 1,300 90
================ ================ ================
Net income (loss) $ (2,935) $ 1,875 $ (1,060)
================ ================ ================
</TABLE>
Due to the change in ownership and equity structure, income (loss) per
share data for these periods cannot be presented meaningfully.
(3) Represents extraordinary charges of $108, or $0.01 per share, for
prepayment penalties for the year ended January 31, 1998, and $864, or
$0.24 per share, for the write-off of prepaid financing costs and early
extinguishment charges for the year ended January 31, 1997, both in
connection with early extinguishments 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 undeclared preferred stock dividends. Accumulated but
undeclared preferred stock dividends were $132 for the fiscal year ended
January 31, 1997. Net income per common share for all periods, except as
shown, cannot be presented meaningfully due to the change in ownership and
equity structure.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, and selected
financial data of the Company included elsewhere in this Annual Report on Form
10-K.
General
On March 5, 1997, the Company completed an initial public offering of
3,900,000 shares of common stock, $0.01 par value per share (the "Offering").
The Company received net proceeds of approximately $34.5 million after deducting
expenses of approximately $4.5 million. The net proceeds were used for, among
other things, the repayment of term and subordinated debt, a paydown of the
Company's credit facility (for a total debt reduction of $22.6 million), payment
of accrued dividends on preferred stock ($0.2 million), and the acquisition of
API for $10.6 million.
Immediately prior to the closing of the Offering, the following
transactions were completed: (i) all outstanding shares of the Series A
Preferred Stock of the Company were converted into 165,000 shares of common
stock at the offering price, (ii) all outstanding warrants to purchase the
1,293,335 shares of the Company's common stock were exercised in full,
12
<PAGE>
(iii) the Company's certificate of incorporation was amended to increase the
authorized common stock of the Company to 25,000,000 shares, and (iv) a
6.4549-to-1 stock split with respect to common stock was effected. Accordingly,
all common share amounts have been restated to give effect to the 6.4549-to-1
stock split.
With the closing of the offering, the Company completed the acquisition of
API. The adjusted purchase price for API was $10.6 million in cash, including
expenses of approximately $0.5 million which were incurred in connection with
the acquisition. The acquisition was accounted for under the purchase method of
accounting as of the closing date. The purchase price, including acquisition
costs, was allocated to the assets and liabilities of API based upon their
relative fair values. The excess of purchase price paid over the value of the
net assets acquired was included in goodwill in the accompanying consolidated
balance sheets. The consolidated financial statements of the Company since March
5, 1997 reflect the impact of the results of operations of API as well as the
purchase price allocation.
In conjunction with the acquisition, AMR Combs purchased 10,407 shares of
API Combs Series A Cumulative Convertible Preferred Stock, $0.001 par value, at
a price of $100 per share. Total proceeds to the Company were $1,041,000. This
transaction is accounted for as a minority interest in the consolidated balance
sheets. Dividends of $4.00 per share are payable quarterly on the preferred
stock. Dividends of $38,000 accrued during the year ended January 31, 1998, and
have been reflected in minority interest in equity of its subsidiary in the
consolidated statements of operations.
Net sales 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. Net sales
of spare parts and components are recorded when parts are shipped. In the fiscal
years ended January 31, 1998 and 1997, and the twelve months ended January 31,
1996, revenues from the servicing, repair and overhaul of gas turbine engines
and original aircraft components accounted for approximately 59.8%, 81.8% and
75.3% of net sales, respectively, with revenue from the sale of spare parts and
components accounting for the remaining 40.2%, 18.2% and 24.7%, respectively of
net sales. The decrease in the percentage of revenues from servicing, repair and
overhaul, and the increase in percentage of revenues from the sale of spare
parts and components in the year ended January 31, 1998 is due to the
acquisition of API, which sells principally parts and components, and internal
growth at NAC.
On April 6, 1998 the Company announced that it had initiated a plan to
streamline operations at NAC, and took pre-tax restructuring charges of
approximately $1.7 million and other non-recurring charges of $1 million in the
first quarter. The economic impact of the restructuring is expected to
positively affect results beginning in the third quarter. The Company expects
that annual savings from the plan will approximate $3.4 million on a pretax
basis.
The plan to streamline NAC's operations includes the consolidation of the
Light Turbine business unit at the Long Beach, California facility as well as a
reduction in force of approximately 80 positions at its Oakland facility.
The Light Turbine business unit currently performs repair and overhaul
work of the Allison 250 engines at both the Oakland and Long Beach facilities.
Pratt & Whitney Canada PT6 gas turbines and Bell Helicopter rotating components
are serviced at the Long Beach facility. Consolidating the two operations is
expected to bring increased efficiency and focus, as well as improved customer
service.
The reduction in force at Oakland is a result of softness in the Large
Flight Engine business unit, and the consolidation of the Light Turbine
operations. The Large Flight Engine business unit's Allison T-56 repair and
overhaul business has slowed due to the deteriorating financial situation in
Asia and a postponement of inputs from customers primarily located in Middle
Eastern countries.
The Company's fiscal year ends January 31. Prior to their acquisitions,
NAC's fiscal year ended on the Saturday closest to March 31, and API's fiscal
year ended on December 31.
13
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentages
of the Company's net sales that certain income and expense items represent. The
results of API are included in the financial information for the fiscal year
ended January 31, 1998 which is presented and discussed below.
<TABLE>
<CAPTION>
Fiscal Year Twelve-months Twelve-months
Ended Ended Ended
January 31, 1998 January 31, 1997 January 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 84.9 85.8 87.4
---------------- ---------------- ----------------
Gross profit 15.1 14.2 12.6
Selling general and
administrative expenses 9.7 9.5 9.2
---------------- ---------------- ----------------
Income from operations 5.4 4.7 3.4
Interest expense 1.2 3.3 3.5
Interest income (0.2) -- --
Other income (expense) -- -- (0.9)
---------------- ---------------- ----------------
Income (loss) before tax and
extraordinary item 4.4 1.4 (1.0)
Income tax expense 1.0 -- 0.1
================ ================ ================
Net income (loss) before
extraordinary item 3.4% 1.4% (1.1)%
================ ================ ================
</TABLE>
Fiscal year ended January 31, 1998 compared to fiscal year ended January 31,
1997
Net sales for the fiscal year ended January 31, 1998 increased $49.4
million, or 47.4%, to $153.6 million from $104.2 million during the fiscal year
ended January 31, 1997. The growth in net sales was due to the acquisition of
API and a 5.2% increase in net sales at NAC. The increase in net sales at NAC
was due to a 4.2% increase in sales from the performance of engine repair and
overhauls, and a 9.8% increase in parts sales. During the fourth quarter of
fiscal 1998, the Company was adversely impacted by the financial downturn that
affected several countries in Asia and the Pacific Rim. As a result of economic
conditions in these countries, especially Thailand, Malaysia, and Japan, the
Company has experienced a reduction in the level of anticipated inputs for
engine overhauls and sales of parts and components. It is management's opinion
that the situation will continue for the foreseeable future.
Cost of sales increased $41.0 million, or 45.9%, to $130.4 million from
$89.4 million during the year ended January 31, 1988. The increase in cost of
sales was due principally to the acquisition of API, and the increase in sales
at NAC.
Total gross profit increased to 15.1% of net sales, compared to 14.2% for
the last fiscal year. A significant portion of the increase is due to the
acquisition of API. API is a distribution business and, as is typical in such
businesses, incurs less direct labor costs than a company such as NAC that
performs engine repair and overhaul services, which require a substantial amount
of direct labor cost. Consequently, gross profits at API are higher than those
at NAC, and the addition of API gross profits increased the Company's overall
gross profit percentage.
Selling, general and administration expenses increased $4.9 million, or
50.1%. This was due to the inclusion of API, offset by a reduction in expense at
NAC during the fiscal year ended January 31, 1998 compared to the prior fiscal
year. NAC's results for the fiscal year ended January 31, 1997 were negatively
impacted by a non-cash charge of $1.5 million for compensatory stock options and
a $0.2 million charge for bonus. These charges were not incurred during the
fiscal year ended January 31, 1998.
Interest expense decreased from the prior fiscal year by $1.6 million or
46.9%. The decrease was due principally to the $22.6 million reduction in
outstanding debt that was paid down from the proceeds of the Offering.
Interest income increased $0.4 million from the prior fiscal year as
interest was received from one of the Company's customers.
14
<PAGE>
During the fiscal year ended January 31, 1998, the Company incurred an
extraordinary charge, net of associated income tax benefits, of $0.1 million for
prepayment penalties associated with the early extinguishment of debt. This
compares to a net extraordinary charge of $0.9 million in the fiscal year ending
January 31, 1997 which also was due to an early extinguishment of debt.
Income taxes for the year ended January 31, 1998 increased $1.5 million.
The increase reflects the profitability of the Company offset by a reduction in
the valuation allowance.
Net income increased $4.7 million to $5.3 million for the fiscal year
ended January 31, 1998, compared to net income of $0.6 million for the fiscal
year ended January 31, 1997.
Fiscal year ended January 31, 1997 compared to the twelve months ended January
31, 1996
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, also are reported as part of the 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. The Predecessor 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 fiscal year ended January 31, 1997 increased $11.3
million, or 12.2%, to $104.2 million from $92.9 million during the twelve months
ended January 31, 1996. The growth in net sales was due primarily to the $15.3
million, or 22%, increase in revenue from repair and overhauls. This increase
was offset in part by a $3.9 million, or 17%, decrease in the level of parts
sold directly to customers due primarily to larger than normal parts orders from
two customers in the twelve months ended January 31, 1996.
Cost of sales increased $8.2 million during the fiscal year ended January
31, 1997 due to the increase in sales during that period. As a percentage of net
sales, cost of sales decreased 1.6% to 85.8% during the fiscal year ended
January 31, 1997 from 87.4% during the twelve months ended January 31, 1996.
This decrease was due primarily to charges of $1.0 million for inventory
obsolescence and $0.9 million for warranty and other accruals that were incurred
during the twelve months ended January 31, 1996.
The Company's total gross profit increased $3.2 million, or 27.4%, to
$14.8 million for the fiscal year ended January 31, 1997. As a percentage of net
sales, total gross profit increased 1.6% from 12.6% to 14.2% for the fiscal year
ended January 31, 1997. The profit margins, before other costs of goods sold,
from engine repair and overhaul services increased from 14.7% to 16.9% for the
fiscal year ended January 31, 1997, while profit margins on part sales declined
from 16.1% to 12.2%.
For parts ordered after September 1994, Allison reduced the Company's
discount from list price on over-the-counter parts sales by 60% for the T56/501
product line. For parts embodied in overhauls, Allison reduced the discount from
list price by 20% for the T56/501 engine, and by 20% for the 250 engine. The
decrease in profit margins on over-the-counter parts sales for the fiscal year
ended January 31, 1997 was largely the result of the change in Allison's
arrangements with its AMC's. Profit margins for the fiscal year ended January
31,1997 reflect the full implementation of changes in Allison's arrangements
with its AMCs. Due to increased levels of productivity, profit margins for
engine repair and overhaul services increased during the fiscal year ended
January 31, 1997 despite the adverse effect of the change in Allison's parts
discounts.
The Company's total gross profit margins for the fiscal year ended January
31, 1997 reflect a reduction of $0.4 million of other cost of goods sold
compared to the twelve months ended January 31, 1996, primarily due to a $1.0
million inventory obsolescence charge and other related expenses incurred during
the twelve months ended January 31, 1996. During the fiscal year ended January
31, 1997 unfavorable production variances of $0.6 million were attributed
primarily to increased levels of training costs associated with the increase in
the direct labor force.
Selling, general and administrative expenses for the fiscal year ended
January 31, 1997 increased by $1.3 million, or 15.1%, to $9.9 million from $8.6
million for the twelve months ended January 31, 1996. The increase is due
primarily to the $1.5 million non-cash charge for compensatory stock options and
a $0.2 million charge for bonus. This was offset in part by
15
<PAGE>
a charge of $0.2 million incurred during the twelve months ended January 31,
1996 for a lump sum settlement to eliminate longevity pay to certain personnel.
Interest expense for the fiscal year ended January 31, 1997 increased $0.3
million to $3.5 million from $3.2 million for the twelve months ended January
31, 1996. The 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 fiscal year ended January
31, 1997. During the twelve months ended January 31, 1996, 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.
During the fiscal year ended January 31, 1997 the Company incurred an
extraordinary charge, net of associated income tax benefit, of $0.9 million due
to the early extinguishment of debt.
Net income increased by $1.7 million to $0.6 million for the fiscal year
ended January 31, 1997, compared to a loss of $1.1 million for the twelve months
ended January 31, 1996.
Liquidity and Capital Resources
The Company utilized the net proceeds from the Offering to complete the
acquisition of API for $10.6 million in cash, to pay down $22.6 million of the
credit facility and term loans of NAC, and for general working capital needs.
The Company also retired the $1.8 million 15% subordinated note due to
Canpartners Investments IV, LLC ("Canpartners"), and paid $231,000 of
accumulated and unpaid dividends on the Company's Series A Preferred Stock. The
preferred was converted into common stock as part of the Offering. In connection
with the retirement of the subordinated note, the Company recorded an
extraordinary after tax charge of $108,000 for prepayment penalties.
First Aviation's aggregate capital expenditures for the fiscal years ended
January 31, 1998 and 1997, and the ten months ended January 31, 1996 were $2.4
million, $1.0 million, $1.1 million, respectively, exclusive of acquisition
costs of API. Management anticipates that capital expenditures for fiscal 1999
will aggregate approximately $4.2 million, exclusive of any costs of
acquisitions. These expenditures will be used to fund the purchases of tooling,
test equipment, and data processing equipment, the construction of a test cell
and the expansion and modernizations of the Company's distribution and logistics
capabilities. Management expects to fund these capital expenditures from cash
flows from operations and from borrowings.
The Company's cash flows (deficit) from operations for the fiscal years
ended January 31, 1998 and 1997, and the ten months ended January 31, 1996 was
$(2.2) million, $(3.7) million, and $2.2 million, respectively. Cash used for
investing during these same periods, including acquisitions, was $13.0 million,
$1.3 million, and $13.9 million, respectively, while cash generated by financing
activities was $15.4 million, $5.0 million, and $11.6 million, respectively.
In June 1996, NAC entered into a $40.0 million credit agreement.
Borrowings under this 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 after tax charge of $864,000 for prepayment
penalties and the write-off of the unamortized balance of loan fees.
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 $2.5 million. At January
31, 1998, borrowings under the revolving portion of the credit facility amounted
to $13.9 million and carried an interest rate of 8.15%. The original term of the
credit facility is through May 15, 1999. A termination of the facility prior to
that date requires the payment of a prepayment penalty of $400,000. Thereafter
the agreement automatically renews for additional one-year periods.
The credit agreement contains a number of covenants, including
restrictions on mergers, consolidations and acquisitions, the incurrence of
indebtedness, transactions with affiliates, the creation of liens, limitations
on capital expenditures, and payment of management fees. The credit agreement
also requires NAC to maintain minimum levels of net worth, specified interest
expense coverage ratios and minimum backlog levels, and currently restricts the
payment of dividends from NAC to the Company without the lender's consent.
Substantially all of NAC's assets are pledged as collateral under the revolving
line of credit.
16
<PAGE>
In connection with the API acquisition, First Aviation, API Combs and AMR
Combs entered into a Stockholders Agreement. Pursuant to this agreement, AMR
Combs agreed that it would not sell its shares of the Preferred Stock or the
shares of API Combs common stock into which such Preferred shares are
convertible (collectively the "API Acquisition Shares") for a minimum period of
three years. API Combs has the right to redeem the API Acquisition Shares at any
time. AMR Combs has the right to cause the Company to repurchase the API
Acquisition Shares commencing three years after the closing of the API
acquisition. The redemption price is equal to the fair market value of the API
Acquisition Shares as determined by an independent appraisal. The Stockholders
agreement also contains certain other rights, including: (i) a right of first
refusal on the part of First Aviation with respect to any proposed sale of the
API 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 Acquisition Shares. The demand registration
rights are not exercisable until three years after the closing of the API
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 Acquisition Shares. The
Company has no plans to cause API Combs to conduct a public offering of its
securities.
On April 23, 1998, API entered into a one year $10 million revolving
credit facility with Fleet National Bank. Advances under the credit facility
bear interest, at the Company's option, at (i) a variable rate per annum equal
to the prime rate, or (ii) a variable rate equal to the cost of funds rate plus
1.5% or (iii) at a fixed rate equal to the LIBOR rate plus 1.5%. The credit
agreement contains a number of covenants, including restrictions on mergers,
consolidations and acquisitions, the incurrence of indebtedness, transactions
with affiliates, the creation of liens, and limitations on capital expenditures.
The credit agreement also requires API to maintain minimum levels of net worth
and specified interest expense coverage ratios, and currently restricts the
payment of dividends. Substantially all of API's accounts receivable, inventory
and equipment are pledged as collateral under the revolving credit facility.
The Company believes that its cash flow from operations, combined with
borrowings available under its existing and new lines of credit, will be
sufficient to meet its current and anticipated cash operating requirements,
including scheduled interest and principal payments, capital expenditures,
preferred dividend requirements and working capital needs through the end of the
fiscal year ending January 31, 1999. The Company currently is in compliance with
all of its debt covenants.
Year 2000. The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in miscalculations and or system failures. Management
estimates that the cost to the Company of addressing the potential problems is
approximately $400,000, and it is not expected to have a material adverse effect
on the Company's overall financial position. The majority of this charge is
expected to be incurred, and will adversely affect the results of operations and
cash flow during this the fiscal year ended January 31, 1999. Moreover, if the
Company or its vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.
Inflation
The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States has had or will have
a significant effect on its revenues or operations.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements, which appears on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company are as follows:
Name Age Positions
- ---- --- ---------
Aaron P. Hollander 41 Chairman of the Board
Michael C. Culver 47 President, Chief Executive Officer and Director
John A. Marsalisi 42 Chief Financial Officer, Secretary and Director
Gerald Schlesinger 53 Senior Vice President
Joshua S. Friedman 42 Director
Robert L. Kirk 68 Director
Charles Ryan 47 Director
Aaron P. Hollander has served as Chairman of the Company since March 1995.
Mr. Hollander became a director of NAC in June 1995. In 1985, Mr. Hollander
co-founded First Equity Development Inc. ("First Equity"), an aerospace
investment and advisory firm, and has served as Co-Managing Director since that
time.
Michael C. Culver has served as a Director and Chief Executive Officer of
the Company since March 1995. Mr. Culver became a director of NAC in June 1995
and Chairman in August 1996. In 1985, Mr. Culver co-founded First Equity, along
with Mr. Hollander, and has served as Co-Managing Director since that time.
John A. Marsalisi has served as a Director and Chief Financial Officer and
Secretary of the Company since March 1995. He has been an officer of First
Equity since 1996. 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.
Gerald Schlesinger became Senior Vice President upon his employment by the
Company in June 1997. From 1993 to 1997, Mr. Schlesinger was affiliated with the
SK Group and served as its Managing Principal. The SK Group provides consulting
and management advisory services to its clients. Prior to 1993, Mr. Schlesinger
served as Executive Vice-President, CFO and CIO for Butler Aviation.
Joshua S. Friedman became a Director in March 1997. Mr. Friedman has been
an executive officer of Canyon Capital Management L.P. and various related or
predecessor entities ("Canyon Capital") since their inception in 1990. Canyon
Capital is a merchant banking and money management firm which Mr. Friedman
co-founded and which is an affiliate of Canpartners, a former subordinated
creditor and warrant holder of the Company. From 1984 to 1990, Mr. Friedman was
an Executive Vice President and Co-Director of 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 became a Director in March 1997. Since 1992, Mr. Kirk has
been the Chairman of British Aerospace Holdings, Inc., an international
aerospace corporation. Mr. Kirk served as Chairman and Chief Executive Officer
of CSX 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 B. Ryan became a Director in March 1997. Since 1982, Mr. Ryan has
been 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.
18
<PAGE>
Board Committees
The Board of Directors has established an Audit Committee, a Compensation
Committee and an Executive Committee. The Audit Committee is composed of Messrs.
Hollander and Ryan. The Audit Committee reviews the Company's annual audit
results and meets with the Company's independent auditors to review the
Company's internal controls and financial management practices. The Compensation
Committee is composed of Messrs. Hollander and Kirk. The primary function of the
Compensation Committee is to review and make recommendations to the Board with
respect to compensation of the Company's officers, including bonuses. The
Company's Executive Committee is composed of Messrs. Culver and Hollander. 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.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain information for the fiscal years
ended January 31, 1998 and 1997, and the twelve months ended January 31, 1996,
regarding compensation awarded to, earned by, or paid to the Company's Chief
Executive Officer and each of the other executive officers of the Company, and
one executive of a subsidiary whose compensation exceeded $100,000.
<TABLE>
<CAPTION>
Name Period Salary Bonus Other Options
- ----------------------- ----------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael C. Culver FYE 1/31/98 $180,000
Chief Executive Officer FYE 1/31/97 23,000
12-months ended 1/31/96 N/A (1)
John F. Risko (3) FYE 1/31/98 $ 78,886 $108,604
FYE 1/31/97 187,887(2)
12-months ended 1/31/96 N/A(1)
FYE 1/31/98 $155,000
John A. Marsalisi FYE 1/31/97 20,000
Chief Financial Officer 12-months ended 1/31/96 N/A(1)
Gerald E. Schlesinger FYE 1/31/98 $99,167 $40,000
Senior Vice President
Rajesh Sharma FYE 1/31/98 $170,000
FYE 1/31/97 165,416 $250,000 $ 4,655 $1,500,000(4)
12-months ended 1/31/96 130,358 8,185 20,670
</TABLE>
(1) The Company was formed in March 1995 to acquire NAC. None of the
executive officers of the Company received any employment
compensation from the Company or NAC during the twelve months ended
January 31, 1996.
(2) The salary payments to Mr. Risko reduced, dollar for dollar, the
amount of the $300,000 annual management fee NAC paid to First
Equity for management services. The obligation to pay a management
fee to First Equity terminated upon consummation of the Offering.
(3) Mr. Risko's employment by the Company was terminated on June 9,
1997, and he resigned as a director on June 24, 1997.
(4) The Company has granted to Mr. Sharma, the Chief Operating Officer
of NAC, options to purchase 150,000 shares of the Company's common
stock at an exercise price of $.01 per share. Mr. Sharma elected to
exercise 40,000 options on April 13, 1998.
19
<PAGE>
Option Grants in the Last Fiscal Year
The following table sets forth information regarding the stock options
that were granted during the last fiscal year to each of the officers named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted
Options to Employees in Exercise of Grant Date
Name Granted Fiscal year Base Price Expiration date Valuation
- ----------------- ------------ --------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Michael C. Culver None N/A N/A N/A N/A
John E. Risko (1) None N/A N/A N/A N/A
John A. Marsalisi 40,000 18% $10 2007 $10
Jerry Schlesinger 50,000 22.5% $10 2007 $10
Rajesh Sharma None N/A N/A N/A N/A
</TABLE>
(1) Mr. Risko's employment by the Company was terminated on June 9,
1997, and he resigned as a director on June 24, 1997.
Aggregated Option Exercises in the Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth the aggregate positions in stock options at
January 31, 1998 held by each of the officers named in the Summary Compensation
Table.
Number of Securities Value of Unexcercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End at Fiscal Year End
Name Exercisable/Unexercisable Excercisable/Unexcercisable
- ---------------- ------------------------- ---------------------------
Michael C. Culver None/None N/A
John F. Risko (1) None/None N/A
John A. Marsalisi None/40,000 N/A
Gerald E. Schlesinger None/50,000 N/A
Rajesh Sharma (2) 150,000/None $1,012,500
(1) Mr. Risko's employment by the Company was terminated on June 9,
1997, and he resigned as a director on June 24, 1997.
(2) On April 13, 1998, Mr. Sharma elected to exercise 40,000 options.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
In December 1996, First Aviation entered into employment agreements with
Michael C. Culver and John A. Marsalisi. Mr. Culver'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 and $155,000,
respectively. In July 1997, First Aviation entered into a three-year employment
agreement with Gerald E. Schlesinger. The agreement provides for a base salary
of $170,000 subject to adjustment at the discretion of the Board of Directors.
Each of the 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 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.
20
<PAGE>
Mr. Culver, Mr. Marsalisi and Mr. Schlesinger 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 his employment by First Aviation and
not to solicit employees or customers of First Aviation for a period of six
months following the end of his employment with First Aviation.
First Aviation also entered into an employment agreement with John Risko
in December 1996 on substantially the same terms as those described for Mr.
Culver. Mr. Risko's employment by the Company was terminated on June 9, 1997,
and he resigned as a director on June 24, 1997.
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, equivalent to his annual base salary 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.
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. The fees are payable quarterly in cash or stock. No
director of the Company receives any fees for attendance at meetings of the
Board of Directors or committees thereof, although members of the Board do
receive reimbursement for actual expenses of such attendance. Messrs. Hollander,
Kirk and Ryan have directed that their directors' fees are to be paid in stock.
21
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of April 24, 1998, (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
officers named in the Summary Compensation Table, 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 15
Riverside Avenue Westport, Connecticut 06880.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
- -------------------- -------------------- ----------------
FAS Inc. ("FAI")(1) 3,721,665 41.5%
Canpartners Investments IV, LLC(2) 1,293,335 14.4%
9665 Wilshire Boulevard
Suite 200
Beverly Hills, California 90212
The Wynnefield Group(3)
One Penn Plaza, Suite 4720
New York, NY 10119 958,300 10.7%
Wellington Management Company, LLP
75 State Street
Boston, MA 02109 882,000 9.8%
Aaron P. Hollander(1) 3,743,648 41.7%
Michael C. Culver(1) 3,743,648 41.7%
John F. Risko(4) -- --
2461 Roscomare Road
Los Angeles, CA 90077
John A. Marsalisi 2,362 --
Gerald E. Schlesinger -- --
Aircraft Parts International
3778 Distriplex Drive North
Memphis, TN 38118
Rajesh Sharma(5) 31,764 0.4%
National Airmotive Corporation
7200 Earhart Road
Oakland, California
Joshua S. Friedman(6) -- --
Robert L. Kirk 7,433 --
Charles B. Ryan 11,983 --
All directors and executive
officers as a group (9 persons) 3,797,190 42.3%
(1) Aaron P. Hollander and Michael C. Culver own, in the aggregate, all
of the outstanding shares of First Equity Group Inc. First Equity
Group Inc. indirectly owns all the outstanding shares of common
stock of FAI. In addition to the shares of the Company owned by FAI,
21,983 shares of the Company are owned directly by First Equity
Group Inc.
(2) Canpartners Incorporated is a Managing Member of Canpartners. Mr.
Friedman, Mitchell R. Julis and R. Christian B. Evenson are the sole
shareholders and directors of Canpartners 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.
(3) The Wynnefield Group is composed of the Wynnefield Partners Small
Cap Value, L.P., Channel Partnership II L.P., Wynnefield Small Cap
Value Offshore Fund, Ltd., and the Wynnefield Small Cap Value, L.P.
I.
(4) Mr. Risko's employment by the Company was terminated on June 9, 1997
and he resigned as a Director on June 24, 1997. See "Legal
Proceedings" for a description of certain claims by Mr. Risko
relating to the ownership of shares of the Company.
(5) On April 13, 1998, Mr. Sharma exercised 40,000 stock options.
22
<PAGE>
(6) 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 Canpartners Incorporated, a 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.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Exchange Act requires the Company's directors,
executive officers and ten percent shareholders to file initial reports of
ownership and reports of changes in ownership of the Company's common stock with
the Securities and Exchange Commission. Directors, executive officers and ten
percent shareholders are required to furnish the Company with copies of all
Section 16 (a) forms that they file. Based upon a review of these filings, the
Company notes that Messrs. Hollander, Culver, Marsalisi and Risko inadvertently
failed to file their Form 3s on a timely basis upon the consummation of the
Offering. Messrs. Hollander, Culver and Marsalisi made their filings on March 7,
1997 and Mr. Risko made his filing on May 10, 1997.
Item 13. Certain Relationships and Related Transactions
On June 1, 1995, in connection with the Company's acquisition of NAC from
Triton Group Ltd., the Company issued 33,000 shares of its Series A Preferred
Stock to FAS Inc. ("FAI") for an aggregate price of $1,650,000 and issued
3,556,665 shares of its Common Stock for an aggregate price of $551,000. In
connection with the closing of the Offering, the Company's face value $1,650,000
Series A Preferred Stock held by FAI was exchanged for 165,000 shares of common
stock.
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 Item 10 "Directors and Executive Officers of Registrant."
Pursuant to the Loan Agreement, Canpartners made a $3,000,000 loan (the
"Subordinated Debt") to NAC which was subordinated in right of payment to NAC's
credit facility. The Subordinated Debt bore interest at the rate of 15% per
year, required 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 Canpartners to purchase 1,832,225 shares of its Common
Stock at an exercise price of $0.0545 per share. 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 canceled. Pursuant to the Second Amendment to
Warrant Agreement, dated December 20, 1996, the remaining warrants held by
Canpartners became exercisable for and were exercised for shares of the
Company's common stock at an exercise price of $0.0545 per share upon
consummation of the Offering. A portion of the proceeds of the Offering were
utilized to retire the remaining debt with Canpartners.
On September 30, 1996, the Company entered into two agreements with First
Equity whereby First Equity was to provide certain investment advisory services
in connection with the Offering as well as to provide advice with respect to,
and to negotiate for the API acquisition. Upon the closing of the Offering,
First Equity was 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
acquisition. First Equity may render other investment advisory services to the
Company in the future. If it does, 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 the agreement,
First Equity 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. 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.
23
<PAGE>
The Company subleases from First Equity approximately 2,000 square feet of
office space in Westport, Connecticut. The sublease, which became effective
April 21, 1997, is for a period of ten years, and is cancelable by either party
with six months notice. The Company has the option to renew the sublease for two
additional five-year periods. Monthly payments under this sublease currently are
approximately $5,000.
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements and Schedules
See Index to Consolidated Financial Statements, which appears on Page
F-1 hereof
(2) Financial Statement Schedule II - Valuation and Qualifying Accounts,
which appears on Page F-24 hereof.
(b) Form 8-K
No reports on Form 8-K were filed by the registrant during the fourth
quarter of fiscal 1998.
(c) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1+ Restated Certificate of Incorporation of the Company
3.2+ Restated Bylaws of the Company
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 T56/501)
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
24
<PAGE>
10.13+ Post-Employment Consulting Agreement, dated January 17, 1992, by
and between Rajesh Sharma and NAC
10.14+ Stock Option Plan
10.15+ 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) 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+ Amended and Restated Registration Rights Agreement, dated as of February
21, 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)
10.29+ Registration Rights Agreement, dated as of February 21, 1997, by
and between the Company and Canpartners
10.30+ Sublease Agreement, dated as of December 31, 1996, between First Equity
and the Company
10.31+ Letter Agreement between FAI and the Company regarding the exchange of
Series A Preferred Stock for Common Stock of the Company
10.32f Letter, dated as of November 13, 1997 by and between Allison Engine Co.
and National Airmotive Corporation regarding the extension of the A250
Authorized Maintenance Agreement until March 31,1998
10.33f Letter, dated as of November 14, 1997 by and between Allison Engine Co.
and National Airmotive Corporation regarding the extension of the T56/501
Engine Authorized Maintenance Agreement until March 31,1998
10.34 Letter, dated as of March 5, 1998, by and between Allison Engine Co. and
National Airmotive Corporation regarding the extension of the A250 Engine
Authorized Maintenance Agreement until April 30, 1998
25
<PAGE>
10.35 Letter, dated as of March 13, 1998, by and between Allison Engine Co. and
National Airmotive Corporation regarding the extension of the T56/501
Engine Authorized Maintenance Agreement until April 30, 1998
10.36 Letter, dated as of March 19, 1998, by and between National Airmotive
Corporation and Allison Engine Corporation wherein National Airmotive
elects to extend the Authorized Maintenance Center Agreement, effective
November 30, 1994, by and between NAC and Allison Engine Company (Model
250)
10.37 Letter, dated as of April 22, 1998, by and between National Airmotive
Corporation and Allison Engine Corporation wherein National Airmotive
elects to extend the Authorized Maintenance Center Agreement, effective
November 30, 1994, by and between NAC and Allison Engine Company (Model
T56/501)
10.38 Loan and Security Agreement, dated April 23, 1998 by and between API and
Fleet National Bank
10.39 Amendment to the First Aviation Services Stock Incentive Plan
21.1+ List of Subsidiaries
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedules for the years ended January 31, 1998 and
1997, and the eight months ended January 31, 1996
+ Incorporated by reference and filed as an Exhibit to the Company's
Registration Statement on Form S-1 (No. 333-18647), as amended.
f Incorporated by reference and filed as an Exhibit to the Company's
Quarterly Report on Form 10Q for the quarter ended October 31, 1997.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has fully caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on May 1, 1998.
FIRST AVIATION SERVICES INC.
By: /s/ John A. Marsalisi
---------------------
John A. Marsalisi
Chief Financial Officer
Signature Title Date
- --------- ----- ----
/s/ Aaron P. Hollander Chairman of the Board May 1, 1998
- ----------------------
Aaron P. Hollander
/s/ Michael C. Culver Chief Executive Officer and May 1, 1998
- --------------------- Director (Principal Executive
Michael C. Culver Officer)
/s/ John A. Marsalisi Chief Financial Officer and May 1, 1998
- --------------------- Director (Principal Financial and
John A. Marsalisi Accounting Officer)
/s/ Joshua S. Friedman Director May 1, 1998
- ----------------------
Joshua S. Friedman
/s/ Robert L. Kirk Director May 1, 1998
- ------------------
Robert L. Kirk
/s/ Charles B. Ryan Director May 1, 1998
- -------------------
Charles B. Ryan
27
<PAGE>
First Aviation Services Inc.
Consolidated Financial Statements
For the years ended
January 31, 1998 and 1997,
the eight-month period
ended January 31, 1996, and
the two-month period ended May 31, 1995
Contents
Report of Independent Auditors...............................................F2
Consolidated Financial Statements
Consolidated Balance Sheets..................................................F3
Consolidated Statements of Operations........................................F4
Consolidated Statements of Stockholders' Equity..............................F5
Consolidated Statements of Cash Flows.....................................F6-F7
Notes to Consolidated Financial Statements...............................F8-F23
Schedule II - Valuation and Qualifying Accounts.............................F24
F1
<PAGE>
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, 1998 and 1997, and the consolidated statements
of operations, stockholders' equity, and cash flows for the years ended January
31, 1998 and 1997, the eight-month period ended January 31, 1996 and the
two-month period ended May 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with 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 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years ended January 31,
1998 and 1997, the eight-month period ended January 31, 1996 and the two-month
period ended May 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 15, 1998,
except for Note 13, as to which the date is
April 23, 1998
F2
<PAGE>
First Aviation Services Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
January 31,
1998 1997
--------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 237 $ --
Trade receivables, net of allowance for doubtful accounts of $346
and $278 at January 31, 1998 and 1997 27,841 19,931
Inventories, net 43,311 36,323
Deferred income taxes 2,381 1,036
Prepaid expenses and other 1,624 1,375
------- -------
Total current assets 75,394 58,665
Plant and equipment, net 5,027 2,793
Goodwill, net 1,873 --
Other assets 229 914
------- -------
$82,523 $62,372
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $14,106 $15,104
Accrued compensation and related expenses 2,146 2,006
Other accrued liabilities 2,631 2,968
Income taxes payable 2,776 --
Current portion of long-term debt -- 1,100
------- -------
Total current liabilities 21,659 21,178
Long-term debt, less current portion 13,866 32,794
Minority interest 1,041 --
Other non-current liabilities -- 2,119
------- -------
Total liabilities 36,566 56,091
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
33,000 shares issued and outstanding at January 31, 1997 -- 1,650
Common stock, $0.01 par value, 25,000,000 shares authorized,
8,928,925 and 3,556,665 shares issued and outstanding 89 36
Additional paid-in capital 38,378 2,125
Retained earnings 7,490 2,470
------- -------
Total stockholders' equity 45,957 6,281
------- -------
$82,523 $62,372
======= =======
See accompanying notes
</TABLE>
F3
<PAGE>
First Aviation Services Inc.
`
Consolidated Statements of Operations
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Predecessor
-----------
Eight-month Two-month
Year ended Year ended period ended period ended
January 31, January 31, January 31, May 31,
1998 1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 153,642 $ 104,236 $ 68,519 $ 10,896
Cost of sales 130,433 89,426 57,390 10,463
----------- ----------- ----------- -----------
Gross profit 23,209 14,810 11,129 433
Selling, general and administrative expenses 14,827 9,881 5,349 1,160
----------- ----------- ----------- -----------
Income (loss) from operations 8,382 4,929 5,780 (727)
Interest expense 1,842 3,470 2,605 287
Interest income (357) -- -- --
Minority interest in subsidiary 38 -- -- --
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes and
extraordinary item 6,859 1,459 3,175 (1,014)
Provision for income taxes 1,500 -- 1,300 --
----------- ----------- ----------- -----------
Income (loss) before extraordinary item 5,359 1,459 1,875 (1,014)
Extraordinary item:
Loss on early extinguishment of debt (108) (864) -- --
----------- ----------- ----------- -----------
Net income (loss) 5,251 595 1,875 (1,014)
Dividends on preferred stock 11 132 88 --
----------- ----------- ----------- -----------
Net income (loss) available to common stockholders $ 5,240 $ 463 $ 1,787 $ (1,014)
=========== =========== =========== ===========
Basic net income per common share:
Income before extraordinary item available to common
stockholders
$ 0.63 $ 0.37 $ 0.50
Extraordinary item (0.01) (0.24) --
----------- ----------- -----------
Basic net income per common share $ 0.62 $ 0.13 $ 0.50
=========== =========== ===========
Shares used in the calculation of basic net income
per common share 8,432,234 3,556,665 3,556,665
=========== =========== ===========
Net income per common share - assuming dilution:
Income before extraordinary item available to
common stockholders $ 0.61 $ 0.26 $ 0.32
Extraordinary item (0.01) (0.17) --
----------- ----------- -----------
Net income per common share - assuming dilution $ 0.60 $ 0.09 $ 0.32
=========== =========== ===========
Shares used in the calculation of net income per common
share - assuming dilution 8,698,400 5,194,456 5,529,579
=========== =========== ===========
</TABLE>
See accompanying notes
F4
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------ -------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at March 31, 1995 (Predecessor) -- $ -- 4,750,000 $ 4,750
Net loss for the two-month period ended
May 31, 1995 -- -- -- --
---------- ---------- ---------- ----------
Balances at May 31, 1995 (Predecessor) -- -- 4,750,000 4,750
Elimination of Predecessor divisional equity
upon acquisition on June 1, 1995 -- -- (4,750,000) (4,750)
Common stock and preferred stock issued
for cash on June 1, 1995 33,000 1,650 3,556,665 36
Warrants issued in connection with
subordinated note payable -- -- -- --
Net income for the eight-month period
ended January 31, 1996 -- -- -- --
---------- ---------- ---------- ----------
Balances at January 31, 1996 33,000 1,650 3,556,665 36
Issuance of options to purchase common
stock -- -- -- --
Net income for the year ended
January 31, 1997 -- -- -- --
---------- ---------- ---------- ----------
Balances at January 31, 1997 33,000 1,650 3,556,665 36
Payment of preferred stock dividends
Conversion of preferred stock (33,000) (1,650) 165,000 1
Issuance of common stock in initial public
offering -- -- 3,900,000 39
Exercise of warrants to purchase common
stock -- -- 1,293,335 13
Shares issued under qualified plans -- -- 13,925 --
Net income for the year ended
January 31, 1998 -- -- -- --
---------- ---------- ---------- ----------
Balance at January 31, 1998 -- $ -- 8,928,925 $ 89
========== ========== ========== ==========
<CAPTION>
Additional
Paid-in Retained
Capital Earnings Total
---------- ---------- ----------
<S> <C> <C> <C>
Balances at March 31, 1995 (Predecessor) $ 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) 27,385 1,875 34,010
Elimination of Predecessor divisional equity
upon acquisition on June 1, 1995 (27,385) (1,875) (34,010)
Common stock and preferred stock issued
for cash on June 1, 1995 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 625 1,875 4,186
Issuance of options to purchase common
stock 1,500 -- 1,500
Net income for the year ended
January 31, 1997 -- 595 595
---------- ---------- ----------
Balances at January 31, 1997 2,125 2,470 6,281
Payment of preferred stock dividends (231) (231)
Conversion of preferred stock 1,649 -- --
Issuance of common stock in initial public
offering 34,438 -- 34,477
Exercise of warrants to purchase common
stock 57 -- 70
Shares issued under qualified plans 109 -- 109
Net income for the year ended
January 31, 1998 -- 5,251 5,251
---------- ---------- ----------
Balance at January 31, 1998 $ 38,378 $ 7,490 45,957
========== ========== ==========
</TABLE>
See accompanying notes.
F5
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Predecessor
-----------
Eight-month Two-month
Year ended Year ended period ended period ended
January 31, January 31, January 31, May 31,
1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 5,251 $ 595 $ 1,875 $ (1,014)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 908 1,047 947 400
Extraordinary item, loss on early
extinguishment of debt -- 538 -- --
Compensation expense on stock
options issued -- 1,500 -- --
Deferred income taxes 448 -- 664 129
Termination of executive defined
benefit plan -- -- (548) --
Changes in assets and liabilities:
Trade receivables (2,142) 3,457 (13,460) 1,860
Inventories (1,041) (5,116) (1,744) (605)
Prepaid expenses and other assets 819 (957) 947 (341)
Accounts payable (4,153) (3,063) 12,587 821
Accrued compensation and related
expenses, and other accrued
liabilities (3,154) (106) 58 578
Income taxes payable 874 -- -- --
Other noncurrent liabilities -- (1,642) (842) (64)
----------------------------------------------------------
Net cash provided by (used in) operating
activities (2,190) (3,747) 484 1,764
Cash flows from investing activities
Purchase of assets from former owners,
including acquisition costs (10,636) -- (12,397) --
Purchases of plant and equipment (2,375) (957) (862) (282)
Payment for license rights and other
intangibles -- (375) (375) --
Proceeds from disposals of plant and
equipment -- -- 13 6
----------------------------------------------------------
Net cash used in investing activities (13,011) (1,332) (13,621) (276)
</TABLE>
See accompanying notes.
F6
<PAGE>
First Aviation Services Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
<TABLE>
<CAPTION>
Predecessor
-----------
Eight-month Two-month
Year ended Year ended period ended period ended
January 31, January 31, January 31, May 31,
1998 1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Net (repayments) / borrowings on
revolving line of credit (15,628) 5,393 6,244 (1,488)
Proceeds from borrowings on term loans -- 3,000 2,000 --
Repayments of term loans (2,650) (2,117) (233) --
Proceeds from borrowings on
subordinated note -- -- 3,000 --
Repayments of subordinated note (1,750) (1,197) (75) --
Sale of preferred stock of subsidiary 1,041 -- 1,650 --
Payment of dividends on preferred stock (231) -- -- --
Proceeds from issuance of common stock
in initial public offering 39,000 -- 551 --
Expenses relating to initial public offering (4,523) -- -- --
Proceeds from exercise of common stock
warrants and issuance of stock under
employee stock purchase plan 179 -- -- --
-----------------------------------------------------
Net cash provided by (used in) financing
activities 15,438 5,079 13,137 (1,488)
-----------------------------------------------------
Net change in cash and cash equivalents 237 -- -- --
Cash at the beginning of
the period -- -- -- --
=====================================================
Cash and cash equivalents at the end of
the period $ 237 $ -- $ -- $ --
=====================================================
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 1,748 $ 3,148 $ 2,322 154
=====================================================
Income taxes $ -- $ 545 $ 129 $ --
=====================================================
</TABLE>
See accompanying notes.
F7
<PAGE>
First Aviation Services Inc.
Notes to 1998 Consolidated Financial Statements
(in thousands, except share amounts)
1. Business and Basis of Presentation
First Aviation Services Inc., through its subsidiaries, National Airmotive
Corporation ("NAC") and Aircraft Parts International Combs, Inc. ("API")
(collectively, "First Aviation" or the "Company"), repairs and overhauls
commercial and military aircraft engines and industrial turbines, and sells and
distributes aircraft parts. The Company is headquartered in Westport,
Connecticut. Customers of the Company include passenger and cargo airlines,
foreign governments, U.S. and foreign military services, fleet operators, fixed
base operators, certified repair facilities and industrial companies.
The accompanying consolidated financial statements include the accounts of First
Aviation Services Inc. and its subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation.
First Aviation was formed in March 1995 to acquire the capital stock of NAC. The
acquisition was accounted for under the purchase method of accounting as of the
closing date. The purchase price, including acquisition costs, was allocated to
the assets and liabilities of NAC based on their relative fair values. The
purchase price allocation was finalized within the time period prescribed by
generally accepted accounting standards.
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 $1,086 and $1,400 during the year
ended January 31, 1997 and the eight-month period ended January 31, 1996,
respectively. The Company also recorded accruals for various liabilities,
including pension plan termination (Note 9), environmental matters (Note 12),
and legal matters. The remaining accruals as of January 31, 1998 and 1997
totaled $391 and $2,143, respectively, and are included in other accrued
liabilities in the accompanying consolidated balance sheets. The reduction in
the accruals arose from changes in facts and circumstances principally relating
to the termination of the NAC pension plan.
The financial statements for the two-month period ended May 31, 1995 represent
the operations of NAC when NAC was owned by Triton ("Predecessor"). The
financial statements of the Company since June 1, 1995 ("Successor") reflect the
results of operations and the impact of indebtedness incurred in the acquisition
of NAC, as well as the impact of the purchase price allocation. Accordingly, the
financial statements of the Successor are not directly comparable to those of
the Predecessor.
On March 5, 1997 the Company completed an initial public offering of 3,900,000
shares of common stock, $0.01 par value per share (the "Offering"). The Company
received net proceeds of approximately $34.5 million after deducting expenses of
approximately $4.5 million. The net proceeds were used for, among other things,
the repayment of term and subordinated debt, a paydown of the Company's credit
facility (for a total debt reduction of $22.6 million), payment of accrued
dividends on preferred stock ($0.2 million), and the acquisition of API from AMR
Combs Inc. ("AMR Combs") ($10.6 million - see below).
F8
<PAGE>
1. Business and Basis of Presentation (continued)
Immediately prior to the closing of the Offering, the following transactions
were completed: (i) all outstanding shares of the Series A Preferred Stock of
the Company were converted into 165,000 shares of common stock at the offering
price, (ii) all outstanding warrants to purchase 1,293,335 shares of the
Company's common stock were exercised in full, (iii) the Company's certificate
of incorporation was amended to increase the authorized common stock of the
Company to 25,000,000 shares, and (iv) a 6.4549-to-1 stock split with respect to
common stock was effected. Accordingly, all common share amounts have been
restated to give effect to the 6.4549-to-1 stock split.
With the closing of the Offering, the Company acquired certain assets and
assumed certain liabilities of API from AMR Combs for an adjusted purchase price
of $10.6 million in cash, including expenses of approximately $523 that were
incurred in connection with the acquisition. The acquisition was accounted for
under the purchase method of accounting as of the closing date. The purchase
price, including acquisition costs, was allocated to the assets and liabilities
of API based upon their relative fair values. The excess of purchase price paid
over the value of the net assets acquired is included in goodwill in the
accompanying consolidated balance sheets. The consolidated financial statements
of the Company since March 5, 1997 reflect the impact of the results of
operations of API as well as the purchase price allocation.
In conjunction with the API acquisition, AMR Combs purchased from API 10,407
shares of API Series A Cumulative Convertible Preferred Stock, $0.001 par value
(the "Preferred Stock"), at a price of $100 per share. Total adjusted proceeds
to the Company were $1,041. This transaction has been accounted for as minority
interest in the accompanying consolidated balance sheets. Dividends are payable
on a quarterly basis on the Preferred Stock at an annual rate of $4.00 per
share. Dividends of $38 accrued during the year ended January 31, 1998, and have
been reflected in minority interest in subsidiary in the accompanying
consolidated statements of operations.
In connection with the API acquisition, First Aviation, API and AMR Combs
entered into a Stockholders Agreement. Pursuant to this agreement, AMR Combs
agreed that it would not sell its shares of the Preferred Stock or the shares of
API common stock into which such Preferred shares are convertible (collectively
the "API Acquisition Shares") for a minimum period of three years. API has the
right to redeem the API Acquisition Shares at any time. AMR Combs has the right
to cause the Company to repurchase the API Acquisition Shares commencing three
years after the closing of the API acquisition. The redemption price is equal to
the fair market value of the API Acquisition Shares as determined by an
independent appraisal. The Stockholders Agreement also contains certain other
rights, including: (i) a right of first refusal on the part of First Aviation
with respect to any proposed sale of the API 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 to a third party; (iii) the right of
AMR Combs to elect to participate, on a pro rata basis, in the sale of the
capital stock of API to a third party; and (iv) piggyback and demand
registration rights granted to AMR Combs with respect to the API Acquisition
Shares. The demand registration rights are not exercisable until three years
after the closing of the API acquisition, and, if API has not previously closed
an underwritten public offering of its common stock at the time AMR Combs elects
to exercise its demand registration rights, API may elect to treat the demand as
an exercise by AMR Combs of its put option with respect to the API Acquisition
Shares. There are no plans to cause API to conduct a public offering of its
securities.
F9
<PAGE>
1. Business and Basis of Presentation (continued)
The following unaudited summary, on a pro-forma basis, presents the consolidated
results of operations as if the acquisitions of NAC and API had taken place as
of April 1, 1995, after including the impact of certain pro-forma adjustments,
such as reduced depreciation expense due to asset write-downs, amortization of
intangibles arising from the acquisitions, increased interest expense due to
acquisition financing, and the related tax effects, including the tax benefit
arising from the utilization of the Predecessor net operating loss.
<TABLE>
<CAPTION>
Period from
Years Ended January 31, April 1, 1995 to
1998 1997 January 31, 1996
-------- -------- ----------------
<S> <C> <C> <C>
Net Sales $156,867 $143,545 $101,946
Net income 5,248 494 1,156
Net income available to common
stockholders 5,237 362 1,068
Basic net income per common share $ 0.62 $ 0.10 $ 0.30
Net income per common share - assuming
dilution $ 0.60 $ 0.07 $ 0.19
</TABLE>
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 consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Sales
Sales are recorded net of discounts, allowances and commissions. Net sales
related to the repair and overhaul of engines are recorded upon completion of
repair and overhaul services. Net sales for parts and engine components sold are
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 generally 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 9%, 16%, 27% and
35% of net sales for the years ended January 31, 1998 and 1997, the eight-month
period ended January 31, 1996, and the two-month period ended May 31, 1995,
respectively. The combined accounts receivable from agencies of the U.S.
government represented 10% and 18% of total trade receivables as of January
31, 1998 and 1997, respectively. Sales to one customer who acts as an agent for
a number of foreign governments accounted for 3% and 12%, respectively, of total
net sales for the years ended January 31, 1998 and 1997.
F10
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Net Sales (continued)
The Company has no foreign operations; however, export sales to unaffiliated
customers were approximately 31%, 32%, 35% and 31% of net sales in the years
ended January 31, 1998 and 1997, the eight-month period ended January 31, 1996,
and the two-month period ended May 31, 1995, respectively. The majority of
export sales activities were to the following geographic areas: Middle East, Far
East, Central America, Canada, and Europe.
Stock Based Compensation
For the year ended January 31, 1997, the Company implemented the disclosure
provisions of Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock-Based Compensation". The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and, accordingly, recognizes
compensation expense to the extent a difference exists between the exercise
price and the fair market value per share at the date of grant.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have been
reclassified to conform to the current year's presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market funds.
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. A significant portion of the Company's inventory consists 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 also from other parts resellers and customers. Inventory also consists
of general aircraft parts. 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, depending on whose engines the Company is
servicing. Specific regulations vary from country to country, although
regulatory requirements in other countries generally coincide with applicable
U.S. requirements. Parts also must 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 already are contained in the Company's inventory to be
scrapped or to require modification. Aircraft engine manufacturers also may
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.
F11
<PAGE>
2. Summary of Significant Accounting Policies (continued)
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 the cost of the
asset. Expenditures for normal maintenance and repairs are charged to expense as
incurred.
Depreciation of plant and equipment is computed using the straight-line method
over the estimated 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.
Noncurrent Assets
During the year ended January 31, 1997, the Company implemented the provisions
of FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The Company records impairment
losses on long-lived assets when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
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
Allison historically has been a major supplier to the Company, and NAC is an
Authorized Maintenance Center for Allison's product lines. During the years
ended January 31, 1998 and 1997, NAC purchased $46,407 and $47,254,
respectively, in parts and engine components from Allison. At January 31, 1998
and 1997, accounts payable to Allison totaled $4,460 and $5,939, respectively.
NAC is also an authorized distributor for Bendix, AC and several suppliers of
accessories that compliment the Allison commercial engine. 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 NAC's relationship with its customers and could adversely
affect NAC'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 consolidated business, financial condition and results of operations.
Goodwill
The excess of purchase price over the fair value of the net assets acquired is
amortized under the straight-line method over a thirty-year period. Accumulated
amortization was $92 at January 31, 1998.
F12
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Net Income Per Common Share
In 1997 the FASB issued Statement No. 128, "Earnings per Share". Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic earnings per share and earnings per share - assuming dilution. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Earnings per share -
assuming dilution is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
Net income per common share is not presented for the two-month period ended May
31, 1995 since such amounts are not meaningful as a result of the change in
ownership and capital stock structure which occurred with the purchase of NAC.
3. Inventories
Inventories consist of the following:
January 31,
1998 1997
----------------------
Parts held for manufacturing or resale $ 31,025 $ 21,218
Work-in-process 8,099 11,067
Finished goods 6,566 6,399
-------- --------
45,690 38,684
Less: allowance for obsolete and slow moving inventory (2,379) (2,361)
-------- --------
$ 43,311 $ 36,323
======== ========
4. Plant and Equipment
Plant and equipment consist of the following:
January 31,
1998 1997
----------------------
Machinery and equipment $ 3,147 $ 1,658
Building and other leasehold improvements 1,934 1,055
Office furniture, fixtures and equipment 1,202 863
Construction-in-process 821 510
------- -------
7,104 4,086
Less: accumulated depreciation (2,077) (1,293)
------- -------
$ 5,027 $ 2,793
======= =======
F13
<PAGE>
5. Related Parties
In 1997 the Company entered into a ten-year sublease with an affiliate for
office space. The lease is cancellable upon six months notice by either party.
The Company has the option of renewing the sublease for two additional five-year
periods. Lease payments totaled $50 under the lease for the year ended January
31, 1998. During 1996 the Company leased office space from the same affiliate
under a month-to-month sublease. Annual lease payments totaled $36 for the year
ended January 31, 1997.
On September 30, 1996, the Company entered into two agreements with an affiliate
whereby the affiliate was to provide certain investment advisory services in
connection with the Offering, and provide advice and negotiate on behalf of the
Company for the acquisition of API. Upon closing of the Offering and the API
acquisition, the affiliate was paid fees for its services of $350 and $250,
respectively.
Prior to the Offering, the Company agreed to pay a management fee to an
affiliate in the amount of $300 per year, payable quarterly. The Company reduced
the 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 obligation to pay the management fee terminated upon the
consummation of the Offering. The Company also agreed to pay an annual
management fee of $50 per year to the subordinated debtholder for each of the
four years commencing June 1, 1995. This agreement also provided 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. These management fees also terminated upon consummation of the Offering.
Fees under the management agreements totaled $100, $170 and $133, respectively,
for the years ended January 31, 1998 and 1997, and the eight-month period ended
January 31, 1996, and were included in selling, general, and administrative
expenses in the accompanying consolidated statements of operations. There were
no management fees for the two-month period ended May 31, 1995.
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 31,
1998 1997
-------------------
<S> <C> <C>
Borrowings under revolving line of credit $ 13,866 $ 29,516
Term loans (with interest at 8.95% at January 31, 1997) -- 2,650
Subordinated note payable (with interest at 15% at January 31, 1997) -- 1,728
-------- --------
Total long-term debt 13,866 33,894
Less current portion -- (1,100)
-------- --------
Long-term portion $ 13,866 $ 32,794
======== ========
</TABLE>
The Company used $22,600 of the proceeds from the Offering to retire the term
loans and the subordinated note payable, and reduce the Company's outstanding
borrowings under its revolving line of credit. In connection with the retirement
of the subordinated note, the Company recorded an extraordinary charge during
the year ended January 31, 1998 of $108, net of associated income tax benefit,
for prepayment penalties.
During the year ended January 31, 1997, NAC entered into a credit agreement that
provides for borrowings up to a total of $40,000, principally through a
revolving credit facility. Initial borrowings under this agreement were used to
retire borrowings under the Company's previous revolving line of credit and term
loan, and to reduce the Company's subordinated note by $1,000. In connection
with this refinancing the Company recorded an
F14
<PAGE>
6. Long-Term Debt (continued)
extraordinary charge, net of associated income tax benefit, of $864 for
prepayment penalties and the write-off of unamortized loan fees.
Borrowings under the revolving credit facility bear interest at the LIBOR rate
plus 3% (8.15% and 8.45% at January 31, 1998 and 1997, respectively). Borrowings
are limited to specified percentages of eligible accounts receivable and
inventories of NAC. The original term of the credit agreement is through May 15,
1999. A termination of the agreement prior to that date will cause a prepayment
penalty of 1% of the total facility to become due. Thereafter, the agreement
automatically renews for additional one-year periods, and may be terminated
without penalty. Management believes that the borrowing base under this credit
facility will exceed the outstanding borrowings for at least the next twelve
months, and therefore has classified these borrowings as long-term in the
accompanying consolidated balance sheets.
The credit agreement also allows for the issuance of letters of credit not to
exceed an aggregate of $2,500. Such letters of credit reduce the availability of
borrowings under the facility. At January 31, 1998 and 1997, NAC was
contingently liable for $1,819 and $424, respectively, under letters of credit,
with $31 and $60, respectively of cash being restricted as security against an
outstanding letter of credit. The restricted cash has been classified in prepaid
and other assets in the accompanying consolidated balance sheets.
The credit agreement contains a number of covenants and provisions imposed on
NAC, including restrictions on mergers, consolidations and acquisitions, the
incurrence of indebtedness, transactions with affiliates, the creation of liens,
limitations on capital expenditures, and payment of management fees. The credit
agreement also requires NAC to maintain minimum levels of net worth, certain
interest expense coverage ratios and minimum backlog levels, and currently
restricts the payment of dividends from NAC to the Company without the lender's
consent. Substantially all of NAC's assets are pledged as collateral under the
revolving line of credit.
Management believes that the carrying amount of the Company's borrowings under
its revolving credit facility approximates fair value because the interest rate
is variable and resets frequently.
7. Stockholders' Equity
The preferred stock that was converted to common as part of the Offering bore
cumulative annual dividends of $4.00 per share. Total cumulative dividends which
had been earned but not yet declared at January 31, 1997 were $220. Subsequently
$11 of dividends were earned. The total cumulative unpaid dividends of $231 were
paid from the proceeds of the Offering.
On December 20, 1996, the Board of Directors approved a 6.4549 to 1 stock split
of issued and outstanding common stock, to be effected as a stock dividend.
Common shares in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split. The Directors also adopted an
Employee Stock Purchase Plan and a Stock Option Plan.
Certain of the Company's directors elected to receive their compensation for the
year ended January 31, 1998 in the form of shares of the Company's common stock.
The fair value of the shares at the date of issuance is charged to expense with
a corresponding credit to additional paid-in capital.
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 $.0545 per share. In connection with the debt
transactions completed in 1996, the number of shares eligible for purchase under
this warrant was reduced to 1,293,335. The warrants were exercised in full in
connection with the Offering.
F15
<PAGE>
7. Stockholders' Equity (continued)
Under the Employee Stock Purchase 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 semi-annual offering period or the fair market value of
the stock at the end of the offering period. The initial offering period
commenced in May 1997 and ran through December 31, 1997. In January 1998, the
Company issued 10,643 shares to employees under the plan.
The Stock Option Plan provides for the grant of incentive stock options,
nonqualifying stock options, stock appreciation rights and stock purchase
rights. A total of 800,000 shares of common stock have been reserved for
issuance under this plan. During the year ended January 31, 1998, 222,300
options were granted to various employees of the Company at an exercise price of
$10.00. These options vest over two to four-year periods, beginning one year
after the date of the grant, and expire ten years after issuance. Options for
900 shares were forfeited during the year. Since the exercise price of all of
the options granted was at or above the fair market value per share at the date
of grant, no compensation expense relating to stock options was recorded during
the year ended January 31, 1998. In January 1997, the Company granted a key
employee options to acquire 150,000 shares of the Company's common stock. These
options carry an exercise price of $0.01 per share, were fully vested at the
date of issuance, and expire ten years from the date of grant. In addition to
the option grant, the employee also received a bonus of $200. To account for the
stock option grant and the bonus the Company recorded a pre-tax charge of
approximately $1,700 for compensation expense during the fiscal year ended
January 31, 1997, with a $1,500 credit to additional paid-in capital. No options
were exercised during the years ended January 31, 1998 and 1997. Under the Stock
Option Plan, 371,400 options were outstanding at January 31, 1998.
Under the provisions of FASB No. 123, the Company is required to disclose the
fair value, as defined, of options granted to employees and the related
compensation expense. The fair value of the stock options granted was estimated
at the date of grant using a Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. In
management's opinion, because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value of the options granted during the year ended January 31, 1998 was
determined using a risk-free interest rate of 6.4%, a dividend yield of 0%, an
average volatility factor of .533, and weighted average expected lives of two to
four years. Under these assumptions the weighted average fair value of each
option is approximately $3.76, and the additional pro forma compensation that
would be recorded is approximately $176, or $0.02 per share. The weighted
average remaining contractual life of these stock options is approximately 9.5
years.
F16
<PAGE>
8. Income Taxes
The provision for income taxes is as follows:
Eight-month Two-month
Year ended Year ended period ended period ended
January 31, January 31, January 31, May 31,
1998 1997 1996 1995
----------- ----------- ------------ -----------
Current:
Federal $ 2,221 $ -- $ 523 $ --
State 36 -- 113 --
----------- ----------- ----------- -----------
2,257 -- 636 --
Deferred:
Federal (1,014) -- 529 --
State 257 -- 135 --
----------- ----------- ----------- -----------
(757) -- 664 --
----------- ----------- ----------- -----------
$ 1,500 $ -- $ 1,300 $ --
=========== =========== =========== ===========
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the consolidated statements
of operations is as follows:
<TABLE>
<CAPTION>
Eight-month Two-month
Year ended Year ended period ended period ended
January 31, January 31, January 31, May 31,
1998 1997 1996 1995
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Provision at statutory rate 34.0% 34.0% 34.0% 34.0%
State tax provision, net of federal
benefit 5.5 6.6 6.6 6.6
Effect of losses of predecessor
business -- -- -- (41.0)
Change in valuation allowance (47.4) (40.6) -- --
Provision for contingencies 29.1 -- -- --
Other, net 0.7 -- 0.4 0.4
--- --- --- ---
21.9% 0.0% 41.0% 0.0%
==== === ==== ===
</TABLE>
F17
<PAGE>
8. Income Taxes (continued)
Deferred tax assets and liabilities result from temporary differences in the
recognition of income and expenses for tax and financial statement purposes.
These differences are set forth below:
January 31, January 31,
1998 1997
---------- -----------
Financial statement accruals not currently deductible
for income tax purposes $ 3,482 $ 4,200
Differences in the financial statement and income tax
bases of fixed assets 1,212 1,870
Attributes subject to IRC Section 382 251 628
Net operating loss carryforwards -- 593
Other 690 334
------- -------
5,635 7,625
Valuation allowance (3,254) (6,589)
------- -------
Net deferred tax assets $ 2,381 $ 1,036
======= =======
The Company believes that based on a number of factors, including its recent
history of tax operating losses, substantial uncertainty exists as to the
realization of its deferred tax assets. Accordingly, a valuation allowance has
been provided on 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 decreased by $3,335 and $547 in the years ended January 31,
1998 and 1997, respectively.
During the year ended January 31, 1997, the Company recorded compensation
expense for book purposes of $1,500 resulting from the issuance of stock
options. The associated tax benefit of $600 was recorded as a deferred tax asset
at that time. When the tax benefit is realized, any excess tax benefit, if any,
will be recorded as additional paid-in capital.
Prior to the Offering, the Company filed a consolidated federal tax return with
its parent company, First Equity Group, Inc. The Company's federal income tax
provision had been based on the tax sharing agreement between the companies
which stipulated that the Company was liable for federal taxes as if it filed on
a separate company basis, subject to certain limitations and adjustments. Income
taxes payable during that period related primarily to the intercompany liability
under the tax sharing agreement. As a result of the Offering, the Company will
file its own tax return and will no longer file a consolidated federal income
tax return with First Equity Group, Inc.
Because of the "change of ownership" provision of the Tax Reform Act of 1986,
and applicable state statutes, utilization of the Company's "net unrealized
built-in losses" and state net operating loss carryforwards which existed as of
the acquisition date are subject to annual limitations in current and future
periods. As a result of the annual limitation, a portion of the net operating
loss carryforwards may expire unused. In addition, the Offering may result in a
change in ownership for federal income tax purposes and, consequently, a
limitation on annual utilization by the Company of certain tax attributes
existing at the date of the Offering.
F18
<PAGE>
8. Income Taxes (continued)
Prior to June 1, 1995, NAC 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 NAC's net operating loss carryforwards due to uncertainties as
to the realization of these amounts. Consequently, no income tax benefit or
expense was recorded for the period.
9. Employee Benefits Plans
Profit Sharing
The Company maintains a discretionary, non-qualified profit sharing plan
covering a substantial number of its employees. The Company recorded profit
sharing expense of $342, $355, and $216 in the years ended January 31, 1998 and
1997, and the eight-month period ended January 31, 1996. No expense was
recorded for the two-month period ended May 31, 1995.
Defined Contribution Plans
The Company maintains 401(k) savings plans that cover substantially all
full-time employees. The plans allow employees to defer up to 15 percent of
their salary, with the Company partially matching employee contributions.
Certain employees vest in the Company contribution ratably over three years. The
Company and its Predecessor expensed $642, $531, $236 and $13 in the years ended
January 31, 1998 and 1997, the eight-month period ended January 31, 1996, and
the two-month period ended May 31, 1995, respectively, related to the plans.
Pension Plans
Prior to June 1, 1995 substantially all employees of NAC were covered by a
qualified noncontributory defined benefit retirement plan. NAC'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 were held by, and invested
in, investment funds of Principal Mutual Life Insurance Company, a qualified
insurance company.
On June 1, 1995, NAC decided to terminate its retirement plan. In connection
with the termination of the plan, NAC amended the plan agreement to provide 100%
vesting for all participants, and froze 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. On
October 7, 1996, NAC purchased $3,923 in guaranteed annuities for all retirees
who were receiving benefits from the plan. On October 15, 1996, NAC announced
the termination of its qualified defined benefit retirement plan. The plan was
amended to allow for lump sum distributions in cash or rollovers to an IRA or
another qualified retirement plan. Active employees of NAC also had the option
to transfer funds to NAC's 401K plan. At January 31, 1997 prepaid pension costs
of $453 were netted against the accrued pension obligation in the accompanying
consolidated balance sheets.
The pension plan was liquidated according to regulatory guidelines on July 28,
1997. A portion of the excess of the net assets remaining after settlement of
liabilities, $102, was contributed to NAC's 401(k) plan. The remaining balance
of $308 reverted back to the Company. In addition, the remaining balance of the
accrual related to settling pension obligations under the plan was reversed.
F19
<PAGE>
10. Earnings per Share
The following sets forth the computation of basic earnings per share and
earnings per share - assuming dilution.
<TABLE>
<CAPTION>
Eight-month
period ended
Years ended January 31, January 31,
1998 1997 1996
-------------- ------------ ----------------
<S> <C> <C> <C>
Numerator:
Net income before extraordinary item $ 5,359 $ 1,459 $ 1,875
Preferred stock dividends (11) (132) (88)
-------------- ------------ ----------------
Numerator for earnings per share - net income available to
common stockholders before extraordinary item 5,348 1,327 1,787
Effect of extraordinary item, net of associated income tax
benefit (108) (864) --
-------------- ------------ ----------------
Numerator for earnings per share - net income available to
common stockholders $ 5,240 $ 463 $ 1,787
============== ============ ================
Denominator:
Denominator for basic earnings per share - weighted
average shares 8,432,234 3,556,665 3,556,665
Effect of dilutive warrants and employee stock options 266,166 1,637,791 1,972,914
-------------- ------------ ----------------
Denominator for earnings per share - assuming dilution -
adjusted weighted average shares and assumed
conversions 8,698,400 5,194,456 5,529,579
============== ============ ================
</TABLE>
Stock options to purchase shares of common stock at $10 per share were issued to
employees during the year but were not included in the computation of earnings
per share - assuming dilution because the exercise price of the options was
greater than the average market price of the common stock during the period and,
therefore, the effect would be antidilutive.
F20
<PAGE>
11. Commitments and Contingencies
Commitments
The Company leases certain land, plant facilities, equipment and office space.
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 January 31, 1998 are as follows:
Fiscal year 1999 $ 1,209
Fiscal year 2000 1,062
Fiscal year 2001 1,070
Fiscal year 2002 577
Fiscal year 2003 585
Thereafter 6,348
-------
$10,851
=======
Rental expense under all short-term and noncancellable operating leases amounted
to $1,551, $933, $316 and $79, net of sublease rental income of $116, $299, $193
and $39 for the years ended January 31, 1998 and 1997, the eight-month period
ended January 31, 1996, and the two-month period ended May 31, 1995,
respectively.
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 consolidated financial position, results of
operations or its ability to conduct business. In the normal conduct of its
business, the Company also is involved in various claims and lawsuits, none of
which, in the opinion of the Company's management, will have a material adverse
impact on the Company's consolidated financial position or results of
operations. However, depending on the amount and timing, unfavorable resolution
of any of these matters could have a material effect on the Company's
consolidated results of operations or cash flows in a particular period.
12. Environmental
Liabilities are recorded when environmental claims for remedial efforts are
probable and the cost can be reasonably estimated. As of January 31, 1998 and
1997, the Company had provided for environmental remediation costs in the amount
of $262 and $285, respectively, and such amounts are included in other accrued
liabilities in the accompanying consolidated balance sheet. Environmental
expenditures that relate to current operations are expensed.
F21
<PAGE>
12. Environmental (continued)
The Company potentially is a 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 consolidated financial position or its results of operations. However,
depending on the amount and timing, unfavorable resolution of any of these
matters could have a material effect on the Company's consolidated results of
operations or cash flows in a particular period.
13. Subsequent Events
Restructuring
On April 6, 1998 the Company announced that it had initiated a plan to
streamline and restructure operations at NAC. In connection with this plan, the
Company will record a $1.7 million pre-tax restructuring charge and take other
non-recurring charges of $1.0 million in the first quarter of the fiscal year
ending January 31, 1999. The restructuring charges relate to costs associated
with consolidating certain facilities and severance charges related to a
reduction in its workforce.
New Credit Facility
On April 23, 1998, API entered into a one year $10 million revolving credit
facility with Fleet National Bank. Advances under the credit facility bear
interest, at the Company's option, at (i) a variable rate per annum equal to the
prime rate, (ii) a variable rate equal to the cost of funds rate plus 1.5% or
(iii) at a fixed rate equal to the LIBOR rate plus 1.5%. The credit agreement
contains a number of covenants, including restrictions on mergers,
consolidations and acquisitions, the incurrence of indebtedness, transactions
with affiliates, the creation of liens, and limitations on capital expenditures.
The credit agreement also requires API to maintain minimum levels of net worth
and specified interest expense coverage ratios, and currently restricts the
payment of dividends. Substantially all of API's accounts receivable, inventory
and equipment are pledged as collateral under the revolving credit facility.
F22
<PAGE>
14. Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Fiscal year ended January 31, 1998
<S> <C> <C> <C> <C>
Net sales $ 35,847 $ 38,575 $ 39,543 $ 39,677
Gross profit 5,294 6,054 6,759 5,102
Net income before extraordinary item 1,120 1,558 1,647 1,034
Extraordinary item - loss on early
extinguishment of debt, net of
associated income tax benefit (108) -- -- --
------------- -------------- ------------- --------------
Net income $ 1,012 $ 1,558 $ 1,647 $ 1,034
============= ============== ============= ==============
Basic net income per share before
extraordinary item $ 0.17 $ 0.17 $ 0.18 $ 0.12
Extraordinary item (0.02) -- -- --
------------- -------------- ------------- --------------
Basic net income per share $ 0.15 $ 0.17 $ 0.18 $ 0.12
============= ============== ============= ==============
Net income per share - assuming dilution,
before extraordinary item $ 0.16 $ 0.17 $ 0.18 $ 0.11
Extraordinary item (0.01) -- -- --
------------- -------------- ------------- --------------
Net income per share - assuming dilution $ 0.15 $ 0.17 $ 0.18 $ 0.11
============= ============== ============= ==============
Fiscal year ended January 31, 1997
Net sales $ 24,582 $ 27,772 $ 24,422 $ 27,460
Gross profit 4,007 3,739 3,424 3,640
Net income/(loss) before extraordinary
item 1,052 921 415 (929)
Extraordinary item - loss on early
extinguishment of debt, net of
associated income tax benefit -- (864) -- --
------------- -------------- ------------- --------------
Net income/(loss) $ 1,052 $ 57 $ 415 $ (929)
============= ============== ============= ==============
Basic net income/(loss) per share before
extraordinary item $ 0.29 $ 0.25 $ 0.11 $ (0.27)
Extraordinary item -- (0.24) -- --
------------- -------------- ------------- --------------
Basic net income/(loss) per share $ 0.29 $ 0.01 $ 0.11 $ (0.27)
============= ============== ============= ==============
Net income/(loss) per share - assuming
dilution, before extraordinary item $ 0.18 $ 0.17 $ 0.08 $ (0.19)
Extraordinary item -- (0.16) -- --
------------- -------------- ------------- --------------
Net income/(loss) per share - assuming
dilution $ 0.18 $ 0.01 $ 0.08 $ (0.19)
============= =============================================
</TABLE>
F23
<PAGE>
Schedule II - Valuation and Qualifying Accounts
First Aviation Services Inc. and Consolidated Subsidiaries
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at
beginning of Balance as of
period Additions Deductions end of period
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Description
Two months ended May 31, 1995
Allowance for doubtful accounts $ 460 $ - $ - $ 460
Eight months ended January 31, 1996
Allowance for doubtful accounts 460 55 237 278
Year ended January 31, 1997
Allowance for doubtful accounts 278 75 75 278
Year ended January 31, 1998
Allowance for doubtful accounts 278 74 6 346
Two months ended May 31, 1995
Slow moving and obsolete inventory 3,713 90 886 2,917
Eight months ended January 31, 1996
Slow moving and obsolete inventory 2,917 - 129 2,788
Year ended January 31, 1997
Slow moving and obsolete inventory 2,788 - 427 2,361
Year ended January 31, 1998
Slow moving and obsolete inventory 2,361 18 - 2,379
</TABLE>
Allison [Logo]
- --------------------------------------------------------------------------------
Allison Engine Company P.O. Box 420 Indianapolis, Indiana 46208-0420
Facsimilie Transmission
510-635-2250
National Airmotive Corporation
7200 Earhart Road
Oakland International Airport
Oakland, California 94621-4504
Attention: Mr. Fredrik Groth, Vice President, Light Turbine Engines
Subject: Allison Renewed Model 250 Authorized Maintenance Center Agreement
Dear Fredrik:
The following message has been transmitted by facsimile then two original
copies express mailed to Allison Engine Company Model 250 Authorized
Maintenance Centers (AMCs)
I am pleased to announce two copies of the renewal for the Model 250 Authorized
Maintenance Center Agreement, along with two original counterparts of this
letter, will be express mailed to your Authorized Maintenance Center Primary
Premise facility Monday, 16 March 1998. Although we experienced additional
delay's during early March, The Agreement has been finalized for submittal to
all Authorized Maintenance Centers in good standing.
The present Model 250 Aircraft Engine Authorized Maintenance Center Agreement
was extended until 31 March 1998. However, in order to permit each Authorized
Maintenance Center enough time to review and sign the Renewal Agreement, Allison
is hereby offering a second extension to 30 April 1998 for the existing Model
250 Authorized Maintenance Center Agreement.
If this offer is acceptable, please countersign below and return by fax
(317-230-3381) to Bill Fesler on or before 27 March 1998, Please express mail
one signed original counterpart of the letter to Allison Engine Company, 2335
South Tibbs Avenue, Speed Code P40A, Indianapolis, Indiana 46241, USA, attention
Bill Fesler. If the extension is not acceptable, your Allison Model 250 Aircraft
Engine Authorized Maintenance Center Agreement will terminate 31 March 1998.
If you have any questions, please contact Bill Fesler (317-230-3242).
Regards,
ALLISON ENGINE COMPANY CONCURRENCE:
/s/ Fredrik Groth 3/27/98
---------------------------------------
/s/ T.H. Thomason (Signature) (Date)
T.H. Thomason, Vice President
Small Aircraft Engines
V.P. Light Turbing
---------------------------------------
(Title)
National Airmotive
---------------------------------------
(Authorized Maintenance Center)
Allison [Logo]
- --------------------------------------------------------------------------------
Allison Engine Company P.O. Box 420 Indianapolis, Indiana 46208-0420
Facsimile Transmittal Telephone: 317-230-2112
Fax: 510-613-7426 Fax: 317-230-3596
National Airmotive Corp.
7200 Earhart Street
Oakland International Airport
Oakland, California 94621
Attention: Mr. Joe Ghantous, T56/501 Flight Programs
Subject: Allison T56/501D/501K Authorized Maintenance Center Agreement
Dear Joe:
The following message is being transmitted by facsimile and express mailed (two
original copies) to all Allison Engine Company Model T56/501D/501K Authorized
Maintenance Centers(AMCs).
Last November Allison extended the current T56/501D/501K Authorized Maintenance
Center Agreement through March 31, 1998. Due to delays in preparation of the new
"Renewal" AMC Agreement we now find it necessary to extend this Agreement for
another thirty (30) days through April 30, 1998. This extension is being
provided so that each Authorized Maintenance Center will have sufficient time to
review, sign, and return the Renewal Agreement prior to the expiration date.
If this extension offer is acceptable, please countersign the fax copy below and
return to your AMC Administrator, Mark McCormick, by fax (317-230-3596) on or
before March 27, 1998. After you receive the two express mail originals please
return one signed original of the letter by express mail to Allison Engine
Company, 2355 South Tibbs Avenue, Speed Code P41, Indianapolis, Indiana, 46241,
USA, Attention Mark McCormick. If you do not sign and return this extension,
your Allison T56/501D/501K Authorized Maintenance Center Agreement will
terminate on March 31, 1998.
Although we have experienced many delays during the last few months, the Renewal
T56/501D/501K AMC Agreement has now been finalized. Two copies of this
Agreement will be express mailed to your Authorized Maintenance Center Primary
Premiere location on or before Friday, March 20, 1998. This should provide
nearly four weeks for you to review, sign and return the Renewal Agreement to
Allison so that it can be fully executed and in force by May 1, 1998.
If you have any questions, please contact Mark McCormick at (317) 230-2112.
Best regards,
ALLISON ENGINE COMPANY CONCURRENCE:
/s/ D. L. [illegible] ---------------------------------------
(Signature) (Date)
for James F. Leach, Vice President
Large Military Engines
/s/ JOSEPH GHANTOUS 3/13/98
---------------------------------------
(Title)
V.P. T56 Flight Programs
---------------------------------------
(Authorized Maintenance Center)
- --------------------------------------------------------------------------------
[LOGO] NAC
ISO 9001 Registered Company
March 19, 1998
Mr. T. H. Thomason, V.P.
Small Aircraft Engines
Allison Engine Company
P.O. Box 420
Indianapolis, IN 46205
RE: Allison Model 250 Authorized Maintenance Centers Agreement
Dear Tommy,
Thank you for your letter of March 5, 1998 concerning potential changes in the
250 Authorized Maintenance Centers (AMC's) Agreement.
We have been looking forward to the changes that Allison plans to make and
firmly believe that it will be possible to make improvements to Allison's status
in the after market if the new AMC agreement is carefully redesigned. The NAC
management team has provided suggestions to Allison - that are in the best
interest of the AMC's, Allison and customers.
Your letter discusses a couple of interim changes, including increasing the
required ownership to 51% in branches and the reduction of insurance to $50M.
Please note that NAC's current branch networks, where NAC owns less than 51%,
were negotiated for in the current agreement in its entirety.
Until the new agreement is approved, we will continue to work under the current
AMC agreement. To insure that there is no legal technicality in the renewal of
our 3-year option, we have included our check in the amount of $1.00 as called
for in the agreement.
I look forward to meeting with you at your earliest convenience and discussing
the new AMC agreement.
Best wishes,
/s/ Fredrik Groth
Fredrik Groth
Vice President, Light Turbine Program
cc: Raj Sharma
National Airmotive Corporation o 7200 Earhart Road, Oakland, California
94621-4504 o Tel 510.562.7426
[LOGO] NAC
ISO 9001 Registered Company
April 22, 1998
Allison Engine Company
2355 South Tibbs Avenue, Speed Code P41
Indianapolis, Indiana 46241
Attention: Mr. Mark S. McCormick
Subject: Allison T56/501D/501K Authorized Maintenance Center Agreement
Dear Mark:
The current AMC Agreement has been extended until April 30, 1998. Section
EIGHTH: TERM in that agreement provides for three-year renewal periods at a
renewal fee of $1.00 (USD) at the time of renewal.
Please find enclosed our Check No. 114183 in the amount of $1.00 (USD) for the
next three-year period. Please forward any documentation necessary as per the
referenced section for our final signature.
Sincerely,
/s/ Leroy Johnson
Leroy Johnson
Vice President, Industrial Program
Enclosure
National Airmotive Corporation o 7200 Earhart Road, Oakland, California
94621-4504 o Tel 510.562.7426
Exhibit 10.38
CREDIT AGREEMENT
Dated as of April 23, 1998
between
AIRCRAFT PARTS INTERNATIONAL COMBS, INC.
and
FLEET NATIONAL BANK
<PAGE>
CREDIT AGREEMENT dated as of April 23, 1998 between AIRCRAFT PARTS
INTERNATIONAL COMBS, INC., a Delaware corporation (the "Borrower"), and FLEET
NATIONAL BANK, a national banking association organized under the laws of the
United States of America (the "Bank").
WHEREAS, the Borrower desires that the Bank extend credit as
provided herein and the Bank is prepared to extend such credit; and
NOW THEREFORE, in consideration of the foregoing, and other valuable
consideration, receipt of which is acknowledged, the parties, intending to be
legally bound, agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS
Section 1.1. Definitions. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa):
"Acquisition" means any transaction pursuant to which the Borrower
(a) acquires greater than 5% of the equity securities (or warrants, options or
other rights to acquire such securities) of any Person, (b) causes or permits
any Person to be merged into the Borrower, in any case pursuant to a merger,
purchase of assets or any reorganization providing for the delivery or issuance
to the holders of such Person's then outstanding securities, in exchange for
such securities, of cash or securities of the Borrower, or a combination
thereof, or (c) purchases all or substantially all of the business or assets of
any Person.
"Affiliate" means any Person: (a) which directly or indirectly
controls, or is controlled by, or is under common control with, the Borrower or
any of its respective Subsidiaries; (b) which directly or indirectly
beneficially owns or holds more than ten percent or more of any class of voting
stock of the Borrower or any of its respective Subsidiaries; (c) ten percent or
more of the voting stock of which is directly or indirectly beneficially owned
or held by the Borrower or any of its respective Subsidiaries; or (d) which is a
partnership in which the Borrower or any of its respective Subsidiaries is a
general partner. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise.
"Agreement" means this Credit Agreement, as amended or supplemented
from time to time. References to Articles, Sections, Exhibits, Schedules and the
like refer to the Articles, Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise indicated.
<PAGE>
2
"Banking Day" means, in respect of any date that is specified in
this Agreement to be subject to adjustment in accordance with the applicable
Banking Day Convention, a day on which commercial banks settle payments in (i)
New York or London if the payment obligation is calculated by reference to any
LIBO Rate, or (ii) New York, if the payment obligation is calculated by
reference to the Prime Rate or the Cost of Funds Rate.
"Banking Day Convention" means the convention for adjusting any
relevant date if it would otherwise fall on a day that is not a Business Day so
that the date will be the first following day that is a Business Day.
"Borrowing" means any Loan requested by the Borrower hereunder.
"Borrowing Base" means an amount equal to the sum of (a) 85% of
Eligible Receivables, and (b) 50% of Eligible Inventory (but in no event more
than $3,500,000); provided, however, in no event shall the aggregate amount
under clause (b) exceed $3,500,000. Unless the Bank shall otherwise determine,
the Borrowing Base as of any date shall be the Borrowing Base set forth on the
most current Borrowing Base Certificate certified and delivered by the Borrower
pursuant to either Section 6.8 or Section 4.2. If, at any time, the Borrowing
Base shall exceed the Commitment, for purposes of this Agreement the Borrowing
Base shall be deemed to be equal to the Commitment.
"Borrowing Base Certificate" means a certificate substantially in
the form of Exhibit C hereto or such other form agreed to in writing by the Bank
and the Borrower.
"Capital Lease" means any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Change of Control" means any one or more of the following events:
(b) the stockholders of the Borrower shall
approve a plan or proposal for the acquisition of, merger, liquidation or
dissolution of the Borrower, or a sale of more than 50% of its assets in one or
a series of related transactions; or
(c) a Person or group of Persons acting in concert (other than
the direct or indirect beneficial owners of the capital stock of the Borrower as
of the date of this Agreement) shall, as a result of a tender or exchange offer,
open market purchases, privately negotiated purchases or otherwise, have become
the direct or indirect beneficial owner (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended from time to time) of securities
of the Borrower representing 50% or more of the combined voting power of the
outstanding voting securities for the election of directors or shall have the
right to elect a majority of the board of directors of the Borrower.
<PAGE>
3
"Closing Date" means the date this Agreement has been executed by
the Borrower and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" has the meaning given thereto in the Security
Agreement.
"Commitment" means the obligation of the Bank to make the Loans
under this Agreement in the aggregate outstanding principal amount of up to
$10,000,000, as such amount may be reduced or otherwise modified from time to
time.
"Consolidated Subsidiary" means any Subsidiary whose accounts are or
are required to be consolidated with the accounts of a Person in accordance with
GAAP.
"Cost of Funds Loan" means any Loan when and to the extent the
interest rate therefor is determined on the basis of the Cost of Funds Rate plus
one and one-half (1 1/2%) percentage points.
"Cost of Funds Rate" means the per annum rate of interest which the
Bank is required to pay, or is offering to pay, for wholesale liabilities
adjusted for reserve requirements and such other requirements as may be imposed
by federal, state or local government and regulatory agencies, as determined by
Fleet Treasury Group.
"Current Assets" of any Person at any time means all assets of a
Person treated as current assets in accordance with GAAP.
"Current Liabilities" means all liabilities of a Person treated as
current liabilities in accordance with GAAP, including without limitation (a)
all obligations payable on demand or within one year after the date in which the
determination is made and (b) installment and sinking fund payments required to
be made within one year after the date on which determination is made, but
excluding all such liabilities or obligations which are renewable or extendible
at the option of such Person to a date more than one year from the date of
determination.
"Debt" means, with respect to any Person: (a) indebtedness of such
Person for borrowed money; (b) indebtedness for the deferred purchase price of
property or services (except trade payables in the ordinary course of business);
(c) Unfunded Benefit Liabilities of such Person; (d) the face amount of any
outstanding letters of credit issued for the account of such Person; (e)
obligations of such Person arising under acceptance facilities; (f) guaranties,
endorsements (other than for collection in the ordinary course of business) and
other contingent obligations to purchase, to provide funds for payment, to
supply funds to invest in any Person, or otherwise to assure a creditor against
loss, including any contingent obligations under swaps, derivatives, currency
exchanges and
<PAGE>
4
similar transactions; (g) obligations secured by any Lien on property of such
Person; and (h) obligations of such Person as lessee under Capital Leases.
"Default" means any event which with the giving of notice or lapse
of time, or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and,
to the extent permitted by law, any other amount payable by the Borrower under
this Agreement or the Note that is not paid when due (whether at stated
maturity, by acceleration or otherwise), a rate per annum during the period from
and including the due date, to, but excluding the date on which such amount is
paid in full equal to three percentage points above the Prime Rate as in effect
from time to time (provided that, if the amount so in default is principal of a
LIBOR Loan and the due date thereof is a day other than the last day of the
Interest Period therefor, the "Default Rate" for such principal shall be, for
the period from and including the due date and to but excluding the last day of
the Interest Period therefor, three (3) percentage points above the interest
rate for such Loan as provided in Section 2.10 hereof and, thereafter, the rate
provided for above in this definition).
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBIT" means, for any Person, for any period, earnings before
Interest Expense and taxes for such Person determined in accordance with GAAP.
"EBITDA" means, for any Person, for any period, earnings before
Interest Expense, taxes, depreciation, amortization and extraordinary items for
such Person determined in accordance with GAAP.
"Eligible Inventory" means, as of any date of determination thereof,
all Inventory (valued at the lower of cost or its net realizable value as
determined using GAAP) owned by the Borrower, but excluding (a) all Inventory in
which the Bank does not have a first perfected security interest, subject to no
other Lien prior to or on a parity with such security interest, (b) all
Inventory for which warehouse receipts or documents of title have been issued,
unless the same are delivered to the Bank, and (c) all other Inventory deemed
ineligible by the Bank because of any circumstance that could, in the Bank's
judgment, reasonably exercised, adversely affect the quality of such Inventory
as collateral security. Notwithstanding the preceding sentence, "Eligible
Inventory" shall not include any Inventory not located at premises owned by or
leased to or contracted to the Borrower.
"Eligible Receivables" means, as of any date of determination
thereof, all Receivables net of the Borrower's customary reserves, discounts,
credits, returns, rebates, allowances or set-offs, excluding the following:
<PAGE>
5
(i) any Receivable unpaid for 90 or more days from the date of
the original invoice;
(ii) any Receivable evidenced by chattel paper or an
instrument of any kind unless such chattel paper or instrument is pledged and
delivered to the Bank or unless the total amount of such Receivables at any one
time does not exceed 5% of total Eligible Receivables at such time;
(iii) any Receivable which is owed by an account debtor which
is insolvent or the subject of any bankruptcy or insolvency proceedings of any
kind or of any other proceeding or action, which might have an adverse effect on
the business of such account debtor;
(iv) all Receivables deemed uncollectable by the Borrower or
turned over to collection agencies or outside collection attorneys;
(v) any Receivable which is not a valid, legally enforceable
obligation of the account debtor or is subject to any present or contingent, or
any fact exists which is the basis for any future, offset or counterclaim or
other defense on the part of such account debtor;
(vi) any Receivable not evidenced by an invoice or other
documentation in form reasonably acceptable to the Bank;
(vii) any Receivable which arises out of any transaction
between the Borrower and FAvS;
(viii) any Receivable which arises out of any transaction
between (A) the Borrower and (B) National Airmotive Corporation or any other
Subsidiary or Affiliate of FAvS or the Borrower, but only to the extent that
such Receivables exceed 10% of all Eligible Receivables;
(ix) any Receivable which is subject to any provision
prohibiting its assignment or requiring notice not theretofor given of or
consent not theretofor obtained to such assignment;
(x) all Receivables from customers having their place of
business outside of the United States of America, Canada and Mexico, except for
such Receivables backed by either (A) letters of credit denominated in Dollars
issued to the Borrower by banks acceptable to the Administrative Agent or (B)
credit insurance policies acceptable to the Administrative Agent;
<PAGE>
6
(xi) all Receivables arising out of or in connection with
advance billings of a customer's requirements of supplies over a period of time,
but only to the extent that such Receivables exceed 10% of all Eligible
Receivables;
(xii) all Receivables that do not conform to the
representations and warranties contained in Article 2 of the Security Agreement;
(xiii) all Receivables in which the Bank does not have a first
perfected security interest, subject to no other Lien prior to or on a parity
with such security interest;
(xiv) all Receivables not denominated in Dollars;
(xv) all Receivables from an account debtor if more than 50%
of the aggregate Dollar amount of invoices billed with respect to such account
debtor is more than 90 days past due according to the original terms of payment;
(xvi) if any account debtor owes greater than 15% of the
Dollar value of total Receivables collectively owed to the Parent and its
Subsidiaries on a consolidated basis, then all Receivables owed by such account
debtor in excess of such 15% limitation shall be ineligible;
(xvii) any Receivable in respect of which the U.S. Government
or any agency thereof is the account debtor;
(xviii) any Receivable which is owed by an account debtor who
has disputed liability or made any claim with respect to any other account due
from such account debtor to the Borrower, except the foregoing exclusion shall
not apply to any account debtor unless and until such disputed amounts equal or
exceed twenty percent (20%) of the aggregate Dollar amount of accounts due from
such account debtor; and
(xix) any Receivable which is determined by the Bank, in the
exercise of its reasonable judgment, to be ineligible for any other reason
generally accepted in the commercial finance business as a reason for
ineligibility.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
<PAGE>
7
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business which
is a member of any group of organizations (i) described in section 414(b) or (c)
of the Code of which the Borrower is a member, or (ii) solely for purposes of
potential liability under section 302(c)(11) of ERISA and section 412(c)(11) of
the Code and the lien created under section 302(f) of ERISA and section 412(n)
of the Code, described in section 414(m) or (o) of the Code of which the
Borrower is a member.
"Event of Default" has the meaning given such term in Section 9.1.
"Facility Documents" means this Agreement, the Note, the
Subordination Agreement, the Security Agreement and each of the documents,
certificates or other instruments referred to in Article 4 hereof as well as any
other document, instrument or certificate to be delivered by the Borrower in
connection with this Agreement or in connection with the documents, certificates
or instruments referred to in Article 4, including documents delivered in
connection with any Borrowing.
"FAvS" means First Aviation Services, Inc., the parent corporation
of the Borrower.
"FCC" means Fleet Capital Corporation.
"Forfeiture Proceeding" means any action, proceeding or
investigation affecting FAvS, the Borrower or any of their respective
Subsidiaries before any court, governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which results in an
indictment of any of them or the seizure or forfeiture of any of their property.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
Section 5.5 (except for changes concurred in by the Borrower's independent
public accountants).
"Interest Coverage Ratio" means, with respect to any Person, for any
period, the ratio of (i) EBITDA to (ii) Interest Expense for such period.
"Interest Expense" shall mean, with respect to any Person, for any
period, the sum, for such Person in accordance with GAAP, of (a) all interest on
Debt that is accrued as an expense during such period (including, without
limitation, imputed interest on Capital Lease obligations), plus (b) all amounts
paid, accrued or amortized as an expense during such period in respect of
interest rate protection agreements, minus (c) all
<PAGE>
8
amounts received or accrued as income during such period in respect of interest
rate protection agreements.
"Interest Period" means with respect to any LIBOR Loan, the period
commencing on the date such Loan is made, converted from another type of Loan or
renewed, as the case may be, and ending, as the Borrower may select pursuant to
Section 2.11, on the numerically corresponding day in the first, second or third
calendar month thereafter, provided that each such Interest Period which
commences on the last Banking Day of a calendar month (or on any day for which
there is no numerically corresponding day in the appropriate subsequent calendar
month) shall end on the last Banking Day of the appropriate calendar month. With
respect to Cost of Funds Loans, "Interest Period" means the period commencing on
the date such Loan is made and ending on any Banking Day up to 90 days
thereafter as the Borrower may select. With respect to Prime Rate Loans,
"Interest Period" means the period commencing on the date such Loan is made and
ending on the Banking Day on which such Prime Rate Loan is repaid. No Interest
Period shall extend beyond the Termination Date.
"Inventory" means all inventory, now or hereafter owned and wherever
located, of the Borrower, including (without limitation) raw materials,
work-in-process, finished goods, supplies and packaging materials.
"Lending Office" means the lending office of the Bank set forth on
the signature page.
"Leverage Ratio" shall have the meaning given thereto in Section 8.2
hereof.
"LIBO Rate" means, as applicable to any LIBOR Loan, the rate per
annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as
determined on the basis of the offered rates for deposits in U.S. dollars, for a
period of time comparable to such LIBOR Loan which appears on the Telerate page
3750 as of 11:00 a.m. London time on the day that is two London Banking Days
preceding the first day of such LIBOR Loan; provided, however, if the rate
described above does not appear on the Telerate System on any applicable
interest determination date, the LIBOR rate shall be the rate (rounded upwards
as described above, if necessary) for deposits in dollars for a period
substantially equal to the interest period on the Reuters Page "LIBO" (or such
other page as may replace the LIBO Page on that service for the purpose of
displaying such rates), as of 11:00 a.m. (London Time), on the day that is two
(2) London Banking Days prior to the beginning of such interest period.
If both the Telerate and Reuters system are unavailable, then the
rate for that date will be determined on the basis of the offered rates for
deposits in U.S. dollars for a period of time comparable to such LIBOR Loan
which are offered by four major banks in the London interbank market at
approximately 11:00 a.m. London time, on the day that is
<PAGE>
9
two (2) London Banking Days preceding the first day of such LIBOR Loan as
selected by the Bank. The principal London office of each of the four major
London banks will be requested to provide a quotation of its U.S. dollar deposit
offered rate. If at least two such quotations are provided, the rate for that
date will be the arithmetic mean of the quotations. If fewer than two quotations
are provided as requested, the rate for that date will be determined on the
basis of the rates quoted for loans in U.S. dollars to leading European banks
for a period of time comparable to such LIBOR Loan offered by major banks in New
York City at approximately 11:00 a.m. New York City time, on the day that its
two London Banking Days preceding the first day of such LIBOR Loan. In the event
that Bank is unable to obtain any such quotation as provided above, it will be
deemed that LIBOR pursuant to a LIBOR Loan cannot be determined.
In the event that the Board of Governors of the Federal Reserve
System shall impose a Reserve Requirement with respect to LIBOR deposits of the
Bank then for any period during which such Reserve Requirement shall apply, LIBO
Rate shall be equal to the amount determined above divided by an amount equal to
1 minus the Reserve Requirement.
"LIBOR Loan" means any Loan when and to the extent the interest rate
therefor is determined on the basis of the definition "LIBO Rate."
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, negative pledge, charge, conditional
sale, title retention agreement, financing lease or other encumbrance or similar
right of others.
"Loans" shall have the meaning set forth in Section 2.1(a) herein.
"Margin" means the percentage points to be added to the Bank's Prime
Rate, the Bank's Cost of Funds Rate or the then applicable LIBOR Rate, as set
forth in the Agreement.
"Multiemployer Plan" means a Plan defined as such in section 3(37)
of ERISA to which contributions have been made by the Borrower or any ERISA
Affiliate and which is covered by Title IV of ERISA.
"Net Income (Loss)" of any Person for any period means the net
income (loss) of such Person for such period determined in accordance with GAAP.
"Note" means the Promissory Note of the Borrower in the form of
Exhibit A hereto evidencing the Loans made by the Bank hereunder and all
Promissory Notes delivered in substitution or exchange therefore, as amended or
supplemented from time to time.
<PAGE>
10
"Notice of Borrowing" shall mean the notice of each Borrowing
described in Section 2.8 and in the form of Exhibit E hereto.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA, other than a
Multiemployer Plan.
"Prime Rate" means that rate of interest from time to time announced
by the Bank at its office located at 111 Westminster Street, Providence, Rhode
Island 02903, which rate may not be the Bank's lowest or best rate.
"Prime Rate Loan" means any Loan when and to the extent the interest
rate therefor is determined in relation to the Prime Rate.
"Receivables" means all accounts owing to a Person arising out of or
in connection with the bona fide sale or lease of goods or services in the
ordinary course of business.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulatory Change" means any change after the date of this
Agreement in United States federal, state, municipal or foreign laws or
regulations (including without limitation Regulation D) or the adoption or
making after such date of any interpretations, directives or requests applying
to a class of banks including the Bank of or under any United States, federal,
state, municipal or foreign laws or regulations (whether or not having the force
of law) by any court or governmental or monetary authority charged with the
interpretation or administration thereof.
"Reserve Requirement" means, for any Interest Period for any LIBOR
Loan, the average maximum rate at which reserves (including any marginal,
supplemental or emergency reserves) are required to be maintained during such
Interest Period under Regulation D by member banks of the Federal Reserve System
in Boston with deposits exceeding $1,000,000,000 against "Eurocurrency
liabilities" (as such term is used in
<PAGE>
11
Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement shall reflect any other reserves required to be maintained by such
member banks by reason of any Regulatory Change against (i) any category of
liabilities which includes deposits by reference to which the LIBO Rate for
LIBOR Loans is to be determined as provided in the definition of "LIBO Rate" in
this Section 1.1 or (ii) any category of extensions of credit or other assets
which include LIBOR Loans.
"Security Agreement" means the security agreement dated as of the
Closing Date by the Borrower in favor of the Bank, in substantially the form of
Exhibit C.
"Senior Liabilities" means for any Person at any time, all Debt,
other than contingent liabilities and Subordinated Debt.
"Subordinated Debt" means all funded Debt of a Person subordinated
to the Loans on terms satisfactory to the Bank.
"Subordination Agreement" means the subordination agreement referred
to in Section 4.1(j) hereof relating to the Borrower's outstanding debt to FAvS.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which at least a majority of the securities or other ownership
interests having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by such Person.
"Tangible Capital Base" shall mean the sum of Tangible Net Worth
plus Subordinated Debt.
"Tangible Net Worth" means, at any date of determination thereof,
the excess of total assets of a Person over total liabilities of such Person,
excluding, however, from the determination of total assets: loans and advances
to officers and non-consolidated Affiliates, goodwill, trademarks, patents,
organizational costs, unamortized debt discounts and expenses and other like
intangible assets as defined by GAAP.
"Termination Date" means April 22, 1999; provided that if such date
is not a Banking Day, the Termination Date shall be the next succeeding Banking
Date.
"Total Funded Debt" means, with respect to any Person, all Debt of
such Person for money borrowed, current or otherwise (including any senior and
subordinated indebtedness of such Person), which by its terms matures more than
one year from the date as of which such Debt is incurred, and any Debt of such
Person for money borrowed maturing within one year from such date which is
renewable or extendible at the option of the obligor to a date beyond one year
from such date (whether or not theretofor renewed or extended), including any
such indebtedness renewable or extendible at the option of the
<PAGE>
12
obligor under, or payable from the proceeds of other indebtedness which may be
incurred pursuant to, the provisions of any revolving credit agreement or
similar agreement.
"Total Liabilities" means all liabilities of a Person which would be
classified as such on a balance sheet in accordance with GAAP.
"Unfunded Benefit Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all benefit liabilities (within
the meaning of section 4001(a)(16) of ERISA) under the Plan exceeds the fair
market value of all Plan assets allocable to such benefit liabilities, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of the Borrower
or any ERISA Affiliate under Title IV of ERISA.
Section 1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
ARTICLE 2. THE CREDIT
Section 2.1. The Loans. Subject to the terms and conditions of this
Agreement, the Bank agrees to make loans (the "Loans") to the Borrower from time
to time from and including the date hereof to and including the Termination
Date, up to but not exceeding in the aggregate principal amount at any one time
outstanding the amount of the Commitment, and provided that the aggregate
outstanding principal amount of Loans shall at no time exceed the Borrowing
Base. The Loans may be outstanding as Prime Rate Loans, Cost of Funds Loans or
LIBOR Loans (each a "type" of Loan). The Loans shall be due and payable on the
Termination Date. Each type of Loan shall be made and maintained at the Bank's
Lending Office for such type of Loan.
Section 2.2. The Note. The Loans shall be evidenced by a promissory
note in favor of the Bank in the form of Exhibit A, dated the date of this
Agreement, duly completed and executed by the Borrower.
Section 2.3. Purpose. The Borrower shall use the proceeds of the
Loans for general corporate purposes, including working capital, leasehold
improvements and equipment needs, and, subject to the Bank's approval, any
Acquisitions. No proceeds of the Loans shall be used to directly or indirectly
fund the needs of any Subsidiary of the Borrower if such Subsidiary is not also
the Borrower hereunder. No proceeds of the Loans shall be used for the purpose,
whether immediate, incidental or ultimate, of buying or carrying "margin stock"
within the meaning of Regulation U.
Section 2.4. Borrowing Procedures. The Borrower shall give the Bank
notice of each Borrowing to be made hereunder as provided in Section 2.8. Not
later than 1:00 p.m. Hartford, Connecticut time on the date of such Borrowing,
the Bank shall,
<PAGE>
13
subject to the conditions of this Agreement, make the amount of the Loan to be
made by it on such day available to the Borrower, in immediately available
funds, by the Bank crediting an account of the Borrower designated by the
Borrower and maintained with the Bank at the Lending Office.
Section 2.5. Prepayments and Conversions.
(a) Optional Prepayments and Conversions. The Borrower shall
have the right to make prepayments of principal, or to convert one type of Loan
into another type of Loan, at any time or from time to time; provided that: (i)
the Borrower shall give the Bank notice of each such prepayment or conversion as
provided in Section 2.8; and (ii) LIBOR Loans and Cost of Funds Loans may be
prepaid or converted only on the last day of an Interest Period for such Loans,
unless the Borrower compensates the Bank as required pursuant to Section 3.4
hereof, and (iii) conversions from any type of Loans into LIBOR Loans or Cost of
Funds Loans may not be made at any time that a Default or Event of Default
exists.
(b) Mandatory Prepayments. The Borrower shall immediately
repay no later than one Banking Day after delivery of any Borrowing Base
Certificate an amount by which (A) the aggregate principal amount of all
outstanding Loans exceeds the Borrowing Base, and (B) an amount by which the
aggregate principal amount of all outstanding Loans exceeds the Commitment,
together with accrued interest to the date of such prepayment on the principal
amount prepaid. In addition, amounts outstanding as Loans will be reduced by
100% of the net cash proceeds from any sale by the Borrower of any material
assets (other than Inventory) outside of the normal course of business. In
addition, upon the occurrence of any Change of Control, the Borrower shall
immediately, at the option of and upon demand by the Bank, repay all outstanding
amounts under the Loans. Each such prepayment in accordance with the foregoing
provisions shall be applied first to any expenses required to be paid under
Section 3.4 herein in connection with a mandatory prepayment and then to any
other expenses incurred by the Bank, second to any interest due on the amount
prepaid, and last to the outstanding principal amount of the Loans prepaid.
(c) Yield Maintenance Fee. If, at any time (i) the interest
rate on any Loan is a fixed rate, and (ii) the Bank in its sole discretion
should determine that current market conditions can accommodate a prepayment
request, Borrower shall have the right at any time and from time to time to
prepay the Loan in whole (but not in part), and Borrower shall pay to the Bank a
yield maintenance fee in an amount computed as follows: The current rate for
United States Treasury securities (bills on a discounted basis shall be
converted to a bond equivalent) with a maturity date closest to the maturity
date of the term chosen pursuant to the Fixed Rate Election as to which the
prepayment is made, shall be subtracted from the "cost of funds" component of
the fixed rate in effect at the time of prepayment. If the result is zero or a
negative number, there shall be no yield maintenance
<PAGE>
14
fee. If the result is a positive number, then the resulting percentage shall be
multiplied by the amount of the principal balance being prepaid. The resulting
amount shall be divided by 360 and multiplied by the number of the days
remaining in the term chosen pursuant to the Fixed Rate Election as to which the
prepayment is made. Said amount shall be reduced to present value calculated by
using the number of days remaining in the designated term and using the
above-referenced United States Treasury security rate and the number of days
remaining in the term chosen shall be the yield maintenance fee due to the Bank
upon prepayment of the fixed rate Loan. Each reference in this paragraph to
"Fixed Rate Election" shall mean the election by Borrower pursuant to Section
2.11 hereof.
If by reason of an Event of Default the Bank elects to declare
such Loan to be immediately due and payable, then any yield maintenance fee with
respect to the Loan shall become due and payable in the same manner as though
Borrower had exercised such right of prepayment.
Section 2.6. Late Charges. Payments not received within 10 days of
the due date therefor (including payments which are incomplete due to
insufficient funds in the Borrower's operating account at the Bank) will be
subject to a one-time charge equal to 5% of the amount overdue, with a minimum
charge of $15.
Section 2.7. Changes of Commitment. The Borrower shall have the
right to reduce or terminate the amount of the unused portion of the Commitment
at any time or from time to time, provided that: (i) the Borrower shall give
notice of each such reduction or termination to the Bank as provided in Section
2.8; and (ii) each partial reduction shall be in an aggregate amount at least
equal to $500,000 (and integral multiples of $100,000 in excess thereof). Once
reduced or terminated, such Commitment may not be reinstated.
Section 2.8. Certain Notices. Notices by the Borrower to the Bank of
each Borrowing pursuant to Section 2.4, and each prepayment or conversion
pursuant to Section 2.5(a), and each reduction or termination of a Commitment
pursuant to Section 2.7 shall be irrevocable and shall be effective only if
received by the Bank not later than 12:00 noon Hartford, Connecticut time, and
(a) in the case of Borrowings and prepayments of, conversions into and (in the
case of LIBOR Loans) renewals of (i) Prime Rate Loans or Cost of Funds Loans,
given one Banking Day prior thereto; and (ii) LIBOR Loans, given two Banking
Days prior thereto; and (b) in the case of reductions or termination of the
Commitment, given three Banking Days prior thereto. Each such Notice of
Borrowing shall be in the form of Exhibit E hereto and shall specify the Loans
to be borrowed, prepaid, converted or renewed and the amount (subject to Section
2.9) and type of the Loans to be borrowed, or converted, or renewed or prepaid
and the date of the Borrowing or prepayment, or conversion or renewal (which
shall be a Banking Day). Each such notice of reduction or termination shall
specify the amount of the Commitment to be reduced or terminated.
<PAGE>
15
Section 2.9. Minimum Amounts. Except for Borrowings which exhaust
the full remaining amount of the unused portion of the Commitment or prepayments
or conversions which result in the prepayment or conversion of all Loans, as the
case may be, of a particular type, each Borrowing, optional prepayment,
conversion and renewal of principal of Loans of a particular type shall be in an
amount at least equal to (a) $50,000 with respect to Prime Rate Loans, (b)
$100,000 and integral amounts of $50,000 with respect to Cost of Funds Loans,
and (c) $500,000 and integral multiples of $100,000 in excess thereof with
respect to LIBOR Loans (borrowings, prepayments, conversions or renewals of or
into Loans of different types or, in the case of LIBOR Loans, having different
Interest Periods at the same time hereunder to be deemed separate borrowings,
prepayments, conversions and renewals for the purposes of the foregoing, one for
each type of Interest Period).
Section 2.10. Interest.
(a) Interest shall accrue on the outstanding and unpaid
principal amount of each Loan for the period from and including the date of such
Loan to but excluding the date such Loan is due at the following rates per
annum: (i) for Prime Rate Loans, at a variable rate per annum equal to the Prime
Rate (ii) for Cost of Funds Loans, at a variable rate equal to the Cost of Funds
Rate plus one and one-half (1 1/2%) percentage points, and (iii) for LIBOR
Loans, at a fixed rate equal to the LIBO Rate plus one and one-half (1 1/2%)
percentage points, for the period from and including the first day of the
Interest Period therefore to but excluding the last day of such Interest Period.
Notwithstanding the foregoing, in the event that the Borrower's Leverage Ratio
during any period is equal to or greater than 1.80 to 1.00, the Margin over any
Cost of Funds Rate or LIBOR Rate will be one and three-quarters percentage
points. If the principal amount of any Loan and any other amount payable by the
Borrower hereunder or under the Note shall not be paid when due (at stated
maturity, by acceleration or otherwise), interest shall accrue on such amount to
the fullest extent permitted by law from and including such due date to but
excluding the date such amount is paid in full at the Default Rate for such type
of Loan.
(b) The interest rate on Prime Rate Loans shall change when
the Prime Rate changes, and interest on each such Loan shall be calculated on
the basis of a year of 360 days for the actual number of days elapsed. Interest
on each LIBOR Loan and Cost of Funds Loan shall be calculated on the basis of a
year of 360 days for the actual number of days elapsed.
(c) Accrued interest on Prime Rate Loans shall be due and
payable in arrears upon any payment of principal and on the last day of each
calendar month, commencing May 29, 1998, and on the Termination Date. Accrued
interest on all LIBOR Loans and Cost of Funds Loans shall be due and payable in
arrears upon any payment of principal and on the last day of each Interest
Period, commencing May 29,
<PAGE>
16
1998, and on the Termination Date. Notwithstanding the foregoing, interest
accruing at the Default Rate shall be due and payable from time to time on
demand of the Bank.
Section 2.11. Interest Periods; Renewals.
(a) In the case of each LIBOR Loan or Cost of Funds Loan, the
Borrower shall select an Interest Period of any duration in accordance with the
definition of Interest Period in Section 1.1, subject to the following
limitations: (i) no Interest Period may extend beyond the Termination Date; (ii)
notwithstanding clauses (i) above, no Interest Period for a LIBOR Loan shall
have a duration less than one month, and if any such proposed Interest Period
would otherwise be for a shorter period, such Interest Period shall not be
available; (iv) if an Interest Period would end on a day which is not a Banking
Day, such Interest Period shall be extended to the next Banking Day; and (v) no
more than five Interest Periods may be outstanding at any one time.
(b) Upon notice to the Bank as provided in Section 2.8, the
Borrower may renew any LIBOR Loan or Cost of Funds Loan on the last day of the
Interest Period therefor as a LIBOR Loan or Cost of Funds Loan with an Interest
Period of the same or different duration in accordance with the limitations
provided above. If the Borrower shall fail to give notice to the Bank of such a
renewal, such LIBOR Loan or Cost of Funds Loan shall automatically become a
Prime Rate Loan on the last day of the current Interest Period.
Section 2.12. Facility Fees. The Borrower shall pay to the Bank, on
the Closing Date, a facility fee equal to $20,000.
Section 2.13. Payments Generally. All payments under this Agreement
or the Note shall be made in Dollars in immediately available funds not later
than 1:00 p.m. Hartford, Connecticut, time on the relevant dates specified above
(each such payment made after such time on such due date to be deemed to have
been made on the next succeeding Banking Day) at the Lending Office of the Bank.
The Bank may (but shall not be obligated to) debit the amount of any such
payment which is not made by such time to any ordinary deposit account of the
Borrower with the Bank. Until the Bank and the Borrower otherwise agree, the
Bank shall debit the Borrower's account number __________ with the Bank for the
amount of any payment required hereunder, but the Bank may also debit any
ordinary deposit account of the Borrower if the amount in account number
__________ is insufficient to make any required payment. The Borrower shall, at
the time of making each payment under this Agreement or the Note, specify to the
Bank the principal or other amount payable by the Borrower under this Agreement
or the Note to which such payment is to be applied (and in the event that it
fails to so specify, or if a Default or Event of Default has occurred and is
continuing, the Bank may apply such payment as it may elect in its sole
discretion). If the due date of any payment under this Agreement or the Note
would otherwise fall on a day which is not a Banking Day, such date shall be
extended to
<PAGE>
17
the next succeeding Banking Day and interest shall be payable for any principal
so extended for the period of such extension.
ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC.
Section 3.1. Additional Costs.
(a) The Borrower shall pay to the Bank from time to time on
demand such amounts as the Bank may determine to be necessary to compensate it
for any costs which the Bank determines are attributable to its making or
maintaining any LIBOR Loans under this Agreement or the Note or its obligation
to make any such Loans hereunder, or any reduction in any amount receivable by
the Bank hereunder in respect of any such Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"Additional Costs"), resulting from any Regulatory Change which: (i) changes the
basis of taxation of any amounts payable to the Bank under this Agreement or the
Note in respect of any of such Loans (other than taxes imposed on the overall
net income of the Bank or of its Lending Office for any of such Loans by the
jurisdiction in which the Principal Office or such Lending Office is located);
or (ii) imposes or modifies any reserve, special deposit, deposit insurance or
assessment, minimum capital, capital ratio or similar requirements relating to
any extensions of credit or other assets of, or any deposits with or other
liabilities of, the Bank (including any of such Loans or any deposits referred
to in the definition of "LIBO Rate" in Section 1.1); or (iii) imposes any other
condition affecting this Agreement or the Note (or any of such extensions of
credit or liabilities). The Bank will notify the Borrower of any event occurring
after the date of this Agreement which will entitle the Bank to compensation
pursuant to this Section 3.1(a) as promptly as practicable after it obtains
knowledge thereof and determines to request such compensation.
(b) Without limiting the effect of the foregoing provisions of
this Section 3.1, in the event that, by reason of any Regulatory Change, the
Bank either (i) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of the Bank which includes deposits by reference to which the interest rate on
LIBOR Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of the Bank which includes LIBOR Loans or
(ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if the Bank so elects by notice
to the Borrower, the obligation of the Bank to make or renew, and to convert
Loans of any other type into, Loans of such type hereunder shall be suspended
until the date such Regulatory Change ceases to be in effect, and the Borrower
shall on the last day(s) of the then current Interest Period(s) for the
outstanding Loans of such type, either prepay such Loans or convert such Loans
into another type of Loan in accordance with Section 2.5.
<PAGE>
18
(c) Without limiting the effect of the foregoing provisions of
this Section 3.1 (but without duplication), the Borrower shall pay to the Bank
from time to time on request such amounts as the Bank may determine to be
necessary to compensate the Bank for any costs which it determines are
attributable to the maintenance by it or any of its affiliates pursuant to any
law or regulation of any jurisdiction or any interpretation, directive or
request (whether or not having the force of law and whether in effect on the
date of this Agreement or thereafter) of any court or governmental or monetary
authority of capital in respect of its Loans hereunder or its obligation to make
Loans hereunder (such compensation to include, without limitation, an amount
equal to any reduction in return on assets or equity of the Bank to a level
below that which it could have achieved but for such law, regulation,
interpretation, directive or request). The Bank will notify the Borrower if it
is entitled to compensation pursuant to this Section 3.1(c) as promptly as
practicable after it determines to request such compensation.
(d) Determinations and allocations by the Bank for purposes of
this Section 3.1 of the effect of any Regulatory Change pursuant to subsections
(a) or (b), or of the effect of capital maintained pursuant to subsection (c),
on its costs of making or maintaining Loans or its obligation to make Loans, or
on amounts receivable by, or the rate of return to, it in respect of Loans or
such obligation, and of the additional amounts required to compensate the Bank
under this Section 3.1, shall be conclusive, provided that such determinations
and allocations are made on a reasonable basis; provided, however, that the Bank
shall provide ninety days' notice of any additional amounts required to
compensate the Bank under this Section 3.1 (the "Adjustment"), and the Borrower
may thereafter attempt to negotiate the amount of the Adjustment in good faith
with the Bank within ninety days of the day on which the Borrower are so
notified. If the Borrower and the Bank are unable to agree on the amount of the
Adjustment within such ninety-day period, then the amount of the Adjustment
shall be the amount set forth in the aforementioned notice from the Bank to the
Borrower. Whatever the final Adjustment may be, if the Bank shall still have any
Loans outstanding to the Borrower upon the expiration of such ninety-day period,
then the Adjustment shall be effective retroactive to the date on which the
Borrower first received notice of the Adjustment. The Bank shall not be
obligated to offer LIBO Rates with respect to Interest Periods commencing during
the period following any such notice and prior to agreement by the Bank and the
Borrower as to the amount of the Adjustment.
Section 3.2. Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if the Bank determines (which determination shall be
conclusive) that:
(a) quotations of interest rates for the relevant deposits
referred to in the definition of "LIBO Rate" in Section 1.1 are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for any LIBOR Loans as provided in this
Agreement; or
<PAGE>
19
(b) the relevant rates of interest referred to in the
definition of "LIBO Rate" in Section 1.1 upon the basis of which the rate of
interest for any LIBOR Loans is to be determined do not adequately cover the
cost to the Bank of making or maintaining such Loans; then the Bank shall give
the Borrower prompt notice thereof, and so long as such condition remains in
effect, the Bank shall be under no obligation to make or renew Loans of such
type or to convert Loans of any other type into Loans of such type and the
Borrower shall, on the last day(s) of the then current Interest Period(s) for
the outstanding Loans of the affected type, either prepay such Loans or convert
such Loans into another type of Loans in accordance with Section 2.5.
Section 3.3. Illegality. Notwithstanding any other provision in this
Agreement, in the event that it becomes unlawful for the Bank or its Lending
Office to (a) honor its obligation to make or renew LIBOR Loans hereunder or
convert Loans of any type into Loans of such type, or (b) maintain LIBOR Loans
hereunder, then the Bank shall promptly notify the Borrower thereof and the
Bank's obligation to make or renew LIBOR Loans and to convert other types of
Loans into Loans of such type hereunder shall be suspended until such time as
the Bank may again make, renew or convert and maintain such affected Loans and
the Borrower shall, on the last day(s) of the then current Interest Period for
the outstanding LIBOR Loans, as the case may be (or on such earlier date as the
Bank may specify to the Borrower), either prepay such Loans or convert such
Loans into another type of Loans in accordance with Section 2.5.
Section 3.4. Certain Compensation. The Borrower shall pay to the
Bank, upon the request of the Bank, such amount or amounts as shall be
sufficient (in the reasonable opinion of the Bank) to compensate it for any
loss, cost or expense which the Bank determines is attributable to:
(a) any payment, prepayment, conversion or renewal of a LIBOR
Loan or Cost of Funds Loan on a date other than the last day of an Interest
Period for such Loan (whether by reason of acceleration or otherwise); or
(b) any failure by the Borrower to borrow, convert into or
renew a LIBOR Loan or Cost of Funds Loan to be made, converted into or renewed
by the Bank on the date specified therefor in the relevant notice under Section
2.4, 2.5 or 2.11, as the case may be.
ARTICLE 4. CONDITIONS PRECEDENT
Section 4.1. Documentary Conditions Precedent. The obligation of the
Bank to make the Loans is subject to the conditions precedent that the Bank
shall have received on or before the date of such Borrowing each of the
following, in form and substance satisfactory to the Bank and its counsel:
(a) the Note duly executed by the Borrower;
<PAGE>
20
(b) the Security Agreement duly executed by the Borrower,
together with (i) acknowledgment copies of the financing statements (UCC-1) duly
filed under the Uniform Commercial Code of all jurisdictions necessary or, in
the opinion of the Bank, desirable to perfect the security interest created by
the Security Agreement; (ii) certified copies of requests for information (Form
UCC-11) identifying all of the financing statements on file with respect to the
Borrower in all jurisdictions referred to under (i), including the financing
statements filed by the Bank against the Borrower, indicating that no party
claims an interest in any of the Collateral (as defined in the Security
Agreement);
(c) a certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Closing Date, attesting to all corporate action taken by
the Borrower, including resolutions of its Board of Directors authorizing the
execution, delivery and performance of the Facility Documents and each other
document to be delivered pursuant to this Agreement and certifying copies of the
Certificate of Incorporation and by-laws of the Borrower;
(d) a certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Closing Date, certifying the names and true signatures
of the officers of the Borrower authorized to sign the Facility Documents and
the other documents to be delivered by the Borrower under this Agreement;
(e) a certificate of a duly authorized officer of the
Borrower, dated the Closing Date, stating that its representations and
warranties in Article 5 of this Agreement, and Article 2 of the Security
Agreement, and in each other Facility Document, are true and correct on such
date as though made on and as of such date and that no event has occurred and is
continuing which constitutes a Default or Event of Default;
(f) an Environmental Indemnification Agreement duly signed by
the Borrower in form and substance satisfactory to the Bank;
(g) a certificate of good standing for the Borrower from the
Secretary of the State of the state in which the Borrower is incorporated and
each other jurisdiction in which the Borrower is qualified to do business;
(h) payment by the Borrower to the Bank of the facility fee as
required by Section 2.12, and all other expenses and fees incurred by the Bank
for which the Bank has furnished the Borrower with an invoice;
(i) a favorable opinion of counsel for the Borrower, dated the
Closing Date, in substantially the form of Exhibit D and as to such other
matters as the Bank may reasonably request;
<PAGE>
21
(j) a Subordination Agreement, in form acceptable to the Bank,
duly executed by the Borrower and FAvS together with copies of all instruments
evidencing any Subordinated Debt of the Borrower and a satisfactory review of
the same;
(k) evidence of no material adverse change in the business,
management, operations, properties, prospects or condition (financial or
otherwise) of the Borrower since the date of the commitment letter;
(l) a Borrowing Base Certificate and a recent Receivables
aging of the Borrower;
(m) appropriate landlord waivers and consents; and
(n) evidence of insurance required by this Agreement.
Section 4.2. Additional Conditions Precedent. The obligation of the
Bank to make the Loans pursuant to a Borrowing which increases the amount
outstanding hereunder (including the initial Borrowing) shall be subject to the
further conditions precedent that on the date of such Borrowing:
(a) the following statements shall be true:
(i) the representations and warranties of the
Borrower contained in Article 5 herein, and in Article 2 of the Security
Agreement, and in each other Facility Document, are true and correct on and as
of the date of such Loan as though made on and as of such date; and
(ii) no Default or Event of Default has occurred
and is continuing, or would result from such Loan; and
(iii) there has been no material adverse change
in the business, management, operations, properties, prospects or
condition (financial or otherwise) of the Borrower or any of its
Subsidiaries since the Closing Date;
(b) audited financial statements of FAvS for the fiscal year
ending January 31, 1998 shall have been delivered to Fleet not later than April
30, 1998 and shall have been deemed satisfactory in all respects by the Bank;
(c) Management-prepared financial statements of the Borrower
for the fiscal year ending January 31, 1998 shall have been delivered to the
Bank not later than April 30, 1998 and shall have been deemed satisfactory in
all respects by the Bank; and
(d) the Bank shall have received such other documents or items
as the Bank may reasonably request.
<PAGE>
22
Without limiting any of the foregoing, a field examination of
the Borrower satisfactory to the Bank in all respects shall be completed within
90 days of the Closing Date, and, to the extent such field examination is not
completed on a timely basis, the Bank shall not be obligated to make any Loans
to the Borrower after the expiration of such 90-day period unless the Bank, at
its sole option, otherwise determines to make such Loans available to the
Borrower. During the 90-day period following the Closing Date and prior to the
completion of the field examination, the Bank shall continue to make Loans to
the Borrower provided that the Borrower complies with all other additional
conditions precedent set forth in this Section 4.2.
Section 4.3. Deemed Representations. Each Notice of Borrowing
hereunder and acceptance by the Borrower of the proceeds of such Borrowing shall
constitute a representation and warranty that the statements contained in
Section 4.2(a) are true and correct both on the date of such notice and, unless
the Borrower otherwise notifies the Bank prior to such Borrowing, as of the date
of such Borrowing.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
Section 5.1. Incorporation, Good Standing and Due Qualification.
Each of the Borrower and its Subsidiaries is duly incorporated, validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has the corporate power and authority to own its assets and to transact the
business in which it is now engaged or proposed to be engaged, and is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required.
Section 5.2. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by the Borrower of the Facility Documents
have been duly authorized by all necessary corporate action and do not and will
not: (a) require any consent or approval of its stockholders; (b) contravene its
charter or by-laws; (c) violate any provision of, or require any filing (other
than the filing of the financing statements contemplated by the Security
Agreement), registration, consent or approval under, any law, rule, regulation
(including, without limitation, Regulation U), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower or any of its Subsidiaries; (d) result in a breach
of or constitute a default or require any consent under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected;
(e) result in, or require, the creation or imposition of any Lien (other than as
created under the Facility Documents), upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower; or (f) cause the
Borrower (or any Subsidiary or Affiliate, as the case may be) to be in default
under any
<PAGE>
23
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
Section 5.3. Legally Enforceable Agreements. Each Facility Document
to which the Borrower is a party is, or when delivered under this Agreement will
be, a legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally.
Section 5.4. Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened, against or affecting
the Borrower or any of its Subsidiaries before any court, governmental agency or
arbitrator, which may, in any one case or in the aggregate, materially adversely
affect the financial condition, operations, properties or business of the
Borrower and its Subsidiaries on a consolidated basis or of the ability of the
Borrower to perform its obligation under the Facility Documents to which it is a
party.
Section 5.5. Financial Statements. (a) The balance sheet of the
Borrower as at September 30, 1996, and the related income statement and
statements of cash flows and changes in stockholders' equity of the Borrower for
the nine-month period then ended, and the accompanying footnote, together with
the opinion thereon as to the statements, of Ernst & Young LLP, independent
certified public accountants, and the unaudited balance sheet of the Borrower as
at December 31, 1995, and the related income statement and statements of cash
flows and changes in stockholders' equity for the fiscal year then ended, copies
of which have been furnished to the Bank, are complete and correct and fairly
present the financial condition of the Borrower as at such dates and the results
of the operations of the Borrower for the periods covered by such statements,
all in accordance with GAAP consistently applied (subject to year-end
adjustments in the case of the interim financial statements). There are no
liabilities of the Borrower, fixed or contingent, which are material but are not
reflected in the financial statements or in the Note thereto, other than
liabilities arising in the ordinary course of business since September 30, 1996.
No information, exhibit or report furnished by the Borrower to the Bank in
connection with the negotiation of this Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact necessary
to make the statement contained therein not materially misleading. Since
September 30, 1996, there has been no material adverse change in the condition
(financial or otherwise), business, operations or prospects of the Borrower.
(b) The consolidated balance sheet of FAvS and its Consolidated
Subsidiaries as at January 31, 1997, and the related consolidated income
statement and statements of cash flows and changes in stockholders' equity of
FAvS and its Consolidated Subsidiaries for the fiscal year then ended, and the
accompanying footnote, together with
<PAGE>
24
the opinion thereon as to the consolidated statements, of Ernst & Young LLP,
independent certified public accountants, and the unaudited consolidated balance
sheet of FAvS and its Consolidated Subsidiaries as at October 31, 1997, and the
related consolidated income statement and statements of cash flows and changes
in stockholders' equity for the fiscal year then ended, copies of which have
been furnished to the Bank, are complete and correct and fairly present the
financial condition of FAvS and its Consolidated Subsidiaries as at such dates
and the results of the operations of FAvS and its Consolidated Subsidiaries for
the periods covered by such statements, all in accordance with GAAP consistently
applied (subject to year-end adjustments in the case of the interim financial
statements). There are no liabilities of the FAvS or its Consolidated
Subsidiaries, fixed or contingent, which are material but are not reflected in
the financial statements or in the Note thereto, other than liabilities arising
in the ordinary course of business since October 31, 1997. No information,
exhibit or report furnished by FAvS to the Bank in connection with the
negotiation of this Agreement contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the statement
contained therein not materially misleading. Except as otherwise set forth on
Schedule 5.5(b) attached hereto, since October 31, 1997, there has been no
material adverse change in the condition (financial or otherwise), business,
operations or prospects of FAvS and its Consolidated Subsidiaries on a
consolidated basis.
Section 5.6. Ownership and Liens. The Borrower and each of its
Subsidiaries has title to, or valid leasehold interests in, all of its
properties and assets, real and personal, including the properties and assets,
and leasehold interests reflected in the financial statements referred to in
Section 5.5 (other than any properties or assets disposed of in the ordinary
course of business), and none of the properties and assets owned by the Borrower
or any of its Subsidiaries and none of its leasehold interests is subject to any
Lien, except as disclosed in such financial statements or as may be permitted
hereunder and except for the Lien created by the Security Agreement.
Section 5.7. Taxes. The Borrower and each of its Subsidiaries has
filed all tax returns (federal, state and local) required to be filed and has
paid all taxes, assessments and governmental charges and levies thereon to be
due, including interests and penalties, except where the failure to so file or
pay would not have a material adverse effect on the condition (financial or
otherwise), business, operations or prospects of the Borrower and its
Subsidiaries on a consolidated basis.
Section 5.8. ERISA. Each Plan, and, to the best knowledge of the
Borrower, each Multiemployer Plan, is in compliance in all material respects
with, and has been administered in all material respects in compliance with, the
applicable provisions of ERISA, the Code and any other applicable federal or
state law, and no event or condition is occurring or exists concerning which the
Borrower would be under an obligation to furnish a report to the Bank in
accordance with Section 6.8(k) hereof. As of the most recent valuation date for
each Plan, each Plan was "fully funded," which for purposes of this
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25
Section 5.8 shall mean that the fair market value of the assets of the Plan is
not less than the present value of the accrued benefits of all participants in
the Plan, computed on a Plan termination basis. To the best knowledge of the
Borrower, no Plan has ceased being fully funded as of the date these
representations are made with respect to any Loan under this Agreement.
Section 5.9. Subsidiaries and Ownership of Stock. Schedule 5.9 is a
complete and accurate list of the Subsidiaries of the Borrower, showing the
jurisdiction of incorporation or organization of each Subsidiary and showing the
percentage of the Borrower's ownership of the outstanding stock or other
interest of each such Subsidiary. All of the outstanding capital stock or other
interest of each such Subsidiary has been validly issued, is fully paid and
nonassessable and is owned by the Borrower free and clear of all Liens.
Section 5.10. Credit Arrangements. Schedule 5.10 is a complete and
correct list of all credit agreements, indentures, purchase agreements,
guaranties, Capital Leases and other investments, agreements and arrangements
presently in effect providing for or relating to extensions of credit (including
agreements and arrangements for the issuance of letters of credit or for
acceptance financing) in respect of which the Borrower or any of its
Subsidiaries is in any manner directly or contingently obligated and which
involve liabilities or obligations in excess of $50,000; and the maximum
principal or face amounts of the credit in question, outstanding and which can
be outstanding, are correctly stated, and all Liens of any nature given or
agreed to be given as security therefor are correctly described or indicated in
such Schedule.
Section 5.11. Operation of Business. The Borrower and each of its
Subsidiaries possesses all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, to conduct its business
substantially as now conducted and as presently proposed to be conducted, and
neither the Borrower nor any of its Subsidiaries is in violation of any valid
rights of others with respect to any of the foregoing.
Section 5.12. Hazardous Materials. The Borrower and each of its
Subsidiaries have obtained all permits, licenses and other authorizations which
are required under all Environmental Laws, except to the extent failure to have
any such permit, license or authorization would not have a material adverse
effect on the consolidated financial condition, operations, business or
prospects of the Borrower and its Subsidiaries. The Borrower and each of its
Subsidiaries are in compliance with the terms and conditions of all such
permits, licenses and authorizations, and are also in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in any applicable Environmental
Law or in any regulation, code, plan, order, decree, judgment, injunction,
notice or demand letter issued, entered, promulgated or approved thereunder,
except to the extent failure to comply would
<PAGE>
26
not have a material adverse effect on the consolidated financial condition,
operations, business or prospects of the Borrower and its Subsidiaries.
In addition, except as set forth in Schedule 5.12 hereto:
(a) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been filed, no
penalty has been assessed and no investigation or review is pending or
threatened by any governmental or other entity with respect to any alleged
failure by the Borrower or any of its Subsidiaries to have any permit, license
or authorization required in connection with the conduct of the business of the
Borrower or any of its Subsidiaries or with respect to any generation,
treatment, storage, recycling, transportation, release or disposal, or any
release as defined in 42 U.S.C. s/s 9601(22) ("Release") of any substance
regulated under Environmental Laws ("Hazardous Materials") generated by the
Borrower or any of its Subsidiaries.
(b) Neither the Borrower nor any of its Subsidiaries has
handled any Hazardous Material, other than as a generator, on any property now
or previously owned or leased by the Borrower or any of its Subsidiaries to an
extent that it has, or may reasonably be expected to have, a material adverse
effect on the consolidated financial condition, operations, business or
prospects taken as a whole of the Borrower and its Subsidiaries; and
(i) to the best of its knowledge, no PCB is or has been
present at any property now or previously owned or leased by the Borrower or any
of its Subsidiaries;
(ii) to the best of its knowledge, no asbestos is or has
been present at any property now or previously owned or leased by the Borrower
or any of its Subsidiaries;
(iii) to the best of its knowledge, there are no
underground storage tanks for Hazardous Materials, active or abandoned, at any
property now or previously owned or leased by the Borrower or any of its
Subsidiaries;
(iv) to the best of its knowledge, no Hazardous
Materials have been Released, in a reportable quantity, where such a quantity
has been established by statute, ordinance, rule, regulation or order, at, on or
under any property now or previously owned by the Borrower or any of its
Subsidiaries.
(c) Neither the Borrower nor any of its Subsidiaries has
transported or arranged for the transportation of any Hazardous Material to any
location which is listed on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), listed for possible inclusion on the National Priorities List by the
Environmental Protection Agency
<PAGE>
27
in the Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLIS") or on any similar state or foreign list or which is the subject
of federal, state, foreign or local enforcement actions or other investigations
which may lead to claims against the Borrower or any of its Subsidiaries for
clean-up costs, remedial work, damages to natural resources or for personal
injury claims, including, but not limited to, claims under CERCLA.
(d) No Hazardous Material generated by the Borrower or any of
its Subsidiaries has been recycled, treated, stored, disposed of or Released by
the Borrower or any of its Subsidiaries at any location other than those listed
in Schedule 5.12 hereto.
(e) No oral or written notification of a Release of a
Hazardous Material has been filed by or on behalf of the Borrower or any of its
Subsidiaries and no property now or previously owned or leased by the Borrower
or any of its Subsidiaries is listed or proposed for listing on the National
Priority List promulgated pursuant to CERCLA, on CERCLIS or on any similar state
or foreign list of sites requiring investigation or clean-up.
(f) There are no Liens arising under or pursuant to any
Environmental Laws on any of the real property or properties owned or leased by
the Borrower or any of its Subsidiaries, and no government actions have been
taken or are in process which could subject any of such properties to such Liens
and neither the Borrower nor any of its Subsidiaries would be required to place
any notice or restriction relating to the presence of Hazardous Materials at any
property owned by it in any deed to such property.
(g) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or which are in the
possession of the Borrower or any of its Subsidiaries in relation to any
property or facility now or previously owned or leased by the Borrower or any of
its Subsidiaries which have not been made available to the Bank.
Section 5.13. No Default on Outstanding Judgments or Orders. The
Borrower and each of its Subsidiaries has satisfied all judgments which would
have a material adverse effect on the condition (financial or otherwise),
business, operations or prospects of the Borrower and its Subsidiaries on a
consolidated basis, and neither the Borrower nor any of its Subsidiaries is in
default with respect to any judgment, writ, injunction, decree, rule or
regulation of any court, arbitrator or federal, state, municipal or other
governmental authority, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would have a material adverse effect on the condition
(financial or otherwise), business, operations or prospects of the Borrower and
its Subsidiaries on a consolidated basis.
<PAGE>
28
Section 5.14. No Defaults on Other Agreements. Neither the Borrower
nor any of its Subsidiaries is a party to any indenture, loan or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction which could have a material adverse effect on
the business, properties, assets, operations or conditions, financial or
otherwise, of the Borrower or any of its Subsidiaries, or the ability of the
Borrower to carry out its obligations under the Facility Documents. Neither the
Borrower nor any of its Subsidiaries is in default in any respect in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement or instrument material to its business to
which it is a party.
Section 5.15. Labor Disputes and Acts of God. Neither the business
nor the properties of the Borrower or of any of its Subsidiaries are affected by
any fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance), materially and adversely
affecting such business or properties or the operation of the Borrower or such
Subsidiary.
Section 5.16. Governmental Regulation. Neither the Borrower nor any
of its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce
Act, the Federal Power Act or any statute or regulation limiting its ability to
incur indebtedness for money borrowed as contemplated hereby.
Section 5.17. Partnerships. Neither the Borrower nor any of its
Subsidiaries is a partner in any partnership.
Section 5.18. No Forfeiture. Neither the Borrower nor any of its
Subsidiaries is currently subject to a Forfeiture Proceeding, and, to the best
knowledge of the Borrower, no Forfeiture Proceeding against any of them is
pending or threatened.
Section 5.19. Solvency.
(a) The present fair salable value of the assets of the
Borrower after giving effect to all the transactions contemplated by the
Facility Documents and the funding of the Commitment hereunder exceeds the
amount that will be required to be paid on or in respect of the existing debts
and other liabilities (including contingent liabilities) of the Borrower and its
Subsidiaries as they mature.
(b) The property of the Borrower does not constitute
unreasonably small capital for the Borrower to carry out its business as now
conducted and as proposed to be conducted, including the capital needs of the
Borrower.
(c) The Borrower does not intend to, nor does it believe that
it will, incur debts beyond its ability to pay such debts as they mature (taking
into account
<PAGE>
29
the timing and amounts of cash to be received by the Borrower, and of amounts to
be payable on or in respect of debt of the Borrower). The cash available to the
Borrower, after taking into account all other anticipated uses of the cash of
the Borrower, is anticipated to be sufficient to pay all such amounts on or in
respect of debt of the Borrower when such amounts are required to be paid.
(d) The Borrower does not believe that final judgments against
it in actions for money damages will be rendered at a time when, or in an amount
such that, the Borrower will be unable to satisfy any such judgments promptly in
accordance with their terms (taking into account the maximum reasonable amount
of such judgments in any such actions and the earliest reasonable time at which
such judgments might be rendered). The cash available to the Borrower after
taking into account all other anticipated uses of the cash of the Borrower
(including the payments on or in respect of debt referred to in paragraph (c) of
this Section 5.19), is anticipated to be sufficient to pay all such judgments
promptly in accordance with their terms.
ARTICLE 6. AFFIRMATIVE COVENANTS
So long as the Note shall remain unpaid or the Bank shall have the
Commitment under this Agreement, the Borrower shall:
Section 6.1. Maintenance of Existence. Preserve and maintain, and
cause each of its Subsidiaries to preserve and maintain, their corporate
existence and good standing in the jurisdiction of their incorporation, and
qualify and remain qualified, and cause each of its Subsidiaries to qualify and
remain qualified, as a foreign corporation in each jurisdiction in which such
qualification is required.
Section 6.2. Conduct of Business. Continue, and cause each of its
Subsidiaries to continue, to engage in an efficient and economical manner in a
business of the same general type as conducted by it on the date of this
Agreement.
Section 6.3. Maintenance of Properties. Maintain, keep and preserve,
and cause each of its Subsidiaries to maintain, keep and preserve, all of their
properties (tangible and intangible), necessary or useful in the proper conduct
of their business in good working order and condition, ordinary wear and tear
excepted.
Section 6.4. Maintenance of Records. Keep, and cause each of its
Subsidiaries to keep, adequate records and books of account, in which complete
entries will be made in accordance with GAAP, reflecting all financial
transactions of the Borrower and their respective Subsidiaries.
Section 6.5. Maintenance of Insurance. Maintain, and cause each of
its Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried
<PAGE>
30
by companies engaged in the same or similar business and similarly situated,
which insurance may provide for reasonable deductibility from coverage thereof;
with suitable endorsements for the benefit of the Bank, naming the Bank as loss
payee.
Section 6.6. Compliance with Laws. Comply, and cause each of its
Subsidiaries to comply, in all respects with all applicable laws, rules,
regulations and orders, such compliance to include, without limitation, paying
before the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property.
Section 6.7. Right of Inspection. At any reasonable time and from
time to time and upon reasonable notice, permit the Bank or any agent or
representative thereof, to examine and make copies and abstracts from the
records and books of account of, and visit the properties of, FAvS, the Borrower
and any of their respective Subsidiaries, and to discuss the affairs, finances
and accounts of FAvS, the Borrower and any such Subsidiary with any of its
officers and directors and the Borrower' independent accountants.
Section 6.8. Reporting Requirements. Furnish to the Bank:
(a) as soon as available and in any event within 90 days after
the end of each fiscal year of the Borrower, a consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of such fiscal year and a
consolidated income statement and statements of cash flows and changes in
stockholders' equity and working capital of the Borrower and its Subsidiaries
for such fiscal year, all in reasonable detail and stating in comparative form
the respective consolidated figures for the corresponding date and period in the
prior fiscal year and all prepared in accordance with GAAP and as to the
consolidated statements accompanied by an opinion thereon acceptable to the Bank
by an independent accounting firm of national standing selected by the Borrower
and acceptable to the Bank; (c) as soon as available and in any event within 90
days after the end of each fiscal year of FAvS, a consolidated balance sheet of
FAvS and its Consolidated Subsidiaries as of the end of such fiscal year and a
consolidated income statement and statements of cash flows and changes in
stockholders' equity and working capital of FAvS and its Consolidated
Subsidiaries for such fiscal year, all in reasonable detail and stating in
comparative form the respective consolidated figures for the corresponding date
and period in the prior fiscal year and all prepared in accordance with GAAP and
as to the consolidated statements accompanied by an opinion thereon acceptable
to the Bank by an independent accounting firm of national standing selected by
the Borrower and acceptable to the Bank;
(b) as soon as available and in any event within [60] days
after the end of each fiscal quarter of FAvS, a true and complete copy of FAvS'
Report on Form 10-Q;
<PAGE>
31
(c) as soon as available and in any event within [60] days
after the end of each of the first three fiscal quarters, a consolidated balance
sheet of the Borrower and its Subsidiaries as of the end of such quarter and a
consolidated income statement and statements of cash flows and changes in
stockholders' equity and working capital, of the Borrower and its Subsidiaries
for the period commencing at the end of the previous fiscal year and ending with
the end of such quarter, all in reasonable detail and stating in comparative
form the consolidated figures for the corresponding date and period in the
previous fiscal year and all prepared in accordance with GAAP and certified by
the President or Chief Financial Officer of the Borrower (subject to year-end
adjustments);
(d) promptly upon receipt thereof, copies of any reports,
inclusive of any management letters, submitted to FAvS, the Borrower or any of
their respective Subsidiaries by independent certified public accountants in
connection with examination of the financial statements of FAvS, the Borrower or
any such Subsidiary made by such accountants;
(e) promptly and in any event with 45 days after the end of
each fiscal quarter, a certificate of the President or Chief Financial Officer
of the Borrower (i) certifying that to the best of his knowledge no Default or
Event of Default has occurred and is continuing or, if a Default or Event of
Default has occurred and is continuing, a statement as to the nature thereof and
the action which is proposed to be taken with respect thereto, and (ii) with
computations demonstrating compliance with the covenants contained in Article 8;
(f) as soon as available and in any event within 90 days after
the end of each fiscal year of FAvS, a true and complete copy of FAvS' Report on
Form 10-K;
(g) simultaneously with the delivery of the annual financial
statements referred to in Section 6.8(a), a certificate of the independent
public accountants who audited such statements to the effect that, in making the
examination necessary for the audit of such statements, they have obtained no
knowledge of any condition or event which constitutes a Default or Event of
Default, or if such accountants shall have obtained knowledge of any such
condition or event, specifying in such certificate each such condition or event
of which they have knowledge and the nature and status thereof;
(h) promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the Borrower or any of its Subsidiaries which, if determined adversely
to the Borrower and its Subsidiaries on a consolidated basis, could have a
material adverse effect on the financial condition, properties or operations of
the Borrower and its Subsidiaries on a consolidated basis;
(i) as soon as possible and in any event within five days
after the occurrence of each Default or Event of Default a written notice
setting forth the details of
<PAGE>
32
such Default or Event of Default and the action which is proposed to be taken by
the Borrower with respect thereto;
(j) as soon as possible, and in any event within ten days
after the Borrower knows or has reason to know that any of the events or
conditions specified below with respect to any Plan or Multiemployer Plan have
occurred or exist, a statement signed by a senior financial officer of the
Borrower setting forth details respecting such event or condition and the
action, if any, which the Borrower or its ERISA Affiliate proposes to take with
respect thereto (and a copy of any report or notice required to be filed with or
given to PBGC by the Borrower or an ERISA Affiliate with respect to such event
or condition):
(i) any reportable event, as defined in section 4043(b)
of ERISA, with respect to a Plan, as to which PBGC has not by regulation waived
the requirement of section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event (provided that a failure to meet the minimum
funding standard of section 412 of the Code or section 302 of ERISA including,
without limitation, the failure to make on or before its due date a required
installment under section 412(m) of the Code or section 302(e) of ERISA, shall
be a reportable event regardless of the issuance of any waivers in accordance
with section 412(d) of the Code) and any request for a waiver under section
412(d) of the Code for any Plan;
(ii) the distribution under section 4041 of ERISA of a
notice of intent to terminate any Plan or any action taken by the Borrower or an
ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under
section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a
notice from a Multiemployer Plan that such action has been taken by PBGC with
respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a
Multiemployer Plan by the Borrower or any ERISA Affiliate that results in
liability under section 4201 or 4204 of ERISA (including the obligation to
satisfy secondary liability as a result of a purchaser default) or the receipt
of the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that
it is in reorganization or insolvency pursuant to section 4241 or 4245 of ERISA
or that it intends to terminate or has terminated under section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of
any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce
section 515 of ERISA, which proceeding is not dismissed within 30 days;
<PAGE>
33
(vi) the adoption of an amendment to any Plan that
pursuant to section 401(a)(29) of the Code or section 307 of ERISA would result
in the loss of tax-exempt status of the trust of which such Plan is a part if
the Borrower or an ERISA Affiliate fails to timely provide security to the Plan
in accordance with the provisions of said Sections;
(vii) any event or circumstance exists which may
reasonably be expected to constitute grounds for the Borrower or any ERISA
Affiliate to incur liability under Title IV of ERISA or under sections
412(c)(11) or 412(n) of the Code with respect to any Plan; and
(viii) the Unfunded Benefit Liabilities of one or more
Plans increase after the date of this Agreement in an amount which is material
in relation to the financial condition of the Borrower and its Subsidiaries, on
a consolidated basis; provided, however, that such increase shall not be deemed
to be material so long as it does not exceed during any consecutive 2-year
period $200,000;
(k) promptly after the request of the Bank, copies of each
annual report filed pursuant to section 104 of ERISA with respect to each Plan
(including, to the extent required by section 104 of ERISA, the related
financial and actuarial statements and opinions and other supporting statements,
certifications, schedules and information referred to in section 103) and each
annual report filed with respect to each Plan under section 4065 of ERISA;
provided, however, that in the case of a Multiemployer Plan, such annual reports
shall be furnished only if they are available to the Borrower or an ERISA
Affiliate;
(l) promptly after the furnishing thereof, copies of any
statement or report furnished to any other party pursuant to the terms of any
indenture, loan or credit or similar agreement and not otherwise required to be
furnished to the Bank pursuant to any other clause of this Section 6.8;
(m) promptly after the sending or filing thereof, copies of
all proxy statements, financial statements and management reports which the
Borrower or any of its Subsidiaries sends to its stockholders (provided that any
management reports shall only be forwarded to the Bank upon the Bank's request),
and copies of all regular, periodic and special reports, and all registration
statements which the Borrower or any of its Subsidiary files with the Securities
and Exchange Commission or any governmental authority which may be substituted
therefor, or with any national securities exchange;
(n) as soon as available, and in any event within 15 days of
the end of each fiscal quarter, an aging schedule with respect to Receivables of
the Borrower with names of all account debtors, as of the end of such calendar
quarter and certified by the President or Chief Financial Officer of the
Borrower;
<PAGE>
34
(o) a monthly Borrowing Base Certificate certified by an
officer of the Borrower, within 15 days of the end of each month;
(p) promptly after the commencement thereof or promptly after
the Borrower knows of the commencement or threat thereof, notice of any
Forfeiture Proceeding; and
(q) such other information respecting the condition or
operations, financial or otherwise, of the Borrower or any of its Subsidiaries
as the Bank may from time to time reasonably request.
Section 6.9. Operating Accounts. Maintain, and cause each of their
respective Subsidiaries to maintain, where practicable, all United States
operating accounts at the Bank, and maintain a majority of its overall banking
relationship with the Bank, including depository accounts, cash management and
other non-credit business.
ARTICLE 7. NEGATIVE COVENANTS
So long as the Note shall remain unpaid or the Bank shall have the
Commitment under this Agreement, the Borrower shall not:
Section 7.1. Debt. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist any
Debt, except:
(a) Debt of the Borrower under this Agreement or the Note;
(b) Debt described in Schedule 5.10, including renewals,
extensions or refinancings thereof, provided that the principal amount thereof
does not increase;
(c) Debt of the Borrower or any of its Subsidiaries secured by
purchase money Liens permitted by Section 7.3;
(d) Intercompany indebtedness between the Borrower and FAvS
(more particularly described in the Subordination Agreement) in an amount not to
exceed $1,000,000, which indebtedness is incurred by the Borrower in the
ordinary course of business in connection with cash management activities of the
Borrower; and
(e) Debt (other than Debt permitted under (a) through (d)
above) of the Borrower in an aggregate amount not to exceed $500,000.
Section 7.2. Guaranties, Etc. Assume, guaranty, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
their respective Subsidiaries to assume, guarantee, endorse or otherwise be or
become directly or indirectly responsible or liable (including, but not limited
to, an agreement to purchase any
<PAGE>
35
obligation, stock, assets, goods or services or to supply or advance any funds,
assets, goods or services, or an agreement to maintain or cause such Person to
maintain a minimum working capital or net worth or otherwise to assure the
creditors of any Person against loss) for the obligations of any Person, except
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.
Section 7.3. Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
(a) Liens for taxes or assessments or other government charges
or levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(b) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than 30 days, or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established;
(c) Liens under workers' compensation, unemployment insurance,
social security or similar legislation (other than ERISA);
(d) Liens, deposits or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(e) judgment and other similar Liens arising in connection
with court proceedings; provided that the execution or other enforcement of such
Liens is effectively stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings;
(f) easements, rights-of-way, restrictions and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by the Borrower or any such Subsidiary of the
property or assets encumbered thereby in the normal course of its business or
materially impair the value of the property subject thereto;
(g) Liens securing obligations of such a Subsidiary to the
Borrower or another such Subsidiary;
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36
(h) Liens set forth on Schedule 7.3, provided the Debt secured
by such Liens is permitted by Section 7.1;
(i) purchase money Liens on any property hereafter acquired or
the assumption of any Lien on property existing at the time of such acquisition,
or a Lien incurred in connection with any conditional sale or other title
retention agreement or a Capital Lease; provided that:
(i) any property subject to any of the foregoing is
acquired by the Borrower or any such Subsidiary in the ordinary course of its
business and the Lien on any such property is created contemporaneously with
such acquisition;
(ii) the obligation secured by any Lien so created,
assumed or existing shall not exceed 80 percent of the lesser of cost or fair
market value as of the time of acquisition of the property covered thereby to
the Borrower or any such Subsidiary acquiring the same, unless otherwise
approved by the Bank;
(iii) each such Lien shall attach only to the property
so acquired and fixed improvements thereon; and
(iv) the obligations secured by such Lien are permitted
by the provisions of Section 7.1(e).
Section 7.4. Leases. Create, incur, assume or suffer to exist, or
permit their respective Subsidiaries to create, incur, assume or suffer to
exist, any obligation as lessee for the rental or hire of any real or personal
property, except: (a) leases existing on the date of this Agreement and any
extensions or renewals thereof; and (b) leases (other than Capital Leases) which
do not in the aggregate require the Borrower and their respective Subsidiaries
on a consolidated basis to make payments (including taxes, insurance,
maintenance and similar expense which the Borrower or any Subsidiary is required
to pay under the terms of any lease) in any fiscal year of the Borrower in
excess of $250,000.
Section 7.5. Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to, or
otherwise invest in, or acquire any interest in, any Person, except: (a) direct
obligations of the United States of America or any agency thereof with
maturities of one year or less from the date of acquisition; (b) commercial
paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation
or "P-1" by Moody's Investors Service, Inc.; (c) certificates of deposit or
other investments with maturities of one year or less from the date of
acquisition issued by any commercial bank operating within the United States of
America having capital and surplus in excess of $500,000,000; and (d) for stock,
obligations or securities received in
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37
settlement of debts (created in the ordinary course of business) owing to the
Borrower or any such Subsidiary. Notwithstanding the foregoing, the Borrower may
enter into intercompany loan transactions with FAvS in amounts not to exceed
$1,000,000, so long as such transactions are entered into in the ordinary course
of business in connection with cash management activities of the Borrower .
Section 7.6. Dividends. Declare or pay any dividends, purchase,
redeem, retire or otherwise acquire for value any of its capital stock now or
hereafter outstanding, or make any distribution of assets to its stockholders as
such whether in cash, assets or in obligations of the Borrower, or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock or permit any of its Subsidiaries to
purchase or otherwise acquire for value any stock of the Borrower or another
such Subsidiary, except that: (a) the Borrower may declare and deliver dividends
and make distributions payable solely in common stock of the Borrower; (b) the
Borrower may purchase or otherwise acquire shares of its capital stock by
exchange for or out of the proceeds received from a substantially concurrent
issue of new shares of its capital stock; and (c) the Borrower may declare or
pay dividends with respect to the Borrower's Series A Convertible Preferred
Stock and have the ability to buy back such Series A Convertible Preferred
Stock, provided that the Borrower is in full compliance with the covenants set
forth in Article 8 herein and no Event of Default has occurred hereunder.
Section 7.7. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, or permit any of its Subsidiaries to sell, lease, assign,
transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets (including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests); except: (a) for inventory
disposed of in the ordinary course of business; (b) the sale or other
disposition of assets no longer used or useful in the conduct of its business;
and (c) that any such Subsidiary may sell, lease, assign or otherwise transfer
its assets to the Borrower.
Section 7.8. Stock of Subsidiaries, Etc. Sell or otherwise dispose
of any shares of capital stock of any of its Subsidiaries or permit any such
Subsidiary to issue any additional shares of its capital stock, except
directors' qualifying shares, or form any Subsidiaries, unless such Subsidiary
enters into a guarantee of the Loans on terms acceptable to the Bank and enters
into a security agreement acceptable to the Bank, and provides a fair value
balance sheet of such Subsidiary to the Bank.
Section 7.9. Transactions with Affiliates. Enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any Affiliate or permit any of
their respective Subsidiaries to enter into any transaction, including, without
limitation, the purchase, sale or exchange of property or
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38
the rendering of any service, with any Affiliate, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower or such Subsidiary than it would obtain in a comparable arms'
length transaction with a Person not an Affiliate, and except as set forth on
Schedule 7.9.
Section 7.10. Mergers, Etc. Merge or consolidate with, or sell,
assign, lease or otherwise dispose of (whether in one transaction or in a series
of transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to, any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of its Subsidiaries to do so except that any such
Subsidiary may merge into or transfer assets to the Borrower.
ARTICLE 8. FINANCIAL COVENANTS
So long as the Note shall remain unpaid or the Bank shall have the
Commitment under this Agreement:
Section 8.1. Minimum Tangible Capital Base. The Borrower, on a
consolidated basis, shall maintain at all times, as measured at the end of each
fiscal quarter, commencing April 30, 1998, a Tangible Capital Base of not less
than $8,500,000, and such minimum dollar amount shall increase from year to year
by the sum of 50% of the Borrower's Net Income for each previous fiscal year
(with no reduction for losses) commencing with the annual Net Income determined
as of January 31, 1999.
Section 8.2. Maximum Leverage Ratio. The Borrower, on a consolidated
basis, shall maintain at all times, as measured at the end of each fiscal
quarter, commencing April 30, 1998, a ratio of Total Funded Debt to Tangible
Capital Base of not greater than 2.00 to 1.0.
Section 8.3. Minimum Interest Coverage Ratio. The Borrower, on a
consolidated basis, shall maintain at all times, as measured at the end of each
fiscal quarter, commencing April 30, 1998 for the twelve month period then ended
(a rolling twelve month calculation measured as of the end of each successive
quarter), an Interest Coverage Ratio of not less than 2.00 to 1.0.
Section 8.4. Minimum Current Ratio. The Borrower, on a consolidated
basis, shall maintain at all times, as measured at the end of each fiscal
quarter, commencing April 30, 1998, a ratio of Current Assets to Current
Liabilities of 1.50 to 1.0.
ARTICLE 9. EVENTS OF DEFAULT
Section 9.1. Events of Default. Any of the following events shall be
an "Event of Default":
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39
(a) the Borrower shall: (i) fail to pay the principal of the
Note as and when due and payable; or (ii) fail to pay interest on the Note or
any fee or other amount due hereunder as and when due and payable;
(b) any representation or warranty made or deemed made by the
Borrower in this Agreement or in any other Facility Document or which is
contained in any certificate, document, opinion, financial or other statement
furnished at any time under or in connection with any Facility Document shall
prove to have been incorrect in any material respect on or as of the date made
or deemed made;
(c) the Borrower shall: (i) fail to perform or observe any
term, covenant or agreement contained in Section 2.3 or Articles 7 or 8; or (ii)
fail to perform or observe any term, covenant or agreement on its part to be
performed or observed (other than the obligations specifically referred to
elsewhere in this Section 9.1) in any Facility Document and such failure shall
continue for 20 consecutive days;
(d) the Borrower, or any of its Subsidiaries: (i) shall
generally not, or be unable to, or shall admit in writing its inability to, pay
its debts as such debts become due; or (ii) shall make an assignment for the
benefit of creditors, petition or apply to any tribunal for the appointment of a
custodian, receiver or trustee for it or a substantial part of its assets; or
(iii) shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced against it, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed for a period of 30 days or more; or shall be the subject of any
proceeding under which its assets may be subject to seizure, forfeiture or
divestiture (other than a proceeding in respect of a Lien permitted under
Section 7.3(b)); or (v) by any act or omission shall indicate its consent to,
approval of or acquiescence in any such petition, application or proceeding or
order for relief or the appointment of a custodian, receiver or trustee for all
or any substantial part of its property; or (vi) shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for a period
of 30 days or more;
(e) one or more judgments, decrees or orders for the payment
of money in excess of $100,000 in the aggregate shall be rendered against the
Borrower, or any of its Subsidiaries and such judgments, decrees or orders shall
continue unsatisfied and in effect for a period of 30 consecutive days without
being vacated, discharged, satisfied or stayed or bonded pending appeal;
(f) any event or condition shall occur or exist with respect
to any Plan or Multiemployer Plan concerning which the Borrower is under an
obligation to furnish a report to the Bank in accordance with Section 6.8(h)
hereof and as a result of such
<PAGE>
40
event or condition, together with all other such events or conditions, the
Borrower or any ERISA Affiliate has incurred or in the opinion of the Bank is
reasonably likely to incur a liability to a Plan, a Multiemployer Plan, the PBGC
or a section 4042 Trustee (or any combination of the foregoing) which is
material in relation to the financial position of the Borrower and its
Subsidiaries, on a consolidated basis; provided, however, that any such amount
shall not be deemed to be material so long as all such amounts do not exceed in
the aggregate during any consecutive 2-year period $200,000;
(g) the Unfunded Benefit Liabilities of one or more Plans have
increased after the date of this Agreement in an amount which is material (as
specified in Section 9.1(g) hereof);
(h) any Forfeiture Proceeding, having a material adverse
effect on the condition (financial or otherwise), business, operations or
prospects of the Borrower and its Subsidiaries, on a consolidated basis, shall
have been commenced or the Borrower shall have given the Bank written notice of
the commencement of any Forfeiture Proceeding;
(i) there shall be (x) any material adverse change in the
condition (financial or otherwise), business, management, operations,
properties, prospects of the Borrower and its Subsidiaries on a consolidated
basis or (y) any Change of Control of the Borrower and its respective
Subsidiaries since the Closing Date;
(j) the Security Agreement shall at any time after its
execution and delivery and for any reason cease: (A) to create a valid and
perfected first priority security interest in and to the property purported to
be subject to such agreement; or (B) to be in full force and effect or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by the party thereto, or such party shall deny it has further
liability or obligation thereunder or such party shall fail to perform any of
its obligations thereunder; or
(k) there shall exist any default and acceleration under that
certain credit agreement between FCC and National Airmotive Corporation.
Section 9.2. Remedies. If any Event of Default shall occur and be
continuing, the Bank may, by notice to the Borrower, (a) declare the Commitments
to be terminated, whereupon the same shall forthwith terminate, and (b) declare
the outstanding principal of the Note, all interest thereon and all other
amounts payable under this Agreement and the Note or any one of them to be
forthwith due and payable, whereupon the Note, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Borrower; provided that, in the case of an Event of Default
referred to in Section 9.1(d) or Section 9.1(h) above, the Commitment shall be
immediately terminated, and the Note, all interest thereon and all other amounts
payable
<PAGE>
41
under this Agreement shall be immediately due and payable without notice,
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
ARTICLE 10. MISCELLANEOUS
Section 10.1. Amendments and Waivers. Except as otherwise expressly
provided in this Agreement, any provision of this Agreement may be amended or
modified only by an instrument in writing signed by the Borrower and the Bank,
and any provision of this Agreement may be waived by the Borrower and the Bank.
No failure on the part of the Bank to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof or preclude any other or
further exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 10.2. Usury. All agreements between the Borrower and the
Bank are hereby expressly limited so that in no contingency or event whatsoever,
whether by reason of acceleration of maturity of the indebtedness evidenced by
the Note or otherwise, shall the amount paid or agreed to be paid to the Bank
for the use or the forbearance of the indebtedness evidenced by the Note exceed
the maximum permissible under applicable law. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof provided,
however that in the event there is a change in the law which results in a higher
permissible rate of interest, then the Note shall be governed by such new law as
of its effective date. In this regard, it is expressly agreed that it is the
intent of the Borrower and the Bank in the execution, delivery and acceptance of
the Note to contract in strict compliance with the laws of the State of
Connecticut from time to time in effect. If, under or from any circumstances
whatsoever, fulfillment of any provision hereof or of any of the Facility
Documents at the time of performance of such provision shall be due, shall
involve transcending the limit of such validity prescribed by applicable law,
then the obligation to be fulfilled shall automatically be reduced to the limits
of such validity, and if under or from circumstances whatsoever the Bank should
ever receive as interest an amount which would exceed the highest lawful rate,
such amount which would be excessive interest shall be applied to the reduction
of the principal balance evidenced hereby and not to the payment of interest.
This provision shall control every other provision of all agreements between the
Borrower and the Bank.
Section 10.3. Expenses. The Borrower shall reimburse the Bank on
demand for all reasonable costs, expenses and charges (including, without
limitation, courier expenses, reasonable fees and charges of external legal
counsel for the Bank) incurred by the Bank in connection with the preparation,
negotiation, execution, delivery, filing, recording, performance,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement, the Note or any
Facility Document. The Borrower agrees to indemnify the Bank and its directors,
<PAGE>
42
officers, employees and agents from, and hold each of them harmless against, any
and all losses, liabilities, claims, damages or expenses incurred by any of them
arising out of or by reason of any investigation or litigation or other
proceedings (including any threatened investigation or litigation or other
proceedings) relating to any actual or proposed use by the Borrower or any of
its Subsidiaries of the proceeds of the Loans, including, without limitation,
the reasonable fees and disbursements of counsel incurred in connection with any
such investigation or litigation or other proceedings (but excluding any such
losses, liabilities, claims, damages or expenses incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified).
Section 10.4. Survival. The obligations of the Borrower under
Section 10.3 shall survive the repayment of the Loans and the termination of the
Commitment.
Section 10.5. Assignment; Participations. This Agreement shall be
binding upon, and shall inure to the benefit of, the Borrower, the Bank and
their respective successors and assigns, except that the Borrower may not assign
or transfer its rights or obligations hereunder. With the consent of the
Borrower, which consent shall not be unreasonably withheld, the Bank may assign,
or sell participations in, all or any part of any Loan to another bank or other
entity, in which event (a) in the case of an assignment, upon notice thereof by
the Bank to the Borrower, the assignee shall have, to the extent of such
assignment (unless otherwise provided therein), the same rights, benefits and
obligations as it would have if it were the Bank hereunder; and (b) in the case
of a participation, the participant shall have no rights under the Facility
Documents. The agreement executed by the Bank in favor of the participant shall
not give the participant the right to require the Bank to take or omit to take
any action hereunder except action directly relating to (i) the extension of a
payment date with respect to any portion of the principal of or interest on any
amount outstanding hereunder allocated to such participant, (ii) the reduction
of the principal amount outstanding hereunder or (iii) the reduction of the rate
of interest payable on such amount or any amount of fees payable hereunder to a
rate or amount, as the case may be, below that which the participant is entitled
to receive under its agreement with the Bank. The Bank may furnish any
information concerning the Borrower in the possession of the Bank from time to
time to assignees and participants (including prospective assignees and
participants); provided that the Bank shall require any such prospective
assignee or such participant (prospective or otherwise) to agree in writing to
maintain the confidentiality of such information. The Bank shall have the right
at any time to pledge all or any portion of its rights under the Loans or this
Agreement or the Note to any of the twelve (12) Federal Reserve Banks organized
under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such
pledge or enforcement thereof shall release the Bank from its obligations under
any of the Facility Documents.
Section 10.6. Notices. Unless the party to be notified otherwise
notifies the other party in writing as provided in this Section, and except as
otherwise provided in this Agreement, notices shall be delivered in person or
sent by overnight courier, facsimile,
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43
ordinary mail, cable or telex addressed to such party at its "Address for
Notices" on the signature page of this Agreement. Notices shall be effective:
(a) on the day on which delivered to such party in person, (b) on the first
Banking Day after the day on which sent to such party by overnight courier, (c)
if given by mail, 48 hours after deposit in the mails with first-class postage
prepaid, addressed as aforesaid, and (d) if given by facsimile, cable or telex,
when the facsimile, cable or telex is transmitted to the facsimile, cable or
telex number as aforesaid; provided that notices to the Bank shall be effective
upon receipt.
Section 10.7. Setoff. The Borrower hereby grants to the Bank, a
lien, security interest and right of setoff as security for all liabilities and
obligations to the Bank, whether now existing or hereafter in the possession,
custody, safekeeping or control of the Bank or any entity under the control of
Fleet Financial Group, Inc., or in transit to any of them. At any time, without
demand or notice, the Bank may set off the same or any part thereof and apply
the same to any liability or obligation of the Borrower even though unmatured
and regardless of the adequacy of any other collateral securing the Loans. ANY
AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT
TO ANY OTHER COLLATERAL WHICH SECURES THE LOANS, PRIOR TO EXERCISING ITS RIGHT
OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE
BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
SECTION 10.8. JURISDICTION; IMMUNITIES. THE BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CONNECTICUT STATE OR UNITED
STATES FEDERAL COURT SITTING IN CONNECTICUT OVER ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE, AND THE BORROWER
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH CONNECTICUT STATE OR FEDERAL
COURT. THE BORROWER IRREVOCABLY CONSENT TO THE SERVICE OF ANY AND ALL PROCESS IN
ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE
BORROWER AT ITS ADDRESS SPECIFIED IN SECTION 10.6. THE BORROWER AGREES THAT A
FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH
STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF
FORUM NON CONVENIENS. THE BORROWER FURTHER AGREES THAT ANY ACTION OR PROCEEDING
BROUGHT AGAINST THE BANK SHALL BE BROUGHT ONLY IN CONNECTICUT STATE OR UNITED
STATES FEDERAL COURT SITTING IN CONNECTICUT.
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44
(a) Nothing in this Section 10.8 shall affect the right of the
Bank to serve legal process in any other manner permitted by law or affect the
right of the Bank to bring any action or proceeding against the Borrower or its
property in the courts of any other jurisdictions.
(b) To the extent that the Borrower has or hereafter may
acquire any immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment, attachment in aid
of execution, execution or otherwise) with respect to itself or its property,
the Borrower hereby irrevocably waives such immunity in respect of its
obligations under this Agreement and the Note.
Section 10.9. Table of Contents; Headings. Any table of contents and
the headings and captions hereunder are for convenience only and shall not
affect the interpretation or construction of this Agreement.
Section 10.10. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 10.11. Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
Section 10.12. Integration. The Facility Documents set forth the
entire agreement between the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
SECTION 10.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CONNECTICUT.
Section 10.14. Confidentiality. The Bank agrees (on behalf of itself
and each of its affiliates, directors, officers, employees and representatives)
to use reasonable precautions to keep confidential, in accordance with safe and
sound banking practices, any nonpublic information supplied to it by the
Borrower pursuant to this Agreement which is identified by the Borrower as being
confidential at the time the same is delivered to the Bank, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) to
counsel for the Bank, (iii) to bank examiners, auditors or accountants, (iv) in
connection with any
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45
litigation to which the Bank is a party or (v) to any assignee or participant
(or prospective assignee or participant) so long as such assignee or participant
(or prospective assignee or participant) agrees to maintain the confidentiality
of such information; and provided finally that in no event shall the Bank be
obligated or required to return any materials furnished by the Borrower.
Section 10.15. Treatment of Certain Information. The Borrower (a)
acknowledges that services may be offered or provided to it (in connection with
this Agreement or otherwise) by the Bank or by one or more of its subsidiaries
or affiliates and (b) acknowledges that information delivered to the Bank by the
Borrower may be provided to each such subsidiary and affiliate.
SECTION 10.16. COMMERCIAL WAIVER. THE BORROWER ACKNOWLEDGES THAT THE
LOANS EVIDENCED BY THE NOTE ARE FOR COMMERCIAL PURPOSES AND WAIVES ANY RIGHT TO
NOTICE AND HEARING UNDER SECTIONS 52-278a THROUGH 52-278n OF THE CONNECTICUT
GENERAL STATUTES AS NOW OR HEREAFTER AMENDED AND AUTHORIZES THE ATTORNEY OF THE
BANK, OR ANY SUCCESSOR THERETO, TO ISSUE A WRIT OF PREJUDGMENT REMEDY WITHOUT
COURT ORDER. FURTHER, THE BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY
LAW, THE BENEFITS OF ALL VALUATION, APPRAISEMENTS, HOMESTEAD, EXEMPTION, STAY,
REDEMPTION AND MORATORIUM LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BECOME LAWS.
THE BORROWER ACKNOWLEDGES THAT IT MAKES THESE WAIVERS AND THE WAIVERS CONTAINED
IN SECTION 10.8 KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION OF
THE RAMIFICATIONS OF THESE WAIVERS WITH ITS ATTORNEYS.
SECTION 10.17. WAIVER OF JURY TRIAL BECAUSE DISPUTES ARISING IN
CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY
RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE BORROWER AND THE BANK WISH
APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE
BORROWER AND THE BANK DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE BORROWER AND THE BANK HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR OTHERWISE ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS AGREEMENT OR ANY OF THE OTHER
FACILITY DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
<PAGE>
46
Section 10.18. Independence of Covenants. All covenants hereunder
shall be given independent effect so that if a particular action or condition is
not permitted by any of such covenants, the fact that it would be permitted by
an exception to, or be otherwise within the limitations of, another covenant
shall not avoid the occurrence of a Default or Event of Default if such action
is taken or condition exists.
Section 10.19. Time of the Essence. Time and punctuality shall be of
the essence with respect to this instrument, but no delay or failure of the Bank
to enforce any of the provisions herein contained and no conduct or statement of
the Bank shall waive or affect any of the Bank's rights hereunder.
Section 10.20. Reference to and Effect on the Facility Documents.
(a) Upon the effectiveness of this Agreement, on and after the
date hereof each reference in the Facility Documents to the Credit Agreement or
the Note, shall mean and be a reference to this Credit Agreement as amended and
restated hereby or the Note as amended and restated in connection with the
execution and delivery of this Agreement.
(b) The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Bank under any of the Facility Documents, nor
constitute a waiver of any provision of any of the Facility Documents.
Section 10.21. Replacement Promissory Note. Upon receipt of an
affidavit of an officer of the Bank as to the loss, theft, destruction or
mutilation of any Note or any other security document which is not of public
record, and, in the case of any such loss, theft, destruction or mutilation,
upon surrender and cancellation of such Note or other security document,
Borrower will issue, in lieu thereof, a replacement Note or other security
document in the same principal amount thereof and otherwise of like tenor.
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47
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
AIRCRAFT PARTS INTERNATIONAL COMBS, INC.
By___________________________________
John A. Marsalisi
Title: Vice President and
Secretary
Address for Notices to Borrower:
3778 Distriplex Drive North
Memphis, Tennessee 38118
Attention: Marc Greenberg
Vice President and Chief
Operating Officer
with a copy to:
15 Riverside Avenue
Westport, Connecticut 06880
Attention: John A. Marsalisi
FLEET NATIONAL BANK
By_____________________________________
John V. Raleigh
Senior Vice President
Address for Notices and Lending Office:
One Landmark Square
Stamford, Connecticut 06901
Attn: John V. Raleigh
Senior Vice President
Facsimile No.: (203) 964-4850
<PAGE>
48
EXHIBITS
Exhibit A - Note
Exhibit B - Subordination Agreement
Exhibit C - Security Agreement
Exhibit D - Opinion of Counsel for Borrower
Exhibit E - Notice of Borrowing
SCHEDULES
Schedule 5.5(b) - Financial Statements
Schedule 5.9 - Subsidiaries of Borrower
Schedule 5.10 - Credit Arrangements
Schedule 5.12 - Hazardous Materials
Schedule 7.3 - Liens
Schedule 7.9 - Transactions with Affiliates Outside the Ordinary
Course of Business
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$10,000,000 Stamford, Connecticut
April 23, 1998
For value received, AIRCRAFT PARTS INTERNATIONAL COMBS, INC. (the
"Borrower"), hereby promises to pay to the order of FLEET NATIONAL BANK, (the
"Bank") at the office of the Bank at One Landmark Square, Stamford, Connecticut
06901, for the account of the appropriate Lending Office of the Bank, the
principal sum of TEN MILLION DOLLARS ($10,000,000) or, if less, the amount of
Loans made by the Bank to the Borrower pursuant to the Credit Agreement referred
to below, in lawful money of the United States of America and in immediately
available funds, on the date(s) and in the manner provided in said Credit
Agreement. The Borrower also promises to pay interest on the unpaid principal
balance hereof, for the period such balance is outstanding, at said principal
office for the account of said Lending Office, in like money, at the rates of
interest as provided in the Credit Agreement referred to below, on the date(s)
and in the manner provided in said Credit Agreement.
The date and amount of each Loan made by the Bank to the Borrower
under the Credit Agreement referred to below, and each payment of principal
thereof, shall be recorded by the Bank on its books and, prior to any transfer
of this Note (or, at the discretion of the Bank, at any other time), endorsed by
the Bank on the schedule attached hereto or any continuation thereof.
This is the Note referred to in that certain Credit Agreement (as
amended from time to time the "Credit Agreement") dated of even date herewith
among the Borrower and the Bank and evidences the Loans made by the Bank
thereunder. All terms not defined herein shall have the meanings given to them
in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain Events of Default and for
prepayments on the terms and conditions specified therein.
The Borrower waives presentment, notice of dishonor, protest and any
other notice or formality with respect to this Note.
This Note shall be governed by, and interpreted and construed in
accordance with, the laws of the State of Connecticut.
THE BORROWER AND THE BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT TO A
<PAGE>
2
TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE
EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS NOTE AND MAKE THE
LOANS.
AIRCRAFT PARTS INTERNATIONAL COMBS, INC.
By_____________________________________
John A. Marsalisi
Title: Vice President and
Secretary
<PAGE>
Amount Amount of Balance Notation
Date of Loan Payment Outstanding By
---- ------- ------- ----------- --
<PAGE>
EXHIBIT E
NOTICE OF BORROWING
[DATE]
Fleet National Bank
One Landmark Square
Stamford, CT 06901
Attn: John V. Raleigh
Ladies and Gentlemen:
The undersigned, a duly authorized officer of Aircraft Parts
International Combs, Inc. refers to the Credit Agreement dated as of April __,
1998 between Aircraft Parts International Combs, Inc. and Fleet National Bank
(as amended, modified or supplemented from time to time the "Credit Agreement")
and hereby gives you notice pursuant to Section 4.2 of the Credit Agreement that
the undersigned hereby requests a Loan, and in that connection sets forth below
the information relating to such Borrowing (the "Proposed Borrowing") as
required by the Credit Agreement. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Credit Agreement.
(i) The Banking Day of the Proposed Borrowing is
_______________.
(ii) The aggregate amount of the Proposed Borrowing is U.S.
$______________.
(iii) The interest rate for the Proposed Borrowing is (check
one):
_____ Prime Rate
_____ LIBO Rate (Complete Section 1 below)
_____ Cost of Funds Rate
1. (LIBOR Loans Only) The initial Interest Period for the Proposed
Borrowing is (check one):
_____ one (1) month
_____ two (2) months
_____ three (3) months
In accordance with Section 4.2 of the Credit Agreement, the
undersigned hereby certifies that all representations and warranties of the
Borrower contained in each
<PAGE>
2
Facility Document, including Article 5 of the Credit Agreement and Article 2 of
the Security Agreement, are true and correct on the date hereof, and unless we
otherwise notify you in writing, you may rely on the fact that such statements
are true and correct on the day of the Proposed Borrowing before and after
giving effect to such Proposed Borrowing and the application of the proceeds
thereof, as though made on and as of such date. The undersigned also certifies
that there has been no material adverse change in the business, management
operations, properties, prospects or condition (financial or otherwise) of the
Borrower since the Closing Date.
The undersigned further certifies and warrants that no Default or
Event of Default is existing as of the date of this Certificate and, unless we
notify you in writing, as of the day of the Proposed Borrowing.
Very truly yours,
AIRCRAFT PARTS INTERNATIONAL COMBS, INC.
By _____________________________________
Name:
Title:
EXHIBIT 10.39
AMENDMENT NO. 1 TO
FIRST AVIATION SERVICES INC.
STOCK INCENTIVE PLAN
Amendment, dated July 28, 1997, to the First Aviation Services Inc. Stock
Incentive Plan (the "Plan"). Capitalized terms used herein and not defined
herein shall have the meanings ascribed thereto in the Plan.
RECITALS
WHEREAS, First Aviation Services Inc., a Delaware corporation (the
"Company"), created and adopted the Plan effective December 20, 1996, which was
approved by the shareholders of the Corporation; and
WHEREAS, the Company, through its Board of Directors, deems it desirable
to amend the Plan as set forth herein.
NOW THEREFORE, subject to the approval of the shareholders of the Company
as set forth in Section 2 hereto, the Plan is hereby amended to read in its
entirety as follows, effective as of July 28, 1997:
1. Amendment to Section 1.4(b). The first two sentences of Section 1.4(b)
of the Plan are hereby amended to read in their entirety as follows:
"The maximum number of shares of Common Stock that may be delivered
pursuant to Awards (including Incentive Stock Options) granted to Eligible
Persons under this Plan shall not exceed 800,000 shares (the "Share Limit"). The
maximum number of shares of Common Stock that may be delivered pursuant to
options qualified as Incentive Stock Options granted under this Plan is 800,000
shares.
2. Shareholder Approval. This Amendment was approved by the affirmative
vote of the holders of a majority of the shares of the Company's common stock
voting at its annual meeting of shareholders held on August 25, 1997.
3. Effect on the Plan. All references in the Plan to "this Plan", the
"Plan", and all phrases of like import shall refer to the Plan as amended by
this Amendment. The terms "hereof", "herein", "hereby" and all phrases of like
import, used in the Plan shall refer to the Plan as amended by this Amendment.
Except as amended hereby, the Plan shall remain in full force and effect.
4. No Further Amendment. Except as expressly provided herein, no other
term or provision of the Plan is amended hereby.
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-25915) pertaining to the First Aviation Services Inc. Stock
Incentive Plan of our report dated March 15, 1998, except for Note 13, as to
which the date is April 23, 1998, with respect to the consolidated financial
statements and schedule of First Aviation Services Inc. included in the Annual
Report (Form 10-K) for the year ended January 31, 1998.
Ernst & Young LLP
Stamford, Connecticut
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial information contained in the body of the accompanying 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 237
<SECURITIES> 0
<RECEIVABLES> 27,481
<ALLOWANCES> 0
<INVENTORY> 43,311
<CURRENT-ASSETS> 75,394
<PP&E> 7,104
<DEPRECIATION> 2,077
<TOTAL-ASSETS> 82,523
<CURRENT-LIABILITIES> 21,659
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 45,868
<TOTAL-LIABILITY-AND-EQUITY> 82,523
<SALES> 153,642
<TOTAL-REVENUES> 153,642
<CGS> 130,433
<TOTAL-COSTS> 130,433
<OTHER-EXPENSES> 14,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,485
<INCOME-PRETAX> 6,859
<INCOME-TAX> 1,500
<INCOME-CONTINUING> 5,359
<DISCONTINUED> 0
<EXTRAORDINARY> 108
<CHANGES> 0
<NET-INCOME> 5,251
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial information contained in the body of the accompanying 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 8-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1996
<PERIOD-START> FEB-01-1996 JUN-01-1995
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 19,931 23,388
<ALLOWANCES> 0 0
<INVENTORY> 36,323 31,207
<CURRENT-ASSETS> 58,665 57,005
<PP&E> 4,086 3,440
<DEPRECIATION> 1,293 734
<TOTAL-ASSETS> 62,372 60,384
<CURRENT-LIABILITIES> 21,178 25,592
<BONDS> 0 0
0 0
1,650 1,650
<COMMON> 36 36
<OTHER-SE> 4,595 2,500
<TOTAL-LIABILITY-AND-EQUITY> 62,372 60,384
<SALES> 104,236 68,519
<TOTAL-REVENUES> 104,236 68,519
<CGS> 89,426 57,390
<TOTAL-COSTS> 89,426 57,390
<OTHER-EXPENSES> 9,881 5,349
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,470 2,605
<INCOME-PRETAX> 1,459 3,175
<INCOME-TAX> 0 1,300
<INCOME-CONTINUING> 1,459 1,875
<DISCONTINUED> 0 0
<EXTRAORDINARY> 864 0
<CHANGES> 0 0
<NET-INCOME> 595 1,875
<EPS-PRIMARY> 0.13 0.50
<EPS-DILUTED> 0.09 0.32
</TABLE>
