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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to ____________
Commission File Number 0-21995
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FIRST AVIATION SERVICES INC.
(Exact name of registrant as
specified in its charter)
Delaware 06-1419064
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 Riverside Avenue, Westport, Connecticut, 06880-4214
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(Address of principal executive offices)
(203) 291-3300
--------------
(Registrant's telephone number)
N/A
----------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
The number of shares outstanding of the registrant's common stock as of June 1,
2005 is 7,332,882 shares.
First Aviation Services Inc.
Index
Part I - Financial Information
------------------------------
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets................................3
Consolidated Condensed Statements of Operations......................4
Consolidated Condensed Statements of Cash Flows......................5
Notes to Consolidated Condensed Financial Statements..............6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................11-15
Item 3. Quantitative and Qualitative Disclosures about Market Risks.........15
Item 4. Controls and Procedures.............................................16
Part II - Other Information
---------------------------
Item 1. Legal Proceedings...................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........17
Item 3. Defaults Upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information ..................................................17
Item 6. Exhibits............................................................17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
First Aviation Services Inc.
Consolidated Condensed Balance Sheets
(in thousands, except share amounts)
April 30, January 31,
2005 2005
------------ ------------
(unaudited) *
Assets
Current assets:
Cash and cash equivalents $ 20,585 $ 22,584
Trade receivables, net of allowance for doubtful
accounts of $770 and $806, respectively 16,469 14,563
Inventory, net of allowance for obsolete and slow
moving inventory of $1,846 and $1,656,
respectively 25,045 24,156
Prepaid expenses and other 953 900
------------ ------------
Total current assets 63,052 62,203
Plant and equipment, net 2,929 2,996
------------ ------------
$ 65,981 $ 65,199
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 11,608 $ 10,495
Accrued compensation and related expenses 811 1,205
Other accrued liabilities 2,203 2,424
Income taxes payable 1,006 900
------------ ------------
Total current liabilities 15,628 15,024
Revolving line of credit 14,500 14,500
Minority interest in subsidiary 1,041 1,041
------------ ------------
Total liabilities 31,169 30,565
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares
authorized, 9,135,699 shares issued 91 91
Additional paid-in capital 38,299 38,318
Retained earnings 5,478 5,325
Accumulated other comprehensive income 351 374
------------ ------------
44,219 44,108
Less: Treasury stock, at cost, 1,802,817 and
1,814,191 shares, respectively (9,407) (9,474)
------------ ------------
Total stockholders' equity 34,812 34,634
------------ ------------
Total liabilities and stockholders' equity $ 65,981 $ 65,199
============ ============
See accompanying notes.
* Balances were derived from the audited balance sheet as of January 31, 2005.
3
First Aviation Services Inc.
Consolidated Condensed Statements of Operations (Unaudited)
(in thousands, except share amounts)
Three months ended
April 30,
2005 2004
------------ ------------
Net sales $ 31,981 $ 30,215
Cost of sales 26,327 24,603
------------ ------------
Gross profit 5,654 5,612
Selling, general and administrative expenses 4,860 4,990
Corporate expenses 604 930
------------ ------------
Income (loss) from operations 190 (308)
Net interest income (expense) and other (37) (82)
Minority interest in subsidiary (10) (10)
------------ ------------
Income (loss) before income taxes 143 (400)
Benefit (provision) for income taxes 10 (10)
------------ ------------
Net income (loss) $ 153 $ (410)
============ ============
Basic net income (loss) per share, and net income
(loss) per share - assuming dilution:
Basic net income (loss) per share, and net income
(loss) per share - assuming dilution $ 0.02 $ (0.06)
============ ============
Weighted average shares outstanding - basic 7,324,551 7,290,048
============ ============
Weighted average shares outstanding - assuming
dilution 7,330,503 7,290,048
============ ============
See accompanying notes.
4
First Aviation Services Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)
(in thousands)
Three months ended
April 30,
2005 2004
------------ ------------
Cash flows from operating activities
Net income (loss) $ 153 $ (410)
Adjustments to reconcile net income (loss) to net
cash from operating activities - non-cash charges:
Depreciation and amortization 256 232
Compensation paid through issuance of stock 48 58
(Increase) decrease in current assets:
Trade receivables (1,952) (1,708)
Inventory (908) 816
Prepaid and other (39) 28
Increase (decrease) in current liabilities:
Accounts payable 1,120 1,771
Accrued compensation and related expenses, and
other accrued liabilities (576) (32)
Income taxes payable 106 (4)
------------ ------------
Net cash (used in) provided by operating activities (1,792) 751
Cash flows from investing activities
Purchases of plant and equipment (192) (292)
Disposals of plant and equipment - 2
------------ ------------
Net cash used in investing activities (192) (290)
Cash flows from financing activities
Borrowings on revolving line of credit 14,500 12,650
Repayments on revolving line of credit (14,500) (14,500)
------------ ------------
Net cash used in financing activities - (1,850)
------------ ------------
Net decrease in cash and cash equivalents (1,984) (1,389)
Effect of exchange rates on cash (15) (10)
Cash and cash equivalents at beginning of period 22,584 25,144
------------ ------------
Cash and cash equivalents at end of period $ 20,585 $ 23,745
============ ============
Supplemental cash flow disclosures:
Interest paid $ 42 $ 14
Income taxes paid $ - $ 19
See accompanying notes.
5
Notes to Consolidated Condensed Financial Statements (Unaudited)
(in thousands, except share amounts)
April 30, 2005
1. Basis of Presentation
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries Aircraft Products International, Ltd. ("API Ltd.") and API Asia
Pacific Inc. ("API Asia Pacific"), and its majority-owned subsidiary, Aerospace
Products International, Inc. ("API"), (collectively, the "Company"), is one of
the premier suppliers of services to the aviation industry worldwide. The
services the Company provides the aviation industry include the sale of aircraft
parts and components, the provision of supply chain management services,
overhaul and repair services for brakes and starter/generators, and the assembly
of custom hoses. The Company's principal executive offices are located at 15
Riverside Avenue, Westport, Connecticut 06880. Customers of the Company include
original equipment manufacturers, aircraft manufacturers, passenger and cargo
airlines, fleet operators, corporate aircraft operators, flight training
schools, fixed base operators, certified repair facilities, governments and
military services. The accompanying unaudited consolidated condensed financial
statements of the Company have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information, and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required for complete financial
statements. In the opinion of management, all material adjustments, including
the elimination of intercompany balances and transactions, and normal recurring
accruals considered necessary for a fair presentation, have been included in the
accompanying unaudited consolidated condensed financial statements. Operating
results for the three months ended April 30, 2005 are not necessarily indicative
of the results that may be expected for the full fiscal year ending January 31,
2006. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
January 31, 2005.
2. Weighted Average Shares Outstanding - Assuming Dilution
The following sets forth the denominator used in the computation of net income
(loss) per share - assuming dilution:
Three months ended
April 30,
2005 2004
------------ ------------
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 7,324,551 7,290,048
Effect of dilutive employee stock options 5,952 N/A
------------ ------------
Denominator for net income (loss) per
share - assuming dilution, adjusted
weighted average shares and assumed
dilutions 7,330,503 7,290,048
============ ============
For the three months ended April 30, 2004, the denominator used in the
calculation of loss per share from continuing operations - assuming dilution,
was the same as the denominator used for basic loss per share because the effect
of options would have been antidilutive. The number of potential shares of
common stock that were excluded from the computation of diluted earnings per
share because their effect was antidilutive for the three months ended April 30,
2004, were 9,122 shares.
6
3. Stock Options Issued to Employees
In lieu of cash, the Company's directors elect to receive their compensation in
the Company's stock. The value of stock issued is equivalent to the compensation
expense, and the number of shares issued is based upon the fair market value per
share at the date issued. For the three months ended April 30, 2005 and April
30, 2004, the Company issued 11,374 and 12,867 shares respectively, to directors
in lieu of board fees.
The Company generally grants stock options to its employees for a fixed number
of shares with an exercise price equal to the fair market value of the stock on
the date of grant. As permitted under Statement of Financial Accounting Standard
No. ("FAS") 123, "Accounting for Stock-Based Compensation", the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for stock
awards to employees. No compensation expense was recognized during the three
months ending April 30, 2005 and 2004 because all grants were issued at the fair
market value of the Company's common stock at the date of grant.
The Company is required to disclose the fair value, as defined, of options
granted to employees and the related compensation expense. The fair value of the
stock options granted was estimated at the date of grant using a Black-Scholes
option-pricing model. The Black-Scholes option-pricing model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. In management's opinion, because the Company's employee stock
options are not publicly traded, and have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
The fair value of each option issued was estimated at the date of grant. No
options were issued for the three months ended April 30, 2005, and the following
assumptions were used for options issued during the three months ended April 30,
2004:
2004
------------
Expected dividend yield 0.0%
Risk-free interest rate 3.6%
Expected volatility 31.9%
Expected life of option 5.0 years
Weighted-average fair value of
options granted $ 1.56
7
Using the above-noted assumptions and the weighted-average fair value of each
option granted, the net income (loss) and earnings (loss) per share that would
have been recorded if the estimated fair value of options granted had been
recorded as an expense was:
Three months ended
April 30,
2005 2004
------------ ------------
Net income (loss) as reported $ 153 $ (410)
Pro forma net compensation expense for
issuance of stock options 13 19
------------ ------------
Pro forma net income (loss) $ 140 $ (429)
============ ============
Basic net income (loss) per share, and net
income (loss) per share - assuming dilution
as reported $ 0.02 $ (0.06)
============ ============
Pro forma basic net income (loss) per share,
and net income (loss) per share - assuming
dilution $ 0.02 $ (0.06)
============ ============
4. Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) resulted from the translation
of accounts into U.S. dollars where the functional currency is the Canadian
dollar. The decrease to net income to arrive at comprehensive net income during
the three months ended April 30, 2005 was due to an increase in the value of the
U.S. dollar relative to the Canadian dollar. Comprehensive income (loss) for the
periods shown was as follows:
Three months ended
April 30,
2005 2004
------------ ------------
Net income (loss) as reported $ 153 $ (410)
Pro forma net impact of foreign currency
translation adjustments - gain (loss) (23) (27)
------------ ------------
Comprehensive net income (loss) $ 130 $ (437)
============ ============
5. Income Taxes
The Company recorded a provision (benefit) for income taxes related to foreign
income tax expense estimates for operations in Canada and the Philippines. The
Company does not record a tax benefit for U.S. tax purposes on any operating
losses incurred due to the deferred tax valuation allowance recorded as it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
6. Related Parties
The Company and First Equity Development Inc. ("First Equity"), the wholly-owned
subsidiary of First Equity Group, Inc., the majority stockholder of the Company,
have an agreement relating to the allocation of potential investment and
acquisition opportunities in the aerospace parts distribution and logistics
businesses. The agreement was approved by the independent members of the Board
8
of Directors on a month-to-month basis effective February 1, 2004. First Equity
Group, Inc. is beneficially owned by Mr. Aaron P. Hollander and Mr. Michael C.
Culver, respectively chairman of the board and chief executive officer of the
Company. Pursuant to the agreement, neither First Equity nor any of its
majority-owned subsidiaries will consummate any acquisition of a majority
interest in any business anywhere in the world (a "Covered Acquisition"),
without first notifying the Company and providing the Company with the
opportunity to choose to effect the Covered Acquisition for its own account. The
Company's decision as to whether to effect the Covered Acquisition will be made
by the independent members of the Board of Directors of the Company. The
agreement can be terminated by either party upon 30 days written notice to the
other party. The agreement does not apply to any proposed acquisition by First
Equity of any business that generates less than 15% of its aggregate net sales
from aerospace parts distribution or logistics, or to any advisory services
performed by First Equity on behalf of third parties.
The Company and First Equity also had an advisory agreement, approved by the
independent members of the Board of Directors on a month-to-month basis
effective February 1, 2004. Pursuant to the terms of this agreement, First
Equity provided the Company with investment and financial advisory services
relating to potential acquisitions and other financial transactions. The
agreement could be terminated by either party upon 30 days' written notice to
the other party. The Company paid First Equity a $30 monthly retainer, and
reimbursed First Equity for its out-of-pocket expenses. In addition, upon the
successful completion of certain transactions, the Company would pay a fee to
First Equity (the "Success Fee"). The amount of any Success Fee would be
established by the independent members of the Board of Directors and would be
dependent upon a variety of factors, including, but not limited to, the services
provided and the size and the type of transaction. Up to one year's worth of
retainer fees paid could be applied as a credit against any Success Fee, subject
to certain limitations. The advisory agreement terminated on January 31, 2005.
During the three months ended April 30, 2005, and 2004, respectively, the
Company paid First Equity retainer fees of $0 and $90, and no Success Fee.
The Company and First Equity had entered into an arrangement whereby First
Equity provided the Company with various additional services to assist the
Company. These services were not part of the advisory agreement, described
above, but derived from the work First Equity performed under the agreement.
Therefore, First Equity did not charge the Company additional fees in connection
with the provision of such services under the advisory agreement, because the
services were derived from the work First Equity performed under the advisory
agreement consistent with their role as financial advisor. The advisory
agreement expired on January 31, 2005. These services included (i) detailed
financial modeling for new business proposals, (ii) Board of Directors
presentation analysis, (iii) investor relations marketing and presentations,
(iv) various analysis for API, including benchmarking, financial analysis, and
competitive market analyses, and (v) other financial analyses for the Company,
including stock buy-back, valuations, and capital structure analyses. The
Company's CEO and CFO had unlimited access to these resources when requested.
These services also terminated with the expiration of the advisory agreement on
January 31, 2005, as described above.
The Company subleases from First Equity approximately 3,000 square feet of
office space in Westport, Connecticut. The leased space is utilized by the
Company as its corporate headquarters. First Equity also utilizes space in the
same premises. The sublease, which became effective on April 21, 1997, is for a
period of ten years, and is cancelable by either party with six months notice.
The Company has the option to renew the sublease for two additional five-year
periods. Lease payments under this sublease totaled approximately $23 and $20,
for the three months ended April 30, 2005, and 2004.
The Company and First Equity share certain common expenses that arise from
sharing office space in Westport, CT. The Company reimburses First Equity and
vice versa, for expenses each entity incurs related to the common usage of the
office space. The amounts are included in the Company's corporate expenses, and
include expenses such as telephone, computer consulting, office cleaning, office
supplies and utilities. The expenses are allocated based on base salaries of the
Company's and First Equity's personnel working in the shared space. Common
expenses are approved by the Company and First Equity, prior to expenditure,
when not of a recurring nature. The allocations are reviewed by the Company's
CFO and the Controller of First Equity each month. In addition, a member of the
Company's audit committee reviews the allocation of expenses quarterly. Some
business development expenses, such as joint marketing expense and business
organizational dues, are shared on an equal basis. Management believes this
method of allocation is reasonable. In addition, the amounts reimbursed by the
Company are the actual costs incurred for the expense. The Company reimbursed
First Equity, $10 and $11, for the three months ended April 30, 2005, and 2004,
respectively.
9
In order to simplify the administration of payroll, certain employees of the
Company who are authorized to perform services for both the Company and First
Equity are paid through the payroll of First Equity. Employees of the Company
who work exclusively for the Company by agreement are paid through the payroll
of API, the Company's principal subsidiary.
7. Interest Income (Expense) and Other
The components relate to interest income on investments, interest expense on
external debt, and realized and unrealized foreign exchange gain (loss) on
Canadian dollar transactions by the Canadian operations.
Three months ended
April 30,
2005 2004
------ ------
Interest income $ 27 $ 10
Interest expense (34) (15)
Foreign exchange (loss) (30) (77)
------ ------
$(37) $(82)
------ ------
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Safe Harbor Statement Under the Private Securities Litigation Reform of Act
- ---------------------------------------------------------------------------
1995.
- -----
Certain statements discussed in Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", Item 3, "Quantitative and
Qualitative Disclosures about Market Risks", Item 1 of Part II, "Legal
Proceedings" and elsewhere in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
statements of historical facts, but rather reflect the Company's current
expectations concerning future events and results. Such forward-looking
statements, including those concerning the Company's expectations, involve
known and unknown risks, uncertainties and other factors, some of which are
beyond the Company's control, that may cause the Company's actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, the Company's ability to obtain parts and components from its
principal suppliers on a timely basis, depressed domestic and international
market and economic conditions, especially those currently facing the aviation
industry as a whole, the impact of changes in fuel and other freight-related
costs, relationships with its customers, the ability of the Company's
customers to meet their financial obligations to the Company, the ability to
obtain and service supply chain management contracts, changes in regulations
or accounting standards, the ability to consummate suitable acquisitions and
expand, the loss of the use of facilities and distribution hub in Memphis,
significant failure of our computer systems or networks, efforts to comply
with section 404 of the Sarbanes-Oxley Act of 2002, and other items that are
beyond the Company's control and may cause actual results to differ from
management's expectations. In addition, specific consideration should be given
to the various factors described in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in the Company's
Annual Report on Form 10-K for the year ended January 31, 2005, and Item 3,
"Quantitative and Qualitative Disclosures about Market Risks", in this report
for the quarter ended April 30, 2005. The Company undertakes no obligation to
update any forward-looking statements or cautionary factors.
General
First Aviation Services Inc. ("First Aviation"), together with its wholly owned
subsidiaries, Aircraft Parts International, Ltd. ("API Ltd."), and API Asia
Pacific Inc. ("API Asia Pacific"), and its majority-owned subsidiary, Aerospace
Products International, Inc. ("API"), (collectively, the "Company"), is one of
the premier suppliers of services to the aviation industry worldwide. The
services the Company provides the aviation industry include the sale of aircraft
parts and components, the provision of supply chain management services,
overhaul and repair services for brakes and starter/generators, and the assembly
of custom hoses.
The Company's principal executive offices are located at 15 Riverside Avenue in
Westport, Connecticut 06880. Certain filings that First Aviation makes with the
U.S. Securities and Exchange Commission are available on First Aviation's
corporate Web site at www.favs.com. These public filings also can be obtained by
calling our investor relations department, or by e-mail at
[email protected].
Critical Accounting Policies
There have been no significant changes in those accounting policies the Company
considers critical from those described under the caption "Critical Accounting
Policies", included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in the Company's Annual Report
on Form 10-K for the year ended January 31, 2005.
Results of Operations
Net Sales
The Company's net sales consist of sales of services to the aviation industry,
including parts and components supply services, supply chain management
services, and component overhaul and repair services. Net sales are recorded
when parts and components are shipped and title transfers to the customer, when
supply chain management services have been provided to the customer, or when
overhauled and repaired items are completed and shipped back to the customer.
11
Shipping and handling billed to customers are included in net sales. The terms
and nature of supply chain management services are stipulated in a long-term
contract between the Company and the customer. The Company provides its
facilities, personnel and systems to provide the services at a lower cost than
the customer would incur to perform the services themselves. In providing
services where the Company distributes inventory on behalf of its customer, the
Company may use its own inventory or hold its customers' inventory without
taking ownership of such inventory. In cases where the Company does not take
ownership of its customers' inventory, net sales generally are recognized as a
fee based on the sales value of the product shipped through the Company's
facilities, and not the sales value of the product itself. Alternatively, the
Company, when providing services to handle customer's inventory without taking
ownership, can take a fee based on the cost of providing services, and not on
the sales value of the product.
Net sales for the three months ended April 30, 2005 increased $1.8 million, or
5.8%, to $32.0 million from $30.2 million for the three months ended April 30,
2004. During the three months ended April 30, 2005, net sales increased in the
majority of the customer sectors the Company serves, compared to the comparable
period of the prior year, with the exception of general aviation that was
impacted by rising fuel prices. Corporate, airline and corporate maintenance
repair and overhaul facilities, and retail sales were largely responsible for
the increase in sales in the quarter. The increases are attributable to
increased levels of global air traffic leading to increases in maintenance and
repairs, and the corresponding parts and services the Company provides. Sales to
airlines are still affected by industry specific conditions, including higher
fuel prices and continued security measures, requiring the Company to cautiously
maintain its credit practices.
Sales increased in the three months ended April 30, 2005 versus the prior
year quarter in three of the foreign geographic regions the Company serves.
Sales in Europe for the three months ended April 30, 2005, improved primarily in
the airline customer sector, over the three month period ended April 30, 2004.
Sales in Asia improved for the three months ended April 30, 2005 over the
similar period ended April 30, 2004 due to increases in corporate, and airline
sales. Sales in Canada for the three month period ended April 30, 2005 improved
in the general aviation and retail customer sectors, compared to the three month
period ended April 30, 2004. The Company's sales in the Latin America region
decreased, due to the airline customer sector for the three month period ended
April 30, 2005 over the same period ended April 30, 2004. The Company continues
to be cautious with respect to providing credit to customers in the Latin
American region, and this has a negative impact on sales.
Freight revenue is a component of net sales and represents freight billed to
customers. Freight revenue for the three months ended April 30, 2005 decreased
18.0%, to $488,000 from $596,000 for the prior year three month period ended
April 30, 2004. This decrease was primarily due to increases in customer
incentives resulting from promotional activities and industry competition. This
had an adverse effect on gross profit margin explained below under the caption
"Gross Profit".
Cost of Sales
Cost of sales consists of costs of inventory sold, direct costs to overhaul and
repair parts and components, and direct costs of providing services. Freight
costs for parts and components sold are also included in cost of sales.
Cost of sales for the three months ended April 30, 2005 increased $1.7 million,
or 7.0%, to $26.3 million from $24.6 million for the three months ended April
30, 2004. Cost of sales for the three months ended April 30, 2005 increased
compared to the prior year principally due to the increase in net sales, and an
increase in freight expense for products delivered to customers.
As a percentage of net sales, cost of sales increased for the period ended April
30, 2005, to 82.3% from 81.4%, over the three month period ended April 30, 2004.
The increase in the percentage of cost of sales compared to net sales for the
three months ended April 30, 2005 compared to the three months ended April 30,
2004, was due to the reasons described above, and higher growth in sales of
products and components supply services versus supply chain management services
contracts, the latter representing a larger share of the revenue mix in the
prior year period versus the current year period.
12
Gross Profit
Gross profit for the three months ended April 30, 2005 of $5.7 million improved
slightly on the gross profit for the three months ended April 30, 2004. Gross
profit as a percentage of net sales decreased to 17.7% for the three months
ended April 30, 2005, from 18.6% for the three months ended April 30, 2004. The
increase in the mix in sales of parts and components supply services, which have
a lower gross profit margin relative to supply chain management services, and
net freight expenses, described below, were factors in the reduction of the
gross profit margin in the quarter ended April 30, 2005 versus 2004.
Net freight expense represents freight expense recorded in cost of sales, less
freight billed to customers in net sales. Net freight expense decreased gross
profit by 6.0% for the three months ended April 30, 2005, compared to a decrease
of 3.6% in the comparable 2004 period. The decrease was due primarily to
increased customer incentives from promotional activities offering customers
reduced or zero freight on shipments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
April 30, 2005 decreased $130,000 or 2.6% to $4.9 million from $5.0 million for
the three months ended April 30, 2004. The decrease for the three months ended
April 30, 2005, over the comparable prior year period, is due to decreases in
salaries and payroll costs, reductions in bonuses, travel and related expenses
and legal charges, offset by increases in utilities and communications costs,
advertising and promotions, and contract labor for IT systems maintenance.
Selling, general and administrative expenses as a percentage of revenues was
15.2% for the three months ended April 30, 2005 versus 16.5% for the three
months ended April 30, 2004.
Corporate Expenses
Corporate expenses for the three months ended April 30, 2005 decreased $326,000
or 35.1%, to $604,000, from the $930,000 incurred during the three months ended
April 30, 2004. The decrease in corporate expenses in the quarter ended April
30, 2005 resulted primarily from reductions in legal fees related to corporate
governance regulations and a dissident shareholder's proxy contest, as well as
First Equity's termination of an advisory agreement, that were incurred in the
prior year quarter ended April 30, 2004 and not incurred in the quarter ended
April 30, 2005. The expense reductions in the quarter ended April 30, 2005
described above, were offset by increases in payroll costs.
Net Interest Income (Expense) and Other
During the three months ended April 30, 2005, other income increased as a result
of a reduction in losses on foreign currency transactions in the quarter ended
April 30, 2005 totaling $30,000 versus losses of $77,000 in the comparable prior
year period ending April 30, 2004. The foreign currency transaction losses
resulted from a strengthening US dollar versus a weakening Canadian dollar that
is used as the functional currency of the Canadian subsidiary.
Provision for Income Taxes
The Company recorded a (provision) benefit for income taxes related to foreign
income tax expense estimates for operations in Canada and the Philippines. The
Company does not record a tax benefit for U.S. tax purposes on any operating
losses incurred due to the deferred tax valuation allowance recorded as it is
more likely than not that some portion or all of the deferred tax asset will not
be realized. Management will evaluate the Company's income tax position as the
year progresses and adjust the rate as necessary.
Net Income (Loss) and Net Income (Loss) per Share
The Company had a net income of $153,000 or $0.02 per share for the three months
ended April 30, 2005, compared to a net loss of $(410,000) or ($0.06) per share
for the three months ended April 30, 2004. The results for the quarter were due
to the reasons described in the preceding sections.
13
Liquidity and Capital Resources
The Company's liquidity requirements arise principally from its working capital
needs. In addition, the Company has liquidity requirements to fund capital
expenditures to support its current operations, and facilitate growth and
expansion. The Company funds its liquidity requirements with a combination of
cash on hand, cash flows from operations and from borrowings. The Company
manages its cash and debt to minimize its interest expense.
Cash and cash equivalents at any time may consist of a combination of demand
deposits, money market or short-term, high-grade bond funds, and short-term
certificates of deposit.
For the three months ended April 30, 2005 the Company utilized $1.8 million in
cash from operating activities, compared to $751,000 of cash provided by
operating activities for the three months ended April 30, 2004. The cash
utilized by operations in the three months ended April 30, 2005 versus the prior
year three-month period was due to an increase in receivables on the increase in
sales, an increase in inventory, partially offset by an increase in cash due to
net income in the three months ended April 30, 2005, and an increase in accounts
payable. Cash used in investing activities was $0.2 million and $0.3 million
during the three months ended April 30, 2005 and 2004, respectively, due
primarily to purchases of plant and equipment. The Company expects that its
aggregate capital expenditure requirements for plant and equipment, for the year
ending January 31, 2006 will range from approximately $2.5 million to $3.0
million. Management expects to fund these requirements from cash on hand, cash
flows from operations, and from borrowings. Net cash used in financing
activities during the three months ended April 30, 2005 was zero, compared to
the financing activity for the three months ended April 30, 2004 of $1.9
million, as the Company borrowed $12.6 million and repaid $14.5 million during
the quarter ended April, 30, 2004.
API has a $20 million revolving line of credit through a Commercial Revolving
Loan and Security Agreement (the "Facility"). Borrowings under this Facility
bear interest equal to LIBOR plus 1.5% and are limited to specified percentages
of eligible trade receivables and inventories of API. The Facility contains a
number of covenants, including restrictions on mergers, consolidations and
acquisitions, the incurrence of indebtedness, transactions with affiliates, the
creation of liens, and limitations on capital expenditures. Pursuant to the
terms and conditions of the Facility, the payment of dividends on API's common
stock is prohibited, except with the lender's consent, and API is required to
maintain minimum levels of net worth and specified interest expense coverage
ratios. Substantially all of API's domestic assets are pledged as collateral
under the Facility, and First Aviation guarantees all borrowings under the
Facility. At April 30, 2005, borrowings under the Facility totaled $14.5
million, at an interest rate of approximately 3.5%. The $14.5 million
represented a draw on the Facility just prior to April 30, 2005, and in May,
shortly after the quarter end, the Company repaid all of the borrowings that
were outstanding. The Company regularly draws down on the Facility just prior to
quarter end, holds the cash, and then repays the amount drawn shortly after the
quarter end. The purpose of these draw downs is to indicate that the Company has
access to cash for potential acquisitions or other investment opportunities that
may arise. An additional total of approximately $2.5 million was available to
borrow under the Facility at April 30, 2005. The Facility expires July 1, 2006,
therefore, borrowings under the Facility are classified as long term. Management
believes that the carrying amount of the Company's borrowings approximates fair
market value because the interest rate is variable and resets frequently.
On January 6, 2003, the Company announced that its Board of Directors, in light
of the Company's cash position, had approved a special cash dividend of $1.00
per share. The dividend was paid on January 30, 2003. The total paid to the
stockholders was $7.3 million. The Company previously had not declared nor paid
any cash dividends or distributions on its common stock since its inception in
1997. At this time, the Company anticipates that all future earnings will be
retained for use in the Company's business. Any payment of cash dividends in the
future on the Company's common stock will be dependent upon the Company's
financial condition, its results of operations, current and anticipated cash
requirements, plans for expansion, the ability of its subsidiaries to pay
dividends or otherwise make cash payments or advances to it, and restrictions,
if any, under any future and existing debt obligations, as well as any other
factors that the Board of Directors deems relevant.
In conjunction with the Company's acquisition of API in 1997, AMR Combs, Inc.
("AMR Combs") purchased 10,407 shares of API Series A Convertible Preferred
Stock, $0.001 par value, with annual dividends of $4.00 per share, payable
quarterly (the "Convertible Preferred Stock"). API has the right to redeem the
Convertible Preferred Stock at any time. AMR Combs has the right to cause API to
repurchase the Convertible Preferred Stock. The Company has, under certain
circumstances, the ability to defer AMR Combs' ability to cause API to
repurchase the Convertible Preferred Stock. The redemption price is equal to the
fair market value of the Convertible Preferred Stock as determined by an
independent appraisal. On March 5, 1999, AMR Combs was acquired by Signature
Flight Support, an affiliate of BBA Group Plc.
14
Based upon current and anticipated levels of operations, the Company believes
that cash flow from operations, combined with cash on hand, and the availability
under the Facility, will be sufficient to meet its current and anticipated
operating cash requirements for the foreseeable future, including scheduled
interest and principal payments, capital expenditures, minority interest
requirements, working capital needs, and cash required for acquisitions that the
Company may pursue.
Contractual Obligations
As of April 30, 2005, there have been no material changes outside the ordinary
course of the Company's business in the Company's specified contractual
obligations disclosed in the Company's Annual Report on Form 10-K for the year
ended January 31, 2005.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
- -------------------------------------------------------------------
The Company's Canadian operations utilize the Canadian dollar as their
functional currency, while the Company's Asian operation utilizes the U.S.
dollar as its functional currency. The Company has transactions denominated in
Canadian dollars and Philippine pesos. The Company is exposed to market risk
from foreign exchange rates. Foreign currency transaction exposure principally
arises from the transfer of foreign currency to and/or from U.S. dollars from
one subsidiary to another within the Company, and from foreign currency
denominated trade receivables. Currency transaction and translation exposures
are not hedged. Foreign currency transaction gains and losses are included in
earnings, and gains or losses will increase in significance with the growth of
the Canadian operations. Unrealized currency translation gains and losses
resulting from the translation of foreign subsidiaries balance sheets to U.S.
dollars are not recorded as income or expense, but are recognized in the Balance
Sheet as other comprehensive income or loss as a component of Stockholder's
Equity. The Company does have risk principally relating to the translation of
accounts in which the Canadian dollar is the functional currency. Sensitivity
analysis of foreign currency exchange rate risk assumes an instantaneous 10%
change in the foreign currency exchange rates from their level at April 30,
2005, with all other variables held constant. A 10% strengthening of the
Canadian dollar versus the U.S. dollar would result in a decrease of
approximately $211,000 in the net liability position of financial instruments at
April 30, 2005. A 10% weakening of the Canadian dollar versus the U.S. dollar
would result in a increase of approximately $256,000 in the net liability
position of financial instruments at April 30, 2005. During the three months
ended April 30, 2005, the Company experienced a comprehensive loss of $23,000,
due to a decrease in the value of the Canadian dollar relative to the U.S.
dollar. The Company did not experience any significant changes in market risk
during the three months ended April 30, 2005.
Borrowings of the Company are denominated in U.S. dollars. Management believes
that the carrying amount of the Company's borrowings approximates fair value
because the interest rates are variable and reset frequently.
15
Item 4. Controls and Procedures
- -------------------------------
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of April 30, 2005. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of April 30, 2005.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended April 30, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
16
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
The Company's business exposes it to possible claims for personal injury, death
or property damage that may result from a failure of certain parts serviced by
the Company or spare parts and components sold by it, or in connection with the
provision of its supply chain management services. The Company takes what it
believes to be adequate precautions to ensure the quality of the work it
performs and the traceability of the aircraft parts and components that it
sells. The original equipment manufacturers that manufacture the parts,
components and supplies that the Company sells carry liability insurance on the
products they manufacture. In addition, the Company maintains what it believes
is adequate liability insurance to protect it from any claims.
In the normal conduct of its business, the Company also is involved in various
claims and lawsuits, none of which, in the opinion of the Company's management,
will have a material, adverse impact on the Company's consolidated financial
position. The Company maintains what it believes is adequate liability and other
insurance to protect it from such claims. However, depending on the amount and
timing, unfavorable resolution of any of these matters could have a material
effect on the Company's consolidated financial position, results of operations
or cash flows in a particular period.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- -------------------------------------------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
NONE
Item 5. Other Information
- -------------------------
NONE
Item 6. Exhibits
- ----------------
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith).
17
SIGNATURES
Pursuant to the requirements 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.
First Aviation Services Inc.
----------------------------
(Registrant)
Date: June 13, 2005 By: /s/ Michael C. Culver
---------------------------------------
Michael C. Culver,
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: June 13, 2005 By: /s/ Robert G. Costantini
---------------------------------------
Robert G. Costantini,
Chief Financial Officer (Principal
Financial and Accounting Officer)
18
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith).
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith).
19