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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION NO. 333-08065
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
(Exact name of registrant as specified in its charter)
------------------------------
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DELAWARE 5088 59-2223025
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
8095 N.W. 64TH STREET
MIAMI, FLORIDA 33166
(305) 593-2658
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ALEXIUS A. DYER III
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
8095 N.W. 64TH STREET
MIAMI, FLORIDA 33166
(305) 593-2658
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
PHILIP A. THEODORE
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303
(404) 572-4600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If any securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
CROSS REFERENCE TABLE
LOCATION IN PROXY STATEMENT/PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-4
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ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Outside Front Cover of Proxy Statement/ Prospectus;
Facing Page of the Registration Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................... Summary
4. Terms of the Transaction............................. Summary; The Restructuring
5. Pro Forma Financial Information...................... Summary; Historical and Pro Forma Capitalization; Pro
Forma Combined Financial Information
6. Material Contacts with the Company Being Acquired.... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters....... Not Applicable
8. Interests of Named Experts and Counsel............... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
10. Information With Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information With Respect to S-2 or S-3 Registrants... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
14. Information With Respect to Registrants Other Than
S-3 or S-2 Registrants.............................. Summary; Selected Historical Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Description of Capital Stock; Index to Financial
Statements
15. Information With Respect to S-3 Companies............ Not Applicable
16. Information With Respect to S-2 or S-3 Companies..... Not Applicable
17. Information With Respect to Companies Other Than S-2
or S-3 Companies.................................... Not Applicable
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ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
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18. Information if Proxies, Consents or Authorizations
are to be Solicited................................. Summary; The Restructuring; The Exchange Offer;
Stockholders' Meeting, Voting Rights and Proxies;
Management; Security Ownership of Certain Beneficial
Owners and Management; Stockholder Proposals
19. Information if Proxies, Consents or Authorizations
are not to be Solicited, or in an Exchange Offer.... Summary; The Restructuring; The Exchange Offer;
Stockholders' Meeting, Voting Rights and Proxies;
Management; Security Ownership of Certain Beneficial
Owners and Management
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 16, 1996
PROXY STATEMENT/PROSPECTUS
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
----------------
OFFER TO EXCHANGE COMMON STOCK, PAR VALUE $.001 PER SHARE,
FOR AND SOLICITATION OF CONSENTS FROM HOLDERS OF
8% CONVERTIBLE SUBORDINATED DEBENTURES DUE AUGUST 31, 2003
($10 MILLION PRINCIPAL AMOUNT OUTSTANDING)
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") describes
the proposed financial restructuring (the "Restructuring") of International
Airline Support Group, Inc. (the "Company"). Pursuant to the Restructuring, the
Company hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Proxy Statement/Prospectus and in the accompanying
Consent and Letter of Transmittal (the "Letter of Transmittal"), to issue 224.54
shares of its Common Stock, par value $.001 per share (the "Common Stock"),
after giving effect to the proposed reverse stock split described below, for
each $1,000 of principal amount of its outstanding 8% Convertible Subordinated
Debentures due August 31, 2003 (the "Convertible Debentures"). Holders of
Convertible Debentures whose securities are accepted in the Exchange Offer will
not be entitled to receive any consideration other than the shares of Common
Stock for any interest accrued subsequent to February 28, 1995. The last trade
of the Convertible Debentures known to the Company occurred in October, 1995,
when the largest single holder of the Convertible Debentures sold all the
Convertible Debentures held by it for a cash price of $150 per $1,000 principal
amount of the Convertible Debentures, to one or more other substantial holders
of the Convertible Debentures.
This Proxy Statement/Prospectus also constitutes a consent solicitation
statement in connection with the solicitation (the "Solicitation") of consents
(the "Consents") to certain amendments (the "Amendments") to the several
Securities Purchase Agreements, each dated as of September 8, 1993
(collectively, the "Purchase Agreements"), pursuant to which the Convertible
Debentures were issued. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER THEIR
CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE
AMENDMENTS. The Exchange Offer and the Solicitation will expire at 5:00 p.m.,
New York City time on , 1996, unless extended (the "Expiration
Date"). Tenders of the Convertible Debentures may be withdrawn, in accordance
with the withdrawal provisions described herein, at any time prior to the
Expiration Date. A Consent may be revoked, in accordance with the revocation
provisions described herein, prior to the date the Amendments become effective.
------------------------
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1996
RELATING TO THE APPROVAL OF CERTAIN AMENDMENTS
TO THE COMPANY'S CERTIFICATE OF INCORPORATION
------------------------
THE COMMON STOCK OFFERED HEREBY IS SUBJECT TO CERTAIN MATERIAL RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 18 OF THIS PROXY STATEMENT/PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE RESTRUCTURING. THE RESTRUCTURING DESCRIBED HEREIN WILL RESULT IN
SUBSTANTIAL DILUTION TO HOLDERS OF THE COMPANY'S COMMON STOCK.
NEITHER THE TRANSACTIONS DESCRIBED HEREIN NOR THE SECURITIES OFFERED HEREBY
HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTIONS OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(COVER CONTINUED ON FOLLOWING PAGE)
------------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1996
<PAGE>
(COVER PAGE CONTINUED)
This Proxy Statement/Prospectus is also being furnished to the stockholders
of the Company as a proxy statement in connection with the solicitation of
proxies for a special meeting of stockholders (the "Meeting") at which proposals
relating to the Restructuring and certain other matters are to be voted on by
the stockholders. The items to be voted on include (a) a proposal to combine
each 27 shares of the Common Stock outstanding after the closing of the Exchange
Offer into one share of Common Stock (the "Reverse Stock Split"); (b) a proposal
to fix the number of directors comprising the Company's Board of Directors at
seven and to provide that the number of Directors constituting the Board shall
not be changed without the affirmative vote of the holders of at least 75% of
the issued and outstanding shares of the Common Stock (collectively, the "Board
Amendments"); (c) a proposal to increase to 2,000,000 the number of authorized
shares of Preferred Stock and to provide that these shares may be issued without
further consent of the stockholders with such terms as may be designated by the
Board of Directors (the "Preferred Stock Authorization"); (d) a proposal to
amend and restate the Company's Certificate of Incorporation to amend provisions
regarding corporate governance to require supermajority voting with respect to
certain matters of corporate governance (the "Charter Amendments") and (e) the
approval of a stock option plan for the Company's directors, officers and
employees (the "Stock Option Plan").
Consummation of the Restructuring is conditioned upon, among other things,
the following: (i) the holders of at least 95% of the outstanding principal
amount of the Convertible Debentures (the "Minimum Debt Tenders") shall have
validly tendered and shall not have withdrawn their Convertible Debentures prior
to the Expiration Date; (ii) the Company shall have received Consents from the
holders of at least a majority of the principal amount of the Convertible
Debentures (disregarding the principal amount of any Convertible Debentures held
by the Company or its affiliates); (iii) the Company's stockholders shall have
approved the Reverse Stock Split, the Board Amendments, the Preferred Stock
Authorization, the Charter Amendments and the Stock Option Plan; (iv) the Credit
Agreement to be negotiated and executed by and between the Company and the bank
named therein (the "Credit Agreement") shall have been negotiated and executed,
the conditions to the effectiveness thereof shall have been satisfied or waived
and the Company shall have the ability to borrow at least $2.5 million pursuant
to the Credit Agreement immediately following the consummation of Restructuring;
and (v) the Company shall have received consents from the holders of at least a
majority of the Stock Units represented by the Warrants, dated July 17, 1992
(the "Old Warrants"), to the amendment of the expiration date of the Old
Warrants (the "Old Warrant Amendment").
If the foregoing conditions are satisfied, the Restructuring will be
consummated at a closing (the "Closing") to be held promptly following the
Meeting. At the Closing, (a) the Reverse Stock Split, the Board Amendments, the
Preferred Stock Authorization, the Charter Amendments, the Stock Option Plan and
the Credit Agreement would become effective; (b) the Company would accept all
valid tenders of Convertible Debentures and would issue shares of Common Stock
in exchange therefor; (c) the Amendments would become effective; (d) the
Company's 12% Senior Notes due July 17, 1997 (the "Senior Notes") would be
redeemed using advances under the Credit Agreement; (e) the Company would issue
options to purchase shares of Common Stock to the Company's directors, officers
and employees pursuant to the Stock Option Plan in settlement of options and/or
warrants previously awarded to them or in connection with employment agreements
to be entered into by them; and (f) the Old Warrant Amendment would become
effective. None of the foregoing will become effective unless all are
consummated at the Closing.
Only holders of record of Common Stock at the close of business on the
Record Date for the Meeting are entitled to receive notice of and to vote at the
Meeting and any adjournments or postponements thereof. The Meeting may be
adjourned from time to time without notice other than by announcement. Any such
adjournment will require the affirmative vote of a majority of the voting power
present or represented at the Meeting. The persons named as proxies will vote in
favor of such
(COVER CONTINUED ON FOLLOWING PAGE)
ii
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(COVER PAGE CONTINUED)
adjournment, if proposed, those proxies which they are entitled to vote in favor
of any one of the Reverse Stock Split, the Board Amendments, the Preferred Stock
Authorization, the Charter Amendments or to approve the Stock Option Plan, and
the persons named as proxies will vote against such adjournment those proxies
required to be voted against all such proposals. A list of stockholders entitled
to vote at the Meeting will be available for inspection by any stockholder for
any purpose germane to the Meeting during ordinary business hours, during the
ten days prior to the Meeting, at the Company's headquarters at the address set
forth herein.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING OF STOCKHOLDERS ARE OF
GREAT IMPORTANCE TO THE COMPANY'S STOCKHOLDERS, ACCORDINGLY, STOCKHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Your vote is important. Whether or not you intend to be present at the
Special Meeting, please complete, sign, date and return the accompanying proxy
in the enclosed envelope, which requires no postage if mailed in the United
States. If you choose to attend the Meeting, you may of course revoke your proxy
and personally cast your votes.
THIS PROXY STATEMENT/PROSPECTUS IS FIRST BEING
MAILED TO HOLDERS OF THE CONVERTIBLE DEBENTURES
AND THE COMMON STOCK
ON , 1996.
iii
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AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended ("the Securities
Act"), with respect to the securities offered hereby. As permitted by the rules
and regulations of the Commission, this Proxy Statement/Prospectus omits certain
information, exhibits and undertakings contained in the Registration Statement.
Such additional information, exhibits and undertakings can be inspected at and
obtained from the Commission in the manner set forth below. For further
information with respect to the securities offered hereby and the Company,
reference is made to the Registration Statement and the financial schedules and
exhibits filed as a part thereof. Statements contained in this Proxy
Statement/Prospectus as to the terms of any contract or other document are not
necessarily complete, and, in each case, reference is made to the copy of each
such contract or other document that has been filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed with
the Commission, as well as the Registration Statement, can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained by mail from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site at http:\\www.sec.gov
which contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. Copies of such
reports, proxy statements and other information may also be obtained from the
Company upon request to the Company at its principal executive offices.
------------------------
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if given or
made, such information or representation must not be relied upon. This Proxy
Statement/Prospectus does not constitute an offer to sell or the solicitation of
an offer to buy any securities other than those to which it relates, or an offer
to sell or a solicitation of an offer to buy any securities in any jurisdiction
in which, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this Proxy Statement/Prospectus nor the
distribution of any securities hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the Company or in
the information contained herein since the date hereof.
iv
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TABLE OF CONTENTS
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PAGE
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SUMMARY................................................................... 1
General................................................................. 1
The Company............................................................. 1
Operating Strategy...................................................... 2
Background and Purpose of the Restructuring............................. 3
Conditions to the Restructuring......................................... 5
Certain Significant Effects of the Restructuring........................ 5
Risk Factors............................................................ 6
Interest of Certain Persons in the Restructuring........................ 7
The Exchange Offer...................................................... 7
The Meeting............................................................. 9
Proposed Amendments to the Company's Certificate of Incorporation....... 10
The Stock Option Plan................................................... 12
Exchange of Stock Certificates; Fractional Shares....................... 13
Federal Income Tax Considerations....................................... 13
Financial Forecast...................................................... 13
Summary Consolidated Historical Financial Data.......................... 14
Summary Pro Forma Financial Data........................................ 15
Market Prices of and Dividends Paid on Common Stock and Market Prices of
Convertible Debentures................................................. 16
Market and Trading Information.......................................... 17
RISK FACTORS.............................................................. 18
Risk Factors Relating to Failure of the Restructuring to Occur.......... 18
Risk Factors Associated with Ownership of the Common Stock.............. 20
THE RESTRUCTURING......................................................... 24
Background.............................................................. 24
Certain Defaults........................................................ 25
Negotiations with Debentureholders...................................... 26
The Standstill Agreement................................................ 28
Overview of the Restructuring........................................... 29
Certain Significant Effects of the Restructuring........................ 30
Conditions to the Restructuring......................................... 32
Projection of Certain Financial Data.................................... 33
General Assumptions..................................................... 34
Operating Assumptions................................................... 35
Interests of Certain Persons in the Restructuring....................... 39
THE EXCHANGE OFFER........................................................ 39
General................................................................. 39
Acceptance of Convertible Debentures and Delivery of Common Stock....... 40
Expiration Date; Extensions; Amendments................................. 41
How to Tender and Consent in the Exchange Offer......................... 41
Tenders and Consents -- General......................................... 42
Guaranteed Delivery Procedures.......................................... 43
Withdrawal of Tenders and Revocation of Consents........................ 44
Conditions.............................................................. 45
Depositary.............................................................. 46
Fees and Expenses....................................................... 47
</TABLE>
v
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STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES.......................... 47
Solicitation of Proxies................................................. 47
Voting of Proxies....................................................... 47
Record Date............................................................. 48
Voting Rights........................................................... 48
Revocation of Proxies................................................... 48
Proposed Amendment to the Company's Certificate of Incorporation:
Reverse Stock Split Amendment......................................... 48
Proposed Amendment to the Company; Certificate of Incorporation:
Preferred Stock Authorization......................................... 48
Proposed Amendment to the Company's Certificate of Incorporation:
Board of Directors.................................................... 49
Proposed Amendments to the Company Certificate of Incorporation:
Provisions Affecting Corporate Governance............................. 49
The Stock Option Plan................................................... 50
Dilution................................................................ 51
Exchange of Stock Certificates; Fractional Shares....................... 51
Other Matters to be Considered.......................................... 52
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 52
General................................................................. 52
Tax Consequences to the Company......................................... 52
Tax Consequences to the Holders of the Convertible Debentures........... 53
ACCOUNTING TREATMENT...................................................... 54
HISTORICAL AND PRO FORMA CAPITALIZATION................................... 55
SELECTED HISTORICAL FINANCIAL DATA........................................ 56
PRO FORMA FINANCIAL INFORMATION........................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 60
Liquidity and Capital Resources......................................... 60
Results of Operations................................................... 62
BUSINESS.................................................................. 67
General................................................................. 67
Operating Strategy...................................................... 67
History................................................................. 68
Industry Overview....................................................... 69
Operations of the Company............................................... 70
Customers............................................................... 72
Additional Services..................................................... 73
Government Regulation and Traceability.................................. 73
Product Liability....................................................... 73
Competition............................................................. 73
Employees............................................................... 74
Legal Proceedings....................................................... 74
MANAGEMENT................................................................ 74
Composition of the Board................................................ 75
Committees of the Board................................................. 75
Executive Compensation.................................................. 75
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vi
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Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Value....................................................... 76
Compensation Committee Interlocks and Insider Participation............. 76
Compensation of Directors............................................... 76
The Stock Option Plan................................................... 76
Employment Agreement.................................................... 80
Certain Transactions.................................................... 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 81
DESCRIPTION OF THE AMENDMENTS............................................. 82
DESCRIPTION OF THE CREDIT AGREEMENT....................................... 82
DESCRIPTION OF THE CONVERTIBLE DEBENTURES................................. 85
General................................................................. 85
Redemption.............................................................. 85
Conversion.............................................................. 86
Subordination of Convertible Debentures................................. 87
Purchase Convertible Debentures Upon a Change of Control................ 88
Certain Covenants....................................................... 89
Events of Default....................................................... 94
Market Information...................................................... 96
Modifications of the terms of the Convertible Debentures or the rights
of the Holders of the Convertible Debentures........................... 96
DESCRIPTION OF CAPITAL STOCK.............................................. 98
General................................................................. 98
Common Stock............................................................ 98
Preferred Stock......................................................... 98
Certain Effects of Authorized but Unissued Stock........................ 98
Directors' Liability.................................................... 98
Anti-takeover Effects of Certain Provisions of the Company's Restated
Certificate of Incorporation and Bylaws................................ 99
LEGAL MATTERS............................................................. 100
EXPERTS................................................................... 100
STOCKHOLDER PROPOSALS..................................................... 100
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A -- PROPOSED RESTATED CERTIFICATE OF INCORPORATION
APPENDIX B -- PROPOSED STOCK OPTION PLAN
</TABLE>
vii
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. CERTAIN TERMS USED IN THE FOLLOWING SUMMARY ARE DEFINED ON
THE COVER PAGE OF THIS PROXY STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS APPEAR THROUGHOUT THIS PROXY
STATEMENT/PROSPECTUS, INCLUDING WITHOUT LIMITATION UNDER THE HEADING "THE
RESTRUCTURING -- PROJECTION OF CERTAIN FINANCIAL DATA," AND INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR
ITS OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (I) FUTURE OPERATING RESULTS;
(II) POTENTIAL ACQUISITIONS; (III) THE COMPANY'S FINANCING PLANS; (IV) TRENDS
AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS; AND (V)
THE COMPANY'S GROWTH AND OPERATING STRATEGY. RECIPIENTS OF THIS PROXY
STATEMENT/PROSPECTUS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING WITHOUT LIMITATION THE
INFORMATION SET FORTH UNDER THE HEADINGS "THE RESTRUCTURING -- PROJECTION OF
CERTAIN FINANCIAL DATA," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS," IDENTIFIES
IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
GENERAL
This Proxy Statement/Prospectus describes the Restructuring of the Company.
In such regard, it sets forth the terms and conditions of the Exchange Offer,
which is part of the Restructuring. This Proxy Statement/Prospectus also
constitutes a consent solicitation statement in connection with the Solicitation
of Consents to the Amendments. Holders of Convertible Debentures who wish to
accept the Exchange Offer as set forth herein must tender their Convertible
Debentures in accordance with the procedures set forth herein and in the
accompanying Letter of Transmittal. HOLDERS OF CONVERTIBLE DEBENTURES WHO WISH
TO ACCEPT THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS.
HOLDERS OF CONVERTIBLE DEBENTURES MAY CONSENT TO THE AMENDMENTS WITHOUT
TENDERING THEIR CONVERTIBLE DEBENTURES. The Exchange Offer will expire at 5:00
p.m., New York City time, on , 1996, unless extended by the Company, in
its sole discretion, to permit the satisfaction of all conditions for such
Exchange Offer (such date or such later date and time to which such offer has
been extended, the "Expiration Date"). For a discussion of the conditions
required to be satisfied to enable the Company to consummate the Exchange Offer,
see "The Exchange Offer -- Conditions." At the Closing, to be held promptly
after the Expiration Date, the Company will acquire, to the extent validly
tendered, all of the Convertible Debentures.
This Proxy Statement/Prospectus is also furnished in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
the Special Meeting of the Company's stockholders (the "Meeting") to be held at
the offices of King & Spalding, 50th Floor, 191 Peachtree Street, Atlanta,
Georgia, 30303, on , 1996 at 9:00 a.m., Atlanta time. Stockholders who
wish to vote at the Meeting must execute and return a proxy in accordance with
the procedures set forth herein and in the accompanying proxy or attend the
Meeting.
THE COMPANY
The Company is a worldwide supplier of aircraft spare parts to the aviation
redistribution market. The Company sells spare parts to major commercial
passenger airlines, air cargo carriers, maintenance and repair facilities and
other redistributors. The parts sold by the Company include avionics, rotable
and expendable airframe and engine components for commercial aircraft, including
Airbus, Boeing and McDonnell Douglas aircraft and Pratt & Whitney and
Rolls-Royce jet engines. During the fiscal year ended May 31, 1996 ("fiscal
1996"), the Company supplied parts to over 771 customers worldwide,
approximately 676 of which were domestic customers and approximately 95 of
1
<PAGE>
which were foreign customers. Currently, the Company specializes in replacement
parts for McDonnell Douglas DC-9 aircraft. Management believes that the Company
has one of the most extensive inventories of aftermarket DC-9 parts in the
industry. For fiscal 1996, the Company's operating revenues were approximately
$23.2 million and its pretax income was approximately $2.3 million.
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market. The
redistribution market is highly fragmented, with a limited number of large, well
capitalized companies selling a broad range of aircraft spare parts, and
numerous smaller competitors serving distinct market niches. The Company
believes that significant trends affecting the redistribution market will
continue to increase its overall size while reducing the number of competitors.
Factors causing the expansion of the redistribution market include the
increasing size and age of the world-wide airline fleet and the increasing
pressures on airlines and maintenance and repair facilities to control their
costs.
Although the Company's current financial condition is weak, the Company has
been successful over the last two years in positioning itself as one of the
premier redistributors of aircraft spare parts. Upon the successful
implementation of the Restructuring, the Company believes that it will have the
financial viability to implement its operating strategy to become one of the
select number of redistributors well positioned to fully service the aircraft
spare parts requirements of its customers.
The Company's principal executive offices are located at 8095 N.W. 64th
Street, Miami, Florida 33166. Its telephone number is (305) 593-2658.
OPERATING STRATEGY
The Company is, therefore, undertaking the Restructuring to improve its
financial flexibility and allow it to more fully implement its operating
strategy. The Company's operating strategy has two components. First, the
Company intends to increase its revenues and operating income through continued
customer penetration in its existing markets and expansion into new markets. The
Company intends to achieve this by continuing to increase its share of the
market for spare parts for certain widely operated aircraft models, including,
in particular, the DC-9 (which is no longer in production) and the MD-80.
Although the MD-80 is still in production, many of the DC-9's parts are
interchangeable with the MD-80, which, given the Company's experience and
knowledge with the DC-9, gives it a competitive advantage. The Company intends
to capitalize on the limited availability of spare parts for such aircraft
models, which are either out of production or have a high degree of parts
interchangeability with other model aircraft, by acquiring (i) pools of
inventory from airlines that cease to operate such aircraft or that desire to
reduce their levels of parts inventory and (ii) aircraft for parting out when
the purchase price justifies doing so. The Company believes that its knowledge
of the fleets of DC-9 and MD-80 aircraft currently in operation and its
worldwide contacts in the commercial aviation industry will permit it to acquire
inventory pools and aircraft for parting out on favorable terms in the future.
The second component of the Company's operating strategy is to achieve
revenue and earnings growth by acquiring other companies engaged in the sale of
aircraft parts as well as companies with product lines that would complement the
Company's existing redistribution business. The Company competes in a fragmented
market in which numerous small companies serve distinct market niches. The
Company believes that small aircraft parts redistributors, many of which are
family owned and capital constrained, are unable to provide the extensive
inventory and quality control necessary to comply with applicable regulatory and
customer requirements and will provide acquisition opportunities for the
Company. The Company believes that such acquisitions will permit it to expand
its customer base by selling aircraft parts to airlines and others that are not
now customers, to expand its product line with respect to aircraft in which the
Company currently specializes, to strengthen its relationships with existing
customers and to expand the types of aircraft in which the Company
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<PAGE>
specializes. The Company, however, has not entered into an agreement to acquire
any such company, and there can be no assurance that the Company will be able to
do so. Further, the Company will be unable to make acquisitions if the
Restructuring is not consummated.
BACKGROUND AND PURPOSE OF THE RESTRUCTURING
The Company issued the Convertible Debentures during fiscal 1994 on
September 8, 1993. The proceeds of the Convertible Debentures were used for the
following purposes: (i) to repurchase a portion of the Senior Notes ($3.4
million); (ii) to repay certain other indebtedness ($1.9 million); (iii) to pay
fees and expenses of the offering ($1.1 million); and (iv) to purchase four DC-9
aircraft for parting out ($3.6 million). Also during fiscal 1994, the Company,
in an attempt to more vertically integrate its business, invested approximately
$3 million to establish a repair facility certified by the Federal Aviation
Administration ("FAA"). The principal business of the repair facility, which
commenced operations in fiscal 1994, was to perform FAA-required maintenance
checks on certain narrow body aircraft. The facility was operated by a
wholly-owned subsidiary of the Company, International Airline Service Center,
Inc. ("IASC").
However, during fiscal 1994, while the Company was undertaking its
diversification and expansion program, its financial performance was adversely
affected by several factors. First, sales to Transafrik Corp., a cargo carrier
operating in Africa, declined significantly, from approximately $6.0 million in
fiscal 1993 to approximately $1.5 million in fiscal 1994. Transafrik had
accounted for a significant portion of the Company's revenue prior to fiscal
1994. During fiscal 1994, Transafrik underwent a change in ownership and made
other significant management and operational changes, including a downsizing of
its fleet and changes in fleet mix. Second, the Company was unable to operate
the repair facility profitably, losing approximately $1.9 million on its
operations of the facility during fiscal 1994. Principally as the result of the
establishment of the repair facility, the number of persons employed by the
Company grew from approximately 80 in fiscal 1993 to approximately 160 in fiscal
1994, and sales, general and administrative expense increased to approximately
37.1% of total revenue in fiscal 1994 from approximately 19.3% of total revenue
in fiscal 1993. Third, the overall market for used aircraft and parts weakened
and this, combined with a diminished cash position, reduced the Company's
ability to purchase additional aircraft and inventory for resale and led to a
43.9% decline in total revenues for fiscal 1994, from $33.5 million in fiscal
1993 to $18.7 million.
As a result of the weak demand in the marketplace and the Company's need to
increase its liquidity to meet its obligations as they became due, it became
necessary for the Company to sell an aircraft at an inopportune time and price,
resulting in a $2.1 million loss. This loss related primarily to the aircraft
being sold to raise cash at an amount substantially below cost, as well as the
write-off of an aircraft because its Nigerian lessee defaulted under the lease
and the Company did not believe it could recover possession of the aircraft. In
addition, during the fourth quarter of fiscal 1994, the Company accrued to cost
of sales a charge of $2.4 million for the partial writedown of three aircraft to
reflect net realizability of the aircraft. The unanticipated cost of overhauling
these aircraft at IASC for delivery eliminated the economic benefit that the
Company had negotiated under their sales contract.
In February 1994, the Company's President and Chief Financial Officer left
the Company and in January 1995, the Company's Chief Executive Officer was
replaced by the current Chief Executive Officer. In an effort to address the
Company's financial problems, current senior management made the strategic
decision to refocus the Company on its core business-parts sales. The costs of
implementing this strategy were largely recognized in fiscal 1994. Accordingly,
the Company recorded a net loss of $17.4 million in fiscal 1994, substantially
all of which was related to non-core businesses and, to the extent related to
the core business, was nonrecurring. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
As part of its strategic decision to refocus on its core business, in late
fiscal 1994 and early fiscal 1995, the Company sought aggressively to reduce its
expenses. As a result, the total number of persons employed by the Company was
reduced by approximately 85%, to 24 by the end of fiscal 1995, and operations at
the service center were terminated. Further, the Company sold a subsidiary that
was
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engaged in air cargo transport. In addition, during fiscal 1995, the Company
sought to reduce its vulnerability to a decrease in sales to any single customer
by focusing its marketing on the identification and solicitation of new
customers. The Company obtained approximately 80 new parts customers during
fiscal 1995. Also in fiscal 1995, the Company instituted new compensation
policies for its parts sales force. Pursuant to the new policies, all salesman
are paid strictly on commission, sales to new customers are encouraged and
commissions are not paid until accounts are collected. Furthermore, the Company
has continued to decrease its exposure to more volatile international markets.
Its domestic revenues as a percentage of total revenues has increased in each of
the last four fiscal years, to approximately 85% in fiscal 1996 from 72% in
fiscal 1995, 59% in fiscal 1994, and 40% in fiscal 1993.
On May 26, 1995, the Company received a notice of payment blockage from the
majority holder (the "Majority Noteholder") 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 that would
otherwise have been payable on May 31, 1995 to holders of the Convertible
Debentures not be paid. As a result of the Company's receipt of the notice of
payment blockage, the Company did not make the interest payments due to holders
of the Convertible Debentures on May 31 and August 31, 1995, totaling $.4
million. Pursuant to terms of the Senior Notes, the Company was prohibited from
making any other payments with respect to the Convertible Debentures prior to
the expiration of the payment blockage period on November 22, 1995.
Notwithstanding the expiration of the payment blockage period, the Company did
not make the November 30, 1995 and the February 29 and May 31, 1996 interest
payments on the Convertible Debentures. The Company does not intend to resume
making payments of interest on the Convertible Debentures.
The Company did not make its scheduled July 17, 1995 principal payment on
the Senior Notes in the approximate amount of $1.8 million. The Company cured
the default in part by making a principal payment of $1.45 million on December
12, 1995. The Company made an additional principal payment of $.7 million on May
13, 1996, which cured such principal payment default and prepaid, without
penalty, approximately $.35 million of the $4.1 million principal payment due on
the Senior Notes on July 17, 1996. The Company did not make the July 17, 1996
principal payment on the Senior Notes, which was due in the amount of
approximately $3.7 million, pending redemption of the Senior Notes in connection
with the Restructuring. If the Restructuring is not consummated, the Company
will be unable to make such principal payment.
The failure to make the interest payments to the holders of the Convertible
Debentures and the principal payment to the holders of the Senior Notes due on
July 17, 1996 referred to above constituted an Event of Default under the
agreements governing the Senior Notes and Convertible Debentures. Further, the
Company is in default in the observance of certain financial covenants
applicable to the Senior Notes and the Convertible Debentures. If the Company
remains in default under the terms of the Senior Notes and Convertible
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of approximately $17.7 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 most likely would require the
Company to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code. In addition, if the holders of any of the Senior Notes or
Convertible Debentures demand repayment or if the holders of the Senior Notes
seek to realize upon the collateral securing the Senior Notes, there is a
substantial likelihood that the Company will be forced to cease operations or to
file for protection under Chapter 11 of the Bankruptcy Code.
The terms of the Restructuring result from an analysis of the Company's
financial condition and operations conducted by the Company. The Company is
proposing the Restructuring to achieve changes in its financial structure that
it believes are necessary to help alleviate the problems caused by the Company's
current debt service levels and debt repayment obligations, to help assure its
long-term viability and to permit it to implement its operating strategies. The
success of the Restructuring does not depend on the Company's meeting the
financial forecasts included elsewhere in this Proxy
4
<PAGE>
Statement/Prospectus or on the Company's consummating any acquisitions as part
of its operating strategy. However, the Company will not be able to implement
its operating strategy fully if it is unable to obtain advances pursuant to the
Credit Agreement. If the Company fails to meet the financial forecasts,
depending on the magnitude of the departures from forecasted performance, the
Company might be unable to comply with the financial covenants imposed on it
pursuant to the Credit Agreement. Noncompliance with such financial covenants
would prevent the Company from obtaining advances pursuant to the Credit
Agreement. The Company will be in compliance with such financial covenants upon
consummation of the Restructuring. See "Description of the Credit Agreement."
If the Restructuring is not consummated, the financial condition of the
Company will necessitate the development of alternative actions. In view of the
Company's limited financial resources and the existence of unwaived defaults
with respect to the Senior Notes and the Convertible Debentures, there can be no
assurance that the Company would succeed in formulating and consummating an
alternative financial restructuring. In such case, the Company most likely would
be forced to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code. See "Risk Factors -- Risk Factors Relating to Failure of the
Restructuring to Occur."
CONDITIONS TO THE RESTRUCTURING
Consummation of the Restructuring is conditioned upon, among other things,
the following: (i) the Minimum Tenders shall have been validly tendered and not
withdrawn by the holders of the Convertible Debentures prior to the Expiration
Date; (ii) the requisite Consents shall have been received and such Consents
shall not have been revoked and the Amendments shall have become effective;
(iii) the Company's stockholders shall have approved the amendments to the
Company's Certificate of Incorporation to effect the Reverse Stock Split, the
Board Amendments, the Preferred Stock Authorization and the Charter Amendments
and shall have approved the Stock Option Plan; (iv) the Company and the Bank (as
defined herein) shall have negotiated and executed the Credit Agreement, the
conditions to the effectiveness thereof shall have been satisfied or waived and
the Company shall have the ability to borrow at least $2.5 million pursuant to
the Credit Agreement immediately following the consummation of the
Restructuring; and (v) the Old Warrant Amendment shall have become effective.
See "The Restructuring -- Conditions to the Restructuring."
The Company reserves the right to amend the terms of the Restructuring
(including changes in the consideration being offered in the Exchange Offer to
holders of the Convertible Debentures), if and to the extent that the Company
determines that such amendments are necessary or desirable to complete the
Restructuring. The Company will give holders of the Common Stock and the
Convertible Debentures notice of such amendments as may be required by
applicable law. Holders of the Convertible Debentures may withdraw their tenders
of the Convertible Debentures at any time prior to the Expiration Date of the
Exchange Offer, including during any period of time the Exchange Offer is
extended because of amendments to the terms of the Restructuring.
CERTAIN SIGNIFICANT EFFECTS OF THE RESTRUCTURING
Implementation of the Restructuring would have significant effects on the
financial obligations of the Company and on the current holders of the Common
Stock, the Senior Notes and the Convertible Debentures. The Restructuring would
result in significant changes in the Company's financial obligations, including
(a) the elimination of future interest and principal payment obligations with
respect to at least 95% of the aggregate principal amount of the Convertible
Debentures, (b) the repayment of the Senior Notes, (c) the incurrence of
approximately $7.9 million of indebtedness under the Credit Agreement, (d) the
increased sensitivity of the Company to prevailing interest rates because
indebtedness under the Credit Agreement will bear interest at a floating rate,
and (e) the deferral of principal payments on the Company's long-term
indebtedness because the final maturity of the Credit Agreement is later than
the maturity date of the Senior Notes. The Restructuring would also result in
the
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<PAGE>
modification of certain restrictive covenants now applicable to the Company
pursuant to the instruments creating the Convertible Debentures and the
elimination of the restrictive covenants now applicable to the Company pursuant
to the instruments creating the Senior Notes.
On a pro forma basis, the Restructuring would have reduced the amount of the
Company's outstanding indebtedness, at May 31, 1996, from $18.1 million to $8.1
million, based on the assumptions that the Restructuring occurred on such date
and that all the Convertible Debentures were accepted for exchange. Total
interest expense, on a pro forma basis, would have been reduced from $2.2
million to $1.2 million during fiscal 1996, based on the assumptions that the
Restructuring occurred on the first day of the period presented, that all the
Convertible Debentures were accepted for exchange and that amounts outstanding
pursuant to the Credit Agreement bore interest at 10.25% throughout the period.
If the Restructuring were implemented, approximately 2.2 million shares of
Common Stock (after giving effect to the Reverse Stock Split) would be issued in
the Exchange Offer, assuming that all of the Convertible Debentures are accepted
for exchange. Issuance of such numbers of shares of Common Stock would dilute
substantially the ownership percentage of the existing holders of the Common
Stock. The percentage ownership of the Company on an actual and on a
fully-diluted basis and the effect of the issuance of such numbers of shares of
Common Stock on the percentage ownership of the common equity of the Company is
shown in the following table:
<TABLE>
<CAPTION>
RESTRUCTURING RESTRUCTURING
PRE-RESTRUCTURING (1) NO DILUTION (2) FULL DILUTION (3)
------------------------ ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENT SHARES PERCENT SHARES PERCENT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Significant Holders of Convertible
Debentures (4):
Cardinal Recovery Partners................ -- -- 263,385 10.0 263,385 8.8
Northeast Investors Trust................. -- -- 224,540 9.4 224,540 7.5
Deltec Asset Management Corp.............. -- -- 224,540 9.4 224,540 7.5
Other Convertible Debenture Holders......... -- -- 1,532,935 65.0 1,532,935 51.2
----------- ----- ----------- ----- ----------- -----
Total Convertible Debenture Holders......... -- -- 2,245,400 93.8 2,245,400 75.0
Existing Common Stockholders................ 4,041,779 100.0 149,704 6.2 149,704 5.0
Warrant and Option Holders.................. -- -- -- -- 598,782 20.0
----------- ----- ----------- ----- ----------- -----
4,041,779 100.0 2,395,104 100.0 2,993,886 100.0
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Assumes no (i) conversion of the Convertible Debentures; (ii) exercise of
the Old Warrants; and (iii) exercise of certain outstanding stock options
and warrants, prior to giving effect to the Reverse Stock Split. The Old
Warrant Amendment will provide for the expiration of the Old Warrants at the
Closing and the options outstanding pursuant to the Company's existing stock
option plan will be canceled as part of the Restructuring.
(2) Assumes that 2,245,400 shares of Common Stock are issued to the Holders of
the Convertible Debentures, after giving effect to the Reverse Stock Split.
(3) Incorporates the assumptions set forth in (2) and further assumes the
exercise of certain outstanding options and warrants, other than the Old
Warrants, and the issuance of all options to be granted under the Stock
Option Plan.
(4) Significant holders of Convertible Debentures are those Convertible
Debenture holders who would receive 5% or more of the Common Stock to be
outstanding upon consummation of the Restructuring.
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<PAGE>
RISK FACTORS
The Common Stock offered hereby pursuant to the Exchange Offer is subject to
certain material risks. In addition, in the event the Restructuring is not
consummated, there are additional risks to the ownership of Common Stock and
Convertible Debentures primarily as a result of the Company's financial
condition. Before deciding whether or not to tender any Convertible Debentures
pursuant to the Exchange Offer, or to vote in favor of the matters to be brought
before the Meeting, each stockholder and each holder of the Convertible
Debentures should consider carefully all of the information contained in this
Proxy Statement/Prospectus. See "Risk Factors."
INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING
In considering the Restructuring, holders of Common Stock and the
Convertible Debentures should be aware that the executive officers and directors
of the Company have certain interests that may present them with potential
conflicts of interests with respect to the Restructuring. See "The Restructuring
- -- Interests of Certain Persons in the Restructuring." The conflicts result from
the following factors: (i) the employment agreement between Mr. Alexius A. Dyer
III, the Chairman of the Board, President and Chief Executive Officer of the
Company, will be extended for an additional five-year term effective upon
consummation of the Restructuring and Mr. George Murnane III, the Executive Vice
President and Chief Financial Officer of the Company, will enter into a
five-year employment agreement with the Company having terms, other than salary
and bonus, substantially similar to those of Mr. Dyer's employment agreement
(see "Management -- Employment Agreement"); (ii) Mr. Dyer's annual compensation
will increase from $135,000 to $175,000 upon consummation of the Restructuring;
(iii) Messrs. Dyer and Murnane will be granted restricted stock and/or options
representing 7.5% and 3.5%, respectively, of the shares of Common Stock to be
outstanding following the Restructuring on a fully-diluted basis (see
"Management -- The Stock Option Plan"); (iv) Messrs. Kyle R. Kirkland and E.
James Mueller, who are non-employee directors of the Company, will be granted
restricted stock and/or options, which, together with shares reserved for
issuance to non-employee directors pursuant to the Stock Option Plan, will
represent up to 2.5% of the shares of Common Stock to be outstanding following
the Restructuring on a fully-diluted basis (see "Management -- The Stock Option
Plan"); and (v) Kirkland Messina, Inc., an investment banking firm of which Mr.
Kirkland is a principal, will receive a placement agent's fee in connection with
the origination of the Credit Agreement (see "Management -- Certain
Transactions").
THE EXCHANGE OFFER
In exchange for the Convertible Debentures, the Company will issue 224.54
shares of Common Stock, after giving effect to the Reverse Stock Split, for each
$1,000 of principal amount of its outstanding Convertible Debentures. As of the
date of this Proxy Statement/Prospectus, there were outstanding $10 million
aggregate principal amount of Convertible Debentures. The Company has not made
an interest payment on the Convertible Debentures since February 28, 1995. The
Company does not intend to make any subsequent payment of accrued interest with
respect to any Convertible Debentures accepted for exchange in the Exchange
Offer. Holders of Convertible Debentures whose Convertible Debentures are
accepted in the Exchange Offer will not be entitled to receive any consideration
other than shares of Common Stock for any interest accrued subsequent to
February 28, 1995, on such Convertible Debentures. See "The Exchange Offer --
General."
In connection with the Exchange Offer, the Company is also soliciting the
Requisite Consents from the "Holders" (as defined below) of the Convertible
Debentures in the Solicitation. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER
THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT
TO THE AMENDMENTS. Holders of Convertible Debentures may consent to the
Amendments without tendering their Convertible Debentures in the Exchange Offer.
The Company will make no separate payment for Consents. The Amendments will not
become effective unless and until the Restructuring is consummated. The term
"Holder," when used with respect to a Convertible Debenture, means the
registered owner of such Convertible Debenture on August 20, 1996 (the "Debt
Record Date") or any person who has obtained a properly completed bond power and
proxy from the registered owner on the Debt Record Date. The Company serves as
the registrar for the Convertible
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<PAGE>
Debentures and will advise any purchaser of Convertible Debentures who was not a
registered owner of the Convertible Debentures on the Debt Record Date as to the
procedures to be followed in order to obtain a properly completed bond power and
proxy and effectively to tender their Convertible Debentures and consent to the
Amendments. See "The Exchange Offer -- General."
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1996, unless the Exchange Offer is extended by the Company, in its
sole discretion, to permit the satisfaction of all conditions to the Exchange
Offer, in which case the term "Expiration Date" shall mean the last date and
time to which the Exchange Offer is extended. See "The Exchange Offer --
Expiration Date; Extensions; Amendments."
A Holder electing to tender Convertible Debentures in the Exchange Offer and
to consent to the Amendments should either (i) complete and sign the Letter of
Transmittal, have the signatures thereon guaranteed if required by Instruction 6
thereof, and mail or deliver such Letter of Transmittal together with a properly
completed and duly executed Notice of Guaranteed Delivery or the Convertible
Debentures and any other required documents to the Depository at one of its
addresses set forth on the back cover page of this Proxy Statement/Prospectus,
or effect the tender of Convertible Debentures pursuant to the procedures for
book-entry transfer as set forth under "The Exchange Offer -- How to Tender and
Consent in the Exchange Offer" or (ii) request his broker, dealer, commercial
bank, trust company or other nominee to effect the transaction for him. Holders
will not be obligated to pay any brokerage commissions or solicitation fees in
connection with the Exchange Offer. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER
THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT
TO THE AMENDMENTS. Holders of Convertible Debentures may consent to the
Amendments without tendering their Debentures in the Exchange Offer.
Tenders of any Convertible Debentures may be withdrawn, in accordance with
the withdrawal provisions described herein, at any time prior to the Expiration
Date for the Exchange Offer. In addition, tenders of Convertible Debentures may
be withdrawn after the expiration of 40 business days from the commencement of
the Exchange Offer, if not yet accepted by the Company. A Consent may be revoked
only by the Holder of the Convertible Debenture with respect to which the
Consent was given and only if the Company receives written notice of revocation
from the Holder prior to the date the Amendment becomes effective. However, the
revocation of a Consent will, unless waived by the Company, render the tender of
the related Convertible Debenture defective. See "The Exchange Offer --
Withdrawal of Tenders and Revocation of Consents."
No fractional shares of Common Stock will be issued upon consummation of the
Exchange Offer. The Company expects to enter into an agreement with the
Depositary whereby the Depositary will aggregate and sell in the open market all
fractional shares of Common Stock otherwise issuable in the Exchange Offer. The
proceeds of such sales would be distributed by the Depositary to the persons who
would otherwise have received such fractional amounts. There can be no assurance
as to the price at which such sales will be affected. See "The Exchange Offer --
Acceptance of Convertible Debentures and Delivery of Common Stock."
If the Restructuring is consummated, at least 95% of the outstanding
Convertible Debentures will be exchanged for shares of Common Stock. Holders of
Convertible Debentures who do not exchange may experience a significant
reduction in their ability to sell their Convertible Debentures and will not
have the benefit of certain restrictive covenants now contained in the Purchase
Agreements. However, the Company's reduced leverage as a result of the
Restructuring should increase the likelihood that the Company will be able to
pay the principal of and interest on the outstanding Convertible Debentures.
Requests for additional copies of this Proxy Statement/Prospectus or the
Letter of Transmittal should be directed to the Company at the address set forth
on the back of this Proxy Statement/ Prospectus or to the telephone number set
forth above. First Union National Bank, Charlotte, North Carolina has been
appointed as Depositary for the Exchange Offer. Questions and requests for
8
<PAGE>
assistance may be directed to the Depositary at (800) 829-8432. For further
information regarding any of the foregoing, contact George Murnane III, Chief
Financial Officer of the Company, at (305) 593-2658.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
CONVERTIBLE DEBENTURES TENDER THEIR SECURITIES IN THE EXCHANGE OFFER AND CONSENT
TO THE AMENDMENTS.
THE MEETING
At the Meeting, the Company's stockholders will be asked to approve
amendments to the Company's Certificate of Incorporation to effect the Reverse
Stock Split, the Preferred Stock Authorization and the Charter Amendments and to
approve the Stock Option Plan. The Company will restate its Certificate of
Incorporation (the "Restated Certificate") in connection with these amendments.
See "Appendix A" for the proposed Restated Certificate. Adoption of the proposed
amendments to the Company's Certificate of Incorporation is a condition to the
Exchange Offer and an essential part of the Restructuring.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
THE COMMON STOCK VOTE IN FAVOR OF THE PROPOSED AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION AND APPROVE THE STOCK OPTION PLAN.
Only stockholders of record at the close of business on August 20, 1996 will
be entitled to notice of and to vote at the Meeting. As of the date of this
Proxy Statement/Prospectus, there were 4,041,779 shares of Common Stock
outstanding, of which there were 105 holders of record and approximately 950
beneficial owners. There are no shares of Preferred Stock outstanding.
Stockholders have no appraisal or dissenters' rights with respect to the
proposals to amend the Company's Certificate of Incorporation.
Each share of Common Stock is entitled to one vote with respect to the
proposed amendments to effect the Reverse Stock Split, the Preferred Stock
Authorization, the Board Amendments, and the Charter Amendments and with respect
to the approval of the Stock Option Plan. Stockholders have no appraisal or
dissenters' rights with respect to any of the proposed amendments to the
Company's Certificate of Incorporation or the approval of the Stock Option Plan.
See "Stockholders' Meeting, Voting Rights and Proxies."
As of the date of this Proxy Statement/Prospectus, without giving effect to
the Reverse Stock Split, Alexius A. Dyer III, the Chairman of the Board,
President and Chief Executive Officer of the Company, owned of record or
beneficially approximately 1,000 shares of the Company's Common Stock
(disregarding any shares of Common Stock beneficially owned by him by reason of
his ownership of stock options or warrants), which represents approximately
.025% of the aggregate number of shares of Common Stock outstanding. At such
date, without giving effect to the Reverse Stock Split, Mr. and Mrs. Richard R.
Wellman, formerly the Chairman of the Board and Secretary, respectively, of the
Company owned of record or beneficially approximately 1,999,700 shares of Common
Stock, or 49.48% of the shares of Common Stock outstanding. Mr. and Mrs. Wellman
executed an irrevocable proxy, in connection with their resignation of their
positions with the Company on January 31, 1995, authorizing the Board of
Directors of the Company to vote 1,980,000 shares of the Company's Common Stock
(representing approximately 48.99% of the shares of Common Stock outstanding)
owned by the Wellmans. The irrevocable proxy was affirmed by the Wellmans in
October 1995. Accordingly, the executive officers and directors of the Company
possess the power to vote approximately 49.02% of the outstanding shares of
Common Stock with respect to the Reverse Stock Split, the Board Classification,
the Preferred Stock Authorization, the Charter Amendments and approval of the
Stock Option Plan. Messrs. Dyer, Mueller and Kirkland have informed the Company
that they intend to vote in favor of the proposed amendments to the Company's
Certificate of Incorporation and for approval of the Stock Option Plan.
9
<PAGE>
Stockholders are encouraged to mark, sign and date the appropriate proxy
card and mail it promptly in the enclosed return envelope. A stockholder who has
executed and returned a proxy may revoke it at any time before it is voted by
executing and returning a proxy bearing a later date, by giving notice of
revocation to the Secretary of the Company or by attending the Meeting and
voting in person. See "Stockholders' Meeting, Voting Rights and Proxies --
Solicitation of Proxies," "-- Voting of Proxies," "-- Record Date," "-- Voting
Rights" and "-- Revocation of Proxies."
PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
REVERSE STOCK SPLIT
The Board of Directors has approved an amendment to the Company's
Certificate of Incorporation to effect the Reverse Stock Split (the "Reverse
Stock Split Amendment"). Pursuant to the Reverse Stock Split Amendment, each 27
outstanding shares of Common Stock will be combined into one share of Common
Stock. If adopted, the Reverse Stock Split Amendment will not become effective
unless and until the Closing occurs. The authorized capitalization of the
Company will not be affected by the Reverse Stock Split. Adoption of the Reverse
Stock Split Amendment requires the affirmative vote of the holders of a majority
of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting
Rights and Proxies -- Proposed Amendment to the Company's Certificate of
Incorporation: Reverse Stock Split Amendment."
BOARD OF DIRECTORS
The Board of Directors has approved the Board Amendments, pursuant to which
(i) the number of directors of the Company shall be fixed at seven members and
(ii) the number of directors constituting the Board shall not be changed without
the affirmative vote of at least 75% of the issued and outstanding shares of
Common Stock.
If the Board Amendments are adopted, three members of the Company's initial
Board of Directors will be members of the Company's management (each, a
"Management Director"). The remaining four directors will be persons nominated
by certain representatives of holders of the Convertible Debentures after
consultation with the Company's Board of Directors (each, an "Independent
Director"). The Management Directors will be Alexius A. Dyer III; George Murnane
III; and E. James Mueller. The Independent Directors will be Kyle R. Kirkland,
, and .
If adopted, the Board Amendment will not become effective unless and until
the Closing occurs. Adoption of the Board Amendments requires the affirmative
vote of the holders of a majority of the shares of Common Stock outstanding. See
"Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the
Company's Certificate of Incorporation: Board of Directors," "Management" and
Description of Capital Stock."
PREFERRED STOCK AUTHORIZATION
The Board of Directors has approved an amendment to the Company's
Certificate of Incorporation (i) to increase the number of authorized shares of
Preferred Stock $.001 par value (the "Preferred Stock") to 2,000,000, (ii) to
provide that such shares may be issued from time to time by the Board of
Directors without further stockholder approval and (iii) to provide that a
series of Preferred Stock may be issued with such designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms and conditions of redemption as are
determined by the Board of Directors (the "Preferred Stock Authorization"). If
adopted, the Preferred Stock Authorization will not become effective unless and
until the Closing occurs. Adoption of the Preferred Stock Authorization requires
the affirmative vote of the holders of a majority of the shares of Common Stock
outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed
Amendments to the Company's Certificate of Incorporation: Preferred Stock
Authorization" and "Description of Capital Stock."
10
<PAGE>
CHARTER AMENDMENTS
The Board of Directors has approved amendments to the Company's Certificate
of Incorporation and Bylaws to add certain provisions with respect to
stockholder action (the "Charter Amendments"). Certain of those provisions may
make an acquisition of the Company more difficult for an acquiror.
SECTION 203 OF THE DELAWARE LAW. Pursuant to the Charter Amendments, the
Company's Certificate of Incorporation would be amended to make the provisions
of Section 203 of the Delaware General Corporation Law (the "DGCL") inapplicable
to the Company. In general, Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date such
stockholder became an "interested stockholder," unless (a) prior to such date
the board of directors of the corporation approved either the "business
combination" or the transaction which resulted in the stockholder becoming an
"interested stockholder," or (b) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(i) persons who are directors and also officers and (ii) by employee stock
plans, in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (c) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at the annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" includes certain mergers, stock or asset
sales and other transactions resulting in a financial benefit to the "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock. Under the terms of Section 203, this amendment
will not be effective until 12 months after adoption by the stockholders and
shall not apply to any "business combination" between the Company and any person
who becomes an "interested stockholder" on or prior to such adoption.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation
will be amended to provide that no action required or permitted to be taken at
any annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.
This provision of the Certificate of Incorporation may not be amended, modified
or repealed by the stockholders of the Company, except with the consent of
holders of three-fourths of the Company's outstanding Common Stock.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual or special meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 30 days nor more than
60 days prior to the meeting; provided, however, that in the event that less
than 40 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
received no later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. The Bylaws also specify certain requirements for a
stockholder's notice to be in proper written form. These provision may preclude
some stockholders from bringing matters before the stockholders at an annual or
special meeting or from making nominations for directors at an annual or special
meeting. As set forth below, this provision of the Bylaws may not be amended,
modified or repealed by the stockholders of the Company, except with the consent
of holders of three-fourths of the Company's outstanding Common Stock.
11
<PAGE>
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to
provide that when a meeting of stockholders of the Company is convened, the
presiding officer, if directed by the Board of Directors, may adjourn the
meeting if no quorum is present for the transaction of business or if the Board
of Directors determines that adjournment is necessary or appropriate to enable
the stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders or
to otherwise effectively exercise their voting rights. This provision will,
under certain circumstances, make more difficult or delay actions by the
stockholders opposed by the Board of Directors. The effect of such provision
could be to delay the timing of a stockholders' meeting, including in cases
where stockholders have brought proposals before the stockholders which are in
opposition to those brought by the Board of Directors and therefore may provide
the Board of Directors with additional flexibility in responding to such
stockholder proposals. As set forth below, the Bylaw provisions regarding
holding of meetings of stockholders may not be amended or repealed by the
stockholders of the Company, except with the consent of holders of three-fourths
of the Company's outstanding Common Stock.
AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended
to provide that no provision of the Bylaws may be amended, modified or repealed
by the stockholders of the Company, nor any provision of the Bylaws inconsistent
with such provision be adopted by the stockholders of the Company, except with
the consent of holders of three-fourths of the Company's outstanding Common
Stock. This provision will make it more difficult for stockholders to make
changes to the Bylaws that are opposed by the Board of Directors. This provision
of the Certificate of Incorporation may not be amended, modified or repealed by
the stockholders of the Company, except with the consent of holders of
three-fourths of the Company's outstanding Common Stock.
If adopted, the Charter Amendments will not become effective unless and
until the Closing occurs. Adoption of the Charter Amendments requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed
Amendment to the Company's Certificate of Incorporation: Provisions Affecting
Corporate Governance" and "Description of Capital Stock."
THE STOCK OPTION PLAN
The Board of Directors has approved the adoption of the Stock Option Plan
for the Company's directors, officers and employees. The Stock Option Plan is
intended to provide a means to attract, retain and motivate selected employees
of the Company and non-employee directors of the Company. The Stock Option Plan
provides for the grant to eligible employees of incentive stock options, non-
qualified stock options, stock appreciation rights, restricted shares,
performance share and performance units, dividend equivalents and other share
based awards. All employees and directors are eligible to participate in the
Stock Option Plan. The portion of the Stock Option Plan applicable to employees
will be administered by the Compensation Committee of the Company's Board of
Directors. The Compensation Committee will have the full and final authority to
select employees to whom awards may be granted, to determine the type of awards
to be granted to such employees and to make all administrative determinations
required by the Stock Option Plan. The Compensation Committee also will have
authority to waive conditions relating to an award or accelerate vesting of
awards. The Stock Option Plan provides for certain grants of nonqualified stock
options to non-employee directors, and, in the case of such grants, is intended
to operate automatically and not require administration. An aggregate of 598,782
shares of Common Stock have been reserved for issuance under the Stock Option
Plan, subject to anti-dilution adjustments in the event of certain changes in
the Company's capital structure.
In connection with the Restructuring, the Company intends to grant
restricted stock and/or options to purchase the following numbers of shares of
Common Stock to the following persons or groups: Alexius A. Dyer III, 224,543
shares, representing 7.5% of the Common Stock to be outstanding following the
Restructuring on a fully-diluted basis; George Murnane III, 104,787 shares,
representing 3.5% of such outstanding Common Stock; and the non-executive
employees of the Company,
12
<PAGE>
119,756 shares, representing 4.0% of such outstanding Common Stock. Forty
percent of such options or shares will vest immediately with 15% vesting
annually, over the four years following the date of grant. In addition, shares
representing 2.5% of the outstanding Common Stock will be reserved for future
issuance pursuant to the Stock Option Plan, each grant to vest equally, over
three years after being awarded. The Company also intends to grant options
representing up to 2.5% of the outstanding Common Stock to non-employee
directors. The number of options to be granted to the non-employee directors
will be determined by the Company prior to the consummation of the
Restructuring. The Company intends to reserve for future issuance to the
non-employee directors any shares not granted as restricted stock and not
covered by options issued upon consummation of the Restructuring. See
"Management -- The Stock Option Plan."
EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SHARES
As soon as practicable after the Closing, the Company's stockholders will be
notified and requested to surrender their present Common Stock certificates for
replacement certificates representing the number of shares of Common Stock into
which their shares of Common Stock were combined pursuant to the Reverse Stock
Split. Until so surrendered, each existing certificate for 27 shares of Common
Stock prior to the Closing will be deemed to represent a certificate for one
share of Common Stock.
No certificates or scrip representing fractional shares of Common Stock will
be issued in connection with the Restructuring. The Company expects to enter
into an agreement with the Depositary whereby the Depositary will aggregate and
sell in the open market all fractional shares of Common Stock otherwise issuable
in connection with the Restructuring. There can be no assurance as to the price
at which such sales will be effected. Market conditions or other factors could
cause the fractional shares to be sold at depressed prices, including prices
substantially below fair market value. The proceeds of such sales will be
distributed by the Depositary to the persons who would otherwise have received
such fractional amount. See "Certain Risk Factors -- Market for Common Stock"
and "Stockholders' Meeting, Voting Rights and Proxies -- Exchange of Stock
Certificates; Fractional Shares."
FEDERAL INCOME TAX CONSIDERATIONS
The Restructuring is expected to result in the recognition by the Company of
a certain amount of cancellation of debt ("COD") income. As a result of such
income, the Company's available federal net operating loss carryforwards
("NOLs") will be reduced accordingly. Following the Restructuring, the Company's
ability to use its remaining NOLs will be significantly limited by Section 382
of the Tax Code, except to the extent the Company recognizes certain built-in
gains in its assets during the five-year period following the Restructuring.
The exchange of the Convertible Debentures for Common Stock should
constitute a tax-free recapitalization for federal income tax purposes.
Accordingly, except to the extent that the consideration received by the holder
of Convertible Debentures is attributable to accrued interest, a holder of
Convertible Debentures should not recognize any gain or loss as a result of the
Restructuring. Under the terms of the Exchange Offer, a holder of Convertible
Debentures will be deemed to have been paid, and thus will be required to
include in income the amount of unpaid interest that has accrued with respect to
such Convertible Debentures as of the date of the Restructuring which has not
previously been included in such holder's income.
See "Certain Federal Income Tax Considerations."
FINANCIAL FORECAST
For information with respect to the Company's projected financial
performance, see "The Restructuring -- Projection of Certain Financial Data."
13
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company for the five years ended May 31, 1996. The historical operating data
and historical balance sheet data for the five years ended May 31, 1996
presented below have been derived from, and should be read in conjunction with,
the Company's audited consolidated financial statements and the related notes
thereto. The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in this Proxy Statement/Prospectus. See "Selected Historical Financial
Data."
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues.................................... $ 26,527 $ 33,505 $ 18,733 $ 24,983 $ 23,205
Income from operations............................ 4,360 4,049 (16,199) 1,170 4,458
Interest expense.................................. 871 2,569 2,953 2,564 2,192
Interest and other income......................... (94) (66) (87) (603) (34)
Unusual and non-recurring items................... -- -- -- (177) --
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes, equity in
loss of joint venture and extraordinary item..... 3,583 1,546 (19,065) (614) 2,300
Provision for income taxes (benefit).............. 1,370 510 (2,476) -- 14
Equity in loss of joint venture................... (229) (59) (424) -- --
Extraordinary loss on extinguishment of debt...... -- -- (363) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)............................... $ 1,984 $ 977 $ (17,376) $ (614) $ 2,286
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Primary earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item....... $ 0.52 $ 0.22 $ (4.21) $ (0.15) $ 0.57
Extraordinary item.............................. -- -- (0.09) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................... $ 0.52 $ 0.22 $ (4.30) $ 0.15 $ 0.57
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding used in
primary calculation.............................. 3,849,852 5,312,046 4,041,779 4,041,779 4,041,779
Fully diluted earnings (loss) per common and
common equivalent shares
Earnings (loss) before extraordinary item....... $ 0.52 $ 0.22 $ (4.21) $ (0.15) $ 0.47
Extraordinary item.............................. -- -- (0.09) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................... $ 0.52 $ 0.22 $ 4.30 $ 0.15 $ 0.47
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding used in fully
diluted calculation.............................. 3,849,852 5,312,046 4,041,779 4,041,779 6,541,779
Ratio of earnings to fixed charges (1)............ 5.01 1.58 -- -- 2.03
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 2,938 $ 17,088 $ (18,312) $ (13,489) $ (10,841)
Total assets...................................... 20,303 35,709 25,553 14,511 16,132
Total debt........................................ 7,605 23,484 26,173 20,335 18,144
Stockholder's equity (deficit).................... 7,080 8,173 (9,088) (9,702) (7,416)
Book value per share.............................. $ 1.78 $ 2.04 $ (2.25) $ (2.40) $ (1.83)
</TABLE>
- --------------------------
(1) For purposes of this item, "fixed charges" represent interest expense and
"earnings" represent income (loss) from operations. Earnings were
insufficient to cover fixed charges by $17.2 million and $.7 million for the
years ended May 31, 1994, and 1995, respectively.
14
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The summary pro forma results of operations and financial position of the
Company set forth below have been derived from the Pro Forma Financial
Information appearing elsewhere in this Proxy Statement/Prospectus. The pro
forma operating data have been prepared assuming that the Restructuring occurred
on the first day of the period presented and the pro forma balance sheet data
have been prepared assuming that the Restructuring occurred on the balance sheet
date.
For purposes of presenting pro forma results, the Company's historical
consolidated financial statements have been adjusted to give effect to the
Restructuring, assuming that all of the Convertible Debentures are accepted for
exchange, that the Senior Notes are redeemed on the Closing Date with the
proceeds of an advance pursuant to the Credit Agreement, that amounts
outstanding pursuant to the Credit Agreement bear interest at the rate currently
applicable (10.25%) throughout the periods and that the Reverse Stock Split is
completed. See "Accounting Treatment." The pro forma financial information does
not purport to be indicative of the results that would actually have been
obtained had such transactions been consummated as of the date and for the
period presented or that may be obtained in the future. The information set
forth below should be read in conjunction with the Company's consolidated
historical financial statements and the notes thereto included elsewhere in this
Proxy Statement/Prospectus. See "Financial Statements." For an explanation of
the adjustments and assumptions made to prepare the pro forma financial data,
see "Pro Forma Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996
-------------------------
(IN THOUSANDS, EXCEPT
RATIOS
AND PER SHARE DATA)
<S> <C>
OPERATING DATA:
Total revenue.......................................................................... $ 23,205
Total operating costs (1).............................................................. 18,747
-----------
Income from operations (2)............................................................. 4,458
Interest expense....................................................................... 1,123
Interest and other income.............................................................. (34)
-----------
Earnings before income taxes........................................................... 3,369
Provision for income taxes (3)......................................................... 14
-----------
Net earnings........................................................................... $ 3,355
-----------
-----------
Ratio of earnings to fixed charges (4)................................................. 3.97
PER SHARE DATA:
Primary earnings per common and common equivalent share................................ $ 1.40
Weighted average shares outstanding used in primary calculation........................ 2,395,104
Fully diluted earnings per common and common equivalent share.......................... $ 1.40
Weighted average shares outstanding used in fully diluted calculation.................. 2,395,104
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31, 1996
-------------------------
<S> <C>
BALANCE SHEET DATA:
Working Capital........................................................................ $ 6,742
Total assets........................................................................... 15,459
Total debt............................................................................. 8,144
Stockholders' equity................................................................... 2,193
Book value per share................................................................... 0.92
</TABLE>
- ------------------------------
(1) Total operating costs is defined as Cost of sales, Selling, general and
administrative expenses, Provision for doubtful accounts, and Depreciation
and amortization.
(2) Income from operations is defined as total revenue less total operating
costs.
(3) As of May 31, 1996 after giving effect to the Restructuring, the Company
would have had net operating loss carryforwards of approximately $4.9
million available to offset future income. The Company's ability to use such
net operating loss carryforwards to offset future income will be limited.
See "Certain Federal Income Tax Considerations."
(4) For purposes of this item, "fixed charges" represent interest expense and
"earnings" represent income from operations.
15
<PAGE>
MARKET PRICES OF AND DIVIDENDS PAID ON COMMON STOCK AND MARKET PRICES OF
CONVERTIBLE DEBENTURES
COMMON STOCK
The Company's Common Stock has been publicly traded since April 2, 1990.
From April 2, 1990 through July 22, 1994, the Common Stock was listed and traded
on the Nasdaq/National Market System under the symbol IASG. Effective July 22,
1994, the Nasdaq Qualifications Committee delisted the Company's Common Stock
from quotation on the Nasdaq/National Market System. Since that time, the Common
Stock has been traded through the National Quotation Bureau's National Daily
Quotation Price Sheets (the "Pink Sheets"). The following table sets forth the
high and low closing prices of the Common Stock for the fiscal periods indicated
below as reported by Nasdaq/ National Market System, prior to July 22, 1994, and
the high and low bid quotations as reported by the National Quotation Bureau
thereafter.
<TABLE>
<CAPTION>
Fiscal 1995 HIGH LOW
- -------------------- ------ ------
<S> <C> <C>
First Quarter
(through July
22)................ $ 15/16 $ 5/16
First Quarter (from
July 22)........... 3/8 1/4
Second Quarter...... 3/8 1/16
Third Quarter....... 13/32 1/32
Fourth Quarter...... 1/2 5/32
<CAPTION>
Fiscal 1996 HIGH LOW
- -------------------- ------ ------
<S> <C> <C>
First Quarter....... $ 7/16 $ 9/32
Second Quarter...... 9/32 5/32
Third Quarter....... 3/16 1/8
Fourth Quarter...... 7/32 1/8
<CAPTION>
Fiscal 1997 HIGH LOW
- -------------------- ------ ------
<S> <C> <C>
First Quarter
(through August 15,
1996).............. $ 1/4 $ 3/16
</TABLE>
At May 31, 1996, there were 105 holders of record and approximately
beneficial owners of the Company's Common Stock and no holders of the Company's
Preferred Stock. After consummation of the Restructuring, there will be
approximately 950 beneficial owners of Common Stock, assuming all of the
Convertible Debentures are tendered in the Exchange Offer.
The Company has not paid dividends on the Common Stock. The Company's
financial condition and the existence of defaults pursuant to the Senior Notes
and the Convertible Debentures make it unlikely that the Company will be able to
pay dividends on the Common Stock in the foreseeable future in the event the
Restructuring is not consummated. If the Restructuring is consummated, covenants
to be contained in the Credit Agreement will prohibit the Company from paying
dividends on the Common Stock as long as indebtedness issued pursuant to the
Credit Agreement remains outstanding.
The last sale of the Common Stock prior to the announcement of the
Restructuring known to the Company occurred on July 9, 1996 at a price of $.1875
per share.
16
<PAGE>
CONVERTIBLE DEBENTURES
No active trading market for the Convertible Debentures exists. The
Convertible Debentures were not registered pursuant to the Securities Act prior
to issuance and are not listed on any exchange. Because of their lack of public
registration and there are only approximately 50 holders of the Convertible
Debentures, trading in the Convertible Debentures is extremely limited and
sporadic. The last trade of the Convertible Debentures known to the Company
occurred in October, 1995, when the largest single holder of the Convertible
Debentures sold all the Convertible Debentures held by it for a cash price equal
to $150 per $1,000 principal amount of the Convertible Debentures, to one or
more other substantial holders of the Convertible Debentures.
MARKET AND TRADING INFORMATION
The Company intends to apply for inclusion of the Common Stock in The Nasdaq
Stock Market's Small Cap Market under the symbol "IFLY" upon consummation of the
Restructuring. The Company will use its best efforts to have the Common Stock
included in The Nasdaq Stock Market's Small Cap Market. However, there can be no
assurance that such application will be granted or that an active trading market
for the Common Stock will develop and no assurance can be given as to the price
at which the Common Stock might trade. See "Certain Risk Factors -- Market for
Common Stock."
17
<PAGE>
RISK FACTORS
The Common Stock offered hereby pursuant to the Exchange Offer is subject to
certain material risks. In addition, in the event the Restructuring is not
consummated, there are additional risks to the ownership of Common Stock and
Convertible Debentures primarily as a result of the Company's financial
condition. Before deciding whether or not to tender any Convertible Debentures
pursuant to the Exchange Offer, or to vote in favor of the matters to be brought
before the Meeting, each stockholder and each holder of the Convertible
Debentures should consider carefully all of the information contained in this
Proxy Statement/Prospectus.
RISK FACTORS RELATING TO FAILURE OF THE RESTRUCTURING TO OCCUR
FINANCIAL CONDITION OF THE COMPANY. The Company faces significant liquidity
problems caused by its substantial debt burden. The Company had outstanding
indebtedness of approximately $18.1 million at May 31, 1996, consisting
primarily of $7.7 million principal amount of the Senior Notes, $10 million
principal amount of the Convertible Debentures and $.4 million principal amount
of a mortgage loan secured by its corporate headquarters. The Company has
scheduled debt service obligations (principal and interest) of approximately
$5.05 million during fiscal 1997. Cash flow from operations and cash on hand
will not be sufficient to cover the Company's scheduled cash debt service
obligations during fiscal 1997. See "The Restructuring -- Forecast of Certain
Financial Data." The Company has not made any interest payments on the
Convertible Debentures since February 28, 1995 and there is currently an
interest arrearage of approximately $1 million on the Convertible Debentures. On
July 17, 1995 the Company did not make its scheduled principal payment totaling
approximately $1.8 million to the holders of the Senior Notes. The Company made
a principal payment of $1.45 million on the Senior Notes on December 12, 1995
and a subsequent payment of $.7 million on May 13, 1996, which cured such
principal payment default and prepaid, without penalty, approximately $.35
million of the $4.1 million principal payment due on the Senior Notes on July
17, 1996. The Company did not make its July 17, 1996 principal payment on the
Senior Notes, which was due in the amount of approximately $3.7 million, pending
redemption of the Senior Notes in connection with the Restructuring. If the
Restructuring is not consummated, the Company will be unable to make such
principal payment, the only remaining principal payment on the Senior Notes due
during the current fiscal year, and will continue to be unable to make interest
payments on the Convertible Debentures for the remainder of the current fiscal
year.
If the Restructuring is not consummated, the financial condition of the
Company will necessitate the development of alternative actions. In view of the
Company's limited financial resources and the existence of unwaived defaults
with respect to the Senior Notes and the Convertible Debentures, there can be no
assurance that the Company would succeed in formulating and consummating an
alternative financial restructuring. In such case, the Company most likely would
be forced to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code.
The Company projects that it will have insufficient funds to make all of its
scheduled principal and interest payments with respect to the Senior Notes and
Convertible Debentures during fiscal 1997 through 2002, as set forth in the
table below:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------
1997 1998 1999 2000 2001 2002
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Scheduled principal payments under the Senior Notes.............. $ 3.70 $ 4.00 -- -- -- --
Scheduled interest payments under the Senior Notes............... .50 .10 -- -- -- --
Scheduled interest payments on the Convertible Debentures (1).... .80 .80 .80 .80 .80 .80
--------- --------- --- --- --- ---
Totals......................................................... $ 5.00 $ 4.90 $ .80 $ .80 $ .80 $ ..80
--------- --------- --- --- --- ---
--------- --------- --- --- --- ---
</TABLE>
- ------------------------
(1) No principal repayments with respect to the Convertible Debentures are due
until August 31, 2003.
18
<PAGE>
CERTAIN DEFAULTS. On May 26, 1995, the Company received a notice of payment
blockage from the Majority Noteholder. 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 Convertible Debentures not be paid. As a result
of the Company's receipt of the notice of payment blockage, the Company did not
make the interest payments due to holders of Convertible Debentures on May 31,
1995 and August 31, 1995, totaling $.4 million. Pursuant to terms of the Senior
Notes, the Company was prohibited from making any other payments with respect to
the Convertible Debentures prior to the expiration of the payment blockage
period on November 22, 1995. Notwithstanding the expiration of the payment
blockage period, the Company did not pay the November 30, 1995 and the February
29 and May 31, 1996 interest payments on the Convertible Debentures. The Company
does not intend to resume making payments of interest on the Convertible
Debentures.
The Company did not make its scheduled July 17, 1995 principal payment on
the Senior Notes in the approximate amount of $1.8 million. The Company cured
the default in part by making a principal payment of $1.45 million on December
12, 1995. The Company made an additional principal payment of $.7 million on May
13, 1996, which cured such principal payment default and prepaid, without
penalty, approximately $.35 million of the $4.1 million principal payment due on
the Senior Notes on July 17, 1996. The Company did not make its July 17, 1996
principal payment on the Senior Notes, which was due in the amount of
approximately $3.7 million, pending redemption of the Senior Notes in connection
with the Restructuring. If the Restructuring is not consummated, the Company
will be unable to make such principal payment.
The failure to make the interest payments to the holders of the Convertible
Debentures and the principal payment to the holders of the Senior Notes due on
July 17, 1996 referred to above constituted an Event of Default under the
agreements governing the Senior Notes and Convertible Debentures. Further, the
Company is in default in the observance of certain financial covenants
applicable to the Senior Notes and the Convertible Debentures. If the Company
remains in default under the terms of the Senior Notes and Convertible
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of $17.7 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 most likely would require the Company to cease
operations or to file for protection under Chapter 11 of the Bankruptcy Code. In
addition, if the holders of any of the Senior Notes or Convertible Debentures
demand repayment or if the holders of the Senior Notes seek to realize upon the
collateral securing the Senior Notes, there is a substantial likelihood that the
Company will be forced to cease operations or to file for protection under
Chapter 11 of the Bankruptcy Code. See "The Restructuring -- Certain Defaults."
CONSEQUENCES OF FAILURE TO CONSUMMATE THE RESTRUCTURING. If the
Restructuring is not consummated, the Company's highly leveraged financial
position will result in the continuation of the defaults described above with
respect to the Senior Notes and the Convertible Debentures and may result in a
number of other serious financial and operational problems, including the
following: (i) the Company will experience a severe liquidity crisis; (ii) the
Company will be unable to invest adequate capital in its business or maintain
its current capital assets; (iii) the Company will have little, if any, ability
to access capital markets; (iv) the Company's senior management will be required
to spend an excessive amount of time and effort dealing with the Company's
financial problems, instead of focusing on the operation of its business; (v)
the Company may be unable to retain top managers and other key personnel and
build the value of its business; (vi) the Company may lose business if customers
become concerned about the Company's ability to supply quality replacement parts
in a timely manner or to comply with applicable regulatory requirements; and
(vii) suppliers to the Company may stop providing supplies or may provide
supplies only on shortened payment or cash terms. If these problems occur, the
Company believes that the value of its business will deteriorate.
19
<PAGE>
Accordingly, if the Restructuring is not consummated, the Company will have
little choice but to devise alternative actions. Considering the Company's
limited financial resources and the existence of unwaived defaults with respect
to the Senior Notes and the Convertible Debentures, there can be no assurance
that the Company would succeed in formulating and consummating an acceptable
alternative financial restructuring. In such case, the Company most likely would
be forced to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code. In addition, because payment defaults currently exist under the
Senior Notes and Convertible Debentures (see "-- Certain Defaults"), it is
possible that creditors of the Company could file an involuntary petition
seeking to place the Company in bankruptcy. There can be no assurance that a
bankruptcy proceeding would result in a reorganization of the Company rather
than a liquidation, or that any reorganization would be on terms as favorable to
the holders of the Convertible Debentures, Senior Notes and Common Stock as the
terms of the Restructuring. If a liquidation or a protracted reorganization were
to occur, there is a risk that there would be no cash or property available for
distribution to holders of the Convertible Debentures and the Common Stock and
that the holders of Senior Notes would incur a significant discount on their
claims. See "The Restructuring -- Certain Defaults."
CONDITIONS TO THE RESTRUCTURING. The Restructuring will not be consummated
unless the following things, among others, occur: (i) the Minimum Tenders shall
have been validly tendered and not withdrawn by the holders of the Convertible
Debentures prior to the Expiration Date; (ii) the requisite Consents shall have
been received and such Consents shall not have been revoked and the Amendments
shall have become effective; (iii) the Company's stockholders shall have
approved the amendments to the Company's Certificate of Incorporation to effect
the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization
and the Charter Amendments and shall have approved the Stock Option Plan; (iv)
the Company and the Bank shall have negotiated and executed the Credit
Agreement, the conditions to the effectiveness thereof shall have been satisfied
or waived and the Company shall have the ability to borrow at least $2.5 million
pursuant to the Credit Agreement immediately following the Restructuring; and
(v) the Old Warrant Amendment shall have become effective. See "The
Restructuring -- Conditions to the Restructuring." There can be no assurance
that the foregoing conditions will be satisfied.
RISK FACTORS ASSOCIATED WITH OWNERSHIP OF THE COMMON STOCK
EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY. Since the
Company's customers consist of airlines, maintenance and repair facilities that
service airlines and other aircraft spare parts redistributors, the Company's
business can be impacted by the economic factors that affect the airline
industry. When such factors adversely affect the airline industry, they tend to
cause downward pressure on the pricing for aircraft spare parts and increase the
credit risk associated with doing business with airlines. Additionally, factors
such as the price of fuel affect the aircraft spare parts market for older
aircraft, since older aircraft become less competitive with newer model aircraft
as the price of fuel increases. There can be no assurance that economic and
other factors which might affect the airline industry will not have an adverse
impact on the Company's results of operations. See "Business -- Industry
Overview."
RISKS REGARDING THE COMPANY'S INVENTORY. The Company's inventory consists
principally of new, overhauled, serviceable and repairable aircraft parts that
are purchased from many sources. Before parts may be installed in an aircraft,
they must meet certain standards of condition established by the Federal
Aviation Administration ("FAA") and/or the equivalent regulatory agencies in
other countries. Specific regulations vary from country to country, although
regulatory requirements in other countries generally coincide with FAA
requirements. Parts must also be traceable to sources deemed acceptable by such
agencies. Parts owned or acquired by the Company may not meet applicable
standards or standards may change in the future, causing parts which are already
contained in the Company's inventory to be scrapped or modified. Aircraft
manufacturers may also develop new parts to be used in lieu of parts already
contained in the Company's inventory. In all such cases, to the extent that the
Company has such parts in its inventory, their value may be reduced. See
"Business -- Operations of the Company."
20
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results are
affected by many factors, including the timing of orders from large customers,
the timing of expenditures to purchase inventory in anticipation of future
sales, the timing of bulk inventory purchases, and the mix of available aircraft
spare parts contained, at any time, in the Company's inventory. Since the
Company typically does not obtain long-term purchase orders or commitments from
its customers, it must anticipate the future volume of orders based upon the
historic purchasing patterns of its customers and upon its discussions with its
customers as to their future requirements. Cancellations, reductions or delays
in orders by a customer or group of customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Operations of the Company."
GOVERNMENT REGULATION. The aviation industry is highly regulated in the
United States by the FAA and in other countries by similar agencies. While the
Company's business is not regulated, the aircraft spare parts which it sells to
its customers must be accompanied by documentation that enables the customer to
comply with applicable regulatory requirements. There can be no assurance that
new and more stringent government regulations will not be adopted in the future
or that any such new regulations, if enacted, would not have an adverse impact
on the Company. See "Business -- Government Regulation."
CONCENTRATION OF SALES. During a given fiscal year, one or more customers
may account for a significant portion of the Company's parts sales. The
Company's parts customers operate in a segment of the airline industry that is
volatile and it is not unusual for a carrier that uses the types of aircraft for
which the Company stocks parts to fail. In addition, in the past the Company's
sales have been concentrated with a small number of customers. For example, in
fiscal 1994 ADC Airlines and Transafrik accounted for approximately 25% of the
Company's total revenue and in fiscal 1995, Aeroservicios Carabobo C.A. and Ajax
Leasing Ltd., accounted for more than 34% of the Company's total revenue. During
fiscal 1996, other than ValuJet Airlines, Inc., no customer represented more
than 4% of the Company's total revenue.
For fiscal 1996 and the first seven months of calendar year 1996, the
Company's parts sales to ValuJet represented approximately 21% and 25%,
respectively, of the Company's total revenues. ValuJet has been the subject of
intense scrutiny by the FAA since the crash of one of its aircraft in early May
1996. On June 17, 1996, ValuJet entered into a consent decree with the FAA.
Pursuant to the consent decree, ValuJet agreed to ground all of its aircraft
until it demonstrates compliance with specified safety and maintenance
procedures. Although ValuJet officials have publicly stated their intentions to
resume operations in the near future, there can be no assurance that ValuJet
will be able to do so. Further, the consent decree provides that ValuJet may
operate no more than 15 aircraft when it initially resumes operations, which is
less than half of its fleet. The failure of ValuJet to resume operations or
eventually to resume operations to substantially the level conducted prior to
the grounding could have a material adverse effect on the Company by reducing
the Company's sales and earnings from ValuJet. Furthermore, to the extent that a
number of ValuJet's aircraft are not returned to service with ValuJet and become
available for sale and/or lease, short-term disruptions may occur in the DC-9
market, temporarily diminishing the value of the Company's inventory and
aircraft. The Company believes that any aircraft previously operated by ValuJet
and not placed back in service will eventually be acquired by other carriers who
will need spare parts, but there can be no assurance in this regard. The Company
also conducts business with other customers who provide services to ValuJet.
Management cannot estimate the effect that the grounding of ValuJet will have on
sales to such other customers.
To reduce the Company's future vulnerability to a decrease in sales to any
single customer, the Company focused its marketing efforts on the identification
and solicitation of new customers. As a result, the Company obtained
approximately 240 new parts customers during fiscal 1995 and approximately 300
during fiscal 1996. See "Business -- Customers."
21
<PAGE>
RISKS REGARDING SALES AND LEASES TO FOREIGN CUSTOMERS. A substantial number
of the Company's customers are located outside the United States. During fiscal
1996, the Company supplied parts to 771 customers worldwide, of which 95 were
foreign customers. The Company's sales and leases abroad entail numerous
financial, legal and political risks for the Company's business, including
restrictions on the convertibility of payments to the Company in foreign
currencies, the difficulty in effecting a legal repossession of aircraft leased
to foreign customers, the difficulty in ascertaining the creditworthiness of
foreign customers, and the difficulty in instituting legal action to collect
receivables owed to the Company by foreign customers. In addition, conducting
business in such foreign jurisdictions exposes the Company to risks of currency
fluctuations, political instability and other risks inherent in operating in
foreign countries. These include controls, expropriation, nationalization and
other policies of local governments as well as the laws and policies of the
United States affecting foreign trade and investment. The Company's sales to
foreign customers are subject to the risks customarily associated with such
activities. Prior to fiscal 1995, a significant portion of the Company's sales
were to foreign customers. Beginning in fiscal 1995, as part of the new senior
management's strategic refocusing, the Company sought to reduce its exposure to
the more volatile international markets. As a result, its foreign revenues as a
percentage of total revenues have decreased in each of the last four years, to
approximately 15% in fiscal 1996 from 28% in fiscal 1995, 41% in fiscal 1994,
and 60% in fiscal 1993. Furthermore, during fiscal 1996, all of the Company's
sales were transacted in U.S. dollars. As of May 31, 1996 the Company owned no
assets outside the United States. See "Business -- Customers."
PRODUCT LIABILITY. The Company's business exposes it to possible claims for
personal injury or death which may result from the failure of an aircraft spare
part sold by it. In this regard, the Company maintains liability insurance in
the amount of $10 million. While the Company maintains what it believes to be
adequate liability insurance to protect it from such claims, and while no
lawsuit has ever been filed against the Company based upon a products liability
theory, no assurance can be given that claims will not arise in the future or
that such insurance coverage will be adequate. Additionally, there can be no
assurance that insurance coverages can be maintained in the future at an
acceptable cost. Any such liability not covered by insurance could have a
material adverse effect on the financial condition of the Company. See "Business
- -- Product Liability."
GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS. A key element of
the Company's strategy involves growth through the acquisition of additional
inventories of aircraft spare parts and the acquisition of other companies,
assets or product lines that would complement or expand the Company's existing
aircraft spare parts business. The Company's ability to grow by acquisition is
dependent upon, and may be limited by, the availability of suitable aircraft
parts inventories, acquisition candidates, capital, and by restrictions
contained in the Credit Agreement. In addition, acquisitions involve risks that
could adversely affect the Company's operating results, including the
assimilation of the operations and personnel of acquired companies, the
potential amortization of acquired intangible assets and the potential loss of
key employees of acquired companies. There can be no assurance that the Company
will be able to consummate acquisitions on satisfactory terms. See "Business --
Operating Strategy."
RELIANCE ON EXECUTIVE OFFICERS AND KEY EMPLOYEES. The continued success of
the Company is dependent to a significant degree upon the services of its
executive officers and upon the Company's ability to attract and retain
qualified personnel experienced in the various phases of the Company's business.
The Company has or will, upon consummation of the Restructuring, have,
employment agreements with all of its executive officers. The ability of the
Company to operate successfully could be jeopardized if one or more of its
executive officers were unavailable and capable successors were not found. The
employment agreements between the Company and its executive officers will be
individually terminable by each executive officer upon a change of control of
the Company. See "Management."
COMPETITION. The aircraft spare parts redistribution market is highly
fragmented. Customers in need of aircraft parts have access, through
computer-generated inventory catalogues, to a broad array
22
<PAGE>
of suppliers, including aircraft manufacturers, airlines and aircraft services
companies. The dominant companies in the aircraft parts aftermarket are AAR
Corp., Aviation Sales Company and Banner Aerospace. These companies are larger
than the Company and have greater financial resources. The Company also competes
with numerous smaller, independent dealers, which generally participate in niche
markets. The Company believes that none of its competitors account for a
significant amount of the spare parts market for DC-8, DC-9 and MD-80 aircraft,
the types of narrow-bodied aircraft in which the Company specializes.
Competition in the redistribution market is generally based on price,
availability and quality of product, including traceability. There can be no
assurance that competitive pressures will not materially and adversely affect
the Company's business, financial condition or results of operations. See
"Business -- Competition."
DILUTION. The issuance of a significant number of shares of Common Stock in
connection with the Restructuring will result in a significant dilution of the
equity interests of the existing holders of Common Stock. Immediately following
the consummation of the Restructuring, the equity interests of the holders of
Common Stock will be diluted to approximately 5% of the total number of shares
outstanding, assuming that all of the Convertible Debentures are accepted for
exchange, and that all options to purchase shares of Common Stock to be issued
to the Company's management are exercised. See "The Restructuring -- Certain
Significant Effects of the Restructuring."
MARKET FOR COMMON STOCK. The Company intends to apply for inclusion of the
Common Stock in The Nasdaq Stock Market's Small Cap Market upon consummation of
the Restructuring. The Company will use its best efforts to have the Common
Stock included in The Nasdaq Stock Market's Small Cap Market. However, there can
be no assurance that such application will be granted or that an active trading
market for the Common Stock will develop and no assurance can be given that a
holder of Common Stock will be able to sell such Common Stock in the future or
as to the price at which the Common Stock might trade. Further, there can be no
assurance that the Company will be able to maintain its inclusion on such
market. The Company expects to enter into an agreement with the Depositary
whereby the Depositary will aggregate and sell in the open market all fractional
shares of Common Stock otherwise issuable in the Exchange Offer. The Company can
give no assurance that the price at which such sales will be made will not be at
a substantial discount from the fair value of the securities sold. See "The
Exchange Offer -- Acceptance of Convertible Debentures and Delivery of Common
Stock."
NO DIVIDENDS. The Company does not anticipate that it will pay any
dividends on the Common Stock in the foreseeable future. The Credit Agreement
will contain provisions prohibiting the Company from paying dividends without
the consent of the lender. See "Description of the Credit Agreement."
CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS. Consummation of the
Restructuring will have significant consequences in the event of a subsequent
bankruptcy for exchanging holders of Convertible Debentures. To the extent
exchanging holders of the Convertible Debentures receive Common Stock, such
holders will have only an equity interest in the Company, which will rank below
all debt claims in a subsequent bankruptcy, including the claims of
non-exchanging holders of Convertible Debentures. Further, the Convertible
Debentures are subordinated to the Senior Notes and to all of the Company's
other secured and unsecured debt. Following the Restructuring, any Convertible
Debentures that have not been exchanged will be subordinated to the Company's
obligations under the Credit Agreement and all of the Company's other secured
and unsecured debt. See "The Restructuring -- Overview of the Restructuring."
23
<PAGE>
The relative rankings of the Company's debt claims and equity interests both
before and after the Restructuring are summarized in the following table.
<TABLE>
<CAPTION>
PRE-RESTRUCTURING POST-RESTRUCTURING
------------------------------ ------------------------------
<C> <S> <C> <C>
1. Secured Debt(a) 1. Secured Debt(a)
Senior Notes Credit Agreement
Other Secured Debt Other Secured Debt
2. Unsecured Debt(b) 2. Unsecured Debt(b) Trade Debt
Trade Debt Convertible Debentures
Convertible Debentures
3. Equity(c) 3. Equity(c)
Common Stock Common Stock
</TABLE>
- ------------------------
(a) All "Secured Debt" ranks ahead of all "Equity" and, to the extent of the
value of the security interests securing any such "Secured Debt," all
"Unsecured Debt." In addition, the debt under the Senior Notes has, and the
debt under the Credit Agreement will have, a contractual priority over all
"Unsecured Debt." To the extent any amount of the "Secured Debt" is under
secured or becomes unsecured, any such amount will have the relative
priority of "Unsecured Debt," except that debt under the Credit Agreement
and Convertible Debentures would retain its contractual priority over all
"Unsecured Debt."
(b) All "Unsecured Debt" ranks ahead of all "Equity." The Convertible Debentures
rank below all indebtedness of the Company other than "Trade Debt" and
indebtedness that by its express terms is not superior to the Convertible
Debentures.
(c) The Common Stock would constitute all the outstanding "Equity" of the
Company. In the event of a liquidation of the Company, all Secured and
Unsecured Debt of the Company, as well as Preferred Stock, if any, would be
paid or provided for and any amounts remaining would be available for the
"Equity."
THE RESTRUCTURING
The following sections of this Proxy Statement/Prospectus set forth certain
information regarding the events leading to the Restructuring, the terms of the
Restructuring, and the effects of the Restructuring on the Company and the
holders of its securities.
BACKGROUND
The Company issued the Convertible Debentures during fiscal 1994 on
September 8, 1993. The proceeds of the Convertible Debentures were used for the
following purposes: (i) to repurchase a portion of the Senior Notes ($3.4
million); (ii) to repay certain other indebtedness ($1.9 million); (iii) to pay
fees and expenses of the offering ($1.1 million); and (iv) to purchase four DC-9
aircraft for parting out ($3.6 million). Also during fiscal 1994, the Company,
in an attempt to more vertically integrate its business, invested approximately
$3 million to establish a repair facility certified by the FAA. The principal
business of the repair facility, which commenced operations in fiscal 1994, was
to perform FAA-required maintenance checks on certain narrow body aircraft. The
facility was operated by IASC.
However, during fiscal 1994, while the Company was undertaking its
diversification and expansion program, its financial performance was adversely
affected by several factors. First, sales to Transafrik Corp., a cargo carrier
operating in Africa, declined significantly, from approximately $6.0 million in
fiscal 1993 to approximately $1.5 million in fiscal 1994. Transafrik had
accounted for a significant portion of the Company's revenue prior to fiscal
1994. During fiscal 1994, Transafrik underwent a change in ownership and made
other significant management and operational changes, including a downsizing of
its fleet and changes in fleet mix. Second, the Company was unable to operate
the repair facility profitably, losing approximately $1.9 million on its
operations of the facility
24
<PAGE>
during fiscal 1994. Principally as the result of the establishment of the repair
facility, the number of persons employed by the Company grew from approximately
80 in fiscal 1993 to approximately 160 in fiscal 1994, and sales, general and
administrative expense increased to approximately 37.1% of total revenue in
fiscal 1994 from approximately 19.3% of total revenue in fiscal 1993. Third, the
overall market for used aircraft and parts weakened and this, combined with a
diminished cash position, reduced the Company's ability to purchase additional
aircraft and inventory for resale and lead to a 43.9% decline in total revenues
in fiscal 1994, from $33.5 million in fiscal 1993 to $18.7 million.
As a result of the weak demand in the marketplace and the Company's need to
increase its liquidity to meet its obligations as they became due, it became
necessary for the Company to sell an aircraft at an inopportune time and price,
resulting in a $2.1 million loss. This loss related primarily to the aircraft
being sold to raise cash at an amount substantially below cost, as well as the
write-off of an aircraft because its Nigerian lessee defaulted under the lease
and the Company did not believe it could recover possession of the aircraft. In
addition, during the fourth quarter of fiscal 1994, the Company accrued to cost
of sales a charge of $2.4 million for the partial write-down of three aircraft
to reflect net realizability of the aircraft. The unanticipated cost of
overhauling these aircraft at IASC eliminated the economic benefit that the
Company had negotiated under their sales contract.
In February 1994, the Company's President and Chief Financial Officer left
the Company and in January 1995, the Company's Chief Executive Officer was
replaced by the current Chief Executive Officer. In an effort to address the
Company's financial problems, current senior management made the strategic
decision to refocus the Company on its core business -- parts sales. The costs
of implementing this strategy were largely recognized in fiscal 1994.
Accordingly, the Company recorded a net loss of $17.4 million in fiscal 1994,
substantially all of which was related to non-core businesses and, to the extent
related to the core business, was nonrecurring. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As part of its strategic decisions to refocus on its core business, in late
fiscal 1994 and early fiscal 1995, the Company sought aggressively to reduce its
expenses. As a result, the total number of persons employed by the Company was
reduced by approximately 85%, to 24 by the end of fiscal 1995, and operations at
the service center were terminated. Further, the Company sold a subsidiary that
was engaged in air cargo transport. In addition, during fiscal 1995, the Company
sought to reduce its vulnerability to a decrease in sales to any single customer
by focusing its marketing on the identification and solicitation of new
customers. The Company obtained approximately 240 new parts customers during
fiscal 1995. Also in fiscal 1995, the Company instituted new compensation
policies for its parts sales force. Pursuant to the new policies all salesman
are paid strictly on commission, sales to new customers are encouraged and
commissions are not paid until accounts are collected. Furthermore, the Company
has continued to decrease its exposure to more volatile international markets.
Its domestic revenues as a percentage of total revenues has increased in each of
the last four fiscal years, to approximately 85% in fiscal 1996 from 72% in
fiscal 1995, 59% in fiscal 1994, and 40% in fiscal 1993.
CERTAIN DEFAULTS
On May 26, 1995, the Company received a notice of payment blockage from the
Majority Noteholder. 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 Convertible Debentures not be paid. As a result of the Company's
receipt of the notice of payment blockage, the Company did not make the interest
payments on the Convertible Debentures due on May 31 and August 31, 1995,
totaling $.4 million. Pursuant to terms of the Senior Notes, the Company was
prohibited from making any other payments with respect to the Convertible
Debentures prior to the expiration of the payment blockage period on November
22, 1995. Notwithstanding the expiration of the payment blockage period, the
Company did not pay the November 30, 1995 and the February 29 and May 31, 1996
interest payments on the Convertible Debentures. The Company does not intend to
resume making payments of interest on the Convertible Debentures.
25
<PAGE>
The Company did not make its scheduled July 17, 1995 principal payment on
the Senior Notes in the approximate amount of $1.8 million. The Company cured
the default in part by making a principal payment of $1.45 million on December
12, 1995. The Company made an additional principal payment of $.7 million on May
13, 1996, which cured such principal payment default and prepaid, without
penalty, approximately $.35 million of the $4.1 million principal amount due on
the Senior Notes on July 17, 1996. The Company did not make its July 17, 1996
principal payment on the Senior Notes, which was due in the amount of
approximately $3.7 million, pending redemption of the Senior Notes in connection
with the Restructuring. If the Restructuring is not consummated, the Company
will be unable to make such principal payment, the only remaining principal
payment on the Senior Notes due during the current fiscal year, and will
continue to be unable to make interest payments on the Convertible Debentures
for the remainder of the current fiscal year.
The failure to make the interest payments to holders of the Convertible
Debentures and the principal payment to the holders of the Senior Notes due on
July 17, 1996 referred to above constituted an Event of Default under the
agreements governing the Senior Notes and Convertible Debentures. Further, the
Company is in default in the observance of certain financial covenants
applicable to the Senior Notes and the Convertible Debentures. If the Company
remains in default under the terms of the Senior Notes and Convertible
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of approximately $17.7 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 most likely would require the
Company to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code. In addition, if the holders of any of the Senior Notes or
Convertible Debentures demands repayment or if the holders of the Senior Notes
seek to realize upon the collateral securing the Senior Notes, there is a
substantial likelihood that the Company will be forced to cease operations or to
file for protection under Chapter 11 of the Bankruptcy Code.
NEGOTIATIONS WITH DEBENTUREHOLDERS
In late fiscal 1995, the Company conducted preliminary meetings with certain
holders of the Senior Notes and Convertible Debentures and representatives of
Dabney/Resnick, Incorporated ("D/ R"), which served as the Company's placement
agent for the offering of the Convertible Debentures and whose clients include
several holders of the Convertible Debentures, regarding a restructuring of the
Company's debt. In July 1995, the Company formulated a restructuring proposal
that contemplated (among other things) (i) the issuance of shares of Common
Stock representing approximately 63.55% of the total shares of Common Stock to
be outstanding on a fully diluted basis following implementation of the proposal
to the holders of the Convertible Debentures in exchange for their debt claims
against the Company; (ii) a deferral of the repayment of approximately $1
million of the principal of the Senior Notes for one year; and (iii) the sale of
up to $2 million of new subordinated debt securities and shares of Common Stock
representing up to 12.5% of the Common Stock outstanding on a fully diluted
basis following the implementation of the proposal to certain holders of the
Convertible Debentures for cash. Pursuant to such restructuring proposal, the
Company's management would have received options representing 8.95% of the total
shares of Common Stock to be outstanding on a fully diluted basis following
implementation of the proposal and options equal to 2% of such Common Stock with
respect to each year during the five fiscal years following implementation of
the proposal that the Company achieved certain earnings projections. Following
the implementation of such proposal, the outstanding shares of Common Stock
would have represented approximately 5% of the total outstanding on a fully
diluted basis. The restructuring proposal was presented to certain major holders
of the Convertible Debentures and D/R in July, 1995. The Company understands
that, after the presentation of the restructuring proposal, the largest holder
of the Convertible Debentures sold all of the Convertible Debentures then held
by it, for a cash price equal to $150 per $1,000 principal amount of the
Convertible Debentures, to one or more substantial holders of Convertible
Debentures that had also been participating in the restructuring discussions.
26
<PAGE>
In November 1995, a major Convertible Debenture holder and D/R held
discussions with the Company regarding a possible counterproposal to the
Company's restructuring proposal. Pursuant to the counterproposal, the holders
of the Convertible Debentures would have exchanged their debt claims against the
Company for $4.85 million aggregate principal amount of new debt instruments and
shares of Common Stock representing 60% of the Common Stock outstanding on a
fully diluted basis following implementation of the counterproposal. The new
debt instrument would have been non-interest bearing through fiscal 2000 and
thereafter would have borne interest at the rate of 15% per annum until maturity
in fiscal 2003. The counterproposal also contemplated that management would
receive Common Stock, or options to acquire shares of Common Stock, representing
10% of the Common Stock outstanding on a fully diluted basis following the
implementation of the counterproposal. Shares of Common Stock representing 20%
of the total outstanding on a fully diluted basis were to be issued to the
holders of a new series of debt instruments contemplated by the counterproposal.
The new debt instruments were to be issued for $1.5 million cash. Finally, under
the counterproposal, the outstanding shares of Common Stock would have
represented approximately 5% of the total outstanding on a fully diluted basis.
The Company rejected the counterproposal and it was retracted.
The Convertible Debenture holder then engaged, at the Company's expense, an
aviation consulting firm and an investment banking firm to review the Company's
restructuring proposal. These experts completed their review and issued a report
dated December 12, 1995. The report concluded (i) that the value of the
Company's aircraft and parts inventory exceeded the then outstanding principal
amount of the Senior Notes; (ii) that the Company's gross margins were likely to
decline from current levels and that, therefore, the Company should consider
selling its aircraft to obtain working capital; and (iii) that the recovery that
the Convertible Debenture holders could expect by retaining an equity interest
in the Company should significantly exceed the recovery from a quick sale of
assets or the current sale of the Company's business to a third party. On
February 1, 1996, the Company again met with the major holder of the Convertible
Debentures and D/R. At this meeting, the Company, the Convertible Debenture
holder and D/R discussed the Company's proposal that the Convertible Debentures
be converted into shares of the Company's common stock. The Convertible
Debenture holder and D/R requested that the Company update certain information
included in its original restructuring proposal and provide a revised
restructuring proposal.
The Company presented the updated financial information to the Convertible
Debenture holder and D/R on June 10, 1996. At the June 10 meeting, the
Convertible Debenture holder agreed to exchange the Convertible Debentures held
by it for shares of Common Stock representing 75% of the shares of Common Stock
to be outstanding following the Restructuring, on a fully-diluted basis, and D/R
agreed to recommend to its clients that they do so, subject to the following
conditions: (i) that, following the consummation of the Restructuring, the
Company would be permitted to borrow at least $2.5 million pursuant to the
Credit Agreement; (ii) that the Company agree to use its best efforts to have
the Common Stock included in The Nasdaq Stock Market following the consummation
of the Restructuring; (iii) that the Company, such Debenture holder and D/R
negotiate final terms regarding the composition of the Board of Directors of the
Company and the terms and distribution of the restricted shares of Common Stock
and options to be issued to management upon consummation of the Restructuring;
and (iv) that the amount of the expenses of consummating the Restructuring be
reduced.
On June 26, 1996, the Company again met with D/R. At that meeting, the D/R
representative indicated that D/R would be supportive of a restructuring plan
that satisfied each of the conditions discussed at the June 10 meeting. Also on
June 26, 1996, the Company met with the Majority Noteholder. At the meeting, the
Majority Noteholder agreed to accept prepayment of its Senior Notes upon
consummation of the Restructuring without receipt of prepayment penalty or
penalty interest on overdue interest and to consent to the Old Warrant
Amendment. The Company proposed to the Majority Noteholder that it enter into a
standstill agreement with the Company and provided a draft of such an agreement
to the Majority Noteholder. The Restructuring is the Company's revised
27
<PAGE>
restructuring proposal provided in response to its negotiations with the
Majority Noteholder, such Convertible Debenture holder and D/R representatives.
The terms of the Restructuring were approved by the Directors of the Company at
a meeting held on August , 1996.
THE STANDSTILL AGREEMENT
As a result of the negotiations described above, the Company entered into a
Standstill Agreement with the Majority Noteholder on July 11, 1996. Pursuant to
the Standstill Agreement, the Majority Noteholder has agreed to refrain (to the
extent provided therein) from exercising any rights or remedies it may have with
respect to the Event of Default with respect to the Senior Notes that occurred
upon the Company's failure to pay the installment of principal due on the Senior
Notes on July 17, 1996. The obligations of the Majority Noteholder pursuant to
the Standstill Agreement terminate on the earlier of (i) the 120th day following
the date of the Standstill Agreement; (ii) the consummation of the
Restructuring; and (iii) the Termination Date (as defined below). Such
agreement, however, does not constitute a waiver of the Event of Default. In the
event that the Termination Date occurs, the Majority Noteholder will be entitled
to exercise any and all of its rights and remedies with respect to such Event of
Default. The Company has agreed, pursuant to the Standstill Agreement, to
continue to pay non-default rate interest with respect to the Senior Notes in
accordance with their terms prior to the consummation of the Restructuring.
For purposes of the Standstill Agreement, the "Termination Date" is defined
as the first to occur of the following: (i) the occurrence of any "Standstill
Event of Default" (as defined below); (ii) the exercise by any creditor of the
Company of any remedies against the Company with respect to the Company's
obligations to such creditor; and (iii) the first date on which, in the
reasonable determination of the Majority Noteholder, any one of the conditions
precedent to the Restructuring (see "-- Conditions to the Restructuring") is no
longer capable of being satisfied. The Standstill Agreement provides that the
Company shall promptly give notice to the Majority Noteholder of the occurrence
of any event or circumstance of which it is aware that would constitute grounds
for the Majority Noteholder to declare that the Termination Date has occurred
and that if the Termination Date shall occur, the holders of a majority of the
principal amount of the Notes shall give the Company notice of the occurrence.
The "Standstill Events of Default" are the following: (i) the Company, pursuant
to or within the meaning of any bankruptcy law, commences a voluntary case or
proceeding, consents to the entry of an order for relief against it in an
involuntary case or proceeding, consents to the entry of an order for relief
against it in an involuntary case or proceeding, consents to the appointment of
a custodian of it or for all or substantially all of its property, makes a
general assignment for the benefit of its creditors or admits in writing its
inability to pay its debts as they come due; (ii) pursuant to or within the
meaning of any bankruptcy law, an involuntary case or proceeding is commenced
with respect to the Company, and an order against the debtor is entered in such
case or proceeding or the court in such case or proceeding appoints a custodian
for or orders the liquidation of the debtor or any substantial part of its
assets and such order or appointment remains unstayed and in effect for 60 days;
or (iii) the Company defaults in its obligation to make interest payment with
respect to the Senior Notes.
The Majority Noteholder has also agreed that, prior to the Termination Date,
it will not voluntarily transfer Senior Notes or Old Warrants unless the
transferee agrees to be bound by the terms and conditions set forth in the
Standstill Agreement. The Majority Noteholder has also agreed to refrain, prior
to the Termination Date, from collecting from the Company, and from asserting
any right to collect, payment of penalty interest on overdue payments of
principal and interest on the Notes. Further, the Majority Noteholder has agreed
that the provisions of the Senior Notes Purchase Agreement that require the
payment by the Company of a prepayment premium upon the optional prepayment of
the Senior Notes shall be waived in connection with the prepayment of the Notes
upon consummation of the Restructuring. Pursuant to the Standstill Agreement,
the provisions of the Senior Notes that provide for the payment of interest and
interest on overdue installments of interest will again be in full force and
effect upon the occurrence of the Termination Date (other than a Termination
Date that results from the consummation of the Restructuring).
28
<PAGE>
OVERVIEW OF THE RESTRUCTURING
GENERAL. The Company is proposing the Restructuring to achieve changes in
its financial structure that it believes are necessary to help alleviate the
problems caused by the Company's excessive debt service levels and debt
repayment obligations, to help assure its long-term viability and to permit it
to implement its operating strategy. If the Restructuring is consummated, the
Company expects that it will have the financial flexibility and liquidity it
requires to implement its operating strategy. The success of the Restructuring
does not depend on the Company's meeting the financial forecasts included
elsewhere in this Proxy Statement/Prospectus or on the Company's consummating
any acquisitions as part of its operating strategy. However, consummation of the
Restructuring is subject to a number of conditions and the Company has no
assurance that such conditions will be satisfied. See "-- Conditions to the
Restructuring."
In the absence of the Restructuring, the Company will be unable to make the
scheduled principal payments on the Senior Notes and the Convertible Debentures.
In addition, in the absence of the Restructuring, although the Company expects
to be able to make scheduled interest payments on the Senior Notes, it would be
unable to make scheduled interest payments on the Convertible Debentures. If the
holders of any of the Company's Senior Notes or Convertible Debentures demand
repayment or if the holders of the Senior Notes seek to realize upon the
collateral securing the Senior Notes, the Company most likely would be forced to
cease operations or to file for protection under Chapter 11 of the Bankruptcy
Code.
Upon consummation of the Restructuring, (a) the Reverse Stock Split, the
Board Classification, the Preferred Stock Authorization, the Charter Amendments,
the Stock Option Plan and the Credit Agreement would become effective; (b) the
Company would accept all valid tenders of Convertible Debentures and would issue
shares of Common Stock in exchange therefor; (c) the Amendments would become
effective; (d) the Senior Notes would be redeemed using advances under the
Credit Agreement; (e) the Company would issue options to purchase shares of
Common Stock to the Company's directors, officers and employees pursuant to the
Stock Option Plan in settlement of options and/or warrants previously awarded to
them or in connection with employment agreements to be entered into by them; and
(f) the Old Warrant Amendment would become effective. None of the foregoing will
become effective unless all are consummated. The consummation of the
Restructuring is conditioned upon the occurrence of certain events. See "--
Conditions to the Restructuring."
On a pro forma basis, the Restructuring would have reduced the amount of the
Company's outstanding indebtedness, at May 31, 1996, from $18.1 million to $8.1
million, based on the assumptions that the Restructuring occurred on such date
and that all Convertible Debentures were accepted for exchange. Total interest
expense, on a pro forma basis, would have been reduced from $2.2 million to $1.2
million during fiscal 1996, based on the assumptions that the Restructuring
occurred on the first day of the period presented, that all Convertible
Debentures were accepted for exchange and that amounts outstanding on the Credit
Agreement bore interest at 10.25% throughout the periods.
If the Restructuring does not receive the required approvals, the highly
leveraged financial condition of the Company will necessitate the development of
alternative actions. In view of the Company's limited financial resources and
the existence of unwaived defaults under the Senior Notes and the Convertible
Debentures, there can be no assurance that the Company would succeed in
formulating and consummating an alternative financial restructuring. In such
case, the Company would most likely be forced to cease operations or to file for
protection under Chapter 11 of the Bankruptcy Code. See "Risk Factors --
Consequences of Failure to Consummate the Restructuring."
THE CREDIT AGREEMENT. The Restructuring is conditioned upon the execution
of the Credit Agreement with the Bank and the Company's ability to borrow at
least $2.5 million pursuant to the Credit Agreement immediately following the
consummation of the Restructuring. See "Description of the Credit Agreement."
29
<PAGE>
RETIREMENT OF THE SENIOR NOTES; AMENDMENT OF OLD WARRANTS. The Senior Notes
will be redeemed upon consummation of the Restructuring. It is a condition to
the Restructuring that the holders of the Old Warrants agree to amend the
expiration date of the Old Warrants upon consummation of the Restructuring.
EQUITY RESTRUCTURING. The amendment to the Company's Certificate of
Incorporation authorizing the Reverse Stock Split must be adopted by the
stockholders prior to the consummation of the Restructuring. Pursuant to the
Reverse Stock Split Amendment, the Reverse Stock Split will cause each 27 shares
of Common Stock outstanding to be combined into one share of Common Stock. In
the course of the negotiations described in "-- Negotiations with
Debentureholders," the Company agreed with a major holder of the Convertible
Debentures that the shares of Common Stock to be issued in the Exchange Offer
would represent 75% of the total shares of Common Stock to be outstanding after
the Restructuring, on a fully-diluted basis. The Company further determined
that, in order to facilitate liquidity in the Common Stock post-Restructuring,
it would be appropriate for it to have approximately 3 million shares of Common
Stock outstanding after the Restructuring and calculated the size of the Reverse
Stock Split accordingly. If the Reverse Stock Split were not implemented, the
Company would have in excess of 80 million shares of Common Stock outstanding
after the Restructuring. Adoption of the Reverse Stock Split requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Exchange
of Stock Certificates; Fractional Shares" for a discussion of the treatment of
fractional shares of Common Stock.
CERTAIN SIGNIFICANT EFFECTS OF THE RESTRUCTURING
Implementation of the Restructuring would have significant effects on the
financial obligations of the Company and on the current holders of the Common
Stock, the Senior Notes and the Convertible Debentures. Certain of the
anticipated effects are described below.
SIGNIFICANT CHANGES IN FINANCIAL OBLIGATIONS. The Restructuring would
result in significant changes in the Company's financial obligations, including
(a) the elimination of future interest and principal payment obligations with
respect to at least 95% of the aggregate principal amount of the Convertible
Debentures, (b) the repayment of the Senior Notes, (c) the incurrence of
approximately $7.9 million of indebtedness under the Credit Agreement, (d) the
increased sensitivity of the Company to prevailing interest rates because
indebtedness under the Credit Agreement will bear interest at a floating rate,
and (e) the deferral of principal payments on the Company's long-term
indebtedness because the final maturity of the Credit Agreement is later than
the maturity date of the Senior Notes. The Restructuring would also result in
the modification of certain restrictive covenants now applicable to the Company
pursuant to the instruments creating the Convertible Debentures and the
elimination of the restrictive covenants now applicable to the Company pursuant
to the instruments creating the Senior Notes. Certain effects of the
Restructuring, assuming, in the case of outstanding indebtedness, that the
Restructuring was consummated on May 31, 1996, and, in the case of interest
expense, that the Restructuring was consummated on June 1, 1995, are set forth
in the tables below. In addition, the information set forth in the tables below
has been prepared based on the assumption that all of the Convertible Debentures
are accepted for exchange. The information set forth in the
30
<PAGE>
tables below and the assumptions upon which such information is based are more
fully described in the section entitled "Pro Forma Financial Information." The
discussion herein is qualified in its entirety by the information set forth in
such section.
<TABLE>
<CAPTION>
OUTSTANDING INDEBTEDNESS
AT MAY 31, 1996
------------------------
HISTORICAL PRO FORMA
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes................................................................ $ 7,700 $ --
Convertible Debentures...................................................... 10,000 --
Credit Agreement............................................................ -- 7,700
Other Debt.................................................................. 400 400
--------- -------------
Total..................................................................... $ 18,100 $ 8,100
--------- -------------
--------- -------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST REQUIREMENTS
FOR THE YEAR ENDED
MAY 31, 1996
--------------------------
HISTORICAL PRO FORMA
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes................................................................ $ 1,100 $ --
Convertible Debentures...................................................... 800 --
Credit Agreement............................................................ -- 900
Other Debt.................................................................. 100 100
----------- -------------
Total..................................................................... $ 2,000 $ 1,000
----------- -------------
----------- -------------
</TABLE>
The Company's scheduled obligations to pay interest and principal under the
instruments creating the Senior Notes and the Convertible Debentures during
fiscal years 1997 through 2001 in the absence of the Restructuring are set forth
in the following table. In the absence of the Restructuring, the Company will be
unable to make the scheduled principal payments on the Senior Notes and the
Convertible Debentures. In addition, in the absence of the Restructuring,
although the Company expects to be able to make scheduled interest payments on
the Senior Notes, it would be unable to make scheduled interest payments on the
Convertible Debentures.
<TABLE>
<CAPTION>
NO RESTRUCTURING
FISCAL YEAR
-----------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Scheduled principal and interest payments on the Senior
Notes....................................................... $ 4.25 $ 4.10 $ -- $ -- $ --
Scheduled principal and interest payments on the Convertible
Debentures.................................................. $ .80 $ .80 $ .80 $ .80 $ .80
--------- --------- --------- --------- ---------
Totals..................................................... $ 5.05 $ 4.90 $ .80 $ .80 $ .80
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
If the Restructuring does not occur, no interest or other payments will be
due under the Credit Agreement because it is a condition precedent to the
effectiveness of the Credit Agreement that the Restructuring occur. The Credit
Agreement will establish a revolving line of credit facility and a term loan
facility in the Company's favor. The Company may borrow up to the lesser of
$11.0 million and an amount based on the level of the Company's eligible
receivables and inventory pursuant to the revolving line of credit facility. All
borrowings pursuant to the revolving line of credit facility must be repaid by
the Company on or before the fifth anniversary of the effectiveness of the
Credit Agreement. The Company may borrow up to the lesser of $3.0 million and an
amount based on a percentage of the liquidation value of its aircraft pursuant
to the term loan facility. To the extent that the entire $3 million is borrowed
pursuant to the term loan facility, such amount must be repaid in monthly
installments of $33,333 during the first fiscal year the term loan is
outstanding, $41,666 during the
31
<PAGE>
second year, $50,000 during the third year, $58,333 during the fourth year and
$66,666 during the fifth year. See "Description of the Credit Agreement" and "--
Forecast of Certain Financial Data" for a discussion of the Company's estimates
regarding borrowings pursuant to the Credit Agreement.
SIGNIFICANT DILUTION OF EQUITY INTERESTS. If the Restructuring were
implemented, approximately 2.2 million shares of Common Stock (after giving
effect to the Reverse Stock Split) would be issued in the Exchange Offer,
assuming that all of the Convertible Debentures are accepted for exchange.
Issuance of such number of shares of Common Stock would dilute substantially the
equity ownership percentage of the existing holders of the Common Stock. The
percentage ownership of the Company on an actual and on a fully diluted basis
and the effect of the issuance of such number of shares of Common Stock on the
percentage ownership of the equity of the Company is shown in the following
table:
<TABLE>
<CAPTION>
PRE- RESTRUCTURING RESTRUCTURING
RESTRUCTURING(1) NO DILUTION(2) FULL DILUTION(3)
------------------------ ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENT SHARES PERCENT SHARES PERCENT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Holders of Convertible Debentures........... -- -- 2,245,400 93.8 2,245,400 75.0
Existing Common Stockholders................ 4,041,779 100.0 149,704 6.2 149,704 5.0
Warrant and Option Holders.................. -- -- -- -- 598,782 20.0
----------- ----- ----------- ----- ----------- -----
4,041,779 100.0 2,395,104 100.0 2,993,886 100.0
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Assumes no (i) conversion of the Convertible Debentures; (ii) exercise of
the Old Warrants; and (iii) exercise of certain outstanding stock options
and warrants, prior to giving effect to the Reverse Stock Split. The Old
Warrant Amendment will provide for the expiration of the Old Warrants at the
Closing and the options outstanding pursuant to the Company's existing stock
option plan will be canceled as part of the Restructuring.
(2) Assumes that 2,245,400 shares of Common Stock are issued to the Holders of
the Convertible Debentures, after giving effect to the Reverse Stock Split.
(3) Incorporates the assumptions set forth in (2) and further assumes the
exercise of certain outstanding warrants, other than the Old Warrants, and
the exercise of all options to be granted under the Stock Option Plan.
OTHER SIGNIFICANT EFFECT. In accordance with the principles of SFAS 15,
entitled "Accounting by Debtors and Creditors for Troubled Debt Restructurings,"
upon completion of the Restructuring, assuming all Convertible Debentures are
accepted for exchange, the Company expects to record an extraordinary gain of
approximately $1.8 million. This represents the difference between the aggregate
outstanding principal amount of the Convertible Debentures and related accrued
interest, less the fair value of the equity interest granted (net of direct
costs), and write-off of the unamortized deferred debt costs associated with the
Convertible Debentures.
CONDITIONS TO THE RESTRUCTURING
Consummation of the Restructuring is conditioned upon, among other things,
the following: (i) the Minimum Tenders shall have been validly tendered and not
withdrawn by the holders of the Convertible Debentures prior to the Expiration
Date; (ii) the requisite Consents shall have been received and such Consents
shall not have been revoked and the Amendments shall have become effective;
(iii) the Company's stockholders shall have approved the amendments to the
Company's Certificate of Incorporation to effect the Reverse Stock Split, the
Board Amendments, the Preferred Stock Authorization and the Charter Amendments
and shall have approved the Stock Option Plan; (iv) the Company and the Bank
shall have negotiated and executed the Credit Agreement, the conditions to the
effectiveness thereof shall have been satisfied or waived and the Company shall
have the ability to borrow at least $2.5 million pursuant to the Credit
Agreement immediately following the consummation of the Restructuring; and (v)
the Old Warrant Amendment shall have become effective.
32
<PAGE>
The Company reserves the right to amend the terms of the Restructuring
(including changes in the consideration being offered in the Exchange Offer to
Holders of the Convertible Debentures), if and to the extent that the Company
determines that such amendments are necessary or desirable to complete the
Restructuring. The Company will give holders of Convertible Debentures and
Common Stock notice of such amendments as may be required by applicable law.
Holders of the Convertible Debentures may withdraw their tenders of the
Convertible Debentures at any time prior to the Expiration Date of the Exchange
Offer, including during any period of time the Exchange Offer is extended
because of amendments to the terms of the Restructuring.
PROJECTION OF CERTAIN FINANCIAL DATA
The projected data contained herein were prepared by the management of the
Company and are qualified by, and are subject to, the assumptions set forth
below and the other information contained in this Proxy Statement/Prospectus.
The following projection was not prepared with a view toward compliance with
published guidelines of the Commission or the American Institute of Certified
Public Accountants regarding projections or generally accepted accounting
principles. Grant Thornton LLP, the independent auditors of the Company, have
neither examined, reviewed nor compiled the projection and, consequently, do not
express an opinion or any other form of assurance with respect thereto. The
Company believes, however, that the projection is presented on a basis
consistent with generally accepted accounting principles as applied to the
Company's historical financial statements.
The projection is forward-looking financial information within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. In
preparing the projection, the Company made numerous assumptions with respect to
industry performance, general business and economic conditions, taxes and other
matters, many of which are beyond the Company's control. All the material
assumptions made in the projection are set forth below or are referenced in the
notes that accompany the projection. The Company believes that all such
assumptions are reasonable; however, such projection and assumptions are not
necessarily indicative of current values or future performance, which may be
significantly less favorable or more favorable than as set forth below. Although
the projection represents the best estimate of the Company, for which the
Company believes it had a reasonable basis as of the time of the preparation
thereof, of the results of operations and financial position of the Company
after giving effect to the Restructuring, it is only an estimate, and actual
results may vary considerably from the projection. The projection also reflects
assumptions as to certain business decisions that are subject to change.
The Company's future results of operations and the other forward looking
statements contained in the projection, in particular the projections of parts
sales and aircraft sale and lease information, gross margin and selling, general
and administrative expenses, involve a number of risks and uncertainties. Among
the factors that could cause actual results to differ materially are business
conditions and the general economy, competitive factors such as the demand for
older aircraft, the Company's ability to maintain inventory that meets
applicable regulatory standards and client demand, the availability of new parts
and general risks of inventory obsolescence, the ongoing trend for customers to
use fewer suppliers causing a loss of customers, and the loss of a principal
customer in a given period if the Company is unable to replace sales to such
customers. See "Risk Factors."
The projection was materially completed in June 1996. The Company is not
aware of any events subsequent to such date that would materially impact the
projection. The Company does not intend to update or otherwise revise the
projection to reflect circumstances existing after the date hereof or to reflect
the occurrence of unanticipated events, even in the event that the assumptions
underlying the forecast are shown to be in error, except as required by
applicable law, prior to the consummation of the Restructuring. Furthermore, the
Company does not intend to update or revise the projection to reflect changes in
general economic or industry conditions. The projection should not be relied on
for any purpose other than in consideration of the Restructuring. The projection
should be read together with the information contained in "Pro Forma Unaudited
Financial Information," "Business" and the Consolidated Financial Statements of
the Company and the related notes included elsewhere in
33
<PAGE>
this Proxy Statement/Prospectus. The Company's regular quarterly and annual
financial statements are included in the Company's Quarterly Reports on Form
10-Q and Annual Reports on Form 10-K, which are filed with the Commission.
Information contained in such financial statements shall be deemed to supersede
the projection. See "Available Information."
The inclusion of the projection herein should not be regarded as a
representation by the Company, and there can be no assurance that the results
reflected in the projection will be realized. The forecast and actual results
will vary, and those variations may be material. Neither the Company nor any of
its agents or representatives assume responsibility for the accuracy or adequacy
of the projections contained herein. HOLDERS OF COMMON STOCK AND CONVERTIBLE
DEBENTURES ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORECAST.
GENERAL ASSUMPTIONS
The projection is based upon assumptions which the Company's management
believes provide a reasonable basis for presenting the effects of the
Restructuring. The general assumptions used to prepare the projection include
the following:
1. The projections give effect to the Restructuring, assuming that all the
Convertible Debentures are accepted for exchange, that the Restructuring
was consummated on May 31, 1996, that all conditions to the Restructuring
have been satisfied and that the Restructuring was accounted for as a
restructuring of troubled indebtedness pursuant to SFAS 15.
2. The Restructuring generates $.7 million in earnings.
3. The interest expense on the Credit Agreement is based on the lender's
prime rate plus 2% and is assumed to equal 10.25% throughout the
projection period.
4. The Senior Notes are redeemed without the payment of a prepayment penalty
or penalty interest on overdue principal or interest.
5. The Company will pay an additional $.4 million of fees and expenses
associated with the Restructuring at or prior to the Closing in addition
to $.3 million of costs incurred to date relating to the Restructuring.
These fees and expenses are expected to consist of the following:
<TABLE>
<S> <C>
Fees and Expenses Incurred to Date:
Legal Expenses................................................. $ 146,059
Accounting..................................................... 16,100
Outside Consultants:........................................... 172,700
---------
Total Consultant Expenses...................................... 172,700
---------
Total Fees and Expenses Incurred to Date......................... $ 334,859
Estimated Additional Fees and Expenses to be Incurred:
Printing and Other............................................. $ 100,000
Accountants.................................................... 50,000
Legal.......................................................... 250,000
---------
Total Estimated Additional Fees and Expenses to be Incurred...... $ 400,000
</TABLE>
The accounting for the fees and expenses will be as provided under
"Accounting Treatment."
6. Following the Restructuring, the Company will have net operating loss
carryforwards of $5.2 million. As a result of built-in gains in the
Company's inventory, the Company expects (outside of the annual Section
382 limitation), to be able to use net operating loss carryforwards of
$4.2 million in respect to 50% of its pretax income. Deferred income
taxes have not been provided because the differences between book and
taxable incomes are not expected to be significant.
34
<PAGE>
7. The Company will make no acquisitions during the periods presented.
OPERATING ASSUMPTIONS
The Company expects to sell one aircraft during fiscal 1997 for
approximately $550,000 (at a cost of $450,000) and that at any given time two of
the three remaining aircraft will be leased for total monthly lease rentals of
$80,000. The Company does not expect to sell any other aircraft during the
projection period.
Parts sales are projected in fiscal 1997 to be the same as in fiscal 1996
(primarily as a result of an expected reduction in sales to ValuJet from fiscal
1996 levels); thereafter, parts sales are expected to increase 7.5% per annum.
The projected growth in parts sales is principally attributed to the Company's
improved financial flexibility, its ability to implement its operating strategy,
primarily through the use of advances obtained pursuant to the Credit Agreement
to acquire new inventory and management's estimate of the effect of such
additional inventory on the level of parts sales, as well as general increased
demand for aircraft spare parts. The gross margin for parts is projected to
remain at approximately 35% in fiscal 1997 and to remain constant thereafter.
Selling, general and administrative costs are expected to increase in fiscal
1997 to approximately 21% of total revenues, principally due to the reduction in
aircraft sales and lease revenue. Thereafter, selling, general and
administrative costs are expected to remain at approximately 22% of total
revenues.
35
<PAGE>
PROJECTED INCOME STATEMENT DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue:
Aircraft sales....................... $ 550 $ -- $ -- $ -- $ --
Parts sales.......................... 18,885 20,301 21,824 23,461 25,220
Lease revenue........................ 960 960 960 960 960
------------- ------------- ------------- ------------- -------------
Total revenue.................... $ 20,395 $ 21,261 $ 22,784 $ 24,421 $ 26,180
Cost of goods sold:
Parts................................ 12,300 13,196 14,186 15,250 16,393
Aircraft............................. 450 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total cost of goods sold......... $ 12,725 $ 13,196 $ 14,186 $ 15,250 $ 16,393
------------- ------------- ------------- ------------- -------------
Gross profit............................. 7,670 8,065 8,598 9,171 9,787
Credit agreement commitment fee.......... 90 90 90 90 90
S, G & A expenses........................ 4,306 4,629 4,976 5,349 5,750
------------- ------------- ------------- ------------- -------------
EBITDA (1)........................... $ 3,274 $ 3,346 $ 3,532 $ 3,732 $ 3,947
Depreciation and amortization............ 736 726 717 496 204
------------- ------------- ------------- ------------- -------------
EBIT (2)............................. $ 2,538 $ 2,620 $ 2,815 $ 3,236 $ 3,743
Interest expense, net.................... 852 948 899 830 743
------------- ------------- ------------- ------------- -------------
Earnings before taxes.................... $ 1,686 $ 1,672 $ 1,916 $ 2,406 $ 3,000
Provision for income taxes............... 294 292 337 429 803
------------- ------------- ------------- ------------- -------------
Net earnings............................. $ 1,392 $ 1,380 $ 1,578 $ 1,977 $ 2,197
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings per common share................ $ 0.58 $ 0.58 $ 0.66 $ 0.83 $ 0.92
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average number of shares
outstanding............................. 2,395,104 2,395,104 2,395,104 2,395,104 2,395,104
</TABLE>
NOTES TO PROJECTED INCOME STATEMENT DATA
1. EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization.
2. EBIT is defined as earnings before interest and income taxes.
36
<PAGE>
PROJECTED CASH FLOW DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings.............................................. $ 1,392 $ 1,380 $ 1,578 $ 1,977 $ 2,197
Adjustments to reconcile Net Income to Net cash provided
by operating activities
Depreciation.......................................... 620 610 601 380 88
Amortization of fees and expenses..................... 116 116 116 116 116
Increase in working capital (1)....................... (3,022) (1,530) (1,513) (1,515) (1,516)
--------- --------- --------- --------- ---------
Total adjustments................................. (2,286) (804) (796) (1,019) (1,312)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities:...... $ (894) $ 576 $ 782 $ 958 $ 885
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (96) (99) (102) (106) (108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Term loan............................................. (400) (500) (600) (700) (800)
Revolving Credit Facility............................. 1,355 50 (54) (126) 49
Other (2)............................................. (39) (27) (26) (26) (26)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... 916 (477) (680) (852) (777)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash........................... $ (74) $ 0 $ 0 $ 0 $ 0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NOTES TO PROJECTED CASH FLOW DATA
(1) Represents changes in accounts receivables plus inventories and other
current assets less accounts payable and accrued and other liabilities.
Inventory purchases are projected to be $1 million in fiscal 1997 and $1.5
million annually thereafter.
(2) Represents principal repayments under the Company's mortgage note, equipment
notes and capitalized lease obligations.
37
<PAGE>
PROJECTED CAPITALIZATION DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash........................................................... $ 0 $ 0 $ 0 $ 0 $ 0
Revolver..................................................... 6,285 6,335 6,281 6,155 6,204
Long-term liabilities:
Term Loan.................................................... 2,600 2,100 1,500 800 0
Mortgage payable............................................. 403 377 351 325 299
Notes payable................................................ 1 0 0 0 0
--------- --------- --------- --------- ---------
Total long-term debt....................................... 3,004 2,477 1,851 1,125 299
Stockholders' equity:
Common stock................................................. 2 2 2 2 2
Additional paid-in capital................................... 11,563 11,563 11,563 11,563 11,563
Accumulated deficit.......................................... (8,037) (6,657) (5,079) (3,102) (905)
--------- --------- --------- --------- ---------
Total stockholders' equity................................. 3,528 4,908 6,487 8,464 10,687
--------- --------- --------- --------- ---------
Total capitalization........................................... $ 12,817 $ 13,720 $ 14,618 $ 15,743 17,163
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
PROJECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
-----------------------------------------------------
ASSETS: 1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash................................................. $ 0 $ 0 $ 0 $ 0 $ 0
Accounts receivable.................................. 3,353 3,495 3,745 4,014 4,304
Aircraft inventory................................... 889 889 889 889 889
Parts inventory...................................... 8,938 10,438 11,938 13,438 14,938
Other current assets................................. 102 106 114 122 131
--------- --------- --------- --------- ---------
Total current assets............................... 13,281 14,928 16,686 18,463 20,261
Property, plant & equipment.......................... 4,830 4,929 5,031 5,137 5,245
Accumulated depreciation............................... (2,672) (3,283) (3,884) (4,264) (4,352)
--------- --------- --------- --------- ---------
Net property, plant & equipment.................... 2,158 1,646 1,147 873 893
Capitalized fees & expenses............................ 515 397 283 167 159
--------- --------- --------- --------- ---------
Total assets....................................... $ 15,954 $ 16,974 $ 18,116 $ 19,503 $ 21,205
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIABILITIES:
Total current liabilities.............................. $ 3,138 $ 3,254 $ 3,498 $ 3,760 $ 4,042
Revolver............................................... 6,285 6,335 6,281 6,155 6,204
Long-term debt:
Term Loan............................................ 2,600 2,100 1,500 800 0
Mortgage (Bank)...................................... 403 377 351 325 299
Notes payable........................................ 1 0 0 0 0
--------- --------- --------- --------- ---------
Total long-term debt............................... 3,004 2,477 1,831 1,225 299
STOCKHOLDERS' EQUITY:
Common stock......................................... 2 2 2 2 2
Additional paid-in capital........................... 11,563 11,563 11,563 11,563 11,563
Accumulated deficit.................................. (8,037) (6,657) (5,079) (3,102) (905)
--------- --------- --------- --------- ---------
Total stockholders' equity......................... 3,528 4,908 6,487 8,464 10,661
--------- --------- --------- --------- ---------
Total liabilities & stockholders' equity............... $ 15,954 $ 16,974 $ 18,116 $ 19,503 $ 21,205
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
38
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING
In considering the Restructuring, holders of Common Stock and the
Convertible Debentures should be aware that the executive officers and directors
of the Company have certain interests that may present them with potential
conflicts of interests with respect to the Restructuring. The conflicts result
from the following factors: (1) the employment agreement between Mr. Alexius A.
Dyer III, the Chairman of the Board, President and Chief Executive Officer of
the Company, will be extended for an additional five-year term effective upon
consummation of the Restructuring and Mr. George Murnane III, the Executive Vice
President and Chief Financial Officer of the Company, will enter into a
five-year employment agreement with the Company having terms, other than salary
and bonus, substantially similar to those of Mr. Dyer's employment agreement
(see "Management -- Employment Agreement"); (ii) Mr. Dyer's annual compensation
will increase from $135,000 to $175,000 upon consummation of the Restructuring;
(iii) Messrs. Dyer and Murnane will be granted restricted stock and/or options
which, together with shares reserved for issuance to non-employee directors
pursuant to the Stock Option Plan, will represent 7.5% and 3.5%, respectively,
of the shares of Common Stock to be outstanding following the Restructuring on a
fully-diluted basis (see "Management -- The Stock Option Plan"); (iv) Messrs.
Kyle R. Kirkland and E. James Mueller, who are non-employee directors of the
Company, will be granted restricted stock and/or options representing up to 2.5%
of the shares of Common Stock to be outstanding following the Restructuring on a
fully-diluted basis (see "Management -- The Stock Option Plan"); and (v)
Kirkland Messina, Inc., an investment banking firm of which Mr. Kirkland is a
principal, will receive a placement agent's fee in connection with the
origination of the Credit Agreement (See "Management -- Certain Transactions").
THE EXCHANGE OFFER
GENERAL
Upon the terms and subject to the conditions set forth in this Proxy
Statement/Prospectus and in the accompanying Letter of Transmittal, the Company
is offering in the Exchange Offer to issue 224.54 shares of the Company's Common
Stock, after giving effect to the Reverse Stock Split, for each $1,000 principal
amount of its outstanding Convertible Debentures. Convertible Debentures not
accepted by the Company in the Exchange Offer will be returned. As of the date
of this Proxy Statement/Prospectus, there were outstanding $10 million aggregate
principal amount of Convertible Debentures. No executive officer, director or
affiliate of the Company owned or owns of record or beneficially any Convertible
Debentures.
The Company has not made an interest payment on the Convertible Debentures
since December 28, 1995. The Company does not intend to make any subsequent
payment of accrued interest with respect to any Convertible Debentures accepted
for exchange in the Exchange Offer. Holders of Convertible Debentures whose
Convertible Debentures are accepted in the Exchange Offer will not be entitled
to receive any consideration other than shares of Common Stock for any interest
accrued subsequent to February 28, 1995 on such Convertible Debentures. Under
the terms of the Exchange Offer, the fair market value of the Common Stock
exchanged for Convertible Debentures will be allocated first to accrued interest
and then to the principal amount of such Convertible Debentures. See "Certain
Federal Income Tax Considerations -- Exchange of Convertible Debentures."
In connection with the Exchange Offer, the Company is also soliciting the
requisite Consents to the applicable Amendments. HOLDERS OF CONVERTIBLE
DEBENTURES WHO TENDER THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE
REQUIRED TO CONSENT TO THE AMENDMENTS. Holders of Convertible Debentures may
consent to the Amendments without tendering their Convertible Debentures in the
Exchange Offer. The Company will make no separate payment for Consents. The
purpose of the Amendments is to amend or eliminate from the Purchase Agreement
covenants and other provisions. The Amendments will reduce the covenant
protection available to holders thereof. The Purchase Agreement with respect to
the Convertible Debentures will be amended, upon consummation of the
Restructuring, by deleting covenants requiring the Company to (i) maintain a
specified interest coverage ratio,
39
<PAGE>
(ii) maintain a specified consolidated net worth, (iii) provide demand
registration rights with respect to the Common Stock issuable upon conversion
and the covenant that limits the ability of the Company to engage in certain
lines of business.
If the Exchange Offer is consummated, Holders of Convertible Debentures who
do not tender pursuant to the Exchange Offer will hold the Convertible
Debentures under the Purchase Agreement as amended by the Amendments. The
Amendments will not affect the Company's obligation to pay the principal of the
Convertible Debentures at maturity and interest on the Convertible Debentures
when due; and, in connection with the Closing, the Holders of the Convertible
Debentures remaining outstanding will be paid amounts sufficient to cure all
interest payment defaults with respect to such Convertible Debentures. Further,
the Company's reduced leverage as a result of the Restructuring should increase
the likelihood that the Company will be able to pay the principal of and
interest on the outstanding Convertible Debentures. See "Description of
Convertible Debentures -- Certain Covenants" and "Description of the
Amendments."
Holders of Convertible Debentures who do not exchange may also experience a
significant reduction in their ability to sell their Convertible Debentures
because, if the Exchange Offer is consummated, at least 95% of the outstanding
Convertible Debentures will be exchanged for shares of Common Stock.
Holders of Convertible Debentures who tender in the Exchange Offer will not
be required to pay brokerage commissions or solicitation fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of securities pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See "-- Fees and Expenses." All references herein to the
Exchange Offer shall be deemed to include the Solicitation, unless otherwise
specified.
Subject to limitations imposed by applicable law and the Company's debt
instruments, the Company may, in the future, seek to acquire any outstanding
Convertible Debentures in open market purchases, optional redemptions,
subsequent exchange offers or otherwise. The Company does not have any current
plans to make any such acquisitions and the Credit Agreement will preclude such
acquisition, absent the consent of the Bank.
ACCEPTANCE OF CONVERTIBLE DEBENTURES AND DELIVERY OF COMMON STOCK
The Company will accept, promptly after the Expiration Date, all Convertible
Debentures that were validly tendered and not withdrawn on or prior to the
applicable Expiration Date. The shares of Common Stock will be delivered in
exchange for the applicable Convertible Debentures accepted in the Exchange
Offer promptly after the Expiration Date.
The Company shall be deemed to have accepted validly tendered Convertible
Debentures in the Exchange Offer and validly delivered Consents in the
Solicitation when, as and if the Company has given oral or written notice
thereof to the Depositary. The Depositary will act as agent for the tendering
Holders of Convertible Debentures for the purposes of receiving the Common Stock
from the Company. The Common Stock will be delivered in exchange for Convertible
Debentures accepted in the Exchange Offer promptly after the Expiration Date. No
fractional shares of Common Stock will be issued upon consummation of the
Exchange Offer.
The Company expects to enter into an agreement with the Depositary whereby
the Depositary will aggregate all fractional shares of Common Stock otherwise
issuable in the Exchange Offer and sell them in the open market. Each person
otherwise entitled to a fractional share of Common Stock will receive a payment
in cash in lieu of such fractional share equal to such person's proportionate
interest in the proceeds of sales of all such fractional shares in the open
market, net of the costs of the Depositary in effecting such sales. The Company
intends to cause such payments to be made promptly after the Expiration Date,
but in any event not later than five business days after the Expiration Date.
40
<PAGE>
The Company can give no assurance that the price at which such sales will be
made will not be at a substantial discount from the fair value of the securities
sold. See "Risk Factors -- Risk Factors Associated with Ownership of the Common
Stock -- Market for Common Stock."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York time on ,
1996, unless extended by the Company, in its sole discretion, to permit the
satisfaction of all conditions to the Exchange Offer, in which case the term
"Expiration Date" shall mean the last date and time to which the Exchange Offer
is extended. In order to extend the Expiration Date, the Company will notify the
Depositary of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period or on a daily basis.
The Company expressly reserves the right to (i) delay accepting any Consents
or Convertible Debentures, to extend the Exchange Offer or to terminate the
Exchange Offer and not accept Consents or Convertible Debentures not previously
accepted if any of the conditions set forth herein under "-- Conditions" shall
not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Depositary, or (ii) amend at any time, or from
time to time, the terms of the Exchange Offer in any respect. If the Company
exercises any such right, the Company will give written or oral notice to the
Depositary and make a public announcement thereof. Without limiting the manner
in which the Company may choose to make such a public announcement, the Company
shall have no obligation to publish, advertise or otherwise communicate any such
public announcement, other than by making a release to the Dow Jones News
Service. The Commission has taken the position that the minimum period during
which an exchange offer must remain open following material changes in the terms
of such exchange offer or in the information concerning such exchange offer
(other than a change in price or a change in percentage of securities sought)
will depend upon the facts and circumstances of such change, including the
relative materiality of the terms or information changes. With respect to any
change in price or percentage of securities sought, a minimum ten business day
period is required to allow for adequate dissemination of such change. Except
for the press release described above and except as required by the Exchange Act
and the rules and regulations thereunder, the Company does not intend to give
written notification of any such changes to Holders of Convertible Debentures.
HOW TO TENDER AND CONSENT IN THE EXCHANGE OFFER
A Holder electing to tender Convertible Debenture in the Exchange Offer and
to consent to the Amendments should either (i) complete and sign the Letter of
Transmittal or a facsimile thereof, have the signatures thereon guaranteed if
required by Instruction 6 thereof, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with a properly completed and duly
executed Notice of Guaranteed Delivery or the Convertible Debentures and any
other required documents to the Depositary at one of its addresses set forth on
the back cover page of this Proxy Statement/ Prospectus, or effect the tender of
Convertible Debentures pursuant to the procedure for book-entry transfer as set
forth below or (ii) request his broker, dealer, commercial bank, trust company
or other nominee to effect the transaction for him.
Pursuant to the terms of the Letter of Transmittal, the completion,
execution and delivery thereof will constitute consent to the Amendments.
However, as set forth in the Letter of Transmittal, a defective tender may,
under circumstances where the Holder has otherwise properly completed, executed
and delivered the Letter of Transmittal, constitute a valid Consent and will be
counted for purposes of determining whether requisite approval of the Amendments
has been obtained even if the accompanying Convertible Debentures are not
accepted for exchange by reason of such defect. In addition, if a Letter of
Transmittal is properly executed, delivered and dated prior to the Expiration
41
<PAGE>
Date, but no box with respect to the Amendments on the Letter of Transmittal is
marked, the Holder of Convertible Debentures who executed such Letter of
Transmittal shall be deemed to have consented to the Amendments.
Holders of Convertible Debentures who do not tender their Convertible
Debentures but wish to consent to the Amendments should complete the Letter of
Transmittal in accordance with the instructions thereto and return it promptly
to the Depositary.
In order for a tender of Convertible Debentures to constitute a valid
tender, Holders should complete the Letter of Transmittal in accordance with the
instructions set forth therein and deliver such Letter of Transmittal to the
Depositary on or prior to 5:00 p.m., New York time, on the Expiration Date. The
term "Holder," when used with respect to a Convertible Debenture means the
registered owner of such a Convertible Debenture on the Debt Record Date or any
person who has obtained a properly completed bond power and proxy from the
registered holder.
Pursuant to the Purchase Agreement, only the registered owner of a
Convertible Debenture on the Debt Record Date (or his duly designated proxy)
shall be entitled to consent to an Amendment or to revoke any Consent, whether
or not such person continues to be the registered owner of such Convertible
Debenture after the Debt Record Date. The Company serves as the registrar for
the Convertible Debentures and will advise any purchaser of Convertible
Debentures who was not a registered owner of the Convertible Debentures on the
Debt Record Date as to the procedures to be followed in order to obtain a
properly completed bond power and proxy and effectively to tender their
Convertible Debentures and consent to the Amendments.
TENDERS AND CONSENTS -- GENERAL
The tender or Consent by a Holder pursuant to one of the procedures set
forth herein will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF CONVERTIBLE DEBENTURES, THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE DEPOSITARY IS AT THE ELECTION AND RISK
OF EACH HOLDER. Except as otherwise provided herein, such delivery will be
deemed made only when actually received by the Depositary. Instead of effecting
delivery by mail, it is recommended that Holders use an overnight or hand
delivery service. If Convertible Debentures are sent by mail, registered mail,
with return receipt requested, properly insured, is recommended. In all cases,
sufficient time should be allowed to assure timely delivery. No documents should
be sent to the Company.
Any beneficial holder of Convertible Debentures whose Convertible Debentures
are registered or held of record in the name of his broker, dealer, commercial
bank, trust company or other nominee and who wishes to tender his Convertible
Debentures should contact such registered holder or record holder promptly and
instruct such holder to tender on his behalf. If such beneficial holder wishes
to tender Convertible Debentures and consent to the Amendments on his own
behalf, such beneficial holder must, prior to completing and executing the
Letter of Transmittal and delivering his Convertible Debentures, make
appropriate arrangements to obtain a properly completed bond power and proxy
from the registered holder.
Signatures on each Letter of Transmittal must be guaranteed unless the
Convertible Debentures delivered pursuant thereto are delivered (i) by a
registered holder of Convertible Debentures who has not completed the boxes on
the Letter of Transmittal entitled "Special Issuance Instructions" or "Special
Delivery Instructions;" (ii) for the account of an Eligible Institution (as
defined below); or (iii) a Consent is being given by the registered holder of
Convertible Debentures that are not being tendered in the Exchange Offer. In the
event that signatures are required to be guaranteed, such guarantees must be by
a firm that is a participant in the Medallion Signature Guarantee Program (an
"Eligible Institution").
42
<PAGE>
If the Letter of Transmittal with respect to any Convertible Debenture is
signed by a person other than the registered holder of any certificate(s) listed
therein, such certificate(s) must be endorsed or accompanied by appropriate bond
powers and proxies, signed exactly as the name or names of the registered holder
or holders appear on the certificate(s). If the Letter of Transmittal or any
certificates, bond powers, proxies or other instruments of transfer are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Convertible
Debentures and delivered Consents will be resolved by the Company, whose
determination will be final and binding. The Company reserves the absolute right
to reject any or all tenders and withdrawals of Convertible Debentures and
deliveries and revocation of Consents that are not in proper form or the
acceptance of which would, in the opinion of the Company or counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tenders or Consents as to particular Convertible
Debentures. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letters of Transmittal) will
be final and binding. Unless waived, any irregularities in connection with
tenders and withdrawals of Convertible Debentures and deliveries and revocations
of Consents must be cured within such time as the Company shall determine.
Neither the Company nor the Depositary shall be under any duty to give
notification of defects in such tenders, withdrawals, deliveries or revocations
or shall incur any liability for failure to give such notification. Tenders and
withdrawals of Convertible Debentures and deliveries and revocation of Consents
will not be deemed to have been made until such irregularities have been cured
or waived. Any Convertible Debentures received by the Depositary that are not
properly tendered or delivered and as to which the irregularities have not been
cured or waived will be returned by the Depositary to the tendering Holders of
Convertible Debentures unless otherwise provided in the Letter of Transmittal as
soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
If a Holder of Convertible Debentures desires to tender such Convertible
Debentures and the certificate(s) representing such Convertible Debentures are
not immediately available, or time will not permit such Holder's certificate(s)
or other required documents to reach the Depositary before 5:00 p.m., New York
time, on the Expiration Date, a tender may be effected if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York time on the Expiration Date, the
Depositary receives from such Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) setting forth the name
and address of the Holder of Convertible Debentures, and the principal
amount of Convertible Debentures to be delivered, as the case may be,
stating that the delivery is being made thereby and guaranteeing that within
five New York Stock Exchange trading days after the date of execution of the
Notice of Guaranteed Delivery, the duly executed Letter of Transmittal (or
facsimile thereof) and the certificate(s) representing the Convertible
Debentures, and any other documents required thereby will be deposited by
the Eligible Institution with the Depositary; and
(c) the certificate(s) for all tendered Convertible Debentures, the
Letter of Transmittal (or facsimile thereof), and all other documents
required thereby are received by the Depositary within five New York Stock
Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery.
Failure to complete the guaranteed delivery procedures outlined above will
not, of itself, affect the validity of, or effect a revocation of, any Consent
properly executed by a Holder of Convertible Debentures who attempted to use the
guaranteed delivery procedures.
43
<PAGE>
WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS
Tenders of Convertible Debentures may be withdrawn at any time prior to the
Expiration Date for the Exchange Offer. In addition, tenders of Convertible
Debentures may be withdrawn after the expiration of 40 business days from the
commencement of the Exchange Offer, if not yet accepted by the Company. Any
Holder of Convertible Debentures who has tendered Convertible Debentures may
withdraw such Convertible Debentures by delivery of a written notice of
withdrawal to the Depositary. To be effective, a written or facsimile
transmission notice of withdrawal must (i) be timely received by the Depositary
at one of its addresses specified on the back cover of this Proxy
Statement/Prospectus before the expiration of the Exchange Offer, (ii) specify
the name of the registered holder of the Convertible Debentures to be withdrawn,
(iii) contain a description of the Convertible Debentures to be withdrawn, the
certificate numbers shown on the particular certificates evidencing such
Convertible Debentures and the aggregate principal amount represented by such
Convertible Debentures, and (iv) be signed by the registered holder of such
Convertible Debentures in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees), or be
accompanied by documents of transfer sufficient to have the transfer of such
Convertible Debenture registered pursuant to the Purchase Agreement. The
signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution unless such Convertible Debentures have been tendered (i) by a
registered holder of Convertible Debentures who has not completed the boxes on
the Letter of Transmittal entitled "Special Issuance Instructions" or "Special
Delivery Instructions" or (ii) for the account of an Eligible Institution. If
the Convertible Debentures to be withdrawn have been delivered or otherwise
identified to the Depositary, a signed notice of withdrawal is effective
immediately upon receipt of written or facsimile transmission notice of
withdrawal even if physical release is not yet effected.
Any Convertible Debentures which have been tendered for exchange but which
are not exchanged will be returned to the Holder thereof without cost to such
Holder promptly following the Expiration Date. Properly withdrawn Convertible
Debentures may be retendered at any time prior to 5:00 p.m., New York time, on
the Expiration Date by following one of the procedures described under "-- How
to Tender and Consent in the Exchange Offer."
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, whose determination will be final
and binding. None of the Company, the Depositary or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or revocation or incur any liability for failure to give
any such notification.
A Consent may be revoked only by the Holder of the Convertible Debentures
with respect to which the Consent was given and only if the Company receives
written notice of revocation from the Holder, prior to the date the Amendments
become effective. However, if a Holder who has tendered Convertible Debentures
subsequently effects a valid revocation of a Consent, such action will render
the prior tender of the Convertible Debentures with respect to which the Consent
was given defective. The Company reserves the right to waive any such defect.
In order to withdraw a Consent, the Holder of the Convertible Debentures
with respect to which the Consent was given must provide the Company written
notice of revocation, at the applicable address as provided below, prior to the
date the Consent becomes effective.
The Purchase Agreement provides that any notice or communication sent to the
Company shall be sufficiently given if in writing and delivered in person,
telecopied or mailed by first-class mail addressed to the President of the
Company at the address set forth above. Notices to the Company are deemed given
only when received by the Company. Holders of Convertible Debentures who wish to
revoke their Consents should allow sufficient time for the notice of revocation
to reach the Company.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Convertible Debentures not theretofore
accepted for exchange or exchanged, and may terminate, extend or amend the
Exchange Offer as provided herein, before the acceptance of such Convertible
Debentures for exchange, if any of the following conditions are not satisfied:
(a) the Minimum Tenders shall have been validly tendered by the Holders
of Convertible Debentures pursuant to the Exchange Offer and not
withdrawn prior to the Expiration Date;
(b) the Company shall have received Consents from the holders of at least
a majority of the principal amount of the Convertible Debentures
(disregarding the principal amount of any Convertible Debenture held by the
Company or its affiliates);
(c) the Company's stockholders shall have approved the Reverse Stock
Split, the Board Amendments, the Preferred Stock Authorization, the
Charter Amendments and the Stock Option Plan;
(d) the Company and the Bank shall have negotiated and executed the
Credit Agreement, the conditions to the effectiveness thereof shall
have been satisfied or waived and the Company shall have the ability to
borrow at least $2.5 million pursuant to the Credit Agreement immediately
following the consummation of the Restructuring;
(e) the Company shall have received Consents from the holders of at least
a majority of the Stock Units represented by the Old Warrants to the
Old Warrant Amendment;
(f) no action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency with respect to the
Exchange Offer which, in the sole judgment of the Company, may materially
impair the contemplated benefits of the Exchange Offer to the Company;
(g) there shall not have occurred (i) any general suspension of, or
limitation on prices for, trading in securities traded on the New
York Stock Exchange; (ii) a declaration of a banking moratorium by United
States, New York, Delaware, Florida or Georgia authorities; or (iii)
commencement or escalation of a war or armed hostilities or other
international or national emergency that, in the sole judgment of the
Company, would or might have a material adverse effect on the market prices
of the Company's securities;
(h) there shall not have occurred any change or development involving a
prospective change in the general economic, financial or market
conditions in the United States or abroad that, in the sole judgment of the
Company, would or might have a material adverse effect upon the market
prices of the Company's securities;
(i) there shall not have occurred any change or development involving a
prospective change in or affecting the business, condition (financial
or otherwise) or prospects of the Company which in the sole judgment of the
Company, would or might prohibit, restrict or delay consummation of the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company;
(j) there shall not exist, in the sole judgment of the Company, any
actual or threatened legal impediment (including a default under a
material agreement, indenture or other instrument or obligation to which the
Company is a party or by which it is bound) to the acquisition of the
Convertible Debentures or the issuance of the Common Stock; or
(k) (i) no person shall have publicly disclosed an acquisition proposal
with respect to the Company or any of its securities or assets; and
(ii) no tender or exchange offer for Convertible Debentures and/or Common
Stock shall have been commenced by any person, if such tender or exchange
offer could result in such other person and its affiliates beneficially
owning directly or indirectly more than 15% of the then outstanding shares
of Common Stock that would be
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outstanding upon consummation of the Restructuring; and (iii) it shall not
have been publicly disclosed and the Company shall not have learned that any
person or "group" (within the meaning of Section 13(d)(3) of the Exchange
Act) shall have acquired, or proposed to acquire, beneficial ownership of
more than 15% of the outstanding shares of Common Stock and/or Convertible
Debentures which would constitute more than 15% of the shares of Common
Stock that would be outstanding upon consummation of the Restructuring;
which, in the sole judgment of the Company in any case, and regardless of the
circumstances (including any action or inaction by the Company) giving rise to
any such condition, makes it inadvisable to consummate the Exchange Offer or to
proceed with such acceptance for exchange.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time, and
from time to time, in its sole discretion. [If any of the conditions listed
above is not satisfied, the Company may (i) refuse to accept any Convertible
Debentures or Consents and return all tendered Convertible Debentures to
tendering Holders, (ii) extend the Exchange Offer and retain all Convertible
Debentures tendered and Consents delivered prior to the expiration of the
Exchange Offer, or (iii) waive or modify any of such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Convertible
Debentures or properly delivered Consents. There can be no assurance that the
foregoing conditions will be satisfied. In the event that the foregoing
conditions are not satisfied or waived, the Restructuring will not occur, the
Company will not accept for exchange any of the Convertible Debentures and the
Amendments will not become effective.] Any determination by the Company
concerning such conditions described above will be final and binding upon all
parties.
If a modification or waiver constitutes a material change to the Exchange
Offer, the Company will promptly disclose such modification or waiver in a
manner reasonably calculated to inform Holders of Convertible Debentures of such
modification, and the Company will extend the Exchange Offer for a period which
the Company in its discretion deems appropriate, subject to any applicable laws,
depending on the significance of the modification or waiver and the manner of
disclosure to Holders of Convertible Debentures. The Commission has taken the
position that the minimum period during which an exchange offer must remain open
following material changes in the terms of such exchange offer or in the
information concerning such exchange offer (other than a change in price or a
change in percentage of securities sought) will depend upon the facts and
circumstances of such change, including the relative materiality of the terms or
information changes. With respect to any change in price or percentage of
securities sought, a minimum ten business day period is required to allow for
adequate determination of such change. IN THE EVENT THE COMPANY MODIFIES OR
WAIVES ANY OF SUCH CONDITIONS, THE COMPANY AND/OR HOLDERS OF CONVERTIBLE
DEBENTURES MAY BE EXPOSED TO ADDITIONAL RISKS WHICH CANNOT PRESENTLY BE
PREDICTED OR EVALUATED.
In addition to the foregoing, the Company will not be required to accept for
exchange any Convertible Debentures not theretofore accepted for exchange or
exchanged, and may terminate, extend or amend the Exchange Offer as provided
herein, if, at any time prior to the time of acceptance for exchange of any
Convertible Debentures pursuant to the Exchange Offer, the Company shall have
been advised, or shall otherwise have reason to believe, that any necessary
consent or approval will be denied or substantially delayed, or will not be
given other than upon terms or conditions which would, in the opinion of the
Company, make it impractical to proceed with the Exchange Offer.
DEPOSITARY
First Union National Bank, Charlotte, North Carolina has been appointed as
Depositary for the Exchange Offer. Questions and requests for assistance may be
directed to the Depositary at one of its addresses and telephone numbers set
forth on the back cover of this Proxy Statement/Prospectus.
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FEES AND EXPENSES
The expenses of soliciting tenders of Convertible Debentures and of
obtaining Consents will be borne by the Company. The principal solicitation is
being made by mail; however, additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of the Company and its
affiliates, who will not receive additional compensation. Such officers may
solicit tenders of Convertible Debentures and seek to obtain Consents.
Arrangements may also be made with brokerage houses and other custodians,
nominees and fiduciaries to forward the material regarding the Exchange Offer to
the beneficial owners of Convertible Debentures. The Company will reimburse such
forwarding agents for reasonable out-of-pocket expenses incurred by them but no
compensation will be paid for their services.
The total cash expenditures to be incurred by the Company in connection with
the Exchange Offer are estimated to be approximately $.4 million.
STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES
SOLICITATION OF PROXIES
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
the Meeting, which will be held at the offices of King & Spalding, 50th Floor,
191 Peachtree Street, Atlanta, Georgia 30303, on , 1996 at 9:00
a.m., Atlanta time, to consider the proposals set forth in this Proxy
Statement/Prospectus to approve the Reverse Stock Split, the Board Amendments,
the Preferred Stock Authorization, the Charter Amendments and the Stock Option
Plan.
WHETHER OR NOT YOU ARE TO ATTEND THE MEETING, YOUR VOTE BY PROXY IS VERY
IMPORTANT. STOCKHOLDERS ARE ENCOURAGED TO MARK, SIGN AND DATE THE APPROPRIATE
PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
The expenses of soliciting proxies will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates, who will not receive additional
compensation. Arrangements may also be made with brokerage houses and other
custodians, nominees and fiduciaries to forward the material regarding the
Meeting to the beneficial owners of Common Stock. The Company will reimburse
such forwarding agents for reasonable out-of-pocket expenses incurred by them,
but no compensation will be paid for their services.
VOTING OF PROXIES
All shares represented by a properly executed proxy will be voted at the
Meeting in accordance with the directions on such proxy. If no direction is
indicated on a properly signed proxy, the shares covered thereby will be voted
in favor of the Reverse Stock Split, the Board Amendments, the Preferred Stock
Authorization, the Charter Amendments and to approve the Stock Option Plan.
Abstentions and "broker non-votes" are counted for purposes of determining the
presence or absence of a quorum for the transaction of business, and will
therefore have the effect of a "no" vote on all proposals brought before the
Meeting. The Board of Directors recommends that you vote, according to your
voting rights, "FOR" such proposals by checking the appropriate box on the
accompanying proxy.
In the event that sufficient votes in favor of any of the proposals set
forth in the Notice of Special Meeting of Stockholders are not received by the
time scheduled for the Meeting, or if any of the other conditions to the
Restructuring are not satisfied, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies with
respect to any such proposal or to permit the satisfaction of any such
condition. Any such adjournment will require the affirmative vote of a majority
of the voting power present or represented at the Meeting. The persons named as
proxies will vote in favor of such adjournment, if proposed, those proxies which
they are entitled to vote in favor of any one of the Reverse Stock Split, the
Board Amendments, the Preferred
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Stock Authorization, the Charter Amendments, or to approve the Stock Option Plan
and persons named as proxies will vote against such adjournment those proxies
required to be voted against all such proposals.
RECORD DATE
Only stockholders of record at the close of business on August 20, 1996 will
be entitled to notice of and to vote at the Meeting. As of the date of this
Proxy Statement/Prospectus, there were 4,041,779 shares of Common Stock
outstanding, of which there were 105 holders of record and approximately 950
beneficial owners. There are no shares of Preferred Stock outstanding.
As of the date of this Proxy Statement/Prospectus, without giving effect to
the Reverse Stock Split, Alexius A. Dyer III, the Chairman of the Board,
President and Chief Executive Officer of the Company, owned of record or
beneficially approximately 1,000 shares of the Company's Common Stock
(disregarding any shares of Common Stock beneficially owned by him by reason of
his ownership of stock options or warrants), which represents approximately
.025% of the aggregate number of shares of Common Stock outstanding. At such
date, without giving effect to the Reverse Stock Split, Mr. and Mrs. Richard R.
Wellman, formerly the Chairman of the Board and Secretary, respectively, of the
Company, owned of record or beneficially approximately 1,999,700 shares of
Common Stock, or 49.48% of the shares of Common Stock outstanding. Mr. and Mrs.
Wellman executed an irrevocable proxy, in connection with their resignation of
their positions with the Company on January 31, 1995, authorizing the Board of
Directors of the Company to vote 1,980,000 shares of the Company's Common Stock
(representing approximately 48.99% of the shares of Common Stock outstanding)
owned by the Wellmans. The irrevocable proxy was affirmed by the Wellmans in
October 1995. Accordingly, the executive officers and directors of the Company
possess the power to vote approximately 49.02% of the outstanding shares of
Common Stock with respect to the Reverse Stock Split, the Board Amendments, the
Charter Amendments, the Preferred Stock Authorization and approval of the Stock
Option Plan. Messrs. Dyer, Mueller and Kirkland have informed the Company that
they intend to vote in favor of the proposed amendments to the Company's
Certificate of Incorporation and for approval of the Stock Option Plan.
VOTING RIGHTS
Each share of Common Stock is entitled to one vote with respect to the
Reverse Stock Split Amendment, the Board Amendments, the Preferred Stock
Authorization, the Charter Amendments and the Stock Option Plan. Stockholders
have no appraisal or dissenters' rights with respect to the proposals to amend
the Company's Certificate of Incorporation.
REVOCATION OF PROXIES
A stockholder who has executed and returned a proxy may revoke it at any
time before it is voted by executing and returning a proxy bearing a later date,
by giving written notice of revocation to the Secretary of the Company or by
attending the Meeting and voting in person.
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION:
REVERSE STOCK SPLIT AMENDMENT
The Board of Directors has approved the Reverse Stock Split Amendment
whereby each 27 outstanding shares of Common Stock will be combined into one
share of Common Stock. See "Description of Capital Stock" and Appendix A. If
adopted, the Reverse Stock Split Amendment will not become effective unless and
until the Closing occurs. The authorized capitalization of the Company will not
be affected by the Reverse Stock Split. Adoption of the Reverse Stock Split
Amendment requires the affirmative vote of the holders of a majority of the
shares of Common Stock outstanding.
PROPOSED AMENDMENT TO THE COMPANY; CERTIFICATE OF INCORPORATION:
PREFERRED STOCK AUTHORIZATION
The Board of Directors has approved the Preferred Stock Authorization. The
Preferred Stock Authorization would increase the number of authorized shares of
Preferred Stock to 2,000,000 from 500,000 and would allow the Board of Directors
to fix the designations, preferences, conversion or
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other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms and conditions of redemption for a particular series of
Preferred Stock. The Board of Directors does not currently intend to issue a
series of Preferred Stock. If adopted, the Preferred Stock Authorization will
not become effective unless and until the Closing occurs. Adoption of the
Preferred Stock Authorization requires the affirmative vote of the holders of a
majority of the shares of Common Stock outstanding.
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION:
BOARD OF DIRECTORS
The Board of Directors has approved the Board Amendments, pursuant to which
(i) the number of directors of the Company shall be fixed at seven members and
(ii) the number of directors constituting the Board shall not be changed without
the affirmative vote of at least 75% of the issued and outstanding shares of
Common Stock. If adopted, the Board Amendments will not become effective unless
and until the Closing occurs. Adoption of the Board Amendments requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding.
PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION:
PROVISIONS AFFECTING CORPORATE GOVERNANCE
The Board of Directors has approved the Charter Amendments to add certain
provisions to the Company's Certificate of Incorporation and Bylaws with respect
to stockholder action. Certain of those provisions may make an acquisition of
the Company more difficult for an acquiror.
SECTION 203 OF THE DELAWARE LAW. Pursuant to the Charter Amendments, the
Company's Certificate of Incorporation would be amended to make the provisions
of Section 203 of the DGCL inapplicable to the Company. In general, Section 203
of the DGCL prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date such stockholder became an "interested stockholder,"
unless (a) prior to such date the board of directors of the corporation approved
either the "business combination" or the transaction which resulted in the
stockholder becoming an "interested stockholder," or (b) upon consummation of
the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (i) by persons who are directors and also officers and (ii) by an
employee stock plan in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (c) on or subsequent to such date the
"business combination" is approved by the board of directors and authorized at
the annual or special meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
"interested stockholder." A "business combination" includes certain mergers,
stock or asset sales and other transactions resulting in a financial benefit to
the "interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. Under the terms of Section 203,
this amendment will not be effective until 12 months after its adoption by the
stockholders and shall not apply to any "business combination" between the
Company and any person who becomes an "interested stockholder" on or prior to
such adoption.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation
will be amended to provide that no action required or permitted to be taken at
any annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.
This provision of the Certificate of Incorporation may not be amended, modified
or repealed by the stockholders of the Company, except with the consent of
holders of three-fourths of the Company's outstanding Common Stock.
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ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual or special meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 30 days nor more than
60 days prior to the meeting; provided, however, that in the event that less
than 40 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
received no later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. The Bylaws also specify certain requirements for a
stockholder's notice to be in proper written form. These provision may preclude
some stockholders from bringing matters before the stockholders at an annual or
special meeting or from making nominations for directors at an annual or special
meeting. This provision of the Bylaws may not be amended, modified or repealed
by the stockholders of the Company, except with the consent of holders of
three-fourths of the Company's outstanding Common Stock.
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to
provide that when a meeting of stockholders of the Company is convened, the
presiding officer, if directed by the Board of Directors, may adjourn the
meeting if no quorum is present for the transaction of business or if the Board
of Directors determines that adjournment is necessary or appropriate to enable
the stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders or
to otherwise effectively exercise their voting rights. This provision will,
under certain circumstances, make more difficult or delay actions by the
stockholders opposed by the Board of Directors. The effect of such provision
could be to delay the timing of a stockholders' meeting, including in cases
where stockholders have brought proposals before the stockholders which are in
opposition to those brought by the Board of Directors and therefore may provide
the Board of Directors with additional flexibility in responding to such
stockholder proposals. As set forth below, this provision of the Bylaws may not
be amended, modified or repealed by the stockholders of the Company, except with
the consent of holders of three-fourths of the Company's outstanding Common
Stock.
AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended
to provide that no provision of the Bylaws may be amended, modified or repealed
by the stockholders of the Company, nor may any provision of the Bylaws
inconsistent with such provision be adopted by the stockholders of the Company,
except with the consent of holders of three-fourths of the Company's outstanding
Common Stock. This provision will make it more difficult for stockholders to
make changes to the Bylaws that are opposed by the Board of Directors. This
provision of the Certificate of Incorporation may not be amended, modified or
repealed by the stockholders of the Company, except with the consent of holders
of three-fourths of the Company's outstanding Common Stock.
If adopted, the Charter Amendments will not become effective unless and
until the Closing occurs. Adoption of the Charter Amendments requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding.
THE STOCK OPTION PLAN
The Board of Directors has approved the adoption of the Stock Option Plan
for the Company's directors, officers and employees. The Stock Option Plan is
intended to provide a means to attract, retain and motivate selected employees
of the Company and non-employee directors of the Company. The Stock Option Plan
provides for the grant to eligible employees of incentive stock options, non-
qualified stock options, stock appreciation rights, restricted shares,
performance share and performance units, dividend equivalents and other share
based awards. All employees and directors are eligible to participate in the
Stock Option Plan. The portion of the Stock Option Plan applicable to employees
will be administered by the Compensation Committee of the Company's Board of
Directors. The Compensation Committee will have the full and final authority to
select employees to whom
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awards may be granted, to determine the type of awards to be granted to such
employees and to make all administrative determinations required by the Stock
Option Plan. The Compensation Committee also will have authority to waive
conditions relating to an award or accelerate vesting of awards. The Stock
Option Plan provides for certain grants of nonqualified stock options to
non-employee directors, and, in the case of such grants, is intended to operate
automatically and not require administration. An aggregate of 598,782 shares of
Common Stock have been reserved for issuance under the Stock Option Plan,
subject to anti-dilution adjustments in the event of certain changes in the
Company's capital structure.
In connection with the Restructuring, after the adoption of the Stock Option
Plan, the Company intends to grant restricted stock and/or options to purchase
the following numbers of shares of Common Stock to the following persons or
groups: Alexius A. Dyer III, 224,543 shares, representing 7.5% of the Common
Stock to be outstanding following the Restructuring on a fully-diluted basis;
George Murnane III, 104,787 shares, representing 3.5% of such outstanding Common
Stock; and the non-executive employees of the Company, 119,756 shares,
representing 4.0% of such outstanding Common Stock. Forty percent of such
options will vest immediately with 15% vesting annually, over the four years
following the date of grant. In addition, shares representing 2.5% of the
outstanding Common Stock will be reserved for future issuance pursuant to the
Stock Option Plan, each grant to vest equally, over three years after being
awarded. The Company also intends to grant options representing up to 2.5% of
the outstanding Common Stock to non-employee directors. The number of options to
be granted to the non-employee directors will be determined by the Company prior
to the consummation of the Restructuring. The Company intends to reserve for
future issuance to the non-employee directors any shares not granted as
restricted stock and not covered by options issued upon consummation of the
Restructuring.
For a complete description of the Stock Option Plan, see "Management -- The
Stock Option Plan."
DILUTION
The Restructuring will result in significant dilution of the equity
interests of the existing holders of Common Stock. See "Risk Factors --
Dilution" and "The Restructuring -- Certain Significant Effects of the
Restructuring -- Significant Dilution of Equity Interests."
EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SHARES
As soon as practicable after the Closing, the Company's stockholders will be
notified and requested to surrender their Common Stock certificates for
replacement certificates representing the number of shares of Common Stock into
which their shares of Common Stock were combined pursuant to the Reverse Stock
Split. Until so surrendered, each existing certificate for 27 shares of Common
Stock prior to the Closing will be deemed to represent a certificate for one
share of Common Stock.
No certificates or scrip representing fractional shares of Common Stock will
be issued in connection with the Restructuring. The Company expects to enter
into an agreement with the Depositary whereby the Depositary will aggregate and
sell all fractional shares of Common Stock otherwise issuable in connection with
the Restructuring. There can be no assurance as to the price at which sales will
be effected. Market conditions or other factors could cause the fractional
shares or holdings to be sold at depressed prices, including prices
substantially below fair market value. The proceeds of such sales will be
distributed by the Depositary to the persons who would otherwise have received
such fractional amount. See "The Exchange Offer -- Acceptance of Convertible
Debentures and Delivery of Common Stock" and "Risk Factors -- Market for Common
Stock."
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OTHER MATTERS TO BE CONSIDERED
It is not anticipated that any matter other than the approval of the Stock
Option Plan, the Reverse Stock Split, the Board Amendments, the Preferred Stock
Authorization and the Charter Amendments will be brought before the Meeting. If
other matters are properly presented, proxies will be voted in accordance with
the best judgment of the proxy holders.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
In the opinion of the Company's counsel, King & Spalding ("Counsel"), the
material federal income tax consequences of the Restructuring to the Company and
to the holders of Convertible Debentures are as described herein. Such opinion
is based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Tax Code"), final, temporary and proposed Treasury regulations thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof, and all of which are subject to change (perhaps retroactively) by
legislation, administrative action or judicial decision. Such opinion is also
based on certain factual representations and warranties. There can be no
assurance that the Internal Revenue Service (the "Service") will not challenge
one or more of the tax consequences of the Restructuring described herein, and
no ruling from the Service has been or will be requested as to any of such tax
consequences.
The following discussion does not include all matters that may be relevant
to any particular holder in light of such holder's particular facts and
circumstances. Certain holders, including financial institutions,
broker-dealers, tax-exempt entities, insurance companies and foreign persons may
be subject to special treatment not described below.
THE FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRUCTURING ARE COMPLEX. ALL
HOLDERS OF CONVERTIBLE DEBENTURES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE RESTRUCTURING AND THE
OWNERSHIP AND DISPOSITION OF THE COMMON STOCK, INCLUDING THE APPLICATION AND
EFFECT OF ANY STATE, LOCAL AND FOREIGN TAX LAWS.
TAX CONSEQUENCES TO THE COMPANY
CANCELLATION OF INDEBTEDNESS. If a taxpayer satisfies its outstanding debt
obligation for less than its principal amount, such taxpayer generally realizes
cancellation of debt ("COD") income for federal income tax purposes. In the case
of an exchange such as that contemplated by the Restructuring, where outstanding
indebtedness is canceled in exchange for Common Stock, the amount of such COD
income is, in general, equal to the excess of the adjusted issue price
(including accrued but unpaid interest) of the indebtedness satisfied over the
fair market value of such Common Stock. Such COD income is recognized and
included in the taxpayer's taxable income except to the extent that Section 108
of the Tax Code applies.
Section 108 of the Tax Code provides an exception to the recognition of COD
income for taxpayers who are insolvent (but only to the extent of their
insolvency) or where the discharge occurs in a Chapter 11 or similar case under
the Bankruptcy Code. Section 108(b) of the Tax Code provides that certain tax
attributes of the taxpayer must be reduced by the amount of the taxpayer's COD
income that is excluded under Section 108(a) of the Tax Code. In general, net
operating loss carryovers, tax credit and capital loss carryforwards are reduced
first, and then the tax basis of the Company's property is reduced (but not
below the remaining amount of its liabilities). In lieu of the generally
required order of attribute reduction, the taxpayer may elect instead to reduce
first, its tax basis in its depreciable property, and then its remaining tax
attributes. Such attribute reductions are made after the determination of the
Company's tax liability for the taxable year in which the Restructuring occurs.
53
<PAGE>
If the cancellation of indebtedness does not occur pursuant to a federal
bankruptcy case, the exclusion from income provided by Section 108 of the Tax
Code applies only to the extent that the taxpayer is insolvent for purposes of
that section. To the extent that the COD income exceeds the amount by which the
taxpayer is insolvent prior to the debt discharge, such excess is included in
the taxpayer's taxable income. A taxpayer is insolvent to the extent of the
excess of (i) the aggregate amount of all the taxpayer's liabilities over (ii)
the fair market value of all of the taxpayer's assets immediately prior to the
debt cancellation transaction.
The Company may recognize COD income in the Restructuring, depending on the
value of the Company's Common Stock following the Restructuring. Based on the
Company's estimate of the Common Stock that will be issued to the holders of the
Convertible Debentures, the Company currently expects that it will recognize
$2,375,000 of COD income in the Restructuring. Any such COD income will be
excluded from the Company's taxable income to the extent of its
pre-Restructuring insolvency (with correlative reduction of its tax attributes
under Section 108(b) of the Tax Code), and the remainder will be included in the
Company's taxable income. There can be no assurance that the IRS or a court will
agree with the Company's determination of its insolvency or the value of the
Common Stock after the Restructuring is effected. As a result, it is possible
that the Company could be required to recognize a significant amount of taxable
income in connection with the Restructuring.
LIMITATION ON UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS. Section 382
of the Tax Code generally limits a corporation's use of its net operating loss
carryforwards ("NOLs") and certain built-in losses if the corporation undergoes
an "ownership change." An ownership change generally occurs when a percentage of
the corporation's stock by value held by certain persons (identified in Tax Code
Section 382 as "5% shareholders") increases in the aggregate by more than 50
percentage points over the lowest level held by such persons during a three-year
testing period. If an ownership change occurs, the corporation's annual
utilization of its NOLs is limited to the product of the corporation's equity
value immediately before the ownership change multiplied by the applicable
long-term federal tax-exempt rate. The Company believes that the Restructuring
will result in an ownership change of the Company for purposes of Section 382 of
the Tax Code.
However, under a special rule, the Company will be entitled to use its NOL
carryforwards to fully offset, without any limitation, any "built-in gains" that
are recognized during the five-year period following the Restructuring. In order
to take advantage of the recognized built-in gain rule, the Company must have an
aggregate net unrealized built-in gain in its assets (i.e., excess of aggregate
fair market value over aggregate tax basis) on the date of the Restructuring
which exceeds the lesser of $10 million or 15% of the total gross fair market
value of its assets (excluding cash and cash items). The Company is permitted to
increase its annual Section 382 limitation by the amount of "recognized built-in
gains" attributable to the disposition of assets held on the date of the
Restructuring within the five-year period following the Restructuring. The
Company presently believes it will have a net unrealized built-in gain in assets
in excess of the statutory threshold.
Without taking into account the COD income attributable to the
Restructuring, the Company presently estimates that it will have NOL
carryforwards following the Restructuring of approximately $5.2 million,
although there can be no assurance that the IRS will concur in the reporting
positions on which the Company's NOL calculations are based. Such NOLs will be
reduced or consumed by the COD income recognized in the Restructuring. The
application of Section 382 of the Tax Code could severely limit the Company's
ability to use such carryforwards. Except to the extent that the Company has a
net unrealized built-in gain and recognizes such gains during such five-year
period, the Company's annual limitation under Section 382 may be small.
TAX CONSEQUENCES TO THE HOLDERS OF THE CONVERTIBLE DEBENTURES
The exchange of the Convertible Debentures for Common Stock pursuant to the
Exchange Offer will constitute a recapitalization under Section 368(a)(1)(E) of
the Tax Code, and therefore, no gain or loss will be recognized by the holders
except to the extent provided in Section 354(c)(2)(B) with respect to accrued
interest that is treated as paid by Common Stock. The terms of the Exchange
Offer provide
54
<PAGE>
that the fair market value of the Common Stock exchanged for Convertible
Debentures will be allocated first to accrued interest and then to the principal
amount of such Convertible Debentures. The Company will report interest in its
information filings to holders and to the Service in a manner consistent with
the above allocations.
If the Company's allocations are accepted by the Service or ultimately
sustained by the courts, then a holder of Convertible Debentures should
recognize ordinary interest income equal to the fair market value of the Common
Stock that is allocated to interest which accrued during the holder's holding
period for such Convertible Debentures to the extent that such interest has not
previously been included in the holder's income.
In general, a holder's tax basis in such Common Stock received pursuant to
the Restructuring (and not allocable to accrued and unpaid interest) would equal
the holder's adjusted tax basis in the Convertible Debentures surrendered, and
such holder's holding period in the Common Stock received (and not allocable to
accrued and unpaid interest) would include its holding period for the
Convertible Debentures surrendered. The holder's tax basis in that portion of
the Common Stock allocable to accrued and unpaid interest would be equal to the
amount of interest deemed received, and the holder's holding period in such
portion of the Common Stock allocable to accrued and unpaid interest would begin
on the day after the exchange.
This discussion assumes that holders hold their Convertible Debentures as
capital assets within the meaning of Section 1221 of the Tax Code and will hold
the Common Stock received in the exchange therefor as capital assets. Based on
this assumption and except as specifically noted herein, any gain or loss
recognized by a holder on the disposition of any such securities would be
capital gain or loss. Such gain or loss would be long-term capital gain or loss
if the holding period with respect to such security exceeds one year, and
otherwise would be short-term capital gain or loss. The use of capital losses to
offset other income is subject to significant limitations. Moreover, gain on the
disposition of Common Stock acquired by a holder in exchange for Convertible
Debentures will generally be treated as ordinary income to the extent that the
holder was allowed an ordinary loss on such exchange.
BACKUP WITHHOLDING. A holder of Common Stock may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to dividends paid on Common Stock or the proceeds of a sale, exchange or
redemption of such Common Stock unless such holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number, certifies that
such holder is not subject to backup withholding and otherwise complies with
applicable requirements of the backup withholding provisions. A holder who does
not provide a correct taxpayer identification number may be subject to penalties
imposed by the Service. Any amount withheld under these rules will be creditable
against the holder's federal income tax liability.
ACCOUNTING TREATMENT
The Company proposes to account for the Restructuring using the principles
of SFAS 15, entitled "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." Pursuant to such principles, a debtor, such as the Company,
that issues an equity interest to a creditor in discharge of the creditor's debt
claim is required to account for the equity interest at its fair value and to
recognize as a gain the difference between the fair value of the equity interest
and the carrying amount of the debt discharged.
Upon completion of the Restructuring, assuming all Convertible Debentures
are accepted for exchange, the Company will record an extraordinary gain of
approximately $1.8 million. This represents the difference between the aggregate
outstanding principal amount of the Convertible Debentures and related accrued
interest, less the fair value of the equity interest granted (net of direct
costs), and write-off of the unamortized deferred debt costs associated with the
Convertible Debentures.
55
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following unaudited tables set forth the consolidated capitalization of
the Company at May 31, 1996 and the consolidated pro forma capitalization of the
Company as of such date as adjusted to give effect to the Restructuring as if it
became effective on such date. The pro forma information presented below assumes
that all of the Convertible Debentures are accepted for exchange. The
information presented below should be read in conjunction with the Consolidated
Financial Statements and the unaudited Pro Forma Financial Information and
related notes appearing elsewhere herein. See "Financial Statements" and "Pro
Forma Financial Information."
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------
ACTUAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................................................... $ 3,695 $ 437
Long-term debt in default classified as current........................................... 14,042 --
Long-term debt............................................................................ 407 7,707
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized; 2,000,000 shares authorized
pro forma; no shares issued and outstanding, actual or pro forma....................... -- --
Common stock, $.001 par value; 20,000,000 shares authorized; 4,041,779 shares issued and
outstanding; 2,395,104 shares issued and outstanding pro forma (1)..................... 4 2
Additional paid-in capital.............................................................. 2,654 10,546
Accumulated deficit..................................................................... (10,074) (8,355)
---------- ---------
Total stockholders' equity (deficit).................................................. (7,416) 2,193
---------- ---------
Total capitalization.................................................................. $ 10,727 $ 10,337
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(1) Represents shares issued after the Restructuring and the Reverse Stock Split
but does not include 2,116,410 shares of Common Stock issuable under certain
outstanding warrants and options pursuant to the existing stock option plan
and the Old Warrants, actual, and 598,782 shares of Common Stock subject to
options under the Stock Option Plan, pro forma. See "Management -- Stock
Option Plan."
56
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company for the five years ended May 31, 1996. The historical operating data
and historical balance sheet data for the five years ended May 31, 1996
presented below have been derived from, and should be read in conjunction with,
the Company's audited consolidated financial statements and the related notes
thereto. The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales...................................................... $ 26,527 $ 32,032 $ 16,747 $ 21,999 $ 21,410
Lease revenue.................................................. -- 1,473 1,986 2,984 1,795
---------- ---------- ---------- ---------- ----------
Total revenues................................................. 26,527 33,505 18,733 24,983 23,205
Cost of sales.................................................. 16,311 21,494 22,104 17,712 13,208
Selling, general and administrative expenses................... 5,281 6,469 6,943 4,358 3,922
Provision (recovery) for doubtful accounts..................... 374 493 1,488 (335) 464
Depreciation and amortization.................................. 201 1,000 2,474 1,402 1,153
Losses of service center subsidiary............................ -- -- 1,923 676 --
---------- ---------- ---------- ---------- ----------
Total operating expenses....................................... 22,167 29,456 34,932 23,813 18,747
---------- ---------- ---------- ---------- ----------
Income from operations......................................... 4,360 4,049 (16,199) 1,170 4,458
Interest expense............................................... 871 2,569 2,953 2,564 2,192
Interest and other income, net................................. (94) (66) (88) (603) (34)
Unusual and nonrecurring items................................. -- -- -- (177) --
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes, equity in loss of joint
venture and extraordinary item................................ 3,583 1,546 (19,065) (614) 2,300
Provision for income taxes (benefit)........................... 1,370 510 (2,476) -- 14
Equity in loss of joint venture................................ (229) (59) (424) -- --
Extraordinary loss on extinguishment of debt................... -- -- (363) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)............................................ $ 1,984 $ 977 $ (17,376) $ (614) $ 2,286
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Primary earnings (loss) per common and common equivalent shares
Earnings (loss) before extraordinary item.................... $ 0.52 $ 0.22 $ (4.21) $ (0.15) $ 0.57
Extraordinary item........................................... -- -- (0.09) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................................ $ 0.52 $ 0.22 $ (4.30) $ 0.15 $ 0.57
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding used in primary
calculation................................................... 3,849,852 5,312,046 4,041,779 4,041,779 4,041,779
Fully diluted earnings (loss) per common and common equivalent
shares
Earnings (loss) before extraordinary item.................... $ 0.52 $ 0.22 $ (4.21) $ (0.15) $ 0.47
Extraordinary item........................................... -- -- (0.09) -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................................ $ 0.52 $ 0.22 $ 4.30 $ 0.15 $ 0.47
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding used in fully diluted
calculation................................................... 3,849,852 5,312,046 4,041,779 4,041,779 6,541,779
Ratio of earnings to fixed charges (1)......................... 5.01 1.58 -- -- 2.03
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................... $ 2,938 $ 17,088 $ (18,312) $ (13,489) $ (10,841)
Total assets................................................... 20,303 35,709 25,553 14,511 16,132
Short-term debt................................................ 7,296 4,905 3,531 1,812 3,695
Long-term debt in technical default classified as current...... -- -- 22,157 18,083 14,042
Long-term debt................................................. 309 18,579 485 440 407
Stockholder's equity (deficit)................................. 7,080 8,173 (9,088) (9,702) (7,416)
Book value per share........................................... $ 1.78 $ 2.04 $ (2.25) $ (2.40) $ (1.83)
</TABLE>
- ------------------------------
(1) For purposes of this item, "fixed charges" represent interest expense and
"earnings" represent income (loss) from operations. Earnings were
insufficient to core fixed charges by $17.2 million and $.7 million for the
years ended May 31, 1994 and 1995, respectively.
57
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 31,
1996 and the unaudited Pro Forma Condensed Consolidated Statements of Operations
for the fiscal year ended May 31, 1996 set forth below, have been prepared using
the principles of SFAS 15, entitled "Accounting by Debtors and Creditors for
Troubled Debt Restructurings" and are based on the historical consolidated
financial statements of the Company, adjusted to give effect to the
Restructuring, assuming all of the Convertible Debentures are accepted for
exchange, that the Senior Notes are redeemed on the Closing Date with the
proceeds of an advance pursuant to the Credit Agreement and that the amounts
outstanding pursuant to the Credit Agreement bear interest at 10.25%. The Pro
Forma Condensed Consolidated Balance Sheet reflects adjustments as if the
Restructuring had occurred as of the date of such balance sheet. The Pro Forma
Condensed Consolidated Statement of Operations reflects adjustments as if the
Restructuring had occurred on the first day of the applicable period, excluding
the effect of the estimated extraordinary gain of $1.8 million to be realized
upon completion of the Restructuring. The pro forma financial information should
be read in conjunction with the historical financial statements, including the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations, all of which are included in this Proxy
Statement/Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Index to Financial Statements." The
pro forma financial information does not purport to be indicative of the results
which would actually have been obtained had such transactions been completed as
of the date and for the period presented or which may be obtained in the future.
PRO FORMA STATEMENT OF OPERATIONS
(in thousands, except ratios and per share data)
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED PRO FORMA YEAR
MAY 31, PRO FORMA ENDED MAY 31,
1996 ADJUSTMENTS 1996
----------- ---------------- ---------------
<S> <C> <C> <C>
Revenues
Net sales...................................................... $ 21,410 -- $ 21,410
Lease revenue.................................................. 1,795 -- 1,795
----------- ---------------
Total revenue................................................ 23,205 -- 23,205
Cost of sales.................................................... 13,208 -- 13,208
SG&A expenses.................................................... 3,922 -- 3,922
Provision for doubtful accounts.................................. 464 -- 464
Depreciation and amortization.................................... 1,153 -- 1,153
----------- ---------------- ---------------
Total operating expenses..................................... 18,747 -- 18,747
Income from operations........................................... 4,458 -- 4,458
Interest expense................................................. 2,192 (213)(1) 1,123
(800)(2)
(162)(3)
106(4)
Interest and other income........................................ (34) -- (34)
----------- ---------------- ---------------
Earnings before income taxes..................................... 2,300 1,069 3,369
Provision for income taxes....................................... 14 -- (9) 14
----------- ---------------- ---------------
Net earnings (loss).............................................. $ 2,286 $ 1,069 $ 3,355
----------- ---------------- ---------------
----------- ---------------- ---------------
Ratio of earnings to fixed charges............................... 2.03 3.86
PER SHARE DATA (10)(11):
Primary earnings per common and common equivalent share $ 15.27 $ 1.40
----------- ---------------
----------- ---------------
Weighted average shares outstanding used in primary
calculation..................................................... 149,704 2,395,104
----------- ---------------
Fully diluted earnings per common and common equivalent share $ 12.74 $ 1.40
----------- ---------------
----------- ---------------
Weighted average shares outstanding used in fully diluted
calculation..................................................... 242,288 2,395,104
----------- ---------------
</TABLE>
58
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED PRO FORMA
MAY 31, PRO FORMA YEAR ENDED
1996 ADJUSTMENTS MAY 31, 1996
----------- ---------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents.......................................... $ 940 -- $ 940
Accounts receivable, net........................................... 2,015 -- 2,015
Inventories........................................................ 9,277 -- 9,277
Other current assets............................................... 69 -- 69
----------- -------- -------------
Total current assets............................................. 12,301 -- 12,301
Property and equipment, net........................................ 2,682 2,682
Deferred debt costs, net........................................... 762 374(4) 424
(611)(5)
(101)(7)
Deferred restructuring fees........................................ 335 (335)(8) --
Other assets....................................................... 52 -- 52
----------- -------- -------------
Total assets....................................................... $ 16,132 $ (673) $ 15,459
----------- -------- -------------
----------- -------- -------------
Current liabilities
Current maturities of long-term obligations...................... $ 3,695 $ 400(6) $ 437
(3,658)(6)
Long-term obligations in default classified as current........... 14,042 (4,042)(6) --
(10,000)(5)
Accounts payable................................................. 2,171 -- 2,171
Accrued expenses................................................. 3,233 (162)(3) 2,951
480(4)
400(8)
(1,000)(5)
----------- -------- -------------
Total current liabilities........................................ 23,141 (17,582) 5,559
Long-term obligations, less current maturities..................... 407 7,300(6) 7,707
Common stock and additional paid in capital........................ 2,658 8,625(5) 10,548
(735)(8)
Accumulated deficit................................................ (10,074) 162(3) (8,355)
(106)(4)
1,764(5)
(101)(7)
----------- -------- -------------
Total stockholders' equity (deficit)............................... (7,416) 9,609 2,193
----------- -------- -------------
Total liabilities and stockholders' equity......................... $ 16,132 $ (673) $ 15,459
----------- -------- -------------
----------- -------- -------------
</TABLE>
59
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following notes set forth an explanation of the assumptions used in
preparing the unaudited pro forma condensed financial statements. The pro forma
adjustments are based on the best estimates of the Company's management using
information currently available.
(1) Reflects elimination of amortization of deferred debt costs included in the
historical financial statements related to the Senior Notes and Convertible
Debentures.
(2) Reflects elimination of interest expense on Convertible Debentures.
(3) Reflects the net differential between the stated interest rate on the 12%
Senior Notes and the assumed rate of 10.25%, based on the current prime rate
plus 2%, as defined in the Credit Agreement, on amounts borrowed during
fiscal 1996.
(4) Represents amortization for year of placement agent fees and other such debt
costs associated with the Credit Agreement. Such fees are expected to be
amortized over a period of 5 years. Such costs are estimated to total $530,
which includes $50 included in the historical financial statements and
incurence of an additional $480 of such costs.
(5) Upon completion of the Restructuring, assuming all Debentures are converted,
the Company estimates that they will recognize an extraordinary gain,
pursuant to SFAS 15, on this troubled debt restructuring. The extraordinary
gain is computed based upon the amount of the Debentures ($10,000) and
related accrued interest ($1,000), less the write-off of the unamortized
deferred debt costs on the Debentures ($611) and the fair value of the
equity interest granted ($8,625). The fair value of the equity interest
granted was determined based upon a multiple of 6 times the projected 1997
EBITDA of $3,274, less pro forma debt of $8,143, multiplied by 75%. Such
percentage represents the percentage of ownership to be held by the
Convertible Debenture holders on a fully diluted basis. This is not
reflected in the Pro Forma Statement of Operations as this is not a
recurring charge.
(6) Reflects the prepayment, without penalty, of the Senior Notes with the
proceeds of a concurrent advance pursuant to the Credit Agreement.
(7) Reflects write-off of deferred debt costs on Senior Notes upon prepayment.
This is not reflected in the Pro Forma Statement of Operations as this is
not a recurring charge.
(8) Reduction in paid-in capital for direct costs associated with granting of
equity interest described in Note (5). Such costs are estimated to total
$735, which includes the $335 in restructuring costs presented in the
historical financial statements and the incurring of an additional $400 of
such costs.
(9) The Company has sufficient net operating losses available to offset pro
forma adjustments. Accordingly, the adjustments described herein are without
tax effect.
(10)Historical weighted average shares and resulting primary and fully-diluted
earnings per share amounts reflect the proposed 1:27 reverse stock split.
(11)Weighted average shares used in computing pro forma primary and fully
diluted earnings per share was computed based upon existing outstanding
shares and shares to be issued upon conversion of the Debentures. Such
calculation excludes stock options and warrants to be issued upon completion
of the restructuring. The following table sets forth a reconciliation of
weighted average shares used in computing historical primary and
fully-diluted earnings per share and pro forma weighted average shares.
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
----------- ------------
<S> <C> <C>
Historical........................................................ 149,704 242,288
Common Stock Equivalents eliminated upon restructuring............ (92,593)
Shares issued in connection with restructuring.................... 2,245,400 2,245,400
----------- ------------
2,395,104 2,395,104
----------- ------------
----------- ------------
</TABLE>
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
THE RESTRUCTURING. As of August 15, 1996, the Company had entered into
Standstill Agreements with holders of approximately 94.2% of the outstanding
principal amount of the Senior Notes and had reached an agreement in principle
with the single largest holder of the Convertible Debentures and D/R providing
for the Restructuring. See "The Restructuring -- Background" and "Negotiations
with Debentureholders." The Company expects that consummation of the
Restructuring will result in the following:
-A reduction of its indebtedness from approximately $18.1 million to
approximately $8.4 million and reclassification of long-term debt from a
current to a long-term obligation.
-A capital structure that will permit the Company to implement its operating
strategy.
-Reduced debt service obligations and adequate cash flow to fund such
obligations and operations.
-An improved operating income to fixed charge ratio.
See "The Restructuring -- Certain Significant Effects of the Restructuring" and
"The Restructuring -- Projection of Certain Financial Data."
If the Restructuring is not consummated, the Company's highly leveraged
financial position will result in the continuation of the defaults with respect
to the Senior Notes and the Convertible Debentures and may result in a number of
other serious financial and operational problems, including the following: (i)
the Company will experience a severe liquidity crisis; (ii) the Company will be
unable to invest adequate capital in its business or maintain its current
capital assets; (iii) the Company will have little, if any, ability to access
capital markets; (iv) the Company's senior management will be required to spend
an excessive amount of time and effort dealing with the Company's financial
problems, instead of focusing on the operation of its business; (v) the Company
may be unable to retain top managers and other key personnel and build the value
of its business; (vi) the Company may lose business if customers become
concerned about the Company's ability to supply quality replacement parts in a
timely manner or to comply with applicable regulatory requirements; and (vii)
suppliers to the Company may stop providing supplies or may provide supplies
only on shortened payment or cash terms. If these problems occur, the Company
believes that the value of its business will deteriorate.
Accordingly, if the Restructuring is not consummated, the Company will have
little choice but to devise alternative actions. Considering the Company's
limited financial resources and the existence of unwaived defaults with respect
to the Senior Notes and the Convertible Debentures, there can be no assurance
that the Company would succeed in formulating and consummating an acceptable
alternative financial restructuring. In such case, the Company most likely would
be forced to cease operations or to file for protection under Chapter 11 of the
Bankruptcy Code. In addition, because payment defaults currently exist under the
Senior Notes and Convertible Debentures (see "Risk Factors -- Risk Factors
Relating to Failure of the Restructuring to Occur -- Certain Defaults"), it is
possible that creditors of the Company could file an involuntary petition
seeking to place the Company in bankruptcy. There can be no assurance that a
bankruptcy proceeding would result in a reorganization of the Company rather
than a liquidation, or that any reorganization would be on terms as favorable to
the holders of the Convertible Debentures, Senior Notes and Common Stock as the
terms of the Restructuring. If a liquidation or a protracted reorganization were
to occur, there is a risk that there would be no cash or property available for
distribution to holders of the Convertible Debentures and the Common Stock and
that the holders of Senior Notes would incur a significant discount on their
claims.
THE COMPANY'S CURRENT FINANCIAL CONDITION. At May 31, 1996, the Company's
total long-term debt amounted to $18.1 million, consisting primarily of $7.7
million principal amount of the Senior
61
<PAGE>
Notes, $10.0 million principal amount of the Convertible Debentures and $.4
million principal amount of a mortgage loan secured by its corporate
headquarters. The entire principal amount of the Senior Notes and the
Convertible Debentures was classified as current at May 31, 1996, 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, and mature in 1997. The Convertible Debentures, which
were issued during fiscal 1994, bear interest at the fixed rate of 8% per annum,
payable quarterly, are convertible into shares of the Company's Common Stock at
$4.00 per share and mature in 2003.
On May 26, 1995, the Company received a notice of payment blockage from the
Majority Noteholder. 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 Convertible 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 and August 31, 1995 interest payments due to holders of
the Convertible Debentures, totaling $400,000. Pursuant to the terms of the
Senior Notes, the Company was prohibited from making any other payments with
respect to the Convertible Debentures prior to the expiration of the payment
blockage period on November 22, 1995. Notwithstanding the expiration of the
payment blockage period, the Company did not pay the November 30, 1995 and the
February 29 and May 31, 1996 interest payments on the Convertible Debentures.
The Company does not intend to resume making payments of interest on the
Convertible Debentures.
The Company did not make its scheduled July 17, 1995 principal payment on
the Senior Notes in the approximate amount of $1.8 million. The Company cured
the default in part by making a principal payment of $1.45 million on the Senior
Notes on December 12, 1995. The Company made an additional principal payment of
$.7 million, on May 13, 1996 which cured such principal payment default and
prepaid, without penalty, approximately $.35 million of the $4.1 million
principal payment due on the Senior Notes on July 17, 1996. The Company did not
make its July 17, 1996 principal payment on the Senior Notes, which was due in
the amount of approximately $3.7 million, pending redemption of the Senior Notes
in connection with the Restructuring. If the Restructuring is not consummated,
the Company will be unable to make such principal payment, the only remaining
principal payment on the Senior Notes due during the current fiscal year, and
will continue to be unable to make interest payments on the Convertible
Debentures for the remainder of the current fiscal year.
The failure to make the interest payments to the holders of the Convertible
Debentures and the principal payment to the holders of the Senior Notes due on
July 17, 1996 referred to above constitutes an Event of Default under the
agreements governing the Senior Notes and Convertible Debentures. Further, the
Company is in default in the observance of certain financial covenants
applicable to the Senior Notes and the Convertible Debentures. If the Company
remains in default under the terms of the Senior Notes and Convertible
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of $17.7 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 most likely would require the Company to cease
operations or to file for protection under Chapter 11 of the Bankruptcy Code. In
addition, if the holders of any of the Company's Senior Notes or Convertible
Debentures demand repayment or if the holders of the Senior Notes seek to
realize upon the collateral securing the Senior Notes, there is a substantial
likelihood that the Company will be forced to cease operations or to file for
protection under Chapter 11 of the Bankruptcy Code.
At May 31, 1996, the Company had a working capital deficit of $10.8 million
and a current ratio of .5 to 1.0, compared to a working capital deficit of $13.5
million and a current ratio of .4 to 1.0 at May 31, 1995. The $2.7 million
reduction in the working capital deficit was primarily the result of proceeds
from the sale of certain aircraft (that were previously leased), being used to
pay down current
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liabilities. This is reflected in the Company's cash flows which show cash flow
provided by operating activities of approximately $2.1 million, but cash flows
from financing activities using approximately $2.6 million.
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. The Company has
received a commitment for a Credit Facility consisting of (i) a revolving line
of credit in an amount equal to the lesser of (a) $11.0 million and (b) an
amount based on the sum of eligible receivables plus eligible inventory and (ii)
a term loan in an amount equal to the lesser of (a) $3.0 million and (b) an
amount based on a percentage of the liquidation value of aircraft approved by
such bank owned by the Company. The Company expects to enter into the Credit
Facility in connection with the Restructuring.
RESULTS OF OPERATIONS
OVERVIEW.
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,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating Data:
Net Sales........................................................ 89.4% 88.1% 92.3%
Lease Revenue.................................................... 10.6 11.9 7.7
----------- ----- -----
Total revenues................................................... 100.0% 100.0% 100.0%
----------- ----- -----
Cost of sales.................................................... 118.0 70.9 56.9
Selling, general and administrative expenses..................... 37.1 17.4 16.9
Provision (recovery) for doubtful accounts....................... 7.9 (1.3) 2.0
Depreciation and amortization expense............................ 13.2 5.6 5.0
Losses of service center subsidiary.............................. 10.3 2.7 --
----------- ----- -----
Total operating expense........................................ (186.5) 95.3 80.8
----------- ----- -----
Income from operations........................................... (86.5) 4.7 19.2
Interest expense................................................. 15.8 10.3 9.4
Interest and other income, net................................... (.5) (2.4) (.1)
Unusual and nonrecurring items................................... -- (.7) --
----------- ----- -----
Earnings (loss) before income taxes, equity in loss of joint
venture and extraordinary item.................................. (101.8) (2.5) 9.9
Provision for income taxes (benefit)............................. (13.2) -- .1
Equity in loss of joint venture.................................. (2.3) -- --
Extraordinary loss on extinguishment of debt..................... (1.9) -- --
----------- ----- -----
Net earnings (loss)............................................ (92.8)% (2.5)% 9.9%
----------- ----- -----
----------- ----- -----
</TABLE>
Inventories are valued at the lower of cost or market. The cost of aircraft
spare parts purchased individually or in lots, as opposed to whole aircraft
purchases, is determined on a specific identification basis. As of May 31, 1996,
such parts represented approximately 83% 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, 1996, such parts represented
approximately 3% of the inventory cost value. The revenue estimates for the pool
of parts (the aircraft) is determined by management based upon
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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 on
which management determines the aircraft is to be parted out. Management
monitors its initial estimates and may make adjustments if warranted by market
conditions. If the actual revenue exceeds the quarterly estimates, no
amortization adjustment is required. The amortization schedule is established 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.
Certain aircraft held for sale, which were previously leased, are accounted
for as inventory. As of May 31, 1996, such aircraft represented approximately
14% of the inventory cost value.
FISCAL 1996 COMPARED WITH FISCAL 1995.
Net parts sales increased by 37% or $5.1 million, from $13.8 million in
fiscal 1995 to $18.9 million in fiscal 1996. The increase in net parts sales is
primarily attributable in part to the Company's sales to ValuJet Airlines, which
sales amounted to $4.8 million in fiscal 1996 compared to $1.4 million in 1995.
Additionally, an improved operating environment within the airline industry led
to increased parts sales to new and existing customers. Aircraft sales decreased
to $2.5 million in fiscal 1996, compared to $8.1 million in fiscal 1995.
Aircraft sales are unpredictable transactions and may fluctuate significantly
from year to year, dependent, in part, upon the Company's ability to purchase an
aircraft at an attractive price and resell it within a relatively brief period
of time, as well as the overall market for used aircraft. During fiscal 1996,
the Company acquired one aircraft and sold three aircraft, as compared to fiscal
1995, during which the Company sold eight aircraft and acquired none. Lease
revenue decreased to $1.8 million in fiscal 1996 from $3.0 million in fiscal
1995, as certain leases that were in existence during the prior year were
terminated and not renewed (two of the aircraft under such terminated leases
were sold during fiscal 1996). The increase in parts sales was insufficient to
offset the decrease in aircraft sales and lease revenue and, as a result, total
revenues for fiscal 1995 decreased 7% to $23.2 million from $25.0 million for
fiscal 1995.
Fiscal 1996 lease revenues include $139,000 in revenues arising from a
fiscal 1995 transaction. During fiscal 1995 the Company accepted lease payments
from a foreign customer in the customer's local currency because conversion
restrictions precluded the customer from obtaining and paying U.S. dollars. Due
to uncertainties regarding when and at what rate the local currency could be
converted to U.S. dollars, the Company valued the local currency at an estimated
value of $200,000 as of May 31, 1995 (included in cash), such amount being less
than the then current U.S. equivalent amount at the official exchange rate. The
Company subsequently was able to convert the funds to U.S. dollars in the amount
of $339,000, resulting in a gain of $139,000, which is included in lease
revenues during fiscal 1996.
In addition, fiscal 1996 revenues were increased as a result of the
settlement of certain disputes with a customer. Pursuant to the settlement, the
customer paid the Company $660,000 and the Company canceled 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 inventory. The Company
recorded as net sales the cost of the inventory plus the amount of the net gain.
As noted above, the Company's net parts sales to ValuJet Airlines amounted
to $4.8 million, or 21% of total revenues, and $1.4 million, or 6% of total
revenues, during fiscal 1996 and 1995, respectively. On June 17, 1996, ValuJet
Airlines entered into a consent decree with the FAA, pursuant to which ValuJet
Airlines agreed to ground all of its aircraft until it demonstrates compliance
with specified safety and maintenance procedures. The failure of ValuJet
Airlines to resume operations or eventually to resume operations to
substantially the level conducted prior to the grounding could have
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a material adverse effect on the Company. The Company also conducts business
with other customers who provide services to ValuJet Airlines. Management cannot
estimate the effect that the grounding of ValuJet Airlines has had or will have
on sales to such other customers.
Cost of sales decreased 25.4% from $17.7 million in fiscal 1995 to $13.2
million in fiscal 1996, primarily as a result of lower sales. In addition, cost
of sales as a percentage of total revenues also decreased from 70.9% to 56.9%
respectively. The decrease in cost of sales as a percentage of total revenues
from fiscal 1995 to fiscal 1996 was primarily due to higher margin aircraft
sales in fiscal 1996 as compared to fiscal 1995. Cost of aircraft sales was
34.8% of total revenues in fiscal 1996 compared to 98.6% in fiscal 1995. The
cost of aircraft sales during fiscal 1995 was in excess of normal levels as the
result of the sale at cost of three DC-9 aircraft during fiscal 1995. Cost of
parts sales as a percentage of total parts sales was 63.4% in fiscal 1996
compared to 66.0% in fiscal 1995.
Selling, general and administrative expenses decreased $.5 million,
amounting to $3.9 million, or 16.9% of total revenues in fiscal 1996, compared
to $4.4 million, or 17.4% of total revenues in fiscal 1995, primarily as a
result of the Company's ongoing cost reduction program.
Provision (recovery) for doubtful accounts was $464,000 in fiscal 1996
compared to $(335,000) in fiscal 1995. During fiscal 1995, the Company,
primarily through litigation, recovered approximately $700,000 of accounts
receivable which had been written off or reserved during fiscal 1994. The
recoveries were offset during fiscal 1995 by a provision for doubtful accounts
of $350,000. During fiscal 1996, the Company instituted a policy whereby it
records a provision of approximately 2% of total revenues for estimated future
write-off's of accounts receivable. There were no other significant provisions
or recoveries made during fiscal 1996.
Depreciation and amortization were $1.2 million in fiscal 1996 compared to
$1.4 million in fiscal 1995. Included in fiscal 1996 depreciation is a writedown
of $190,000 to the Company's headquarters facility to reduce its cost to
estimated market value. On August 8, 1996, the Company entered into a contract
to sell its headquarters facility. The Company anticipates that the sale will be
consummated during the second quarter of fiscal 1997. The net reduction from
fiscal 1995 to fiscal 1996 was due primarily to a decrease in depreciation of
aircraft held for lease, resulting from the sale of certain of the Company's
aircraft which were previously held for lease during fiscal 1995.
The Company incurred losses from its service center subsidiary of $676,000
in fiscal 1995. The amounts recorded relate to the Company's wholly owned
subsidiary, International Airline Service Center, Inc., which ceased operations
in fiscal 1995.
Interest expense in fiscal 1996 was $2.2 million, compared to $2.6 million
in fiscal 1995. The decrease in interest expense from fiscal 1995 to fiscal 1996
was due to a net reduction in total debt outstanding, to $18.1 million at May
31, 1996 compared to $20.3 million at May 31, 1995.
Interest and other income for fiscal 1996 was $34,000, compared to $.6
million in fiscal 1995. Included in the fiscal 1995 amounts were several
non-recurring transactions, including approximately $340,000 of interest income
collected on notes receivable (such notes were retired during the first quarter
of fiscal 1996), a $66,000 gain on the sale of certain land located in Kentucky,
and approximately $120,000 received in connection with consulting and other
services provided to an insurance company.
During fiscal 1995, the Company incurred unusual and nonrecurring items of
$177,000. Included in these unusual and nonrecurring items is an expense of
$180,000 incurred in connection with the transactions between the Company and
Richard R. Wellman and Lynda Wellman and an affiliate of the Wellmans, and a
gain of $375,000 relating to settlement of litigation which had previously been
accrued in an amount in excess of the settlement amount. There were no unusual
and nonrecurring items in fiscal 1996.
Although the Company had net operating loss carryforwards sufficient to
offset income during fiscal 1996 it recorded a provision for income taxes of
$14,000. The Company has fully exhausted its
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carryback benefits and recorded a one hundred percent (100%) valuation allowance
against the deferred tax asset for net operating loss carryforwards. The $14,000
provision recorded in fiscal 1996 relates to alternative minimum taxes and
amendments of certain prior year state and federal tax returns.
Net earnings during fiscal 1996 were $2,286,000, or $.57 per share, compared
to a loss of $614,000 or $.15 per share during fiscal 1995. On a fully-diluted
basis, earnings (loss) per share were $(.47) and $(.15) per share during fiscal
1996 and 1995, respectively.
FISCAL 1995 COMPARED WITH FISCAL 1994.
Total revenues for fiscal 1995 increased 33.4% from total revenues for
fiscal 1994, to $25.0 million from $18.7 million. The increase in total revenues
is primarily attributable to an increase in aircraft sales, from $4.1 million in
fiscal 1994 to $8.2 million in fiscal 1995. During fiscal 1995, the Company sold
three DC-9 aircraft to a leasing company for $5.6 million pursuant to a contract
entered into during fiscal 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 at an attractive price and resell it
within a relatively brief period of time. Lease revenue increased to $3.0
million in fiscal 1995 from $2.0 million in fiscal 1994.
Cost of sales decreased 19.9% from $22.1 million in fiscal 1994 to $17.7
million in fiscal 1995, while cost of sales as a percentage of revenues
decreased from 118.0% in fiscal 1994 to 70.9% in fiscal 1995. During fiscal
1994, the Company recorded charges to cost of sales totaling $9.5 million for
writedowns and valuation adjustments to certain parts inventory and aircraft
(see "-- Fiscal 1994 Compared With Fiscal 1993"), thus making a comparison of
cost of sale percentages between fiscal 1994 and fiscal 1995 not meaningful.
During fiscal 1995, the Company realized no profit on the $5.6 million sale of
three DC-9 aircraft to a leasing company because the carrying value of such
aircraft equaled the sales price. Excluding the $5.6 million from sales and cost
of sales during fiscal 1995, the Company's cost of sales as a percentage of
fiscal 1995 revenues was 66.0% compared to 64.0% and 61.2% in fiscal 1993 and
1992, respectively.
Selling, general and administrative expenses ("SG&A") for fiscal 1995
decreased 37.2% to $4.4 million in fiscal 1995 compared to $6.9 million in
fiscal 1994. As a percentage of revenues, SG&A expense was 17.4% in fiscal 1995
compared to 37.1% in fiscal 1994. The reduction in SG&A expense of $2.6 million
from fiscal 1994 to fiscal 1995 was due to several factors, including reductions
in the number of management personnel and ongoing efforts to reduce operating
costs. Payroll and commission costs were $1.3 million in fiscal 1995 compared to
$2.2 million in fiscal 1994. Travel and entertainment costs were $261,000 in
fiscal 1995 compared to $610,000 in fiscal 1994. Additionally, in the fourth
quarter of fiscal 1994 the Company accrued 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.
Provision (recovery) for doubtful accounts was $(335,000) in fiscal 1995
compared to $1.5 million in fiscal 1994. During fiscal 1995, the Company,
primarily through litigation, recovered approximately $700,000 of accounts
receivable which had been written off or reserved during fiscal 1994. The
recoveries were offset during fiscal 1995 by a provision for doubtful accounts
of $350,000. During fiscal 1994, the Company wrote off approximately $900,000 of
accounts receivable which were determined to be uncollectible, and reserved
additional funds for accounts that may not be collectible.
Depreciation and amortization was $1.4 million in fiscal 1995 compared to
$2.5 million in fiscal 1994. The net reduction from 1994 to 1995 was due
primarily to a decrease in depreciation of aircraft held for lease, as several
of the Company's aircraft that were being depreciated in fiscal 1994 were sold
either during the latter part of fiscal 1994 or during fiscal 1995.
Loss of the service center subsidiary was approximately $.7 million in
fiscal 1995 compared to a loss of $1.9 million in fiscal 1994. The subsidiary
ceased operations in fiscal 1995.
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Interest expense for fiscal 1995 was $2.6 million compared to $3.0 million
in fiscal 1994. The decrease in interest expense is due to a net reduction in
total debt outstanding, from $26.2 million at May 31, 1994 to $20.3 million at
May 31, 1995. During fiscal 1995, the Company repaid $4.7 million of the
principal due on the Senior Notes.
Interest and other income was $.6 million in fiscal 1995 compared to $88,000
in fiscal 1994. Included in interest and other income during fiscal 1995 is
approximately $340,000 interest income collected on notes receivable, a $66,000
gain on the sale of certain land located in Kentucky, and approximately $120,000
received in connection with consulting and other services provided to an
insurance company.
Included in unusual and non-recurring items in fiscal 1995 is an expense of
$180,000 incurred in connection with the transactions between the Company and
Richard R. Wellman and Lynda Wellman and an affiliate of the Wellmans and a gain
of $375,000 relating to settlement of litigation which had previously been
accrued in an amount in excess of the settlement amount.
The net loss for fiscal 1995 was $614,000, or $(.15) per share, compared to
a net loss of $17.4 million or $(4.30) per share for fiscal 1994.
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<PAGE>
BUSINESS
GENERAL
The Company is a worldwide supplier of aircraft spare parts to the aviation
redistribution market. The Company sells spare parts to major commercial
passenger airlines, air cargo carriers, maintenance and repair facilities and
other redistributors. The parts sold by the Company include avionics, rotable
and expendable airframe and engine components for commercial aircraft, including
Airbus, Boeing and McDonnell-Douglas aircraft and Pratt & Whitney and
Rolls-Royce jet engines. During fiscal 1996, the Company supplied parts to over
771 customers worldwide, approximately 676 of which were domestic customers and
approximately 95 of which were foreign customers. Currently, the Company
specializes in replacement parts for McDonnell Douglas DC-9 aircraft. Management
believes that the Company has one of the most extensive inventories of
aftermarket DC-9 parts in the industry. For fiscal 1996, the Company's operating
revenues were approximately $23.2 million, its gross profit was approximately
$9.1 million and its pretax income was approximately $2.3 million.
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market and that
the Company's sales represented approximately 2% of such market during fiscal
1996. The redistribution market is highly fragmented, with a limited number of
large, well capitalized companies selling a broad range of aircraft spare parts,
and numerous smaller competitors serving distinct market niches. The Company
believes that significant trends affecting the redistribution market will
continue to increase its overall size while reducing the number of competitors.
Factors causing the expansion of the redistribution market include the
increasing size and age of the world-wide airline fleet and the increasing
pressures on airlines and maintenance and repair facilities to control their
costs.
Although the Company's current financial condition is weak, the Company has
been successful over the last two years in positioning itself as one of the
premier redistributors of aircraft spare parts. Upon the successful
implementation of the Restructuring, the Company believes that it will have the
financial viability to implement its operating strategy and to become one of the
select number of redistributors well positioned to fully service the aircraft
spare parts requirements of its customers.
OPERATING STRATEGY
The Company is, therefore, undertaking the Restructuring to improve its
financial flexibility and allow it to implement its operating strategy. The
Company's operating strategy has two components. First, the Company intends to
increase its revenues and operating income through continued customer
penetration in its existing markets and expansion into new markets. The Company
intends to achieve this by continuing to increase its share of the market for
spare parts for certain widely operated aircraft models, including, in
particular, the DC-9 (which is no longer in production) and the MD-80. Although
the MD-80 is still in production, many of the DC-9's parts are interchangeable
with the MD-80, which, given the Company's experience and knowledge with the
DC-9, gives it a competitive advantage. The Company intends to capitalize on the
limited availability of spare parts for such aircraft models by acquiring (i)
pools of inventory from airlines that cease to operate such aircraft or that
desire to reduce their levels of parts inventory and (ii) aircraft for parting
out when the purchase price justifies doing so. In this regard, the Company
purchased an inventory of DC-9 and MD-80 parts from Pt. Garuda Indonesia, an
Indonesian airline, in May 1996 for total consideration of approximately $2.6
million. This inventory, which has an appraised fair market value in excess of
$7.5 million, became available following Garuda's decision to discontinue
operating DC-9 aircraft. The Company believes that its knowledge of the fleets
of DC-9 and MD-80 aircraft currently in operation and its worldwide contacts in
the commercial aviation industry will permit it to acquire other inventory pools
and aircraft for parting out on favorable terms in the future.
The second component of the Company's operating strategy is to achieve
revenue and earnings growth by acquiring other companies engaged in the sale of
aircraft parts as well as companies with product lines that would complement the
Company's existing redistribution business. The Company
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competes in a fragmented market in which numerous small companies serve distinct
market niches. The Company believes that small aircraft parts redistributors,
many of which are family owned and capital constrained, are unable to provide
the extensive inventory and quality control necessary to comply with applicable
regulatory and customer requirements and will provide acquisition opportunities
for the Company. The Company believes that such acquisitions will permit it to
expand its customer base by selling aircraft parts to airlines and others that
are not now customers, to expand its product line with respect to aircraft in
which the Company currently specializes, to strengthen its relationships with
existing customers and to expand the types of aircraft in which the Company
specializes. The Company, however, has not entered into an agreement to acquire
any such company and there can be no assurance that the Company will be able to
do so. Further, the Company will be unable to make acquisitions if the
Restructuring is not consummated.
HISTORY
The Company became a supplier of aircraft parts in the early 1980s 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
expectancies that have exceeded the manufacturer's original estimates. Beginning
in 1992, the Company began purchasing and parting out Boeing 727 aircraft. The
Company has acquired thirty-eight DC-8, eight DC-9, and six Boeing 727 aircraft
for parting out since the Company began operations. In addition, the Company
purchased the original testbed MD-80 from McDonnell Douglas and parted it out.
The Company's extensive inventory of DC-9 parts also enables it to sell parts to
operators of the MD-80 because a substantial number of DC-9 parts may be used on
the MD-80.
Traditionally, the Company obtained most of its parts inventory by parting
out high quality aircraft. Although management expects that, if financing is
available, it may acquire additional aircraft for parting out, management
believes that the principal source of its inventory acquisitions during the next
fiscal year will be purchases of excess inventory from aircraft operators. In
the past, the Company acquired aircraft for parting out only if its initial
estimate of the timing and value of parts 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
appropriate prices are increasingly difficult to locate because of, among other
things, the continued trend of start-up, low-cost airlines to use narrow-body
aircraft such as the DC-9. However, the emergence of the start-up, low-cost
airlines has enhanced the value of the Company's existing inventory because in
order to assure reliable operations, such airlines need to maintain a minimum
supply of spare parts or establish relationships with spare parts suppliers.
Because of the Company's position as a primary source of spare parts for the
DC-9 aircraft and because the start-up airlines generally lack the resources to
maintain extensive supplies of spare parts, the Company believes that it will
continue to be an active parts supplier for such airlines.
In addition to its DC-9 spare parts, the Company maintains inventories of
spare parts for the Boeing 727, 737 and 747 aircraft, the McDonnell Douglas DC-8
and 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.
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, subject to the availability of
financing, maintains an adequate level of inventory in order to service such
customers in a timely manner. Management believes that availability and timely
delivery of quality spare parts are the primary factors considered by customers
when making a spare parts purchase decision.
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INDUSTRY OVERVIEW
GENERAL. The Company believes that the world-wide aircraft fleet is both
growing and getting older. According to the World Jet Airplane Inventory for
calendar 1995, the combined aircraft fleets of aircraft operators throughout the
world at December 31, 1995 consisted of approximately 12,452 jet aircraft, the
average age of which was approximately 13.1 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 redistributors,
such as the Company, 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-capitalized
and financed companies with proven infrastructures to exploit niche markets in
certain types of aircraft, such as the DC-9 and MD-80.
Economic factors have prompted many airlines to defer aircraft procurement
programs and extend the useful life of older equipment. 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.
Furthermore, increased competition in the airline industry has led to the
emergence of several start-up low-cost airlines which use DC-9s and MD-80s,
including ValuJet, Spirit Airlines and Reno Air. The start-up airlines generally
offer service on specific high traffic, short-haul routes rather than attempting
to compete with the extensive hub-and-spoke systems used by the major carriers
to obtain long-haul traffic. Second generation aircraft (such as the DC-9) are
able to operate profitably on these high-traffic, short-haul routes.
In addition to the growth in the number of older aircraft in service, cost
and availability considerations are causing airlines to reduce the size of their
spare parts inventories and, therefore, to utilize aircraft spare parts sold by
redistributors to provide parts that are no longer in production. As airlines
adopt just-in-time inventory procurement processes, inventory storage and
handling devolves to suppliers such as the Company, thus increasing the
percentage of parts sold by redistributors relative to those sold by parts
manufacturers. Furthermore, in order to reduce purchasing costs, airlines have
been reducing the number of "approved" suppliers.
As a result of these supplier reductions, there has been and the Company
believes there will continue to be a consolidation in the redistribution market
even as the redistribution market is expected to grow. The Company believes that
only those redistributors with extensive inventories, adequate capital and the
ability to comply with applicable regulatory and customer requirements regarding
part quality and traceability will be able to capitalize on these trends. The
Company currently maintains an inventory of over 50,500 line items consisting of
more than 565,000 parts, which the Company believes will enhance its ability to
respond well to such market trends.
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 that was not the original purchaser of the aircraft.
As OEMs cease manufacturing replacement parts, and as other sources of new
parts become increasingly scarce, aircraft operators must locate alternative
sources for quality aftermarket parts to
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<PAGE>
maintain the reliable operation of their aircraft. Often, aircraft operators
will opt for quality aftermarket parts even when new parts are still in
production. Aftermarket aircraft parts must meet the same FAA standards as new
parts but generally cost less than new parts, and are often more readily
available.
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 phase out their noisier aircraft gradually by 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 was required either to reduce the number of Stage 2
aircraft it operated 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." Traditionally, the Company obtained most of its
spare parts inventory by parting out high quality aircraft. When the Company
acquires an aircraft for parting out, the aircraft is delivered to an inventory
storage facility. 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 often 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. Management believes that its principal source of inventory
acquisitions during the next fiscal year will be from such sales.
Modern aircraft design emphasizes the use of components that may be reused
repeatedly after inspection and overhaul. Because of the reusable nature of such
"rotable" parts, sales of rotable parts offer greater profit potential than the
nonreusable "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
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<PAGE>
other than malfunction and may be reinstalled after inspection. The remaining
condition, "unserviceable," designates the need for the part to be overhauled
prior to inspection and installation. The FAA requires rotable 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 aftermarket parts
that have not been inspected and certified.
PRODUCT LINES. Historically, the Company maintained a large inventory of
aftermarket 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 DC-8s powered by JT3 and JT4 class
engines in use in the United States and required such aircraft 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 declined. Certain devices
known as "hush kits" were invented in order to bring the JT3 engines within
acceptable noise limits. In late 1985, the FAA approved the first hush kit for
certain JT3 engines and an additional hush kit was approved for other JT3
engines in 1987. The effect of these changes was to create new demand for DC-8
parts because a DC-8 equipped with a hush kit 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 of DC-8s in operation, the Company began
expanding its inventory to include parts for Stage 2 aircraft, such as the DC-9
aircraft. Currently, the Company specializes in replacement parts for DC-9
aircraft. The noise abatement regulations issued by the FAA require aircraft
operators to phase out their noisier Stage 2 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 useful life of DC-9s. 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 and for the
Pratt & Whitney JT-8D engine series. Many of the parts on the MD-80, which is
still in production, are interchangeable with similar parts for the DC-9.
MARKETING. The Company has developed a sales and marketing infrastructure
which includes well-trained and knowledgeable sales personnel, computerized
inventory management, listing of parts in electronic industry data bank
catalogues and a home page on the Internet. Crucial to the successful marketing
of the Company's inventory is the Company'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.
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 aftermarket aircraft parts. No pricing
service or catalogue exists for aftermarket components. Aftermarket aircraft
parts prices are determined by referencing new parts catalogues with
consideration given to existing supply and demand conditions. Often, aircraft
operators will opt for quality aftermarket parts even when new parts are still
in production. Aftermarket aircraft parts that meet the same FAA standards as
new parts cost less than the same new parts and are often more readily
available.
In addition to directly marketing its inventory, the Company lists its
inventory in the Air Transport Association's computerized data bank ("AIRS") and
with the Inventory Locator Service ("ILS"), a proprietary computerized data
bank. Both of these data bases are 24 hour electronic "marketplaces" where
aircraft parts transactions take place.
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CUSTOMERS
GENERAL. The Company's customer base includes major passenger and cargo
operators, smaller aircraft operators, overhaul facilities, FAA-certified repair
facilities and other redistributors who may in turn resell to end users. Certain
aircraft operators often buy through competitors instead of directly through the
Company because of the operator's existing relationship with the competitor or
the competitor's ability to overhaul the part sought.
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, dependent, 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.
MAJOR CUSTOMERS. In fiscal 1993 and 1994, Transafrik Corp., a cargo carrier
operating in Africa, accounted for a significant amount of the Company's revenue
Prior to fiscal 1993, no customer accounted for more than 10% of the Company's
net revenues, except Transafrik. In fiscal 1994, sales to Transafrik declined
significantly. Transafrik accounted for less than one percent of the Company's
total revenue in fiscal 1995 and fiscal 1996, compared with 25%, 18% and 10% of
total revenue in fiscal 1992, 1993 and 1994, respectively. During fiscal 1995,
the Company sought to reduce its vulnerability to a decrease in sales to any
single customer by focusing its marketing on the identification and solicitation
of new customers. The Company obtained approximately 240 new parts customers
during fiscal 1995 and 242 new customers in fiscal 1996. In fiscal 1995, the
Company instituted new compensation policies for its parts sales force. Pursuant
to the new policies, all salesman are paid strictly on commission, sales to new
customers are encouraged and commissions are not paid until accounts are
collected. In addition, the Company has continued to decrease its exposure to
more volatile international markets. Its domestic revenues as a percentage of
total revenues has increased in each of the last four fiscal years, to
approximately 85% in fiscal 1996 from 72% in fiscal 1995, 59% in fiscal 1994,
and 40% in fiscal 1993.
During fiscal 1996 and the first seven months of calendar year 1996, the
Company's parts sales to ValuJet represented approximately 21% and 25%,
respectively, of the Company's total revenues. On June 17, 1996, ValuJet entered
into a consent decree with the FAA, pursuant to which ValuJet agreed to ground
all its aircraft until it demonstrates compliance with specified safety and
maintenance procedures. The Company also conducts business with other customers
who provide services to ValuJet. Management cannot estimate the effect that the
grounding of ValuJet has had or will have on sales to such customers.
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, 1996 and 1995:
<TABLE>
<CAPTION>
NET REVENUES
CUSTOMER (000'S) PERCENTAGE OF TOTAL NET REVENUES
- --------------------------------------------------- ------------------- ---------------------------------
<S> <C> <C>
1995:
Aeroservices Carabobo C.A. $ 2,716 10.9
Ajax Leasing Ltd. 5,625 22.5
1996:
ValuJet Airlines, Inc. 4,771 20.6
</TABLE>
GEOGRAPHIC DISTRIBUTION OF CUSTOMERS. The Company sells aircraft and
aircraft parts and leases aircraft to foreign and domestic customers. The
footnotes to the Consolidated Financial Statements of the Company, which are set
forth elsewhere in this Proxy Statement/Prospectus, provide certain information
with respect to the geographic areas from which the Company has derived revenue
during the three fiscal years ended on May 31, 1996. See also "Risk Factors --
Risk Factors Associated with Ownership of the Common Stock -- Risks Regarding
Sales and Leases to Foreign Customers."
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ADDITIONAL SERVICES
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that its
spare parts sales opportunities are enhanced by providing its existing and new
customers with whole aircraft and engines through sale transactions. Such
transactions allow the Company to expand its customer base for spare parts and
to reduce the cost basis in its aircraft. The Company currently owns four
aircraft. As of May 31, 1996, one of the aircraft was subject to a
month-to-month lease. The Company expects to continue to broker sales of
aircraft and engines when opportunities to do so arise.
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 the Company within 14 days. A "core"
unit is the same part which is being delivered to the customer by the Company,
but in need of overhaul. The Company 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. During fiscal 1996, brokered transactions accounted for
approximately 13% of total revenues, as compared to approximately 19% of total
revenues during fiscal 1995.
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the FAA
and in other countries by similar agencies. While the Company's business is not
regulated, the aircraft spare parts which it sells to its customers must be
accompanied by documentation that enables the customer to comply with applicable
regulatory requirements. There can be no assurance that new and more stringent
government regulations will not be adopted in the future or that any such new
regulations, if enacted, would not have an adverse impact on the Company.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal injury or
death which may result from the failure of an aircraft spare part sold by it. In
this regard, the Company maintains liability insurance in the amount of $10
million. While the Company maintains what it believes to be adequate liability
insurance to protect it from such claims, and while no lawsuit has ever been
filed against the Company based upon a products liability theory, no assurance
can be given that claims will not arise in the future or that such insurance
coverage will be adequate. Additionally, there can be no assurance that
insurance coverages can be maintained in the future at an acceptable cost. Any
such liability not covered by insurance could have a material adverse effect on
the financial condition of the Company.
COMPETITION
The aircraft spare parts redistribution market is highly fragmented.
Customers in need of aircraft parts have access, through computer-generated
inventory catalogues, to a broad array of suppliers, including aircraft
manufacturers, airlines and aircraft services companies. The dominant companies
in the aircraft parts aftermarket are AAR Corp., Aviation Sales Company and
Banner Aerospace. These companies are larger than the Company and have greater
financial resources. The Company also competes with numerous smaller,
independent dealers, which generally participate in niche markets. The Company
believes that none of its competitors account for a significant amount of the
spare parts market for DC-8, DC-9 and MD-80 aircraft, the types of narrow-bodied
aircraft in which the Company specializes. Competition in the redistribution
market is generally based on price, availability and quality of product,
including traceability.
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EMPLOYEES
As of August 15, 1996, the Company had approximately 25 employees. Of these,
two are executive officers, six are sales personnel, seven are accounting,
finance, data processing, and administrative personnel, one is a quality
assurance specialist and the remainder are inventory and warehouse operations
personnel. The Company is not a party to any collective bargaining agreement.
The Company believes its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is not now a party to any litigation or other legal proceeding.
The Company may become a defendant in legal proceedings in the ordinary course
of business.
MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of the date of the Proxy
Statement/Prospectus. A summary of the background and experience of each of
these individuals is set forth following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD DIRECTOR SINCE
- ------------------------- --- ---------------------------------------- --------------
<S> <C> <C> <C>
Alexius A. Dyer III (1) 40 Chairman of the Board, President and 1992
Chief Executive Officer
George Murnane III (2) 38 Executive Vice President and Chief N/A
Financial Officer
Kyle R. Kirkland (3)(4) 34 Director 1992
E. James Mueller 50 Director 1991
(1)(3)(4)
</TABLE>
- ------------------------
(1) Member of Executive Committee
(2) Mr. Murnane is a nominee to the Board of Directors
(3) Member of Audit Committee
(4) Member of Compensation Committee
ALEXIUS A. DYER III has been the Chief Executive Officer of the Company and
Chairman of the Company's Board of Directors since February 1995. Mr. Dyer has
been a director of the Company since 1992. Mr. Dyer served as President of the
Company from February 1994 to February 1995. From February 1991 to February
1994, Mr. Dyer served as Executive Vice President of Capital Markets of the
Company. Additionally, during 1991, he served as the President and director of
the Company's subsidiary, Barnstorm Leasing, Inc., which was merged into the
Company in July 1992.
GEORGE MURNANE III has been Executive Vice President and Chief Financial
Officer of the Company since June 1996. From March 1996 through June 1996, Mr.
Murnane served as a consultant for the aviation industry. From October 1995
through February 1996 he served as Executive Vice President and Chief Operating
Officer of Atlas Air, Inc., an air cargo company. From 1986 to 1995 he was
affiliated with the New York investment banking firm of Merrill Lynch & Co.,
most recently as Director in the firm's Transportation Group.
KYLE R. KIRKLAND has been a director of the Company since July 1992. Mr.
Kirkland was appointed to the Board in connection with the Company's issuance of
the Senior Notes. Mr. Kirkland has served as the President of Kirkland Messina,
Inc., an investment banking firm, since March 1994. Mr. Kirkland was employed as
Senior Vice President of Dabney/Resnick, Inc. ("D/R") from June 1991 until
February 1994. D/R acted as the placement agent for the Senior Notes and the
Subordinated Debentures. Mr. Kirkland was employed as an investment banker with
Canyon Partners, Inc. and with Drexel Burnham Lambert, Inc. from March 1990
through June 1991 and from July 1988 through March 1990, respectively. Mr.
Kirkland is also a director of Steinway Musical Instruments, Inc.
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<PAGE>
E. JAMES MUELLER has been a director of the Company since 1991. Mr. Mueller
has been a principal with J.M. Associates, Inc., a business development
consulting firm, since January 1992. From June 1978 through December 1991, Mr.
Mueller was the Vice President of Sales/Marketing of Air Cargo Associates, Inc.,
a Connecticut airline charter brokerage/sales corporation. The Company has
entered into a commission agreement with J.M. Associates, Inc., pursuant to
which J.M. Associates, Inc. is compensated for originating transactions for the
Company. See "Certain Relationships and Related Transactions."
COMPOSITION OF THE BOARD
Pursuant to the Board Amendment, (i) the number of directors of the Company
shall be fixed at seven members; and (ii) the number of directors constituting
the Board shall not be changed without the affirmative vote of at least 75% of
the issued and outstanding shares of Common Stock.
COMMITTEES OF THE BOARD
The Compensation Committee of the Board of Directors reviews all aspects of
compensation of executive officers of the Company and makes recommendations on
such matters to the full Board of Directors. The Compensation Committee was
created by action of the Board of Directors after the end of fiscal 1992.
The Audit Committee makes recommendations to the Board concerning the
selection of outside auditors, reviews the financial statements of the Company
and considers such other matters in relation to the internal and external audit
of the financial affairs of the Company as may be necessary or appropriate in
order to facilitate accurate and timely financial reporting. The Audit Committee
also reviews proposals for major transactions.
The Board of Directors also created an Executive Committee after the end of
fiscal 1992.
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate cash
compensation paid to or earned by the Company's Chief Executive Officer during
fiscal 1994, 1995 and 1996. Mr. Murnane became Chief Financial Officer of the
Company on June 17, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
NAME AND -------------------------- ----------------
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#)
- -------------------------- --------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Alexius A. Dyer III, 1996 $ 135,000 80,000(1) --
President and Chief 1995 133,108 -- 107,000
Executive Officer 1994 108,865 20,000 --
</TABLE>
- ------------------------
(1) Mr. Dyer's fiscal 1996 bonus consists of $80,000 paid to him upon execution
of his employment agreement and an additional amount to be earned by him
pursuant to the terms of his employment agreement and to be determined by
the Compensation Committee. See "-- Employment Agreement."
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUE
Shown below is information with respect to all unexercised options to
purchase the Company's Common Stock granted to Mr. Alexius A. Dyer III, the
Company's sole executive officer at May 31, 1996, through the end of fiscal 1995
under the Company's option plans. No options were exercised during fiscal year
1996. At May 31, 1996, the exercise price of all such unexercised options
exceeded the market value of the underlying Common Stock.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT FY-END
NAME EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------------- -----------------------
<S> <C>
Alexius A. Dyer III (1).............................................. 173,667/33,333(2)
</TABLE>
- ------------------------
(1) All options granted under the prior stock option plan will be canceled in
connection with the Restructuring.
(2) Includes 66,667 shares of Common Sock that may be acquired pursuant to the
vested portion of a Stock Purchase Warrant granted to Mr. Dyer on October
15, 1993. The exercise price is $3.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee, Kyle R. Kirkland and E. James
Mueller, have never been employees of the Company. No interlocks existed and no
insiders participated in the Compensation Committee's deliberations or decisions
regarding fiscal 1995 salaries.
COMPENSATION OF DIRECTORS
The non-employee members of the Company's Board of Directors received a
$25,000 fee for their service on the Board during fiscal 1996 pursuant to a
Director's Compensation Plan that was adopted during fiscal 1995. During fiscal
1995, the non-employee members of the Company's Board of Directors received a
$25,000 fee for their service on the Board pursuant to the Director's
Compensation Plan. During fiscal 1994, non-employee members of the Board of
Directors received options to purchase 15,000 shares of Common Stock upon their
appointment or election to the Board. Such grants vest in increments of 5,000
shares per year. Additional grants of 15,000 shares are made upon election to
the Board after all previous grants have vested. These additional grants also
vest in 5,000 share increments. The exercise price of all grants is the fair
market value of the Common Stock at the date of grant. All options granted under
the prior stock option plan will be cancelled in connection with the
Restructuring. Directors are also reimbursed for expense incurred in connection
with the attendance of Board meetings.
THE STOCK OPTION PLAN
The following information regarding the Stock Option Plan is being provided
to the stockholders of the Company in connection with the solicitation of
proxies for approval of the Stock Option Plan. The following description of the
Stock Option Plan is a summary only and does not purport to be complete. This
summary is qualified in its entirety by reference to the Stock Option Plan,
which is attached hereto as Appendix B. Stockholders are urged to read the Stock
Option Plan.
PLAN DESCRIPTION
The Stock Option Plan is intended to provide a means to attract, retain and
motivate selected employees and non-employee directors of the Company. The Stock
Option Plan provides for the grant to eligible employees of incentive stock
options, non-qualified stock options, share appreciation rights, restricted
shares, restricted share units, performance shares and performance units,
dividend equivalents and other share-based awards (collectively "awards"). All
employees (approximately 25 persons) and directors (seven persons) are eligible
to participate in the Stock Option Plan. The portion of the Stock Option Plan
applicable to employees will be administered by the Compensation Committee. The
Compensation Committee will have the full and final authority to select
employees to whom
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<PAGE>
awards may be granted, to determine the type of awards to be granted to such
employees and to make all administrative determinations required by the Stock
Option Plan. The Compensation Committee also will have authority to waive
conditions relating to an award or accelerate vesting of awards. The Stock
Option Plan provides for certain grants of nonqualified stock options to
non-employee directors. An aggregate of 598,782 shares of Common Stock have been
reserved for issuance under the Stock Option Plan, subject to anti-dilution
adjustments in the event of certain changes in the Company's capital structure.
In connection with the Restructuring, after the adoption of the Stock Option
Plan, the Company intends to grant shares of restricted stock and/or options to
purchase the following numbers of shares of Common Stock to the following
persons or groups:
<TABLE>
<CAPTION>
NUMBER OF STOCK OPTIONS
AND/OR SHARES OF
RESTRICTED STOCK
NAME TO BE GRANTED
- ----------------------------------------------------------------------------------------- -----------------------
<S> <C>
Alexius A. Dyer III...................................................................... 224,543
All executive officers as a group (2 persons)............................................ 329,330
All other employees as a group........................................................... 119,756
</TABLE>
Forty percent of such options will vest immediately with 15% vesting
annually over the next four years. The Company also intends to grant options
representing up to 2.5% of the outstanding Common Stock to non-employee
directors. The number of options to be granted to non-employee directors will be
determined by the Company prior to the consummation of the Restructuring. The
Company intends to reserve for future issuance to non-employee directors any
shares not granted as restricted stock and not covered by options issued upon
consummation of the Restructuring.
STOCK OPTIONS. The Stock Option Plan authorizes the granting of both
incentive stock options and non-qualified stock options. At the discretion of
the Compensation Committee, awards of options to employees under the Stock
Option Plan may be granted in tandem with other types of awards. Incentive stock
options granted to employees under the Stock Option Plan, and any accompanying
share appreciation rights, must generally expire within 10 years after the date
of grant. The exercise prices of incentive stock options must be equal to at
least 100% of the fair market value of the Common Stock on the date of grant.
The exercise prices of non-qualified stock options may be more or less than the
fair market value of the Common Stock on the date of grant. Awards under the
Stock Option Plan to employees, except for vested shares, are not transferable
by the holder other than by will or applicable laws of descent or distribution,
except pursuant to a designation filed by an employee with the Company as to who
shall receive the benefits specified under the Stock Option Plan upon the death
of such employee.
RESTRICTED STOCK. The Stock Option Plan authorizes the Compensation
Committee to grant shares of restricted stock to employees, subject to the terms
and conditions imposed by the Compensation Committee. These terms may include a
restriction period during which the shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered and during which such
shares may be subject to forfeiture if one or more conditions established by the
Compensation Committee are not satisfied. Except for such restrictions on
transfer and such other restrictions as the Compensation Committee may impose,
the recipient of restricted stock will have all the rights of a holder of Common
Stock as to such restricted stock including the right to vote the shares and the
right to receive dividends. Except as provided by the Compensation Committee at
the time of grant or otherwise, upon a termination of employment for any reason
during the restriction period, all shares still subject to restriction will be
forfeited by the employee. The Stock Option Plan also authorizes the
Compensation Committee to grant restricted share units to an employee, under
which shares of Common Stock or cash will be delivered to the employee after the
expiration of the restriction period.
SHARE APPRECIATION RIGHTS. The Stock Option Plan authorizes the
Compensation Committee to grant share appreciation rights to employees, subject
to the terms and conditions imposed by the Compensation Committee. Share
appreciation rights give an employee the right to receive the excess
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<PAGE>
of the fair market value of shares of Common Stock at a particular time over the
exercise price of the share appreciation rights, as set by the Compensation
Committee. Terms within the discretion of the Compensation Committee may include
the time of exercise, the form of consideration payable at exercise, and the
method by which shares of Common Stock will be delivered or deemed to be
delivered to an employee.
PERFORMANCE SHARES AND PERFORMANCE UNITS. The Stock Option Plan also
authorizes the Compensation Committee to grant performance shares or performance
units to employees, subject to the terms and conditions imposed by the
Compensation Committee. These awards provide shares of Common Stock or cash to
an employee upon the satisfaction of certain performance objectives, as
determined by the Compensation Committee. Awards may be fixed or may vary in
accordance with the level of such performance. The Compensation Committee may
revise the performance objectives to reflect the occurrence of significant
events which it expects to have a substantial effect on the performance
objectives. Except as provided by the Compensation Committee at the time of
grant or otherwise, upon a termination of employment during the performance
period, all shares and units relating to such performance period will be
forfeited by the employee.
DIVIDEND EQUIVALENTS. The Stock Option Plan also authorizes the
Compensation Committee to grant dividend equivalents to employees. These awards
relate to other awards of shares, rights or units and generally give an employee
the right to receive cash or other property equal to any dividends paid on the
shares of Common Stock underlying such other awards. Such dividend equivalents
may either be paid when accrued or deemed to have been reinvested in additional
shares of Common Stock. Dividend equivalents will be subject to all conditions
and restrictions of the underlying awards to which they relate.
In addition to the foregoing types of awards, the Stock Option Plan also
authorizes the Compensation Committee, subject to limitations under applicable
law, to grant employees any other awards based on shares of Common Stock,
including the award of unrestricted shares purely as a bonus and not subject to
any conditions. Cash awards, as an element of or supplement to any other award,
are also authorized under the Stock Option Plan. In all cases, the Compensation
Committee shall determine the terms and conditions of such awards.
The Stock Option Plan may be amended, altered, suspended, discontinued or
terminated from time to time by the Board of Directors, except that stockholder
approval is required, in accordance with Section 422 of the Code, for any
amendment (a) to increase the number of shares of Common Stock reserved for
issuance under the Stock Option Plan or (b) to change the class of employees
eligible to participate in the Stock Option Plan; provided, however, that no
such amendment may impair the rights of any participant without his consent.
The Stock Option Plan provides that, if the Compensation Committee
determines that a stock dividend, recapitalization, stock split, reorganization,
merger, consolidation, spin-off, combination, or similar corporate transaction
affects the Common Stock such that an adjustment is appropriate to prevent
dilution or enlargement of rights of employees participating in the Stock Option
Plan, the Compensation Committee has discretion to adjust the number and kind of
shares to be issued under the Stock Option Plan and the terms of any award. The
Stock Option Plan provides that such adjustments with respect to non-employee
director's options shall be made automatically. In addition, the Compensation
Committee is authorized to make adjustments in the terms of awards in
recognition of certain unusual or non-recurring events affecting the Company and
its financial statements.
FEDERAL INCOME TAX CONSEQUENCES OF OPTION GRANTS
The following discussion outlines generally the federal income tax
consequences of option awards under the Stock Option Plan. Individual
circumstances may vary these results. The federal income tax law and regulations
are frequently amended, and each participant should rely on his own tax counsel
for advice regarding federal income tax treatment under the Stock Option Plan.
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<PAGE>
NON-QUALIFIED STOCK OPTIONS. The recipient of a non-qualified stock option
under the Stock Option Plan is not subject to any federal income tax upon the
grant of such option nor does the grant of the option result in an income tax
deduction for the Company. As a result of the exercise of an option, the
recipient will recognize ordinary income in an amount equal to the excess, if
any, of the fair market value of the shares transferred to the recipient upon
exercise over the exercise price. Such fair market value generally will be
determined on the date the shares of Common Stock are transferred pursuant to
the exercise. However, if the recipient is subject to Section 16(b) of the
Exchange Act, the date on which the fair market value of the shares transferred
will be determined is delayed until the earlier of the last day of the six-month
period beginning on the date the "property" is "purchased" or the first day on
which a sale of the "property purchased" will not subject the recipient to suit
under Section 16(b) of the Exchange Act. Alternatively, if the recipient is
subject to Section 16(b) of the Exchange Act and makes a timely election under
Section 83(b) of the Code, such fair market value will be determined on the date
the shares are transferred pursuant to the exercise without regard to the effect
of Section 16(b) of the Exchange Act. The recipient will recognize ordinary
income in the year in which the fair market value of the shares transferred is
determined. The Company generally will be entitled to a federal income tax
deduction equal to the amount of ordinary income recognized by the recipient
when such ordinary income is recognized by the recipient, provided the Company
satisfies applicable federal income tax reporting requirements. The Company's
deduction, however, is subject to a $1,000,000 limitation on the deduction of
certain employee remuneration under Section 162(m) of the Code, unless an
exception for performance-based compensation under such section applies.
Depending on the period the shares of Common Stock are held after exercise,
the sale or other taxable disposition of shares acquired through the exercise of
a non-qualified stock option generally will result in a short- or a long-term
capital gain or loss equal to the difference between the amount realized on such
disposition and the fair market value of such shares when the non-qualified
stock option was exercised.
Special rules apply to a recipient who exercises a non-qualified stock
option by paying the exercise price, in whole or in part, by the transfer of
shares of Common Stock to the Company.
INCENTIVE STOCK OPTIONS. An employee is not subject to any federal income
tax upon the grant of an incentive stock option pursuant to the Stock Option
Plan, nor does the grant of an incentive stock option result in an income tax
deduction for the Company. Further, an employee will not recognize income for
federal income tax purposes and the Company normally will not be entitled to any
federal income tax deduction as a result of the exercise of an incentive stock
option and the related transfer of shares of Common Stock to the employee.
However, the excess of the fair market value of the shares transferred upon the
exercise of the incentive stock option over the exercise price for such shares
generally will constitute an item of alternative minimum tax adjustment to the
employee for the year in which the option is exercised. Thus, certain employees
may increase their federal income tax liability as a result of the exercise of
an incentive stock option under the alternative minimum tax rules of the Code.
If the shares of Common Stock transferred pursuant to the exercise of an
incentive stock option are disposed of within two years from the date the option
is granted or within one year from the date the option is exercised, the
employee generally will recognize ordinary income equal to the lesser of (1) the
gain recognized (i.e., the excess of the amount realized on the disposition over
the exercise price) or (2) the excess of the fair market value of the shares
transferred upon exercise over the exercise price for such shares. If the
employee is subject to Section 16(b) of the Exchange Act, special rules may
apply to determine the amount of ordinary income recognized upon the
disposition. The balance, if any, of the employee's gain over the amount treated
as ordinary income on disposition generally will be treated as long- or
short-term capital gain depending upon whether the holding period applicable to
long-term capital assets is satisfied. The Company generally would be entitled
to a federal income tax deduction equal to any ordinary income recognized by the
employee, provided the
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<PAGE>
Company satisfies applicable federal income tax reporting requirements and
subject to the limitation on the deduction of certain employee remuneration as
mandated by Section 162(m) of the Code, absent an exception for the
performance-based compensation under such section.
If the shares of Common Stock transferred upon the exercise of an incentive
stock option are disposed of after the holding periods have been satisfied, such
disposition generally will result in a long-term capital gain or loss treatment
with respect to the difference between the amount realized on the disposition
and the exercise price. The Company will not be entitled to a federal income tax
deduction as a result of a disposition of such shares after these holding
periods have been satisfied.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has unanimously approved the Stock
Option Plan and has determined that the Stock Option Plan is in the best
interest of the Company and its stockholders. Accordingly, the Board of
Directors unanimously recommends that the stockholders of the Company vote to
approve the Stock Option Plan.
EMPLOYMENT AGREEMENT
As of December 1, 1995, the Company entered into a two-year employment
agreement with Mr. Alexius A. Dyer III, the President, Chief Executive Officer
and Chairman of the Company. The employment agreement provides for payment of a
base salary of $135,000 per annum for each year during the stated term; provided
that the base salary shall automatically increase to $150,000 per annum
effective upon consummation of the Restructuring. Further, pursuant to the
employment agreement, the Company paid Mr. Dyer a bonus of $80,000 upon his
execution of the employment agreement as an inducement for entering into the
agreement.
The employment agreement provides that Mr. Dyer is entitled to an annual
bonus during the stated term in an amount equal to 5% of the Company's net
income before extraordinary and non-recurring items and income taxes, subject to
two adjustments. First, in computing net income, the Company is required to
exclude any item of revenue (including COD income) or expense attributable to
the Restructuring or to any litigation commenced by or against the Company.
Second, items of revenue and expense attributable to the sale of aircraft are
not considered extraordinary or non-recurring items.
Pursuant to the employment agreement, if Mr. Dyer is terminated without
cause prior to the end of the term of the employment agreement, the Company is
required to pay to Mr. Dyer the base salary for the remaining term of the
agreement plus an amount equal to a pro rata portion (based on months employed
during the current fiscal year) of the bonus paid to him during the previous
fiscal year. If Mr. Dyer terminates the employment agreement following the
occurrence of a "Change of Control" (as defined) or the consummation of the
Restructuring, the Company is obligated to pay to him an amount equal to the
average annual compensation paid to him during the two most recent fiscal years
of the Company.
CERTAIN TRANSACTIONS
The Company has engaged Kirkland Messina, Inc., an investment banking firm,
to act as the exclusive financial advisor and agent to the Company in connection
with the origination of the Credit Agreement. Mr. Kyle R. Kirkland, a director
of the Company, is an executive officer of Kirkland Messina, Inc. Kirkland
Messina, Inc. will receive customary compensation for its services pursuant to
such engagement. For a description of the interests of executive officers and
directors that may present them with potential conflicts of interest with
respect to the Restructuring, see "The Restructuring -- Interests of Certain
Persons in the Restructuring." During fiscal 1996, the Company paid commissions
totaling $85,000 to J.M. Associates, Inc., a company controlled by E. James
Mueller, a director of the Company. Under the terms of a commission agreement,
J.M. Associates, Inc. is entitled to 3-4% of revenues originated by Mr. Mueller.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding (i) each person
known to the Company who may be considered a beneficial owner of more than 5% of
the outstanding shares of the Company's Common Stock and (ii) by the Company's
Chief Executive Officer, who is the only officer of the Company whose salary
exceeds $100,000, and each of the Company's directors and by all directors and
executive officers as a group as of May 31, 1996:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
OWNED OUTSTANDING SHARES
----------------- -------------------
<S> <C> <C>
Alexius A. Dyer III (1)......................................... 174,667(2) 4.00
E. James Mueller (1)............................................ 15,000(3) *
Kyle R. Kirkland (1)............................................ 107,237(4) 2.65
All Directors and Executive Officers as a Group (3 persons)..... 296,904 6.87
Lynda Wellman (1)(5)............................................ 1,999,700 49.48
Richard R. Wellman (1)(5)....................................... 1,999,700 49.48
Sun Life Insurance Company of America (6)....................... 514,865 12.74
11601 Wilshire Boulevard, 12th Floor Los Angeles, California
90025-1748
</TABLE>
- ------------------------
* Less than one percent of the shares of Common Stock outstanding.
(1) The address for Messrs. Dyer, Mueller and Kirkland is c/o International
Airline Support Group, Inc., 8095 N.W. 64th Street, Miami, Florida 33166.
The address for Mr. and Mrs. Wellman is 7540 Lochness Drive, Miami Lakes,
Florida 33014.
(2) Includes 107,000 shares of Common Stock that may be obtained by Mr. Dyer
upon exercise by him of options granted to him pursuant to the Employee
Stock Option Plan and 66,667 shares of Common Stock that may be acquired
pursuant to the vested portion of a Stock Purchase Warrant granted to Mr.
Dyer on October 15, 1993. The exercise prices for the options and warrants
are $.19 and $3.00 per share, respectively. The options will be canceled as
part of the Restructuring and new options will be granted as part of the
Restructuring. See "Management -- The Stock Option Plan."
(3) Represents shares that may be obtained by Mr. Mueller upon exercise by him
of options granted to him pursuant to the Non-Employee Directors Stock
Option Plan. The exercise price is $4.625 per share. These options will be
cancelled as part of the Restructuring. The options will be canceled as part
of the Restructuring and new options will be granted as part of the
Restructuring. See "Management -- The Stock Option Plan."
(4) Represents shares that may be obtained by Mr. Kirkland upon exercise of
options granted to him pursuant to the Non-Employee Directors Stock Option
Plan and upon the exercise of warrants granted to him as an officer of the
placement agent for the Senior Notes. The exercise prices for the options
and warrants are $5.125 and $5.3875 per share, respectively. These options
will be canceled pursuant to the Restructuring. The options will be canceled
as part of the Restructuring and new options will be granted as part of the
Restructuring. See "Management -- The Stock Option Plan."
(5) For purposes of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), Mr. and Mrs. Wellman are deemed to be the beneficial owners
of the Common Stock owned by the other. Mr. and Mrs. Wellman executed an
irrevocable proxy, in connection with their resignation of their
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<PAGE>
positions with the Company on January 31, 1995, authorizing the Board of
Directors of the Company to vote 1,980,000 shares of the Company's Common
Stock owned by the Wellmans. The Wellmans affirmed the proxy in October
1995. The proxy expires in January 1997.
(6) Sun Life Insurance Company of America ("Sun Life"), a subsidiary of
SunAmerica Corporation ("SunAmerica"), is the registered owner of
exercisable warrants to purchase 514,865 shares of the Company's Common
Stock at an exercise price of $5.3875. Sun Life acquired the warrants in
connection with its purchase of Senior Notes. Under the Exchange Act,
SunAmerica may be deemed the beneficial owner of the shares described
herein. These warrants will expire on the date of the Closing pursuant to
the Old Warrant Amendment.
DESCRIPTION OF THE AMENDMENTS
This Proxy Statement/Prospectus constitutes a consent solicitation for
consents to the Amendments to the Purchase Agreements. The Amendments will
delete certain financial covenants contained in the Purchase Agreements. The
Amendments will delete the covenants requiring the Company to (i) maintain a
specified interest coverage ratio, (ii) maintain a specified consolidated net
worth, (iii) provide demand registration rights with respect to the Common Stock
issuable upon conversion and the covenant that limits the ability of the Company
to engage in certain lines of business. For a description of such covenants, see
"Description of the Convertible Debentures -- Certain Covenants -- Interest
Coverage Ratio; -- Maintenance of Consolidated Net Worth; -- Demand Registration
Rights; and -- Limitation on Activities."
DESCRIPTION OF THE CREDIT AGREEMENT
Pursuant to the Credit Agreement between the Company and BNY Financial
Corporation (the "Lender"), the Lender will provide a $3,000,000 term loan (the
"Term Loan") and will agree to provide loans from time to time, in its
reasonable discretion, pursuant to an $11,000,000 revolving credit (the
"Revolver"; the Term Loan and the Revolver, collectively the "Credit Facility").
The Credit Facility shall be secured by a first lien on substantially all assets
of the Company, including accounts receivable, amounts receivable under aircraft
leases, inventory, equipment and intangibles.
Availability under the Revolver is subject to a borrowing base consisting of
(i) up to 85% of Eligible Accounts and Eligible Lease Payment Receivables (in
each case after subtraction of any Collateral Reserves) PLUS (ii) the lesser of
(A) up to 100% of the total cost of Eligible Inventory plus $500,000 (after
subtracting any Collateral Reserves), (B) up to 75% of the Forced Liquidation
Value of Eligible Inventory (after subtracting any Collateral Reserves) and (C)
$8,000,000, MINUS (iii) the Revolver Reserve. The Revolver Reserve is an amount
determined by the Lender from time to time in its discretion not to exceed the
difference between the outstanding principal amount of the Term Loan at such
time minus the Term Loan Borrowing Base at such time. The Term Loan Borrowing
Base at any time is calculated as an amount equal to the sum of (i) up to 80% of
the Forced Liquidation Value of all Approved Aircraft located in jurisdictions
other than Kenya (after subtraction of Collateral Reserves) PLUS (ii) up to 50%
of the Forced Liquidation Value of all Approved Aircraft domiciled in Kenya
(after subtraction of Collateral Reserves). The foregoing percentages applicable
to the Revolver and Term Loan Borrowing Bases are subject to the discretion of
the Lender. The Revolver is subject to mandatory prepayment to the extent that
outstanding amount thereunder on any day exceed the Revolver Borrowing Base
minus the Revolver Reserve. The Term Loan is subject to mandatory prepayment to
the extent that the outstanding principal balance of the Term Loan exceeds the
Term Loan Borrowing Base plus the Revolver Reserve.
Borrowings under the Credit Agreement shall bear interest at a daily
floating rate equal to the higher of (i) the Prime Rate or (ii) the Federal
Funds Rate plus 0.5%, in each case plus a margin of 2.0%. Interest shall be
payable monthly in arrears. In addition, a closing fee in the amount of $70,000,
is payable upon the closing of the Credit Agreement, and a monthly facility fee
of $7,500 is payable until the earlier of maturity or termination of the Credit
Facility.
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<PAGE>
The Credit Facility will mature on the fifth anniversary of the closing of
the Credit Agreement. Amounts outstanding under the Revolver may be prepaid from
time to time and thereafter may be reborrowed subject to the terms of the Credit
Agreement. The principal balance of the Term Loan shall be payable in monthly
installments of $33,333 during the first year of the Term Loan, $41,666 during
the second year of the Term Loan, $50,000 during the third year of the Term
Loan, $58,333 during the fourth year of the Term Loan, and $66,666 during the
fifth year of the Term Loan, with the unpaid principal balance due and payable
on the final maturity date. The Term Loan is subject to mandatory prepayment in
an amount equal to the lesser of (i) 100% of the net proceeds of the sale of
Approved Aircraft and (ii) the sum of the Revolver Reserve and the amount by
which the Term Loan Borrowing Base is reduced by the sale of such Approved
Aircraft. In addition, the Revolver is subject to prepayment in an amount equal
to 100% of the net proceeds of the sale of other assets, but amounts so prepaid
may be reborrowed subject to the terms of the Revolver.
If the Company terminates the Credit Facility during the first year
following the closing of the Credit Agreement, the Company must pay to the
Lender an early termination fee equal to 3% of the amount of the Credit Facility
immediately prior to termination. If such termination occurs during the second
year following the closing of the Credit Agreement, the early termination fee
payable is equal to 2% of the amount of the Credit Facility immediately prior to
termination. If such termination occurs during the third year following the
closing of the Credit Agreement, the early termination fee payable is equal to
1% of the amount of the Credit Facility immediately prior to termination.
Covenants contained in the Credit Agreement include (i) limitations on
indebtedness, (ii) limitations on liens, (iii) limitations on guarantee
obligations, (iv) limitations on mergers, consolidations, liquidations and the
like, prohibition upon the sale of substantially all of the assets of the
Company, and prohibition on material changes in the present method of conducting
business, (v) limitations on asset sales, (vi) limitations on dividends, (vii)
limitations on capital expenditures, (viii) limitations on investments, loans
and advances, (ix) limitations on optional prepayment and modification of debt
instruments, (x) limitations on transactions with affiliates, (xi) limitations
on negative pledges, (xii) limitations on changes in fiscal year, (xiii)
prohibition on new business lines, (xiv) limitations on amendments to the
Company's certificate of incorporation or bylaws in a manner that would
adversely affect the interests of the Lender, and (xv) certain requirements
regarding financial tests and ratios (the "Financial Covenants").
The covenant regarding limitations on indebtedness prohibits the Company
from incurring additional indebtedness other than (i) indebtedness incurred
under the Credit Facility, (ii) indebtedness incurred to finance the acquisition
of fixed or capital assets (whether pursuant to a loan, a financing lease or
otherwise) in an aggregate principal amount not exceeding $100,000 at any time
outstanding, (iii) indebtedness subordinated in right of payment to the Credit
Facility on terms and conditions satisfactory to the Lender and (iv) additional
indebtedness not exceeding $50,000 in aggregate principal amount at any time
outstanding.
The Financial Covenants include a fixed charge coverage ratio, a tangible
net worth test and a current ratio. The Credit Agreement provides that the
Company must maintain a fixed charge coverage ratio that is greater than or
equal to 1:1 from the closing date through the fiscal quarter ending November,
1996 and thereafter a fixed charge coverage ratio that is greater than or equal
to 1.1:1. The fixed charge coverage ratio will be measured on the basis of a
trailing four fiscal quarter basis, provided that for the first three fiscal
quarters after the closing of the Credit Agreement the fixed charge coverage
ratio shall be measured from the closing date to the relevant fiscal quarter
end.
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<PAGE>
The tangible net worth covenant will require that the Company achieve a
positive tangible net worth as of the last day of the fiscal quarter ending
November 1996, and that the Company's tangible net worth on the last day of each
fiscal quarter thereafter has increased in the amounts specified below:
<TABLE>
<CAPTION>
AMOUNT BY WHICH TANGIBLE
NET WORTH MUST EXCEED TANGIBLE
FISCAL QUARTER END NET WORTH ON NOVEMBER 30, 1996
- -------------------------------------------------------------- ------------------------------
<S> <C>
February, 1997................................................ $ 65,000
May, 1997..................................................... $130,000
August, 1997.................................................. $200,000
November, 1997................................................ $285,000
February, 1998................................................ $360,000
May 1, 1998................................................... $440,000
August 1, 1998................................................ $530,000
November, 1998................................................ $625,000
February, 1999................................................ $720,000
Each Fiscal Quarter End Thereafter............................ Amount required for prior
fiscal quarter end plus
$80,000.
</TABLE>
The Credit Agreement also requires that the Company maintain a monthly current
ratio that is greater than or equal to 1:1. The current ratio will be the ratio
of (i) current asset, to (ii) the sum of current liabilities plus outstandings
under the Revolver, minus current maturities under the Term Loan.
Events of Default under the Credit Agreement include (i) failure by the
Company to make any payment of principal, interest or other amount owing under
the Credit Agreement when due and payable that, in the case of interest and
other amounts (other than principal), continues unremedied for a period of three
days; (ii) any representation or warranty by the Company proving to have been
materially false or misleading when made; (iii) the breach of certain negative
and financial covenants contained in the Credit Agreement; (iv) the breach of
any other obligation under the Credit Agreement that shall continue unremedied
for a period of thirty days; (v) the failure to make any payment in respect of
material indebtedness of the Company, or the default by the Company with respect
to any such indebtedness the effect of which is to cause or permit the holder or
holders of such indebtedness cause such indebtedness to become due prior to its
stated maturity; (vi) the institution of bankruptcy or insolvency proceedings by
or against the Company which, in the case of a proceeding instituted against the
Company, remains undismissed, undischarged or unbonded for a period of sixty
days, (vii) the application for the appointment of a receiver, or the failure of
the Company generally to, or the inability of the Company to, or the admission
by the Company in writing of its inability to, pay its debts as they become due;
(viii) the occurrence of a "prohibited transaction" or certain other events
relative to ERISA involving an amount material to the Company; (ix) the entering
against the Company of one or more judgments or decrees involving liability of a
material amount that is not paid or covered by insurance; if such judgment or
decree has not been vacated, discharged, stayed or bonded pending appeal within
thirty days; and (x) the termination of certain security documents or the liens
evidenced thereby. Upon the occurrence and during the continuance of an Event of
Default (other than an Event of Default described in clause (vi) above), the
Lender may, by notice to the Company, declare the Credit Facility terminated and
declare all amounts outstanding under the Credit Agreement and the other
documents executed by the Company in connection therewith to be due and payable
whereupon the same shall immediately become due and payable. If an Event of
Default described in clause (vi) above has occurred and is continuing, the
Credit Facility shall immediately terminate and all amounts outstanding under
the Credit Agreement and the other documents executed in connection therewith
shall immediately become due and payable.
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<PAGE>
DESCRIPTION OF THE CONVERTIBLE DEBENTURES
The Convertible Debentures were issued by the Company pursuant to the
several Security Purchase Agreement each dated as of September 8, 1993 (each, a
"Purchase Agreement" and collectively, the "Purchase Agreements"). The following
statements are subject to the detailed provisions of the Purchase Agreements and
are qualified in their entirety by reference to the Purchase Agreements, a form
of which is filed as an exhibit to the Registration Statement of which this
Proxy Statement/ Prospectus is a part and is also available for inspection at
the offices of the Company.
GENERAL
The Convertible Debentures represent unsecured general obligations of the
Company subordinate in right of payment to certain other obligations of the
Company as described under " -- Subordination of Convertible Debentures," and
convertible into Common Stock as described under " -- Conversion." At May 31,
1996, $10,000,000 principal amount of Convertible Debentures were outstanding.
The Convertible Debentures mature on August 31, 2003, unless earlier redeemed at
the option of the Company or at the option of a Holder upon a Change of Control
(as defined below). See " -- Redemption" and "Purchase of Convertible Debentures
Upon a Change of Control." The Convertible Debentures are not subject to a
sinking fund. The Convertible Debentures are issued in fully registered form
only in denominations of $1,000 or any integral multiple thereof.
No established trading market exists for the Convertible Debentures. See "
- -- Market Information."
Interest at the annual rate of 8.0% is payable quarterly in arrears on each
February 28, May 31, August 31 and November 30. The Company has not paid
interest since February 28, 1995. As of May 31, 1996, the amount of interest
arrearages on the Convertible Debentures was approximately $1 million.
REDEMPTION
MANDATORY. The Company is required to redeem on August 31, 2003, the
aggregate amount of outstanding Convertible Debentures at a redemption price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
to the redemption date.
OPTIONAL. The Convertible Debentures may be redeemed upon 30 days notice,
in whole or in part, on any interest payment date after August 31, 1996 (three
year non-call) at the following prices (expressed as a percentage of par) if
redeemed during the twelve month period beginning August 31 of the year
indicated below, plus accrued interest:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
1996........................................................................ 106.00%
1997........................................................................ 105.15%
1998........................................................................ 104.30%
1999........................................................................ 103.45%
2000........................................................................ 102.60%
2001........................................................................ 101.75%
2002........................................................................ 100.85%
2003 and thereafter......................................................... 100.00%
</TABLE>
The Company is required to give written notice of redemption of the
Convertible Debentures pursuant to the Purchase Agreements to each Holder of any
outstanding Convertible Debentures not less than 30 nor more than 60 days prior
to the date fixed for such redemption in such notice, which notice shall specify
the principal amount to be redeemed, together with the premium to be paid
thereon and the date fixed for such redemption. Upon the giving of notice of any
redemption as provided in related Purchase Agreement, the Company will redeem on
the date therein fixed for redemption the applicable redemption price of the
Convertible Debentures so to be redeemed as specified in such notice, together
with interest accrued thereon to such date fixed for redemption.
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<PAGE>
CONVERSION
The Convertible Debentures may be converted at their principal amount or any
portion thereof which is an integral multiple of $1,000 at any time prior to the
close of business on August 31, 2003 subject to prior redemption or purchase at
the option of the Holder of Convertible Debentures into shares of the Company's
Common Stock par value $.001 per share (calculated as to each conversion to the
nearest 1/100th of a share), at the conversion price of $4.00 per share (the
"Conversion Price"), subject to adjustment as described below. The conversion
price per share for any Convertible Debenture not tendered pursuant to the
Exchange Offer will be $108, subject to adjustment as described below. The
Company will not be required to issue fractional shares of Common Stock but will
pay a cash adjustment in lieu thereof. In the case of any Convertible Debenture
or portion thereof called for redemption, conversion rights will expire at the
close of business on the business day immediately preceding the date fixed for
redemption. A Convertible Debenture for which a Holder of Convertible Debentures
has delivered notice exercising the option of such Holder of Convertible
Debentures to require the Company to purchase such Convertible Debenture may be
converted only if such notice is withdrawn by a written notice of withdrawal
delivered by the Holder of Convertible Debentures prior to the close of business
on the purchase date in accordance with the Securities Purchase Agreement.
Convertible Debentures surrendered for conversion during the period from the
close of business on any record date next preceding any date specified in the
related Purchase Agreement as the fixed date on which an installment of interest
thereon is due and payable (the "Interest Payment Date") to the opening of
business on such Interest Payment Date (except Convertible Debentures called for
redemption) must be accompanied by payment of an amount equal to the interest
thereon which the Holder of Convertible Debentures is to receive. In the case of
any Convertible Debenture which has been converted after any record date but on
or before the next Interest Payment Date (except Convertible Debentures called
for redemption within such period), the interest payable on such Interest
Payment Date shall be paid notwithstanding such conversion, and such interest
shall be paid to the Holder of such Convertible Debenture on such record date.
Except as described above, no interest on converted Convertible Debentures will
be payable by the Company on any Interest Payment Date subsequent to the date of
conversion. No other payment or adjustment for interest or dividends is to be
made upon conversion.
The Conversion Price is subject to adjustment as set forth in the Securities
Purchase Agreement in certain events, including (i) the subdivision, combination
or reclassification of the outstanding Common Stock of the Company; (ii) the
issuance of Common Stock as a dividend or distribution on Common Stock; (iii)
the issuance of rights, warrants or options (expiring within 45 days after the
record date in respect of such rights, warrants or options) to an affiliate
and/or all holders of Common Stock entitling them to acquire shares of Common
Stock (or securities convertible into or exchangeable for Common Stock) at less
than the current market price (as defined in the Purchase Agreements) of the
Common Stock; (iv) the distribution to all holders of Common Stock or shares of
any class of capital stock other than Common Stock, of cash or assets (including
securities, but excluding any regular or quarterly cash dividends or
distributions paid out of consolidated current or retained earnings), any
rights, options warrants to purchase securities of the Company, and the issuance
of any class of capital stock as a dividend or distribution on Common Stock; or
(v) certain mergers, consolidations or sales of assets. There will be no upward
adjustment in the Conversion Price except in the event of a reverse stock split.
The Company is not required to make any adjustment in the Conversion Price of
less than $0.05, but the same will be carried forward and taken into account in
the computation of any subsequent adjustment.
Conversion Price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends under the Internal Revenue Code to Holders of Convertible
Debentures or to holders of Common Stock.
In case of any reclassification (excluding those referred to above), merger,
consolidation or sale of substantially all the assets of the Company as an
entirety, the Holder of each outstanding Convertible Debenture shall have the
right to convert such Convertible Debenture only into the kind and amount
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of securities, cash and other property receivable by a holder of the number of
shares of Common Stock into which such Convertible Debentures might have been
converted immediately prior to the effective date of the transaction.
The Company shall at all times reserve and keep available, free from
preemptive rights, out of authorized but unissued Common Stock, the full number
of shares of Common Stock then issuable upon the conversion of all outstanding
Convertible Debentures. All outstanding shares of Common Stock are, and the
shares of Common Stock issuable upon conversion of the Convertible Debentures
will be, upon issuance, validly issued, fully paid and nonassessable.
SUBORDINATION OF CONVERTIBLE DEBENTURES
The payment of the principal of, premium, if any, interest on and all other
amounts with respect to the Convertible Debentures is subordinated in right of
payment, to the extent set forth in the Purchase Agreements, to the prior
payment in full of all Senior Indebtedness (as defined below) of the Company. By
reason of such subordination of the Company, whether in bankruptcy, insolvency,
reorganization, marshaling of assets and liabilities of the Company or similar
events, certain general creditors of Company may recover more, ratably, than the
Holders of the Convertible Debentures. There are no restrictions in the Purchase
Agreements on the amount of Senior Indebtedness or any other indebtedness that
may be incurred by the Company or any of its subsidiaries, and the Convertible
Debentures will be subordinate to substantially all future indebtedness of the
Company and its subsidiaries. No payment on account of principal of, premium, if
any, interest on, or any other amounts with respect to the Convertible
Debentures may be made unless all amounts then due for principal of, premium, if
any, and sinking fund requirements and interest on, and any other amounts with
respect to any Senior Indebtedness have been paid; and no payment on account of
principal of, premium, if any, interest on, or any other amounts with respect to
the Convertible Debentures may be made unless there shall not have existed at
the time of payment or immediately after giving effect thereto any default in
the payment of any amounts with respect to Senior Indebtedness or any event of
default with respect to any Senior Indebtedness permitting acceleration of
maturity of such Senior Indebtedness. Upon any distribution of the assets of the
Company or upon any dissolution, winding up, liquidation, or reorganization of
the Company, the holders of Senior Indebtedness will be entitled to receive
payment in full before the Holders of the Convertible Debentures are entitled to
receive any payment.
Senior Indebtedness is defined in the Purchase Agreement as the principal of
or premium, if any, unpaid interest on and any other amounts with respect to (i)
indebtedness for borrowed money for the payment of which the Company is
responsible or liable or the payment of which the Company has guaranteed,
whether such indebtedness is outstanding as of the date of the Securities
Purchase Agreement or thereafter created, incurred, assumed or guaranteed by the
Company, unless in the instrument creating or evidencing the same or pursuant to
which the same is outstanding it is specifically provided that such indebtedness
is not superior in right of payment to the Convertible Debentures; (ii) capital
lease obligations determined in accordance with generally accepted accounting
principals; (iii) any reimbursement and cash collateralization obligations under
letters of credit; (iv) obligations under bankers' acceptances and interest rate
hedge or currency hedge agreements; (v) all interest on such amounts accruing
after the commencement of any bankruptcy or similar proceeding of which the
Company or any of its subsidiaries is the subject, whether or not a claim for
post-petition interest is allowed as a claim in any such proceeding, and
including all fees, expenses and other amounts payable in connection therewith;
and (vi) renewals, extensions, modifications and refundings of any such
indebtedness or obligations.
The Convertible Debentures will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of the Company's subsidiaries. Any right of the Company to
receive assets of any such subsidiary upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Convertible
Debentures to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors, except to
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the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinated
to any obligations secured by the assets of such subsidiary and any indebtedness
of such subsidiary senior to that held by the Company.
At May 31, 1996, the aggregate amount of Senior Indebtedness of the Company
and indebtedness of its consolidated subsidiaries was approximately $18.4
million.
PURCHASE OF CONVERTIBLE DEBENTURES UPON A CHANGE OF CONTROL
In the event of any Change in Control (as defined below) of the Company
occurring prior to maturity, each Holder of Convertible Debentures will have the
right, at the Holder's option, subject to the terms and conditions of the
Purchase Agreements, to require the Company to purchase all or any part
(provided that the remaining principal amount thereof is $1,000 or an integral
multiple thereof), of the Holder's Convertible Debentures on the date that is no
later than 30 business days after the occurrence of such Change in Control (the
"Change in Control Purchase Date") at a cash price equal to 100% of the
principal amount thereof plus accrued interest to and including the Change in
Control Purchase Date (the "Change in Control Purchase Price").
Within 15 business days after the Change in Control, the Company is
obligated to mail to the registered agent for the Holders of the Convertible
Debentures (the "Agent") and to all Holders of Convertible Debentures at their
addresses shown in the register of the registrar (and to beneficial owners as
required by applicable law) a notice regarding the Change in Control, which
notice shall state, among other things: (i) the last date on which the purchase
right may be exercised; (ii) the Change in Control Purchase Price; (iii) the
Change in Control Purchase Date; (iv) the name and address of the Agent (if
other than the Company) and of any other office or agency maintained for the
purpose of surrender of the Convertible Debentures for purchase; and (v) the
procedures that Holders of Convertible Debentures must follow to exercise these
rights. The Company will cause a copy of such notice to be published in a daily
newspaper of national circulation.
To exercise this right, the Holder of Convertible Debentures must deliver
written notice (a "Change in Control Purchase Notice") to the Agent or to any
other office or agency maintained for such purpose, of the exercise of such
right prior to the close of business on the Change in Control Purchase Date. The
Change in Control Purchase Notice must state: (i) the certificate numbers on the
Convertible Debentures to be delivered by the Holder of Convertible Debentures
thereof for purchase by the Company; (ii) the portion of the principal amount of
the Convertible Debentures to be purchased, which portion must be $1,000 or an
integral multiple thereof; and (iii) that such Convertible Debentures are to be
purchased by the Company on the Change in Control Purchase Date pursuant to the
applicable provisions of the Convertible Debentures.
Any Change in Control Purchase Notice may be withdrawn by the Holder of
Convertible Debentures by a written notice of withdrawal delivered to the Agent
or to any other office or agency maintained for such purpose on or prior to the
close of business on the Change in Control Purchase Date. The notice of
withdrawal shall state the principal amount and the certificate numbers of the
Convertible Debentures as to which the withdrawal notice relates and the
principal amount, if any, which remains subject to the original Change in
Control Purchase Notice.
Under the Securities Purchase Agreement, a "Change in Control" of the
Company is deemed to have occurred at such time as (x) there shall be
consummated any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which the Company's
Voting Stock (as defined below) would be converted into cash, securities or
other property, other than, in either case, a merger of the Company in which the
holders of Voting Stock of the Company immediately prior to the merger have
directly or indirectly, at least a majority of Voting Stock of the surviving
corporation immediately after the merger or (y) any person, including its
Affiliates, other than Lynda Wellman, Richard Wellman or the Company, its
subsidiaries or their employee benefit plans, files a Schedule 13D or 14D-l (or
any successor schedule, form or report under the Exchange Act) disclosing that
such person has become the beneficial owner of 50% or more of the
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voting power of the Company's Voting Stock. "Voting Stock" means, with respect
to any person, capital stock of such person having general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such person (irrespective of whether or not at the time
capital stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
Notwithstanding the foregoing, a Change in Control as described above shall
not be deemed to have occurred if (i) the Closing Price per share of the Common
Stock for any five trading days within the period of ten consecutive trading
days ending immediately before the Change in Control (in the case of a Change in
Control described in clause (x) above) or, in the case of a Change in Control
described in clause (y) above, within such period or within the period of ten
consecutive trading days commencing on the date immediately after the later of
the Change in Control or the public announcement of the Change in Control, is at
least equal to 105% of the conversion price in effect on the date immediately
preceding the date of such Change in Control or public announcement, as the case
may be, (ii) the average Closing Price per share of the Common Stock for the ten
consecutive trading days ending immediately before the Change in Control (in the
case of a Change in Control described in clause (x) above) or, in case of a
Change in Control described in clause (y) above, for such period or for the ten
consecutive trading days commencing on the date immediately after the later of
the Change in Control or the public announcement of the Change in Control, is
greater than 100% of the conversion price in effect on the date immediately
preceding the date of such Change in Control or public announcement, as the case
may be, (iii) all of the consideration to the holders of Common Stock in the
transaction giving rise to such Change in Control consists of cash, securities
that are, or immediately upon issuance will be, listed on the national
securities exchange or quoted on The Nasdaq National Market System, or a
combination of cash and such securities, and the aggregate fair market value of
such consideration (which, in the case of such securities, shall be equal to the
average of the daily closing prices of such securities during the ten
consecutive trading days commencing with the sixth trading day following
consummation of such transaction) allocable to each share of Common Stock is
greater than 100% of the conversion price in effect on the date immediately
preceding the closing date of such transaction or (iv) at least 90% of the
consideration in any consolidation, merger, recapitalization or business
combination, however effected, accounted for as a pooling of interests, consists
of common stock which is (or will, upon consummation of such transaction or
event, be) listed on a national securities exchange or approved for quotation on
The Nasdaq National Market System.
CERTAIN COVENANTS
Payment of Convertible Debentures. The Company shall pay the principal of
and interest on the Convertible Debentures on the dates and in a manner provided
in the Convertible Debentures. Principal and interest shall be considered paid
on the date due if the Paying Agent (other than the Company or a Subsidiary
thereof) holds on the date money designated for and sufficient to pay all
principal of and interest on the Convertible Debentures then due.
To the extent lawful, the Company shall pay interest on (I) overdue
principal, at 10.0% per annum, compounded quarterly and (ii) installments of
overdue interest at 10.0% per annum. Interest is payable on overdue principal
and interest regardless of the applicable grace period.
DEMAND REGISTRATION RIGHTS. Holders of at least 51.0% principal amount of
the Convertible Debentures acting jointly, and as one class, may demand that the
Company have a Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), with respect to the Common Stock issuable upon
conversion of the Convertible Debentures, filed within six months and declared
effective within nine months following the date of such demand (the "Demand
Date"), which Registration Statement would permit public trading of such Common
Stock, and to keep such registration effective for three years thereafter. This
covenant will be deleted pursuant to the Amendments.
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PIGGYBACK REGISTRATION RIGHTS. Whenever the Company proposes to register
any of its securities under the 1933 Act and the registration form to be used
may be used for the registration of Registerable Securities (a "Piggyback
Registration"), the Company will give prompt notice to all holders of
Registerable Securities of its intention to effect such registration and,
subject to underwriter cutbacks, will include in such registration all
Registerable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice. For purposes of the Convertible Debentures, "Registerable Securities"
means any shares of Common Stock into which the Convertible Debentures have been
converted.
FINANCIAL INFORMATION. The Company will deliver to the Holders of
Convertible Debentures copies of the annual and quarterly reports and other
information, documents, and other reports which the Company is required to file
with the SEC pursuant to any provision of the Securities and Exchange Act of
1934, and of any other reports or information which the Company delivers or
makes available to any of its security holders, within five (5) days of filing
such reports with the SEC or of delivery to the Company's security holders, as
the case may be.
So long as any of the Convertible Debentures remain outstanding, the Company
shall cause quarterly reports for the first three quarters of each fiscal year
and annual reports which it would be required to file under any provision of the
Exchange Act if it had a class of securities listed on a national securities
exchange, together with copies of a consolidating balance sheet of the Company
and its subsidiaries as of the end of each such accounting period and of the
related consolidating statements of income and cash flow for the portion of the
year then ended, to be mailed to the Holders of Convertible Debentures at their
address appearing in the register within five (5) days of when such report would
have been required to be filed under Section 13 of the Exchange Act.
The Company shall also make such reports available promptly to prospective
purchasers of the Convertible Debentures, beneficial Holders of the Convertible
Debentures, securities analysts and broker-dealers upon their reasonable
request.
INSPECTION RIGHTS. Holders of at least $1 million in aggregate principal
amount of the Convertible Debentures (at issuance), at such Holders' expense
(unless a Default or an Event of Default has occurred and is continuing, in
which case at the Company's expense), shall have the right to visit and inspect
any of the properties of the Company and its Subsidiaries, to examine the books
of account and records of the Company and its Subsidiaries, to be provided with
copies and extracts therefrom, to discuss the affairs, finances and accounts of
the Company and its Subsidiaries with, and to be advised as to the same by, its
and their officers and employees and their independent public accountants (and
the Company authorizes such independent public accountants to discuss the
Company's and its Subsidiaries financial matters with such Holder of Convertible
Debentures or its representatives, regardless of whether any representative of
the Company or any of its Subsidiaries is present, but provided that an officer
of the Company will be afforded a reasonable opportunity to be present at any
such discussion), all at such reasonable times and intervals during normal
business hours and upon reasonable prior notice. The Company will likewise
afford such Holders the opportunity to obtain any information, to the extent the
Company or any of its Subsidiaries possesses such information or can acquire it
without unreasonable effort or expense, necessary to verify the accuracy or any
of the representations and warranties made by the Company under the Securities
Purchase Agreement. Each Holder of Convertible Debentures agrees to keep all
information received pursuant to the "DISCLOSURE" section of the Securities
Purchase Agreement confidential, except that disclosure can be made: (I) to any
governmental body (including for this purpose the National Association of
Insurance Commissioners) having jurisdiction over the holder of the Convertible
Debentures in the law or ordinary course of business; (ii) to any other person
pursuant to subpoena or other process, whether legal, administrative or other;
(iii) to the Holder of the Convertible Debentures' officers, directors,
trustees, employees, legal counsel, financial advisors, auditors or accountants
who need access to such information in connection with their duties, provided
that such party agrees to keep such information confidential in accordance with
this paragraph; (iv) to any transferee or prospective institutional purchaser of
a Debenture who agrees to be bound by this paragraph; or (v) to the extent
necessary in
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the enforcement of such Holder of Convertible Debentures' rights under the
Securities Purchase Agreement and under the Convertible Debentures during the
continuance of a Default or Event of Default.
INTEREST COVERAGE RATIO. The Company shall not permit the Interest Coverage
Ratio (defined as the ratio of Consolidated Cash Flow to Total Net Interest
Expense) of the Company for the immediately preceding four fiscal quarters as
determined as of the last day of each fiscal quarter beginning May 31, 1994 to
be less than 2.0 to 1.0. This covenant will be deleted pursuant to the
Amendments.
MAINTENANCE OF CONSOLIDATED NET WORTH. The Company shall furnish to the
Holders of Convertible Debentures an Officer's Certificate within 60 days after
the end of the first three fiscal quarters of the Company's Fiscal Year and 90
days after the end of its Fiscal Year, setting forth the Consolidated Net Worth
(defined as common equity) of the Company as of the end of such fiscal quarter
or Fiscal Year. For each four fiscal quarter period ending on the dates set
forth below, the Consolidated Net Worth of the Company at the end of at least
one of the four fiscal quarters ending during such period shall be equal to or
greater than the amount set forth across from such dates for such fiscal
quarters:
<TABLE>
<CAPTION>
ONE QUARTER WITH A
CONSOLIDATED NET WORTH
DATE OF AT LEAST:
- ---------------------------------------------------------------------- ----------------------
<S> <C>
November 30, 1993..................................................... $ 6,000,000
February 28, 1994..................................................... 6,000,000
May 31, 1994.......................................................... 6,000,000
August 31, 1994....................................................... 8,000,000
November 30, 1994..................................................... 8,000,000
February 28, 1995..................................................... 8,000,000
May 31, 1995.......................................................... 8,000,000
August 31, 1995....................................................... 10,000,000
November 30, 1995..................................................... 10,000,000
February 29, 1996..................................................... 10,000,000
May 31, 1996.......................................................... 10,000,000
August 31, 1996....................................................... 11,000,000
November 30, 1996..................................................... 11,000,000
February 28, 1997..................................................... 11,000,000
May 31, 1997.......................................................... 11,000,000
August 31, 1997....................................................... 12,000,000
November 30, 1997..................................................... 12,000,000
February 28, 1998..................................................... 12,000,000
May 31,1998........................................................... 12,000,000
August 31, 1998....................................................... 13,000,000
November 30, 1998..................................................... 13,000,000
February 28, 1999..................................................... 13,000,000
May 31, 1999.......................................................... 13,000,000
August 31, 2000....................................................... 14,000,000
November 30, 2000..................................................... 14,000,000
February 29, 2000..................................................... 14,000,000
May 31, 2000.......................................................... 14,000,000
August 31, 2000 and thereafter........................................ 15,000,000
</TABLE>
This covenant will be deleted pursuant to the Amendments.
COMPLIANCE CERTIFICATE. The Company shall deliver to the Holders of
Convertible Debentures, within 45 days after the end of each of the first three
fiscal quarters of each Fiscal Year and within 90
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days after the end of each Fiscal Year, an Officers' Certificate stating that a
review of the activities of the Company during the preceding Fiscal Year, as the
case may be, has been made under the supervision of the signing Officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations under the Securities Purchase Agreement, and further
stating that, to the best knowledge of each such Officer signing such
certificate, the Company has kept, observed, performed and fulfilled each and
every covenant contained in the Securities Purchase Agreement, and is not in
default in the performance or observance of any of the terms, provisions and
conditions hereof, and to the best of such Officer's knowledge, no event has
occurred and is continuing which is, or after notice or lapse of time or both
would become, a Default or an Event of Default, or if such an event has occurred
and is continuing, specifying each such event known to such Officer and the
nature and status thereof.
The Company, so long as any of the Convertible Debentures are outstanding,
shall deliver to the Holders of Convertible Debentures, forthwith upon becoming
aware of any Default, Event of Default or default in the performance of any
covenant, agreement or condition contained in the Convertible Debentures, the
Securities Purchase Agreement or any of the Collateral Documents, an Officer's
Certificate specifying such Default, Event of Default and the nature and status
thereof.
STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent it may
lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law which would prohibit or forgive the
Company from paying all or a portion of the principal of or interest on the
Convertible Debentures as contemplated herein, wherever enacted, now or at any
time hereinafter in force, or which may materially affect the covenants or the
performance of the Securities Purchase Agreement in a manner inconsistent with
the provisions of the Securities Purchase Agreement. The Company expressly
waives all benefit or advantage of any such law, and will covenant that it will
not hinder, delay or impede the execution of any power granted to the Holders of
Convertible Debentures, but will suffer and permit the execution of every such
power as though no such law had been enacted. If a court of competent
jurisdiction proscribes that the Company may not waive its rights to take the
benefit or advantage of any stay or extension law or any usury law or other law
in accordance with the prior sentence, then the obligation to pay interest on
the Convertible Debentures shall be reduced to the maximum legal limit under
applicable law governing the interest payable in connection with the Convertible
Debentures.
LIMITATION ON ACTIVITIES. The Company shall not be permitted to engage in
any business or investment activities other than those necessary for, incident
to, connected with, or arising out of its principal activities in the aircraft
parts industry or a directly related industry. This covenant will be deleted
pursuant to the Amendments.
SALE OF ASSETS. The Company shall not sell, lease, transfer or dispose of
any of its interest in its respective properties or assets, whether real,
personal or mixed, or tangible or intangible, other than in the ordinary course
of business consistent with prudent business practice.
ACCOUNTING CHANGES. The Company will use one of the following accounting
firms, or their respective successors: Arthur Andersen, Coopers & Lybrand,
Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, Price Waterhouse, or Grant
Thornton.
INVESTMENT COMPANY ACT. The Company shall not become an investment act
company subject to registration under the Investment Company Act of 1940, as
amended.
LIMITATION ON MERGER CONSOLIDATION OR SALE. Except for certain limited
circumstances, the Company shall not without the consent of a majority of the
Holders of Convertible Debentures
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consolidate or merge with or into, or sell, transfer, lease or convey all or
substantially all of its assets to, any person, provided HOWEVER, that the
Company will be permitted to consolidate or merge a wholly-owned subsidiary into
the Company or another wholly-owned subsidiary of the Company. Such action, in
certain instances, will result in a redemption of the Convertible Debentures at
the option of the Holders of Convertible Debentures subject to the redemption
provisions contained in the Change of Control covenant herein.
EXISTENCE. The Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence in accordance with the
organizational documents of the Company and the rights (charter and statutory),
licenses and franchises of the Company; PROVIDED, HOWEVER, that the Company
shall not be required to preserve any such right, license or franchise if the
Board of Directors of the Company shall determine in good faith in accordance
with the Company's charter documents that the preservation thereof is no longer
desirable in the conduct of the business of the Company taken as a whole and
that the loss thereof is not adverse in any material respect to the Holders of
Convertible Debentures.
MAINTENANCE OF PROPERTIES. The Company shall maintain, preserve, protect
and keep its properties in good repair, working order and condition (ordinary
wear and tear excepted), and make necessary and proper repairs, renewals and
replacements so that its business carried on in connection therewith may be
properly conducted at all times consistent with past practices of International
Airline Support Group, Inc.
MAINTENANCE OF INSURANCE. The Company shall, and shall cause each of its
Subsidiaries to, maintain insurance in such amounts and covering such risks as
is usually carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Company and its subsidiaries
operate.
All insurance shall be maintained with insurance carriers having an A.M.
Best & Co. rating of
"A-" or better.
BOOKS AND RECORDS. The Company shall keep books and records which
accurately reflect all of its business affairs and transactions and permit any
Holder of Convertible Debentures or any of its representatives, at reasonable
times and intervals during normal business hours, and upon reasonable prior
notice, to visit the Company offices, to discuss financial matters with
representatives of senior management and independent public accountants (and the
Company shall authorize such independent public accountants to discuss the
Company's financial matters with any Holder of Convertible Debentures or its
representative whether or not any representative of the Company is available to
be present but provided that an officer of the Company shall be afforded a
reasonable opportunity to be present at any such discussion) and to examine
(and, at the expense of the Company, photocopy extracts from) any of its books
or other corporate records.
COMPLIANCE WITH ERISA. The Company shall not permit any ERISA Affiliate to
(i) terminate, any Welfare Plan so as to result in any liability of the Company
or ERISA Affiliate to the PBGC; (ii) permit to exist any other event or
condition that presents a material risk of such termination by the PBGC of any
Welfare Plan, including, but not limited to, the occurrence of any Reportable
Event; (iii) withdraw, or permit any ERISA Affiliate to incur any withdrawal
liability with respect to any Multi employer Plan; or (iv) permit a Reportable
Event to occur with respect to any Welfare Plan which would present a material
risk to the Company of incurring a liability on account of such Welfare Plan.
TRANSFER OF THE CONVERTIBLE DEBENTURES. The Convertible Debentures may not
be transferred except in compliance with the Securities Act of 1933, as amended,
and no other Holder of the Convertible Debentures may transfer any Convertible
Debentures in an aggregate principal amount less than the lessor of (i) all of
the Convertible Debentures held by such Holder of Convertible Debentures or (ii)
$500,000.
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MODIFICATION OF CERTAIN AGREEMENTS. With the consent of the Holders of at
least a majority in aggregate principal amount of the outstanding Convertible
Debentures, the Agent and the Company may execute a supplemental agreement to
add provisions to, or change in any manner or eliminate any provisions of, the
Securities Purchase Agreement or modify in any manner the rights of the Holders
of Convertible Debentures; provided however, that, without the consent of the
Holder of each outstanding Convertible Debenture, no such supplemental agreement
shall (i) extend the stated maturity of any Convertible Debenture, or reduce the
rate or extend the time of payment of interest thereon, or reduce the principal
amount thereof or reduce the premium payable upon the redemption thereof or the
amount payable thereon in the event of acceleration or the amount thereof
payable in bankruptcy; (ii) reduce the aforesaid percentage of Holders of
Convertible Debentures which are required to consent to any such supplemental
agreement; or (iii) make any change that adversely affects the right to convert
or the conversion price for any Convertible Debenture; provided further that no
such supplemental agreement shall modify or eliminate the provisions of the
Securities Purchase Agreement relating to the subordination of the Convertible
Debentures in any manner that might terminate or impair the subordination of the
Convertible Debentures to Senior Indebtedness without the prior written consent
of all the holders of the Senior Indebtedness.
EVENTS OF DEFAULT
An "Event of Default" occurs under the Purchase Agreements if:
(i)
there is a default in the payment of the principal of or premium, if
any, on any Convertible Debenture when and as the same shall become
due and payable, whether at stated maturity, by acceleration, by notice of
prepayment or otherwise; or
(ii)
default shall be made in the payment of any interest on any
Convertible Debenture when and as such interest shall become due and
payable, and such default shall have continued for a period of 10 days; or
(iii)
default shall be made in the performance or observance of any
covenant, agreement or condition continued in the "INTEREST COVERAGE
RATIO," "CHANGE IN CONTROL," or "MAINTENANCE OF CONSOLIDATED NET WORTH"
sections of the Purchase Agreements; or
(iv)
default shall be made in the performance or observance of any other
covenant, agreement or condition contained in the Purchase Agreements
or the related registration rights agreement, and such default shall have
continued for a period of 30 days after such default shall first have become
known to the Company; or
(v)
any event shall occur or any condition shall exist in respect of any
Indebtedness of the Company (other than the Convertible Debentures)
in any aggregate principal amount of $500,000 or more, or under any
agreement securing or relating to any of such Indebtedness, the effect of
which is to cause the acceleration of the maturity of such Indebtedness, or
any such Indebtedness shall not have been paid at the final maturity date
thereof and any applicable grace period shall have expired; or
(vi)
the Company shall (a) apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property, (b) be
generally unable to pay its debts as such debts become due, (c) make a
general assignment for the benefit of its creditors, (d) commence a
voluntary case under Title 11, United States Code or any similar federal or
state law for the relief of debtors (the "Bankruptcy Laws") (as now or
hereafter in effect), (e) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (f) fail to controvert in a
timely or appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under such Bankruptcy Laws, (g) take any
action under the laws of its jurisdiction of incorporation analogous to any
of the foregoing, or (h) take any corporate action for the purpose of
effecting any of the foregoing; or
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<PAGE>
(vii)
a proceeding or case shall be commenced, without the application or
consent of the Company in any court of competent jurisdiction,
seeking (1) the liquidation, reorganization, dissolution, winding up, or
composition or readjustment of its debts, (2) the appointment of a trustee,
receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets, or (3) similar relief in respect of it,
under any law providing for the relief of debtors, and such proceeding or
case shall continue undismissed, or unstayed and in effect, for a period of
30 days; or an order for relief shall be entered in an involuntary case
under such Bankruptcy Laws, against the Company; or action under the laws of
the jurisdiction of incorporation of the Company analogous to any of the
foregoing shall be taken with respect to the Company and shall continue
unstayed and in effect for any period of 30 days; or
(viii)
final judgment for the payment of money shall be rendered by a court
of competent jurisdiction against the Company and the Company shall
not discharge the same or provide for its discharge in accordance with its
terms, or procure a stay of execution thereof within 60 days from the date
of entry thereof and within said period of 60 days, or such longer period
during which execution of such judgment shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal,
and such judgment together with all other such judgments shall exceed in the
aggregate $500,000;
(ix)
any representation or warranty made by the Company in the Securities
Purchase Agreement or in any certificate or other instrument
delivered hereunder or thereunder or pursuant hereto or thereto or in
connection with any provision hereof of thereof shall be false or incorrect;
or
(x)
either the Company or any of its ERISA Affiliates as employers under
any multi-employer plan, within the meaning of Section 4001(a)(3) of
ERISA, shall have incurred, in connection with a complete or partial
withdrawal from such multi-employer plan, withdrawal liability that is
reasonably likely to have a material adverse effect on the business,
business prospects, operations, properties or financial condition of the
Company, or of the Company and its Subsidiaries;
then (A) upon the occurrence of any Event of Default described in subsection
(vi) or (vii) above, the unpaid principal amount of all Convertible Debentures,
together with the interest accrued thereon and all other amounts payable by the
Company hereunder and, to the extent permitted by applicable law, an amount
equal to the premium that would be payable if the Company were redeeming the
Convertible Debentures at such time pursuant to Purchase Agreements (or if such
time is prior to August 31, 1996, then on September 1, 1996), shall
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind, all of which are hereby expressly
waived by the Company or (B) upon the occurrence of any other Event of Default,
the Holders of at least a majority in principal amount of the then outstanding
Convertible Debentures, provided that Convertible Debentures owned by the
Company or any affiliate of the Company shall be disregarded and not deemed
outstanding for this purpose (the "Majority Holders"), may, by written notice to
the Company, declare the unpaid principal amount of all Convertible Debentures
to be, and the same shall forthwith become, due and payable, together with the
interest accrued thereon and all other amounts payable by the Company hereunder
and, to the extent permitted by applicable law, an amount equal to the premium
that would be payable if the Company were redeeming the Debentures at such time
pursuant to the Purchase Agreements (or if such time is prior to August 31,
1996, then on September 1, 1996), provided that, during the existence of an
Event of Default described in clauses (i) or (ii) above with respect to any
Convertible Debenture, the Holder of such Convertible Debentures may, by written
notice to the Company declare such Convertible Debenture to be, and the same
shall forthwith become, due and payable, together with the interest accrued
thereon and all other amounts payable by the Company hereunder and, to the
extent permitted by applicable law, an amount equal to the premium that would be
payable if the Company were redeeming the Convertible Debentures at the time
pursuant to the Purchase Agreements (of if such time is prior to August 31,
1996, then on September 1, 1996). If any Holder of any Convertible Debenture
shall exercise the option specified in
96
<PAGE>
the proviso to the preceding sentence, the Company will forthwith give written
notice thereof to the Holders of all other outstanding Convertible Debentures
and each such Holder of Convertible Debentures may (whether or not such notice
is given or received), by written notice to the Company, declare the principal
of all Convertible Debentures held by it to be, and the same shall forthwith
become, due and payable, together with the interest accrued thereon and all
other amounts payable by the Company hereunder and, to the extent permitted by
applicable law, an amount equal to the premium that would be payable if the
Company were redeeming the Debentures at the time pursuant to the Purchase
Agreements (or if such time is prior to August 31, 1996, then on September 1,
1996).
However, if at any time after any Convertible Debenture shall have so become
due and payable, the Company shall pay all arrears of interest on the
Convertible Debentures and all payments on account of the principal of and
premium (if any) on the Convertible Debentures which shall have become due
otherwise than by acceleration (with interest on such principal, premium (if
any) and, to the extent permitted by law, on overdue payments of interest, at
the rate specified in the Convertible Debentures) and all Events of Default
(other than nonpayment of principal of and accrued interest on Convertible
Debentures, and amounts equal to premium as aforesaid, due and payable solely by
virtue of acceleration) shall be remedied or waived pursuant to the Purchase
Agreements, then, and in every such case, the Majority Holders, by written
notice to the Company, may rescind and annul any such acceleration and its
consequences; but no such action shall affect any subsequent Default or Event of
Default or impair any right consequent thereon.
Within forty-five days after the end of the first three fiscal quarters of
the Company's fiscal year and within ninety days after the end of its fiscal
year, an Officer's Certificate of Compliance with the Agreement must be
delivered to the Holders of Convertible Debentures. A written statement
regarding any Events of Default discovered by the Company's independent
certified public accountants must be delivered to the Holders of Convertible
Debentures within ninety days of the end of the fiscal year. Immediately upon
becoming aware of any default, event of default, or default in the performance
of any covenant, agreement or condition contained in the Convertible Debentures
or the Purchase Agreements, written specifying such default, event of default,
or default in performance and the nature and status thereof must be delivered to
the Holders of the Convertible Debentures. Such notice must be in writing and
delivered, telecopied or mailed, first class postage prepaid to the Holders of
the Convertible Debentures at their addresses as set forth in the Purchase
Agreements or at such other address as has been designated by a Holder of
Convertible Debentures by written notice to the Company.
MARKET INFORMATION
No active trading market for the Convertible Debentures exists. Because
there are only approximately 50 holders of Convertible Debentures, trading in
the Convertible Debentures is extremely limited and sporadic. The last trade of
the Convertible Debentures known to the Company occurred in October, 1995, when
the largest single holder of the Convertible Debentures sold all of the
Convertible Debentures held by it for a cash price equal to $150 per $1,000
principal amount of the Convertible Debentures, to one or more other substantial
Holders of the Convertible Debentures. Convertible Debentures not tendered in
the Exchange Offer may experience a significant decrease in liquidity.
MODIFICATIONS OF THE TERMS OF THE CONVERTIBLE DEBENTURES OR THE RIGHTS OF THE
HOLDERS OF THE CONVERTIBLE DEBENTURES
The Purchase Agreements permit the Company to amend or waive compliance with
any term, covenant, agreement or condition of the Purchase Agreements by one or
more substantially concurrent written instruments signed by the Majority
Holders; provided, however, that (i) no such amendment or waiver shall: (a)
reduce the principal of, or reduce the rate of or change the time for payment of
interest on or any premium payable upon redemption or the amount payable in
bankruptcy with respect to, any Convertible Debenture, or extend the maturity of
any Convertible Debenture, without the consent of the Holder of each Convertible
Debenture so affected; or (b) modify any of the provisions of the Securities
Purchase Agreement or of the Convertible Debentures with respect to the
97
<PAGE>
payment or prepayment thereof, or reduce the percentage of the Holders of
Convertible Debentures required to approve any such amendment or effectuate any
such waiver, without the consent of the Holders of all of the Convertible
Debentures at the time outstanding; or (c) make any change that adversely
affects the right to convert or the conversion price of any Convertible
Debenture, without the consent of the Holders of all of the Convertible
Debentures at the time outstanding; or (d) modify or eliminate the provisions of
the Securities Purchase Agreement relating to the subordination of the
Convertible Debentures in any manner that might terminate or impair the
subordination of the Convertible Debentures to Senior Indebtedness, without the
prior written consent of the holders of Senior Indebtedness, and (ii) no such
waiver shall extend to or affect any obligation not expressly waived or impair
any right consequent thereon.
Any amendment or waiver to the Convertible Debentures or the Purchase
Agreements shall apply equally to all the Holders of the Convertible Debentures
and shall be binding upon them, upon each future Holder of any Convertible
Debenture and upon the Company, in each case whether or not a notation thereof
shall have been placed on any Convertible Debenture.
So long as any outstanding Convertible Debentures are owned by any
institutional Holder, the Company will not solicit, request or negotiate for or
with respect to any proposed waiver or amendment of any of the provisions of the
Purchase Agreements or the Convertible Debentures unless each Holder of
Convertible Debentures (irrespective of the amount of Convertible Debentures
then owned by it) shall be informed thereof by the Company and shall be afforded
the opportunity of considering the same and shall be supplied by the Company
with sufficient information to enable it to make an informed decision with
respect thereto. Executed or true and correct copies of any amendment or waiver
effected pursuant to the provisions of the Purchase Agreements shall be
delivered by the Company to each Holder of Convertible Debentures forthwith
following the date on which the same shall have been executed and delivered as
set forth herein. Neither the Company nor any of its subsidiaries will, directly
or indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any Holder of
Convertible Debentures as consideration for or as an inducement to the entering
into by any Holder of Convertible Debentures or any amendment or waiver of any
of the terms and provisions of the Purchase Agreements unless such remuneration
is concurrently paid, on the same terms, ratably to the Holders of all of the
Convertible Debentures outstanding at the time such offer is made, and who
consented to such amendment or waiver.
98
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
After the Restructuring, the authorized capital stock of the Company will
consist of 20,000,000 shares of Common Stock, par value $.001 per share and
2,000,000 shares of Preferred Stock par value $.001 per share. As of May 31,
1996, there were 4,041,779 shares of Common Stock outstanding which were held of
record by 105 stockholders and beneficially by stockholders and no shares of
Preferred Stock outstanding. Immediately following completion of the
Restructuring, there will be 2,395,105 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of an
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of stockholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be when issued, fully paid and nonassessable.
The transfer agent for the Common Stock is The First Union National Bank of
North Carolina.
PREFERRED STOCK
Pursuant to the Preferred Stock Authorization, the Company's Board of
Directors will have the authority to issue shares of Preferred Stock in one or
more series and to fix, by resolution, the voting powers, full or limited or no
voting powers, and such designations, preferences and relative, participating,
optional or other rights, if any, and the qualifications, limitations or
restrictions thereof, if any, including the number of shares in such series
(which the Board may increase or decrease as permitted by Delaware law),
liquidation preferences, dividend rates, conversion rights and redemption
provisions of the shares constituting any series, without any further vote or
action by the stockholders. Any share of Preferred Stock so issued would have
priority over the Common Stock with respect to dividend or liquidation rights or
both.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy consent, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
DIRECTORS' LIABILITY
The Company has included in its Restated Certificate provisions to eliminate
the personal liability of its directors for monetary damages resulting from
breaches of their fiduciary duty (provided that such provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, violations under Section 174 of the DGCL or for any transaction from which
the director derived an improper personal benefit) and in its Bylaws provisions
to indemnify its directors and officers to the fullest extent
99
<PAGE>
permitted by Section 145 of the DGCL, including circumstances in which
indemnification is otherwise discretionary. The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION AND BYLAWS
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation
will be amended to provide that no action required or permitted to be taken at
any annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.
This provision of the Certificate of Incorporation may not be amended, modified
or repealed by the stockholders of the Company, except with the consent of
holders of three-fourths of the Company's outstanding Common Stock.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual or special meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 30 days nor more than
60 days prior to the meeting; provided, however, that in the event that less
than 40 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
received no later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. The Bylaws also specify certain requirements for a
stockholder's notice to be in proper written form. These provision may preclude
some stockholders from bringing matters before the stockholders at an annual or
special meeting or from making nominations for directors at an annual or special
meeting. As set forth below, this provision of the Bylaws may not be amended,
modified or repealed by the stockholders of the Company, except with the consent
of holders of three-fourths of the Company's outstanding Common Stock.
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to
provide that when a meeting of stockholders of the Company is convened, the
presiding officer, if directed by the Board of Directors, may adjourn the
meeting if no quorum is present for the transaction of business or if the Board
of Directors determines that adjournment is necessary or appropriate to enable
the stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders or
to otherwise effectively exercise their voting rights. This provision will,
under certain circumstances, make more difficult or delay actions by the
stockholders opposed by the Board of Directors. The effect of such provision
could be to delay the timing of a stockholders' meeting, including in cases
where stockholders have brought proposals before the stockholders which are in
opposition to those brought by the Board of Directors and therefore may provide
the Board of Directors with additional flexibility in responding to such
stockholder proposals. As set forth below, this provision of the Bylaws may not
be amended, modified or repealed by the stockholders of the Company, except with
the consent of holders of three-fourths of the Company's outstanding Common
Stock.
AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended
to provide that no provision of the Bylaw may be amended, altered, changed or
repealed by the stockholders of the Company, nor may any provision of the Bylaws
inconsistent with such provision be adopted by the stockholders of the Company,
except with the consent of holders of three-fourths of the Company's outstanding
Common Stock. This provision will make it more difficult for stockholders to
make changes to the Bylaws that are opposed by the Board of Directors. This
provision of the Certificate of Incorporation may not be amended, modified or
repealed by the stockholders of the Company, except with the consent of holders
of three-fourths of the Company's outstanding Common Stock.
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<PAGE>
If adopted, the Charter Amendments will not become effective unless and
until the Closing occurs. Adoption of the Charter Amendments requires the
affirmative vote of the holders of a majority at the shares of Common Stock
outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed
Amendment to the Company's Certificate of Incorporation: Provisions Affecting
Corporate Governance" and "Description of Capital Stock."
LEGAL MATTERS
Certain legal matters in connection with the Restructuring, including the
validity of the shares of Common Stock to be issued pursuant to the Exchange
Offer, will be passed upon for the Company by King & Spalding.
EXPERTS
The audited financial statements and schedules of the Company for the three
years ended May 31, 1995 are included in this Proxy Statement/Prospectus in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Any holder of Common Stock and any person who will become a holder of Common
Stock who wishes to present a proposal for inclusion in the Company's proxy
statement for the next annual meeting of stockholders must comply with the rules
and regulations of the Commission then in effect. Such proposal must be received
by the Secretary of the Company at 8095 N.W. 64th Street, Miami, Florida 33166,
no later than , 1997, in order to be considered for inclusion in the
Company's next annual meeting proxy statement.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Audited Consolidated Financial Statements
Report of independent certified public accountants..................................................... F-
Consolidated balance sheets as of May 31, 1995 and 1996................................................ F-
Consolidated statements of operations for the years ended May 31, 1994, 1995 and 1996.................. F-
Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1994, 1995 and
1996.................................................................................................. F-
Consolidated statements of cash flows for the years ended May 31, 1994, 1995 and 1996.................. F-
Notes to consolidated financial statements............................................................. F-
</TABLE>
<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, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended May 31, 1996.
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, 1995
and 1996 and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended May
31, 1996, 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 is in default under its debt agreements 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.
We have also audited Schedule II of International Airline Support Group, Inc.
and Subsidiaries for each of the three years in the period ended May 31,
1996. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Miami, Florida
July 12, 1996
F-2
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents (Note A) $ 848,331 $ 940,274
Accounts receivable, net of allowance for doubtful accounts
of approximately $619,000 in 1995 and $735,000 in 1996 2,592,463 2,014,691
Notes receivable 313,490 -
Inventories (Notes A, C and D) 6,497,270 9,277,315
Deferred tax benefit - current, net of valuation allowance
of $1,146,000 in 1995 and $960,000 in 1996 (Note F) - -
Other current assets 31,480 68,798
----------- -----------
Total current assets 10,283,034 12,301,078
Property and equipment (Notes A, D, E and R)
Land 330,457 -
Aircraft held for lease 3,289,613 2,974,760
Building and leasehold improvements 715,772 36,815
Machinery and equipment 940,948 972,507
----------- -----------
5,276,790 3,984,082
Less accumulated depreciation 1,980,927 2,051,620
Land and building held for sale, net - 750,000
----------- -----------
Property and equipment, net 3,295,863 2,682,462
----------- -----------
Other assets
Deferred debt costs, net (Note A) 931,932 762,431
Deferred tax benefit, net of valuation allowance of
$3,894,000 in 1995 and $3,011,000 in 1996 (Note F) - -
Deferred restructuring fees - 334,860
Deposits and other assets - 51,500
----------- -----------
931,932 1,148,791
----------- -----------
$14,510,829 $16,132,331
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D) $ 1,812,040 $ 3,695,108
Long-term obligations in default classified as current (Notes B and D) 18,083,334 14,041,667
Accounts payable 1,650,078 2,171,496
Accrued expenses (Note O) 2,226,900 3,233,231
----------- -----------
Total current liabilities 23,772,352 23,141,502
Long-term obligations, less current maturities (Notes B and D) 440,377 406,760
Commitments and contingencies (Notes E, M and P) - -
Stockholders' equity (deficit) (Notes G and H)
Preferred Stock - $.001 par value; authorized 500,000 shares;
0 shares outstanding in 1995 and 1996. - -
Common stock - $.001 par value; authorized 20,000,000 shares;
issued and outstanding 4,041,779 shares in 1995 and 1996. 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Accumulated deficit (12,360,274) (10,074,305)
----------- -----------
Total stockholders' deficit (9,701,900) (7,415,931)
----------- -----------
$14,510,829 $16,132,331
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Revenues
Net sales $ 16,746,932 $ 21,998,869 $ 21,410,201
Lease revenue 1,986,450 2,984,218 1,794,768
------------- ------------- -------------
Total revenues 18,733,382 24,983,087 23,204,969
Cost of sales (Note N) 22,104,131 17,712,427 13,207,671
Selling, general and administrative
expenses (Notes N and O) 6,943,147 4,358,119 3,921,795
Provision (recovery) for doubtful accounts 1,487,969 (334,571) 464,099
Depreciation and amortization 2,475,071 1,400,832 1,153,477
Losses of service center subsidiary (Note Q) 1,922,086 675,860 -
------------- ------------- -------------
Total operating costs 34,932,404 23,812,667 18,747,042
------------- ------------- -------------
Income (loss) from operations (16,199,022) 1,170,420 4,457,927
Interest expense 2,953,220 2,564,318 2,191,968
Interest and other income (87,600) (602,943) (34,058)
Unusual and nonrecurring items (Note P) - (177,115) -
------------- ------------- -------------
Earnings (loss) before income taxes,
equity in loss of joint venture, and
extraordinary item (19,064,642) (613,840) 2,300,017
Provision for income taxes (benefit) (Note F) (2,475,185) - 14,048
------------- ------------- -------------
Earnings (loss) before equity in loss of
joint venture and extraordinary item (16,589,457) (613,840) 2,285,969
Equity in loss of joint venture (Note J) (423,224) - -
------------- ------------- -------------
Earnings (loss) before extraordinary item (17,012,681) (613,840) 2,285,969
Extraordinary loss on the extinguishment of debt
(Note D) (363,022) - -
------------- ------------- -------------
Net earnings (loss) $ (17,375,703) $ (613,840) $ 2,285,969
------------- ------------- -------------
------------- ------------- -------------
Per share data:
Primary earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (.15) $ .57
Extraordinary item (.09) - -
--------- --------- --------
Net earnings (loss) $ (4.30) $ (.15) $ .57
--------- --------- --------
--------- --------- --------
Weighted average shares outstanding used in
primary calculation 4,041,779 4,041,779 4,041,779
------------- ------------- -------------
------------- ------------- -------------
Fully-diluted earnings (loss) per common and
common equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (.15) $ .47
Extraordinary item (.09) - -
--------- --------- --------
Net earnings (loss) $ (4.30) $ (.15) $ .47
--------- --------- --------
--------- --------- --------
Weighted average shares outstanding used in
fully-diluted calculation 4,041,779 4,041,779 6,541,779
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<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, 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 - - - (17,375,703) (17,375,703)
----------- -------- ------------- -------------- -------------
Balance at May 31, 1994 4,041,779 4,042 2,654,332 (11,746,434) (9,088,060)
Net loss - - - (613,840) (613,840)
----------- -------- ------------- -------------- -------------
Balance at May 31, 1995 4,041,779 4,042 2,654,332 (12,360,274) (9,701,900)
Net earnings - - - 2,285,969 2,285,969
----------- -------- ------------- -------------- -------------
Balance at May 31, 1996 4,041,779 $ 4,042 $ 2,654,332 $ (10,074,305) $ (7,415,931)
----------- -------- ------------- -------------- -------------
----------- -------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (17,375,703) $ (613,840) $ 2,285,969
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,865,610 1,693,301 1,372,979
Depreciation - service center 284,452 196,322 -
Gain on sale of aircraft held for lease - - (864,795)
Gain on Express One transaction - (70,631) -
Loss on Wellman transaction - 33,575 -
(Increase) decrease in deferred tax benefit 69,000 (23,696) -
Equity in loss of joint venture 423,224 - -
Decrease (increase) in accounts receivable (83,108) 1,224,560 577,770
Decrease in notes receivable 800,000 806,510 313,490
Decrease (increase) in income tax refund (1,930,000) 1,930,000 -
(Increase) decrease in inventories 8,243,147 4,910,834 (3,030,045)
(Increase) decrease in other current assets 981,557 154,271 (37,318)
(Increase) decrease in other assets (112,999) 178,322 (51,500)
Increase (decrease) in accounts payable and accrued expenses 5,012,896 (4,591,430) 1,527,750
(Decrease) in income taxes payable (211,666) - -
------------ ----------- -----------
Net cash provided by (used in) operating activities (1,033,590) 5,828,098 2,094,300
Cash flows from investing activities:
Proceeds from maturity of restricted certificates of deposit 356,115 - -
Capital expenditures (3,635,919) (135,936) (875,281)
Proceeds from sale of aircraft held for lease 1,000,000 - 1,450,000
------------ ----------- -----------
Net cash provided by (used in) investing activities (2,279,804) (135,936) 574,719
Cash flows from financing activities:
Net payments under line of credit (1,000,000) - -
Borrowings under notes and leases 10,000,000 - -
Increase in deferred restructuring costs - - (334,860)
Increase in deferred debt costs (341,326) - (50,000)
Repayments of debt obligations (5,760,432) (4,939,621) (2,192,216)
------------ ----------- -----------
Net cash (used in) provided by financing activities 2,898,242 (4,939,621) (2,577,076)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (415,152) 752,541 91,943
Cash and cash equivalents at beginning of period 510,942 95,790 848,331
------------ ----------- -----------
Cash and cash equivalents at end of period $ 95,790 $ 848,331 $ 940,274
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosures of cash flow information (Note K):
Cash paid during the year for:
Interest $ 2,736,233 $ 2,167,279 $ 1,206,028
------------ ----------- -----------
------------ ----------- -----------
Income taxes $ - $ - $ 36,910
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1995 AND 1996
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. 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
and DC-9. The Company supplies parts to over 500 customers worldwide. The
Company previously was engaged in other activities through the Company's
wholly-owned subsidiary, International Airline Service Center, Inc. ("Service
Center"), which was an FAA certified repair facility engaged in the
performance of maintenance checks required by the FAA on narrow body aircraft
(see Note Q). The Company's other wholly-owned subsidiary, Brent Aviation,
Inc. d/b/a Custom Air Transport was previously engaged in the flight
operation of cargo aircraft (see Note P).
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 original
maturities of three months or less at the time of purchase to be cash
equivalents. Included as cash equivalents at May 31, 1996 is $1,100,000 in
certificates of deposit with a stated maturity of seven days.
Cash balances in financial institution accounts are secured by the Federal
Deposit Insurance Corporation ("FDIC") for amounts up to $100,000, per
customer. At May 31, 1996, the Company's uninsured cash balances
approximated $1,472,000.
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 individually or in lots where specific identification is
practical. For parts acquired through whole aircraft purchases, the costs
are assigned to pools which are amortized as part sales take place. The
amortization is 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. Certain
aircraft, which were previously leased have been classified as held for sale
and are included in inventory.
At May 31, 1995 and 1996, approximately 80% and 97%, respectively, of the
ending inventory (including aircraft held for sale) was costed under the
specific identification method, and the remaining 20% and 3%, respectively,
was costed under the pooling method.
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. The estimated lives of the
depreciable assets range from 5 to 31.5 years. 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.
F-7
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
e) 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,
1995 and 1996, was approximately $1,094,000 and $1,307,000, respectively.
f) Earnings Per Share
Primary earnings (loss) per share is computed by dividing 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. For the purpose
of computing common stock equivalents for stock options and warrants, the
modified treasury stock method was not used as the effect would be
antidilutive. The Company's Convertible Subordinated Debentures
("Debentures") are not considered common stock equivalents for the purpose
of computing primary earnings per share as the effective yield on the
securities exceeded 66-2/3% of the average Aa corporate bond rate at the
time of issuance.
Fully diluted earnings (loss) per shares is computed for 1996 as if the
Debentures were converted into common stock as of the beginning of the
period (see Note D). Stock options and warrants are not considered common
stock equivalents for the purpose of computing fully diluted earnings
(loss) per share as the effect would be antidilutive under the modified
treasury stock method. The Debentures and stock options and warrants are
not considered common stock equivalents in fiscal years 1994 and 1995 due
to the net losses for those periods.
g) Revenue Recognition
Revenue from the sale of parts 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. Lease revenue is recognized on an accrual basis,
unless collectibility is uncertain.
h) Employee Benefit Plan
In fiscal 1992, the Company established a contributory 401(K) plan. The
plan is a defined contribution plan covering all eligible employees of the
Company, to which the Company makes certain discretionary matching
contributions based upon the level of its employees' contributions. The
amount charged to earnings in fiscal 1994, 1995 and 1996 were insignificant.
The Company does not provide any health or other benefits to retirees.
i) Stock Options
Options granted under the Company's Stock Option Plans are accounted for
under APB 25, "Accounting for Stock Issued to Employees," and related
interpretations. In November 1995, the Financial Accounting Standards Board
issued Statement 123, "Accounting for Stock-Based Compensation," which will
require additional proforma disclosures for companies that will continue to
account for employee stock options under the intrinsic value method specified
in APB 25. The Company plans to continue to apply APB 25 and the only effect
of adopting Statement 123 in fiscal 1997 will be the new disclosure
requirement.
F-8
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
j) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade receivables, and
accounts payable approximate fair value due to the short term maturities of
these instruments.
k) Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
l) Income Taxes
Income taxes are provided based on earnings reported for tax return
purposes in addition to a provision for deferred income taxes. Deferred
income taxes are provided in order to reflect the tax consequences in future
years of differences between the financial statement and tax basis on assets
and liabilities at each year end.
m) Management Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
May 31, 1995 and 1996 and revenues and expenses during the periods then ended.
The actual outcome of the estimates could differ from these estimates made in
the preparation of the financial statements.
n) Land and Building Held for Sale
The land and building (the "property") held for sale represents the Company's
corporate offices and adjacent warehouse located in Miami, Florida.
Subsequent to May 31, 1996, the Company entered into a contract to sell the
property, with an expected sales date in November 1996. As of May 31, 1995
and 1996, the net book value of the property was approximately $963,000 and
$750,000, respectively. As of May 31, 1996, the property was written down
to its market value, less estimated selling expenses. Included in
depreciation expense for the year ended May 31, 1996 is approximately
$190,000 relating to this write down.
NOTE B - GOING CONCERN
Primarily as a result of the net losses experienced in fiscal 1994 and
1995, and the classification of certain debt obligations as current, the
Company has a significant deficit in working capital and stockholders'
equity. Currently, the Company is not in compliance 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 D). The Notes are secured by substantially all of the
assets of the Company and the Debentures are subordinated in right of payment
to the Notes.
Excluding amounts scheduled to be repaid in fiscal 1997 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 May 31, 1996. The Company has presented a restructuring proposal to the
holders of the Notes and the Debentures which is described in a Registration
Statement filed on Form S-4 filed by the Company with the Securities and
Exchange Commission on July 12, 1996 (see Note R). However, 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.
F-9
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE B - GOING CONCERN - Continued
As a result of the above factors, there exists substantial doubt about the
Company's ability to continue in existence.
NOTE C - INVENTORY
Inventories at May 31, 1995 and 1996 consisted of the following:
1995 1996
----------- -----------
Aircraft parts $ 4,063,352 $ 7,938,049
Aircraft available for sale 2,433,918 1,339,266
----------- -----------
$ 6,497,270 $ 9,277,315
----------- -----------
----------- -----------
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1995 and 1996 consisted of the following:
1995 1996
----------- -----------
12% Senior Secured Notes $ 9,850,000 $ 7,700,000
8% Convertible Subordinated Debentures 10,000,000 10,000,000
Mortgage note payable to bank 455,420 429,260
Notes payable due in equal monthly
installments through October 1997,
bearing interest at 9.5% to 11.5%
collateralized by equipment 16,363 8,000
Capitalized lease obligations (Note E) 13,968 6,275
----------- ----------
20,335,751 18,143,535
Less: Current maturities and long-term
obligations in default classified
as current 19,895,374 17,736,775
----------- ----------
$ 440,377 $ 406,760
----------- ----------
----------- ----------
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 included a 6%
prepayment penalty as well as that portion of the deferred debt issuance
costs associated with the Notes retired. In May 1996, the Company prepaid,
without penalty $383,334 of the amount due in July 1996. 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 $5.38. 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
default of the loan agreement.
F-10
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE D - LONG-TERM OBLIGATIONS - Continued
In September 1993, the Company issued $10.0 million in Convertible
Subordinated Debentures ("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 default of the loan agreement.
In May 1995, the Company received a notice of payment blockage from the
holder of a majority of the Notes. The payment blockage prevented the
Company from any scheduled interest payment on the Debentures, through
November 1995. Irrespective of the payment blockage, the Company has not
made any of the scheduled interest payments on the Debentures since February
1995. Included in the May 31, 1995 and 1996, financial statements is
$200,000 and $1,000,000 representing accrued interest on the Debentures.
In September 1992, the Company entered into a promissory note and mortgage
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 (see Note A). This property also has a junior
mortgage in favor the holders of the notes.
The scheduled maturities of long-term obligations in each of the next five
years subsequent to May 31, 1996 are as follows: 1997 - $3,695,108, 1998 -
$4,448,426, 1999 - $0, 2000 - $0, 2001 -$0 and thereafter $10,000,000.
However, the Company is in default under the terms of the securities purchase
agreement for the Notes and the Debentures. If the holders were to demand
repayment, $14,041,667, which is scheduled to be paid subsequent to May 31,
1997, would be due immediately.
NOTE E - LEASES
The Company conducts a portion of its operations utilizing leased equipment
which has been capitalized. 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, 1996.
Future minimum lease payments $ 7,890
Less amount representing interest 1,615
-------
Present value of future minimum lease payments 6,275
Current maturities 5,092
-------
Long term obligations under capital leases $1,183
-------
-------
Capitalized equipment leases are accounted for and amortized as
company-owned equipment. The following is a schedule of leased equipment
under capital leases:
1995 1996
---------- ----------
Equipment $ 298,279 $ 298,279
Less: Accumulated amortization 279,863 292,244
---------- ----------
$ 18,416 $ 6,035
---------- ----------
---------- ----------
F-11
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE E - LEASES - Continued
The Company leased warehouse and hangar facilities as well as certain
equipment under long-term operating lease agreements. Rental expense under
these leases for the years ended May 31, 1994, 1995 and 1996 was
approximately $242,000, $220,000 and $53,000, respectively. At May 31, 1996,
there are no future minimum payments on non-cancellable operating leases.
The Company currently leases an aircraft to a customer under a month to
month operating lease. In addition to minimum base rentals, the lease
agreement requires additional rent based upon aircraft usage. The net
investment in aircraft held for or leased to customers was $2,210,202 and
$1,849,143 at May 31, 1995 and 1996, respectively.
NOTE F - INCOME TAXES
The provision for income taxes for the years ended May 31, 1994, 1995 and
1996 is as follows:
1994 1995 1996
------------- --------- ----------
Current provision:
Federal $ (2,544,185) $ - $ 14,048
State - - -
------------ --------- ----------
(2,544,185) - 14,048
Deferred provision 69,000 - -
------------ --------- ----------
$ (2,475,185) $ - $ 14,048
------------ --------- ----------
------------ --------- ----------
The tax effect of the Company's temporary differences and carryforwards is
as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax (benefits) - current:
Reserve for overhaul costs $ (545,000) $ (332,000)
Bad debt reserve (233,000) (276,000)
Inventory capitalization (188,000) (145,000)
Accrued payroll (37,000) -
Accrued legal settlement costs (116,000) (1,000)
Accrued vacation (16,000) (15,000)
Accrued - other (11,000) (4,000)
Accrued repair costs - (187,000)
------------ ------------
$ (1,146,000) $ (960,000)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Deferred tax liabilities (benefits) - non-current:
Depreciation $ 226,000 $ (17,000)
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (702,000) (160,000)
Accrued interest income (106,000) -
Net operating loss carryforward - federal (2,941,000) (2,467,000)
Net operating loss carryforward - state (277,000) (260,000)
Minimum tax credit - federal (122,000) (135,000)
Other, net (8,000) (8,000)
------------ ------------
$ (3,894,000) $ (3,011,000)
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE F - INCOME TAXES - Continued
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1995 and 1996. The valuation allowance has
decreased by $1,069,000 in fiscal 1996.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
1994 1995 1996
---- ---- ----
Statutory federal rate (34.0)% (34.0)% 34.0%
Operating losses with no current tax benefit 19.6 34.0 -.
Tax benefit from net operating loss carryforward -. -. (33.4)
------ ------ ------
Effective tax rate (14.4)% -. 0.6%
------ ------ ------
------ ------ ------
The Company has net operating loss carryforwards for federal and state
purposes of approximately $7.3 and $7.2 million, respectively. The net
operating losses will expire at various points through the year 2010. The
Company has a federal minimum tax credit carryover of approximately $135,000
which may be utilized in future years to the extent that the 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.
NOTE G - 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 1993, the Company issued 32,667 shares of common stock to an
individual in exchange for certain aircraft parts included in the Company's
inventory.
NOTE H - 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:
Number of Shares
--------------------------------------------
Reserved Outstanding Available
---------- ------------- -----------
Balance June 1, 1994 315,000 150,500 164,500
Granted - 265,000 (265,000)
Expired - (54,000) 54,000
Canceled - (66,500) 66,500
--------- ---------- --------
Balance May 31, 1995 315,000 295,000 20,000
Granted - - -
Expired - - -
Canceled - (25,500) 25,500
--------- ---------- --------
Balance May 31, 1996 315,000 269,500 45,500
--------- ---------- --------
--------- ---------- --------
F-13
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE H - STOCK OPTIONS - Continued
Effective in December 1994, the outstanding employee stock options were
canceled and new options were issued through an Incentive Stock Option
Agreement. Options were granted to purchase 265,000 shares at an exercise
price of $.19, which equaled the fair market value of the Company's stock on
the effective date of the grant. All options granted were fully vested at
May 31, 1995, and expire in December 1999. Included in the above table are
options granted to directors to purchase 30,000 shares at exercise prices
ranging from $4.625 to $4.875 per share.
In April 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 1996.
In connection with the settlement of a legal dispute arising from a loan to
the Company, in April 1992, the Company issued an option to the lender to
purchase 200,000 shares at $3.25 per share, which approximated the market
price on the date of the grant.
NOTE I - 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, 1995
and 1996.
(IN THOUSANDS)
1994 1995 1996
--------- --------- ----------
United States $ 10,978 $ 18,048 $ 19,800
Africa and Middle East 4,636 1,204 623
Europe 374 1,350 177
Latin America 2,178 4,347 2,454
Canada 558 34 -
Asia 9 - 151
--------- --------- ---------
$ 18,733 $ 24,983 $ 23,205
--------- --------- ---------
--------- --------- ---------
The Company had part sales to a domestic customer which accounted for
approximately 21% of net sales in fiscal 1996 and less than 10% of net sales
in fiscal 1995. The Company did not have any sales to this customer in
fiscal 1994. However, this customer has been the subject of intense scrutiny
by the FAA since the crash of one of its aircraft in early May 1996. On June
17, 1996, the customer entered into a consent decree with the FAA. Pursuant
to the consent decree, the customer agreed to ground all of its aircraft
until it demonstrates compliance with specified safety and maintenance
procedures. The customer has not yet resumed operations. Additionally,
the Company has customers which in turn do business with this customer.
There is no way to estimate the sales volumes to these other customers which
may also be impacted by the aforementioned events. No other customer
accounted for more than 10% of the Company's sales in fiscal 1996.
(continued)
F-14
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC - Continued
The Company had sales to a Venezuelan customer which accounted for
approximately 11% of net sales in fiscal 1995 and less than 10% in fiscal
year 1994. Additionally, the Company sold 3 aircraft to a United States
customer which represented 23% of net sales in fiscal 1995. The Company did
not have any sales to this customer in previous fiscal years. The Company
had sales to one African customer which accounted for less than 10% of net
sales during the years ended May 31, 1996 and 1995, and 10% of net sales
during the year ended May 31, 1994.
The Company's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, and, in the opinion of
management is believed to be set in an amount sufficient to respond to normal
business conditions. Should such conditions deteriorate or any major credit
customer default on its obligations to the Company, this allowance may need
to be increased which may have an adverse impact upon the Company's earnings.
NOTE J - 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 Joint Venture partner, a promissory note for $2,900,000
due October 31, 1993. The promissory note was also signed as co-maker by the
then 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).
NOTE K - SUPPLEMENTAL CASH FLOW DISCLOSURE
During fiscal 1994, the Company acquired approximately $1,140,000 in
equipment under a leasing arrangement which was classified as a capital lease
obligation at May 31, 1994.
The net change in inventory in fiscal 1995 and 1996, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
<TABLE>
<CAPTION>
1995 1996
------------- -----------
<S> <C> <C>
Net increase (decrease) in inventory $ (2,222,504) $ 2,780,045
Write-down of aircraft - 250,000
Transfer of aircraft from held for lease to inventory (2,688,330) -
------------ -----------
Cash flow impact from change in inventory $ (4,910,834) $ 3,030,045
------------ -----------
------------ -----------
</TABLE>
In fiscal 1994, the Company issued 32,667 shares of common stock in
exchange for certain inventory.
F-15
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE L - 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.
In fiscal 1994, the Company paid approximately $54,000 to a director under
a consulting agreement which originated in fiscal 1993. In 1994, the
consulting agreement was terminated and a commission agreement was entered
into. This consulting agreement, which originated in fiscal 1993, was
terminated in 1994, and a commission agreement was entered into. Under the
commission agreement, the director is entitled to 3-4% of revenues
generated from sales to customers brought in by the director. In fiscal
1995 and 1996, the Company paid commissions of approximately $33,000 and
$85,000, respectively.
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
was an employee of the placement agent.
In fiscal 1994, the Company rented a condominium unit from an entity
controlled by an officer/director. Total rent paid in fiscal 1994 was
approximately $9,000.
NOTE M - 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.
The Company recorded a fourth quarter adjustment in 1996 in the amount of
approximately $385,000 which related to capitalizing the costs incurred as a
result of the planned restructuring (see Note R). Approximately $306,000 of
these costs were expensed in the first three quarters of fiscal 1996.
NOTE N - COST OF SALES
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, other reductions in personnel, the sale of certain fixed assets
and an intensive review of the Company's product lines and inventories.
Cost of sales for fiscal 1994 includes charges aggregating $9.6 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 that was
expected to be completed in fiscal 1995. The Company recorded a
provision of approximately $2.4 million at May 31, 1994, for the
estimated excess of the final cost of the repairs and maintenance
over the sales price, after overhauling the aircraft to meet the
customer's contract specifications.
(continued)
F-16
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE N - COST OF SALES - Continued
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.
4. Losses totaling approximately $2.1 million 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. In June 1995, the Company
recovered this aircraft.
NOTE O - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Customer deposits $ 426,453 $ 367,669
Accrued repair costs 224,406 187,157
Accrued legal costs 60,000 -
Accrued interest 399,030 1,165,468
Accrued payroll 282,834 399,886
Accrued property taxes 2,730 31,144
Accrued commissions 159,536 167,741
Reserve for repair of leased aircraft 570,940 480,308
Other 100,971 433,858
---------- ----------
$2,226,900 $3,233,231
---------- ----------
---------- ----------
</TABLE>
NOTE P - WELLMAN TRANSACTION
In January 1995, the Company entered into an agreement with the former
President and former Secretary of the Company whereby the Company transferred
all of the outstanding stock of Brent Aviation, a wholly-owned subsidiary, to
an affiliate of the former employees. In addition, the Company also
transferred certain spare parts, components, inventory and equipment for
B-727 series aircraft, and a McDonnell Douglas DC-4 aircraft. In
consideration, the Company received $230,000 and agreed to lease a B-727 to
the affiliate on a month-to-month basis.
In addition, the employees resigned from all positions as officers or
directors, granted a proxy to the Company enabling the Company's directors to
vote 1.98 million shares of common stock held by the employees for a period
of two years, and agreed not to compete or interfere with any of the
businesses of the Company and its remaining subsidiaries for a period of two
years. The Company further agreed to pay the former Secretary one year's
salary as severance. As of May 31, 1995, $95,000 of the accrued severance
was unpaid and was recorded in accrued liabilities. In fiscal 1996, this
liability was paid in full. The Company also agreed to terminate its
leasehold interest in a facility located at Grayson County, Texas Airport,
allowing Brent Aviation to lease such facility for its operations.
NOTE Q - DISPOSAL OF SERVICE CENTER OPERATIONS
In June 1994, the Company's Board of Directors unanimously voted to cease
operations and to sell or otherwise dispose of the Company's wholly-owned
subsidiary, International Airline Service Center, Inc. ("IASC"), which was
an FAA certified repair facility engaged in the performance of maintenance
check required by the FAA on narrow body aircraft, following the sale of
certain of the Company's aircraft being serviced under contract by IASC.
(continued)
F-17
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE Q - DISPOSAL OF SERVICE CENTER OPERATIONS - Continued
During the third quarter of 1995, IASC fulfilled its obligations to service
the aircraft and ceased operations. On January 31, 1995, IASC entered into
an agreement with a third party, pursuant to which IASC assigned its interest
in a certain equipment lease with a net book value of $826,965 at May 31,
1995, to the third party, and the third party assumed IASC's interests and
obligations under such lease. IASC's interest in the lease as of May 31,
1995 was $897,596. Thus a gain of $70,631 was recognized as a result of the
transaction. Pursuant to the transaction, IASC disposed of substantially all
of its operating assets.
As of May 31, 1995, IASC had an insignificant amount of assets and
liabilities recorded on its books.
NOTE R - SUBSEQUENT EVENTS
Subsequent to May 31, 1996, the Company entered into a contact to sell its
premises in Miami, Florida for $850,000 in cash, less applicable selling
costs. As the premises were written down to the estimated net realizable
value as of May 31, 1996, no gain or loss is expected to be recognized upon
completion on this transaction. The write down is included in depreciation
expense in fiscal 1996.
On July 12, 1996, the Company announced that it did not intend to pay the
scheduled $3.7 million principal installment due on the Notes on July 17,
1996, pending redemption of the Senior Notes in connection with a
restructuring of its indebtedness. The debt restructuring is described in a
Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission, also on July 12, 1996. Pursuant to the proposed
restructuring, the Company would offer to exchange (the "Exchange Offer")
224.54 shares of its Common Stock for each $1,000 principal amount of the
Convertible Debentures. In connection with the restructuring, the Company
also intends to solicit proxies form the holders of its Common Stock to
approve a 1-for-27 reverse stock split, to effect certain amendments to its
Certificates of Incorporation and to approve a stock option plan.
Consummation of the restructuring is subject to certain conditions.
The Company also announced that, on July 11, 1996, the holder of a majority
of the outstanding principal amount of the Notes (the "Majority Noteholders")
executed a "Standstill Agreement" with the Company pursuant to which such
holder agreed that it would refrain (to the extent provided therein) from
exercising any rights or remedies it may have with respect to the Event of
Default with respect to the Notes that will occur upon the Event of Default
with respect to the Notes that will occur upon the Company's failure to pay
the July 17, 1996 installment of principal.
The obligations of the Majority Noteholder pursuant to the Standstill
Agreement terminate on the earlier of (i) the 120th day following the date of
the Standstill Agreement; (ii) the consummation of the restructuring; and
(iii) the occurrence of certain specified events, including, among other
things, the exercise by any creditor of the Company of any remedies against
the Company with respect to the Company's obligations to such creditor and
the first date on which, in the reasonable determination of the Majority
Noteholder, any one of the conditions precedent to the restructuring is no
longer capable of being satisfied.
F-18
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ----------------------- -------- --------
Additions
-----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1994
- -----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 450,000 $ 1,337,969 $ 28,850 $ 876,605 (a) $ 940,214
--------- ----------- -------- --------- ----------
--------- ----------- -------- --------- ----------
Year ended May 31, 1995
- -----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 940,214 $ 406,147 $ - $ 727,176 (a) $ 619,185
--------- ----------- -------- --------- ----------
--------- ----------- -------- --------- ----------
Year ended May 31, 1996
- -----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 619,185 $ 482,375 $ - $ 366,874 (a) $ 734,686
--------- ----------- -------- --------- ----------
--------- ----------- -------- --------- ----------
</TABLE>
(a) Write-off of accounts receivable against the reserve.
S-1
<PAGE>
S-2
<PAGE>
APPENDIX A -- PROPOSED
RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
RESTATED AND AMENDED
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
International Airline Support Group, Inc., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is International Airline Support Group,
Inc. (the "Corporation"). The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
October 20, 1989.
2. Pursuant to Sections 242 and 245 of the Delaware General Corporation
Law, this Restated and Amended Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of the Corporation.
3. This Restated and Amended Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of the
Delaware General Corporation Law.
4. Upon the filing in the Office of the Secretary of State of the State
of Delaware of this Restated and Amended Certificate of Incorporation, the
shares of common stock, par value $.001 per share, of the Corporation (the
"Common Stock") issued and outstanding immediately prior to such filing of this
Restated and Amended Certificate of Incorporation are hereby automatically
reclassified and changed without any action on the part of the stockholders of
the Corporation so that each twenty-seven (27) shares of Common Stock become one
(1) share of common stock, par value $.001 per share, of the Corporation,
neither increasing nor decreasing the Corporation's stated capital thereby.
5. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
ARTICLE I
The name of the Corporation is International Airline Support Group, Inc.
A-1
<PAGE>
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, New Castle County, Wilmington, Delaware 19801. The name
of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation shall have authority to issue 20,000,000 shares of common
stock, par value $.001 per share ("Common Stock"), and 2,000,000 shares of
preferred stock, par value $.001 per share ("Preferred Stock").
ARTICLE V
The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of the shares of Preferred Stock in series,
and by filing a certificate pursuant to the applicable law of the State of
Delaware to establish from time to time the number of shares to be included in
each such series and to fix the designations, powers, preferences and rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, if any, whether
dividends shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares
of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date
or dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(h) Any other relative rights, preferences and limitations of that
series.
A-2
<PAGE>
ARTICLE VI
Upon the filing of this Restated and Amended Certificate of Incorporation,
the new Board of Directors of the Corporation shall consist of seven (7)
members, but the number may be increased or decreased in the manner provided in
the Bylaws of the Corporation; provided, however, that the number of directors
constituting the full Board of Directors shall not be changed without the
affirmative vote of at least seventy-five percent (75%) of the issued and
outstanding shares of Common Stock. The names and mailing addresses of the
persons who are to serve as the new directors of the Corporation upon the filing
of this Restated and Amended Certificate of Incorporation are:
Alexius A. Dyer III
International Airline Support Group, Inc.
8095 N.W. 64th Street
Miami, Florida 33166
George Murnane III
International Airline Support Group, Inc.
8095 N.W. 64th Street
Miami, Florida 33166
E. James Mueller
International Airline Support Group, Inc.
8095 N.W. 64th Street
Miami, Florida 33166
Kyle R. Kirkland
International Airline Support Group, Inc.
8095 N.W. 64th Street
Miami, Florida 33166
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
--------------------------
ARTICLE VII
SECTION 1. The Board of Directors shall have the power to adopt, amend or
repeal any provision of the Bylaws of the Corporation. Notwithstanding any
other provision of this Restated and Amended Certificate of Incorporation or the
Bylaws of the Corporation (and notwithstanding that some lesser percentage may
be specified by law), no provision of the Bylaws of the Corporation shall be
amended, modified or repealed by the stockholders of the Corporation, nor shall
any provision of the Bylaws of the Corporation inconsistent with any such
provision be adopted by the stockholders of the
A-3
<PAGE>
Corporation, unless approved by the affirmative vote of at least seventy-five
percent (75%) of the issued and outstanding shares of Common Stock.
SECTION 2. Notwithstanding any other provision of this Restated
Certificate of Incorporation or the Bylaws of the Corporation (and
notwithstanding that some lesser percentage may be specified by law), no
provision of Articles IV, V, VI, VII, VIII, or X of this Restated and Amended
Certificate of Incorporation shall be amended, modified or repealed, nor shall
any provision of this Restated and Amended Certificate of Incorporation
inconsistent with any such provision be adopted, by the stockholders of the
Corporation, unless approved by the affirmative vote of at least seventy-five
percent (75%) of the issued and outstanding shares of Common Stock.
ARTICLE VIII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as director, except for liability (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law or
(iv) for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. Any repeal or modification of this Article by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of or prior to
such repeal or modification.
ARTICLE IX
The provisions of Section 203 of the Delaware General Corporation Law, as
in effect on the date hereof and as amended hereafter, shall not be applicable
to the Corporation.
ARTICLE X
Notwithstanding any other provision of this Restated and Amended
Certificate of Incorporation or the Bylaws of the Corporation, and
notwithstanding anything to the contrary specified by law, no action required or
permitted to be taken at any annual or special meeting of the stockholders of
the Corporation may be taken without such a meeting, and the power of
stockholders of the Corporation to consent in writing to the taking of such
action without a meeting, as contemplated by Section 228 of the Delaware General
Corporation Law, is hereby specifically denied.
ARTICLE XI
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the Corporation.
IN WITNESS WHEREOF, this Restated and Amended Certificate of Incorporation
has been signed as of this ___ day of _______________, 1996.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
By:
-------------------------------------------
Title:
----------------------------------------
A-4
<PAGE>
Attest:
By:
------------------------------------------
Title:
---------------------------------------
A-5
<PAGE>
APPENDIX B -- PROPOSED
STOCK OPTION PLAN
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
-------------------------------------------------------------
1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN
-------------------------------------------------------------
Section Page
- ------- ----
I. Purposes..........................................................B-3
II. Definitions.......................................................B-3
III. Administration....................................................B-5
(A) Authority of the Committee...................................B-5
(B) Manner of Exercise of Committee Authority....................B-6
(C) Limitation of Liability......................................B-7
IV. Shares Subject to the Plan........................................B-7
V. Specific Terms of Awards..........................................B-8
(A) General......................................................B-8
(B) Options......................................................B-8
(C) SARs.........................................................B-9
(D) Restricted Shares............................................B-10
(E) Restricted Share Units.......................................B-11
(F) Performance Shares and Performance Units.....................B-11
(G) Dividend Equivalents.........................................B-12
(H) Other Share-Based Awards.....................................B-13
VI. Certain Provisions Applicable to Awards...........................B-13
(A) Stand-Alone, Additional, Tandem and Substitute Awards........B-13
(B) Terms of Awards..............................................B-14
(C) Form of Payment Under Award..................................B-14
(D) Nontransferability...........................................B-14
VII. Director's Options................................................B-14
(A) Annual Grant.................................................B-14
B-1
<PAGE>
(B) Market Value.................................................B-14
(C) Termination of Service.......................................B-15
(D) Time and Method of Exercise..................................B-15
(E) Nontransferability...........................................B-15
(F) Adjustments..................................................B-15
(G) Administration...............................................B-15
VIII. General Provisions................................................B-16
(A) Compliance with Legal and Trading Requirements...............B-16
(B) No Right to Continued Employment or Service..................B-16
(C) Taxes........................................................B-16
(D) Changes to the Plan and Awards...............................B-16
(E) No Rights to Awards; No Stockholder Rights...................B-17
(F) Unfunded Status of Awards....................................B-17
(G) Nonexclusivity of the Plan...................................B-17
(H) Not Compensation for Benefit Plans...........................B-18
(I) No Fractional Shares.........................................B-18
(J) Governing Law................................................B-18
(K) Effective Date; Plan Termination.............................B-18
(L) Titles and Headings..........................................B-18
B-2
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
-------------------------------------------------------------
1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN
-------------------------------------------------------------
I. PURPOSES. The purposes of the 1996 Long Term Incentive and Share Award
Plan are to advance the interests of International Airline Support Group, Inc.
and its stockholders by providing a means to attract, retain, and motivate
selected employees and non-employee directors of the Company, upon whose
judgment, initiative and efforts the continued success, growth and development
of the Company is dependent.
II. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:
A. "Affiliate" means any entity other than the Company and its Subsidiaries
that is designated by the Board or the Committee as a participating employer
under the Plan, provided that the Company directly or indirectly owns at least
20% of the combined voting power of all classes of stock of such entity or at
least 20% of the ownership interests in such entity.
B. "Award" means any Option, SAR, Restricted Share, Restricted Share Unit,
Performance Share, Performance Unit, Dividend Equivalent, or Other Share-Based
Award granted to an Eligible Employee under the Plan.
C. "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
D. "Beneficiary" means the person, persons, trust or trusts which have been
designated by such Eligible Employee in his most recent written beneficiary
designation filed with the Company to receive the benefits specified under this
Plan upon the death of the Eligible Employee, or, if there is no designated
Beneficiary or surviving designated Beneficiary, then the person, persons, trust
or trusts entitled by will or the laws of descent and distribution to receive
such benefits.
E. "Board" means the Board of Directors of the Company.
F. "Code" means the Internal Revenue Code of 1986, as amended from time to
time. References to any provision of the Code shall be deemed to include
successor provisions thereto and regulations thereunder.
G. "Committee" means the Compensation Committee of the Board, or such other
Board committee as may be designated by the Board to administer the Plan.
B-3
<PAGE>
H. "Company" means International Airline Support Group, Inc., a corporation
organized under the laws of Delaware, or any successor corporation.
I. "Director" means a member of the Board who is not an executive officer
of the Company.
J. "Director's Option" means a NQSO granted to a Director under Section
VII.
K. "Dividend Equivalent" means a right, granted under Section V.G., to
receive cash, Shares, or other property equal in value to dividends paid with
respect to a specified number of Shares. Dividend Equivalents may be awarded on
a free-standing basis or in connection with another Award, and may be paid
currently or on a deferred basis.
L. "Eligible Employee" means any employee of the Company or its Subsidiaries
and Affiliates, including any director who is an employee.
M. "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time. References to any provision of the Exchange Act shall be deemed
to include successor provisions thereto and regulations thereunder.
N. "Fair Market Value" means, with respect to Shares or other property, the
fair market value of such Shares or other property determined by such methods or
procedures as shall be established from time to time by the Committee. If a
public market for the Company's Shares shall exist, unless otherwise determined
by the Committee in good faith, the Fair Market Value of Shares shall mean the
mean between the high and low selling prices per Share on the immediate
preceding date (or, if the Shares were not traded on that day, the next
preceding day that the Shares were traded) on the principal exchange or market
on which the Shares are traded, as such prices are officially quoted on such
exchange or market.
O. "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
P. "NQSO" means any Option that is not an ISO.
Q. "Option" means a right, granted under Section V.B. or Section VII, to
purchase Shares.
R. "Other Share-Based Award" means a right, granted under Section V.H., that
relates to or is valued by reference to Shares.
S. "Participant" means an Eligible Employee or Director who has been granted
an Award or Director's Option under the Plan.
T. "Performance Share" means a performance share granted under Section V.F.
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U. "Performance Unit" means a performance unit granted under Section V.F.
V. "Plan" means this 1996 Long Term Incentive and Share Award Plan.
W. "Restricted Shares" means an Award of Shares under Section V.D. that may
be subject to certain restrictions and to a risk of forfeiture.
X. "Restricted Share Unit" means a right, granted under Section V.E., to
receive Shares or cash at the end of a specified deferral period.
Y. "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
Z. "SAR" or "Share Appreciation Right" means the right, granted under
Section V.C., to be paid an amount measured by the difference between the
exercise price of the right and the Fair Market Value of Shares on the date of
exercise of the right, with payment to be made in cash, Shares, or property as
specified in the Award or determined by the Committee.
AA. "Shares" means shares of common stock, $.001 par value per share, of the
Company.
BB. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns shares
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
III. ADMINISTRATION.
A. AUTHORITY OF THE COMMITTEE. Except as provided in Section VII, the
Plan shall be administered by the Committee, and the Committee shall have full
and final authority to take the following actions, in each case subject to and
consistent with the provisions of the Plan:
1. to select Eligible Employees to whom Awards may be granted;
2. to designate Affiliates;
3. to determine the type or types of Awards to be granted to each
Eligible Employee;
4. to determine the type and number of Awards to be granted, the number
of Shares to which an Award may relate, the terms and conditions of any Award
granted under the Plan (including, but not limited to, any exercise price, grant
price, or purchase price, and any bases for adjusting such exercise, grant or
purchase price, any restriction or condition, any schedule for lapse of
restrictions or conditions relating to transferability or forfeiture,
exercisability, or settlement of an
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Award, and waiver or accelerations thereof, and waivers of performance
conditions relating to an Award, based in each case on such considerations as
the Committee shall determine), and all other matters to be determined in
connection with an Award;
5. to determine whether, to what extent, and under what circumstances
an Award may be settled, or the exercise price of an Award may be paid, in cash,
Shares, other Awards, or other property, or an Award may be canceled, forfeited,
exchanged, or surrendered;
6. to determine whether, to what extent, and under what circumstances
cash, Shares, other Awards, or other property payable with respect to an Award
will be deferred either automatically, at the election of the Committee, or at
the election of the Eligible Employee;
7. to prescribe the form of each Award Agreement, which need not be
identical for each Eligible Employee;
8. to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
9. to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any Award,
rules and regulations, Award Agreement, or other instrument hereunder;
10. to accelerate the exercisability or vesting of all or any portion
of any Award or to extend the period during which an Award is exercisable; and
11. to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or advisable
for the administration of the Plan.
B. MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee shall have
sole discretion in exercising its authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, Subsidiaries, Affiliates, Eligible
Employees, any person claiming any rights under the Plan from or through any
Eligible Employee, and stockholders. The express grant of any specific power to
the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee.
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C. LIMITATION OF LIABILITY. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished to
him by any officer or other employee of the Company or any Subsidiary or
Affiliate, the Company's independent certified public accountants, or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Committee, nor any officer or employee of the Company
acting on behalf of the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and any officer or employee of the
Company acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action,
determination, or interpretation.
IV. SHARES SUBJECT TO THE PLAN.
A. Subject to adjustment as provided in Section IV.C. hereof, the total
number of Shares reserved for issuance in connection with Awards and Director's
Options under the Plan shall be 598,782. No Award or Director's Option may be
granted if the number of Shares to which such Award or Director's Option
relates, when added to the number of Shares previously issued under the Plan,
exceeds the number of Shares reserved under the preceding sentence. If any
Awards or Director's Options are forfeited, canceled, terminated, exchanged or
surrendered or such Award or Director's Option is settled in cash or otherwise
terminates without a distribution of Shares to the Participant, any Shares
counted against the number of Shares reserved and available under the Plan with
respect to such Award or Director's Option shall, to the extent of any such
forfeiture, settlement, termination, cancellation, exchange or surrender, again
be available for Awards or Director's Options under the Plan; PROVIDED, HOWEVER,
that in the case of forfeiture, cancellation, exchange or surrender of
Restricted Shares or Restricted Share Units with respect to which dividends or
Dividend Equivalents were accrued but unpaid, such dividends and Dividend
Equivalents are also forfeited, canceled, exchange or surrendered. Upon the
exercise of any Award granted in tandem with any other Awards, such related
Awards shall be canceled to the extent of the number of Shares as to which the
Award is exercised.
B. Any Shares distributed pursuant to an Award or Director's Option may
consist, in whole or in part, of authorized and unissued Shares or treasury
Shares, including Shares acquired by purchase in the open market or in private
transactions.
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C. In the event that the Committee shall determine that any dividend in
Shares, recapitalization, Share split, reorganization, merger, consolidation,
spin-off, combination, repurchase, or share exchange, or other similar
corporate transaction or event, affects the Shares such that an adjustment is
appropriate in order to prevent dilution or enlargement of the rights of
Eligible Employees under the Plan, then the Committee shall make such
equitable changes or adjustments as to deems appropriate and, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of
shares which may thereafter be issued under the Plan, (ii) the number and
kind of shares, other securities or other consideration issued or issuable in
respect of outstanding Awards, and (iii) the exercise price, grant price, or
purchase price relating to any Award; PROVIDED, HOWEVER, in each case that,
with respect to ISOs, such adjustment shall be made in accordance with
Section 424(a) of the Code, unless the Committee determines otherwise. In
addition, the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria and performance objectives included in,
Awards in recognition of unusual or non-recurring events (including, without
limitation, events described in the preceding sentence) affecting the Company
or any Subsidiary or Affiliate or the financial statements of the Company or
any Subsidiary or Affiliate, or in response to changes in applicable laws,
regulations, or accounting principles; provided, however, that, if an Award
Agreement specifically so provides, the Committee shall not have discretion
to increase the amount of compensation payable under the Award to the extent
such an increase would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the
Code and the regulations thereunder.
V. SPECIFIC TERMS OF AWARDS.
A. GENERAL. Awards may be granted on the terms and conditions set forth in
this Section V. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section
VIII.D.), such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
regarding forfeiture of Awards or continued exercisability of Awards in the
event of termination of employment by the Eligible Employee.
B. OPTIONS. The Committee is authorized to grant Options, which may be
NQSOs or ISOs, to Eligible Employees on the following terms and conditions:
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1. EXERCISE PRICE. The exercise price per Share purchasable under an
Option shall be determined by the Committee, and the Committee may, without
limitation, set an exercise price that is based upon achievement of performance
criteria if deemed appropriate by the Committee.
2. TIME AND METHOD OF EXERCISE. The Committee shall determine at the
date of grant or thereafter the time or times at which an Option may be
exercised in whole or in part (including, without limitation, upon achievement
of performance criteria if deemed appropriate by the Committee), the methods by
which such exercise price may be paid or deemed to be paid (including, without
limitation, broker-assisted exercise arrangements), the form of such payment
(including, without limitation, cash, Shares, notes or other property), and the
methods by which Shares will be delivered or deemed to be delivered to Eligible
Employees.
3. ISOs. The terms of any ISO granted under the Plan shall comply in
all respects with the provisions of Section 422 of the Code, including but not
limited to the requirement that no ISO shall be granted more than ten years
after the earlier of the date of adoption or stockholder approval of the Plan.
C. SARs. The Committee is authorized to grant SARs (Share Appreciation
Rights) to Eligible Employees on the following terms and conditions:
1. RIGHT TO PAYMENT. An SAR shall confer on the Eligible Employee to
whom it is granted a right to receive with respect to each Share subject
thereto, upon exercise thereof, the excess of (a) the Fair Market Value of one
Share on the date of exercise (or, if the Committee shall so determine in the
case of any such right, the Fair Market Value of one Share at any time during a
specified period before or after the date of exercise) over (b) the exercise
price of the SAR as determined by the Committee as of the date of grant of the
SAR (which, in the case of an SAR granted in tandem with an Option, shall be
equal to the exercise price of the underlying Option).
2. OTHER TERMS. The Committee shall determine, at the time of grant or
thereafter, the time or times at which an SAR may be exercised in whole or in
part, the method of exercise, method of settlement, form of consideration
payable in settlement, method by which Shares will be delivered or deemed to be
delivered to Eligible Employees, whether or not an SAR shall be in tandem with
any other Award, and any other terms and conditions of any SAR. Unless the
Committee determines otherwise, an SAR (a) granted in tandem with an NQSO may be
granted at the time of grant of the
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related NQSO or at any time thereafter or (b) granted in tandem with an ISO may
only be granted at the time of grant of the related ISO.
D. RESTRICTED SHARES. The Committee is authorized to grant Restricted
Shares to Eligible Employees on the following terms and conditions:
1. ISSUANCE AND RESTRICTIONS. Restricted Shares shall be subject to
such restrictions on transferability and other restrictions, if any, as the
Committee may impose at the date of grant or thereafter, which restrictions may
lapse separately or in combination at such times, under such circumstances
(including, without limitation, upon achievement of performance criteria if
deemed appropriate by the Committee), in such installments, or otherwise, as the
Committee may determine. Except to the extent restricted under the Award
Agreement relating to the Restricted Shares, an Eligible Employee granted
Restricted Shares shall have all of the rights of a stockholder including,
without limitation, the right to vote Restricted Shares and the right to receive
dividends thereon.
2. FORFEITURE. Except as otherwise determined by the Committee, at the
date of grant or thereafter, upon termination of employment during the
applicable restriction period, Restricted Shares and any accrued but unpaid
dividends or Dividend Equivalents that are at that time subject to restrictions
shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule
or regulation or in any Award Agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Restricted Shares
will be waived in whole or in part in the event of termination resulting from
specified causes, and the Committee may in other cases waive in whole or in part
the forfeiture of Restricted Shares.
3. CERTIFICATES FOR SHARES. Restricted Shares granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Shares are registered in the name of the
Eligible Employee, such certificates shall bear an appropriate legend referring
to the terms, conditions, and restrictions applicable to such Restricted Shares,
and the Company shall retain physical possession of the certificate.
4. DIVIDENDS. Dividends paid on Restricted Shares shall be either paid
at the dividend payment date, or deferred for payment to such date as determined
by the Committee, in cash or in unrestricted Shares having a Fair Market Value
equal to the amount of such dividends. Shares distributed in connection with a
Share split or dividend in Shares, and other property distributed as a dividend,
shall be subject to restrictions and a risk of forfeiture to the same extent as
the Restricted Shares with respect to which such Shares or other property has
been distributed.
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E. RESTRICTED SHARE UNITS. The Committee is authorized to grant Restricted
Share Units to Eligible Employees, subject to the following terms and
conditions:
1. AWARD AND RESTRICTIONS. Delivery of Shares or cash, as the case may
be, will occur upon expiration of the deferral period specified for Restricted
Share Units by the Committee (or, if permitted by the Committee, as elected by
the Eligible Employee). In addition, Restricted Share Units shall be subject to
such restrictions as the Committee may impose, if any (including, without
limitation, the achievement of performance criteria if deemed appropriate by the
Committee), at the date of grant or thereafter, which restrictions may lapse at
the expiration of the deferral period or at earlier or later specified times,
separately or in combination, in installments or otherwise, as the Committee may
determine.
2. FORFEITURE. Except as otherwise determined by the Committee at date
of grant or thereafter, upon termination of employment (as determined under
criteria established by the Committee) during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the Award
Agreement evidencing the Restricted Share Units), or upon failure to satisfy any
other conditions precedent to the delivery of Shares or cash to which such
Restricted Share Units relate, all Restricted Share Units that are at that time
subject to deferral or restriction shall be forfeited; PROVIDED, HOWEVER, that
the Committee may provide, by rule or regulation or in any Award Agreement, or
may determine in any individual case, that restrictions or forfeiture conditions
relating to Restricted Share Units will be waived in whole or in part in the
event of termination resulting from specified causes, and the Committee may in
other cases waive in whole or in part the forfeiture of Restricted Share Units.
F. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee is authorized
to grant Performance Shares or Performance Units or both to Eligible Employees
on the following terms and conditions:
1. PERFORMANCE PERIOD. The Committee shall determine a performance
period (the "Performance Period") of one or more years and shall determine the
performance objectives for grants of Performance Shares and Performance Units.
Performance objectives may vary from Eligible Employee to Eligible Employee and
shall be based upon such performance criteria as the Committee may deem
appropriate. Performance Periods may overlap and Eligible Employees may
participate simultaneously with respect to Performance Shares and Performance
Units for which different Performance Periods are prescribed.
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2. AWARD VALUE. At the beginning of a Performance Period, the
Committee shall determine for each Eligible Employee or group of Eligible
Employees with respect to that Performance Period the range of number of Shares,
if any, in the case of Performance Shares, and the range of dollar values, if
any, in the case of Performance Units, which may be fixed or may vary in
accordance with such performance or other criteria specified by the Committee,
which shall be paid to an Eligible Employee as an Award if the relevant measure
of Company performance for the Performance Period is met.
3. SIGNIFICANT EVENTS. If during the course of a Performance Period
there shall occur significant events as determined by the Committee which the
Committee expects to have a substantial effect on a performance objective during
such period, the Committee may revise such objective; PROVIDED, HOWEVER, that,
if an Award Agreement so provides, the Committee shall not have discretion to
increase the amount of compensation payable under the Award to the extent such
an increase would cause the Award to lose its qualification as performance-based
compensation for purposes of Section 162(m)(4)(C) of the Code and the
regulations thereunder.
4. FORFEITURE. Except as otherwise determined by the Committee, at the
date of grant or thereafter, upon termination of employment during the
applicable Performance Period, Performance Shares and Performance Units for
which the Performance Period was prescribed shall be forfeited; PROVIDED,
HOWEVER, that the Committee may provide, by rule or regulation or in any Award
Agreement, or may determine in an individual case, that restrictions or
forfeiture conditions related to Performance Shares and Performance Units will
be waived in whole or in part in the event of terminations resulting from
specified causes, and the Committee may in other cases waive in whole or in part
the forfeiture of Performance Shares and Performance Units.
5. PAYMENT. Each Performance Share or Performance Unit may be paid in
whole Shares, or cash, or a combination of Shares and cash either as a lump sum
payment or in installments, all as the Committee shall determine, at the time of
grant of the Performance Share or Performance Unit or otherwise, commencing as
soon as practicable after the end of the relevant Performance Period.
G. DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend
Equivalents to Eligible Employees. The Committee may provide, at the date of
grant or thereafter, that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have been reinvested in additional Shares, or
other investment vehicles as the Committee may
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specify, provided that Dividend Equivalents (other than freestanding Dividend
Equivalents) shall be subject to all conditions and restrictions of the
underlying Awards to which they relate.
H. OTHER SHARE-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Eligible Employees such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Shares, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, unrestricted shares awarded purely as a "bonus" and not subject to
any restrictions or conditions, other rights convertible or exchangeable into
Shares, purchase rights for Shares, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the performance of specified
Subsidiaries or Affiliates. The Committee shall determine the terms and
conditions of such Awards at date of grant or thereafter. Shares delivered
pursuant to an Award in the nature of a purchase right granted under this
Section V.H. shall be purchased for such consideration, paid for in such times,
by such methods, and in such forms, including, without limitation, cash, Shares,
notes or other property, as the Committee shall determine. Cash awards, as an
element of or supplement to any other Award under the Plan, shall also be
authorized pursuant to this Section 5(h).
VI. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
A. STAND-ALONE, ADDITIONAL, TANDEM AND SUBSTITUTE AWARDS. Awards granted
under the Plan may, in the discretion of the Committee, be granted to Eligible
Employees either alone or in addition to, in tandem with, or in exchange or
substitution for, any other Award granted under the Plan or any award granted
under any other plan or agreement of the Company, any Subsidiary or Affiliate,
or any business entity to be acquired by the Company or a Subsidiary or
Affiliate, or any other right of an Eligible Employee to receive payment from
the Company or any Subsidiary or Affiliate. Awards may be granted in addition
to or in tandem with such other Awards or awards, and may be granted either as
of the same time as or a different time from the grant of such other Awards
or awards. The per Share exercise price of any Option, grant price of any
SAR, or purchase price of any other Award conferring a right to purchase
Shares which is granted, in connection with the substitution of awards granted
under any other plan or agreement of the Company or any Subsidiary or
Affiliate or any business entity to be acquired by the Company or any
Subsidiary or Affiliate, shall be determined by the Committee, in its
discretion.
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B. TERMS OF AWARDS. The term of each Award granted to an Eligible Employee
shall be for such period as may be determined by the Committee; PROVIDED,
HOWEVER, that in no event shall the term of any ISO or an SAR granted in tandem
therewith exceed a period of ten years from the date of its grant (or such
shorter period as may be applicable under Section 422 of the Code).
C. FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, maturation, or exercise of an Award may be made in
such forms as the Committee shall determine at the date of grant or thereafter,
including, without limitation, cash, Shares, or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
Committee may make rules relating to installment or deferred payments with
respect to Awards, including the rate of interest to be credited with respect to
such payments.
D. NONTRANSFERABILITY. Awards (except for vested Shares) shall not be
transferable by an Eligible Employee except by will or the laws of descent and
distribution (except pursuant to a Beneficiary designation) and shall be
exercisable during the lifetime of an Eligible Employee only by such Eligible
Employee or his guardian or legal representative. An Eligible Employee's rights
under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered, and shall not be subject to claims of the Eligible Employee's
creditors. Each Award, or the Shares issued pursuant to such Award, shall be
held (subject to expiration or forfeiture, as the case may be) for at least
six months following the date of grant of such Award.
VII. DIRECTOR'S OPTIONS.
A. ANNUAL GRANT. On the Effective Date, each Director in office on such
date shall automatically be granted a NQSO to purchase [ ] Shares with an
exercise price per Share of $_________. In addition, on each anniversary, such
date, beginning with the anniversary occurring in 1997, each Director in office
on such date shall automatically be granted a NQSO to purchase [ ] Shares
with an exercise price per Share equal to 100 percent of the Market Value of one
Share on the date of grant; provided, however, that such price shall be at least
equal to the par value of a Share. Each Option granted to a Director under this
paragraph (1) shall become fully exercisable on the date of grant, and shall
expire (unless terminated earlier under paragraph (2) below) on the tenth
anniversary of the date of grant.
B. MARKET VALUE. For purposes of this Section VII, Market Value shall mean
the mean between the high and low selling prices per Share on the immediately
preceding date (or, if the Shares were not traded on that day, the next
preceding day that the Shares were traded) on the principal exchange or market
on which the Shares are traded, as such prices are
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officially quoted on such exchange or market. If no public trading market for
the Shares shall exist, Market Value shall mean $_________ per share.
C. TERMINATION OF SERVICE. If a person ceases to be a Director, (i) due to
retirement after attainment of age 65, or (ii) due to death or disability, all
of his outstanding Options may be exercised at any time prior to the expiration
dates of such Options. If the Director's service terminates for any other
reason, all of his outstanding Options may be exercised at any time within six
months after the date of such termination, but no later than the expiration date
of the Options.
D. TIME AND METHOD OF EXERCISE. The exercise price of a Director's Option
shall be paid to the Company at the time of exercise either in cash or in Shares
already owned by the optionee and having a total Market Value equal to the
exercise price, or in a combination of cash and such Shares.
E. NONTRANSFERABILITY. No Director's Option granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, a Director's Option shall be exercisable
only by him or by his guardian or legal representative. Each Director's
Option, or the Shares issued pursuant to such option, shall be held (subject
to expiration) by the Director for at least six months following the date of
grant of such Director's Option.
F. ADJUSTMENTS. In the event that subsequent to the Effective Date any
dividend in Shares, recapitalization, Share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other such change, affects the Shares such that they are
increased or decreased or changed into or exchanged for a different number or
kind of shares, other securities of the Company or of another corporation or
other consideration, then in order to maintain the proportionate interest of the
Director and preserve the value of the Director's Option, (1) there shall
automatically be substituted for each Share subject to an unexercised Director's
Option and each Share to be issued under Section VII.A. subsequent to such event
the number and kind of shares, other securities or other consideration into
which each outstanding Share shall be changed or for which each such Share shall
be exchanged, and (2) the exercise price shall be increased or decreased
proportionately so that the aggregate purchase price for the Shares subject to
any unexercised Director's Option shall remain the same as immediately prior to
such event.
G. ADMINISTRATION. To the extent the Plan relates to Director's Options, it
is intended to operate automatically and not require administration. However,
to the extent that administration is necessary with respect to such grants,
the Plan shall be administered by the Secretary of the Company. Since the
Director's Options are awarded automatically, this function will be limited to
ministerial matters. The plan administrator will have no discretion with
respect to the selection of Director
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optionees, the determination of the exercise price of Director's Options, the
timing of such grants or number of Shares covered by the Director's Options.
VIII. GENERAL PROVISIONS.
A. COMPLIANCE WITH LEGAL AND TRADING REQUIREMENTS. The Plan, the granting
and exercising of Awards or Director's Options thereunder, and the other
obligations of the Company under the Plan and any Award Agreement, shall be
subject to all applicable federal and state laws, rules and regulations, and to
such approvals by any regulatory or governmental agency as may be required. The
Company, in its discretion, may postpone the issuance or delivery of Shares
under any Award or Director's Option until completion of such stock exchange or
market system listing or registration or qualification of such Shares or other
required action under any state or federal law, rule or regulation as the
Company may consider appropriate, and may require any Participant to make such
representations and furnish such information as it may consider appropriate in
connection with the issuance or delivery of Shares in compliance with applicable
laws, rules and regulations. No provisions of the Plan shall be interpreted or
construed to obligate the Company to register any Shares under federal or state
law.
B. NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan or any
action taken thereunder shall be construed as giving any employee or director
the right to be retained in the employ or service of the Company or any of its
Subsidiaries or Affiliates, nor shall it interfere in any way with the right of
the Company or any of its Subsidiaries or Affiliates to terminate any employee's
or director's employment or service at any time.
C. TAXES. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Shares, or any payroll or other payment
to an Eligible Employee, amounts of withholding and other taxes due in
connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and Eligible
Employees to satisfy obligations for the payment of withholding taxes and other
tax obligations relating to any Award. This authority shall include authority
to withhold or receive Shares or other property and to make cash payments in
respect thereof in satisfaction of an Eligible Employee's tax obligations.
D. CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant awards
under the Plan without the consent of stockholders of the Company or
Participants,
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except that any such amendment, alteration, suspension, discontinuation, or
termination shall be subject to the approval of the Company's stockholders to
the extent such stockholders' approval is required under Section
422 of the Code; provided, however, that, without the consent of an affected
Participant, no amendment, alteration, suspension, discontinuation, or
termination of the Plan may impair the rights or, in any other manner, adversely
affect the rights of such Participant under any Award or Director's Option
theretofore granted to him.
E. NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Eligible Employee or
employee shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Eligible Employees and
employees. No award shall confer on any Eligible Employee any of the rights of
a stockholder of the Company unless and until Shares are duly issued or
transferred to the Eligible Employee in accordance with the terms of the Award.
F. UNFUNDED STATUS OF AWARDS. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments not
yet made to a Participant pursuant to an Award or Director's Option, nothing
contained in the Plan or any Award or Director's Option shall give any such
Participant any rights that are greater than those of a general creditor of the
Company; provided, however, that the Committee may authorize the creation of
trusts or make other arrangements to meet the Company's obligations under the
Plan to deliver cash, Shares, other Awards, or other property pursuant to any
Award, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant.
G. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of options and other awards otherwise than under the
Plan, and such arrangements may be either applicable generally or only in
specific cases.
B-17
<PAGE>
H. NOT COMPENSATION FOR BENEFIT PLANS. No Award payable under this Plan
shall be deemed salary or compensation for the purpose of computing benefits
under any benefit plan or other arrangement of the Company for the benefit of
its employees or directors unless the Company shall determine otherwise.
I. NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award or Director's Option. In the case of Awards
to Eligible Employees, the Committee shall determine whether cash, other Awards,
or other property shall be issued or paid in lieu of such fractional Shares or
whether such fractional Shares or any rights thereto shall be forfeited or
otherwise eliminated. In the case of Director's Options, cash shall be paid in
lieu of such fractional shares.
J. GOVERNING LAW. The validity, construction, and effect of the Plan, any
rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the laws of Delaware without giving effect to
principles of conflict of laws.
K. EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective as of
___________ (the "Effective Date") upon approval by the affirmative votes of the
holders of a majority of voting securities of the Company. The Plan shall
terminate as to future awards on the date which is ten (10) years after the
Effective Date.
L. TITLES AND HEADINGS. The titles and headings of the sections in the Plan
are for convenience of reference only. In the event of any conflict, the text
of the Plan, rather than such titles or headings, shall control.
B-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following summary is qualified in its entirety by reference to the
complete text of the statute referred to below, the Company's Certificate of
Incorporation and Bylaws.
The Registrant's Bylaws provides that each person who was or is made a party
to, is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, or
is contacted by any governmental or regulatory body in connection with any
investigation or inquiry, by reason of the fact that he or she is or was a
director or executive officer of the Registrant or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding or investigation is alleged action in an official capacity or in
any other capacity as set forth above shall be indemnified and held harmless by
the Registrant to the fullest extent authorized by the Delaware General
Corporation Law as it currently exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Registrant to provide broader indemnification rights than such law permitted the
Registrant to provide prior to such amendment).
Under Section 145 of the Delaware General Corporation Law, a corporation may
indemnify a director, officer, employee or agent of the corporation (or other
entity if such person is serving in such capacity at the corporation's request)
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In the
case of an action brought by or in the right of a corporation, the corporation
may indemnify a director, officer, employee or agent of the corporation (or
other entity if such person is serving in such capacity at the corporation's
request) against expenses (including attorneys' fees) actually and reasonably
incurred by him if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation, except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless a court determines that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnification for such expenses as the court shall deem proper.
Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation.
The Registrant's Certificate of Incorporation provides that no director of
the Registrant shall be personally liable to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for any acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law or (iv) for any transaction in which
the director derived an improper personal benefit.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------------------------
<C> <S>
*2.1.1 Form of Standstill Agreement dated July 8, 1996 among the Registrant and the holders of the
Registrant's 12% Senior Secured Notes due 1997 who are signatories thereto.
2.1.2 Form of Standstill Agreement dated July 11, 1996 among the Registrant and the holders of the
Registrant's 12% Senior Secured Notes due 1997 who are signatories thereto (incorporated by
reference to Exhibit 2.1.2 of the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1996 (the "1996 Form 10-K")).
*2.2 Form of Warrant Agreement Amendment No. 1, dated as of July 9, 1996, among the Registrant and
the holders of the Warrants, dated July 17, 1992, who are signatories thereto.
*2.3 Letter, dated June 7, 1996, from BNY Financial Corporation to the Registrant with attached Term
Sheet.
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (the "1993 Form
10-K").
3.2 Restated and Amended Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the
1993 Form 10-K).
3.3 Proposed Form of Amended and Restated Certificate of Incorporation of the Registrant (attached
as Appendix A to the Proxy Statement/Prospectus forming a part of this Registration Statement).
*3.4 Proposed form of Amended and Restated Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the 1993 Form
10-K).
4.2 Form of Warrant issued to holders of Senior Notes (incorporated by reference to Exhibit 4-A to
the Registrant's Form 8-K dated July 17, 1992 (the "July 1992 Form 8-K")).
4.3 Form of 8% Convertible Subordinated Debentures due August 31, 2003 (incorporated by reference to
Exhibit 4.3 of the 1993 Form 10-K).
*4.4 Form of 12% Senior Secured Notes.
*5.1 Opinion of King & Spalding as to the legality of the securities being registered.
8.1 Opinion of King & Spalding as to tax matters (filed herewith).
*10.1.1 Employment Agreement, dated as of December 1, 1995, between the Registrant and Alexius A. Dyer
III.
10.2.1 Employee Stock Option Plan (incorporated by reference to Exhibit 10.2.1. of the 1993 Form 10-K).
10.2.2 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2.2 of the 1993
Form 10-K).
10.2.3 401(k) Plan (incorporated by reference to Exhibit 10-H of the Registrant's Annual Report in Form
10-K for the fiscal year ended May 31, 1992 (the "1992 Form 10-K")).
10.2.4 Bonus Plan (incorporated by reference to Exhibit 10.2.4 of the 1992 Form 10-K).
10.2.5 Cafeteria Plan (incorporated by reference to Exhibit 10.2.5 of the 1993 Form 10-K).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------------------------
<C> <S>
10.2.6 Proposed Form of 1996 Long-Term Incentive and Share Award Plan (attached as Appendix B to the
Proxy Statement/Prospectus forming a part of this Registration Statement).
10.3.1 Form of Securities Purchase Agreement dated as of July 17, 1992 among Registrant and the
Purchasers listed therein, as amended (Incorporated by reference to Exhibit 10-A of the
Registrant's July 1992 Form 8-K).
10.3.2 Consent, Amendment and Waiver dated as of September 8, 1993 among Registrant and the parties
listed therein (incorporated by reference to Exhibit 10.9.2 of the 1993 Form 10-K).
10.4 Representative Indemnity Agreement between Registrant and its Directors and Executive Officers.
(incorporated by reference to Exhibit 10.12 of the 1993 Form 10-K).
10.5.1 Securities Purchase Agreement dated as of September 8, 1993 among Registrant and the Purchasers
listed therein (incorporated by reference to Exhibit 10.13 of the 1993 Form 10-K).
10.6 Form of Registration Rights Agreement dated as of September 8, 1993, among Registrant and the
Purchasers listed therein (incorporated by reference to Exhibit 10.14 of the 1993 Form 10-K).
10.7 Settlement Stipulation, dated January 31, 1995, among Admark International, Ltd., Plaintiff and
Norville Trading Company Ltd., International Airline Support Group, Inc., and Richard R.
Wellman, Defendants (incorporated by reference to Exhibit 10.7.3 of the Registrant's Annual
Report in Form 10-K for the fiscal year ended May 31, 1995 (the "1995 Form 10-K")).
10.8 Purchase Agreement, dated January 1995, among International Airline Support Group, Inc., Richard
R. Wellman, Lynda Wellman, and Custom Air Holdings, Inc., including as an exhibit the "General
Proxy" executed by Richard R. Wellman and Lynda Wellman (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q/A for the quarter ended August 31, 1994).
10.10 Assignment and Assumption Agreement, dated January 31, 1995, between International Airline
Service Center, Inc. and Express One International, Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-Q/A for the quarter ended August 31, 1994).
10.11 Notice of Payment Blockage, dated May 25, 1995 (incorporated by reference to Exhibit 10.11 of
the 1995 Form 10-K).
*10.12 Form of Engagement Letter dated February 16, 1996, between the Registrant and Kirkland Messina,
Inc.
10.13 Form of Depositary Agreement between the Registrant and First Union National Bank of North
Carolina (incorporated by reference to Exhibit 10.13 to the Registrant's 1996 Form 10-K).
10.14 Commission Agreement dated December 1, 1995 between the Registrant and J.M. Associates, Inc.
(incorporated by reference to Exhibit 10.14 to the Registrant's 1996 Form 10-K).
11 Statement regarding computation of per share earnings (filed herewith).
12 Statement regarding computation of ratios (filed herewith).
21 Subsidiaries of Registrant (filed herewith).
23.1 Consent of Grant Thornton L.L.P. (filed herewith).
*23.2 Consent of King & Spalding (included in Exhibit 5.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------------------------
<C> <S>
*24.1 Power of attorney of the officers and directors of Registrant signing this Registration
Statement.
*99.1 Form of Consent and Letter of Transmittal for the Registrant's 8% Convertible Subordinated
Debentures due August 31, 2003.
*99.2 Form of Notice of Guaranteed Delivery for the Registrant's 8% Convertible Subordinated
Debentures due August 31, 2003.
*99.2 Form of Proxy with respect to the solicitation of the holders of the Registrant's Common Stock.
</TABLE>
- ------------------------
* previously filed.
<TABLE>
<S> <C> <C>
b. Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on August 16, 1996.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By /s/ GEORGE MURNANE III
------------------------------------------
George Murnane III
EXECUTIVE VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ ---------------
* Chairman of the Board,
- ------------------------------ President, Chief Executive August 16, 1996
Alexius A. Dyer III Officer and Director
*
- ------------------------------ Executive Vice President and August 16, 1996
George Murnane III Chief Financial Officer
* Vice President -- Finance,
- ------------------------------ Controller and Chief August 16, 1996
Robert K. Norris Accounting Officer
*
- ------------------------------ Director August 16, 1996
E. James Mueller
*
- ------------------------------ Director August 16, 1996
Kyle R. Kirkland
*By /s/ GEORGE MURNANE III
--------------------------
George Murnane III
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- -----
<C> <S> <C>
*2.1.1 Form of Standstill Agreement dated July 8, 1996 among the Registrant and the holders of the
Registrant's 12% Senior Secured Notes due 1997 who are signatories thereto.
2.1.2 Form of Standstill Agreement dated July 11, 1996 among the Registrant and the holders of the
Registrant's 12% Senior Secured Notes due 1997 who are signatories thereto (incorporated by
reference to Exhibit 2.1.2 of the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1996 (the "1996 Form 10-K")).
*2.2 Form of Warrant Agreement Amendment No. 1, dated as of July 9, 1996, among the Registrant and
the holders of the Warrants, dated July 17, 1992, who are signatories thereto.
*2.3 Letter, dated June 7, 1996, from BNY Financial Corporation to the Registrant with attached Term
Sheet.
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (the "1993 Form
10-K").
3.2 Restated and Amended Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the
1993 Form 10-K).
3.3 Proposed Form of Amended and Restated Certificate of Incorporation of the Registrant (attached
as Appendix A to the Proxy Statement/Prospectus forming a part of this Registration Statement).
*3.4 Proposed form of Amended and Restated Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the 1993 Form
10-K).
4.2 Form of Warrant issued to holders of Senior Notes (incorporated by reference to Exhibit 4-A to
the Registrant's Form 8-K dated July 17, 1992 (the "July 1992 Form 8-K")).
4.3 Form of 8% Convertible Subordinated Debentures due August 31, 2003 (incorporated by reference to
Exhibit 4.3 of the 1993 Form 10-K).
*4.4 Form of 12% Senior Secured Notes.
*5.1 Opinion of King & Spalding as to the legality of the securities being registered.
8.1 Opinion of King & Spalding as to tax matters (filed herewith).
*10.1.1 Employment Agreement, dated as of December 1, 1995, between the Registrant and Alexius A. Dyer
III.
10.2.1 Employee Stock Option Plan (incorporated by reference to Exhibit 10.2.1. of the 1993 Form 10-K).
10.2.2 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2.2 of the 1993
Form 10-K).
10.2.3 401(k) Plan (incorporated by reference to Exhibit 10-H of the Registrant's Annual Report in Form
10-K for the fiscal year ended May 31, 1992 (the "1992 Form 10-K")).
10.2.4 Bonus Plan (incorporated by reference to Exhibit 10.2.4 of the 1992 Form 10-K).
10.2.5 Cafeteria Plan (incorporated by reference to Exhibit 10.2.5 of the 1993 Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- -----
<C> <S> <C>
10.2.6 Proposed Form of 1996 Long-Term Incentive and Share Award Plan (attached as Appendix B to the
Proxy Statement/Prospectus forming a part of this Registration Statement).
10.3.1 Form of Securities Purchase Agreement dated as of July 17, 1992 among Registrant and the
Purchasers listed therein, as amended (Incorporated by reference to Exhibit 10-A of the
Registrant's July 1992 Form 8-K).
10.3.2 Consent, Amendment and Waiver dated as of September 8, 1993 among Registrant and the parties
listed therein (incorporated by reference to Exhibit 10.9.2 of the 1993 Form 10-K).
10.4 Representative Indemnity Agreement between Registrant and its Directors and Executive Officers.
(incorporated by reference to Exhibit 10.12 of the 1993 Form 10-K).
10.5.1 Securities Purchase Agreement dated as of September 8, 1993 among Registrant and the Purchasers
listed therein (incorporated by reference to Exhibit 10.13 of the 1993 Form 10-K).
10.6 Form of Registration Rights Agreement dated as of September 8, 1993, among Registrant and the
Purchasers listed therein (incorporated by reference to Exhibit 10.14 of the 1993 Form 10-K).
10.7 Settlement Stipulation, dated January 31, 1995, among Admark International, Ltd., Plaintiff and
Norville Trading Company Ltd., International Airline Support Group, Inc., and Richard R.
Wellman, Defendants (incorporated by reference to Exhibit 10.7.3 of the Registrant's Annual
Report in Form 10-K for the fiscal year ended May 31, 1995 (the "1995 Form 10-K")).
10.8 Purchase Agreement, dated January 1995, among International Airline Support Group, Inc., Richard
R. Wellman, Lynda Wellman, and Custom Air Holdings, Inc., including as an exhibit the "General
Proxy" executed by Richard R. Wellman and Lynda Wellman (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q/A for the quarter ended August 31, 1994).
10.10 Assignment and Assumption Agreement, dated January 31, 1995, between International Airline
Service Center, Inc. and Express One International, Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-Q/A for the quarter ended August 31, 1994).
10.11 Notice of Payment Blockage, dated May 25, 1995 (incorporated by reference to Exhibit 10.11 of
the 1995 Form 10-K).
*10.12 Form of Engagement Letter dated February 16, 1996, between the Registrant and Kirkland Messina,
Inc.
10.13 Form of Depositary Agreement between the Registrant and First Union National Bank of North
Carolina (incorporated by reference to Exhibit 10.13 to the Registrant's 1996 Form 10-K).
10.14 Commission Agreement dated December 1, 1995 between the Registrant and J.M. Associates, Inc.
(incorporated by reference to Exhibit 10.14 to the Registrant's 1996 Form 10-K).
11 Statement regarding computation of per share earnings (filed herewith).
12 Statement regarding computation of ratios (filed herewith).
21 Subsidiaries of Registrant (filed herewith).
23.1 Consent of Grant Thornton L.L.P. (filed herewith).
*23.2 Consent of King & Spalding (included in Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- -----
<C> <S> <C>
*24.1 Power of attorney of the officers and directors of Registrant signing this Registration
Statement.
*99.1 Form of Consent and Letter of Transmittal for the Registrant's 8% Convertible Subordinated
Debentures due August 31, 2003.
*99.2 Form of Notice of Guaranteed Delivery for the Registrant's 8% Convertible Subordinated
Debentures due August 31, 2003.
*99.2 Form of Proxy with respect to the solicitation of the holders of the Registrant's Common Stock.
</TABLE>
- ------------------------
* previously filed.
<PAGE>
EXHIBIT 8.1
[LETTERHEAD]
August 15, 1996
International Airline Support Group, Inc.
8095 N.W. 64th Street
Miami, Florida 33166
Re: Federal Income Tax Considerations of the Proposed Financial
Restructuring of International Airline Support Group, Inc.
-----------------------------------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to International Airline Support Group,
Inc. (the "Company") in connection with the proposed financial restructuring
(the "Restructuring") of the Company as described in that certain Proxy
Statement/Prospectus (the "Proxy Statement") filed with the Securities and
Exchange Commission on July 12, 1996. You have requested our opinion, in our
capacity as tax counsel to the Company, with respect to certain federal
income tax considerations relating to the Restructuring.
We understand that our opinion will be attached as an Exhibit to the
Proxy Statement, and will also be referred to in the Proxy Statement under
the caption "Certain Federal Income Tax Considerations." We hereby consent
to such use of our opinion.
All capitalized terms used herein without definition shall have the same
meaning as in the Proxy Statement.
INFORMATION RELIED ON
In rendering the opinion expressed herein, we have examined such
documents as we have deemed appropriate, including (but not limited to) the
Proxy Statement. In our examination of documents, we have assumed, with your
consent, that all documents submitted to us as photocopies or telecopies
faithfully reproduce the originals thereof, that all such originals are
authentic, that all such documents have been or will be duly executed to the
extent required, and that all statements set forth in such documents are
accurate. We also have obtained such additional information and
representations as we have deemed relevant and necessary through consultation
with various representatives of the Company.
<PAGE>
International Airline Support Group, Inc.
August 15, 1996
Page 2
OPINION
Based upon and subject to the foregoing and the additional assumptions
set forth in that portion of the Proxy Statement captioned "Certain Federal
Income Tax Considerations," our opinion regarding certain federal income tax
considerations of the Restructuring is set forth under the caption "Certain
Federal Income Tax Considerations" in the Prospectus.
* * *
The opinion expressed herein is based upon the Internal Revenue Code of
1986, as amended, the Treasury regulations promulgated thereunder, current
administrative positions of the Internal Revenue Service, and existing
judicial decisions, any of which could be changed at any time, possibly on a
retroactive basis. Any such changes could adversely affect the opinion
rendered herein. In addition, our opinion is based solely on the documents
that we have examined and the additional information that we have obtained.
Our opinion cannot be relied upon if any of the material facts contained in
such documents or in any such additional information are, or later become,
inaccurate. Finally, our opinion is limited to the tax matters specifically
covered thereby, and we have not been asked to address herein, nor have we
addressed herein, any other tax consequences relating to the Restructuring.
Very truly yours,
/s/ King & Spalding
KING & SPALDING
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
1994 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income (loss) before extraordinary items $(17,012,681) $ (613,840) $2,285,969
Extraordinary item (363,022) - -
------------ ---------- ----------
Net earnings (loss) $(17,375,703) $ (613,840) $2,285,969
------------ ---------- ----------
------------ ---------- ----------
Weighted average shares issued and outstanding 4,041,779 4,041,779 4,041,779
------------ ---------- ----------
------------ ---------- ----------
Primary earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (0.15) $ 0.57
Extraordinary item (0.09) - -
------------ ---------- ----------
Net earnings (loss) $ (4.30) $ (0.15) $ 0.57
------------ ---------- ----------
------------ ---------- ----------
FULLY-DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary items, as reported $(17,012,681) $ (613,840) $2,285,969
Reduced interest expense due to assumed conversion
of Convertible Debentures - - 800,000
------------ ---------- ----------
Income before extraordinary items for computing
earnings (loss) per share (17,012,681) (613,840) 3,085,969
Extraordinary item (363,022) - -
------------ ---------- ----------
Net income for computing earnings (loss) per share $(17,375,703) $ (613,840) $3,085,969
------------ ---------- ----------
------------ ---------- ----------
Weighted average shares issued and outstanding 4,041,779 4,041,779 4,041,779
Common stock equivalents, Convertible Debentures
computed using if converted method - - 2,500,000
------------ ---------- ----------
Weighted average shares for computing
fully-diluted earnings (loss) per share 4,041,779 4,041,779 6,541,779
------------ ---------- ----------
------------ ---------- ----------
Fully-diluted earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (0.15) $ 0.47
Extraordinary item (0.09) - -
------------ ---------- ----------
Net earnings (loss) $ (4.30) $ (0.15) $ 0.47
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Exhibit 11
<PAGE>
EXHIBIT 12
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations............................... $ 4,360 $ 4,049 $ (14,277) $ 1,846 $ 4,458
Interest expense............................................ 871 2,569 2,953 2,564 2,192
--------- --------- ---------- --------- ---------
Ratio of earnings to fixed charges (1)...................... 5.01 1.58 -- -- 2.03
</TABLE>
- ------------------------
(1) For purposes of this item, "fixed charges" represent interest expense and
"earnings" represent income (loss) from operations. Earnings were
insufficient to cover fixed charges by $17.2 million and $.7 million for the
years ended May 31, 1994 and 1995, respectively.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
IASG -- Virgin Islands, Inc.
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 12, 1996, accompanying the consolidated
financial statements of International Airline Support Group, Inc. contained
in Amendment #1 to the Proxy Statement and Prospectus. We consent to the use
of the aforementioned report in the Proxy Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts."
/s/ GRANT THORNTON LLP
Miami, Florida
August 14, 1996
