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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Second Amendment)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-18352
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 59-2223025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8095 N.W. 64th Street, Miami, Florida 33166
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 593-2658
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title or class on which registered
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Common Stock, $.001 par value None
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(Title of class)
Page 1 of 2 pages
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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 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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At October 14, 1994, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $1,407,550.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE LAST FIVE YEARS
Indicate by check mark whether the Registrant has filed all
documentation and reports required to be filed by Section 12, 13 or 15(b) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
Not Applicable
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
4,041,779 shares of Common Stock outstanding on January 16, 1995
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DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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(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.)
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 12
Item 8. Financial Statements and
Supplementary Data. . . . . . . . . . . . . . . . . . . . . 20
PART III
Item 13. Certain Relationships and
Related Transactions. . . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS.
GENERAL
International Airline Support Group, Inc. ("IASG" or the "Company") is a
worldwide supplier of spare parts and equipment to the aviation industry.
Since its inception in 1982, the Company has become a primary source of
replacement parts for widely operated aircraft models which are no longer in
production, such as the McDonnell Douglas DC-8 ("DC-8") and DC-9 ("DC-9").
The Company's core business involves purchasing aircraft, dismantling or
"parting out" such aircraft and reselling the resulting parts. For the fiscal
year ended May 31, 1994, IASG supplied parts to over 400 customers worldwide.
RECENT DEVELOPMENTS
In June 1993, International Airline Service Center, Inc. ("IASC"), a
wholly-owned subsidiary of the Company, commenced operations as an
FAA-certified repair facility located adjacent to the Company's warehouse
facilities in Sherman, Texas. The principal business of IASC is the
performance of maintenance checks required by the FAA on narrow body
aircraft, primarily DC-9 Series 10 through 30, and 727-100 aircraft. During
the 1994 fiscal year, IASC provided such services for third party customers
and for various of the Company's aircraft. IASC created Professional Aviation
Technical Services, Inc., a Nevada corporation wholly-owned by IASC ("PATS").
PATS was formed to provide engineering service to aircraft manufacturers.
The Company identified over forty aircraft operators as potential
customers for IASC. However, due to several factors, including substantial
competition, some of which came from larger companies with significantly more
financial resources, and space constraints that permit IASC to service only
certain narrow body aircraft at its repair facility, IASC has generated
little third party revenue and has incurred substantial losses. For the 1994
fiscal year, IASC incurred costs and expenses of $2.4 million, while earning
revenues of only $525,000.
In November, 1993, the Company purchased all of the capital stock of
Brent Aviation, Inc., a Texas corporation ("Brent") in exchange for $125,000
cash, which the Company financed from operations. Brent is engaged in the
business of air cargo transport and is the holder of an air cargo operator
certificate issued by the FAA.
In June 1994, the Company's Board of Directors unanimously voted to sell
or otherwise dispose of IASC following the sale of certain aircraft being
serviced under contract by IASC. The Company is negotiating with certain
parties interested in acquiring IASC; however, no definitive agreement has
been reached with any of these parties. In an effort to return its focus to
its traditional parting out and inventory business, the Company also is
considering whether to sell Brent. In addition, the Company will continue to
evaluate and implement additional cost-cutting measures in an effort to
return the Company to profitability.
COMPANY STRATEGY
The Company's strategy is to capitalize on the limited availability of
spare and replacement parts for certain widely operated aircraft models which
are no longer in production. In the 1980s, management implemented this
strategy by parting out DC-8 aircraft and reselling the resulting spare
parts. Based upon the Company's success in parting out DC-8 aircraft, which
ceased production in 1972, the Company began purchasing and parting out DC-9
aircraft in 1991. Production of DC-9 aircraft ceased in 1982. The DC-8 and
DC-9 aircraft have life
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expectancies that exceed the manufacturer's original estimates. In addition,
approximately 40% of the parts of the DC-9 aircraft are interchangeable with
the McDonnell Douglas MD-80 (the "MD-80") aircraft which permits the Company
to better serve its existing customers and further expands the Company's
potential market. Beginning in 1992, the Company began purchasing and parting
out Boeing 727 aircraft. IASG has acquired thirty-eight DC-8, eight DC-9, and
six Boeing 727 aircraft for parting out since the Company began operations.
As aircraft operators phase out their use of DC-8s, the Company expects that
the bulk of its parting out business will become DC-9 parts.
The Company believes that parting out high quality aircraft is a cost
effective means of acquiring its spare parts inventory. Management acquires
aircraft for parting out only if its initial estimates of the timing and
value of part sales for such aircraft would allow the Company to recover the
purchase price within 180 days through the sale of a portion of parts, and to
sell the remaining parts for amounts in excess of the purchase price over the
subsequent five years. Aircraft that are available at part out prices
typically come from owners who are in need of immediate liquidity or are
unable to economically lease such aircraft to third parties. Additionally,
such aircraft may require extensive maintenance or overhaul or may require
government-mandated improvements which are not economical for owners to
perform.
Upon acquisition, all aircraft are delivered to the Company's facilities
in Sherman, Texas. The parts of the aircraft are immediately identified,
catalogued and entered into the Company's computer system. As the aircraft is
disassembled, the removed parts are then bar-coded. These procedures permit
the parts to become immediately available for resale by the Company's sales
personnel. High value parts such as engines and engine components are often
pre-sold. In other instances, the Company may recondition certain parts to
enhance a part's resale value. The Company also makes its inventory available
to potential customers through computer database clearinghouses which list
the spare aircraft parts inventories of substantially all parts suppliers.
Aircraft operators, repair facilities and other aviation related entities
worldwide have immediate 24-hour access to these clearinghouses, which
typically are their primary source for locating parts. In-stock parts are
generally shipped and received by the customer within 24 hours after the
order is placed.
Due in part to the noise abatement regulations issued by the FAA, the
major U.S. aircraft passenger operators have eliminated the DC-8 aircraft
from their fleets and have begun to reduce the number of DC-9 aircraft in
their fleets. Many of these aircraft have been sold to the numerous smaller
passenger and cargo aircraft operators throughout the world, including
several of IASG's existing customers. In order to assure reliable operations,
the operators of these aircraft need to maintain a minimum supply of spare
parts or establish relationships with spare parts suppliers. Because of
IASG's position as a primary source of spare parts for the DC-9 aircraft, the
Company believes that it will continue to be an active supplier for operators
of these aircraft.
In addition to its DC-8 and DC-9 spare parts, the Company maintains
inventories of spare parts for the Boeing 727, 737 and 747 aircraft, the
McDonnell Douglas MD-80 aircraft and the Lockheed L1011 and L100/C130. The
Company also generates additional revenues by brokering third party spare
parts on behalf of customers and by arranging for the repair or exchange of
customers' spare parts with FAA-certified repair facilities.
During the 1994 fiscal year, the Company expanded its leasing of
aircraft under various operating leases to both domestic and foreign
customers, consisting of major passenger and cargo operators and smaller
aircraft operators. Lease revenue comprised approximately 10% of total
revenues in 1994 compared to 4% of total revenues in 1993. Lease terms
typically range from three months to twenty-four months with renewal options.
At May 31, 1994, the Company had five aircraft operating under such leasing
agreements. In addition, the Company
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may from time to time engage in sale of whole aircraft or engines when market
conditions warrant such transactions. The Company has typically used IASC for
refurbishment and repairs necessary to prepare such aircraft for sale.
Management believes that its customer relationships are important to the
Company's operational success. The Company has established relationships with
many domestic and foreign aircraft operators and generally maintains an
adequate level of inventory in order to service such customers in a timely
manner. Management believes that availability and timely delivery of spare
parts are the primary factors considered by customers when making a spare
parts purchase decision.
INDUSTRY OVERVIEW
GENERAL. According to the Boeing World Jet Airplane Inventory for
year-end 1993, the combined aircraft fleets of aircraft operators throughout
the world at December 31, 1993 consisted of approximately 11,200 jet
aircraft. Since 1980, the average age of the jet aircraft fleet worldwide has
increased from 10.5 years to 13.2 years. A significant number of the spare
parts used in these aircraft are supplied by different types of companies,
including original equipment manufacturers ("OEMs") and numerous
distributors, fixed-base operators, FAA-certified overhaul facilities,
traders and brokers. Management believes that the fragmented nature of the
aircraft spare parts industry creates opportunities for small well-financed
companies with proven infrastructures to exploit niche markets in certain
types of aircraft, such as the DC-8 and DC-9. To date, the larger companies
in the aircraft aftermarket have focused their resources on newer aircraft
models.
Economic factors have prompted many airlines to defer aircraft
procurement programs and extend the useful life of older equipment. New
aircraft are priced in the $25 to $125 million range, while second generation
aircraft (such as the DC-9) cost less. Consequently, many aircraft operators
are postponing, deferring or canceling orders for new aircraft and are
retaining their older aircraft. Certain U.S. and European operators have
implemented measures such as the installation of FAA- approved hush kits and
extended life maintenance programs to extend the useful lives of older
aircraft in their fleets. In addition, many foreign and domestic start-up
aircraft operators are establishing their fleets through the acquisition of
the less expensive second generation aircraft even though such older aircraft
typically require more maintenance and replacement parts than new aircraft.
AVAILABILITY OF REPLACEMENT PARTS. Aircraft and parts manufacturers
typically provide their customers with replacement parts throughout the
production life of the aircraft. Other sources for new aircraft parts include
authorized subcontractors for the OEMs, new parts distributors and aircraft
operators with excess inventories. Once an aircraft is no longer in
production, a manufacturer will continue to supply spare parts to its
customers for an extended period of time, which varies among aircraft types.
For example, spare parts for the DC-8 aircraft were available from the
aircraft manufacturer until 1987, 15 years after the DC-8 model type ceased
production. However, manufacturers generally have no obligation to supply or
maintain parts for an aircraft operator which was not the original purchaser
of the aircraft.
As OEMs cease manufacturing replacement parts, and as other sources of
new parts become increasingly more scarce, aircraft operators must locate
alternative sources for quality used parts to maintain the reliable operation
of their aircraft. Often, aircraft operators will opt for quality used parts
even when new parts are still in production. Used aircraft parts must meet
the same FAA standards as new parts but generally cost 55% to 75% of the
price of the same new part, and are often available with shorter lead times.
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NOISE ABATEMENT REGULATIONS. The FAA classifies aircraft in three
groups, Stage 1, Stage 2 and Stage 3, in order of decreasing noise
characteristics. In 1980 the FAA adopted a rule prohibiting the operation of
Stage 1 aircraft in or to the United States. In response to a Congressional
requirement, the FAA submitted a report to Congress in April 1986 which
presented various approaches to encourage or require the replacement of Stage
2 aircraft with Stage 3 aircraft. The FAA noise abatement regulations that
were adopted require aircraft operators to gradually phase out their noisier
aircraft, either replacing them with quieter Stage 3 aircraft or equipping
them with hush kits to comply with noise abatement regulations according to
the following schedule: by December 31, 1994, each aircraft operator must
either reduce the number of Stage 2 aircraft it operates by 25% or operate a
fleet composed of not less than 55% Stage 3 aircraft; by December 31, 1996,
each aircraft operator must either reduce its Stage 2 aircraft by 50% or
operate a fleet composed of not less than 65% Stage 3 aircraft; by December
31, 1998 at least 75% of an aircraft operator's Stage 2 aircraft must be
eliminated, or its overall fleet must be composed of 75% Stage 3 aircraft;
and by December 31, 1999, 100% of the fleet must be composed of Stage 3
aircraft, subject to certain waivers.
OPERATIONS OF THE COMPANY
"PARTING OUT" AND INVENTORY ACQUISITION. The purchase and dismantling
of an aircraft and the resale of the dismantled parts for use on other
aircraft is commonly called "parting out." When the Company acquires an
aircraft for parting out, the aircraft is delivered to the Company's
inventory storage facilities in Sherman, Texas. The aircraft is then removed
from the U.S. registry. The seller of the aircraft will often provide the
Company with a computerized data base listing all the parts and equipment on
the aircraft which is verified by the Company. If a computerized listing of
parts is not available, the Company will conduct its own inventory of the
aircraft to be parted out. The parts and equipment are catalogued and all
the relevant information regarding the parts, including each part's repair
history, is entered into the Company's computer database. Management
believes that it is essential that such information be immediately available
in order to facilitate sales by the Company's sales personnel. In certain
instances, parts which are in high demand are pre-sold prior to the delivery
of the aircraft to the Company. High value parts such as engines and engine
components are also often pre-sold. Pre-selling allows the Company to recover
a significant amount of its investment within a short time from the date of
the aircraft delivery.
An aircraft purchased for parting out is generally in the same condition
as the aircraft that will utilize the spare parts. Sellers are usually
motivated to dispose of their aircraft at part out prices for a variety of
reasons, including the seller's need for immediate liquidity or inability to
economically lease the aircraft to third parties. Additionally, such aircraft
may require extensive maintenance or overhaul or may require
government-mandated improvements which are uneconomical for the sellers to
perform.
In addition to purchasing whole aircraft, the Company also acquires
spare parts by bidding on the inventory of companies that are eliminating
certain portions of their spare parts inventory due to the retirement of an
aircraft type from their fleet, the downsizing of operations or the
dissolution of its business as a whole.
Modern aircraft design emphasizes the use of components that may be
reused hundreds of times after inspection and overhaul. Because of the
reusable nature of such "rotable" parts, sales of rotable parts offer greater
profit potential than the non-reusable "consumable" parts. Vendors offer
rotable parts in different conditions, designated by industry standards. A
component may be sold in "serviceable" condition, meaning that the unit may
be installed on an aircraft without further inspection. "As removed - not for
failure" designates a component that was removed from an aircraft for some
reason other than malfunction and may be reinstalled after inspection. The
remaining condition, "unserviceable," designates the need for the part to
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be overhauled prior to inspection and installation. The FAA requires rotables
and other spare parts to be inspected at FAA-certified repair facilities
prior to installation on an aircraft. However, the FAA does not prohibit the
sale of used parts that have not been inspected and certified.
PRODUCT LINES. Historically, the Company maintained a large inventory of
used parts for the DC-8 aircraft. The DC-8, an early model Stage 1 aircraft,
has not been produced since 1972. The FAA's enactment of noise abatement
restrictions in 1980 grounded all existing DC-8's in use in the United States
and required the fleets to be refitted with modern, quieter engines. Because
of the expense involved in installing new engines, the use of DC-8 aircraft
in the United States diminished. Certain devices known as "hush kits" were
invented in order to bring the DC-8 engines within acceptable noise limits.
In late 1985, the FAA approved the first hush kit for certain DC-8 models.
Another hush kit was approved for other DC-8 models in 1987. The effect of
these changes was to create new demand for the DC-8 parts because a hushed
DC-8 is among the lowest cost aircraft to operate per ton mile. Accordingly,
the Company believes that the DC-8s will continue to be used by freight
carriers and other operators and that the sale of DC-8 parts will continue to
be a source of revenues in the foreseeable future. However, it is expected
that sales of DC-8 parts will continue to decline in correspondence with the
decrease of DC-8s in operation.
Because of the limited number (232) of DC-8s in operation, the Company
began expanding its inventory to include parts for Stage 2 aircraft, such as
the DC-9 aircraft. The noise abatement regulations issued by the FAA require
aircraft operators to gradually phase out their Stage 2 noisier jets by the
year 2000 unless they are retrofitted with hush kits to bring them into
compliance with the Stage 3 noise requirements. The Company believes that
retrofitting with hush kits as well as the extended life maintenance programs
instituted by many aircraft operators will increase the market life of the
DC-9s.
The Company believes that as U.S. passenger airlines eventually replace
their existing early model DC-9s, such aircraft will continue to be used in
domestic cargo and foreign passenger and cargo operations. In addition, the
DC-9 presents the Company with additional opportunities to supply parts to
the MD-80 aircraft, which is still in production, because approximately 40%
of the DC-9 parts may be installed on the MD-80 aircraft. Accordingly, the
Company continues to seek purchase opportunities in DC-9 aircraft. In
addition to the Company's inventory of McDonnell Douglas DC-8 and DC-9 parts,
the Company's inventory also includes spare parts for the Boeing 727, 737,
and 747 aircraft, the McDonnell Douglas MD-80 aircraft and the Lockheed L1011
and L100/C130 aircraft.
MARKETING. The Company has developed a sales and marketing
infrastructure which includes well-trained and knowledgeable sales
personnel, computerized inventory management and listing of parts in
electronic industry data bank catalogues. Key to the successful marketing of
the Company's inventory is IASG's ability to make timely delivery of spare
parts in reliable condition. The Company believes aircraft operators are more
sensitive to reliability and timeliness than price. Rather than purchase new
parts, the Company believes aircraft operators will purchase less expensive
overhauled parts from a trusted vendor.
The Company's account executives are experienced and knowledgeable
about the market segment in which the Company participates. Account
executives understand maintenance requirements, parts for the aircraft type
utilized in their markets, as well as list prices and fair values of most
items sold. Furthermore, they are familiar with alternative sources for parts
not inventoried by the Company.
Market forces establish the price for used aircraft parts. No pricing
service or catalogue exists for used components. Used aircraft parts prices
are determined by referencing new parts
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catalogues with consideration given to existing supply and demand conditions.
Often, aircraft operators will opt for quality used parts even when new parts
are still in production. Used aircraft parts that meet the same FAA standards
as new parts, cost less than the same new part and are often available in
shorter lead times.
In addition to directly marketing its inventory, IASG lists its
inventory in the Air Transport Association's computerized data bank ("AIRS")
and with Ryder System's Inventory Locator Service ("ILS"). Both of these
data bases are 24 hour electronic "marketplaces" where aircraft parts
transactions take place.
The Company has consigned inventory to certain of its larger customers
in order for these customers to have immediate availability of parts. The
parts are owned by the Company but are maintained at the customer facilities.
When the parts are consumed by the customer, the Company charges the
customer the full value of the part. This consignment program has resulted in
increased parts sales since the customers have immediate access to the parts,
thereby eliminating the necessity and desire to shop around for such parts.
CUSTOMERS
GENERAL. The Company's parts customers operate in a segment of the
airline industry that is very volatile. A number of carriers that use the
types of aircraft for which the Company stocks parts fail each year.
Consequently, the identity of the Company's major customers frequently
changes. The loss of a major parts customer could have an adverse impact on
the Company's sales of parts for a given period. However, the Company
believes that the overall level of its parts sales is determined more by the
number of aircraft of the types for which it stocks parts that are in service
than by the identity of the operators of such aircraft.
In addition to selling parts, the Company also sells entire aircraft
from time-to-time. In a given period, a substantial portion of the Company's
revenues may be attributable to the sale of aircraft. Such sales are
unpredictable transactions, dependant, in part, upon the Company's ability
to purchase an aircraft and resell it within a relatively brief period of
time. The revenues from the sale of aircraft during a given period may result
in the purchaser of the aircraft being considered a major customer of the
Company for that period. The Company does not expect to make repeat aircraft
sales to a given customer; therefore, changes in the identity of major
customers are frequently due to the occurrence of aircraft sales.
CUSTOMER PROFILE. IASG's customer base includes aircraft operators,
overhaul facilities and other parts suppliers who may in turn resell to end
users. The Company's customers range from major passenger and cargo operators
to smaller aircraft operators and FAA-certified repair facilities. Certain
aircraft operators often buy through competitors instead of directly through
IASG because of the operator's existing relationship with the competitor or
the competitor's ability to overhaul the part sought.
MAJOR CUSTOMERS. Historically, one customer, Transafrik Corp., a cargo
carrier operating in Africa has accounted for a significant amount of the
Company's revenue. Recently, sales to Transafrik have declined
significantly. Transafrik accounted for 9% of the Company's total revenue in
fiscal 1994, compared to 18% and 25% of total revenue in fiscal 1993 and
1992, respectively. During fiscal 1994, Transafrik underwent a change in
ownership and made other significant management and operational changes,
including a down-sizing of its fleet and changes in fleet mix. The Company
anticipates that sales to Transafrik may continue to decline. The loss of
Transafrik as a customer could have a material adverse effect on the
Company's business. There can be no assurance that the Company will be able
to replace the business previously provided by Transafrik.
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The following table lists the Company's customers which, based upon net
revenues, accounted for more than 10% of net revenues for the fiscal years
ended May 31, 1994 and 1993:
<TABLE>
<CAPTION>
Percentage of
Customer Net Revenues (000's) Total Net Revenues
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<S> <C> <C>
1994:
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ADC Airlines $ 3,182 16%
1993:
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Transafrik Corp. $ 6,030 18%
Air Terrex Ltd 3,896 12
ADC Airlines 3,827 11
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Total $13,753 41%
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Air Terrex Ltd. accounted for 12% of net revenues during fiscal 1993
because it purchased an aircraft from the Company during such fiscal year.
Prior to the 1993 fiscal year, no customer accounted for more than 10% of the
Company's net revenues, other than Transafrik. During the 1992, 1993 and 1994
fiscal years, 49%, 60% and 52% of the Company's net revenues were made to
customers in foreign countries.
ADDITIONAL SERVICES
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that
its spare part sales opportunities are enhanced by providing its existing and
new customers with whole aircraft and engines through sale and lease
transactions. Such transactions allow the Company to expand its customer base
for spare parts and to reduce the cost basis in its aircraft. In addition,
leasing transactions are typically on a short-term basis and provide the
Company with additional revenue and cash flow as well as the ability to
utilize inventory in the form of whole aircraft. The Company will continue to
supply whole aircraft and engines, as well as the necessary spare parts to
maintain the reliability of the aircraft. As of May 31, 1994, the Company was
leasing five aircraft under agreements ranging in terms through November
1995, in certain cases with renewal options.
OVERHAUL SERVICES. In June 1993, IASC commenced operations as an
FAA-certified repair facility located adjacent to the Company's warehouse
facilities in Sherman, Texas. The principal business of IASC is the
performance of maintenance checks required by the FAA on narrow body
aircraft, primarily DC-9 Series 10 through 30, and 727-100 aircraft. During
the 1994 fiscal year, IASC provided such services for third party customers
and for various of the Company's aircraft. However, due to several factors,
including substantial competition, some of which came from larger companies
with significantly more financial resources, and size constraints that limit
IASC's repair facility to servicing only certain narrow body aircraft, IASC
has generated only a small amount of third party revenue and has incurred
substantial losses.
As noted previously, the Company has determined to sell or otherwise
dispose of IASC following the sale of certain aircraft being serviced under
contract by IASC. The Company is negotiating with certain parties interested
in purchasing IASC; however, no definitive agreement has been reached with
any of these parties.
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EXCHANGE TRANSACTIONS. An "exchange transaction" generally involves a
high value/high turnover rotable part which an operator frequently replaces
when performing aircraft maintenance. In an exchange transaction, a customer
pays an exchange fee and returns a "core" unit to IASG within 14 days. A
"core" unit is the same part which is being delivered to the customer by
IASG, but in need of overhaul. IASG has the customer's core unit overhauled
and bills the customer for the overhaul charges and retains the overhauled
core unit in its inventory. The Company continues to emphasize exchange
transactions because they are profitable and ensure that scarce parts remain
in stock for future sales.
BROKERED TRANSACTIONS. In a "brokered transaction" the Company fills a
customer order for a part not held in the Company's inventory. The Company
locates the part for the customer from another vendor and then resells the
part to the customer. These lower margin transactions have become a
decreasing percentage of the Company's total revenues.
CARGO OPERATIONS. Brent, a wholly-owned subsidiary of the Company, is
engaged in the air cargo transport business, primarily on the African
continent. Brent holds an air cargo operator certificate issued by the FAA.
REGULATION
The United States aviation industry is regulated by the FAA. The FAA
requires aircraft parts to be inspected by FAA-certified repair stations
prior to installation. Because of concerns regarding maintenance procedures,
it is possible that the FAA will promulgate new and more stringent
regulations relating to the ability to trace the repair history of individual
parts. If this were to occur, it could have a material adverse impact upon
the Company's business; however, the Company has attempted to anticipate the
focus of such new regulations and has added resources and implemented
procedures to address these potential requirements.
SUBSIDIARIES
IASG-VIRGIN ISLANDS, INC. IASG-Virgin Islands, Inc. ("IASG- VI"), a
wholly owned subsidiary of the Company was formed in July 1992. IASG-VI is
incorporated under the laws of the United States Virgin Islands and is
qualified as a "foreign sales corporation" under the Internal Revenue Code of
the United States. The Company established IASG-VI in order to promote
foreign sales while receiving favorable tax treatment under the United States
Internal Revenue Code.
INTERNATIONAL AIRLINE SERVICE CENTER, INC. International Airline Service
Center, Inc. ("IASC"), a wholly owned subsidiary of the Company, was formed
in April 1993. IASC is incorporated under the laws of the state of Nevada and
operates a FAA- certified maintenance facility adjacent to its warehouse in
Sherman, Texas.
PROFESSIONAL AVIATION TECHNICAL SERVICES, INC. Professional Aviation
Technical Services, Inc. ("PATS"), a wholly owned subsidiary of IASC, was
formed in July, 1993. PATS is incorporated under the laws of the state of
Nevada and was formed in connection with the Company's FAA-certified
maintenance facility adjacent to its warehouse in Sherman, Texas. PATS was
formed to provide engineering service to original equipment manufacturers
("OEMs") of aircraft and aircraft parts.
BRENT AVIATION, INC. Brent Aviation, Inc. ("Brent"), a wholly owned
subsidiary of IASG, was acquired by the Company in November, 1993. Brent is
incorporated under the laws of the state of Texas and is engaged in the
business of air transport related operations and is the holder of a
certificate issued by the Federal Aviation Administration authorizing Brent
to operate as an air cargo operator and conduct FAR Part 125 operations.
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As discussed under "Business-Recent Developments", the Company has
determined to sell or otherwise dispose of IASC and PATS, and is considering
selling Brent.
JOINT VENTURE
AIRCRAFT PARTNERS LTD. In August 1992, the Company and R.T. Leasing,
Inc., a Florida corporation ("RTL") and a non-affiliate of the Company,
entered into a joint venture agreement and formed Aircraft Partners Ltd., a
Florida general partnership (the "Partnership"). The Company was the managing
partner of the Partnership. The Partnership's purpose was to acquire aircraft
for sale or lease. The Partnership formed A.P. Number 1, Inc., a Florida
corporation, to hold title to the aircraft. The Company, as general partner
of the Partnership, executed as co-maker a promissory note dated August 20,
1992, in the principal amount of $2.9 million for the benefit of
International Air Leases, Inc., the parent corporation of RTL. The interest
rate on the note was the greater of 10% or the prime rate plus 4%. The note
was due October 31, 1993, and the outstanding principal amount at May 31,
1993 was $2.6 million. The proceeds of the promissory note were used to
purchase two DC-9 and one 727 aircraft, as well as two spare Pratt & Whitney
engines.
The Partnership's operations were not successful, and the Partnership
was not able to make the required payments under the terms of the note. The
Company was in default under the terms of the note due to nonpayment of
principal and interest and in February 1994, the Company agreed to a
settlement with the lender, whereby the lender received title to the three
aircraft and $500,000 from the Company. All remaining liabilities have been
satisfied and the Partnership has been dissolved. The Company's fiscal 1994
loss relating to the joint venture, as shown in the statement of operations
for fiscal 1994 and recorded under the equity method, includes its share of
the Partnership's operating losses ($280,000) and its loss upon dissolution
($143,224), which is less than the $500,000 settlement payment.
PRIVATE PLACEMENTS
1992 PRIVATE PLACEMENT.
In July 1992, the Company completed a private placement (the "1992
Private Placement") of 12% Senior Secured Notes due July 1997 (the "Senior
Notes") in the aggregate principal amount of $18,000,000 in compliance with
Regulation D under the Securities Act of 1933. Warrants to purchase an
aggregate of 820,146 shares of the Company's Common Stock at an exercise
price of $5.3875 per share were also issued to the Senior Note purchasers on
a pro rata basis (the "Senior Note Warrants"). In addition, the Company's
placement agent for the 1992 Private Placement, Dabney/Resnick & Wagner, Inc.
("DRW"), received warrants to purchase 273,382 shares of the Company's Common
Stock at an exercise price of $5.3875 per share (the "DRW Warrants"). The
Senior Note Warrants and the DRW Warrants are hereinafter collectively
referred to as the "1992 Warrants." The 1992 Warrants have a five year term
and carry restrictions regarding exercise and registration of the underlying
shares.
The Senior Notes carry a fixed interest rate of 12% per annum payable
quarterly. The securities purchase agreement pursuant to which the Senior
Notes were issued (the "Senior Note Agreement") originally called for a
sinking fund requiring payments of $4 million in July 1994 and 1995, and $5
million in July 1996, with the balance to be repaid in July 1997. The Senior
Note Agreement contains restrictive covenants requiring the Company to
maintain certain financial ratios, restrict dividends and limits capital
expenditures, indebtedness and inventory purchases, and requires the Company
to fund the interest and income taxes payments on a monthly basis into a
restricted cash account. In September 1993, the Company made an optional
prepayment of $3,450,000 on the Senior Notes, which payment was made from the
proceeds of the 1993 Private Placement, discussed below. This prepayment of
the Senior Notes
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<PAGE>
reduced the principal outstanding on the Senior Notes to $14,550,000 and
reduced the required sinking fund payments to $3.2 million in July 1994 and
1995 and $4 million in July 1996 and 1997.
The Company has been in breach of certain covenants ontained in the
Senior Note Agreement, relating to the failure to make timely sinking fund
payments, the failure to comply with financial covenants and notice
requirements, and the failure to perfect and/or obtain the release of
security interests in various aircraft. The Company currently is negotiating
with the Senior Noteholders to obtain a waiver of these defaults and to amend
certain provisions of the Senior Note Agreement and related agreements. There
can be no assurances that the Company will successfully obtain such a waiver
and amendment. If the Company fails to do so, there can be no assurances that
the Senior Noteholders will not exercise remedies available to them,
including declaring an event of default and accelerating the entire amount of
the indebtedness under the Senior Notes.
1993 PRIVATE PLACEMENT.
On September 9, 1993, the Company issued $10 million in principal amount
of 8% Convertible Subordinated Debentures due August 2003 (the "Debentures")
through a private placement offering (the "1993 Private Placement").
Originally, the Debentures were convertible at any time prior to maturity,
upon 30 days notice, into shares of the Company's common stock at $4.00 per
share. The Debenture conversion options carry restrictions regarding the
conversion and the registration of the shares of Common Stock into which the
Debentures may be converted. The Debenture holders have certain piggyback
and demand registration rights for the shares of Common Stock underlying the
Debentures. Proceeds from the issuance of the Debentures were used to repay
certain notes payable, to satisfy certain of the Company's aircraft purchase
obligations and to repay certain of the Senior Notes. The Debentures may be
redeemed in whole or in part after August 1996, upon 30 days notice. The
Debentures carry a fixed rate of 8% per annum payable quarterly. The
securities purchase agreement pursuant to which the Debentures were issued
(the "Debenture Agreement") contains restrictive covenants requiring the
Company to maintain a certain level of consolidated net worth and certain
financial ratios related to interest coverage.
In September 1993, the 1992 Warrants to purchase 1,093,528 ares of
Common Stock were adjusted to purchase 1,235,675 shares. The 1992 Warrants
are adjusted when shares, warrants or options are issued below market value
or below the exercise price of the 1992 Warrants. The adjustment primarily
was the result of the issuance of the Debentures in the 1993 Private
Placement with a conversion price below the exercise price of the 1992
Warrants.
The Company has been in breach of certain covenants contained in the
Debenture Agreement, relating to the failure to comply with certain financial
covenants and notice requirements contained in the Debenture Agreement. The
Company currently is negotiating with the Debentureholders to obtain a waiver
of these defaults and to amend certain provisions of the Debenture Agreement
and related agreements. There can be no assurances that the Company will
successfully obtain such a waiver and amendment. If the Company fails to do
so, there can be no assurances that the Debentureholders will not exercise
remedies available to them, including declaring an event of default and
accelerating the entire amount of the indebtedness under the Debentures.
PRODUCT LIABILITY
Claims paid by aircraft and aircraft parts manufacturers have risen
dramatically in the past 10 years; however, no lawsuit has ever been filed
against the Company based upon a products liability theory. The Company is
not aware of a corresponding increase in claims
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<PAGE>
against businesses similar to the Company which sell but do not manufacture
new and used aircraft parts. The Company maintains liability insurance in the
amount of $50 million. In addition, the Company's policy is to require
lessees of its aircraft to maintain liability insurance covering the Company
as an additional insured. Nevertheless, there can be no assurances that such
insurance will be adequate to protect the Company in the event a claim is
brought against the Company.
COMPETITION
The Company competes with several other companies, none of which
accounts for a significant amount of the spare parts market for narrow-bodied
aircraft. Customers in need of aircraft parts have access, through
computer-generated inventory catalogues, to a broad array of suppliers
including major aircraft manufacturers, airlines and aircraft service
companies, many of which have greater financial resources and some of which
have larger inventories and more established reputations than the Company.
The Company has established relationships with many domestic and foreign
aircraft operators and maintains such relationships by having the necessary
parts available and by delivering such parts in a timely manner.
The dominant companies in the aircraft parts aftermarket are AAR Corp.,
Aviation Sales (a division of Ryder Systems) and Banner Aerospace. These
companies are larger than IASG and have more substantial financial resources;
however, their focus to date has not been to supply parts for DC-8 and DC-9
aircraft.
EMPLOYEES
As of December 15, 1994, the IASG had approximately 29 employees. Of
these, three are executive officers, eight are sales personnel, 12 are
accounting, finance, data processing, and administrative personnel, and the
remainder are warehouse and inventory personnel. As of December 15, 1994,
IASC employed 56 people at its facilities in Sherman, Texas and five
employees work at Brent in Sherman, Texas. Of the IASC employees, one is an
executive officer, eight are accounting, finance, data processing and
administrative personnel, eight are warehouse and inventory personnel and 39
are mechanical and repair personnel. The Company is not a party to any
collective bargaining agreement. The Company believes its relations with its
employees are good.
ITEM 3. LEGAL PROCEEDINGS.
In February 1991, Admark International, Ltd. ("Admark") brought suit in
the Dade County Circuit Court (Case No. 91-08435 (07)) against the Company
for the payment of spare parts brokerage commissions of approximately
$600,000 plus interest from 1989. Admark is a Bangladesh corporation alleging
that the Company owes it a commission based upon an alleged joint venture
between the Company and Norvalle Trading Co., a United Kingdom corporation.
Admark initially filed suit in Bangladesh against Norvalle, but that action
was dismissed and the dismissal affirmed on appeal. The Company filed a
motion for summary judgement in this action, maintaining that this cause of
action is the same as that finally determined in Bangladesh. However, on
October 14, 1994, the jury returned a verdict in favor of Admark for $500,000
in commission and approximately $335,000 in pre-judgment interest. The
Company has filed motions for a judgment notwithstanding the verdict, for a
new trial, and for remittitur seeking a reduction of the damages awarded. If
the judgment is upheld, it will constitute a default by the Company under the
terms of the Senior Notes purchase agreement.
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<PAGE>
In July 1993, Viglass Aviation ("Viglass") filed a complaint against the
Company in the Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida (Case No. 93-14256CA20), 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 Company disputes this claim, maintaining that the sale
occurred outside the provisions of the commission agreement. The Company
filed a motion to hold the plaintiffs in contempt for failure to comply with
discovery demands. This motion remains in abeyance pending settlement
negotiations between the parties.
On February 28, 1994, a class action complaint entitled 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 under the federal securities laws, as well as claims for common law
fraud and breach of fiduciary duty. In addition to the Company, named
defendants include the Company's independent public accountants, Grant
Thornton, as well as the following officers and directors of the Company:
Richard R. Wellman, Alexius A. Dyer, III, Kyle R. Kirkland, E. James Mueller
and Lynda Wellman. The plaintiffs seek unspecified damages. By stipulation of
the parties, on July 5, 1994 the court granted motions to dismiss filed on
behalf of IASG and the other defendants, and further ordered that the
plaintiffs had thirty (30) days in which to file an amended complaint. On
August 3, 1994, the plaintiffs filed an amended complaint, 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 the 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
believe that these claims have merit and intends to continue to defend them
vigorously.
In June 1994, Symix Computer Systems, Inc. ("Symix") filed a complaint
against the Company and its wholly owned subsidiary, International Airline
Service Center, Inc. ("IASC") for non-payment of invoices for the purchase of
computer software and services provided to IASC in the amount of $46,944.86,
plus interest, costs incurred and reasonable attorneys fees. In December
1994, the parties settled this litigation with the Company agreeing to pay
$22,300 in three monthly installments to Symix.
In August 1994, Phase II brought suit in the Dade County Circuit Court
(Case No. 94-15972 CA9) against the Company alleging that the Company is
obligated to Phase II for the payment of commissions allegedly owed for the
sale of aircraft. Phase II seeks damages in an unspecified amount. In October
1994, Phase II filed a motion for summary judgment. In December 1994, the
Company agreed to pay Phase II $75,000 in settlement of this matter.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its 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 affect upon the
financial position of the Company.
PART II
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below for, and as of
the end of, each of the fiscal years in the five year period ended May 31,
1994 have been derived from the Company's consolidated financial statements.
The consolidated financial statements of the Company for the fiscal years
ended May 31, 1994, 1993 and 1992 were audited by Grant Thornton, independent
certified public accountants. The consolidated financial statements of the
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Company for the fiscal years ended May 31, 1991 and 1990 were audited by
Wachsman, Rappaport and Fink, P.A., independent certified public accountants.
The consolidated financial statements for the Company as of May 31, 1994 and
1993 and for the three-year period ended May 31, 1994 and the accountants'
reports thereon are included in Item 8 of this Form 10-K.
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(In thousands, except per share data)
------------------------------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Revenues
Net sales. . . . . . . . . . . . . . $10,067 $21,521 $26,526 $32,031 $17,272
Lease revenue. . . . . . . . . . . . - - - 1,473 1,986
Other revenue. . . . . . . . . . . . 62 55 94 66 88
-------- -------- -------- -------- --------
Total revenues. . . . . . . . . . 10,129 21,576 26,620 33,570 19,346
Costs and Expenses
Cost of sales. . . . . . . . . . . . 6,913 14,920 16,310 21,493 22,327
Selling general and
administrative expenses. . . . . . . 1,966 3,230 5,281 6,469 8,839
Provision for doubtful accounts. . . 75 517 374 493 1,488
Interest expense . . . . . . . . . . 164 513 871 2,163 2,607
Depreciation and amortization. . . . 94 164 201 1,406 3,150
-------- -------- -------- -------- --------
Total costs and expenses. . . . . 9,212 19,344 23,037 32,024 38,411
Earnings (loss) before income taxes,
equity in earnings (loss) of joint
venture and extraordinary item . . . . 917 2,232 3,583 1,546 (19,065)
Provision for income taxes (benefit) . 363 941 1,370 510 (2,475)
Equity in earnings (loss) of joint
venture. . . . . . . . . . . . . . . - 121 (229) (59) (423)
Extraordinary loss on extinguishment
of debt. . . . . . . . . . . . . . . . - - - - (363)
-------- -------- -------- -------- --------
Net earnings (loss). . . . . . . . . $554 $1,412 $1,984 $977 $(17,376)
======== ======== ======== ======== ========
Earnings (loss) per common share
before extraordinary items . . . . . . .20 .37 .52 .24 (4.21)
Extraordinary item . . . . . . . . . . - - - - (.09)
-------- -------- -------- -------- --------
Earnings (loss) per common share . . . $0.20 $0.37 $0.52 $0.24 $(4.30)
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding . . . . . . . . . . 2,807 3,825 3,850 3,997 4,042
At May 31
-----------------------------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital (deficit). . . . . . . $2,683 $1,748 $2,938 $17,087 $(18,312)
Total assets . . . . . . . . . . . . . 7,924 14,319 20,303 35,709 25,553
Short-term debt. . . . . . . . . . . . 3,004 4,863 7,296 4,905 3,531
Long-term debt in technical
default classified as current. . . . - - - - 22,157
Long-term debt . . . . . . . . . . . . 73 57 309 (18,579) 485
Stockholders equity (deficit). . . . . 3,117 4,529 7,081 8,173 (9,088)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
INTRODUCTION. From 1990 through 1993 the Company experienced rapid
revenue growth. In fiscal 1994, the Company's revenues declined significantly
due to weak market conditions and a large decline in sales to a key customer
as discussed below in "Results of Operations." The Company believes that the
weakness in the market during fiscal 1994 was attributable to factors
affecting the airline industry as a whole. These factors included
overcapacity on many routes and intense fare competition and the continuation
of a recession in many parts of the world, which reduced demand for
air-freight. The Company believes that many airlines deferred aircraft
purchases and maintenance due to pressures to control costs during this
period. In addition, market conditions caused a number of carriers to take
aircraft out of service, resulting in more than 1,000 aircraft being in
storage at the end of fiscal 1994. At the same time, the Company's margins
declined due to weak demand for aircraft supplies in the marketplace which
reduced prices. Margins were also adversely affected by certain unprofitable
sales contracts and inventory charges. In addition, selling, general and
administrative expenses increased significantly due to the start-up costs and
the operations of IASC, as well as a large legal judgment against the Company.
In order to reduce costs, the Company implemented a restructuring
program in the third quarter of fiscal 1994. The restructuring program
included the termination of the Company's President, the resignation of the
Chief Financial Officer and an overall 55% reduction in personnel. The
restructuring program also included a $2.2 million charge for fixed asset
sales and certain severance pay. The Company also charged $3.1 million and
$2.0 million to cost of sales to reflect the decreased carrying value of
certain inventory and changes in sales estimates and related inventory
values, respectively. In addition to the restructuring program, in the fourth
quarter of fiscal 1994, the Company charged to cost of sales an additional
write- down of certain aircraft by $2.4 million to reflect anticipated
realizability upon sale of such aircraft.
The above factors resulted in a large operating loss, and the Company's
net worth declined significantly. In July 1994, the Nasdaq Qualifications
Committee delisted the Company's securities from quotation on the
Nasdaq-National Market due to the Company's failure to satisfy Nasdaq's
continuing net worth requirements. In addition, the Company continues to be
in default under its Senior Notes and Debentures as a result of its failure
to comply with certain financial and other covenants and to make timely
payments thereunder.
The Company currently is negotiating with the Senior Noteholders and the
Debenture holders to obtain waivers of these defaults and to amend certain
provisions of the Senior Note Agreement, the Debenture Agreement and related
agreements. There can be no assurances that the Company will successfully
obtain such waivers and amendments. If the Company fails to do so, there can
be no assurances that the Senior Noteholders and/or the Debenture holders
will not exercise remedies available to them, including declaring an event of
default and accelerating the entire amount of the indebtedness under the
Senior Notes and/or the Debenture Agreement.
Going forward, the Company has determined to return its focus toward its
traditional parting and inventory business. Although the market for used
aircraft and parts was weak during fiscal 1994, the number of inquiries
received by the Company's marketing personnel has been increasing, indicating
that demand is improving. The Company has taken steps to reduce its costs,
and intends to continue cutting costs, including the disposition of IASC and
PATS, the
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possible disposition of Brent and further personnel reductions. The cost
reductions effected to date include a 55% reduction in personnel, which the
Company estimates will reduce operating costs by approximately $800,000, in
future fiscal years. The Company also estimates that the personnel cuts will
reduce its insurance and travel and entertainment expenses by approximately
$400,000 in future fiscal years. The Company is continuing to evaluate
additional cost-cutting measures. The Company is hopeful that these measures
will enable it to improve its operating results and increase its financial
net worth; however, there can be no assurance that this can be achieved.
INVENTORY ACCOUNTING. The Company believes that its inventory
accounting procedures are integral to a complete understanding of the
Company's operations. Inventories are primarily valued at the lower of cost
or market. The cost of aircraft spare parts purchased in lots, as opposed to
whole aircraft purchases, is determined on a specific identification basis.
As of May 31, 1994, such parts represented 72% of the inventory cost value.
The cost of parts acquired through whole aircraft purchases is assigned
to the pool of parts (the aircraft) based on the purchase price of the
aircraft. As parts are sold from the pool, the amount of cost amortized is
based upon the relationship of the cost basis of the pool to the estimated
sales value of the pool. As parts sales take place, the costs are charged to
cost of sales based on the estimated cost of sales percentage. As of May 31,
1994, such parts represented 28% of the inventory cost value.
The revenue estimates for the pool of parts (the aircraft) is determined
by management based upon the individual sales values of all the parts in the
pool. The revenue estimates are then projected by quarter over a five-year
period beginning with the date in which management determines the aircraft is
to be parted out. Management continually monitors its initial estimates and
may make appropriate adjustments if warranted by market conditions. If the
actual revenue exceeds the quarterly estimates, no amortization adjustment is
required. The amortization schedule is set up to write the pool of parts to
zero over a five-year period even though there may be parts in the pool
remaining for future sale after such period.
GENERAL FINANCIAL INFORMATION. The following table sets forth
percentage relationships of expense items to total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Years ended May 31,
------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 61.3 64.0 115.4
Selling, general and administrative expenses 19.8 19.3 45.7
Provision for bad debts 1.4 1.5 7.7
Interest expense 3.3 6.4 13.5
Depreciation and amortization expense 0.8 4.2 16.3
Operating earnings 13.5 4.6 (98.6)
Income tax expense (benefit) 5.1 1.5 (12.8)
Joint venture (loss) income (0.9) (0.2) (2.2)
Extraordinary loss -- -- (1.9)
----- ----- -----
Net earnings 7.5% 2.9% (89.8)%
===== ===== =====
</TABLE>
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RESULTS OF OPERATIONS
FISCAL 1994 COMPARED WITH FISCAL 1993.
Total revenues for the fiscal year ended May 31, 1994 ("fiscal 1994")
decreased 42% from total revenues for fiscal year ended May 31, 1993 ("fiscal
1993"), to $19.3 million from $33.5 million. The decrease in total revenues
is primarily attributable to a 72% decrease in aircraft sales, from $14.9
million in fiscal 1993 to $4.1 million in fiscal 1994. The reduction in
aircraft sales from fiscal 1993 to fiscal 1994 is based on several factors,
including the Company's weak cash position, which decreased the Company's
ability to purchase aircraft and inventory for resale, and overall weakness
in the market for used aircraft and parts. The decrease in total revenues is
also attributable to a reduction in parts and engine sales to Transafrik, a
cargo carrier operating in Africa. Parts and engine sales to Transafrik
decreased 75% from $6.0 million in fiscal 1993 to $1.5 million in fiscal
1994. During fiscal 1994 Transafrik underwent a change in ownership and made
other significant management and operational changes, including a down-sizing
of its fleet and certain changes in fleet mix. Transafrik is headquartered
in Angola. The Company has experienced difficulty in obtaining current
information regarding Transafrik due to conditions prevailing in Angola,
namely the on-again, off-again civil war and the existence of a Marxist
government. In addition, the Company experienced a number of changes in
senior management during the first half of calendar 1994. The Company's Chief
Financial Officer resigned in early February, 1994. The Company's President,
who was the Company's primary contact with Transafrik, was terminated not
long thereafter. Due to such management changes, it is difficult to say with
certainty when the Company became aware of the circumstances that the Company
believes resulted in a loss of business from Transafrik. The Company
believes that it disclosed the circumstances as soon as practicable following
the Company's current senior management becoming aware of them.
The Company's decrease in total revenues was in small part offset by an
increase in lease revenue of $.5 million, from $1.5 million in fiscal 1993 to
$2.0 million in fiscal 1994.
Cost of sales increased 3.9% from $21.5 million in fiscal 1993 to $22.3
million in fiscal 1994, while cost of sales as a percentage of total revenues
increased to 115.4% in fiscal 1994 from 64% in fiscal 1993. The increase in
cost of sales from fiscal 1993 to fiscal 1994 is a result of several factors,
including lower profits realized on aircraft sales due to weak market
conditions, and charges of $3.1 million and $2.0 million for decreasing the
carrying value of certain inventory due to continuing poor market conditions
and changes in sales estimates and related inventory values. These
write-downs included parts costed under both the specific identification
method and the pooling method. The write-downs were due to a change in
emphasis of sales from certain older product lines, including DC-8 and other
parts, and a close examination of the realizability of asset values in light
of weak market conditions. In connection with the write-downs of inventory,
the amount of cost being amortized upon the sale of inventory accounted for
under the pooling method has been increased based on management's evaluation
of the adjusted cost basis of the pool to the estimated sales value of the
pool.
As a result of weak demand in the marketplace and the Company's need to
increase its liquidity to meet its obligations as they become due, the
Company recorded to cost of sales a $2.1 million charge for losses from the
sale or loss of aircraft. This charge related primarily to one 727 sold in
April 1994 to its lessee at an amount substantially below cost to raise cash,
and another 727 that was written off entirely because the Nigerian lessee
defaulted under the lease and it was doubtful that the Company could recover
possession of the aircraft through a lawsuit which it has instituted in
Nigeria.
In addition, during the fourth quarter, the Company accrued to cost of
sales a charge of $2.4 million for three (3) McDonnell Douglas DC-9-15F
aircraft to reflect net realizability of
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the aircraft. The unanticipated cost of overhauling these aircraft for
delivery eliminated the economic benefit that the Company had negotiated
under their sales contract. One of these aircraft was sold in June 1994,
another was sold in early October 1994, and the third aircraft was sold in
November 1994.
Selling, general and administrative expense ("SG&A") for fiscal 1994
increased 36.6% to $8.8 million from $6.5 million for fiscal 1993. As a
percentage of revenues, SG&A expense increased from 19.3% during fiscal 1993
to 45.7% during fiscal 1994. The increase in aggregate SG&A expense as a
percentage of revenues was primarily due to a 42% decrease in revenues
without a corresponding decrease in aggregate SG&A expense. The Company
incurred substantial expenses related to settlement of litigation (including
a charge of $825,000 in connection with an unfavorable judgment arising from
a lawsuit relating to commissions owed on the sale of an aircraft in 1989),
severance payments and other charges.
Provision for doubtful accounts for fiscal 1994 increased 202% to $1.4
million for fiscal 1994, from $.5 million in fiscal 1993. During the third
quarter, the Company wrote off $.9 million of accounts receivable which were
determined to be uncollectible, and reserved additional funds for accounts
that may not be collectible. The Company has legal and collection
proceedings against some of these accounts.
Interest expense for fiscal 1994 totaled $2.6 million compared with $2.2
million for fiscal 1993. The increase in interest expense was the result of
the 1992 Private Placement of the Senior Notes and the 1993 Private Placement
of the Debentures.
Depreciation and amortization expense for fiscal 1994 increased from
$1.4 million in fiscal 1993 to $3.2 million in fiscal 1994. The increase in
depreciation expense for fiscal 1994 of $1.8 million over fiscal 1993 was
primarily attributable to the depreciation costs associated with the higher
volume of aircraft leased by the Company to third parties and higher overhaul
costs incurred relating to the aircraft placed on lease. In addition,
depreciation of property and equipment increased by approximately $300,000 in
connection with the operation of the maintenance facility in Texas.
The Company is monitoring and evaluating all of its operations to
identify further cost reductions, including consolidations, reductions, and
elimination of various operations.
Extraordinary loss on the extinguishment of debt of $363,000 in fiscal
1994 is net of tax and consists of a 6% prepayment penalty and write-off of
deferred debt issuance costs in connection with the early retirement of a
portion of the Company's 12% Senior Secured Notes.
Equity in loss of joint venture was $423,000 in fiscal 1994 compared to
$59,000 in fiscal 1993. The 1994 amount includes the Company's share of the
joint venture operating losses of $280,000 and a loss of $143,000 upon
dissolution of the venture. The fiscal 1993 amount consisted of the
Company's share of that joint venture's operating losses.
In August 1993, the Company entered into a management agreement with a
domestic corporation in Mojave, California for a period of four months from
September 1, 1993 to December 31, 1993. Pursuant to this agreement, the
Company engaged in selling the parts of part-out consignment aircraft from
various parties. During the contract period, the Company incurred a net loss
of $47,906 related to these services. The domestic corporation with which
the Company entered the management arrangement was not affiliated with the
Company. Pursuant to the management arrangement the Company received
commissions based on sales of consigned parts. The Company's expenses of
providing the management services, consisting principally of personnel costs,
exceeded the Company's revenue from the contract. Therefore,
-18-
<PAGE>
the Company elected not to renew the management arrangement after the
expiration of the initial four-month term.
The net loss for fiscal 1994 was $17.3 million, or $(4.30) per share,
representing a decrease from net earnings of $1.0 million or $.24 per share
for fiscal 1993. For fiscal 1994, IASC incurred losses of $1.9 million or
$(.48) per share of the Company's Common Stock.
FISCAL 1993 COMPARED WITH FISCAL 1992.
Total revenues for fiscal 1993 increased 26.3% over total revenues for
fiscal year ended May 31, 1992 ("fiscal 1992"), to $33.6 million from $26.6
million. The increase in sales was mainly attributable to an increase in
aircraft sales. The Company sold $11.5 million in aircraft during fiscal
1993 compared to $4.7 million during fiscal 1992. The Company's cost of
sales as a percentage of total revenues increased from 61.2% to 64.0% in
fiscal 1993, primarily as a result of the increase in aircraft sales which
were at a higher cost of sales percentage.
SG&A for fiscal 1993 increased 22.5% to $6.5 million from $5.3 million
for fiscal 1992. As a percentage of total revenues, SG&A decreased from 19.8%
during fiscal 1992 to 19.3% during fiscal 1993. The increase in the aggregate
SG&A expense was primarily due to an $0.8 million increase in payroll expense
resulting from the addition of management and warehouse personnel to
accommodate the Company's overall growth. The Company also incurred expenses
related to settlement of litigation and other one time charges totalling
approximately $0.4 million.
Interest expense for fiscal 1993 totaled $2.2 million, compared with
$0.9 million for fiscal 1992. The increase in interest expense was the
result of the 1992 Private Placement of the Senior Notes. The proceeds of
1992 Private Placement were used to pay down notes payable and to acquire
inventory to expand the Company's overall growth.
Depreciation and amortization expense for fiscal 1993 increased from
$0.2 million in fiscal 1992 to $1.4 million in fiscal 1993. The increase was
primarily attributable to the depreciation costs associated with the aircraft
leased by the Company to third parties. The increase in debt amortization
expense in fiscal 1993 of $0.3 million was the result of the 1992 Private
Placement.
Net earnings for fiscal 1993 were $1.0 million, or $0.24 per share, a
decrease of 50.7% compared to net earnings of $2.0 million, or $0.52 per
share, for fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1994, the Company had a working capital deficit of $18.3
million and a current ratio of .46 to 1.0, compared to working capital of
$17.1 million and a current ratio of 3.0 to 1.0 at May 31, 1993. The
decrease in working capital and current ratio was principally due to the
current maturity of long-term debt due on the Company's Senior Notes and the
Debentures of $14.5 million and $10 million, respectively, which amounts are
classified as current liabilities as a result of the Company's default on
certain financial covenants relating to those instruments. The Company is
attempting to restructure the principal payment schedule of the Senior Notes,
but there can be no assurances that it will succeed in so doing.
The decrease in current ratio from fiscal 1993 to fiscal 1994 is also
due in part to a reduction in cash, from $511,000 at fiscal 1993 year end to
$88,000 at fiscal 1994 year end, which is attributable primarily to net cash
used in operating activities; a decrease in inventories from $18.6 million at
fiscal 1993 year end to $8.7 million at fiscal 1994 year end, resulting from
the Company's reduced liquidity and write-downs of $2.4 million and $5.1
million of
-19-
<PAGE>
certain aircraft and aircraft parts, respectively, as discussed previously; a
reduction in other current assets from $1.1 million in fiscal 1993 to
$162,000 in fiscal 1994 (the Company had in place at May 31, 1993 a $1
million irrevocable letter of credit with Northwest Airlines, Inc. in
connection with an aircraft purchase agreement which was subsequently
consummated during fiscal 1994); and an increase in accounts payable and
accrued expenses from $3.5 million at fiscal 1993 year end to $8.1 million at
fiscal 1994 year end, resulting from the Company's reduced liquidity and the
incurring of additional accrued expenses in connection with the Company's
maintenance facility in Texas.
In the second quarter of fiscal 1994, the Company completed a financing
lease for up to $1.25 million. The proceeds were used to fund the capital
requirements for IASC's maintenance facility. As of May 31, 1994, the
Company had borrowed $1.1 million against this financing lease. Aircraft
held for lease increased from $4.8 million to $7.2 million in fiscal 1994.
This resulted in an increase of $2.4 million in assets related to aircraft
held for lease. These aircraft were previously held in inventory.
Although the Company has no present plans or commitments for any
significant 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. The 1992 and 1993 Private Placements 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
its future 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 exceeding $24 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-20-
<PAGE>
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC. AND SUBSIDIARIES
MAY 31, 1994, 1993 AND 1992
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
International Airline Support Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1994 and 1993, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended May 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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
from 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 financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of
International Airline Support Group, Inc. and Subsidiaries as of May 31, 1994
and 1993 and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended May
31, 1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company
has incurred significant operating losses and the Company is in default of
various debt covenants which could result in the lenders demanding payment
under the Company's long-term debt agreements, raising substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note B. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Miami, Florida
August 24, 1994 (except for Note R, as to which the date is
November 16, 1994)
F-1
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS
1994 1993
----------- -----------
<S> <C> <C>
Current assets
Cash $ 95,790 $ 510,942
Restricted cash (Note D) - 356,115
Accounts receivable, net of allowance for doubtful accounts
of $940,000 in 1994 and $450,000 in 1993 3,817,023 3,733,915
Notes receivable (Note A) 1,120,000 840,000
Income tax refund receivable - designated (Notes E and G) 1,930,000 -
Inventories (Notes A, C and E) 8,719,774 18,620,918
Deferred tax benefit - current, net of valuation allowance
of $2,190,000 in 1994 and $0 in 1993 (Note G) - 454,000
Other current assets 162,055 1,143,612
----------- -----------
Total current assets 15,844,642 25,659,502
Property and equipment (Notes A and F)
Land 330,457 330,457
Aircraft held for lease 7,227,835 4,759,200
Building and leasehold improvements 789,340 865,983
Machinery and equipment 2,191,999 1,065,320
----------- -----------
10,539,631 7,020,960
Less accumulated depreciation 2,233,680 1,507,272
----------- -----------
8,305,951 5,513,688
----------- -----------
Other assets
Notes receivable (Note A) - 1,080,000
Investment in joint venture (Note K) - 2,507,792
Deferred debt costs, net (Note A) 1,224,401 883,075
Deferred tax benefit, net of valuation allowance of
$3,095,000 in 1994 and $0 in 1993 (Note G) - -
Deposits and other assets 178,322 65,323
----------- -----------
1,402,723 4,536,190
----------- -----------
$25,553,316 $35,709,380
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Notes payable (Note D) $ - $ 4,504,335
Current maturities of long-term obligations (Note E) 3,531,228 400,682
Long-term obligations in technical default
classified as current (Notes B and E) 22,156,720 -
Bank overdrafts 410,570 -
Accounts payable 4,086,998 1,115,253
Accrued expenses (Note R) 3,970,840 2,340,219
Income taxes payable - 211,666
----------- -----------
Total current liabilities 34,156,356 8,572,195
Long-term obligations, less current maturities (Notes B and E) 485,020 18,578,877
Deferred income taxes (Note G) - 385,000
Commitments and contingencies (Notes F, N and O) - -
Stockholders' equity (deficit) (Notes H and I)
Preferred Stock - $.001 par value, authorized 500,000 shares;
0 shares outstanding in 1994 and 1993. - -
Common stock - $.001 par value; authorized 20,000,000
shares; issued and outstanding 4,041,779 and 4,009,112
shares in 1994 and 1993, respectively. 4,042 4,009
Additional paid-in capital 2,654,332 2,540,030
Retained earnings (deficit) (11,746,434) 5,629,269
----------- -----------
Total stockholders' equity (deficit) (9,088,060) 8,173,308
----------- -----------
$25,553,316 $35,709,380
=========== ===========
</TABLE>
The accompanying notes are an integral part of these sttements.
F-2
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
Revenues
Net sales $ 17,271,747 $32,031,596 $26,526,713
Lease revenue 1,986,450 1,473,038 -
Other revenue 87,600 65,828 93,662
------------ ----------- -----------
Total revenues 19,345,797 33,570,462 26,620,375
Costs and expenses
Cost of sales (Note Q) 22,326,370 21,493,792 16,310,678
Selling, general and administrative expenses (Notes Q and R) 8,838,828 6,469,160 5,281,358
Provision for doubtful accounts 1,487,969 493,234 373,557
Interest expense 2,607,210 2,162,994 870,898
Depreciation and amortization 3,150,062 1,405,720 201,251
------------ ----------- -----------
Total costs and expenses 38,410,439 32,024,900 23,037,742
------------ ----------- -----------
Earnings (loss) before income taxes, equity in
loss of joint venture and extraordinary item (19,064,642) 1,545,562 3,582,633
Provision for income taxes (benefit) (Note G) (2,475,185) 510,000 1,370,000
------------ ----------- -----------
Earnings (loss) before equity in loss
of joint venture and extraordinary item (16,589,457) 1,035,562 2,212,633
Equity in loss of joint venture (Note K) (423,224) (58,543) (229,000)
------------ ----------- -----------
Earnings (loss) before extraordinary item (17,012,681) 977,019 1,983,633
Extraordinary loss on the extinguishment of debt (Note E) (363,022) - -
------------ ----------- -----------
Net earnings (loss) $(17,375,703) $ 977,019 $ 1,983,633
============ =========== ===========
Per share data (Note A):
Weighted average shares 4,041,779 3,997,458 3,849,852
============ =========== ===========
Earnings (loss) per common share
and common equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ .24 $ .52
Extraordinary item (.09) - -
------- ------ ------
Net earnings (loss) $ (4.30) $ .24 $ .52
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Retained
Number of Par Paid-In Earnings
Shares Value Capital (Deficit) Total
--------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1991 3,825,000 $ 3,825 $ 1,856,668 $ 2,668,617 $ 4,529,110
Issuance of common stock 149,112 149 430,911 - 431,060
Tax benefit from exercise of
warrants (Note G) - - 137,000 - 137,000
Net earnings - - - 1,983,633 1,983,633
--------- ------- ----------- ------------ -----------
Balance at May 31, 1992 3,974,112 3,974 2,424,579 4,652,250 7,080,803
Issuance of common stock 35,000 35 115,451 - 115,486
Net earnings - - - 977,019 977,019
--------- ------- ----------- ------------ -----------
Balance at May 31, 1993 4,009,112 4,009 2,540,030 5,629,269 8,173,308
Issuance of common stock 32,667 33 114,302 - 114,335
Net loss - - - 7,375,703) (17,375,703)
--------- ------- ----------- ------------ -----------
Balance at May 31, 1994 4,041,779 $ 4,042 $ 2,654,332 $(11,746,434) $(9,088,060)
========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(17,375,703) $ 977,019 $ 1,983,633
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,150,062 1,405,720 201,251
Deferred taxes 69,000 (332,000) 388,000
Legal expenses (Note L) - - 143,060
Tax benefit of warrant exercise (Notes G and L) - - 137,000
Equity in loss of joint venture 423,224 58,543 229,000
(Increase) decrease in accounts receivable (83,108) 281,738 (163,206)
Decrease (increase) in notes receivable 800,000 (1,920,000) -
(Increase) in income tax refund (1,930,000) - -
Decrease (increase) in inventories 8,243,147 (8,631,990) (4,352,725)
Decrease (increase) in other current assets 981,557 (1,098,118) 9,237
(Increase) in deferred debt costs (341,326) (1,237,980) -
Decrease (increase) in other assets (112,999) (9,026) 4,609
Increase (decrease) in accounts payable
and accrued expenses 5,012,896 134,576 (158,151)
(Decrease) increase in income taxes payable (211,666) (1,788,676) 697,320
------------- ----------- -----------
Total adjustments 16,000,787 (13,137,213) (2,864,605)
------------- ----------- -----------
Net cash (used in) operating activities (1,374,916) (12,160,194) (880,972)
Cash flows from investing activities:
Proceeds from maturity of restricted
certificates of deposit 356,115 1,350,000 -
Purchase of restricted certificate of deposit - (350,000) -
Capital expenditures (3,635,919) (1,960,700) (686,134)
Proceeds from sale of aircraft held for lease 1,000,000 - -
Investments in joint ventures - (5,000) -
Decrease (increase) in due from affiliates - 25,445 (25,445)
------------- ----------- -----------
Net cash (used in) investing activities (2,279,804) (940,255) (711,579)
Cash flows from financing activities:
Net (payments) borrowings under line of credit (1,000,000) (2,918,463) (557,126)
Proceeds from issuance of common stock - 115,486 288,000
Borrowings under notes and leases 10,000,000 19,515,783 3,358,825
Repayments of debt obligations (5,760,432) (3,312,238) (1,317,072)
------------- ----------- -----------
Net cash provided by financing activities 3,239,568 13,400,568 1,772,627
------------- ----------- -----------
Net (decrease) increase in cash (415,152) 300,119 180,076
Cash at beginning of period 510,942 210,823 30,747
------------- ----------- -----------
Cash at end of period $ 95,790 $ 510,942 $ 210,823
============= =========== ===========
Supplemental disclosures of cash flow information (Note L):
Cash paid during the year for:
Interest $ 2,736,233 $ 1,843,630 $ 642,419
============= =========== ===========
Income Taxes $ - $ 2,633,626 $ 411,848
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the
"Company") is primarily engaged in the sale of aircraft, aircraft parts,
leasing of aircraft and related services. The Company's wholly-owned
subsidiary, International Airline Service Center ("Service Center"), is
a FAA certified repair facility for the performance of maintenance
checks required by the FAA on narrow body aircraft. The Company's other
wholly-owned subsidiary, Brent Aviation, Inc. d/b/a Custom Air Transport
Service is engaged in the flight operation of cargo aircraft.
a) CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Investments in nonconsolidated entities are reported on the equity
method.
b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
c) INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
aircraft parts is determined on a specific identification basis for
those parts purchased in lots where specific identification is
practical. For parts acquired through whole aircraft purchases, the
costs are assigned to certain pools which are then amortized as part
sales take place. The amortization is then based upon the actual sales,
except in any periods where sales are lower than expected, the estimated
sales per the initial sales projection are used (which has a maximum
life of 5 years). 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 May 31, 1994 and 1993, approximately 72% and 56% of the ending
inventory has been costed under the specific identification method, and
the remaining 28% and 44% are costed under the pooling method,
respectively.
d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
life utilizing straight-line and accelerated methods. Overhaul costs on
aircraft held for lease are capitalized and depreciated over the
estimated service life of the overhaul. For income tax purposes,
accelerated methods of depreciation are generally used. Deferred income
taxes are provided for the difference between depreciation expense for
tax and financial reporting purposes.
e) NOTES RECEIVABLE
In fiscal 1993, the Company sold certain aircraft to an African airline
in exchange for notes receivable totalling $2,590,000. The notes bear
interest at a rate of 15% and require monthly payments of $70,000 until
paid. Due to certain economic conditions in Nigeria, the Company is
deferring the recognition of interest income on these notes until the
collection of such interest is reasonably assured. The notes are
collateralized by the aircraft sold.
F-6
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
e) NOTES RECEIVABLE - Continued
In May 1993, the Financial Accounting Standards Board issued SFAS No.
114, which relates to "Accounting for Creditors For Impairment of a Loan".
This Statement, which is effective for fiscal years beginning after
December 15, 1994, requires that impaired loans or notes receivable be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or fair value of the
collateral. Management does not anticipate that the adoption of SFAS No.
114 will have a significant effect on the overall financial condition or
operations of the Company. The Company intends to adopt SFAS No. 114 on
June 1, 1996, as required.
f) DEFERRED DEBT COSTS
Deferred debt costs principally relate to the costs associated with
obtaining the Company's Senior Secured Notes and Convertible
Subordinated Debentures. These costs are being amortized using the
interest method over the life of the respective debt issue. Accumulated
amortization at May 31, 1994 and May 31, 1993 was approximately $802,000
and $282,000, respectively.
g) EARNINGS PER SHARE
Earnings per share is computed by dividing the net earnings (loss) by
the weighted average number of common shares outstanding and common
stock equivalents. Stock options and warrants are considered common
stock equivalents unless their inclusion would be anti-dilutive. The
Company's Convertible Subordinated Debentures are not considered common
stock equivalents as their inclusion would be anti-dilutive and the
effective yield on the securities exceeded 66-2/3 of the average Aa
corporate bond rate at the time of issuance.
h) REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer. Revenue
from the sale of aircraft is recognized when all consideration has been
received and the buyer has taken delivery and acceptance of the aircraft.
i) EMPLOYEE BENEFIT PLAN
The Company established in fiscal 1992 a contributory 401(K) plan to
which the Company makes certain matching contributions based upon the
level of its employees' contributions. The amount charged to earnings
in fiscal 1994, 1993 and 1992 were insignificant. The Company does not
provide any health or other benefits to retirees.
j) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
F-7
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE B - GOING CONCERN
Primarily as a result of large net losses experienced in fiscal 1994,
the Company has a significant deficit in working capital and
stockholders' equity. Also, as discussed in Note N, 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 the 12% Senior Secured Notes ("Notes"),
issued July 1992, and the 8% Convertible Subordinated Debentures
("Debentures"), issued September 1993 (see Long-Term Obligations Note E)
as well as the lease agreement relating to the assets acquired for the
Service Center (See Leases Note F). 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.
Excluding amounts scheduled to be repaid in fiscal 1995 under the terms
of the agreements, $22,156,720 is subject to accelerated maturity and,
as such, has been classified as a current liability in the Consolidated
Balance Sheets at May 31, 1994. The Company is continuing discussions
with these lenders in an effort to finalize a restructuring of the Notes
and Debentures, including the modification of scheduled principal
repayment amounts and dates. The Company believes that they will be able
to restructure the debt and obtain waivers for their failure to meet the
restrictive covenants. However, if the lenders were to accelerate
maturity, the Company would not have sufficient funds to repay the debt
obligations.
As a result of the 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 closing or sale of its Service Center,
personnel reductions and the elimination of other costs.
NOTE C - INVENTORY
Inventories at May 31, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Aircraft parts $ 5,624,922 $ 11,161,278
Aircraft 3,094,852 7,459,640
----------- ------------
$ 8,719,774 $ 18,620,918
=========== ============
</TABLE>
NOTE D - NOTES PAYABLE
Notes payable at May 31, 1994 and 1993 consisted of the
following:
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Note payable to a bank $ - $ 1,000,000
12% Unsecured note payable to a foreign corporation - 910,000
10% Note payable to a domestic corporation - 2,594,335
----------- ------------
$ - $ 4,504,335
=========== ============
</TABLE>
In September 1993, the Company terminated its revolving loan agreement
and repaid all notes payable to the bank and foreign corporation with
the proceeds from the issuance of the Convertible Subordinated
Debentures and the maturity of the restricted certificate of deposit
which secured the line of credit.
In August 1992, the Company executed, as a co-maker, a $2,900,000
promissory note. The note was due October 31, 1993, and was secured by a
mortgage on the assets of the Company's 50% owned joint venture. In
1994, the Company agreed to a settlement with the lender for repayment
of the unpaid principal balance, unpaid interest and certain other
penalties. In full satisfaction of this obligation, the lender received
title to the assets of the joint venture as well as $500,000 paid by the
Company. (See Investment in Joint Venture Note K).
F-8
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE E - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
12% Senior Secured Notes $ 14,550,000 $ 18,000,000
8% Convertible Subordinated Debentures 10,000,000 -
Note payable to a foreign bank - 305,466
Mortgage note payable to bank 481,580 507,740
Notes payable due in equal monthly installments
through March 1996, bearing interest at 9.5% to
12-7/8% collateralized by equipment 31,824 49,163
Capitalized lease obligations (Note F) 1,109,565 117,190
------------ ------------
26,172,969 18,979,559
Less: Current maturities and long-term obligations
in technical default classified as current 25,687,949 400,682
------------ ------------
$ 485,020 $ 18,578,877
============ ============
</TABLE>
In July 1992, the Company issued $18.0 million of five (5) year 12%
Senior Secured Notes ("Notes") due July 1997. In September of 1993, the
note agreement was amended, to require a payment of $3,450,000 with the
proceeds from the issuance of the Convertible Subordinated Debentures
("Debentures") and subsequent sinking fund payments of $3,233,333 in
July 1994 and 1995 and $4,041,667 in July 1996 and 1997. In connection
with this extinguishment, the Company recorded as an extraordinary item
the loss on retirement of debt. Such costs include a 6% prepayment
penalty as well as that portion of the deferred debt issuance costs
associated with the Notes retired. The notes are secured by
substantially all the assets of the Company. Warrants to purchase
1,093,528 shares of common stock were issued to the Noteholders at an
exercise price of $5.375. The warrants have a five year term and carry
restrictions regarding exercise and registration of the underlying
shares. The security purchase agreement contains restrictive covenants
requiring the Company to maintain a minimum net worth as well as certain
financial ratios, restricts dividends and limits capital expenditures,
indebtedness, liens, certain business activities and inventory
purchases. The Company is in technical default of the loan agreement and
is working to restructure the debt and obtain waivers from the
bondholders for failure to meet the restrictive covenants. As part of
these negotiations, the Company was granted verbal permission to extend
the $3,233,333 principal payment due July 1994 to September 15, 1994.
The Company has designated the use of the proceeds from the income tax
refund receivable towards the next principal payment and expects the
revised debt agreement to require the use of the proceeds for such
purpose.
In September 1993, the Company issued $10.0 million in Convertible
Subordinated Debentures, due August 2003, through a private placement
offering. The Debentures may be redeemed in whole or in part after
August 1996, upon 30 days notice by the Company. The Debentures are
convertible to the Company's common stock at a price of $4.00 per share
(2,500,000 shares). The Debentures conversion options carry restrictions
regarding conversion and registration of the underlying shares. The
Debenture holders have certain demand and piggy-back registration rights
on the underlying shares. The Debentures have a fixed annual interest
rate of 8%, with such interest payable quarterly. The securities
purchase agreement contains restrictive covenants requiring the Company
to maintain a certain level of consolidated net worth and certain
financial ratios related to interest expense coverage. The Company is
in technical default of the loan agreement and is working to restructure
the debt and obtain waivers from the bondholders for failure to meet the
restrictive covenants.
F-9
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE E - LONG-TERM OBLIGATIONS - Continued
In September 1992, the Company entered into a promissory note and
ortgage and security agreement with a bank. The promissory note is
payable in equal monthly installments of $2,180 plus interest through
September 1997 when the remaining balance is due. The note has an
interest rate of 1% above the bank's prime rate. The note is secured
by a first mortgage on the land and building in Miami, Florida. The
land and building has a total cost of approximately $1,009,000. This
property also has a junior mortgage filed by the Senior Secured
Noteholders.
The maturities of long-term obligations in each of the next five years
subsequent to May 31, 1994 are as follows: 1995 -$3,531,229, 1996 -
$3,490,219, 1997 - $4,313,649, 1998 -$4,687,518, 1999 - $150,354, and
thereafter $10,000,000. As mentioned, the Company is in technical
default under the terms of the securities purchase agreement for the
12% Senior Secured Notes, the 8% Convertible Subordinated Debentures as
well as the capitalized lease agreement for the equipment utilized by
the Service Center. If the holders were to demand repayment,
$22,156,720, which is scheduled to be paid subsequent to May 31, 1995,
would be due in fiscal 1995.
NOTE F - LEASES
The Company conducts a portion of its operations utilizing leased
equipment which has been capitalized. Substantially all of the fixed
assets of the Service Center were acquired through a leasing
arrangement which has been classified as a capitalized lease. The
Company is a guarantor to this lease agreement, which contains
restrictive covenants regarding the Company's minimum consolidated
net worth. At May 31, 1994, the Company was in technical default of
this covenant. The equipment and computer leases are non-cancelable
and expire at various points in time through October 1998. Following is
a schedule of future minimum rental payments under capital leases
together with the present value of future minimum rentals as of May
31, 1994.
<TABLE>
<CAPTION>
<S> <C>
Year ended May 31, 1994 $1,331,102
Amount representing interest 221,537
-----------
Present value of future minimum lease payments 1,109,565
Current maturities and long-term obligations in
technical default classified as current of capital
lease obligations 1,095,549
----------
Long term obligations under capital leases $ 14,016
==========
</TABLE>
Capitalized equipment leases are accounted for and amortized as
company-owned equipment. The following is a schedule of leased equipment
under capital leases:
<TABLE>
<CAPTION>
5/31/94 5/31/93
---------- --------
<S> <C> <C>
Equipment $1,412,904 $298,283
Less: Accumulated amortization 482,051 226,563
---------- --------
$ 930,853 $ 71,720
========== ========
</TABLE>
The Company leases warehouse and hangar facilities as well as certain
equipment under long-term operating lease agreements which expire at
varying times over the next five years. Rental expense under these
leases for the years ended May 31, 1994, 1993 and 1992 was approximately
$242,000, $203,000 and $142,000, respectively.
F-10
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE F - LEASES - Continued
Minimum payments on non-cancellable operating leases at May 31, 1994 are
summarized as follows: 1995 - $147,000, 1996 -$147,000, 1997 - $147,000,
1998 - $147,000, 1999 - $147,000, and thereafter $311,896.
The Company leases aircraft to customers under various operating leases
which expire at various points through November 1995. In addition to
minimum base rentals, the lease agreements require additional rent based
upon aircraft usage. Future minimum rentals at May 31, 1994, on
non-cancellable leases are summarized as follows: 1995 - $1,948,500, and
1996 - $120,000. The net investment in aircraft held for or leased to
customers was approximately $6,126,138 and $3,982,000 at May 31, 1994
and 1993, respectively.
NOTE G - INCOME TAXES
The Company adopted SFAS No. 109 effective June 1, 1991. Adoption of
SFAS No. 109 did not have a significant effect on the Company's
financial position or results of operations in fiscal 1992 or on years
prior to fiscal 1992. SFAS No. 109 requires the use of the liability
method of accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the difference between the tax basis
of assets and liabilities and their carrying amounts for financial
reporting purposes. In addition, the current or deferred tax
consequences of a transaction are measured by applying the provisions
of enacted tax laws to determine the amount of taxes payable currently
or in future years.
The provision for income taxes for the years ended May 31, 1994, 1993
and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ----------
<S> <C> <C> <C>
Current provision:
Federal $(2,544,185) $ 732,000 $ 880,000
State - 110,000 102,000
----------- --------- ----------
(2,544,185) 842,000 982,000
Deferred provision (benefit) 69,000 (332,000) 388,000
----------- --------- ----------
$(2,475,185) $ 510,000 $1,370,000
=========== ========= ==========
</TABLE>
Included in the Company's income tax liability at May 31, 1992 are
amounts pertaining to the 1991 and 1990 fiscal year income taxes. The
Company has accrued for penalties and interest related to late payments
of income taxes.
The tax effect of the Company's temporary differences and carryforwards
are as follows:
<TABLE>
<CAPTION>
1994 1993
----------- ---------
<S> <C> <C>
Deferred tax liabilities (benefits) - current:
Reserve for overhaul costs $ (316,000) $ -
Bad debt reserve (354,000) (168,000)
Inventory capitalization (256,000) (259,000)
Inventory writedown (912,000) -
Bonus accrual (29,000) (27,000)
Accrued legal settlement costs (310,000) -
Accrued vacation (13,000) -
----------- ---------
$(2,190,000) $(454,000)
=========== =========
</TABLE>
F-11
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE G - INCOME TAXES - Continued
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax liabilities (benefits) - non-current:
Inventory capitalization $ (10,000) $ 25,000
Partnership investment - 33,000
Depreciation 23,000 327,000
Aircraft - capitalized maintenance 36,000 -
Restructuring charges (1,279,000) -
Accrued interest income (106,000) -
Net operating loss carryforward - federal (1,315,000) -
Net operating loss carryforward - state (315,000) -
Minimum tax credit - federal (122,000) -
Other, net (7,000) -
----------- --------
$(3,095,000) $385,000
=========== ========
</TABLE>
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1994. No valuation allowances were
recorded at May 31, 1993.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Statutory federal rate (34.0)% 34.0% 34.0%
Operating losses with no current tax benefit 19.6 - -
Increase in taxes resulting from State income tax
less federal income tax benefit - 3.6 3.6
Foreign Sales Corporation (FSC) - (6.0) -
Penalties and other non-deductible items - 1.4 0.6
----- ---- ----
(14.4)% 33.0% 38.2%
===== ==== ====
</TABLE>
In 1992, warrants were exercised which resulted in a reduction of the
Company's current tax liability. The tax benefit was recorded as an
increase to the Company's paid-in capital account in the amount of
$137,000.
The Company has net operating loss carryforwards for federal and state
purposes of approximately $3.9 and $10.5 million, respectively. The net
operating losses will expire in the year 2009. The Company has a federal
minimum tax credit carryover of approximately $122,000 which may be
utilized in future years to the extent that regular tax liability
exceeds the alternative minimum tax. Certain provisions of the tax law
may limit the net operating loss and credit carryforwards available for
use in any given year in the event of a significant change in ownership
interest.
F-12
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE H - COMMON AND PREFERRED STOCK
In July 1993, the Company amended the Articles of Incorporation to
authorize the issuance of up to 500,000 shares of preferred stock. No
such stock has been issued.
In June of 1993, the Company issued 32,667 to a individual in exchange
for certain aircraft parts included in the Company's inventory.
In connection with the initial public offering in April 1990, the
Company sold warrants to the underwriter to purchase up to 120,000
shares of common stock at $2.40 per share for aggregate consideration
of $1,200. In April 1992, the underwriter exercised the warrants and
purchased all 120,000 shares at $2.40 per share or $288,000.
During the year ended May 31, 1992, the Company issued 29,112 shares of
stock in exchange for various legal services performed by the Company's
outside counsel.
NOTE I - STOCK OPTIONS
The Stockholders in October 1989 approved a Stock Option Plan pursuant
to which 350,000 shares of the Company's common stock were reserved for
the grant of options to employees and directors of the Company or its
subsidiaries. The issuance of the options and the form of the options
shall be at the discretion of the Company's Compensation Committee.
Information with respect to stock options under the plan is as follows:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------
Reserved Outstanding Available
-------- ----------- ---------
<S> <C> <C> <C>
Balance June 1, 1992 350,000 150,000 200,000
Granted - 125,500 (125,500)
Exercised (35,000) (35,000) -
Expired - (19,000) 19,000
-------- -------- --------
Balance May 31, 1993 315,000 221,500 93,500
Granted - - -
Exercised - - -
Expired - (71,000) 71,000
-------- -------- --------
Balance May 31, 1994 315,000 150,500 164,500
======== ======== =======
</TABLE>
The option price is at least equal to the fair market value at the date
of the grant. Options to purchase 135,500 shares were exercisable at May
31, 1994 at exercise prices ranging from $3.8625 to $5.6375. The options
expire on various dates through October 1997. The exercise price of
non-vested options range from $4.625 - $5.125
In April of 1992, the Company granted a lender options to purchase
100,000 and 50,000 shares with exercise prices of $4.875 and $4.625,
respectively. The options expire in October of 1996.
In connection with the settlement of a legal dispute arising from a loan
to the Company, the Company issued an option to the lender to purchase
200,000 shares at $3.25 per share. The option price approximated the
market price on the date of the grant.
F-13
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE J - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC
The Company sells aircraft and aircraft parts, and leases aircraft to
foreign and domestic customers. Most of the Company's sales take place
on an unsecured basis, and a majority of the sales are to aircraft
operators. The information with respect to sales and lease revenue, by
geographic area, is presented in the table below for the years ended May
31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
United States $10,978 $13,245 $13,547
Africa and Middle East 5,249 14,354 9,592
Europe 374 4,514 597
Latin America 2,178 1,102 2,254
Canada 558 307 -
Asia 9 48 630
------- ------- -------
$19,346 $33,570 $26,620
======= ======= =======
</TABLE>
The Company had sales to one African customer which accounted for 10%,
18% and 25% of total sales during the years ended May 31, 1994, 1993,
and 1992, respectively. The Company also had sales to another African
customer which accounted for 16% and 12% of total sales for fiscal 1994
and 1993, respectively. In 1993, the Company had sales to a
Czechoslovakian customer and a United States customer each of which
accounted for 11%, of 1993 total sales.
NOTE K - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The Company had a 50% interest in A.P. Number 1, Inc., a joint venture
corporation created to purchase, sell and lease aircraft and engines. In
fiscal 1993, the Company advanced $5,000 and executed as co-maker,
together with the Company's JV partner, a promissory note for $2,900,000
due October 31, 1993. The promissory note was also signed as co-maker by
the Chairman of the Company personally. The proceeds of the loan were
advanced to the joint venture without any specific terms regarding
repayment of principal or payment of interest, and the funds were used
to purchase three aircraft. The joint venture's operations were not
successful, and the joint venture was not able to make the required
payments under the terms of the note. The Company was in default under
the terms of the note due to nonpayment of principal and interest and
in February 1994, the Company agreed upon a settlement with the lender,
whereby the lender received title to the three (3) aircraft and $500,000
from the Company. All remaining liabilities have been satisfied and the
joint venture has been dissolved. The Company's loss relating to the
joint venture, as shown in the statement of operations for fiscal 1994,
includes its share of the joint venture operating losses ($280,000) and
its loss upon dissolution ($143,224).
Summarized financial information for the joint venture for the year
ended May 31, 1993 was as follows:
<TABLE>
<CAPTION>
1993
----------
<S> <C>
Total assets $2,721,329
Total liabilities $2,894,416
Net loss $ 183,057
</TABLE>
F-14
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE L - SUPPLEMENTAL CASH FLOW DISCLOSURE
During fiscal 1994, the Company acquired approximately $1,140,000 in
equipment under a leasing arrangement which has been classified as a
capital lease obligation.
The net change in inventory, as derived from the change in balance sheet
amounts, has been adjusted for the following items:
<TABLE>
<CAPTION>
<S> <C>
Net decrease in inventory $(9,901,144)
Transfer of aircraft from inventory at May 31, 1993,
to held for lease at May 31, 1994 4,070,430
Transfer of aircraft from held for lease at May 31, 1993,
to inventory at May 31, 1994 (250,000)
Write-down of inventory through restructuring charge (2,449,458)
Reduction in carrying value of aircraft leased and depreciated in
fiscal 1994 and classified as inventory at May 31, 1994 287,025
-----------
Cash flow impact from change in inventory $(8,243,147)
===========
</TABLE>
The Company issued 32,667 shares of common stock in exchange for certain
inventory.
During the year ended May 31, 1993, the Company sold three aircraft to
several customers for $3,700,000 of which the Company received
$1,100,000 in cash, $125,000 in receivables and $2,475,000 in aircraft,
which were classified in inventory and aircraft held for lease.
During the year ended May 31, 1992, the Company purchased certain
inventory from one of its major customers (see Note J) in exchange for
$700,000 of credit against the customer's receivable account.
During the year ended May 31, 1992, the Company issued 29,112 shares of
stock in exchange for various legal services performed by the Company's
outside counsel. Also, the exercise of certain warrants created a tax
benefit to the Company of $137,000.
During the year ended May 31, 1992, the Company redeemed its investment
and related receivables from its Irish joint venture (see Note K) in
exchange for an aircraft and the Company's assumption of $1.2 million in
debt secured by the aircraft. The aircraft is included in aircraft held
for lease.
NOTE M - RELATED PARTY TRANSACTIONS
During the year ended May 31, 1994, the Company sold an aircraft for
$400,000 to a business partner of an outside director of the Company
based upon management's best estimate of the aircraft's fair market
value. The Company recorded a loss of approximately $106,000 on this
transaction.
During the year ended May 31, 1993, the Company paid an outside director
of the Company a total of $203,000, including interest of $23,000, to
repay a short-term unsecured loan made to the Company during the same
year. Also in fiscal 1994 and 1993, the Company paid approximately
$54,000 and $35,000, respectively, to a director for certain consulting
services. The consulting agreement which originated in fiscal 1993 was
terminated in March 1994.
F-15
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE M - RELATED PARTY TRANSACTIONS - Continued
In connection with the issuance of the Senior Secured Notes, the
Company's placement agent received a $720,000 placement fee, together
with a warrant to purchase 273,382 shares of common stock at $5.3875 per
share. In connection with the issuance of the Convertible Subordinated
Debentures, this same placement agent received a $600,000 placement fee.
A director of the Company is an employee of the placement agent.
The Company rents an aircraft used in corporate travel from an entity
controlled by an officer/director of the Company. The total rent paid in
fiscal 1994, 1993 and 1992 was approximately $0, $81,000 and $40,000,
respectively. The Company also rented a condominium unit from an entity
controlled by this officer/director. Total rent paid in fiscal 1994 and
1993 was approximately $9,000 and $18,000, respectively.
NOTE N - COMMITMENTS AND CONTINGENCIES
The Company entered into an employment agreement with its president for
a term of three years beginning April 1993. In February 1994, the
president was terminated and in accordance with the terms of the
employment agreement, received severance pay equal to one year's salary
as of the termination date.
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. In August 1994, an amended complaint was filed.
The Company does not believe these claims have merit and intends to
defend them vigorously. 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 financial statements.
The Company is also a defendant in various lawsuits which arise in the
ordinary course of business. In the opinion of management, based on
advice of legal counsel, the ultimate resolution of the remaining
lawsuits will not have a material effect on the financial statements.
NOTE O - RESTRUCTURING COSTS
In the third quarter of fiscal 1994, the Company adopted a restructuring
program designed to reduce costs, improve liquidity, and increase
stockholder value. The restructuring program included the termination of
the Company's President, the resignation of the Chief Financial Officer,
other reductions in personnel, the sale of certain fixed assets and an
intensive review of the Company's product lines and inventories.
As a result of the restructuring program, the Company recorded a
provision of $100,000, representing severance payments to the Company's
President, which has been included in selling, general and
administrative expenses.
The restructuring program also resulted in a change in emphasis on
certain product lines, including DC-8 and other parts, and substantial
inventory writedowns, which were charged to cost of sales (See Note Q).
In formulating the program, the Company also discussed the disposition
of its Service Center. However, the commitment to dispose of the center
was not made until the first quarter of fiscal 1995 and the Company
expects to report operations of the center as discontinued operations in
1995. (A final method of disposal has not yet been determined, and
accordingly, no gain or loss on disposal can be estimated).
F-16
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1993 AND 1992
NOTE P - FOURTH QUARTER ADJUSTMENTS
The Company recorded a fourth quarter adjustment in 1994 in the amount
of approximately $2,476,000 which related to reducing certain estimated
tax benefits recorded in the third quarter, for which a 100% valuation
allowance was established at year-end. Also, an adjustment was made for
$110,000 reversing an inventory part included erroneously twice in
inventory in the first, second, and third quarters. Also in the fourth
quarter, certain charges recorded initially as restructuring charges in
the third quarter were re-classified to cost of goods sold.
In the fourth quarter of fiscal 1993, the Company recorded an accrual of
approximately $200,000 at May 31, 1993 relating to the settlement of
certain litigation. The Company also increased its allowance for
doubtful accounts by $215,000 in the fourth quarter of fiscal 1993 due
to concerns about the collectibility of receivable balances from various
customers.
NOTE Q - COST OF SALES
Cost of sales for fiscal 1994 includes charges aggregating $7.5 million
relating to the following:
1. Reductions of approximately $2.0 million in the carrying amount of
the Company's inventory part pools resulting from changes in sales
estimates and related inventory values, reflecting the
deteriorating economic conditions in the industry.
2. In March 1994, the Company entered into an agreement to sell three
aircraft upon completion of certain repairs and maintenance expected
to be completed in fiscal 1995. The Company has recorded a provision
of approximately $2.4 million at May 31, 1994, for the expected loss
in readying the aircraft for sale.
3. Writedowns approximating $3.1 million relating to weak current
market conditions and the review of realizability of Company assets
performed during the Company's restructuring program (See Note O).
4. Losses totalling approximately $2.1 relating to the sale of a
leased aircraft and the write-off of another aircraft due to a
default by the lessee under the terms of the lease.
NOTE R - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Accrued legal settlement $ 825,000 $ -
Customer deposits 558,900 319,700
Accrued repair costs 585,510 544,650
Accrued interest 294,460 423,485
Accrued payroll 329,255 197,320
Advance payment on customer account 600,000 -
Reserve for repair of leased aircraft 579,450 442,200
Other 198,265 412,864
---------- ----------
$3,970,840 $2,340,219
========== ==========
</TABLE>
In November 1994, the Company received an unfavorable judgment arising
from a lawsuit relating to commissions owed on the sale of an aircraft
in 1989. Accordingly, the Company has recorded an accrual of $825,000
at May 31, 1994 relating to this settlement, as reflected in the above
table.
F-17
<PAGE>
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had a 50% interest in A.P. Number 1, Inc., a joint venture
corporation created to purchase, sell and lease aircraft and engines. In
1993, the Company advanced $5,000 and executed as co- maker, together with
the Company's JV partner, a promissory note for $2,900,000 due October 31,
1993. The promissory note was also signed as co-maker by Richard Wellman, the
Chairman of the Company, personally. The proceeds of the loan were advanced
to the joint venture without any specific terms regarding repayment of
principal or payment of interest, and the funds were used to purchase three
aircraft. The amount contributed to the joint venture was determined by
arms-length negotiations with the Company's JV partner, which was not
affiliated with the Company, based on the Company's and its JV partner's
expectations regarding the amount of capital the joint venture would require
to conduct its operations. Of the capital contributed, $2.75 million was used
to purchase three aircraft. The joint venture's operations were not
successful, and the joint venture was not able to make the required payments
under the terms of the note. The Company was in default under the terms of
the note due to nonpayment of principal and interest and in February 1994,
the Company agreed upon a settlement with the lender, whereby the lender
received title to three (3) aircraft and $500,000 from the Company. Mr.
Wellman did not personally provide any consideration for the settlement. The
Company's Board of Directors, with Mr. Wellman abstaining, resolved not to
seek any contributions from Mr. Wellman with respect to the settlement
because Mr. Wellman agreed to become a co-maker of the note solely as an
accommodation to the Company and did not expect to derive any personal
benefit from the joint venture. All remaining liabilities have been satisfied
and the joint venture has been dissolved.
In connection with the Company's private placement of the Senior Notes,
Dabney, the Company's placement agent, received a $720,000 placement fee,
together with a warrant to purchase 273,382 shares of Common Stock at $5.3875
per share. Mr. Kirkland, a director of the Company, was an employee of Dabney
at the time of the private placement. Dabney also received a 1% financial
advisory fee and a 5% placement fee totaling $600,000 in connection with (i)
the issuance of $10,000,000 of the Company's 8% convertible subordinated
debentures; (ii) the repurchase of certain Senior Notes; and (iii) the
solicitation of consents to amend certain covenants in the purchase agreement
relating to the Senior Notes. The Company believes that the fees were
reasonable in relation to the services performed and the type of debt
instruments involved in the private placements. In 1994, IBJ Schroder Bank &
Trust Company replaced Dabney as the agent for the Senior Notes and the
Debentures.
During the 1994 fiscal year the Company sold a Boeing 737 aircraft to a
business partner of Kyle Kirkland for $400,000 in order to raise cash needed
to make required debt payments. Although the Company's book value for the
aircraft was $506,000, the Company believes that the sale price represented
the fair market value of the aircraft at the time of sale based on its
knowledge of sales of similar aircraft. Mr. Kirkland's partner subsequently
sold the aircraft to a third party for $400,000.
The Company also employs certain family members of affiliates on a
full-time or part-time basis. The compensation paid to each of these person
is consistent with the compensation paid to other unaffiliated employees.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amended report on Form
10-K/A (Second Amendment) to be signed on its behalf by the undersigned,
thereunto duly authorized this day of July, 1995.
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International Airline Support Group, Inc.,
a Delaware corporation
By:
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Alexius A. Dyer III
President
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