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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 1995 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 0-18352
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
Delaware 59-2223025
(State or other jurisdiction of No.) (IRS Employer Identification
incorporation or organization)
8095 NW 64th Street, Miami, FL 33166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 593-2658
Indicate by check mark whether the registrant (1) has 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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
The number of shares of the Company's common stock outstanding as of
March 24, 1995 was 4,041,779.
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FORM 10-Q/A
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
(Pursuant to Rule 12b-15, the complete text of each item
being amended is set forth in this Amendment.
The text of items not being amended has been omitted.)
INDEX
Page No.
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
February 28, 1995 and May 31, 1994 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months ended
February 28, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
Nine Months ended February 28, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 3. Defaults Upon Senior Securities 13
Item 6. Exhibits and Reports on Form 8-K 14
2
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS February 28, 1995 May 31, 1994
(Unaudited) (Note)*
---------------- -------------
<S> <C> <C>
Current assets:
Cash $ 276,289 $ 95,790
Accounts receivable, net of allowance for
doubtful accounts of $586,000 and $940,000 at
February 28,1995 and May 31, 1994, respectively 3,098,382 3,817,023
Notes receivable 518,929 1,120,000
Income tax refund receivable 40,000 1,930,000
Inventories 4,422,387 8,719,774
Other current assets 121,032 162,055
------------- ------------
Total current assets 8,477,019 15,844,642
Property and equipment
Land 330,457 330,457
Aircraft held for lease 7,757,035 7,227,835
Building and leasehold improvements 715,772 789,340
Machinery and equipment 940,948 2,191,999
------------- -----------
9,744,212 10,539,631
Less accumulated depreciation 3,159,344 2,233,680
------------- -----------
6,584,868 8,305,951
------------- -----------
Other assets:
Deferred debt costs, net 935,857 1,224,401
Deposits and other assets 21,895 178,322
$ 16,019,639 $ 25,553,316
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long term obligations $ 1,826,686 $ 3,531,228
Long-term obligations in technical default
classified as current 18,083,334 22,156,720
Bank overdrafts - 410,570
Accounts payable and accrued expenses 5,636,686 8,057,838
--------------- ---------------
Total current liabilities 25,546,706 34,156,356
Long-term obligations, less current maturities 452,228 485,020
Commitments and contingencies - -
Stockholders' equity (deficit):
Common stock 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Retained earnings (deficit) (12,637,669) (11,746,434)
---------------- ---------------
Total stockholders' equity (deficit) (9,979,295) (9,088,060)
---------------- ---------------
$ 16,019,639 $ 25,553,316
=============== ==============
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
3
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Net sales $3,380,806 $3,684,520 $18,248,074 $12,290,444
Lease revenue 774,278 920,400 2,189,778 1,393,414
Other revenue 352,462 61,884 590,628 97,836
---------- ---------- ----------- -----------
Total revenues 4,507,546 4,666,804 21,028,480 13,781,694
Cost of sales 2,044,978 10,469,332 14,910,941 15,934,628
Selling, general and
administrative expenses 1,005,113 1,639,592 3,322,197 4,419,177
(Recovery) provision for
doubtful accounts (194,095) 1,044,429 (291,602) 1,007,646
Interest expense 516,274 590,213 1,754,892 1,906,844
Depreciation and amortization 563,793 554,681 1,699,085 1,319,529
Unusual and non-recurring
items (177,115) -- (177,115) --
(Income) Loss of service
center subsidiary (285,552) 431,609 701,317 943,846
---------- --------- ---------- ---------
Income (loss)
before income taxes,equity
in loss of joint venture
and extraordinary item 1,034,150 (10,063,052) (891,235) (11,749,976)
Income tax benefit -- (3,589,000) -- (4,011,000)
--------- ------------ -------- ------------
Income (loss)
before equity in loss of
joint venture and
extraordinary item 1,034,150 (6,474,052) (891,235) (7,738,976)
Equity in loss of joint
venture -- (51,412) -- (180,356)
--------- ----------- ---------- -----------
Income (loss) before
extraordinary item 1,034,150 (6,525,424) (891,235) (7,919,332)
Extraordinary loss on the
extinguishment of debt -- -- -- (232,334)
--------- ---------- --------- ------------
Net income (loss) $1,034,150 $(6,525,464) $(891,235) $(8,151,666)
========== ============ ========== ============
Per share data:
Weighted average shares 4,041,779 4,111,779 4,041,779 4,087,048
========== =========== ========= ==========
Income (loss) per common
share and common
equivalent shares
Income (loss) before
extraordinary item $0.26 $(1.59) $(0.22) $(1.93)
Extraordinary item -- -- -- (0.06)
Net income (loss) $0.26 $(1.59) $(0.22) $(1.99)
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended
February 28,
1995 1994
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (891,235) $ (8,151,666)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,889,145 1,394,529
Provision for doubtful accounts 350,000 -
Gain on disposal of discontinued subsidiary (70,628) -
Extraordinary loss on early extinguishment of debt - 232,334
Increase in deferred debt cost - (893,436)
Equity in loss of joint venture - 180,356
Decrease in notes receivable 601,071 800,000
Changes in assets and liabilities 3,921,756 10,952,949
--------- ----------
Total adjustments 6,691,344 12,666,732
Net cash provided by operating activities 5,800,109 4,515,066
Cash flows from investing activities:
Capital expenditures (706,482) (10,395,915)
Restricted cash - 348,472
Investment in joint venture - (100,000)
---------- ------------
Net cash used in investing activities (706,482) (10,147,443)
Cash flows from financing activities:
Repayments of notes payable and debt obligations (4,913,128) (5,787,376)
Proceeds from long-term obligations - 10,000,000
Borrowings under notes and leases - 1,018,156
------------- --------------
Net cash provided by (used in) financing activities (4,913,128) 5,230,780
Net increase (decrease) in cash 180,499 (401,597)
Cash at beginning of period 95,790 510,942
------------- -------------
Cash at end of period $ 276,289 $ 109,345
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments and, with respect to the nine-month period ended
February 28, 1994, the adjustments referred to in Note 7 below) necessary to
present fairly International Airline Support Group, Inc.'s condensed
consolidated balance sheets as of February 28, 1995 and May 31, 1994, the
condensed consolidated statements of operations for the three and nine month
periods ended February 28, 1995 and 1994, and the condensed consolidated
statements of cash flows for the nine month periods ended February 28, 1995
and 1994, and the condensed consolidated statements of cash flows for the nine
month periods then ended.
The accounting policies followed by the Company are described in the
May 31, 1994 financial statements.
The results of operations for the nine months ended February 28, 1995
are not necessarily indicative of the results to be expected for the full year.
For interim reporting purposes, certain expenses are based on estimates rather
than actually incurred.
2. Inventories consist of the following:
February 28, 1995 May 31, 1994
----------------- ------------
Aircraft - $ 3,094,852
Aircraft Parts $ 4,422,387 5,624,922
--------- ---------
$ 4,588,931 $ 8,719,774
========= =========
Inventories are primarily valued at the lower of cost or market. For
those aircraft parts purchased in lots, the cost is determined on a specific
identification basis. For parts acquired through whole aircraft purchases,
the costs are assigned to certain pools which are then amortized as parts
sales take place. The amount of cost amortized is based upon the gross profit
percentage as calculated from the estimated sales value of the parts. The
sales value estimates are monitored by management, and adjusted periodically
as necessary.
At February 28, 1995, approximately 57% of the ending inventory has been
costed under the specific identification method, and the remaining 43% is
costed under the pooling method.
3. Primarily as a result of large net losses experienced in fiscal 1994 and
further net losses incurred during the nine month period ended February 28,
1995, the Company has a significant deficit in working capital and
stockholder's equity. Also, as discussed in Part II - Other Information, a
class-action complaint has been filed against the Company. Currently, the
Company is in noncompliance with certain financial and other covenants under
the loan agreements relating to previous borrowings under the 12% Senior
Secured Notes and the 8% Convertible Subordinated Debentures. The Notes are
secured by substantially all the assets of the Company and the Debentures are
subordinated to the rights of the Notes. The Company has worked with lenders
for several months to restructure the existing senior debt, however, an
agreement has not yet been reached.
A principal payment of $3.2 million was due in July 1994 under the 12%
Senior Secured Notes Agreement (which was subsequently extended by agreement
and paid in September 1994), $1.5 million was paid in December 1994, and $1.8
million is due in July 1995. As a result of the Company's noncompliance with
certain covenants as discussed above, $18.1 million is subject to accelerated
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maturity and, as such, has been classified as a current liability in the
Condensed Consolidated Balance Sheet at February 29, 1995.
As a result of these factors, there exists substantial doubt about the
Company's ability to continue in existence. However, the Company has and will
continue to take a number of cost-cutting steps to reduce its operating
losses, including the closure and sale of assets of IASC (discussed in Note 5)
and the elimination of other costs.
4. On January 31, 1995 the Company entered into a Purchase Agreement with
Richard R. Wellman and Lynda Wellman (the "Wellmans") and an entity
affiliated with the Wellmans, Custom Air Holdings, Inc., a Nevada corporation
("Custom Air"), pursuant to which the Company transferred to Custom Air (i)
all of the outstanding shares of common stock of Brent Aviation, Inc.
("Brent"), a Texas corporation, a wholly-owned subsidiary of the Company, (ii)
certain spare parts, components, inventory and equipment for Boeing 727 series
aircraft, and (iii) a McDonnell Douglas DC-4 aircraft. In consideration for
the foregoing, Custom Air paid the Company $230,000 and agreed to lease a
Boeing B-727-100 freighter airplane on a month-to-month basis. In addition,
the Wellmans resigned from all positions as officers or directors held by them
with the Company and its subsidiaries, granted a proxy to the Company enabling
the Company's directors to vote 1,980,000 shares of common stock of the
Company held by the Wellmans for a period of two years, and agreed not to
compete or interfere with any of the businesses of the Company and its
subsidiaries for a period of two years. The Company agreed to pay Lynda
Wellman severance equivalent to her current salary for a period of one year.
The Company further agreed to terminate its leasehold interest in a facility
located at the Grayson County, Texas Airport, allowing Brent to lease such
facility for its operations.
In connection with the above transaction the Company recorded a loss of
$180,000 which is included in unusual and non-recurring items in the
accompanying Condensed Consolidated Statements of Operations (see also Note
6.).
5. In June 1994, the Company's Board of Directors unanimously voted to
cease operations and to sell or otherwise dispose of IASC following the sale of
certain aircraft being serviced under contract by IASC. During the fourth
quarter of 1994 IASC fulfilled its obligations to service the aircraft and
ceased operations. On January 31, 1995, IASC entered into an agreement with
Express One International, Inc., a Delaware corporation ("Express One"),
pursuant to which IASC assigned its interest in a certain equipment lease with
CIT Group/Equipment Financing, Inc. to Express One, and Express One assumed
IASC's interests and obligations under such lease. In addition, IASC
transferred to Express One certain additional assets that served as
collateral under the CIT lease. Pursuant to the transaction, IASC disposed
of substantially all of its operating assets. IASC also agreed to terminate
two leases relating to a warehouse and hanger at the Grayson County, Texas
Airport, allowing Express One to lease such facilities for its operations.
The remaining assets of IASC will be liquidated to satisfy IASC's outstanding
liabilities, consisting primarily of unsecured trade payables. The Company
has not yet determined whether to dispose of IASC's common stock.
As a result of the above transaction, the Company has accounted for the
operations and loss on disposal of IASC as a separate line item in the
accompanying condensed consolidated financial statements. For the three and
nine months ended February 28, 1995, IASC had net income of $286,000 and a net
loss of $701,000, respectively. Net income of $286,000 reported by IASC
during the three months ended February 28, 1995 was due to several factors,
including a gain of $71,000 realized on the Express One transaction resulting
from the excess of the principal balance of the debt assumed by Express One
over the net book value of assets transferred (principal balance of debt
assumed by Express One was $898,000; net book value of assets transferred was
$827,000), settlements of certain trade payables for amounts less than face
value, and actual costs of IASC's operations through January 31, 1995 being
less than amounts estimated and accrued as of the November 30, 1994 Form 10Q.
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6. During the three months ended February 28, 1995 the Company incurred
certain unusual and non-recurring transactions as follows: (a) the Wellman
transaction discussed in Note 4., which resulted in a loss of $180,000
consisting of accrued severance pay to Lynda Wellman and the excess of net
book value of assets sold to the Wellmans over amounts received, and (2) a
gain of $357,000 relating to settlement of litigation which had previously
been accrued for at an amount in excess of the settlement amount (see Part II
- Other Information.)
7. Net loss per share was computed by dividing net loss by weighted average
number of common shares outstanding. The effect of options and warrants is
not included because they are anti-dilutive.
8. Supplemental cash flow disclosures:
Cash payments for interest were $1,692,000 and $2,061,000 for the nine
months ended February 28, 1995 and 1994, respectively.
In connection with the transaction between IASC and Express One
discussed in Note 5. above, IASC transferred to Express One certain assets with
a net book value of approximately $827,000 and Express One assumed IASC's
equipment lease payable with a principal balance of approximately $898,000,
resulting in a net gain of $71,000.
9. Commitments and contingencies:
In February 1991, Admark International, Ltd. ("Admark") brought suit in
the Dade County Circuit Court against the Company alleging that IASG is oblig-
ated to Admark for the payment of spare parts brokerage commissions in excess
$0.5 million. In November 1994 the Company received an unfavorable judgment
arising from the suit and recorded an accrual of $825,000 at May 31, 1994,
representing final judgment of $500,000 and accrued interest of $325,000. On
January 31, 1995 the Company reached a settlement with Admark to pay $520,000
as follows: $135,000 on January 31, 1995 and $35,000 quarterly through
October 1997. In connection with the settlement, during the three months
ended February 28, 1995 the Company recorded a gain of $357,000 to adjust the
accrual to the present value of the future payments. The gain is included in
unusual and non-recurring items in the accompanying Condensed Consolidated
Statements of Operations.
On February 28, 1994, a complaint titled Ullman et al v. International
Airline Support Group, Inc. et al. was filed in the United States District
Court for the Southern District of Florida (Case No. 94-0379), alleging
certain actionable misrepresentations and non-disclosures by the Company and
certain directors under the federal securities laws, as well as claims for
common law fraud and breach of fiduciary duty. The plaintiff alleges damages
due to declines in the market price of the Company's common stock and seeks to
have the action certified as a class-action complaint. The complaint seeks
unspecified damages. The plaintiff's original complaint was dismissed by the
Court with leave to re-plead such complaint. On August 3, 1994, an amended
complaint was filed, which again does not specify the amount of damages
sought. Motions to dismiss were filed on behalf of all defendants on
September 30, 1994. In response to motions to dismiss, the plaintiffs filed a
second amended complaint. The defendants intend to respond by filing new
motions to dismiss. The Company does not expect this case to have a material
financial impact on the Company, and no provision for any loss has been made
in the accompanying condensed consolidated financial statements.
In July 1993, Viglass Aviation ("Viglass") filed a complaint against the
Company claiming that Viglass was entitled to payment of $681,750 under a
commission agreement with the Company relating to the sale of certain aircraft
to one of the Company's significant customers. The plaintiff has offered to
settle the litigation in exchange for a $50,000 payment by the Company;
therefore, the Company does not expect this litigation to have a material
financial impact on the Company.
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The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of business and which have not been finally
adjudicated. The actions, when ultimately concluded and determined, will not,
in the opinion of management, have a material adverse effect upon the
financial position or results of operations of the Company.
9
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is management's discussion and analysis of certain signi-
ficant factors which have affected the Company's operating results and
financial position during the periods included in the accompanying
condensed consolidated financial statements.
RESULTS OF OPERATIONS:
Revenues
Total revenues for the three and nine months ended February 28, 1995
decreased 3% and increased 53%, respectively, to $4.5 million and $21.0
million from $4.7 million and $13.8 million, respectively, for the same
periods in the prior fiscal year. Aircraft and engine sales were $9.2 million
for the nine months ended February 28, 1995, compared to $3.1 million for the
same period in the prior fiscal year. Included in other revenue during the
three and nine months ended February 28, 1995 is $286,000 of cash received
representing interest past due on a note receivable from an African carrier.
The Company had not been accruing interest income on the note receivable due
to certain uncertainties in collecting the funds. Also included in other
revenue in the nine months ended February 28, 1995 is approximately $120,000
received in connection with consulting and other services provided to an
insurance company.
Cost of Sales
Cost of sales as a percentage of total revenues for the three and nine
months ended February 28, 1995 was 45% and 71%, respectively, compared to 179%
and 100%, respectively, for the same periods in the prior fiscal year. During
the three and nine months ended February 28, 1994 the Company recorded
adjustments of $5 million to reduce the carrying value of certain inventory
due to continuing poor market conditions. Exclusive of these adjustments,
cost of sales as a percentage of total revenues would be 72% and 64% for the
three and nine months ended February 28, 1994. The improvement in cost of
sales as a percentage of total revenues from the three months ended February
28, 1994 to the three months ended February 28, 1995 is due primarily to the
Company realizing higher margins on engine and certain large dollar parts
sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) for the three and
nine months ended February 28, 1995 decreased to $1.0 million and $3.3 million,
respectively, compared to $1.5 million and $4.3 million for the same periods
in the prior fiscal year. The decrease in SG&A expenses during the three and
nine months ended February 28, 1995 is the result of the Company's continuing
effort to reduce costs, including reductions in personnel.
(Recovery) Provision for Doubtful Accounts
(Recovery) provision for doubtful accounts was $(194,000) and $(292,000) in
the three and nine months ended February 28, 1995 compared to $1.0 million and
$1.0 million in same periods of the prior fiscal year. During the three
months ended February 28, 1995, the Company, primarily through litigation,
recovered approximately $540,000 of accounts receivable which had been written
off or reserved during the fiscal year ended May 31, 1994. The recoveries
were offset during the three months ended February 28, 1995 by a provision for
doubtful accounts of $350,000. During the three months ended February 28,
1994 the Company wrote off or reserved approximately $1.0 million of accounts
deemed to be uncollectible.
Interest Expense
Interest expense for the three and nine months ended February 28, 1995
decreased to $516,000 and $1.8 million, respectively, versus $590,000 and $1.9
million, respectively, for the same periods in the prior fiscal year. The
decrease in interest expense is due to a net reduction in total debt
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outstanding at February 28, 1995 versus debt outstanding at February 28, 1994,
to $20.3 million from $26.2 million, respectively.
Depreciation and Amortization
Depreciation and amortization increased to $564,000 and $1.7 million in
three and nine months ended February 28, 1995, respectively, from $555,000 and
$1.3 million, respectively, for the same periods in the prior fiscal year. The
increase in depreciation and amortization is primarily attributable to the
incurrence during the nine months ended February 28, 1995 of additional
scheduled maintenance checks and mandatory air-worthiness directives on
certain of the Company's aircraft held for lease, and an acceleration over
prior years of the depreciation of such costs to more closely match the
estimated life of the service work.
Unusual and Non-recurring Items
Included in unusual and non-recurring items is an expense of $180,000 incurred
in connection with the Wellman transaction discussed in Notes 4. and 6. of
Notes to Condensed Consolidated Financial Statements, and a gain of $357,000
relating to settlement of litigation which had previously been accrued for at
an amount in excess of the settlement amount (see Part II - Other
Information).
(Income) Loss of Service Center Subsidiary
As discussed in Note 5. of Notes to Condensed Consolidated Financial
Statements, the Company has recorded the net (income) loss of IASC, amounting
to $(285,552) and $701,317 during the three and nine months ended February 28,
1995, respectively, and $431,609 and $943,846 during the three and nine months
ended February 28, 1994, respectively, as a separate line item included in
operations in the accompanying financial statements.
Income Taxes
No income tax benefits have been recorded in the three and nine months
ended February 28, 1995 as the Company has fully exhausted its carryback
benefits and recorded a one hundred percent (100%) valuation allowance for net
operating loss carryforwards.
Liquidity and Capital Resources
At February 28, 1995, the Company had a working capital deficit of
$17.1 million and a current ratio of .33 to 1.0, compared to a working capital
deficit of $18.3 million and a current ratio of .46 to 1.0 at May 31, 1994.
The decrease in working capital deficit was principally the result of a
reduction in total debt outstanding of $5.8 million and a reduction in
accounts payable and accrued expenses of $2.4 million, offset by the Company's
net loss of $891,000 incurred during the nine months ended February 28, 1995
and a decrease in inventory and income tax receivable of $4.1 million (due
primarily to the sale of aircraft) and $1.9 million, respectively. As
discussed in Note 3. of Notes to Condensed Consolidated Financial Statements,
the long term amounts due under the Company's 12% Senior Secured Notes and 8%
Convertible Subordinated Debentures have been classified as current due to
noncompliance with certain financial and other covenants under the loan
agreements.
Although the Company has no present plans or commitments for any signi-
ficant capital improvements or additions that would impact cash flows from
investing activities, the Company has required, and will continue to require,
additional financing to acquire inventory in order to maintain its operations.
Previous borrowings under the 12% Senior Secured Notes and 8% Convertible
Subordinated Debentures, and other borrowings have resulted in significant
debt service obligations for the Company. Current negotiations between the
Company and the holders of its Senior Notes and Debentures may reduce the
impact of debt repayments on cash flows from investing activity; however,
there can be no assurance that such negotiations will be successfully
concluded. Management believes that the Company will have to obtain
additional financing or liquidate inventories in order to meet future
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obligations. If the Company is unable to restructure its existing debt and/or
obtain such financing, cash flow from the sale of inventory at current levels
will be insufficient to meet the Company's obligations as they become due. If
the Company remains in default under the terms of the Senior Notes and
Debentures agreements, the holders could accelerate the debt under such
instruments, resulting in principal of approximately $20 million becoming
immediately payable, which the Company would have no ability to satisfy. The
foregoing circumstances could require the Company to cease operations or seek
protection from its creditors through judicial reorganization proceedings.
The Company believes that it will have sufficient cash to support its
operations through May 31, 1995.
Impact of Inflation
Current financial statements are prepared in accordance with generally
accepted accounting principles and report operating results in terms of
historical costs. They provide a reasonable, objective, quantifiable
statement of financial results, but do not evaluate the impact of inflation.
Management believes that impact of inflation would not materially affect
operating results because, competitive conditions permitting, the Company
modifies its selling prices to recognize cost changes as incurred.
12
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1991, Admark International, Ltd. ("Admark") brought suit in the
Dade County Circuit Court against the Company alleging that IASG is obligated
to Admark for the payment of spare parts brokerage commissions in excess of
$0.5 million. In November 1994 the Company received an unfavorable judgment
arising from the suit and recorded an accrual of $825,000 at May 31, 1994,
representing final judgment of $500,000 and accrued interest of $325,000. On
January 31, 1995 the Company reached a settlement with Admark to pay $520,000
as follows; $135,000 on January 31, 1995 and $35,000 quarterly through
October 1997. In connection with the settlement, during the three months
ended February 28, 1995 the Company recorded a gain of $357,000 to adjust the
accrual to the present value of the future payments. The gain is included in
unusual and non-recurring items in the accompanying Condensed Consolidated
Statements of Operations.
On February 28, 1994, a complaint titled Ullman et al v. International
Airline Support Group, Inc. et al. was filed in the United States District
Court for the Southern District of Florida (Case No. 94-0379), alleging
certain actionable misrepresentations and non-disclosures by the Company and
certain directors under the federal securities laws, as well as claims for
common law fraud and breach of fiduciary duty. The plaintiff alleges damages
due to declines in the market price of the Company's common stock and seeks to
have the action certified as a class-action complaint. The complaint seeks
unspecified damages. The plaintiff's original complaint was dismissed by the
Court with leave to re-plead such complaint. On August 3, 1994, an amended
complaint was filed, which again does not specify the amount of damages
sought. Motions to dismiss were filed on behalf of all defendants on
September 30, 1994. In response to motions to dismiss, the plaintiffs filed a
second amended complaint. The defendants intend to respond by filing new
motions to dismiss. The Company does not expect this case to have a material
financial impact on the Company, and no provision for any loss has been made
in the accompanying condensed consolidated financial statements.
In July 1993, Viglass Aviation ("Viglass") filed a complaint against he
Company claiming that Viglass was entitled to payment of $681.750 under a
commission agreement with the Company relating to the sale of certain aircraft
to one of the Company's significant customers. The plaintiff has offered to
settle the litigation in exchange for a $50,000 payment by the Company;
therefore, the Company does not expect this litigation to have a material
financial impact on the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Currently, the Company is in noncompliance with certain financial
and other covenants under the loan agreements relating to previous borrowings
under the 12% Senior Secured Notes and the 8% Convertible Subordinated
Debentures, as well as the equipment lease agreement relating to the assets
acquired for International Airline Service Center, Inc. ("IASC"), the Company's
repair facility located in Sherman, Texas. The Notes are secured by
substantially all the assets of the Company and the Debentures are subordinated
to the rights of the Notes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Page Number or
Number Description Method of Filing
10.1 Purchase Agreement, dated January __, Incorporated by reference to
1995, by and among International Exhibit 10.1 to the Company's
Airline Support Group, Inc., Richard R. Quarterly Report on Form 10-Q/A
Wellman, Lynda Wellman and Custom Air for the quarter ended
Holdings, Inc., including as an exhibit August 31, 1994.
the "General Proxy" executed by
Richard R. Wellman and Lynda Wellman.
10.2 Assignment and Assumption Agreement, Incorporated by reference to
dated January 31, 1995, between Exhibit 10.2 to the Company's
International Airline Service Center, Quarterly Report on Form 10-Q/A
Inc. and Express One International, for the quarter ended
Inc. August 31, 1994.
(b) Reports on Form 8-K.
A report on Form 8-K dated January 31, 1995 was filed by the
Company during ther for which this report is filed. The Form 8-K
reported the consummation of the transaction contemplated by the
Purchase Agreement, dated January __, 1995, by and among the Company,
Richard R. Wellman, Lynda Wellman and Custom Air Holdings, Inc.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report on Form 10-Q/A to be signed on
its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
(Registrant)
/s/ Robert K. Norris August 14, 1995
ROBERT K. NORRIS Date
Vice President-Finance
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