SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended August 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________________ to __________________.
Commission file number 0-18352
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
Delaware 59-2223025
(State or other jurisdication of (IRS Employer Identification No.)
incorporation or organization)
8095 NW 64th Street, Miami, FL 33166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including aera code: (305) 593-2658
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of the Company's common stock outstanding as of
September 25, 1995 was 4,041,779.
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FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I FINANCIAL INFORMATION ----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
August 31, 1995 and May 31, 1995 3
Condensed Consolidated Statements of Operations
Three Months ended August 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
Three Months ended August 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-10
Part II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 3. Defaults upon Senior Securitites 11
Item 6. Exhibits and Results on Form 8-K 11
2
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FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS August 31, May 31,
1995 1995
(Unaudited) (Note)*
----------- ------------
<S> <C> <C>
Current assets:
Cash $ 415,034 $ 848,331
Accounts receivable, net of allowance
for doubtful accounts of $619,000
at August 31, 1995 and May 31,
1995, respectively 3,200,795 2,592,463
Notes receivable - 313,490
Inventories 7,447,828 6,497,270
Other current assets 124,676 31,480
---------- ----------
Total current assets 11,188,333 10,283,034
Property and equipment
Land 330,457 330,457
Aircraft held for lease 3,168,613 3,289,613
Building and leasehold improvements 715,772 715,772
Machinery and Equipment 940,948 940,948
---------- ----------
5,155,790 5,276,790
Less accumulated depreciation 2,114,722 1,980,927
---------- ----------
3,041,068 3,295,863
Other assets: ---------- ----------
Deferred debt costs, net 869,252 931,932
---------- ----------
$ 15,098,653 $ 14,510,829
================= ================
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long term
obligations $ 5,850,168 $ 1,812,040
Long-term obligations in default classified
as current 14,041,667 18,083,334
Accounts payable and accrued expenses 4,056,410 3,876,978
---------- ----------
Total current liabilities 23,948,245 23,772,352
Long-term obligations, less current maturities 433,462 440,377
Commitments and contingencies - -
Stockholders' equity (deficit):
Common stock 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Retained earnings (deficit) (11,941,428) (12,360,274)
---------- ----------
Total stockholders' equity (deficit) (9,283,054) (9,701,900)
---------- ----------
$ 15,098,653 $ 14,510,829
================= ================
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
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FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months ended
August 31,
1995 1994
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 4,657,819 $ 7,708,652
Lease revenue 302,110 728,477
------------- -------------
Total revenues 4,959,929 8,437,129
Cost of sales 2,628,997 6,643,161
Selling, general and administrative
expenses 1,021,371 1,156,469
Financial restructuring costs 141,410 -
Interest expense 530,718 646,953
Depreciation and amortization 220,961 562,719
Interest and other income (2,374) (125,686)
Losses of service center subsidiary - 908,603
------------- ------------
4,541,083 9,792,219
Income (loss) before income taxes 418,846 (1,355,090)
Provision for income taxes - -
------------ -----------
Net income (loss) $ 418,846 $ (1,355,090)
============ ===========
Per share data:
Weighted average shares 4,041,779 4,041,779
============ ==========
Net income (loss) per common share
and common equivalent shares
Net income (loss) $0.10 $(0.34)
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
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FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited)
Three Months ended
August 31,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ $418,846 $ (1,355,090)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 220,961 643,417
Changes in assets and liabilities (1,159,164) 1,155,411
----------- -----------
Total adjustments (938,203) 1,798,828
Net cash (used in) provided by
operating activities (519,357) 443,738
Cash flows from investing activities:
Capital equipment deletions (additions) 96,514 (369,303)
----------- ---------
Net cash provided by (used in) investing activities 96,514 (369,303)
Cash flows from financing activities:
Repayments of notes payable and debt obligations (10,454) (67,600)
---------- ---------
Net cash (used in) financing activities (10,454) (67,600)
Net (decrease) increase in cash (433,297) 6,835
Cash at beginning of period 848,331 95,790
--------- ---------
Cash at end of period $ 415,034 $ 102,625
============== =============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain adjustments (consisting only of
normal and recurring adjustments) necessary to present fairly International
Airline Support Group, Inc.'s condensed consolidated balance sheets as of
August 31, 1995 and May 31, 1995, the condensed consolidated statements of
operations and the condensed consolidated statements of cash flows for the
three month period ended August 31, 1995, and August 31, 1994.
The accounting policies followed by the Company are described in the
May 31, 1995 financial statements.
The results of operations for the three months ended August 31, 1995
are not necessarily indicative of the results to be expected for the full year.
For interim reporting purposes, certain expenses are based on estimates rather
than expenses actually incurred.
2. Inventories consisted of the following:
August 31, 1995 May 31, 1995
--------------- --------------
Aircraft parts $ 4,823,351 $ 4,063,352
Aircraft available for sale 2,624,477 2,433,918
------------- --------------
$ 7,447,828 $ 6,497,270
============= ==============
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 individually or in lots where specific identification is
practical. For parts acquired through whole aircraft purchases, the costs are
assigned to pools which are then amortized as parts 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 August 31, 1995, approximately 86% of the ending inventory (including
aircraft held for sale) was costed under the specific identification method,
and the remaining 14% was costed under the pooling method.
3. Primarily as a result of large net losses experienced in fiscal 1995 and
1994, and the classification of most indebtedness as current, the Company has
a significant deficit in working capital and stockholders' equity. Currently,
the Company is in default in the payment of principal on the 12% Senior
Secured Notes (Notes), issued July 1992, and is in default in payment of
interest on the 8% Convertible Subordinated Debentures (Debentures),
issued September 1993. The Notes are secured by substantially all of the
assets of the Company and the Debentures are unsecured and are subordinated in
right of payment to the Notes.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Continued
Excluding amounts scheduled to be repaid within the next 12 months under
the terms of the agreements, $14,041,667 is subject to accelerated maturity
and, as such, has been classified as a current liability in the Consolidated
Balance Sheets at August 31, 1995. The Company intends to present a
restructuring proposal to the holders of the Notes and the Debentures during
the second quarter of fiscal 1996. There can be no assurance that the Company
will be able to consummate a restructuring of its indebtedness. 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.
During the fiscal quarter ended August 31, 1995, the Company incurred
approximately $141,000 of legal, accounting and other consulting fees in
connection with its debt restructuring activities.
4. The company recorded a gain during the quarter ending August 31, 1995
relating to the settlement of certain disputes with a customer. Pursuant to
the settlement, the customer paid the Company $660,000 and the Company
cancelled a note receivable from the customer. The Company also released all
claims it had against the customer, which included among other things, claims
for the purchase price of parts purchased by the customer on open account or
pursuant to a consignment arrangement. The customer released certain claims
it had against the Company as part of the settlement. The transaction
resulted in a net gain to the Company of approximately $345,000, consisting of
the excess of cash received over the net carrying value of the note receivable
and cost of the inventory. The Company recorded as net sales the cost of the
inventory plus the amount of the net gain.
5. Supplemental cash flow disclosures:
Cash payments for interest were $331,000 and $895,000 for the three
months ended August 31, 1995 and August 31, 1994, respectively.
7
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATION AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain
significant factors which have affected the Company's operating results and
financial position during the periods included in the accompanying condensed
consolidated financial statements.
RESULTS OF OPERATIONS:
Revenues
Total revenues for the first fiscal quarter ended August 31, 1995
decreased 41% to $5.0 million, from $8.4 million for the fiscal quarter ended
August 31, 1994. Aircraft sales were $325,000 in the quarter ended August 31,
1995 compared to $4.1 million in the quarter ended August 31, 1994. Aircraft
sales are unpredictable transactions and may fluctuate significantly from year
to year, dependant, in part, upon the Company's ability to purchase an
aircraft and resell it within a relatively brief period of time. Parts sales
were $3.8 million during the quarter ended August 31, 1995, compared to $3.4
million during the quarter ended August 31, 1994. Lease revenue decreased to
$302,000 in the quarter ended August 31, 1995, from $728,000 in the quarter
ended August 31, 1994 as certain aircraft leases terminated during fiscal
1995.
The company recorded a gain during the quarter ending August 31, 1995
relating to the settlement of certain disputes with a customer. Pursuant to
the settlement, the customer paid the Company $660,000 and the Company
cancelled a note receivable from the customer. The Company also released all
claims it had against the customer, which included among other things, claims
for the purchase price of parts purchased by the customer on open account or
pursuant to a consignment arrangement. The customer released certain claims
it had against the Company as part of the settlement. The transaction
resulted in a net gain to the Company of approximately $345,000, consisting of
the excess of cash received over the net carrying value of the note receivable
and cost of the inventory. The Company recorded as net sales the cost of the
inventory plus the amount of the net gain.
Cost of Sales
Cost of sales as a percentage of total revenues in the quarter ended
August 31, 1995 was 53% compared to 79% for the quarter ended August 31, 1994.
The higher cost of sales as a percentage of total revenues in the quarter
ended August 31, 1994 was the result of lower margins realized on aircraft
sales. Excluding aircraft sales and cost of aircraft sales, cost of sales as
a percentage of total revenues was 54% during the quarter ended August 31,
1995, compared to 62% during the quarter ended August 31, 1994. The
improvement in cost of sales as a percentage of total revenues (excluding
aircraft sales) was primarily the result of the settlement with a customer
noted above.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the quarter
ended August 31, 1995 were $1.0 million, compared to $1.2 million for the
quarter ended August 31, 1994. The decrease in SG&A expenses is a result of
continuing efforts to reduce costs.
Financial Restructuring Costs
During the fiscal quarter ended August 31, 1995 the Company incurred
approximately $141,000 of legal, accounting and other consulting fees in
connection with its debt restructuring activities.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
Interest Expense
Interest expense for the quarter ended August 31, 1995 was $531,000
versus $647,000 for the quarter ended August 31, 1994. The decrease in
interest expense is due to a reduction in total debt outstanding, which was
$20.3 million at August 31, 1995 compared to $26.1 million outstanding at
August 31, 1994.
Depreciation and Amortization
Depreciation and amortization decreased to $221,000 during the quarter
ended August 31, 1995, from $563,000 during the quarter ended August 31, 1994.
The decrease in depreciation and amortization was due primarily to a reduction
in depreciable aircraft held for lease, such aircraft held for lease amounting
to a gross value of $7.6 million at August 31, 1994 compared to $3.2 million
at August 31, 1995. The reduction in aircraft held for lease is due to the
Company selling during fiscal 1995 certain aircraft previously leased or
transferring certain aircraft to inventory held for sale.
Losses of Service Center Subsidiary
In fiscal 1994 the Company began operations of International Airline
Service Center, Inc. (IASC), an FAA-certified repair facility. During
fiscal 1995 IASC ceased operations and the majority of its assets were sold.
As such, there were no operating results of IASC during the fiscal quarter
ended August 31, 1995. The results of IASC for the quarter ended August 31,
1994 are shown as losses of service center subsidiary.
Income Taxes
No income tax provision has been recorded in the fiscal quarter ended
August 31, 1995 as the Company has net operating loss carryforwards sufficient
to offset income.
Liquidity and Capital Resources
At August 31, 1995 the Company's total long-term debt amounted to
$20.3 million, consisting of $9.9 million principal amount of the Senior Notes,
$10 million principal amount of the Subordinated Debentures and $400,000
principal amount of a mortgage loan secured by its corporate headquarters.
The entire principal amount of the Senior Notes and the Subordinated Debentures
is classified as current at May 31, 1995, because of the existence of defaults
under the governing documents. The Senior Notes, which were issued during
fiscal 1993, bear interest at the fixed rate of 12% per annum, payable
quarterly. The Senior Notes mature in 1997. The Subordinated Debentures,
which were issued during fiscal 1994, bear interest at the fixed rate of 8%
per annum, payable quarterly and are convertible into shares of the Company's
Common Stock at $4.00 per share. The Subordinated Debentures mature in 2003.
On May 26, 1995, the Company received a notice of payment blockage from
the holder (the Majority Noteholder) of a majority of the outstanding
principal amount of the Senior Notes. Citing a continuing Event of Default
under the agreement governing the Senior Notes as a result of the Company's
noncompliance with certain financial covenants, the Majority Noteholder
demanded that the scheduled interest payment which would otherwise have been
payable on May 31, 1995 to holders of the Subordinated Debentures not be paid.
As a result of the Company's receipt of the notice of payment blockage, the
Company did not make its scheduled May 31, 1995 nor its August 31, 1995
interest payments, totalling $400,000, to the holders of the Subordinated
Debentures, and is prohibited from
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
making any other payments with respect to the Subordinated Debentures until
the earlier of (i) the expiration of a 180-day period commencing upon the date
of the Company's receipt of such notice (the
Payment Blockage Period) or (ii) the receipt by the Company of written
notice from the Majority Noteholder terminating such Payment Blockage Period.
The Company did not make its scheduled July 17, 1995 principal payment to the
holders of the Senior Notes. The aggregate principal payment due on July 17,
1995 was approximately $1.8 million.
The failure to make the May 31, 1995 and August 31, 1995 interest
payments to the holders of the Subordinated Debentures and the July 17, 1995
principal payment to the holders of the Senior Notes constitutes an Event of
Default under the agreements governing the Senior Notes and Subordinated
Debentures. If the Company remains in default under the terms of the Senior
Notes and Subordinated Debentures, the holders of such instruments could
accelerate the debt, resulting in principal of approximately $20 million
becoming immediately due and payable. The Company would have no ability to
repay such indebtedness if it were to be accelerated. The foregoing
circumstances could require the Company to cease operations or to seek
protection from its creditors through judicial reorganization proceedings.
At August 31, 1995, the Company had a working capital deficit of $12.8
million and a current ratio of .47 to 1.0, compared to a working capital
deficit of $13.5 million and a current ratio of .43 to 1.0 at May 31, 1995.
The decrease in working capital deficit was principally the result of the
Company's net income recorded during the fiscal quarter ended August 31, 1995.
The Company does not have any bank lines of credit or other sources of
liquidity beyond cash flows from operating activities due to profitable
operations, if any, or further asset sales. However, the Company does not
currently have any significant commitments for capital outlays.
Impact of Inflation
Current financial statements are prepared in accordance with generally
accepted accounting principles and report operating results in terms of
historical costs. They provide a reasonable, objective, quantifiable
statement of financial results, but do not evaluate the impact of inflation.
Management believes that impact of inflation would not materially affect
operating results because, competitive conditions permitting, the Company
modifies its selling prices to recognize cost changes as incurred.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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.
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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Currently, the Company is in default in the payment of principal on
the 12% Senior Secured Notes and in default in the payment of interest on the
8% Convertible Subordinated Debentures. The Notes are secured by substantially
all of the assets of the Company and the Debentures are unsecured and are
subordinated in right of payment to the Notes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
A report on Form 8-K dated July 17,1995 was filed by the Company during
the quarter for which this report is filed. The Form 8-K reported that the
Company did not make its scheduled July 17, 1995 principal payment in the
amount of approximately $1.8 million to the holders of the Company's 12%
Senior Secured Notes due July 17, 1997, noting that non-payment constituted
an Event of Default under the underlying loan agreements and under the
agreements relating to the Company's 8% Convertible Subordinated Debentures.
The report discussed that the Company has commenced meeting with lenders to
discuss a preliminary restructuring proposal.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
- -----------------------------------------
(Registrant)
/s/ Robert K. Norris September 26, 1995
- ---------------------------- ----------------------
ROBERT K. NORRIS Date
Vice President-Finance
