UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 2-87778A
THE FLIGHT INTERNATIONAL GROUP, INC.
(Name of small business issuer in its charter)
Georgia 58-1476225
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Lear Drive 23602
Newport News VA (Zip Code)
(Address of principal executive offices)
(757) 886-5500
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
New Common Stock, par value $.01 per share
------------------------------------------
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X .
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B herein, and no disclosure will be contained, to the best
of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ending April 30, 2000 were
$29,521,241. As of the date hereof, there is no public market for the issuer's
securities.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court. Yes X No As of
September 15, 2000, there were 1,109,424 shares of the issuer's New Common
Stock, par value $.01 per share, issued and outstanding. Documents Incorporated
by Reference: None .
Traditional Small Business Disclosure Format: Yes No X.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Introduction
The Flight International Group, Inc. (the "Company") was incorporated
in Georgia on May 7, 1982. The Company is an aviation services company that
performs military training services using specially modified commercial
aircraft, principally under contract with the United States Department of
Defense ("DOD"), other government agencies and foreign countries, operating
through its direct and indirect subsidiaries. In addition, with the use of these
aircraft, the Company has established a market for training and testing in the
aerospace industry. The Company also operates a fixed base operation ("FBO") at
the Newport News/Williamsburg International Airport ("NN/W Airport"), a
scheduled cargo and charter passenger airline throughout Alaska, and Aircraft
Modification, Repair and Overhaul Centers at the NN/W Airport and the Myrtle
Beach International Airport in Myrtle Beach, South Carolina.
Flight International, Inc., a Georgia corporation ("FII"); Flight
International Aviation, Inc., a Georgia corporation ("FIA"); Flight
International Sales and Leasing, Inc., a Delaware corporation ("FSL"); Flight
Alaska, Inc., a Delaware Corporation ("FAI"); and Flight International Services,
Inc., a Delaware corporation (FIS), are each wholly-owned subsidiaries of the
Company. Flight International of Florida Inc., a Florida corporation ("FIF"), is
a wholly owned subsidiary of FII. GeoFlight, LLC ("GFL"), a Delaware limited
liability company, is a joint venture between the Company and Geophysical &
Environmental Resources Corporation, of Millbrook, New York. The Company is a
50% owner of GFL.
In October 1999, the Company entered into an agreement with Geophysical
& Environmental Resources Corporation, an unrelated party, to form GeoFlight,
LLC ("GFL"). GFL was formed to provide remote sensing services to public and
private customers using an array of airborne sensing devices. Management
believes this transaction will position the Company to compete in the emerging
market for private aerial imaging and intelligence gathering services. No
substantial investments have been made in GFL, nor did GFL have any operations
in fiscal year 2000.
In December 1999, the Company entered into an agreement with the United
States Bankruptcy Court for the District of Alaska (the "Court") to manage the
operations of Yute Air Alaska, Inc. ("Yute"). The Company managed the ongoing
operations of Yute until March 28, 2000, when the Court approved and ordered the
sale of selected assets of Yute to FAI. An asset purchase agreement was executed
on April 28, 2000 following successful transfer of Yute's Air Carrier Operating
Certificate and Certificate of Public Convenience and Necessity. The acquisition
represents the Company's desire to expand its services into the scheduled cargo
airline business. Total consideration for the transaction consisted of $373,282
in cash and $775,000 in additional long-term debt obligations. The Company is
hopeful that these operations will augment and strengthen its existing
Alaska-based operations. See "Selected Financial Data - Business Combinations or
Dispositions".
Effective February 29, 2000, the Company completed, through FIS, the
acquisition of the assets and certain liabilities of Flight Systems, Inc., in
Myrtle Beach, South Carolina. The acquisition represents the Company's desire to
expand its services and capabilities in the commercial aircraft maintenance and
modification business. Total consideration for the transaction consisted of
$150,000 cash and 101,398 shares of New Common Stock of the Company,
representing approximately 9% of the currently outstanding shares of New Common
Stock. In addition, the Company assumed approximately $973,000 in net
liabilities. Between March 1, 2000 and April 30, 2000 the Company made
additional investments of $262,236 in working capital, bringing the total equity
investment to $767,129. The Company believes that this operation will add
materially to its revenue base and decrease its overall dependence on government
contracts.
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Government Contracts
The majority of the Company's revenues are derived from contracts with
the United States federal government. For the fiscal year ended April 30, 2000,
revenue from contracts with the United States government represented
approximately 80.1% of the Company's total revenues.
United States federal government contract awards are made through
sealed competitive bids, unless an exemption from full and open competition
under federal procurement laws is applicable. Under the regulations governing
sealed bidding, the qualified bidder with the lowest price and the price-related
factors most advantageous to the government is generally awarded the contract.
Under negotiated procurements, other evaluation factors such as experience,
quality of technical approach and management capability may weigh more heavily
than price in the selection process.
All of the Company's contracts with the United States Department of
Defense ("DOD") were either awarded competitively pursuant to federal
procurement laws and procedures or are annual contracts having additional
one-year option periods that may be exercised by the DOD.
For each year of any government contract, including the base year and
any option year that the government has elected to take, all contract revenues
are contingent upon the availability of adequate funding.
Payments received under government contracts normally are based upon
flight hours at the price per flight hour as established in the contract. Flight
hours are measured from the time aircraft and personnel depart for a
pre-designated location to perform the assigned training or support mission
through completion of the mission and the return of the aircraft to the
predetermined station. Under most government contracts, it is necessary to
attain a predetermined mission success rate or other contract performance
standard.
Minimum guaranteed contract payments under most government contracts
are based on an established number of flight hours that the government is
required to order during each year of the contract. The Company's price for
"guaranteed" flight hours is fixed in the contract, but the government may order
more flight hours than specified in the contract. Such "excess" hours are paid
for at an established contract price for excess hours.
For each contract year, the Company receives payment from the
government for the number of guaranteed flight hours specified in the contract
at the applicable contract rate, regardless of whether or not the government
actually uses all such flight hours for the contract year. However, payment to
the Company for a shortfall, if any, between the number of hours actually used
by the government and the level specified in the contract will not be received
until the end of the contract year.
The Company's DOD contracts generally are firm, fixed-price contracts
under which the Company bears the risk that the prices paid by the government
will be sufficient to cover actual costs incurred in performing under the
contract, plus the amount of profit expected in pricing its bid or proposal. The
Company may, however, file claims for certain uncontrollable cost overruns, such
as jet fuel cost increases.
The Defense Contract Audit Agency has the right to audit the Company's
books and records as a result of these contractual relationships. Because of the
fixed-price nature of the Company's contracts, however, prices are not normally
subject to re-negotiation or retroactive adjustment and therefore the chances of
such an audit are greatly diminished.
Competition
The markets in which the Company conducts fleet operations are highly
competitive. Price usually is a significant factor considered in awarding
contracts. Many firms, ranging in size from companies having substantially
smaller operations than the Company to affiliates of major corporations having
substantially greater resources than the Company, compete directly with the
Company for contracts awarded by the United States government and the other
fleet operations customers and potential customers of the Company.
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Competitive factors other than price which affect the award of flight
operations contracts include the number of employees (for example, certain
contracts are available only to businesses with fewer than 1,500 employees),
experience in the field of aviation services and adequacy of resources,
including maintenance personnel, aircrews, repair facilities and aircraft.
Competition is an even greater factor in the commercial segment of the
flight operations market where barriers to entry are lower than in the
government sector. This is due in part to the fact that aircraft may not require
unique modifications in order to perform the desired services. In this market
the Company competes with numerous companies, some of which also compete in the
market for military contracts. Price also can be a significant factor where, on
occasion, competitors are single aircraft operators engaged in the business on a
part-time basis.
FLEET COMPOSITION
As of August 1, 2000, the Company operated 38 aircraft. FII operates 16
Learjets, six Fairchild Metro III's and two other prop aircraft. These aircraft
are used in the conduct of fleet operations for government and commercial
customers. In addition, the Company owns and operates electronic warfare
equipment used in conjunction with its fleet operations contracts.
FAI operates two twin-turboprop Casa 212s, one twin-prop Navajo
Chieftain and 9 single-engine prop aircraft.
GFL operates a twin-prop Piper Navajo and twin-prop Piper Aztec.
The Company maintains an inventory of spare aircraft parts, equipment
and tooling used in support of the Company's fleet, as well as for the repair
and maintenance of third party aircraft. In addition to the aircraft listed
above, the Company currently holds one Learjet and two Jetstream J-31 turbo-prop
aircraft for resale.
FLIGHT INTERNATIONAL, INC.
CAS-MOS Contract
In August 1996, the Company was awarded a major contract. The
Commercial Air Services-Military Operations Support contract ("CAS-MOS") is a
derivative of the original government contract won by the Company in 1980 and
operated until September 1993. The new contract began on October 1, 1996 and is
currently in its third option year, with one additional option year remaining.
Annual revenues from this contract have been $16.8 million, $15.2 million, $13.9
million and $7.3 million for the fiscal years ended April 30, 2000, April 30,
1999, April 30, 1998 and the seven months ended April 30, 1997, respectively.
This contract currently represents 56.7% of the Company's total revenues, down
from 64.2% in fiscal year 1999. There can be no assurance that the government
will exercise its remaining option on the CAS-MOS contract.
CAS-MED Contract
In September 1999, the Company was awarded a Commercial Air Services
contract to provide Electronic Warfare ("EW") training and VIP transportation
for the United States Navy's 6th Fleet deployed in and around the Mediterranean
Sea ("CAS-MED"). Based in Naples, Italy, the contract requires two Learjet
Series-30 aircraft in "multi-mission" configurations that allow passenger
transportation as well as required training services. The contract, which
consists of one base year and 4 option years, commenced on October 1, 1999. In
fiscal year 2000, the contract contributed 5.1% of the Company's revenues. There
can be no assurance that the government will exercise its remaining options on
the CAS-MED contract.
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FII is a relatively small competitor in the European marketplace for EW
training, target tow and VIP transportation services. Management believes it can
successfully penetrate this marketplace using the CAS-MED contract as a
springboard. Competitors in this market include a number of large companies with
significant financial resources and no assurances can be given that the Company
will increase its market share.
Contract Flight Services
FII performs contract flight services for the DOD, other government
agencies and commercial customers. The Company utilizes specially modified
business jets, propjets and piston-powered aircraft in conjunction with the
training of military aircrews, radar operators and weapons controllers in the
techniques of airborne target identification and interception.
Under the DOD contracts, FII's aircraft simulate aggressor aircraft,
tow airborne targets for air-to-air and surface-to-air missile and gunnery live
firing exercises and use airborne electronic countermeasures equipment and
techniques to disrupt ship, aircraft and land based communications and radar.
Contracts with the DOD generally provide for compensation based on flight hours
of usage. Flight crews are required to hold United States government security
clearances in connection with certain classified aspects of the services
provided.
In addition to its contracts with the DOD, a small portion of the
Company's revenues from fleet operations are generated from customers in the
aerospace industry, which use specially configured aircraft for training and
testing. Typically, customers utilize aircraft and flight crews in connection
with product development. Many of these services are provided pursuant to
purchase orders rather than long-term contracts.
Seasonality is a significant factor in contract fleet operations
(historically representing a majority of FII's revenues) affecting both revenue
and cash flow. Revenues are lower during midsummer and winter months.
In addition to offering contract fleet services, FII offers its
aircraft and equipment for lease or rental to DOD and other government
customers. During the fiscal year ended April 30, 2000, this part of the
business remained strong, due principally to extension of the Company's contract
with the U.S. Navy/Naval Weapons Center in China Lake, California, to provide
Metro III aircraft necessary to accomplish transportation of naval personnel.
This revenue stream was enhanced by the Navy's desire to upgrade the Metro III
fleet with additional avionics and structural modifications. The Company is
hopeful that the Navy will enter into a new multi-year contract for these
services utilizing the newly modified aircraft, but there can be no assurances
that the Company will be selected to provide these aircraft after September 30,
2000 once the current contract expires.
FLIGHT ALASKA, INC.
Scheduled Operations
On April 28, 2000, FAI began providing scheduled air cargo services
from five major hubs in Western Alaska to more than 60 villages throughout the
state. Flight Alaska's primary customer is the United States Postal Service.
Mail in Alaska is tendered to qualified air carriers serving the state through
an "equitable tender" system that provides each carrier with an equal share of
the mail for each market served. Through its acquisition of Yute and the
transfer of Yute's operating certificates, FAI was automatically qualified to
receive an equitable share.
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FAI utilizes a combination of single and twin engine reciprocating
aircraft to perform its mail and freight carriage services. The single engine
aircraft acquired in the Yute Air acquisition are ideally suited to carry mail
and freight to the small villages throughout Alaska. The twin-engine aircraft
are equipped to operate in all but the worst weather conditions.
Management believes the Company is well positioned to compete
effectively in this extremely competitive marketplace due to a lower than
average operating cost structure achieved through its acquisition of Yute's
fixed assets at 80% of fair market value. Mail revenues are set by the US
Department of Transportation ("DOT") and updated annually based on average
industry costs. Management believes the Company's ownership costs provide a
competitive advantage and allow management to spend more than its competitors on
training and other safety investments. In general, insurance costs in Alaska are
double those experienced in the Company's other operations. Management intends
to reduce its insurance costs in Alaska through aggressive safety programs to
further enhance its competitive position.
In response to rapidly escalating fuel prices in 1999, Alaskan air
carriers petitioned the DOT for interim fuel cost adjustments. The DOT honored
the request and has instituted a quarterly adjustment decreasing the carrier's
exposure to fuel cost volatility.
Charter and Contract Operations
FAI also provides charter freight and passenger services to government
organizations and businesses throughout the state. In July 2000, FAI entered
into an agreement to provide freight transportation services for Phillips
Petroleum's Alaska division. Negotiations which expand that relationship to
transport the oil company's employees to and from remote operating sites on
Alaska's North Slope have been completed.
Ground-handling Services
FAI also provides ground-handling services for other air carriers at
its regional hubs. Management believes that the Company is well positioned to
provide space and handling services to other carriers. While no assurances can
be given that these relationships will continue, FAI provides services for
Lynden Air Cargo and Lynden Projects in Dillingham, Alaska, and Alaska Central
Express in Bethel, Alaska.
FLIGHT INTERNATIONAL AVIATION, INC.
FIA operates a FBO at the NN/W Airport pursuant to an agreement with
the Peninsula Airport Commission, that terminates in January 2004. The Company
offers a full range of aviation services customarily provided by such a facility
to third parties. These services include aircraft fueling, maintenance services
(including inspections and engine and airframe repairs), aircraft modifications,
avionics installation and replacement, charter, pilot services and aircraft
storage.
The competitive market for FBO services may be local, regional or
national, depending upon the particular type of service considered. Competition
with respect to fuel and maintenance generally arises from other FBOs located at
the same airport or within the vicinity of such airport. The availability of
storage hangars for aircraft is also an important competitive factor. Generally,
pilots with aircraft hangared at a facility will purchase fuel and a substantial
portion of their maintenance and avionics requirements at that facility. The
Company maintains three hangars at its Newport News FBO that are used for its
fleet of aircraft as well as third-party aircraft. Management does not believe
that revenues from its FBO are seasonal or dependent on a single customer.
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MODIFICATION, REPAIR AND OVERHAUL CENTERS
Flight International, Inc.
FII operates a Modification, Repair and Overhaul (MRO) Center pursuant
to an agreement with the Peninsula Airport Commission that terminates in January
2004, in conjunction with its fleet operations at the NN/W Airport. The MRO
Center consists of approximately 39,000 square feet of hangar space and 33,000
square feet of maintenance, shop and office space.
Both the Company and FII intend to exploit the expertise it has
developed maintaining its fleet of aircraft to repair, modify and maintain
customer aircraft. The airport is strategically located in the highly traveled
Eastern Seaboard corridor, with a heavy concentration of corporate aviation. FII
competes with other facilities, particularly Learjet Service Centers,
nationwide.
Flight International Services, Inc.
FIS operates a MRO Center at the Myrtle Beach International Airport in
Myrtle Beach, South Carolina, pursuant to an agreement with the Horry County
Department of Airports that terminates on March 1, 2004. FIS has an option to
renew for up to four additional five-year terms. FIS offers a full range of
aircraft inspection, repair, overhaul and modification services to third
parties. These services include the accomplishment of extensive routine
inspections, performance of minor and major airframe, power plant and component
repairs, major airframe overhauls, major and minor airframe modifications,
avionics suite installations, aircraft interior designs and installations and
exterior painting services.
The customer base includes airlines, corporate aircraft owners, private
aircraft owners and original equipment manufacturers. The Company's facilities
compete with other facilities nation-wide. FIS is strategically located in the
Eastern Seaboard corridor, with a high concentration of airlines and corporate
aircraft operators. The Company currently utilizes four hangars with over 87,000
square feet of hangar and office space. Should the need for future expansion
arise, the Company has the option to add an additional 44,000 square feet of
hangar space. The facility also includes a 10,000 square foot paint facility.
REGULATION
The Company's business is subject to regulation by the U.S. Federal
Aviation Administration ("FAA") and the DOT, under the provisions of the Federal
Aviation Act of 1958, as amended (the "Aviation Act"). The DOT is responsible,
among other things, for evaluating and determining the fitness of individuals
and organizations to function as air carriers, and maintains jurisdiction over
consolidations, mergers and acquisitions of air carriers.
The FAA regulates aircraft and air carrier operations, including
personnel employed, equipment used, ground facilities, maintenance,
communications and other matters. More specifically, the FAA regulates the
operation of aircraft in commercial operations, including FII and FAI
operations, under Federal Aviation Regulation Part 135, and regulates MRO
Centers, including those operated by FII and FIS, under Federal Aviation
Regulation Part 145.
The FAA has the authority to suspend or revoke the approval of air
carriers, commercial operators, repair stations and pilot schools, or their
licensed personnel, for failure to comply with any FAA regulation, and can
"ground" aircraft if questions arise concerning their airworthiness. Management
believes the Company holds all operating, airworthiness and other FAA
certificates required for the conduct of its business, although these
certificates may be suspended or revoked for cause.
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The FAA also has authority under the Noise Control Act of 1972, as
amended, to monitor and regulate aircraft engine noise. Management believes that
the aircraft operated by the Company are in compliance with regulations
promulgated by the FAA and that such aircraft also comply with regulations for
aircraft exhaust promulgated by the Environmental Protection Agency pursuant to
the Clean Air Act of 1979, as amended. In addition, the Company's operations may
be subject to local regulation with respect to noise control. Such authorities
and ordinances could restrict the Company's use of older Learjets, which produce
greater engine noise than newer models.
Because of the extensive use of radio and other communication
facilities in its aircraft operations, the Company is also subject to the
Federal Communications Commission Act of 1934, as amended (the "FCC Act"), and
regulation thereunder by the Federal Communications Commission ("FCC"). The
Company believes it is in compliance with all material requirements of the FCC
Act and the FCC.
The Company maintains a fuel storage area at its FBO and handles
materials that are subject to federal, state and local regulations. The Company
believes it is in compliance with all such regulations and does not currently
anticipate that maintaining compliance will have a material effect on the
capital expenditures, earnings or competitive position of the Company. The
Company believes the costs and effects of compliance with such regulations are
minor.
Compliance with the regulatory requirements applicable to the Company's
business imposes material burdens on the Company, including license
requirements, maintenance, training, record keeping and reporting obligations
and limitations on the manner in which the Company operates its aircraft.
Further, the cost of compliance with these requirements is significant.
Management believes, however, that the regulatory requirements applicable to the
Company generally are no more burdensome to the Company than to other businesses
operating in the aviation services industry.
EMPLOYEES
As of April 30, 2000, the Company had 321 employees, including 265
full-time employees. None of the Company's employees is covered by a collective
bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices and corporate headquarters are located
at One Lear Drive, Newport News, Virginia 23602, where the Company has
approximately 10,000 square feet of office space.
FII's leasehold interests at the NN/W Airport represent approximately
4.1% of the total assets of the Company. These leasehold interests consist of
three hangars totaling 39,000 square feet and approximately 33,000 square feet
of maintenance shop and office space. The leasehold improvements are amortized
on a straight-line basis over the term of the land lease, which runs through
January 2004. There are no plans for additional improvements to the property,
and, in the opinion of management, the property is adequately insured.
FAI's leasehold interests in Bethel, Alaska, acquired in June 2000,
represent approximately 5.5% of the total assets of the Company. These leasehold
interests consist of a single hangar totaling 14,000 square feet of hangar, shop
and office space. These leasehold improvements are amortized on a straight-line
basis over the term of the land lease, which runs through June 2015. There are
plans for an additional $7,500 in improvements to the property. In the opinion
of management, the property and its contents are adequately insured.
FAI's leasehold interests in Anchorage, Alaska consist of a single
hangar totaling 5,800 square feet of hangar, shop and office space, leased from
Signature Aviation, which runs through May 31, 2001. There are no plans for
leasehold improvements to this facility. In the opinion of management, the
property and its contents are adequately insured.
FAI's leasehold interests in Dillingham, Alaska consist of a single
hangar totaling 8,000 square feet of hangar, shop, office, and mail-storage
space. The leasehold runs month-to-month. There are no plans for additional
improvements to the property. In the opinion of management, the property and its
contents are adequately insured.
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FAI's leasehold interests in Kotzebue, Alaska consist of a single
hangar totaling 4,800 square feet of hangar, mail storage and office space
leased from Nelson Walker, which runs through April 4, 2001. There are no plans
for any leasehold improvements to the property. In the opinion of management,
the property and its contents are adequately insured.
FAI's leasehold interests in Aniak, Alaska represent approximately 0.4%
of the total assets of the Company. These leasehold interests consist of mail
storage and office space totaling 2,800 square feet. The leasehold improvements
are amortized on a straight-line basis over the term of the land lease, which
runs through February 1, 2007. There are no plans for any improvements to the
property. In the opinion of management, the property and its contents are
adequately insured.
FIS's leasehold interests in Myrtle Beach consist of four hangars with
over 87,000 square feet of hangar and office space. In addition, the Company has
an option to lease an additional 44,000 square feet of hangar space. The
facility also includes a 10,000 square foot paint facility. The terms of the
leases run concurrent with the operating agreement with Horry County. The
leasehold improvements are amortized on a straight-line basis over the term of
the land lease. In the opinion of management, the property and its contents are
adequately insured.
The Company presently operates a fleet of 38 aircraft, of which seven
are owned and 31 are leased. The Company also owns, subject to a Deed of Trust
and Security Interest Lien to Vbank, formerly First Union National Bank, certain
buildings, hangars and maintenance facilities. As of April 30, 2000, the
indebtedness to Vbank was approximately $1,238,401. The indebtedness to Vbank
provides for complete amortization thereof through graduated payments through
November 2003, at which time the entire obligation will be satisfied.
A majority of the Company's assets are pledged as collateral on its
debt and capital lease obligations. The Company leases the land underlying its
maintenance and headquarters building and hangars through the year 2004,
pursuant to a lease agreement with the Peninsula Airport Commission of Newport
News, Virginia.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, there are no material legal proceedings to
which the Company is a party or to which any of its assets or properties are
subject. The Company is subject to normal litigations in the ordinary course of
business.
Stephen Wyche, et al. vs. Flight International, Inc. A former employee
filed suit against the Company in the United States District Court for Eastern
Virginia alleging violations of the Fair Labor Standards Act, the Virginia
Payment of Wage Law, and the Civil Rights Act of 1964, as amended, as well as
embezzlement and fraud. The former employee sought judgment in the amount of
$3,000,000. The Company was awarded full summary judgment in this matter, which
has been dismissed. The Company is pursuing a claim for damages as a result of
the costs incurred in defending this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fiscal quarter ended April 30, 2000.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company became a reporting company under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in 1984, at the time of its
initial public offering of securities. Thereafter, it filed reports pursuant to
the requirements of Sections 13 and 15(d) of the Exchange Act. It has filed all
required filings reflective of all periods from and after February 1, 1995.
The shares of New Common Stock of the Company currently trade in the
pink sheets.
The Company believes that since April 30, 1993, virtually no public
trading has taken place with respect to the New Common Stock and its predecessor
class of common stock. There is no established public trading market currently
for the New Common Stock, and, therefore, no bid information is available.
The approximate number of holders of record of New Common Stock as of
June 5, 2000 is 819. The Company has no other class of securities authorized. On
December 10, 1996, the shareholders of the Company approved an amendment to the
Company's Amended Certificate of Incorporation to increase the number of
authorized shares of New Common Stock from 1,000,000 to 10,000,000 shares.
There have been no cash dividends declared in the past five fiscal
years, and the Company does not anticipate awarding cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
YEAR ENDED APRIL 30, 2000 COMPARED TO THE YEAR ENDED APRIL 30, 1999
Revenues
For the year ended April 30, 2000, revenues totaled $29,521,241. This
represents an increase of 16.6% over the prior year. In fiscal year 2000, the
Company's revenues were generated from three sources. Fleet Operations of owned
or leased aircraft accounted for 87.3% of total revenue, while the MRO Centers
(Commercial Maintenance) produced 6.9% of sales and the FBO provided 5.8% of
total revenues.
A year-over-year revenue comparison for each source is outlined in the
following table. While Fleet Operations showed substantial increases, Commercial
Maintenance and Fixed Base Operations revenues decreased as displayed below (in
thousands):
12 Months Ended 12 Months Ended
April 30, 2000 April 30, 1999 % Increase (Decrease)
--------------- --------------- ---------------------
Fleet Operations $25,772 $20,875 23.5 %
Commercial Maintenance $ 2,047 $ 2,667 (23.3)%
Newport News FBO $ 1,702 $ 1,772 (4.0)%
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The increase in Fleet Operations revenues is due to continued expansion
of flying hours in the CAS-MOS contract, the addition of the CAS-MED contract in
October 1999, and an increase in compensation associated with an extension of
the Company's contract with the US Navy to supply and maintain five Metro III
aircraft for charter passenger service at China Lake, California. Included in
the extension of the China Lake Contract were revenues for modifying the Metro
III fleet to new DOD safety and operating standards.
Commercial Maintenance revenues were down due to the Company's
requirement to procure and ready three additional Lear 30 Series aircraft for
operations in conjunction with the award of the CAS-MED contract. The addition
of FIS in March 2000 accounted for 20% of the Commercial Maintenance revenues
for fiscal year 2000. Without these revenues, Commercial Maintenance revenues
would have decreased by more than 34% as a result of the required expansion of
fleet operations assets.
FBO revenues decreased due to increased competition at the NN/W Airport
that resulted in the loss of some fuel sales market share.
Cost of Services
Cost of services includes the direct operating expenses of aircraft
utilized and maintained by the Company. Types of expenses incurred include the
following: lease, fuel, insurance, maintenance, pilots and equipment. Also
included are the costs of operating the FBO at the NN/W Airport and the costs of
goods sold and direct labor for the MRO Centers.
For the year ending April 30, 2000, there was a 17.1% increase in cost
of services. The major factor contributing to the increase in cost of services
was expenses related to the cost of fuel, some non-recurring expenses associated
with start-up of the CAS-MED contract and the Flight Systems acquisition. The
overall gross margin declined to 15.5% from 15.8% in the prior year.
The Company has worked to decrease its exposure to volatile fuel prices
by performing as many services as possible on an "ACMI" basis. Under an ACMI
arrangement, the Company is responsible for aircraft ownership, crew,
maintenance and insurance expenses. The customer is responsible for cost of
fuel, ground handling, landing and air traffic control fees (if any), and any
and all crew accommodation expenses. Due to existing fixed-price contracts and
the Company's common-carriage operations, it is neither practical nor possible
to perform all the Company's services on an ACMI basis and the Company is not
able to eliminate this exposure completely. During fiscal year 2000, fuel prices
increased over 100% and adversely affected profitability. During fiscal year
2000, actual fuel expense was $3,960,629 versus $2,217,290 in the prior year,
which reflects both an increase in fuel price and flight activity.
During fiscal year 2000, the Company recognized approximately $300,000
in expense reimbursement for federal excise taxes paid in prior years for fuel
used on the CAS-MOS contract. The expense was initially recognized in fiscal
years 1997, 1998 and 1999. This tax reimbursement is shown as an offset to
fiscal year 2000 fuel expense.
Depreciation and Amortization
Aircraft and engines are depreciated as follows: aircraft are
depreciated on a straight-line basis over 12 years, while engines are
depreciated based on hours flown down to a core value. In addition, a reserve is
recorded to cover the cost of major periodic inspections on engines. Electronic
Warfare equipment is depreciated on a straight-line basis over five years. All
other property and equipment is depreciated over its estimated useful life or
lease term, if applicable.
Depreciation and amortization of $884,611 for the fiscal year ended
April 30, 2000 reflects an increase of 47.3% compared to fiscal year 1999. The
$284,000 increase is due primarily to fully depreciating an aircraft engine
which required overhaul prematurely ($105,000), the addition of depreciation for
two months at FIS ($95,000), increases in assets associated with additional
aircraft, equipment and facilities required for expansion of the CAS-MOS and
CAS-MED contracts, and GeoFlight equipment.
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General, Corporate and Administrative
General, corporate and administrative expenses consist principally of
facility costs associated with the Company's hangars and corporate headquarters,
and labor costs associated with the administrative and sales staff. General,
corporate and administrative expenses aggregated $2,940,626 for the year ended
April 30, 2000, an increase of 26.7% over the prior twelve-month period. The
increase was a result of additions of personnel responsible for the Company's
new activities, general and administrative positions at FIS, expenses associated
with implementation of new accounting software systems, and additional legal
fees associated with the Company's expansion during the year.
Interest Expense
Interest expense increased to $349,477 from $331,049 for the prior
twelve-month period, or 5.6%. The increase in interest expense is principally
due to an increase in short-term borrowings to fund the working capital
requirements of the new contracts and business enterprises that began or were
acquired during the fiscal year. In addition, the Company capitalized interest
of approximately $166,000 related to assets held for resale. See "Liquidity and
Capital Resources" below.
Income Tax Expense
Income tax expense varies from statutory tax rates principally because
of the utilization of net operating loss carry forwards. For further discussion
see Note 7 to the Consolidated Financial Statements included herein.
Net Income
The consolidated net profit for the year ended April 30, 2000 was
$878,281, a profit of $.85 per share compared to a net profit of $809,411 or
$0.80 per share, for the year ended April 30, 1999. The weighted average number
of shares was 1,029,656 and 1,013,976, respectively.
In the fourth quarter of fiscal year 2000, the Company recorded net
adjustments which increased net income by approximately $400,000, reflecting an
adjustment for approximately $825,000 of unrecorded contracts revenues earned
during the third quarter and a deferral of a portion of a gain related to a
sale-leaseback transaction ($425,000).
YEAR ENDED APRIL 30, 1999 COMPARED TO THE YEAR ENDED APRIL 30, 1998
Revenues
For the year ended April 30, 1999, revenues totaled $25,313,924. This
represents an increase of 15% over the prior year. Company revenue is generated
from three sources. Flight operations of owned or leased aircraft accounts for
82% of total revenue, followed by the maintenance and repair facility at 11% and
the FBO at 7% of total revenue.
While flight operations and the FBO showed substantial increases, the
maintenance and repair facility revenue increased to a greater extent, as
displayed below (in thousands):
12 Months Ended 12 Months Ended
April 30, 1999 April 30, 1998 % Increase
--------------- --------------- ----------
Flight Operations $20,875 $18,585 12%
Commercial Maintenance $ 2,667 $ 1,853 44%
Newport News FBO $ 1,772 $ 1,622 9%
The increase in flight operations is primarily due to a 10% increase in
revenues from the CAS-MOS contract. Other contract flying also increased by more
than 20%. Maintenance revenue increased due to a large mid year project
involving the rebuilding of a damaged Learjet. FBO revenues increased following
a pattern of increased traffic through the NN/W Airport.
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Cost of Services
Cost of services include the direct operating expenses of aircraft
owned and leased by the Company. Types of expenses incurred include the
following: lease, fuel, insurance, maintenance, pilots and equipment. Also
included are the costs of operating the FBO at the NN/W Airport. The costs for
the aircraft repair facility are also included in costs of services.
For the year ending April 30, 1999 there was a 17% increase in costs of
services. The major factor contributing to the increase in cost of services was
expenses related to the CAS-MOS contract. The overall gross margin declined to
16% from 18% in the prior year.
Depreciation and Amortization
Aircraft and engines are depreciated as follows: aircraft are
depreciated on a straight-line basis over 12 years. Engines are depreciated
based on hours flown down to a core value. In addition, a reserve is recorded to
cover the cost of major periodic inspections on engines. Electronic warfare
equipment is depreciated on a straight line basis over five years. All other
property and equipment is depreciated over its estimated useful life or lease
term, if applicable.
Depreciation and amortization of $600,658 for the fiscal year ended
April 30, 1999 reflects an increase of 5% compared to fiscal year 1998. This
change is primarily due to an engine purchase completed during the year.
General, Corporate and Administrative
General, corporate and administrative expenses consist principally of
facility costs associated with the three hangars and corporate headquarters
building, and labor costs associated with the administrative and sales staff.
General, corporate and administrative expenses aggregated $2,320,463 for the
year ended April 30, 1999, an increase of 7% over the prior twelve-month period.
The increase is not due to one particular event but more of an overall increase
in all aspects of general and administrative costs.
Interest Expense
Interest expense decreased to $331,049 from $365,540 for the prior
twelve month period, or 9%. The decrease in interest expense is principally due
to the pay down of long term debt as well as more favorable rates of interest on
the line of credit with Crestar Bank.
Income Tax Expense
Income tax expense varies from statutory tax rates principally because
of the utilization of net operating loss carry forwards.
Net Income
The consolidated net profit for the year ended April 30, 1999 was
$809,411, a profit of $.80 per share compared to a net profit of $725,883, or
$.72 per share, for the year ended April 30, 1998. The weighted average number
of shares was 1,013,976 for both years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth plan resulted in a significant number of financing
transactions in fiscal year 2000. During that year, the Company funded its
growth and operations primarily through short and long-term borrowings.
Cash from Operations
Net income less non-operating items and the effect of depreciation and
reserves provided $1,464,375 in fiscal year 2000 versus $1,044,132 in 1999.
Expanded working capital requirements absorbed $1,064,836 in fiscal year 2000
while providing $717,006 in the prior year. The recognition of deferred revenue
effectively absorbed $727,586 in fiscal year 2000 versus $950,802 in fiscal year
1999. On a net basis, the Company's operating activities absorbed $328,047 for
the fiscal year ending April 30, 2000, while providing $810,336 in the
comparable prior year period.
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Cash to Investing Activities
On November 1, 1999, the Company sold one Learjet 30 and two aircraft
engines to Maritime Sales and Leasing, Inc.("Maritime") that provided $1,700,000
in cash, and subsequently leased the aircraft back at market rates. This
transaction resulted in a net gain of $916,661, of which $492,070 was recognized
in fiscal year 2000.
During fiscal year 2000, the Company acquired three aircraft that were
in the process of being refurbished and are carried as assets held for resale.
The aircraft, related parts and labor expended during the year to prepare them
for resale, was $2,651,012.
Purchases of property, plant and equipment included the assets of Perry
Avionics ($240,000), flight-equipment required for GFL ($225,000), and
modifications to aircraft required for the CAS-MED and China Lake contracts
($650,000). The remainder of the activity represents the acquisition of
replacement machinery, furnishings, computers and equipment associated with
normal operations and an upgrade of the Company's information technology
infrastructure. In fiscal year 2000, investments in property, plant and
equipment absorbed $1,710,923 versus $1,103,201 in the prior year.
During fiscal year 2000, the Company acquired specific assets of Yute
and virtually all the assets and specific liabilities of Flight Systems, Inc.
for $1,298,281.
For the year, net cash absorbed by investing activities totaled
$3,960,216 versus $1,103,201 in fiscal year 1999. Exclusive of funds generated
by the sale/leaseback of the Learjet aircraft, cash absorbed by investment
activities would have totaled $5,660,216 in fiscal year 2000.
Cash from Financing Activities
In fiscal year 2000, the Company utilized a combination of short and
long-term borrowing to fund its expansion needs. Net proceeds from long-term
debt and notes payable provided $3,259,858. Net proceeds from lines of credit
provided an additional $1,116,760 in cash to fund increased working capital
requirements that accompanied the expansion. During the fiscal year, short and
long-term financing activities provided a total of $4,376,618.
For fiscal year 2000, the Company realized a net increase in cash and
cash equivalents of $88,355.
On February 25, 1998, the Company entered into a line of credit with
SunTrust Bank ("SunTrust") for its short term financing needs. The agreement
provided for up to $2,750,000 in credit. The loan was represented by a demand
note which could have been payable at any time upon the demand of SunTrust. The
Company was obligated to pay interest to SunTrust at prime rate plus one-half
percent of the average balance outstanding. The line was secured by the
Company's accounts receivable and an assignment of the CAS-MOS contract.
On August 1, 1999, the Company entered into agreement with Wachovia
Bank, N.A. ("Wachovia") to provide $1,300,000 in "floor-plan" debt, at an
interest rate of prime plus 1%, to facilitate the purchase of a Learjet 35 that
the Company intends to refurbish and sell. In a related transaction dated August
15, 1999, the Company refinanced one of its owned Learjet aircraft to secure
$500,000 of additional working capital to cover refurbishment investments on
this aircraft. These aircraft provide security for the debt.
On September 23, 1999, the Company entered into an agreement with
Harbor Bank for an 8% fixed-rate term-loan, the proceeds of which were used to
refurbish the Company's hangar and office facilities at NN/W Airport. In
addition to the term note, the Company also negotiated a $500,000 line of credit
at an interest rate of prime plus .5% to fund the acquisition, repair and sale
of spare parts to third parties. These loans were subsequently retired on
September 6, 2000 by a Wachovia Loan and Security Agreement dated August 28,
2000.
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On October 1, 1999, the Company entered into an agreement with Wachovia
to provide $900,000 in term debt at an interest rate of prime plus 1% to
facilitate the purchase of two Jetstream 31 aircraft. While initially intended
for fleet operations, these aircraft are now being prepared for resale at FIS.
The aircraft provide security for the debt.
On October 15, 1999, the Company entered into an agreement with First
Commercial Bank to provide $225,000 in term debt at an interest rate of prime
plus .75% to facilitate the purchase of one Piper Navajo and one Piper Aztec for
use in the Company's GFL operation.
On February 29, 2000, the Company assumed, as part of FIS's purchase of
Flight Systems, Inc., a short-term demand note payable to a local South Carolina
bank in the amount of $123,127 at an interest rate of prime plus .25%. This loan
was subsequently retired on September 6, 2000 by a Wachovia Loan and Security
Agreement dated August 28, 2000.
On February 29, 2000, as part of the FIS acquisition, the Company
entered into an agreement with a shareholder for a non-interest bearing
stockholder note payable maturing February 28, 2001 in the amount of $168,953.
Net advances from February 29, 2000 to April 30, 2000 increased the balance to
$238,585.
In April 2000, the Company entered into an agreement with Wachovia to
provide $240,000 in long-term debt at an interest rate of LIBOR plus 3% to
purchase the assets of Perry Avionics in Myrtle Beach, South Carolina. The
assets acquired in the transaction provide security for the 3-year loan.
In April 2000, the Company entered into an agreement with Wachovia to
provide $775,000 in long-term financing at an interest rate of LIBOR plus 3% to
facilitate the purchase of selected assets of Yute. The aircraft, spare parts
and equipment acquired provide security for the 5-year loan.
On June 5, 2000, the Company entered into an agreement with the Alaska
Industrial Development and Export Authority to purchase a hangar in Bethel,
Alaska for $1,100,000. The purchase was financed in total by AIDEA and is
payable over 15 years at an interest rate of 9.25%. The loan is secured by the
hangar facilities.
On September 5, 2000, the Company entered into a new Loan and Security
Agreement with Wachovia for all its short-term financing needs. The new
agreement provides for up to $5,500,000 in credit and is represented by a term
note. The Company is obligated to pay Wachovia interest at LIBOR plus 250 basis
points on the average outstanding balance plus 25 basis points on any unused
portion of the line. The line may be reduced at the discretion of the Company,
without penalty. This instrument, which replaces current short-term financing of
$4,123,127 at BB&T, SunTrust, Harbor, and Wachovia Banks collectively,
represents more favorable pricing, terms and conditions to the Company. The new
line is secured by the Company's accounts receivable, inventory held for resale,
intangible assets and an assignment of its CAS-MOS and CAS-MED contracts.
The Company operates in a capital-intensive industry. Typically, major
expenses are incurred in connection with the initiation of a new contract. These
costs can consist of acquisition of additional aircraft, equipment and training,
and these costs can be reduced through leasing arrangements and advance payments
from customers, if obtainable. The Company believes that it will be able to
arrange through available means the financing of these initial contract costs
when necessary, although no assurance can be given. See Notes 5, 6 and 8 to the
Consolidated Financial Statements included herein for a discussion of debt and
lease commitments.
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BUSINESS TRENDS AND RESULTS OF SUBSIDIARY OPERATIONS
General
On a consolidated basis, the Company's profitability was little-changed
from the prior year. The Company's results were positively impacted by the
$492,071 gain recorded on the sale-leaseback of one of its Learjet aircraft.
Profits from on-going CAS-MOS and China Lake contracts were a positive force
while results were negatively impacted by rising fuel prices and market
development efforts in Alaska and Naples, Italy. In total, operating losses
associated with the initial operations in Myrtle Beach offset the gain recorded
on the sale-leaseback transaction. Excluding FIS, net income would have been
$1,335,849 on sales of $29,147,716. Return on sales would have increased to 4.6%
from 3.2%. Gross margin would have increased to 16.1% of sales from 15.8%.
The Company has embarked on a long-term effort to decrease its exposure
to the cyclicality and narrow margins that are prevalent in its DOD-based
contracts. In an effort to achieve these goals, the Company has expanded
operations in areas where it has developed expertise and unique capabilities
with the specific intent of attracting a non- or counter-cyclical customer base.
Management believes that aircraft and facility utilization are the
major components of the Company's financial success. The Company's DOD contracts
tend to be characterized by "fixed-rate per aircraft hour" price schedules and
the flying tends to peak in late spring, late summer and early fall. Where
excess capacity exists currently, the Company is instituting revenue management
techniques where possible and appropriate to enhance total revenues and increase
asset utilization rates.
Since April 1999, the cost of jet fuel has increased from $.50 to over
$1.05 per gallon. Crude oil prices have increased from under $10.00 per barrel
in February 1999 to over $32.00 per barrel in August 2000. While the core rate
of inflation has remained fairly stable during this period, the Company is
vulnerable to dramatic fluctuations in oil prices. To mitigate this exposure,
the Company attempts to negotiate contracts that have frequent fuel price cost
adjustments, or passes the risk to the customer altogether. The Company has
achieved moderate success in these efforts.
Despite an insurance loss rate under 4% over the past five years, the
Company has experienced a significant increase in hull and liability insurance
premiums in the past year. Underlying this increase in premiums are general
industry trends based on liability loss experience, particularly in Alaska. In
an effort to bring premiums in line with our loss experience, the Company has
initiated negotiations with alternative underwriters in an effort to reverse
this adverse trend.
Flight International, Inc.
Revenues for FII grew to $27,448,603 in fiscal year 2000 from
$23,539,924 in the prior year, an increase of 16.8%. Net income before gain on
sale of assets rose slightly to $660,393 from $574,306, an increase of 15.0%.
Including the gains recognized on the sale of one of the Company's aircraft, net
income rose to $1,152,463, or a gain of 100.7%.
Total revenues at FII continued their double-digit growth rate in
fiscal year 2000. A small portion of this growth was derived from the 2% price
inflator built into the CAS-MOS contract. A larger portion of the increase came
as a direct result of the one-year extension to the China Lake contract that
included significant revenues for the modification of the aircraft utilized in
the performance of that contract. In addition, the subsidiary saw a significant
increase in revenues from the CAS-MED contract. The revenue stream from the
China Lake contract is not expected to remain at the levels experienced in 2000,
even if the Company is the successful bidder for the contract in October 2000.
No assurances can be given that the DOD will exercise its options on the CAS-MED
contract.
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The Company's new contract in Naples, Italy required a restructuring of
the FII's aircraft fleet. Three additional Learjets with "multi-mission"
capability were acquired, modified and placed into service during the year. For
the last seven months of the year, the Company had more aircraft than necessary
while the restructuring process took place. During this same period, FII also
employed contract aircraft to enable it to maintain adequate reliability during
the initial contract start-up period and the Metro III modification program.
These additional aircraft, while essential for customer satisfaction reasons,
served to further depress FII's gross margin. Management believes costs for the
CAS-MED contract will drop commensurate with the anticipated decrease in
revenues. Similarly, the costs associated with the China Lake contract should
decrease in future years if the contract is awarded for the next five-year
period. No assurances can be given that the China Lake contract will be awarded
to the Company for the government's 2001 fiscal year and beyond.
Flight Alaska, Inc.
On May 1, 2000, the Company established a separate subsidiary to better
manage its growing operations in Alaska. As a part of FII in 1999, the Alaska
operations received minimal oversight and limited direct marketing effort.
During 2000, and particularly following the acquisition of Yute Air, a local
management team, assembled through combination of the two subsidiaries, has
accelerated the revenue growth rate of the Company's Alaska division. In fiscal
year 2000, the operating results of the Alaska division were reported as part of
FII. Had they been reported separately, the division would have stated revenues
of $1,100,000 and costs of $1,950,000.
In late August 2000, FAI negotiated a contract with Phillips Alaska,
Inc. To support these operations, and additional operations on the North Slope
of Alaska, the Company intends to construct a minimal hangar in Deadhorse,
Alaska, large enough to accommodate two Casa 212 and one single-engine aircraft.
The total cost of procurement and construction is not expected to exceed
$165,000 and the structure can be economically disassembled and sold should the
Company's commitment to North Slope operations change.
Commercial Maintenance
The Company's management believes that the MRO sector of the aviation
maintenance marketplace has entered a consolidation phase that will ultimately
result in fewer competitors and higher yields throughout the industry. Over the
past five to ten years, this industry sector has been characterized by increased
labor-cost pressure and decreased profit margins, particularly in the airline
maintenance segment. During the past year, the industry has been confronted with
increasing liability insurance costs that are accelerating the inevitable
consolidation.
After the acquisition of Flight Systems, management began the process
of renegotiating rates with the subsidiary's primary customers to increase
yields. In July 2000, the Company successfully negotiated a contract amendment
with its largest customer to increase pricing by nearly 15%. All future work is
being priced in line with current market rates, which have increased
significantly during the past 12 to 18 months.
As is the case with other areas of the Company, FIS faces the prospect
of rising insurance premiums for product liability coverage. Wherever possible,
the Company has sought to protect itself and provide adequate risk management
through a cooperative agreement with its customers. To date, most of the
Company's customers posing significant increases in liability risk have been
willing to name the Company as an additional insured and indemnify the Company,
its officers, directors and shareholders against claims in excess of existing
liability limits. In the future, these risks may be forced upon the Company and
result in higher premiums, which in turn, must be passed on to the customers in
the form of increased pricing for labor and parts.
As expected, the initial start-up of FIS resulted in operating losses
consistent with those seen by the previous owner of Flight Systems, Inc. Through
aggressive marketing directed toward higher yield customers, including corporate
business jet clients and original-equipment manufacturers, management is seeking
to achieve profitable operations.
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In fiscal year 2000, the Company realized a need for better production
planning and control capabilities in its MRO Centers. In May 2000, the Company
entered into an agreement with Continuum Applied Technology, Inc. to acquire
that company's production planning and tracking system for use in both of its
MRO Centers. The software will enable management to better manage its labor
force, plan maintenance projects, and control labor and materials expenses. The
software is scheduled to come online at FIS in mid-September and be fully
operational in both MRO Centers by the end of fiscal year 2001. The investment
in software and hardware required is estimated to be $150,000.
Fixed Base Operation
FIA was confronted with increased competition in fiscal year 2000 which
placed margin pressure on its main revenue stream - fuel sales. In conjunction
with the increased competition, two of the Company's airline customers
renegotiated fuel service agreements placing even greater pressure on margins.
Correspondingly, revenues decreased slightly to $1,702,113 in fiscal year 2000
from $1,772,000 in fiscal year 1999. Net profits for the subsidiary were
$183,386 in fiscal year 2000, versus a net profit of $235,105 for the previous
year.
Management believes that the full service capability offered by the
Company places FIA in an excellent position to compete effectively in the
future. In July 2000, the Company found that government contract fuel being
supplied through FIA's competitor at the NN/W Airport is currently below the
price the Company could procure from FIA's suppliers. The fueling services
provided on an inter-company basis were discontinued in July and management made
all necessary changes to keep the subsidiary's cost structure in line. Should
fuel prices decrease and the cost of government fuel come in line with pricing
available to FIA, management can reverse this decision.
YEAR 2000 MODIFICATIONS
The Company has not experienced any material business interruptions or
supplier delays from Year 2000 computer issues to date and had replaced all
computer hardware and software that was Year 2000 non-compliant by December 31,
1999. The replacement of non-compliant hardware and software had no adverse
impact on the Company's performance. However, the failure of the Company's
internal systems or those of any of its customers, vendors, suppliers or service
providers could have a material adverse effect on its business and results of
operations. Investments in hardware and software during fiscal year 2000
necessary to bring the Company's computer system into compliance was
approximately $543,000.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 to F-19, attached.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The current officers and directors will serve for terms of one year or
until their respective successors are elected and qualified. The current
officers and directors are:
Name Age Date of Election Position
---- --- ---------------- --------
David E. Sandlin 56 March 30, 1994 Chairman, President,
Chief Executive Officer,
Director
B. Scott Terry 36 April 3, 2000 Executive Vice President
Robert C. Dynan 44 April 3, 2000 Chief Financial Officer and
Treasurer
Ann P. Campbell 61 April 13, 1993 Corporate Secretary
C. Lofton Fouts, Jr. 68 February 13, 1995 Director
John R. Bone 49 February 13, 1995 Director
Vice Admiral Richard M. 67 May 24, 1995 Director
Dunleavy (Ret.)
The Company's Board of Directors is required to remain at six (6)
members until changed by vote of shareholders. The members of the Board of
Directors need not be shareholders of the Company. Further, three members of the
Board of Directors may be, but are not required to be, officers, employees,
consultants or independent contractors engaged, employed or retained by the
Company or its subsidiaries and/or affiliates. Messrs. Sandlin and Bone
represent these directors and the Company is currently seeking to replace Wayne
M. Richmon, a former director who resigned from the Board and as Chief Financial
Officer in September 1999. The remaining three directors must be individuals who
are not directly or indirectly engaged, employed or retained by the Company or
its subsidiaries or affiliates. Messrs. Fouts and Dunleavy represent two of
these three directors. James N. Lingan was the third of these "independent"
directors until his death in March, 1998. The Board of Directors has attempted
to seek a replacement for Mr. Lingan.
Each director and executive officer's business experience during the
past five years is described below:
David E. Sandlin. Mr. Sandlin has been Chairman, President and a
Director of the Company and its subsidiaries since March 30, 1994, and was
formerly President of Flight International Sales and Leasing, Inc.. Mr. Sandlin
has been involved in aircraft marketing and management since 1978. He has worked
in various capacities for Cessna and Dassault and has extensive experience with
Learjets. In 1990 he founded DESCO Aviation Consultants International ("DESCO")
and is an officer, director and 50% shareholder of Maritime Sales & Leasing,
Inc. ("Maritime"), a major lessor of turbine aircraft. Maritime has leased a
total of 20 aircraft to FII and two to FAI. In addition, Mr. Sandlin leases one
aircraft to FAI personally. See Item 12, "Certain Relationships and Related
Transactions."
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B. Scott Terry. Mr. Terry has been Executive Vice President since April
3, 2000 and has worked with the Company since 1998, primarily in the role of
strategic planning. Mr. Terry served in the United States Navy from 1985 to 1995
where, among other duties, he served as Co-Chairman for the United States Navy
Partnership for Peace Program and as the Executive Assistant to the Commander in
Chief, U.S. Naval Forces Europe. In August 1995, Mr. Terry began working in
corporate finance with Merrill Lynch & Co. In August, 1996 he founded Geneva
Limited Partnership, a company that specializes in strategic planning, mergers
and acquisitions advisory services and international business development, which
he managed until he joined the Company in 1998. Mr. Terry holds a Bachelor of
Science degree in Economics from Regents College, and a Master of Science degree
in International Business Administration from Boston University.
Robert C. Dynan. Mr. Dynan has been Chief Financial Officer and
Treasurer of the Company, and its subsidiaries, since April 3, 2000. Mr. Dynan
has worked with aviation-related businesses since 1976. From 1991 to 1998, he
served in various management capacities for Mesa Air Group, Inc., including Vice
President of Customer Service for its Air Midwest and WestAir subsidiaries. In
April, 1994 he was appointed President of Mesa's Liberty Express division and
was elected President of Mesa Airlines, Inc. in January 1998. In October, 1998,
he was elected President and Chief Operating Officer of Northern Air Cargo, Inc.
In January, 2000 he served as a consultant on the Company's Yute Air acquisition
and formally joined Flight International in March. Mr. Dynan received his
undergraduate degree in Aviation Management from Auburn University and his
Masters of Business Administration degree from the Harvard Graduate School of
Business.
Ann P. Campbell. Ms. Campbell, Corporate Secretary, joined the Company
in 1987 as Secretary to the Chief Financial Officer of the Company. Since that
time, she has served as Executive Secretary to the Chief Operating Officer and
President, and Assistant to the Chairman. Ms. Campbell has over fifteen years
experience as a legal secretary and currently serves as Executive Secretary to
the Chairman, Executive Vice President, and the Chief Financial Officer.
C. Lofton Fouts, Jr. Mr. Fouts, Director, has been involved in the
aviation industry for 29 years. He wrote the original Piper Flite Center
training syllabus, the first standardized flight program used nationwide in the
general aviation industry. In 1988, Mr. Fouts formed Lofton Fouts & Associates,
Inc., a general aviation consulting business specializing in sales, acquisitions
and mergers of fixed base operations and related aviation businesses.
John R. Bone. Mr. Bone, Director, is President of Global Jet, a
corporate aircraft sales and brokerage firm, and is an officer, director and 50%
shareholder of Maritime. Mr. Bone studied aeronautical engineering at Northrup
University. He is an A&P mechanic, has worked as Chief Pilot for major U.S.
companies and currently is a pilot with a major United States airline. Global
Jet, with Mr. Bone, has been instrumental in developing the fleet of Learjets
for Phoenix Air Group, a competitor of FII. See Item 12, "Certain Relationships
and Related Transactions."
Vice Admiral Richard M. Dunleavy (Ret.). Admiral Dunleavy, Director,
was formerly Assistant Chief of Naval Operations (Air Warfare). Admiral Dunleavy
joined the Staff of the Chief of Naval Operations in 1976. From 1978 to 1979 he
was Commanding Officer of the USS Ponchatoula and assumed command of the USS
Coral Sea in 1979. In 1981, he was selected as Commander of U.S. Naval Forces in
the Philippines and later became Commander, Carrier Group FOUR/Commander
Striking Force Atlantic. From 1986 to 1989 he was Commander, Naval Air Force,
U.S. Atlantic Fleet. Admiral Dunleavy's military awards include a Distinguished
Service Medal, three Legions of Merit, eight Air Medals and four Navy
Commendation Medals.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company believes that all required Forms 3 and 4 with respect to
the fiscal year ended April 30, 2000 were furnished to the Registrant.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a profile of the Company's executive
compensation and shows, among other things, salaries and other compensation paid
during the last three years, and certain options granted for the Chief Executive
Officer of the Company and the other executive officers of the Company who had
aggregate remuneration exceeding $100,000 (the "Named Officers"). The tables
following show option grant and option exercise information with respect to the
Named Officers.
ANNUAL COMPENSATION
-------------------
Annual Other [Long term]
Name, Principal Position Year Salary Comp. Compensation
------------------------ ---- ------ ----- ------------
David E. Sandlin(4) 2000 $134,124(1) (2) $-----(3)
Chairman, President 1999 $129,842(1) (2) $-----(3)
Chief Executive Officer, 1998 $110,728(1) (2) $-----(3)
Director
(1) Pursuant to an Employment Agreement, dated as of January 3, 1995, by
and between the Company and David E. Sandlin, as amended to date (the
"Sandlin Agreement"), Mr. Sandlin received a salary at an annual rate
of $110,728 during the fiscal year ended April 30, 1998, $129,842
during the fiscal year ended April 30, 1999 and $134,124 during the
fiscal year ended April 30, 2000. See "Employment Agreements," below.
(2) The Sandlin Agreement and Mr. Sandlin's employment arrangement prior to
entering into the Sandlin Agreement provides for certain perquisites,
including an apartment in Newport News, Virginia, travel costs to and
from his home in Atlanta, Georgia and an automobile in Newport News.
The aggregate cost of these items for the fiscal year ended April 30,
2000 was $39,199 for the fiscal year ended April 30, 1999 was $37,969;
and for the fiscal year ended April 30, 1998, $30,079.
(3) On October 7, 1998, Mr. Sandlin was granted 6,000 and 45,000 shares at
an option price of $3.00 and $3.12, respectively. On July 16, 1999, Mr.
Sandlin was granted 25,000 shares vesting over the next two years at an
option price of $3.49. On August 1, 1999, Mr. Sandlin was granted an
additional 33,000 shares vesting over the next two years at the same
option price of $3.49. See "Employment Agreements," below. On July 1,
2000, Mr. Sandlin was granted 10,000 and 54,000 shares vesting over the
next two years at an option price of $4.38.
(4) Mr. Sandlin is an officer, director and 50% shareholder of Maritime.
Maritime has leased a total of 21 aircraft to the various subsidiaries
of the Company and has engaged in certain other activities with the
Company. The Company does not believe that any of the foregoing
constituted compensation to Mr. Sandlin, but makes this disclosure for
the sake of completeness. See "Certain Relationships and Related
Transactions".
21
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e)
----------------- -------- --------- --------- ---------
David E. Sandlin 25,000 31.85% $3.49 7/15/04
33,000 42.04% $3.49 7/31/04
(a) Name
(b) Number of Securities Underlying Options/SARs Granted (#)
(c) Percentage of Total Options/SARs Granted to Employee in Fiscal Year
(d) Exercise or Base Price ($/sh)
(e) Expiration Date
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR VALUES
This table is not included because no options were exercised by the named
executive officer during the fiscal year ended April 30,2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of August 1, 2000
regarding the beneficial ownership of the Company's Common Stock of (i) each
person known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and executive officers of the Company as a group. Except as otherwise
specified, the named beneficial owner has sole voting and investment power.
Name and Amount and
Address of Nature of
Beneficial Beneficial
Owner Ownership (1) Percent of Class
----- ------------- ----------------
David E. Sandlin 449,992(2) 36.87
c/o The Flight International Group, Inc.
One Lear Drive,
Newport News, Virginia 23602
B. Scott Terry 7,666 *
c/o The Flight International Group, Inc.
One Lear Drive,
Newport News, Virginia 23602
Robert C. Dynan 2,500 *
c/o The Flight International Group, Inc.
One Lear Drive,
Newport News, Virginia 23602
Ann P. Campbell 4,332 *
c/o The Flight International Group, Inc.
One Lear Drive,
Newport News, Virginia 23602
C. Lofton Fouts, Jr. 2,999 *
9027 High St., Kensington Gardens
Douglasville, GA 30135
John R. Bone 281,992(2) 25.35%
3 East Broad St.
Newman, GA 30263
22
<PAGE>
Name and Amount and
Address of Nature of
Beneficial Beneficial
Owner Ownership (1) Percent of Class
----- ------------- ----------------
Vice Admiral Richard M. Dunleavy (Ret.) 2,999 *
2220 Sandfiddler Road
Virginia Beach, VA 23456
Maritime Sales & Leasing, Inc. 108,993 9.82%
3 East Broad Street,
Newnan, Georgia 30623
Charles T. Myers 101,398 9.14%
4497 Carriage Run
Murrells Inlet, South Carolina 29576
Flight Partners Limited., L.P. ("FPP") 60,048 5.41%
c/o Lincolnshire Management, Inc.
780 Third Avenue, New York, NY 10017
Attention: Mr. William F. Wolffer, Jr.
SouthTrust Bank of Alabama, N.A. 107,408 9.68%
112 N. 20th Street, 3rd Floor
Birmingham, AL 35203
Attention: C. Trey Maxwell .
LeasePlan USA, Inc. 61,346 5.53%
180 Interstate North Parkway, Suite 400
Atlanta, GA 30339
Attention: John Stasiowski, Vice President
ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP (7 individuals) 738,478 66.56%
* Represents less than a one percent interest.
(1) Includes currently exercisable options to purchase shares of common
stock, namely: Sandlin (110,999), Terry (7,666), Campbell (4,332), Bone
(2,999), Dunleavy (2,999), Dynan (2,500) and Fouts (2,999).
(2) Includes 108,993 shares owned by Maritime, of which Messrs. Sandlin and
Bone are 50% owners and directors & officers.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Sandlin is an officer, director and 50% shareholder of Maritime, a
major lessor of turbine aircraft. Maritime has leased a total of 22 aircraft to
the Company's subsidiaries at a total cost to the Company of $3,752,779 for the
fiscal year ended April 30, 2000. In addition, Mr. Sandlin personally leases one
aircraft to Flight Alaska, Inc. On November 18, 1999, the Company entered into
an agreement with Maritime to sell a Lear 30 aircraft and two turbofan engines
to Maritime for $1,700,000 and leased those assets back through a two-year lease
at a rate of $26,000 per month plus engine reserves at a rate of $225 per
aircraft hour. These rates are considered to be fair market rates. The Company
believes the financial and other arrangements between it, Maritime and Mr.
Sandlin are reasonable and fair and similar to arrangements that would have been
made in an arm's length transaction between the Company and an unaffiliated
third party. The Company does not believe that Mr. Sandlin's relationship with
Maritime materially interferes with his ability to fully perform his obligations
to the Company as a director, officer and employee.
23
<PAGE>
Mr. Bone is an officer, director and 50% shareholder of Maritime. In
addition, Mr. Bone is the sole shareholder, director and officer of Global Jet
("Global Jet"), which, with Mr. Bone, has been instrumental in developing the
fleet of Learjets for Phoenix Air Group, a competitor of FII. The Company does
not believe that Mr. Bone's relationships with Maritime and Global Jet
materially interfere with Mr. Bone's ability to fully perform his obligations to
the Company as a director.
Mr. Charles T. Myers is a shareholder of the Company. In addition, Mr.
Myers sold his business, Flight Systems, Inc. to the Company on February 29,
2000. In conjunction with the sale of those assets, Mr. Myers provided the
Company with a Shareholder Note Payable in the amount of $238,535. The
non-interest bearing note matures on February 28, 2001 and is to be repaid
through funds generated from operations.
The Board of Directors of the Company currently requires approval or
ratification by the Board of all related party transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
1. The exhibits required to be filed as part of this Annual Report on
Form 10-K are listed in the attached Exhibit Index.
2. During the quarter ended April 30, 2000, the Company filed no
Current Reports on Form 8-K.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: October 18, 2000 THE FLIGHT INTERNATIONAL GROUP, INC.
By: /s/ David E. Sandlin
--------------------
David E. Sandlin
Principal Executive Officer
By: /s/ Robert C. Dynan
-------------------
Robert C. Dynan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/ David E. Sandlin Chairman, Director, October 18, 2000
------------------- President, CEO
David E. Sandlin
s/ C. Lofton Fouts, Jr. Director October 18, 2000
-----------------------
C. Lofton Fouts, Jr.
s/ John R. Bone Director October 18, 2000
---------------
John R. Bone
s/ Vice Admiral
Richard M. Dunleavy (Ret.) Director October 18, 2000
--------------------------
Vice Admiral
Richard M. Dunleavy (Ret.)
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Page Description
------ ---- -----------
3(a) Amended and Restated Articles of
Incorporation of the Company (incorporated
by reference to the Company's Report on
Form 10-KSB for the fiscal year ended
April 30, 1996).
3(b) Bylaws of the Company (incorporated by
reference to the Company's Report on Form
10-KSB for the fiscal year ended April 30,
1996).
10(a) Lease Agreement dated November 8, 1984
between the Peninsula Airport Commission
and Flight International Aviation, Inc.,
as amended. (incorporated by reference to
Exhibit 10(n) to the Company's Report on
Form 10-K for the fiscal year ended April
30, 1988).
10(b) Award/Contract No. N00421-92-C-0134 dated
September 15, 1992, issued by the United
States Naval Weapons Center, Patuxent
River, MD to Flight International, Inc.
(incorporated by reference to the
Company's Report on Form 10-KSB for the
fiscal year ended April 30, 1996).
10(c) Award/Contract No. N68936-94-C-0086 dated
November 21, 1994, issued by the United
States Naval Weapons Center, China Lake,
CA to Flight International, Inc.
(incorporated by reference to the
Company's Report on Form 10-KSB for the
fiscal year ended April 30, 1996).
10(d) Employment Agreement dated January 3, 1995
between the Company and David E. Sandlin
(incorporated by reference to the
Company's Report on Form 10-KSB for the
fiscal year ended April 30, 1995).
10(e) Employment Agreement dated January 3, 1995
between the Company and Wayne M. Richmon
(incorporated by reference to the
Company's Report on Form 10-KSB for the
fiscal year ended April 30, 1995).
10(f) Award/Contract No. N00019 dated August 30,
1996, issued by the United States Naval
Air Systems Command, AIR-2.5.3, Patuxent
River, MD to Flight International, Inc.
("CAS-MOS" Contract) (incorporated by
reference to the Company's Report on Form
10-KSB/A for the fiscal year ended April
30, 1996).
26
<PAGE>
Exhibit
Number Page Description
------ ---- -----------
Certain portions of this Exhibit have been
omitted based upon a request for
confidential treatment with the Securities
and Exchange Commission (the
"Commission"). The confidential portions
have been filed with the Commission.
10(g) Intentionally omitted.
10(h) Intentionally omitted.
10(i) Fourth Modification Agreement, dated as of
April 30, 1996, by and between Flight
International Aviation, Inc., Steven D.
Delaney, Otto W. Konrad and Signet Bank
(incorporated by reference to the
Company's Report on Form 10-KSB for the
fiscal year ended April 30, 1996).
10(j) Amended and Restated Deed of Trust Note,
dated April 30, 1996, from Flight
International Aviation, Inc., as maker, to
Signet Bank (incorporated by reference to
the Company's Report on Form 10-KSB for
the fiscal year ended April 30, 1996).
10(k) Documents Relating to Crestar Bank Loan
(incorporated by reference to the
Company's Report on form 10-QSB for the
quarter ended January 31, 1998).
10(l) Documents Relating to Wachovia Bank
Refinancing (incorporated by reference to
the Company's Report on Form 10-QSB for
the quarter ended January 31, 1998).
10(m) Option Agreement between David E. Sandlin
and the Company dated March 9, 1998
(incorporated by reference to the
Company's Report on Form 10-KSB for the
year ended April 30, 1998).
10(n) Current pricing information with respect
to CAS-MOS Contract (incorporated by
reference to the Company's Report on Form
10-QSB for the quarter ended December 31,
1999)
10(o) Yute Air Alaska Bankruptcy Court Order
dated February 25, 2000
10(p) Flight International Services, Inc. Asset
Purchase Agreement dated February 29, 2000
10(q) Documents relating to Alaska Industrial
Development and Export Authority Agreement
dated June 5, 2000
10(r) Documents relating to Wachovia Bank Line
of Credit Agreement dated August 28, 2000
27 Financial Data Schedule
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
April 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Current assets
Cash $ 167,647 $ 79,292
Accounts receivable, net (Note 2) 5,701,100 3,517,018
Inventories (Notes 3, 5 and 6) 3,023,887 2,601,966
Costs in excess of billings 722,259 284,699
Prepaid expenses and other 202,412 138,286
Deposits 806,173 681,799
Assets held for sale 2,651,012 -
----------------------------------------------------------------------------------------------------------
Total current assets 13,274,490 7,303,060
----------------------------------------------------------------------------------------------------------
Property and equipment, net (Notes 4, 5 and 6) 5,313,631 4,157,709
----------------------------------------------------------------------------------------------------------
Other long-term assets, net of amortization of approximately
$42,000 in 1999 580,308 454,613
Goodwill, net of amortization of approximately $11,000 (Note 1) 962,548 -
----------------------------------------------------------------------------------------------------------
Total other assets 1,542,856 454,613
----------------------------------------------------------------------------------------------------------
Total assets $20,130,977 $11,915,382
----------------------------------------------------------------------------------------------------------
</TABLE>
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
April 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $ 2,272,191 $ 555,609
Deferred revenue - 727,586
Deferred gain - current portion (Note 12) 283,060 -
Accrued fuel expense 1,010,682 923,715
Accrued expenses and other liabilities 2,257,375 1,644,703
Notes payable (Note 5) 3,900,391 1,080,505
Long-term debt due currently (Note 6) 1,081,525 750,950
Note payable stockholder (Note 12) 238,585 -
----------------------------------------------------------------------------------------------------------
Total current liabilities 11,043,809 5,683,068
Deferred gain, less current portion (Note 12) 141,531 -
Accrued engine reserves 642,002 448,469
Long-term debt, less current maturities (Note 6) 3,889,912 2,570,261
----------------------------------------------------------------------------------------------------------
Total liabilities 15,717,254 8,701,798
----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8, 9 and 10)
----------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, $.01 par value, 10,000,000 shares
authorized; 1,109,424 and 1,013,976 issued and
outstanding (Note 14) 11,095 10,140
Additional paid-in capital 1,328,520 1,007,617
Retained earnings 3,074,108 2,195,827
----------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,413,723 3,213,584
----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,130,977 $11,915,382
----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------
2000 1999
<S> <C> <C>
Revenues (Note 11) $29,521,241 $25,313,924
----------------------------------------------------------------------------------------------------------
Operating costs and expenses
Costs of services 24,960,317 21,322,103
Gain on disposal of assets (Note 12) (492,071) (69,760)
Depreciation and amortization 884,611 600,658
General, corporate and administrative 2,940,626 2,320,463
----------------------------------------------------------------------------------------------------------
Total operating costs and expenses 28,293,483 24,173,464
----------------------------------------------------------------------------------------------------------
Operating income 1,227,758 1,140,460
----------------------------------------------------------------------------------------------------------
Other (income) expenses
Interest expense 349,477 331,049
----------------------------------------------------------------------------------------------------------
Total other (income) expenses 349,477 331,049
----------------------------------------------------------------------------------------------------------
Income before taxes 878,281 809,411
Income tax expense (Note 7) - -
----------------------------------------------------------------------------------------------------------
Net income $ 878,281 $ 809,411
----------------------------------------------------------------------------------------------------------
Earnings per share data:
Basic and diluted earnings per share $ .85 $ .80
Weighted average number of shares - basic 1,029,656 1,013,976
Weighted average number of shares - diluted 1,039,217 1,013,976
----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Retained
Shares Amount Capital Earnings
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, April 30, 1998 1,013,976 $10,140 $1,007,617 $1,386,416
Net income - - - 809,411
----------------------------------------------------------------------------------------------------------
Balance, April 30, 1999 1,013,976 10,140 1,007,617 2,195,827
Shares issued in acquisition (Note 1) 101,398 1,014 353,886 -
Shares redeemed (Note 14) (5,950) (59) (32,983) -
Net income - - - 878,281
----------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 1,109,424 $11,095 $1,328,520 $3,074,108
----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income $ 878,281 $ 809,411
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 884,611 600,658
Engine reserve 193,553 (296,178)
Gain on sale of assets (492,071) (69,759)
Net cash provided (absorbed) by
Accounts receivable (1,684,436) 472,055
Inventories (256,692) (798,854)
Costs in excess of billings (288,343) (111)
Prepaid expenses and other assets (211,696) 682,974
Accounts payable 1,093,011 105,206
Accrued expenses and other liabilities 283,321 275,736
Deferred revenue (727,586) (950,802)
Income taxes payable - (20,000)
----------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities (328,047) 810,336
----------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from sale of property and equipment 1,700,000 -
Purchase of property and equipment (1,710,923) (1,103,201)
Investment in assets held for sale (2,651,012) -
Acquisitions (1,298,281) -
----------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (3,960,216) (1,103,201)
----------------------------------------------------------------------------------------------------------
Financing activities
Proceeds from lines of credit, net 1,116,760 629,409
Repayment of long-term debt and notes payable (1,024,774) (856,260)
Proceeds from long-term debt and notes payable 4,215,000 495,000
Proceeds from shareholder note payable 69,632 -
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,376,618 268,149
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 88,355 (24,716)
Cash and cash equivalents,
beginning of year 79,292 104,008
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 167,647 $ 79,292
----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Flight International Group, Inc. and Subsidiaries
(the "Company") is an aviation services company that performs military training
services using specially modified commercial aircraft, principally under
contracts with the United States Department of Defense, other government
agencies and foreign countries. In addition, the Company has established a
market for training and testing in the aerospace industry. The Company also
operates a fixed base operation ("FBO") at the Newport News/Williamsburg
International Airport.
In the fourth quarter of the year ended April 30, 2000, the Company added
two new subsidiaries described in Note 1 to the financial statements. The
Company now also provides commercial airplane maintenance at its new Myrtle
Beach, South Carolina location and flight services at its new subsidiary in
Alaska.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Inventories - Aircraft parts - Aircraft parts include rotables, repairable
and expendable aircraft components. Rotables and repairables are recorded using
the specific identification method and are valued at the lower of cost or
market. Expendables are recorded at the lower of average cost or market.
Targets and cable - Targets and cable are special equipment required to
perform target tow missions and are recorded at the lower of average cost or
market.
Fuel - Fuel includes Jet A and Avgas, both of which are consumed in the
performance of contracts and sold commercially. Fuel is recorded at the lower of
average cost or market.
Costs in Excess of Billings - Costs in excess of billings consists of the
cost of parts and labor of customer maintenance work orders in process.
Completed work orders are included in accounts receivable.
Property and Equipment - Property and equipment are recorded at cost. The
cost of improvements are capitalized, while the cost of replacements,
maintenance and repairs which do not improve or extend the life of the
respective assets are expensed.
Depreciation and amortization of property and equipment are provided, for
financial reporting purposes, as follows:
Aircraft and Engines - Aircraft are depreciated on a straight-line basis
over 12 years. Engines are depreciated based on hours flown down to a core
value.
The U.S. Federal Aviation Administration mandates the performance of a
Major Periodic Inspection (MPI) on engines every 1,500 flight hours. In order to
properly account for the cost of this inspection over the time the engine is in
service, the Company records a reserve based on hours between inspections for
each engine. The reserve is relieved when the service work is performed on the
engine.
Electronic Warfare Equipment - Substantially all electronic warfare
equipment and related aircraft modifications are utilized to train military
aircrews, radar operators and weapons controllers in the techniques of airborne
target identification and intercept. Such equipment and related aircraft
modifications are carried at the lower of cost or market value and are
depreciated on a straight-line basis over 5 years.
F-6
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Other equipment - All other property and equipment is depreciated on a
straight-line basis over its estimated useful life or lease term, as applicable.
Estimated useful lives are as follows: leasehold interests and improvements,
primarily in the airport buildings - 61 months (remaining lease term);
equipment, office furniture, and fixtures - 5 years.
Goodwill - Goodwill is stated at the excess amount of the purchase price
over net assets acquired. Goodwill is related to the March 2000 acquisition of
the Company's Myrtle Beach, South Carolina subsidiary and is being amortized on
a straight line basis over a 15 year period.
Assets Held for Resale - Assets held for resale includes costs related to
the acquisition and refurbishment of three airplanes. The assets are stated at
the lower of cost or market. Capitalized interest of approximately $166,000 is
included in the April 30, 2000 balance.
Other Long-Term Assets - Other long-term assets includes costs incurred in
developing proprietary airplane maintenance and modification certifications.
These costs total approximately $443,000 and are being amortized on a straight
line basis over 15 years. The Company also is licensed through its Alaska
subsidiary to carry mail for the U.S. Postal Service. The license was acquired
at a cost of approximately $112,000 and has no expiration date.
Asset Impairments and Disposals - Under 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 reviews the carrying values of its
long-lived and identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable.
Fair Value of Financial Instruments - Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, and trade receivables. The Company
places its cash and cash equivalents with high credit qualified financial
institutions.
The following details the fair values of financial instruments for which it
is practicable to estimate the value:
Cash and cash equivalents - The carrying amounts approximate fair value
because of the short maturity of these instruments.
Debt - The aggregate fair value of the Company's long-term debt
obligations, which is based upon quoted market prices and rates currently
available to the Company for debt with similar terms and maturities,
approximates the carrying amount.
Revenue Recognition - Contract Revenue - The Company recognizes contract
revenue as hours are flown, at the average rate per flight hour, over the term
of each contract. Certain contracts provide for a guaranteed minimum number of
flight hours per contract year. Contract revenue for such guaranteed but unflown
hours, if any, is recognized at the end of the contract year. Certain contracts
provide for cash payments in excess of the average rate per hour in the early
years of a contract; such excess is recorded as deferred revenue and recognized
as revenue as hours are flown over the contract term, which may exceed one year.
Maintenance Revenue - The Company recognizes maintenance revenue at the
time of completion.
F-7
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Statement of Cash Flows - For purposes of the statement of cash flows, the
Company considers all highly-liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
Earnings Per Share - Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilutive effect of stock options that could share in earnings of the
Company.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain requirements are met, a
derivative may be specifically designated as a hedge and an entity that elects
to apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. Those methods must be consistent with the entity's approach to managing
risk. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and requires application prospectively. The Company does not
expect the adoption of SFAS 133 to have a material effect on the financial
statements.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACQUISITIONS - The Company acquired the assets of Flight Systems, Inc.
on March 1, 2000. The purchase price was $150,000 plus 101,398 shares of Company
stock and assumption of liabilities. The shares were valued at $3.50 per share.
The operations which are located in Myrtle Beach, South Carolina were
immediately reincorporated into Flight International Services, Inc. ("FIS") a
newly formed wholly owned subsidiary of the Company. Approximately $973,000 of
goodwill was recorded on FIS related to the acquisition, which is being
amortized evenly over a 15 year period. During April 2000, FIS acquired
approximately all of the fixed assets of an avionics company for approximately
$240,000.
In April 2000, the Company acquired certain assets of Yute Air through a newly
formed entity, Flight Alaska, Inc. ("FAI"). The acquisition was part of a
bankruptcy liquidation. The asset purchase was financed by FAI in part with
long-term debt totaling $775,000.
The purchase method of accounting was utilized for each transaction. The
operating results of these acquired entities have been included in the
consolidated statements of operations from the dates of the acquisitions.
Unaudited proforma combined results of the Company, as if the acquisitions had
taken place at the beginning of the years ended April 30, 1999 and 2000, are not
presented, as those results were not considered material to the operations and
earnings per share of the Company for the periods presented. A summary of the
acquisitions of FIS and FAI can be found at Note 13.
NOTE 2 - ACCOUNTS RECEIVABLE - The balance of accounts receivable is comprised
of the following:
April 30,
---------------------------
2000 1999
---- ----
Flight operations contracts
and programs $5,063,132 $3,400,216
Commercial 551,426 133,483
Other receivables 106,229 54,805
---------- ----------
5,720,787 3,588,504
Less: allowance for
doubtful accounts (19,687) (71,486)
---------- ----------
$5,701,100 $3,517,018
---------- ----------
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - ACCOUNTS RECEIVABLE (CONTINUED)
Accounts receivable from flight operations contracts and programs consist of the
following:
April 30,
----------------------------------
2000 1999
---- ----
U.S. Government
Amounts billed $2,053,128 $2,222,312
Services provided,
not billed 2,129,655 613,143
---------- ----------
4,182,783 2,835,455
---------- ----------
Commercial Customers
Amounts billed 770,679 564,761
Services provided,
not billed 109,670 -
---------- ----------
880,349 564,761
---------- ----------
Total flight operations
contracts and programs $5,063,132 $3,400,216
---------- ----------
Accounts receivable are billed in accordance with the terms of the contracts
under which they arise. Amounts not billed represent services performed between
the last billing date and year end.
Approximately $300,000 of fuel excise taxes incurred by the Company prior to the
year ended April 30, 2000 is included in U.S. Government accounts receivable at
April 30, 2000. The Company reached an agreement with the Government to bill
these amounts which relate to the tax paid by the Company in prior years which
had not been billed or reimbursed by the Government prior to the year ended
April 30, 2000.
NOTE 3 - INVENTORIES - Inventories are compromised of:
April 30,
----------------------------------
2000 1999
---- ----
Aircraft parts $2,828,592 $2,431,023
Targets and cable 183,308 156,830
Fuel 11,987 14,113
---------- ----------
$3,023,887 $2,601,966
---------- ----------
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - PROPERTY AND EQUIPMENT - Property and equipment consist of the
following:
April 30,
----------------------------------
2000 1999
---- ----
Aircraft and engines $3,220,532 $2,830,884
Electronic warfare equipment 519,147 519,147
Buildings and leasehold improvements 2,246,378 1,999,791
Office furniture and fixtures 287,392 138,185
Other equipment 1,839,260 1,055,662
---------- ----------
8,112,709 6,543,669
Accumulated depreciation
and amortization (2,799,078) (2,385,960)
---------- ----------
Property and equipment, net $5,313,631 $4,157,709
---------- ----------
NOTE 5 - NOTES PAYABLE - During the year ended April 30, 1998 the Company
entered into a $2,000,000 asset based borrowing agreement with a bank in Newport
News, Virginia, which was subsequently increased to $2,700,000. Under the terms
of the agreement, the Company may obtain advances up to 85% of amounts billed by
the Company on government contracts. The Company must pay interest at prime plus
.50% on outstanding advances. Under the agreement, the Company must maintain
certain net worth ratios. The Company was in compliance with these ratios at
April 30, 2000. Outstanding advances at April 30, 2000 and 1999 were
approximately $2,024,000 and $1,081,000, respectively.
During the year ended April 30, 2000, the Company entered into a $500,000
commercial line of credit agreement with a bank in Newport News, Virginia,
maturing September 1, 2000. The Company must pay interest at prime plus .50% on
outstanding advances. The line of credit is secured by inventory. Outstanding
advances at April 30, 2000 were $173,270.
During the year ended April 30, 2000, the Company entered into a loan agreement
for $1,300,000 with a bank in Newport News. Interest is payable at the prime
rate plus 1.00%. The loan is due in one payment of principal and unpaid interest
on February 2, 2001, secured by aircraft.
During the year ended April 30, 2000, the Company entered into a loan agreement
for $240,000 in Myrtle Beach, South Carolina. Interest is payable at the monthly
LIBOR Index plus 3.00%. The loan is due in one payment of principal and unpaid
interest on September 26, 2000, secured by aircraft.
As of April 30, 2000, $163,127 of demand notes payable assumed by the Company
were outstanding related to the FIS acquisition. Interest is payable at the
Prime rate plus .25% on $123,127 of the outstanding balance with the remainder
bearing no interest.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - LONG-TERM DEBT - Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Note payable to a bank with interest payable at 8.5%, due in graduated monthly
installments of principal and interest, beginning at $19,000 and ending at
$37,000, through November 1, 2003, secured by a first mortgage deed of trust
on leasehold improvements and assignment of leases on certain real property
located in Newport News, Virginia. $1,238,041 $1,482,633
Note payable to a bank with interest payable at 9.25%, due in equal monthly
principal installments of $15,938 plus interest through January 15, 2005,
secured by aircraft. 908,438 1,099,688
Note payable to a bank with interest payable at 8.22%, due in equal monthly
installments of principal and interest of $13,602 through February 2002,
secured by certain property and equipment. 288,948 411,312
Note payable to a bank with interest payable at 7% through December 8, 1999, and
at the five-year U.S. Treasury Bill rate plus 2.10% through December 8, 2001,
due in monthly installments of principal and interest of approximately $15,333
through December 8, 2001, secured by inventory. Loan was paid off in September
1999 with additional financing. - 312,935
Note payable to a bank with interest payable at 8.9%, due in equal monthly
installments of principal and interest of $376 maturing on March 1, 2003,
secured by a vehicle. 11,085 14,643
Note payable to a bank with interest payable at 8%, due in equal monthly
installments of principal and interest of $12,452, maturing August 2000,
collateralized by inventory. 205,416 -
Note payable to a bank with interest payable at Prime rate plus 1.00% (10.5%),
due in equal monthly installments of principal and interest of $5,952 maturing
on August 15, 2006, secured by aircraft. 452,384 -
Note payable to a bank with interest payable at the monthly LIBOR Index plus
3.00% (9.6%), graduated monthly installments of principal and interest,
beginning at $8,000 and ending at $12,000, through September 1, 2004, secured
by aircraft. 876,500 -
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
April 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Note payable to a bank with interest payable at the Prime rate plus 0.75%
(10.25%), due in equal monthly installments of principal and interest of
$1,875 through October 15, 2004, secured by aircraft $ 215,625 $ -
Note payable to a bank with interest payable at the LIBOR Index plus 3% (9.6%),
due in monthly installments of $16,500 beginning June 1, 2000 through May 1,
2005, secured by aircraft. 775,000 -
---------- ----------
4,971,437 3,321,211
Current maturities 1,081,525 750,950
---------- ----------
Long-term debt, net $3,889,912 $2,570,261
---------- ----------
</TABLE>
At April 30, 2000, aggregate principal payments due for long-term debt for the
next five fiscal years and thereafter were as follows:
2001 $1,081,525
2002 1,082,465
2003 959,436
2004 798,032
2005 939,195
Thereafter 110,784
----------
$4,971,437
----------
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - INCOME TAXES - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The sources of temporary differences and their effect on net deferred tax assets
(liabilities) are summarized as follows:
<TABLE>
<CAPTION>
April 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Deferred gain $ 161,000 $ -
Deferred revenue - 276,000
Engine reserve 244,000 197,000
Allowance for bad debts 7,000 26,000
Vacation expense 83,000 67,000
Net operating loss carryforwards 2,964,000 3,163,000
Basis difference of property and equipment (225,000) (232,000)
----------- ----------
Net deferred tax asset 3,234,000 3,497,000
Valuation allowance (3,234,000) (3,497,000)
----------- ----------
$ - $ -
----------- ----------
</TABLE>
The provision for income taxes differs from the amount determined by applying
federal statutory tax rates to pre-tax income as a result of the utilization of
net operating loss carryforwards. Income tax expense is comprised of federal
alternative minimum tax and state taxes in 1998.
The Company has recorded a valuation allowance for the deferred tax asset due to
uncertainty of its realization, due in part, to the short term nature of the
Company's major contracts.
As of April 30, 2000, the cumulative net operating loss available for federal
income tax purposes was approximately $7,800,000, which will expire primarily
during years ended 2006 - 2011 and 2019, subject to certain limitations due to
reorganization, if not previously utilized.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8 - OPERATING LEASE COMMITMENTS - The Company leases various aircraft and
engines under operating leases for use on government contracts. Total lease
expense for these aircraft was approximately $9,719,000 and $7,272,000 for the
years ended April 30, 2000 and 1999, respectively. Such lease expenses included
approximately $7,028,000 and $4,160,000 for the years ended April 30, 2000 and
1999, respectively, for contingent rentals based on hours flown. See discussion
of related party lease commitments at Note 12.
The Company leases various office facilities and airport property under lease
arrangements with terms expiring through May 2004. Other operating leases are
for office machines and aircraft maintenance equipment. The lease expense for
these operating leases was $391,000 and $369,000 for the years ended April 30,
2000 and 1999, respectively. Such lease expenses included approximately $105,000
and $102,000 for the years ended April 30, 2000 and 1999, respectively, for
contingent rentals based on revenue.
At April 30, 2000, future minimum lease payments on operating leases for each of
the next five fiscal years were as follows:
2001 $3,206,000
2002 1,189,000
2003 1,122,000
2004 813,000
2005 397,000
Thereafter 51,000
----------
$6,778,000
----------
NOTE 9 - CLAIMS, CONTINGENCIES, AND COMMITMENTS - On February 4, 1994, the
Company filed voluntary petitions in the United States Bankruptcy Court for the
Eastern District of Virginia (the "Bankruptcy Court") for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Code"). On December 8,
1994, the Bankruptcy Court entered an order confirming the Company's joint plan
of reorganization (the "Plan"), and the Plan became effective on December 28,
1994 (the "Effective Date"). For accounting purposes, the effective date was
deemed to be December 31, 1994.
Pursuant to the Plan, a total of 1,000,000 shares of new common stock were
authorized and 998,976 shares were issued. The 9,899,713 shares of common stock
previously outstanding were retired. Of the new shares of common stock issued,
51,000 shares are being held by the Company to satisfy the remaining claims of
the unsecured creditors.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - EMPLOYEE BENEFIT PLANS - The Company sponsors a defined contribution
pension plan covering all eligible employees. Employees become eligible to
participate upon completing one year of service in a job classification not
subject to a collective bargaining agreement. One year of service is defined as
any consecutive 12 month period in which the employee works 1,000 hours.
Participants may elect to have 1% to 15% of their compensation contributed to
the Plan, up to the maximum allowed by law. Contributions to the Plan are
matched by the Company at the rate of 50% of the first 6% of employees'
contributions. All employee contributions, rollover contributions, and earnings
thereon are 100% vested. Company contributions vest at a rate of 20% per year.
The participant may designate his contribution and employer matching
contributions to be invested in any combination of seven money market, stock or
bond funds maintained by the Trustee. After a participant dies or retires, the
participant or his beneficiary is entitled to receive the entire vested balance
of his account.
The Company reserves the right to amend or terminate the Plan at any time. If
the Plan is terminated, each participant is then vested with the amount in their
account. The Company contributed approximately $72,000 and $59,000 to the Plan
for the years ended April 30, 2000 and 1999, respectively.
NOTE 11 - TRANSACTIONS WITH MAJOR CUSTOMER - Revenues from all U.S. government
contracts included in Flight operations are approximately as follows:
Percent
Amount Total Revenue
------ -------------
Fiscal year ended April 30, 2000 $23,643,000 80%
Fiscal year ended April 30, 1999 $19,444,000 77%
Fiscal year ended April 30, 1998 $17,174,000 78%
NOTE 12 - RELATED PARTIES - The Company has a note payable on advances from a
stockholder of $238,585. The note is non-interest bearing and matures February
2001.
The Company has entered into lease agreements with Maritime Sales and Leasing
("MSL") for certain aircraft which require future minimum lease payments at
April 30, 2000 for each of the next five years as follows: 2001 - $2,300,000,
2002- $634,000, 2003 - $634,000, 2004 - $634,000, and 2005 - $219,000. David
Sandlin, President and CEO of the Company, is also an officer of MSL.
During the third quarter of the year ended April 30, 2000, the Company entered
into a sale/leaseback transaction with MSL to sell a plane and two engines.
Total proceeds from the sale were $1,700,000, however due to the leaseback, the
Company is amortizing approximately $566,000 of the $916,000 gain realized on
the transaction over the 2 year term of the lease.
On April 15, 1996, the Company sold three planes to MSL for $2.9 million. The
Company leased the planes back from MSL for a three year period. Proceeds from
the sale were distributed as follows: $1.85 million to payoff bank debt;
$106,000 to MSL for lease deposits; and the remainder to the Company. The
Company realized a $218,000 gain related to the sale/leaseback which was
deferred over the lease term, and a $313,793 extraordinary gain related to the
early extinguishment of related bank debt. The remainder of the deferred gain
was recognized during the year ended April 30, 1999.
During 1996, the Company entered into a lease with the Aviation Company. David
Sandlin has an ownership interest in the Aviation Company. The single aircraft
lease called for payments of $500 per hour flown. Approximately $3,000 and
$67,000 of lease expense was incurred for the years ended April 30, 2000 and
1999, respectively. The lease was terminated in January 2000.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 12 - RELATED PARTIES (CONTINUED)
Total rent expense on all related party leases were approximately as follows:
Fiscal year ended April 30, 2000 $4,942,000
Fiscal year ended April 30, 1999 $3,085,000
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - The Company made
interest payments of approximately $520,000 and $355,000 for the years ended
April 30, 2000 and 1999, respectively, including interest capitalized of
approximately $166,000 for the year ended April 30, 2000.
A summary of the acquisitions of FIS and FAI is as follows:
FIS FAI
--------------------------------------------------------------------------------
Fair value of assets acquired $ 785,000 $1,221,000
Goodwill recorded 973,000 -
Liabilities assumed/incurred 1,253,000 73,000
Cash paid 150,000 1,148,000
Fair value of stock issued for acquisition 355,000 -
NOTE 14 - STOCKHOLDERS' EQUITY - During the year ended April 30, 2000, the
Company redeemed 5,950 shares of stock in satisfaction of an outstanding
receivable of approximately $33,000.
In August 1998, the Company implemented a stock option plan to provide incentive
to employees, directors, and consultants. The initial term of the plan is 10
years and a total of 500,000 shares are available for grant. Under the new plan,
38,000 options previously issued to an officer of the Company at an exercise
price of $2.00 were replaced by 45,000 options at $3.12. The following table
summarizes all option activity:
<TABLE>
<CAPTION>
Year Ended April 30, 2000 1999
--------------------------------------------------------------------------------------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 74,650 $3.07 38,000 $2.00
Options granted 92,000 3.37 74,650 3.07
Options exercised - - - -
Options forfeited
(cancelled) (13,300) 3.10 (38,000) 2.00
--------------------------------------------------------------------------------------------------------
Options outstanding at end of year 153,350 $3.25 74,650 $3.07
--------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
As of April 30, 2000, 88,844 options are vested and exercisable at a weighted
average price per share of $3.18. The weighted average remaining life of options
outstanding is approximately eight years. The Company applies APB Opinion 25 and
related interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized. The weighted average fair value of
options granted during the year ended April 30, 2000 is $1.56. Proforma net
income and basic and diluted earnings per share under the provisions of SFAS 123
for the effect of options granted and outstanding for the years ended April 30,
2000 and 1999 are $735,494 and $.71 and $715,575 and $.71, respectively. For the
purposes of computing the proforma amounts, the fair value of each option on the
date of grant is estimated using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, no expected volatility, risk-free
interest rate of 5.72% and 5.09% for the years ended April 30, 2000 and 1999,
respectively, and expected life of eight years.
NOTE 15 - FOURTH QUARTER RESULTS- In the fourth quarter of the year ended April
30, 2000, the Company recorded net adjustments which increased its net income by
approximately $400,000 reflecting approximately $825,000 of unrecorded contract
revenues earned during the third quarter and the deferral of a portion of a gain
related to a sale-leaseback transaction ($425,000).
F-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
To the Board of Directors and Stockholders of
The Flight International Group, Inc.
We have audited the accompanying consolidated balance sheets of The Flight
International Group, Inc. and subsidiaries as of April 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 financial position of The Flight
International Group, Inc. and subsidiaries as of April 30, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Richmond, Virginia BDO Seidman, LLP
August 31, 2000
F-19
