<PAGE>
SCHEDULE 13E-4
Tender Offer Statement Pursuant to Section 13(e)(l) of the
Securities Exchange Act of 1934 and Rule 13e-4 Thereunder
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Issuer Tender Offer Statement (Pursuant to Section 13(e)(l)
of the Securities Exchange Act of 1934)
(Amendment No. ________)
International Airline Support Group, Inc.
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(Name of Issuer)
International Airline Support Group, Inc.
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(Name of Person(s) Filing Statement)
8% Convertible Subordinated Debentures Due August 31, 2003
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(Title of Class of Securities)
NONE
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CUSIP (Number of Class of Securities)
Alexius A. Dyer III
Chairman, Chief Executive Officer and President
8095 N.W. 64th Street
Miami, FL 33166
(305) 593-2658
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(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) filing Statement)
As soon as practicable following the effective date of the
related Registration Statement on Form S-4
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(Date Tender Offer First Published, Sent or Given to Security-Holders)
Calculation of Filing Fee
TRANSACTION VALUATION* AMOUNT OF FILING FEE
$3,333,333.33 $666.67
* Calculated pursuant to Rule 0-11(b)(2) based upon one-third of the
principal amount of the Convertible Debentures as of July 11, 1996, the
latest practicable date prior to the date of filing.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
Amount Previously Paid: $1,149.43
Form or Registration No.: Registration Statement on Form S-4
Filing Party: International Airline Support Group, Inc.
Date Filed: July 12, 1996
<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The issuer is International Airline Support Group, Inc. (the
"Company") and the address of its principal executive offices is 8095 N.W.
64th Street, Miami, Florida 33166.
(b) As of the date hereof, $10,000,000 aggregate principal amount of 8%
Convertible Subordinated Debentures due August 31, 2003 ("Convertible
Debentures") are outstanding. The Company is seeking to acquire all of the
Convertible Debentures. Upon the terms and subject to the conditions set
forth in the Company's Proxy Statement/Prospectus dated July 12, 1996 (the
"Proxy Statement/Prospectus") and in the related Consent and Letter of
Transmittal, copies of which are attached hereto as exhibits (a) and (b), the
Company is offering (the "Exchange Offer") to issue 224.54 shares of its
Common Stock, par value $.001 per share ("Common Stock") for each $1,000 of
principal amount of Convertible Debentures. No officer, director or
affiliate of the Company owns of record or beneficially any Convertible
Debentures.
(c) The information set forth in "Market Prices of and Dividends Paid on
Common Stock and Market Prices of Convertible Debentures -- Convertible
Debentures" in the Proxy Statement/Prospectus is incorporated by reference
herein.
(d) This Issuer Tender Offer Statement on Schedule 13E-4 is being filed
by the Company, as issuer.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) Assuming that all $10,000,000 of principal amount of Convertible
Debentures are tendered to and accepted by the Company, the Company will
issue an aggregate of 2,245,400 shares of its Common Stock in exchange
therefor (after giving effect to the proposed one-for-27 reverse stock split
described in the Proxy Statement/Prospectus).
(b) No part of the consideration is expected to be borrowed, directly or
indirectly, for purposes of the Exchange Offer.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The purpose of the Exchange Offer is to assist the Company in achieving
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 strategy. The Company intends to retire
all Convertible Debenture tendered to and accepted by the Company in the
Exchange Offer.The Exchange Offer, if consummated, will materially change the
Company's level of indebtedness and capital structure, as reflected in the
table under "Historical and Pro Forma Capitalization" in the Proxy
Statement/Prospectus, which table is incorporated by reference herein.
As described in the Proxy Statement/Prospectus, the Exchange Offer is one
component of the Company's proposed financial restructuring (the
"Restructuring"). The consummation of the Restructuring would also result
in, among other things: (i) the issuance of options to acquire up to 598,782
shares of Common Stock pursuant to a new stock option plan (the "Option
Issuance"); (ii) certain changes to the present board of directors of the
Company, including changes in the number of directors (the "Board
Amendments") and (iii) certain changes to the Company's Certificate of
Incorporation and Bylaws, including the Board Amendments (the "Charter
Amendments"). The Option Issuance, Board Amendments and Charter Amendments
are described in "Stockholders' Meeting, Voting Rights and Proxies -- The
Stock Option Plan," "Stockholders' Meeting, Voting Rights and Proxies --
Proposed Amendment to the Company's Certificate of Incorporation;
Classification of Board of Directors" and various sections under
"Stockholders' Meeting, Voting Rights and Proxies", respectively, in the
Proxy Statement/Prospectus, and such discussions are incorporated by
reference herein.
2
<PAGE>
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
None.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS
WITH RESPECT TO THE ISSUER'S SECURITIES.
There is no contract, arrangement, understanding or relationship
relating, directly or indirectly, to the Exchange Offer between the Company
(including its executive officers and directors) and any person with respect
to any securities of the Company, except that the Company expects to enter
into an agreement with First Union National Bank, Charlotte, North Carolina,
as described in "The Exchange Offer -- Acceptance of Convertible Debentures
and Delivery of Common Stock" and except for the arrangements described in
"The Exchange Offer -- Fees and Expenses" in the Proxy Statement/Prospectus,
which discussions are incorporated by reference herein.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
None.
ITEM 7. FINANCIAL INFORMATION.
(a) Audited and unaudited financial information concerning the Company is
set forth at "Summary -- Summary Consolidated Historical Financial Data",
"Selected Historical Financial Data" and pages F-1 through F-24 of the Proxy
Statement/Prospectus.
(b) Certain pro forma data disclosing the effect of the consummation of
the Exchange Offer is set forth at "Summary -- Summary Pro Forma Financial
Data", "Historical and Pro Forma Capitalization" and "Pro Forma Financial
Information" in the Proxy Statement/Prospectus.
ITEM 8. ADDITIONAL INFORMATION.
Except as would not be material to a decision by a holder of the
Convertible Debentures as to whether or not to tender them in the Exchange
Offer, there are no:
(a) Present or proposed contracts, arrangements, understandings or
relationships between the Company and its executive officers, directors or
affiliates;
(b) Applicable regulatory requirements which must be complied with or
approvals which must be obtained in connection with the Exchange Offer;
(c) Applications of the margin requirements of Section 7 of the Exchange
Act and the regulations thereunder;
(d) Material pending legal proceedings relating to the Exchange Offer; or
(e) Additional information necessary to make the required statements
herein, in light of the circumstances under which they are made, not
materially misleading.
3
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) Proxy Statement/Prospectus filed as part of the Company's
Registration Statement on Form S-4 (No. 333- _____) (the "Registration
Statement").
(b) Consent and Letter of Transmittal, filed as Exhibit 99.1 to the
Registration Statement is hereby incorporated by reference herein.
(c) Form of agreement by and among the Company and First Union National
Bank, Charlotte, North Carolina, as Depositary.*
(d) Tax opinion of King & Spalding, filed as Exhibit 8.1 to the Registration
Statement is hereby incorporated by reference herein.
_____________________
* To be filed by amendment.
4
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
Dated: July 12, 1996
/s/ GEORGE MURNANE III
--------------------------------------------
George Murnane III
Executive Vice President and Chief Financial
Officer
5
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
(a) Proxy Statement/Prospectus filed as part of the Company's
Registration Statement on Form S-4 (No. 333- _____) (the
"Registration Statement").
(b) Consent and Letter of Transmittal, filed as Exhibit 99.1 to the
Registration Statement is hereby incorporated by reference herein.
(c) Form of agreement by and among the Company and First Union National
Bank, Charlotte, North Carolina, as Depositary.*
(d) Tax opinion of King & Spalding, filed as Exhibit 8.1 to the
Registration Statement is hereby incorporated by reference herein.
_____________________
* To be filed by amendment.
6
<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.
SUBJECT TO COMPLETION, DATED JULY 12, 1996
PROXY STATEMENT/PROSPECTUS
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
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OFFER TO EXCHANGE TO 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 12:00
Midnight, 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.
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SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1996
RELATING TO THE APPROVAL OF CERTAIN AMENDMENTS
TO THE COMPANY'S CERTIFICATE OF INCORPORATION
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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
---------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS _________, 1996
(COVER PAGE CONTINUED ON FOLLOWING PAGE)
---------------
<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 (i) amend
provisions regarding corporate governance to require supermajority voting with
respect to certain matters of corporate governance and (ii) require
supermajority stockholder approval and board approval of certain transactions in
accordance with Delaware law (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 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
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. 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.
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<PAGE>
(COVER PAGE CONTINUED)
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-
<PAGE>
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.
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<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . .
Background and Purpose of the Restructuring . . . . . . . . . . . . . .
Conditions to the Restructuring . . . . . . . . . . . . . . . . . . . .
Certain Significant Effects of the Restructuring. . . . . . . . . . . .
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest of Certain Persons in the Restructuring. . . . . . . . . . . .
The Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . .
The Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed Amendments to the Company's Certificate of Incorporation . . .
Exchange of Stock Certificates; Fractional Shares . . . . . . . . . . .
The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . .
Financial Forecast . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Consolidated Historical Financial Data. . . . . . . . . . . . .
Summary Pro Forma Financial Data. . . . . . . . . . . . . . . . . . . .
Market Prices of and Dividends Paid on Common Stock and Market Prices
of Convertible Debentures. . . . . . . . . . . . . . . . . . . . . . .
Market and Trading Information. . . . . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors Relating to Failure of the Restructuring to Occur. . . . .
Risk Factors Associated with Ownership of the Common Stock. . . . . . .
THE RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Negotiations with Debentureholders. . . . . . . . . . . . . . . . . . .
Overview of the Restructuring . . . . . . . . . . . . . . . . . . . . .
Certain Significant Effects of the Restructuring. . . . . . . . . . . .
Conditions to the Restructuring . . . . . . . . . . . . . . . . . . . .
Forecast of Certain Financial Data. . . . . . . . . . . . . . . . . . .
Interests of Certain Persons in the Restructuring . . . . . . . . . . .
THE EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acceptance of Convertible Debentures and Delivery of Common Stock . . .
Expiration Date; Extensions; Amendments . . . . . . . . . . . . . . . .
How to Tender and Consent in the Exchange Offer . . . . . . . . . . . .
Tenders and Consents -- General . . . . . . . . . . . . . . . . . . . .
Guaranteed Delivery Procedures. . . . . . . . . . . . . . . . . . . . .
Withdrawal of Tenders and Revocation of Consents. . . . . . . . . . . .
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
-v-
<PAGE>
STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES. . . . . . . . . . . . . .
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . .
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed Amendment to the Company's Certificate of Incorporation:
Reverse Stock Split Amendment. . . . . . . . . . . . . . . . . . . . .
Proposed Amendment to the Company; Certificate of Incorporation:
Preferred Stock Authorization . . . . . . . . . . . . . . . . . . . .
Proposed Amendment to the Company's Certificate of Incorporation:
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed Amendments to the Company Certificate of Incorporation:
Provisions Affecting Corporate Governance. . . . . . . . . . . . . . .
The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . .
Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange of Stock Certificates; Fractional Shares . . . . . . . . . . .
Other Matters to be Considered. . . . . . . . . . . . . . . . . . . . .
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Consequences to the Company . . . . . . . . . . . . . . . . . . . .
Tax Consequences to the Holders of the Convertible Debentures . . . . .
ACCOUNTING TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .
HISTORICAL AND PRO FORMA CAPITALIZATION . . . . . . . . . . . . . . . . . .
SELECTED HISTORICAL FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . .
PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . .
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations of the Company . . . . . . . . . . . . . . . . . . . . . . .
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Regulation and Traceability. . . . . . . . . . . . . . . . .
Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Composition of the Board. . . . . . . . . . . . . . . . . . . . . . . .
Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . .
-vi-
<PAGE>
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . .
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . .
The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . .
Employment Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . .
DESCRIPTION OF THE AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF THE CREDIT AGREEMENT . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF THE CONVERTIBLE DEBENTURES . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordination of Convertible Debentures . . . . . . . . . . . . . . . . .
Purchase Convertible Debentures Upon a Change of Control. . . . . . . . .
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Modifications of the terms of the Convertible Debentures or the rights of
the Holders of the Convertible Debentures. . . . . . . . . . . . . . . .
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Effects of Authorized but Unissued Stock. . . . . . . . . . . . .
Directors' Liability. . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-takeover Effects of Certain Provisions of the Company's Restated
Certificate of Incorporation and Bylaws. . . . . . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A -- PROPOSED RESTATED CERTIFICATE OF INCORPORATION. . . . . . . . .
APPENDIX B -- PROPOSED STOCK OPTION PLAN. . . . . . . . . . . . . . . . . . .
-vii-
<PAGE>
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 -- PROJECTIONS 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 -- PROJECTIONS 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 12:00
Midnight, 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, subject to the continuing
satisfaction of such conditions.
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 __ 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
Boeing and McDonnell Douglas aircraft and Pratt & Whitney jet engines. During
the fiscal year ended May 31, 1996 ("fiscal 1996"), the Company supplied parts
to over 771 customers worldwide. 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 the twelve-month period ended on
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<PAGE>
February 29, 1996, the Company's operating revenues were approximately $22.1
million, its gross profit was approximately $9.9 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. 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
specializes.
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
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<PAGE>
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 Results of Operations and Financial
Condition."
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 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 parts sales as a percentage of total sales has increased in each of
the last four fiscal years, to approximately 79% for the nine months ended
February 29, 1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% 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.
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<PAGE>
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
approximately $.35 million of the $4.1 million principal payment due on the
Senior Notes on July 17, 1996. The Company will not make its July 17, 1996
payment, 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 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 and, following
July 17, 1996, will be in default with respect to the payment of principal on
the Senior Notes. 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.
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
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<PAGE>
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 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, 1995, from $20.3 million to
$10.3 million and at February 29, 1996, from $18.9 million to $8.9 million,
based on the assumptions that the Restructuring occurred on such dates and that
all the Convertible Debentures were accepted for exchange. Total interest
expense, on a pro forma basis, would have been reduced from $2.3 million to $1.3
million during fiscal 1995 and from $1.5 million to $.8 million during the nine
months ended February 29, 1996, based on the assumptions that the Restructuring
occurred on the first day of the respective periods 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 periods.
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:
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<TABLE>
<CAPTION>
PRE- RESTRUCTURING RESTRUCTURING
RESTRUCTURING(1) NO DILUTION(2) FULL DILUTION(3)
---------------- -------------- ---------------
NUMBER NUMBER NUMBER
OF SHARES PERCENT OF SHARES PERCENT OF SHARES PERCENT
<S> <C> <C> <C> <C> <C> <C>
Convertible Debentures -- -- 2,245,400 93.8 2,245,400 75.0
Common Stock 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 issuance of all options to be granted under the Stock Option Plan.
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 (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 (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").
-6-
<PAGE>
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 ___________________, 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. See "The
Exchange Offer -- General."
The Exchange Offer will expire at 12:00 Midnight, 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
-7-
<PAGE>
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
assistance may be directed to the Depositary at _____________. 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 ___________, 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. 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 and the Board
Classification 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
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<PAGE>
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.
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 Amendment is 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 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: Annual Election of 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
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<PAGE>
Proxies--Proposed Amendments to the Company's Certificate of Incorporation:
Preferred Stock Authorization" and "Description of Capital Stock."
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 60 days nor more than
90 days prior to the meeting; provided, however, that in the event that less
than 70 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
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<PAGE>
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 Dyer, 224,543 shares,
representing 7.5% of the Common Stock to be outstanding following the
Restructuring; George Murnane, 104,787 shares, representing 3.5% of the
outstanding Common Stock; and the non-executive employees of the Company,
119,756 shares, representing 4.0% of the 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."
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<PAGE>
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 -- Forecast of Certain Financial Data."
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company for the five years ended May 31, 1995 and the nine-month periods
ended February 28, 1995 and February 29, 1996. The historical operating data
and historical balance sheet data for the five years ended May 31, 1995
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 selected unaudited historical financial information for the nine-
month periods indicated has been derived from unaudited consolidated financial
statements prepared by the Company, which reflect all adjustments, consisting of
normal recurring adjustments that, in the opinion of management, are necessary
for a fair presentation. Results of operations for the nine-month periods are
not necessarily indicative of results for the full year. 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."
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28 OR 29
-------------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
Total revenues $21,521 $26,527 $33,504 $18,733 $24,983 $20,438 $17,524
Gross profit 6,601 9,537 12,011 (3,371) 7,270 5,527 7,763
Income from operations 2,690 4,360 3,643 (14,668) 1,554 798 3,785
Interest and other income, net 458 777 2,097 2,475 1,669 1,164 1,507
Other (55) (94) (66) 1,922 499 524 306
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes, equity in
earnings (loss) of joint
venture and
extraordinary item 2,232 3,583 1,546 (19,065) (614) (890) 1,972
Provision for income taxes
(benefit) 941 1,370 510 (2,475) -- -- --
Equity in earnings (loss) of
joint venture
121 (229) (59) (423) -- -- --
Extraordinary loss on
extinguishment of debt -- -- -- (363) -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $ 1,412 $ 1,984 $ 977 $(17,376) $ (614) $ (890) $ 1,972
Earnings (loss) per
common share $0.37 $0.52 $0.24 $(4.30) $(0.15) $(0.22) $0.49
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Weighted average number
of common shares
outstanding 3,825 3,850 3,997 4,042 4,042 4,042 4,042
Ratio of earnings to fixed
charges (1) 5.24 5.00 1.68 -- -- -- 2.50
<CAPTION>
AT MAY 31, AT FEBRUARY 28 OR 29,
-------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $1,748 $2,938 $17,087 $(18,312) $(13,489) $(17,070) $(11,167)
Total assets 14,319 20,615 35,709 25,553 14,511 16,020 15,769
Total debt 4,920 7,605 23,484 26,173 20,336 20,829 18,854
Stockholder's equity (deficit) 4,529 7,081 8,173 (9,088) (9,702) (9,979) (7,729)
Book value per share $1.18 $1.78 $2.04 $(2.25) $(2.40) $(2.47) $(1.91)
</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, $.7 million and $1.0
million for the years ended May 31, 1994 and 1995 and the nine months ended
February 28, 1995, respectively.
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<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 respective period presented and the pro
forma balance sheet data have been prepared assuming that the Restructuring
occurred on the respective balance sheet dates. 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 applicable to the Credit Agreement (2%
above the lender's prime rate) throughout the periods and that the
Restructuring was accounted for as a restructuring of troubled debt pursuant
to Statement of Financial Accounting Standards 15 ("SFAS 15"). 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 periods
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."
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YEAR ENDED NINE MONTHS ENDED
MAY 31, 1995 FEBRUARY 29, 1996
------------ -----------------
(IN THOUSANDS, EXCEPT RATIOS
AND PER SHARE DATA)
OPERATING DATA:
Total revenue $24,983 $17,524
Gross profit (1) 7,270 7,763
Income from operations (2) 1,217 3,595
Interest and other income, net 645 820
Other (3) 499 306
------- -------
Earnings before income taxes and
extraordinary items 73 2,473
Provision for income taxes (benefits) (4) -- --
------- -------
Earnings before extraordinary items 73 2,473
Extraordinary gain on troubled debt
restructuring 1,300 456
------- -------
Net earnings $ 1,373 $ 2,929
------- -------
------- -------
Ratio of earnings to fixed charges (5) -- 4.38
PER SHARE DATA:
Weighted average number of common shares
outstanding 2,395 2,395
Earnings before extraordinary items $ 0.03 $ 1.03
Extraordinary items 0.54 0.19
------- -------
Net earnings $ .57 $ 1.22
- -------------------------------
(1) Gross profit is defined as total revenues less cost of sales.
(2) Income from operations is defined as gross profit less SG&A expenses,
provision for doubtful accounts, depreciation and amortization.
(3) Other is defined as losses of service center subsidiary and unusual and
nonrecurring items.
(4) As of February 29, 1996 after giving effect to the Restructuring, the
Company had net operating losses carryforwards of approximately
$7.5 million available to offset income.
(5) For purposes of this item "fixed charges" represent interest expense and
"earnings" represent income from operations. Pro forma earnings would be
insufficient to cover fixed charges by $31,000 for the year ended
May 31, 1995.
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AT
FEBRUARY 29, 1996
-----------------
BALANCE SHEET DATA:
Working Capital $ 6,460
Total assets 15,472
Total debt 8,854
Stockholders' equity 1,601
Book value per share $ 0.67
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.
Fiscal 1995 High Low
----------- ------ -----
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
Fiscal 1996 High Low
----------- ------ -----
First Quarter.......................................... $ 7/16 $9/32
Second Quarter......................................... 9/32 5/32
Third Quarter.......................................... 3/16 1/8
Fourth Quarter......................................... 7/32 1/8
Fiscal 1997 High Low
----------- ------ -----
First Quarter (through July 11, 1996).................. $ 1/4 $3/16
At May 31, 1996, there were 105 holders of record of the Company's
Common Stock and no holders of the Company's Preferred Stock.
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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 remain 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.
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. The Convertible
Debentures are traded over the counter by certain dealers who from time to
time are willing to effect transactions in the Convertible Debentures.
Holders of the Convertible Debentures also from time to time effect
transactions in the Convertible Debentures with one another. Trading in the
Convertible Debentures is, however, 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 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. 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."
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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.
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 approximately $.35 million of the $4.1 million principal payment due
on the Senior Notes on July 17, 1996. The Company will not make its July 17,
1996 payment, 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.
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:
FISCAL YEAR
1997 1998 1999 2000 2001 2002
----- ----- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
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
----- ----- ---- ---- ---- ----
----- ----- ---- ---- ---- ----
- -----------------------------
(1) No principal repayments with respect to the Convertible Debentures are
due until August 31, 2003.
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
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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 approximately $.35 million of the $4.1 million principal payment due
on the Senior Notes on July 17, 1996. The Company will not make its July 17,
1996 payment, 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 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 and,
following July 17, 1996, will be in default with respect to the payment of
principal on the Senior Notes. 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.
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.
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
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<PAGE>
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.
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.
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.
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.
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."
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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 the twelve months ended May 31, 1996, the Company's parts sales to
ValuJet represented approximately 21% of the Company's total revenue.
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 within 30 to 60 days,
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.
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.
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.
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.
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.
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COMPETITION. There are numerous suppliers of aircraft spare parts in
the aviation market worldwide and, through inventory listing services,
customers have access to a broad array of suppliers. These include major
aircraft manufacturers, airline and aircraft service companies and aircraft
spare parts redistributors. None of the Company's competitors, however,
accounts for a significant amount of the spare parts market for narrow-bodied
aircraft. Certain of the Company's competitors have substantially greater
financial and other resources than the Company. There can be no assurance
that competitive pressures will not materially and adversely affect the
Company's business, financial condition or results of operations.
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.
MARKET FOR COMMON STOCK. The Company intends to apply for inclusion of
the Common Stock in The Nasdaq Stock Market upon consummation of the
Restructuring. The Company will use its best efforts to have the Common
Stock included in The Nasdaq Stock 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. 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.
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.
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The relative rankings of the Company's debt claims and equity interests
both before and after the Restructuring are summarized in the following
table.
PRE-RESTRUCTURING POST-RESTRUCTURING
----------------- ------------------
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
- -----------------------------
(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 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
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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 Results of Operations and Financial
Conditions."
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 parts
sales as a percentage of total sales has increased in each of the last four
fiscal years, to approximately 79% for the nine months ended February 29,
1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% 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.
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 approximately $.35 million of the $4.1 million principal amount due
on the Senior Notes on July 17, 1996. The Company will not make its July 17,
1996 payment, pending redemption of the Senior Notes
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<PAGE>
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 holders of the Convertible
Debentures 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 and, following
July 17, 1996, will be in default with respect to the payment of principal on
the Senior Notes. 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.
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.
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<PAGE>
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 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 __________, 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 will occur 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
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<PAGE>
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 an 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).
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. 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, 1995, from $20.3
million to $10.3 million and at February 29, 1996, from $18.9 million to $8.9
million, based
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<PAGE>
on the assumptions that the Restructuring occurred on such dates and that all
Convertible Debentures were accepted for exchange. Total interest expense,
on a pro forma basis, would have been reduced from $2.3 million to $1.3
million during fiscal 1995 and from $1.5 million to $.8 million during the
nine months ended February 29, 1996, based on the assumptions that the
Restructuring occurred on the first day of the respective periods 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."
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. 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 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.
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<PAGE>
OUTSTANDING INDEBTEDNESS
------------------------
AT MAY 31, 1996
--------------------------
PRO FORMA
HISTORICAL RESTRUCTURING
---------- -------------
(IN THOUSANDS)
PRINCIPAL PRINCIPAL
Senior Notes..................................... $ 7,700 $ --
Convertible Debentures........................... 10,000 --
Credit Agreement................................. -- 7,700
Other Debt....................................... 400 400
--------- ---------
Total........................................ $18,100 $ 8,100
--------- ---------
--------- ---------
INTEREST
REQUIREMENTS
FOR THE YEAR ENDED
MAY 31, 1996
--------------------------
(IN THOUSANDS)
PRO FORMA
HISTORICAL RESTRUCTURING
---------- -------------
Senior Notes..................................... $ 1,100 $ --
Convertible Debentures........................... 800 --
Credit Agreement................................. -- 900
Other Debt....................................... 100 100
--------- ----------
Total........................................ $ 2,000 $1,000
--------- ----------
--------- ----------
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.
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<PAGE>
NO RESTRUCTURING
FISCAL YEAR
------------------------------
(IN MILLIONS)
1997 1998 1999 2000 2001
----- ----- ---- ---- ----
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
----- ----- ---- ---- ----
----- ----- ---- ---- ----
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 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:
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<PAGE>
<TABLE>
<CAPTION>
PRE- RESTRUCTURING RESTRUCTURING
RESTRUCTURING(1) NO DILUTION(2) FULL DILUTION(3)
-------------------- -------------------- --------------------
NUMBER OF NUMBER NUMBER OF
SHARES PERCENT OF SHARES PERCENT SHARES PERCENT
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Convertible Debentures -- -- 2,245,400 93.8 2,245,400 75.0
Common Stock 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 Revenue 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 cancelled 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 issuance of all options to be granted under the Stock Option Plan.
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.
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.
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<PAGE>
FORECAST OF CERTAIN FINANCIAL DATA
The forecasted 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 forecast was not prepared with a view
toward compliance with published guidelines of the Commission or the American
Institute of Certified Public Accountants regarding forecasts or generally
accepted accounting principles. Grant Thornton LLP, the independent auditors
of the Company, have neither examined, reviewed nor compiled the forecast and,
consequently, do not express an opinion or any other form of assurance with
respect thereto. The Company believes, however, that the forecast is
presented on a basis consistent with generally accepted accounting principles
as applied to the Company's historical financial statements.
The forecast 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 forecast, 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 forecast are set forth below or are
referenced in the notes that accompany the forecast. The Company believes
that all such assumptions are reasonable; however, such forecast 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 forecast 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
forecast. The forecast 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 forecast, in particular the forecasts 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 forecast was materially completed in June 1996. The Company is not
aware of any events subsequent to such date that would materially impact the
forecast. The Company does not intend to update or otherwise revise the
forecast 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 forecast to
reflect changes in general economic or industry conditions. The forecast
should not be relied on for any purpose other than in consideration of the
Restructuring. The forecast 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 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 forecast. See "Available
Information."
The inclusion of the forecast herein should not be regarded as a
representation by the Company, and there can be no assurance that the results
reflected in the forecast 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 forecasts contained herein. HOLDERS OF COMMON STOCK AND
CONVERTIBLE DEBENTURES ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORECAST.
-32-
<PAGE>
GENERAL ASSUMPTIONS
The forecast 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 forecast 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 forecast
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. 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.
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 forecast period.
Parts sales are forecasted 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 forecasted 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 forecasted 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.
-33-
<PAGE>
PROJECTED INCOME STATEMENT DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands)
<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 733 725 717 496 204
------ ------ ------ ------ ------
EBIT (2) 2,541 2,621 2,815 3,236 3,743
Interest expense, net 852 937 887 817 729
------ ------ ------ ------ ------
Earnings before taxes 1,689 1,684 1,928 2,419 3,014
Provision for income taxes 295 294 340 432 603
------ ------ ------ ------ ------
Net earnings $1,394 $1,390 $1,588 $1,987 $2,411
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Earnings per common share $0.58 $0.58 $0.66 $0.83 $1.01
</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.
- 34 -
<PAGE>
PROJECTED CASH FLOW DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net earnings $1,394 $1,391 $1,588 $1,988 $2,411
Adjustments to reconcile Net Income to
Net cash provided by operating activities
Depreciation 617 609 601 380 88
Amortization of fees and expenses 116 116 116 116 116
Increase in working capital (1) (2,913) (1,531) (1,514) (1,515) (1,516)
------- ------- ------- ------- -------
Total adjustments (2,180) (806) (797) (1,019) (1,312)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities: $ (786) $ 585 $ 791 $ 969 $1,099
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 1,246 41 (64) (137) (165)
Other (2) (39) (26) (26) (26) (26)
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 807 (485) (690) (863) (991)
Net increase (decrease) in cash ($166) $ 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.
- 35 -
<PAGE>
PROJECTED CAPITALIZATION DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MAY 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revolving Credit Facility $6,176 $6,218 $6,154 $6,017 $5,852
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
Retained earnings
(accumulated deficit) (7,749) (6,358) (4,770) (1,782) (371)
------ ------ ------ ------ -----
Total stockholders'
equity 3,816 5,207 6,795 9,783 11,194
------ ------ ------ ------ ------
Total capitalization $12,996 $13,902 $14,800 $16,925 $17,345
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- 36 -
<PAGE>
PROJECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 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 1,654 1,654 1,654 1,654 1,654
Parts inventory 8,250 9,750 11,250 12,750 14,250
Other current costs 102 106 114 122 130
------- ------- ------- ------- -------
Total current assets 13,359 15,005 16,763 18,540 20,338
Net property, plant & equipment 1,982 1,472 973 699 719
Land 330 330 330 330 330
Capitalized fees & expenses 464 348 232 116 ---
------- ------- ------- ------- -------
Total assets $16,135 $17,156 $18,298 $19,685 $21,387
------- ------- ------- ------- -------
------- ------- ------- ------- -------
LIABILITIES:
Total current liabilities $3,138 $3,254 $3,498 $3,760 $4,042
Revolving Credit Facility 6,177 6,218 6,154 6,017 5,852
Long-term debt:
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
Retained earnings
(accumulated deficit) (7,749) (6,358) (4,770) (2,782) (371)
------- ------- ------- ------- -------
Total stockholders' equity 3,816 5,207 6,795 8,783 11,194
------- ------- ------- ------- -------
Total liabilities & stockholders'
equity $16,135 $17,156 $18,298 $19,685 $21,387
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- 37 -
<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 (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 (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, (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.
- 38 -
<PAGE>
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
Subject to the satisfaction of all conditions to the Exchange Offer, 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. The Company's obligation to accept Convertible Debentures for
exchange and to accept delivered Consents is subject to the satisfaction of the
conditions set forth below under "-- Conditions." 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.
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."
- 39 -
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer will expire at 12:00 Midnight, 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
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 12:00 midnight, New York time, on the Expiration Date.
The term "Holder," when used with respect to a
- 40 -
<PAGE>
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.
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.
The Depositary will make a request promptly after the date of this Proxy
Statement/Prospectus to establish accounts with respect to the Convertible
Debentures at the ___________________________________ (the "Book Entry Transfer
Facilities(y)") for the purpose of facilitating the Exchange Offer. Any
financial institution that is a participant in any of the Book Entry Transfer
Facilities'(y'S) systems may make book-entry delivery of the Convertible
Debentures by causing such Book Entry Transfer Facility to transfer such
Convertible Debentures into the Depositary's account in accordance with such
Book Entry Transfer Facility's procedure for such transfer. Although delivery
of Convertible Debentures may be effected through book entry transfer in the
Depositary's account at___________________________________ , the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Depositary at one of its addresses set forth on the back
cover of this Proxy Statement/Prospectus prior to 12:00 midnight, New York time,
on the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK ENTRY TRANSFER FACILITY
IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
DEPOSITARY.
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").
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,
- 41 -
<PAGE>
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 12:00 midnight, New
York time, on the Expiration Date or such Holder cannot complete the procedure
for book-entry transfer on a timely basis, a tender may be effected if:
(a) the tender is made through an Eligible Institution;
(b) prior to 12:00 midnight, 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, or a
confirmation of a book entry transfer of such Convertible Debentures into
the Depositary's applicable account at a Book-Entry Transfer Facility as
described above, 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.
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
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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 12:00 midnight, 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 Amendment
becomes 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.
CONDITIONS
The obligation of the Company to accept for exchange any Convertible
Debentures validly tendered pursuant to the Exchange Offer is subject to the
satisfaction of the following conditions:
(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);
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(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; and
(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.
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) 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.
If a modification constitutes a material change to the Exchange Offer, the
Company will promptly disclose such modification 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 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 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.
Furthermore, 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 exist:
(a) any action or proceeding is 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;
(b) there shall 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;
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(c) there shall 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;
(d) there shall 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;
(e) there exists, 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
(f) (i) any person shall publicly disclose an acquisition proposal
with respect to the Company or any of its securities or assets; or (ii) a
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 outstanding upon consummation of the
Restructuring; or (iii) it shall have been publicly disclosed or the
Company shall have learned that any person or "group" (within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended)
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 event, 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 set forth in clauses (a) through (f) above 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.
Any determination by the Company concerning such conditions described above will
be final and binding upon all parties.
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.
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, including printing, accounting and legal fees and the
fees and expenses of the Depositary, are estimated to be approximately
$.4 million.
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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
__________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 Amendment 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 the Reverse Stock Split, the Board
Amendments, the Preferred Stock Authorization, the Charter Amendment, and to
approve the Stock Option Plan and persons named as proxies will vote against
such adjournment those proxies required to be voted against such proposals.
RECORD DATE
Only stockholders of record at the close of business on _______________,
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. 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
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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 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 Amendment, 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.
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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.
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 60 days nor more than
90 days prior to the meeting; provided, however, that in the event that less
than 70 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
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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 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 Dyer, 224,543 shares, representing 7.5% of the
Common Stock to be outstanding following the Restructuring; George Murnane,
104,787 shares, representing 3.5% of the outstanding Common Stock; and the non-
executive employees of the Company, 119,756 shares, representing 4.0% of the
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."
- 49 -
<PAGE>
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."
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.
- 50 -
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Company has received an opinion from its counsel, King & Spalding
("Counsel"), that 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. 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.
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.
- 51 -
<PAGE>
The Company may recognize COD income in the Restructuring depending on
the value of the Company's Common Stock following 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. However, 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.
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. 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 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
- 52 -
<PAGE>
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.
- 53 -
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following unaudited tables set forth the consolidated
capitalization of the Company at February 29, 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>
FEBRUARY 29, 1996
-----------------------------
ACTUAL PRO FORMA
------ ---------
IN THOUSANDS
<S> <C> <C>
Short-term debt $ 38 $ 438
Long-term debt 18,816 8,416
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;
2,993,880 shares issued and outstanding pro forma (1) 4 2
Additional paid-in capital 2,654 11,031
Retained earnings (accumulated deficit) (10,387) (9,433)
-------- ---------
Total stockholders' equity (deficit) (7,729) 1,600
-------- ---------
Total capitalization $ 11,125 $ 10,454
-------- ---------
-------- ---------
</TABLE>
- ----------------------------
(1) Represents shares issued after the Restructuring and Reverse Stock
Split but does not include ____ shares of Common Stock issuable under
certain outstanding warrants and options pursuant to the existing stock
option plan and the Old Warrants, actual, and ____ shares of Common Stock
subject to options under the Stock Option Plan, pro forma. See
"Management -- Stock Option Plan."
- 54 -
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial
information of the Company for the five years ended May 31, 1995 and the
nine-month periods ended February 28, 1995 and February 29, 1996. The
historical operating data and historical balance sheet data for the five
years ended May 31, 1995 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 selected unaudited historical
financial information for the nine-month periods indicated has been derived
from unaudited consolidated financial statements prepared by the Company,
which reflect all adjustments, consisting of normal recurring adjustments
that, in the opinion of management, are necessary for a fair presentation.
Results of operations for the nine-month periods are not necessarily
indicative of results for the full year. 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.
- 55 -
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
YEAR ENDED MAY 31, FEBRUARY 28 OR 29,
-------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
OPERATING DATA: (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $21,521 $26,527 $32,031 $16,747 $21,999 $18,248 $16,247
Lease revenue -- -- 1,473 1,986 2,984 2,190 1,277
------- ------- ------- ------- ------- ------- -------
Total revenues $21,521 $26,527 $33,504 $18,733 $24,983 $20,438 $17,524
Cost of sales 14,920 16,940 21,493 22,104 17,713 14,911 9,761
------- ------- ------- ------- ------- ------- -------
Gross profit 6,601 9,587 12,011 (3,371) 7,270 5,527 7,763
Selling, general and
administrative expenses 3,230 4,652 6,469 6,943 4,358 3,322 3,046
Provision (recovery) for
doubtful accounts 517 374 493 1,488 (335) (292) 317
Depreciation and
amortization 164 201 1,406 2,866 1,693 1,699 614
Financial Restructuring
costs -- -- -- -- -- -- 306
------- ------- ------- ------- ------- ------- -------
Total operating expenses 3,911 5,227 8,368 11,297 5,716 4,729 4,283
Income from operations 2,690 4,360 3,643 (14,668) 1,554 798 3,785
Interest and other
income, net 458 777 2,097 2,475 1,669 1,164 1,507
Unusual and nonrecurring
items -- -- -- -- (177) (177) 306
Losses of service center
subsidiary -- -- -- 1,922 676 701 --
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes, equity
in earnings (loss)
of joint venture and
extraordinary item 2,232 3,583 1,546 (19,065) (614) (890) 1,972
Provision for income
taxes (benefit) 941 1,370 510 (2,475) -- -- --
Equity in earnings
(loss) of joint venture 121 (229) (59) (423) -- -- --
Extraordinary loss on
extinguishment of debt -- -- -- (363) -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $1,412 $1,984 $977 $(17,376) $(614) $(890) $1,972
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Earnings (loss) per
common share before
extraordinary items .37 .52 .24 (4.21) (.15) (.22) .49
Extraordinary item -- -- -- (.09) -- -- --
------- ------- ------- ------- ------- ------- -------
Earnings (loss) per
common share $0.37 $0.52 $0.24 $(4.30) $(0.15) $(0.22) $0.49
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Weighted average number
of common shares
outstanding 3,825 3,850 3,997 4,042 4,042 4,042 4,042
Ratio of earnings to
fixed charges (1) 5.24 5.00 1.68 -- -- -- 2.50
</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, $.7 million and $1.0
million for the years ended May 31, 1994 and 1995 and the nine months ended
February 28, 1995, respectively.
- 56 -
<PAGE>
<TABLE>
<CAPTION>
AT MAY 31, AT FEBRUARY 28 OR 29,
-------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $1,748 $2,938 $17,087 $(18,312) $(13,489) $(17,070) $(11,167)
Total assets 14,319 20,615 35,709 25,553 14,511 16,020 15,769
Short-term debt 4,863 7,296 4,905 3,531 1,812 527 38
Long-term debt in
technical default
classified as current -- -- -- 22,157 18,083 19,850 18,400
Long-term debt 57 309 18,579 485 440 452 416
Stockholder's equity
(deficit) 4,529 7,081 8,173 (9,088) (9,702) (9,979) (7,729)
Book value per share $1.15 $1.78 $2.04 $(2.25) $(2.40) $(2.47) $(1.91)
</TABLE>
- 57 -
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited Pro Forma Condensed Consolidated Balance Sheet as of
February 29, 1996 and the unaudited Pro Forma Condensed Consolidated
Statements of Operations for the fiscal year ended May 31, 1995 and the nine
months ended February 29, 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 the rate
applicable to the Credit Agreement (2% above the lender's prime rate)
throughout the periods. 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 Statements of
Operations reflect adjustments as if the Restructuring had occurred on the
first day of the applicable period. 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 periods presented or
which may be obtained in the future.
- 58 -
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR ENDED PRO FORMA YEAR ENDED
OPERATING DATA: MAY 31, 1995 ADJUSTMENTS MAY 31, 1995
------------ ----------- ------------
Revenues
- -------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C>
Net sales $21,999 $21,999
Lease revenue 2,984 2,984
------- -------
Total revenue 24,983 24,983
Cost of sales 17,713 17,713
------- -------
Gross profit $7,270 $7,270
Operating expenses:
- -------------------
SG&A expenses 4,023 4,023
Depreciation and amortization 1,693 231 (1) 2,030
50 (3)
------ --------- ------
Total operating expenses 5,716 337 (7) 6,053
Income from operations 1,554 (337) 1,217
Interest and other income, net 1,669 (224)(4) 1,645
(800)(5)
Other 499 499
------ --------- ------
Earnings before income taxes and extraordinary items (614) 687 73
------ --------- ------
Provision for income taxes (benefits) -- (11) -- (11) --(11)
Earnings (loss) before extraordinary items (614) 687 73
Extraordinary (gain) loss gain on trouble debt retructuring 701 (2) (1,301)
(10,000)(6)
8,001 (8)
(2)(6)
------ --------- ------
Net earnings (loss) $(614) $ 1,987 $1,373
------ --------- ------
------ --------- ------
Ratio of earnings to fixed charges (14) -- --
PER SHARE DATA:
Earnings (loss) before extraordinary items $(0.15) $0.03
Extraordinary items -- .54
------ ------
Net earnings (loss) per common share $(0.15) $0.57
------ ------
------ ------
Weighted average number of common shares outstanding 4,042 2,395
</TABLE>
- 59 -
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS ENDED PRO FORMA NINE MONTHS ENDED
OPERATING DATA: FEBRUARY 29, 1995 ADJUSTMENTS FEBRUARY 29, 1995
----------------- ----------- -----------------
Revenues
- -------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C>
Net sales $16,247 $16,247
Lease revenue 1,277 1,277
------- ------
Total revenue 17,524 17,524
Cost of sales 9,761 9,761
------- ------
Gross profit $7,763 $7,763
Operating expenses:
- -------------------
SG&A expenses 3,363 3,363
Depreciation and amortization 614 113 (1) 807
38 (3)
42 (7)
------- -------- ------
Total operating expenses 3,977 193 4,170
Income from operations 3,786 (193) 3,593
Interest and other income, net 1,507 (92)(4) 815
(600)(5)
Other 306 306
------- --------- ------
Earnings before income taxes and extraordinary 1,973 499 2,472
Provisions for income taxes (benefits) --(11) --(11) --(11)
------- --------- ------
Earnings (loss) before extraordinary items 1,973 499 2,472
Extraordinary (gain) loss gain on debt retirement 634 (2) (456)
(10,000)(6)
(200)(5)
9,112 (8)
(2)(8)
------- --------- ------
Net earnings (loss) $1,973 $1,048 $2,928
------- --------- ------
------- --------- ------
Ratio of earnings to fixed charges (14) -- 4.38
PER SHARE DATA:
Earnings before extraordinary items $.49 $1.03
Extraordinary items -- .19
------ ------
Net earnings per common share $0.49 $1.22
------ ------
------ ------
Weighted average number of common shares outstanding 4,042 2,395
</TABLE>
- 60 -
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS ENDED PRO FORMA NINE MONTHS ENDED
BALANCE SHEET DATA: FEBRUARY 29, 1996 ADJUSTMENTS FEBRUARY 29, 1996
----------------- ----------- -----------------
<S> <C> <C> <C>
Working Capital (deficit) ($11,167) 250 (3) $6,460
(92)(4)
(800)(5)
735 (12)
280 (7)
400 (13)
(8,400)(9)
(10,000)(6)
Total assets 15,769 (113)(1) 15,472
(634)(2)
212 (3)
238 (7)
Total debt 18,854 (10,000)(6) 8,854
(8,400)(9)
8,400 (7)
Stockholders' equity (deficit) (7,729) (2)(8) 1,600
9,112 (8)
(735)(7)
935 (10)
Book value per share $(1.91) $0.67
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
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 the amortization of remaining balance of the deferred debt
costs attributable to the Senior Notes.
(2) Reflects the amortization of remaining balance of the deferred debt
costs attributable to the Convertible Debentures.
(3) The Company will pay a fee of $250,000 to a placement agent in
connection with the origination of the Credit Agreement. The Company
intends to amortize the fee over a five-year period. Reflects
amortization of the placement agent's fee for the periods presented.
(4) Reflects the assumed differential between the stated interest rate on
the Senior Notes (12%) and the assumed interest rate on the amounts
borrowed pursuant to the Credit Agreement.
(5) Reflects elimination of Interest on Convertible Debentures.
(6) Reflects the conversion of $10 million principal amount on the
Convertible Debentures to equity.
(7) Reflects fees incurred in connection with the Credit Agreement less
amortization of such fees for the periods presented.
(8) Reflects the assumed value of the Common Stock issued to holders of the
Convertible Debentures.
(9) Reflects the prepayment of the Senior Notes with the proceeds of a
concurrent advance pursuant to the Credit Agreement.
- 61 -
<PAGE>
(10) Net Pro Forma earnings adjustments.
(11) The Company has net operating loss carryforwards sufficient to offset
income.
(12) Reflects estimated costs to be incurred in connection with the
Restructuring.
(13) Reflects the current portion of amounts advanced pursuant to the Credit
Agreement.
(14) Earnings were insufficient to cover fixed charges by $1.0 million and
$.7 million for the nine months ended February 28, 1996 and year ended
May 31, 1995, respectively, and, on a pro forma basis would have been
insufficient to cover fixed charges by $31,000 for the year ended May
31, 1995.
- 62 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
THE RESTRUCTURING. On July __, 1996, the Company announced that it had
entered into Standstill Agreements with holders of approximately ____% of the
outstanding principal amount of the Senior Notes and that it 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 $18.4 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--Forecast 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, 1995, the Company's
total long-term debt amounted to $20.3 million, consisting of $9.9 million
principal amount of the Senior Notes, $10.0 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,
1995, because of the existence
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of defaults under the governing documents. The Senior Notes, which were
issued during fiscal 1993, bear interest at the fixed rate of 12% per annum,
payable quarterly. The Senior Notes mature in 1997. The Convertible
Debentures, which were issued during fiscal 1994, bear interest at the fixed
rate of 8% per annum, payable quarterly and are convertible into shares of
the Company's Common Stock at $4.00 per share. The Convertible Debentures
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 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 approximately $.35 million of the $4.1 million principal payment due on
the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996
payment, 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 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, 1995, the Company had a working capital deficit of $13.3 million
and a current ratio of .44 to 1.0, compared to a working capital deficit of
$18.3 million and a current ratio of .46 to 1.0 at May 31, 1994. The $5.0
million reduction in the working capital deficit was the result of proceeds from
the sale of certain aircraft (that were previously leased), being used to pay
down current liabilities. This is reflected in the Company's cash flows which
show cash flow provided by operating activities of approximately $5.8 million,
but cash flows from financing activities using approximately $4.9 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.
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RESULTS OF OPERATIONS
OVERVIEW.
The following table sets forth percentage relationships of expense items to
total revenues for the periods indicated:
PERCENTAGE OF TOTAL REVENUES
YEARS ENDED MAY 31,
-----------------------------
1993 1994 1995
---- ---- -----
Total revenues 100.0% 100.0% 100.0%
----- ----- -----
Cost of goods sold 64.2 118.0 70.9
Selling, general and administrative expenses 19.3 37.1 17.4
Provision (recovery) for doubtful accounts 1.5 7.9 (1.3)
Interest expense 6.4 13.7 9.1
Depreciation and amortization expense 4.2 15.2 6.8
Interest and other income (.2) (.5) (2.4)
Unusual and nonrecurring items -- -- (.7)
Loss on discontinued subsidiary -- 10.3 2.7
----- ------ -----
Operating earnings (loss) 4.6 (101.7) (2.5)
Income tax expense (benefit) 1.5 (13.2) --
Joint venture (loss) income (0.2) (2.3) --
Extraordinary loss -- (1.9) --
---- ----- ---
Net earnings (loss) 2.9% (92.7)% (2.5)%
---- ----- ---
---- ----- ---
Inventories are valued at the lower of cost or market. The cost of
aircraft spare parts purchased in lots, as opposed to whole aircraft
purchases, is determined on a specific identification basis. As of May 31,
1995, such parts represented approximately 42% 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, 1995,
such parts represented approximately 20% of the inventory cost value. The
revenue estimates for the pool of parts (the aircraft) is determined by
management based upon the individual sales values of all the parts in the
pool. The revenue estimates are then projected by quarter over a five-year
period beginning with the date 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, 1995, such aircraft represented
approximately 38% of the inventory cost value.
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
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year to year, dependant, in part, upon the Company's ability to purchase an
aircraft and resell it within a relatively brief period of time. 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 60% 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.
Interest expense for fiscal 1995 was $2.3 million compared to $2.6 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.
Depreciation and amortization was $1.7 million in fiscal 1995 compared to
$2.9 million in fiscal 1994. The net reduction of $1.2 million 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.
Interest and other income was $603,000 for fiscal 1995 compared to $88,000
for 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 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.
Loss of service center subsidiary was approximately $675,000 in fiscal 1995
compared to a loss of $1.9 million in fiscal 1994.
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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.
FISCAL 1994 COMPARED WITH FISCAL 1993.
Total revenues for fiscal 1994 decreased 43.9% from total revenues for
fiscal 1993, to $18.8 million from $33.5 million. The decrease in total
revenues was primarily attributable to a 72% decrease in aircraft sales, from
$14.9 million in fiscal 1993 to $4.1 million in fiscal 1994. The reduction in
aircraft sales from fiscal 1993 to fiscal 1994 was based on several factors,
including the Company's weak cash position, which decreased the Company's
ability to purchase aircraft and inventory for resale, and overall weakness in
the market for used aircraft and parts. The decrease in total revenues was also
attributable to a reduction in parts and engine sales to Transafrik, a cargo
carrier operating in Africa. Parts and engine sales to Transafrik decreased 75%
from $6.0 million in fiscal 1993 to $1.5 million in fiscal 1994. During fiscal
1994 Transafrik underwent a change in ownership and made other significant
management and operational changes, including a down sizing of its fleet and
certain changes in fleet mix. Transafrik is headquartered in Angola. The
Company experienced difficulty in obtaining current information regarding
Transafrik due to conditions prevailing in Angola, namely the on-again, off-
again civil war and the existence of a Marxist government. In addition, the
Company experienced a number of changes in senior management during the first
half of calendar 1994. The Company's Chief Financial Officer resigned in early
February, 1994. The Company's President, who was the Company's primary contact
with Transafrik, was terminated not long thereafter. Due to such management
changes, it is difficult to say with certainty when the Company became aware of
the circumstances that the Company believes resulted in a loss of business from
Transafrik. The Company believes that it disclosed the circumstances as soon as
practicable following the Company's current senior management becoming aware of
them.
The Company's decrease in total revenues was in small part offset by an
increase in lease revenue of $500,000 from $1.5 million in fiscal 1993 to $2.0
million in fiscal 1994.
Cost of sales increased 2.8% from $21.5 million in fiscal 1993 to $22.1
million in fiscal 1994, while cost of sales as a percentage of total revenues
increased to 117.4% in fiscal 1994 from 64% in fiscal 1993. The increase in
cost of sales from fiscal 1993 to fiscal 1994 is a result of several factors,
including lower profits realized on aircraft sales due to weak market
conditions, and charges of $3.1 million and $2.0 million for decreasing the
carrying value of certain inventory due to continuing poor market conditions
and changes in sales estimates and related inventory values. These
write-downs included parts costed under both the specific identification
method and the pooling method. The write-downs were due to a change in
emphasis of sales from certain older product lines, including DC-8 and other
parts, and a close examination of the realizability of asset values in light
of weak market conditions. In connection with the write-downs of inventory,
the amount of cost being amortized upon the sale of inventory accounted for
under the pooling method has been increased based on management's evaluation
of the adjusted cost basis of the pool to the estimated sales value of the
pool.
As a result of weak demand in the marketplace and the Company's need to
increase its liquidity to meet its obligations as they become due, the
Company recorded a $2.1 million charge to cost of sales for losses from the
sale or loss of aircraft. This charge related primarily to one B-727 sold in
April 1994 to its lessee at an amount substantially below cost to raise cash,
and another B-727 that was written off entirely because the Nigerian lessee
defaulted under the lease and it was doubtful that the Company could recover
possession of the aircraft. The Company did recover the aircraft in June
1995.
In addition, during the fourth quarter, the Company accrued to cost of
sales a charge of $2.4 million for three DC-9-15F aircraft to reflect net
realizability of the aircraft. The unanticipated cost of overhauling these
aircraft for delivery eliminated the economic benefit that the Company had
negotiated under their sales contract. One of these aircraft was sold in
June 1994, another was sold in early October 1994, and the third aircraft was
sold in November 1994.
SG&A expense for fiscal 1994 increased 7.3% to $6.9 million from $6.5
million for fiscal 1993. As a percentage of revenues, SG&A expense increased
from 19.3% during fiscal 1993 to 36.9% during fiscal 1994. The increase in
SG&A's expense as a percentage of revenues was due primarily to a 42%
decrease in revenues without a corresponding decrease in SG&A expense. The
Company incurred substantial expenses related to settlement of litigation
(including a charge of $825,000 in connection with an unfavorable judgment
arising from a lawsuit relating to commissions owed on the sale of an
aircraft in 1989), severance payments and other charges.
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Provision for doubtful accounts for fiscal 1994 increased 202% to $1.4
million for fiscal 1994, from $500,000 in fiscal 1993. During the third
quarter, the Company wrote off $900,000 of amounts receivable which were
determined to be uncollectible, and reserved additional funds for accounts
that may not be collectible. The Company has legal and collection
proceedings against some of these accounts.
Interest expense for fiscal 1994 totaled $2.6 million compared with $2.2
million for fiscal 1993. The increase in interest expense was the result of
the issuance of the Senior Notes and the Convertible Debentures.
Depreciation and amortization expense for fiscal 1994 increased from $1.4
million in fiscal 1993 to $2.9 million in fiscal 1994. The increase in
depreciation expense for fiscal 1994 of $1.5 million over fiscal 1993 was
primarily attributable to the depreciation costs associated with the higher
volume of aircraft leased by the Company to third parties and an acceleration
of depreciation of overhaul costs of aircraft to more closely match the
estimated service life of the overhaul. In addition, depreciation of
property and equipment increased by approximately $300,000 in connection with
the operation of the maintenance facility in Texas.
Losses of service center subsidiary were approximately $1.9 million in
fiscal 1994.
Equity in loss of joint venture was $423,000 in fiscal 1994 compared to
$59,000 in fiscal 1993. The 1994 amount includes the Company's share of the
joint venture operating losses of $280,000 and a loss of $143,000 upon
dissolution of the venture. The fiscal 1993 amount consisted of the
Company's share of that joint venture's operating losses.
Extraordinary loss on the extinguishment of debt of $363,000 in fiscal
1994 is net of tax and consists of a 6% prepayment penalty and write-off of
deferred debt issuance costs in connection with the early retirement of a
portion of the Senior Notes.
In August 1993, the Company entered into a management agreement with a
domestic corporation in Mojave, California for a period of four months from
September 1, 1993 to December 31, 1993. Pursuant to this agreement, the
Company engaged in selling the parts of part-out consignment aircraft from
various parties. During the contract period, the Company incurred a net loss
of $47,906 related to these services, which was included in SG&A expense for
fiscal 1994. The domestic corporation with which the Company entered the
management arrangement was not affiliated with Company. Pursuant to the
management arrangement, the Company received commissions based on sales of
consigned parts. The Company's expenses of providing the management services,
consisting principally of personnel costs, exceeded the Company's revenue
from the contract. Therefore, the Company elected not to renew the
management arrangement after the expiration of the initial four-month term.
The net loss for fiscal 1994 was $17.4 million, or $(4.30) per share,
representing a decrease from net earnings of $1.0 million or $.24 per share
for fiscal 1993. For fiscal 1994, IASC incurred losses of $1.9 million or
$(.48) per share of the Company's Common Stock.
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THREE AND NINE MONTHS ENDED FEBRUARY 29, 1996 COMPARED WITH
THREE AND NINE MONTHS ENDED FEBRUARY 28, 1995.
Total revenues of the three months and nine months ended February 29, 1996
increased 89% and decreased 14% respectively, to $7.8 million and $17.5
million, from $4.2 million and $20.4 million, respectively, for the three
months and nine months ended February 28, 1995. Aircraft sales were
$1,450,000 and $1,775,000 during the three and nine months ended February 29,
1996, compared to $0 and $8.2 million, respectively, during the three and
nine months ended February 28, 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 and resell it within
a relatively brief period of time. Included in aircraft sales during the nine
months ended February 28, 1995 are the sale of three DC-9 aircraft sold to a
leasing company of $5.6 million pursuant to a contract entered into during
the fiscal year ended 1994. Parts sales for the three and nine months ended
February 29, 1996 were $5.9 million and $14.4 million, respectively, compared
to $3.4 million and $10.1 million, respectively, during the three and nine
months ended February 28, 1995. During the nine months ended February 29,
1996, the Company has continued to increase its domestic customer base and
decrease its number of foreign customers in order to lessen the Company's
credit risks. Lease revenue for the three and nine months ended February 29,
1996 decreased to $529,000 and $1.3 million, respectively, compared to
$774,000 and $2.2 million, respectively, during the three and nine months
ended February 28, 1995, as certain leases that were in existence during the
prior year have terminated.
During the fiscal year ending May 31,1995, 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 the nine months ended
February 29, 1996.
The Company recorded a gain during the nine months ended February 29, 1996
relating to 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 the inventory. The Company recorded as net sales the
cost of the inventory plus the amount of the net gain.
During the three months and nine months ended February 29, 1996, the
Company's parts sales to ValuJet represented approximately 25.0% and 18.0%
repsective of the Company's revenues. On June 17, 1996, ValuJet entered into
a consent decree with the FAA, pursuant to which ValuJet agreed to ground all
of its aircraft until it demonstrates compliance with specified safety and
maintenance procedures. 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.
Cost of sales as a percentage of total revenues for the three and nine
months ended February 29, 1996 was 56%, compared to 49% and 73%,
respectively, during the three and nine months ended February 28, 1995. Cost
of sales on aircraft sales was 28% and 30% for the three and nine months
ended February 29, 1996, compared to 99% during the nine months ended
February 28, 1995 (there were no aircraft sales during the three months ended
February 28, 1995). The higher percentage of cost of sales on aircraft sales
during the nine months ended February 28, 1995 as compared to the three and
nine months ended February 29, 1996 was the result of zero margins realized
on the sale of three DC-9 aircraft sold during the nine months ended February
28, 1995 to a leasing company for $5.6 million pursuant to a contract entered
into during the fiscal year ended 1994. Excluding aircraft sales and cost of
aircraft sales, cost of sales as a percentage of total revenues during the
three and nine months ended February 29, 1996 was 62% and 59%, respectively,
compared to 49% and 56% during the three and nine months ended February 28,
1995.
The higher cost of sales percentage (excluding aircraft sales and cost of
aircraft sales) during the three and nine months ended February 29, 1996
compared to the three and nine months ended February 28, 1995 is primarily
attributable to the larger volume of parts sales during the three months
ended February 29, 1996, some of which were brokered transactions (the
Company fills a customer order for a part not held in inventory, whereby the
Company locates the part of the customer from another vendor and then resells
the part to the customer, which typically have lower margins, and sales from
inventory of certain large dollar items at slightly lower margins.
Additionally, the decrease in lease revenue in fiscal 1996 from fiscal 1995
results in lower overall margins due to the lower amount of cost of sales
incurred in generating such lease revenue.
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Selling, general and administrative expenses for the three and nine months
ended February 29, 1996 were $1.1 million and $3.0 million, respectively,
compared to $1.0 million and $3.3 million, respectively, during the three and
nine months ended February 28, 1995.
Provision (recovery) for doubtful accounts was $317,000 during the three
and nine months ended February 29, 1996, compared to ($194,000) and
($292,000) during the three and nine months ended February 28, 1995. The
provision recorded during the three and nine months ended February 29, 1996
resulted from a general provision for doubtful accounts. During the three
and nine months ended February 28, 1995, the Company, primarily through
litigation, recovered approximately $540,000 and $640,000, respectively, of
accounts receivable which had been written off or reserved during the fiscal
year ended May 31, 1994. The recoveries were offset by a general provision
of doubtful accounts of $350,000.
During the three and nine months ended February 29, 1996 the Company
incurred approximately $113,000 and $6,000, respectively, of legal,
accounting and other consulting fees in connection with its debt
restructuring activities.
Interest expense for the three and nine months ended February 29, 1996 was
$475,000 and $1.5 million, respectively, compared to $516,000 and $1.8
million during the three and nine months ended February 29, 1995, reflecting
the overall reduction in debt.
Depreciation and amortization for the three and nine months ended February
29 1996 was $183,000 and $614,000, respectively, compared to $564,000 and
$1.7 million, respectively, during the three and nine months ended February
28, 1995. The decrease in depreciation and amortization was due primarily to
a reduction in depreciable aircraft held for lease, such aircraft held for
lease amounting to a gross value of $2.9 million at February 29, 1996
compared to $7.8 million at February 28, 1995. The reduction in aircraft
held for lease is due to the Company selling during fiscal 1995 certain
aircraft previously leased or transferring certain aircraft to inventory held
for sale.
In fiscal 1994 the Company began operations of IASC, an FAA-certified
repair facility. During the fiscal year 1995, IASC ceased operations and the
majority of its assets were sold. As a result, there were no operating
results of IASC during the three and nine months ended February 29, 1996.
The results of IASC during the three and nine months ended February 28, 1995,
amounting to approximately ($286,000) and $701,000, respectively, are shown
as (income) losses of service center subsidiary.
No income tax provision or benefits were recorded during the three and
nine months ended February 29, 1996, or during the three and nine months
ended February 28, 1995, respectively, as the Company has net operating loss
carryforwards sufficient to offset income. The Company has fully exhausted
its carryback benefits and recorded a one hundred percent (100%) valuation
allowance against the deferred tax asset for net operating loss carryforwards.
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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 Boeing and McDonnell-Douglas aircraft and
Pratt & Whitney jet engines. During fiscal 1996, the Company supplied parts
to over 771 customers worldwide. 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 the twelve-month period ended on February
29, 1996, the Company's operating revenues were approximately $22.1 million,
its gross profit was approximately $9.9 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 1995. 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
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
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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.
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.
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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 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.
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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
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
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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.
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. Transafrik Corp., a cargo carrier operating in Africa,
accounted for a significant amount of the Company's revenue prior to fiscal
1994. 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 the nine months ended February 29, 1996, compared with 9%,
18% and 25% of total revenue in fiscal 1994, 1993 and 1992, 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. 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. In addition, the Company has continued to
decrease its exposure to more volatile international markets. Its domestic
parts sales as a percentage of total sales has increased in each of the last
four fiscal years, to approximately 79% for the nine months ended February
29, 1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% in fiscal 1993.
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During fiscal 1996, the Company's parts sales to ValuJet represented
approximately 21% 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 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>
Customer Net Revenues (000's) Percentage of Total Net Revenues
- -------- -------------------- --------------------------------
<S> <C> <C>
1996:
- -----
ValuJet Airlines, Inc. $4,771 20.6%
1995:
- -----
Aeroservices Carabobo C.A. $2,716 10.9
Ajax Leasing Ltd. 5,625 22.5
</TABLE>
Prior to fiscal 1993, no customer accounted for more than 10% of the
Company's net revenues, other than Transafrik.
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
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
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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 Company competes with several other companies, none of which accounts
for a significant amount of the spare parts market for narrow-bodied
aircraft. Customers in need of aircraft parts have access, through
computer-generated inventory catalogues, to a broad array of suppliers
including major aircraft manufacturers, airlines and aircraft services
companies, many of which have greater financial resources and some of which
have larger inventories and more established reputations than the Company.
The Company has established relationships with many domestic and foreign
aircraft operators and maintains such relationships by having the necessary
parts available and by delivering such parts in a timely manner. The
dominant companies in the aircraft parts aftermarket are AAR Corp., Aviation
Sales Company and Banner Aerospace. The companies are larger than the
Company and have greater financial resources.
EMPLOYEES
As of June 30, 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.
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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.
NAME AGE POSITION HELD DIRECTOR SINCE
- ---- --- ---------------------- -----
Alexius A. Dyer III(1) 40 Chairman of the Board, 1992
President and Chief
Executive Officer
George Murnane III(2) 38 Executive Vice President N/A
and Chief Financial Officer
Kyle R. Kirkland(3)(4) 34 Director 1992
E. James Mueller(1)(3)(4) 50 Director 1991
- ------------------------------
(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 1998 through
March 1990, respectively. Mr. Kirkland is also a director of Steinway
Musical Instruments, Inc.
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. From time to time, J.M. Associates, Inc. provides the Company
with consulting services. See "Certain Relationships and Related
Transactions."
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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.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
Name and -------------------- ----------------------------- All Other
Principal Position Year Salary($) Bonus($)(1) Options/SARs(#) Compensations($)
- ------------------ ---- --------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Alexius A. Dyer III 1996 $135,000 80,000 -- --
President and Chief 1995 133,108 -- 107,000 --
Executive Officer 1994 108,865 20,000 -- --
</TABLE>
- ----------------------------------------------
(1) All officers are eligible to participate in the Company's bonus plan.
Awards are based upon certain performances criteria relating to the
Company's net sales.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUE
Shown below is information with respect to all unexercised options to
purchase the Company's Common Stock granted to the Named Officers through the
end of fiscal 1995 under the Company's option plans. No options were exercised
during fiscal year 1996.
<TABLE>
<CAPTION> Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired Value Options at FY-End at FY-End($)
Name by Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Alexius A. Dyer III(2) 0 0 173,667/33,333(3) $ --
</TABLE>
- ---------------------------
(1) Represents the market value of the underlying Common Stock at fiscal year
end minus the exercise price. With respect to all such options, the
exercise price exceeded the market value of the underlying Common Stock
at fiscal year end.
(2) All options granted under the prior stock option plan will be canceled in
connection with the Restructuring.
(3) 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 shares.
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, which was adopted during fiscal 1995. 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. Directors are also reimbursed for expense
incurred in connection with the attendance of Board meetings.
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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, which will consist of
disinterested persons within the meaning of Rule 16b-3 under the Exchange
Act. 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, so as to qualify as a formula plan meeting the requirements
of Rule 16b-3 under the Exchange Act. 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
Name Shares of Restricted Stock 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.
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<PAGE>
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 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 further provides that stockholder
approval is required, in accordance with Rule 16b-3 under the Exchange Act,
for any amendment (a) to increase materially the benefits accruing to an
individual under the Stock Option Plan, (b) to increase materially the number
of securities which may be issued under the Stock Option Plan to insiders or
(c) otherwise to modify materially the requirements as to eligibility for
participation in the Stock Option Plan. No provision of the Stock Option
Plan may be amended more than once every six months if such amendment would
result in the loss of an exemption under Rule 16b-3 under the Exchange Act,
and provisions which apply specifically to non-qualified stock options for
non-employee directors may not be amended more than once every six months
other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
- 82 -
<PAGE>
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.
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 renumeration 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
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<PAGE>
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 Company satisfies
applicable federal income tax reporting requirements and subject to the
limitation on the deduction of certain employee renumeration 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.
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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 PERCENTAGE OF
BENEFICIALLY 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 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 and new options will be
granted as part of the Restructuring. See "Management -- The Stock
Option Plan."
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<PAGE>
(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 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.
(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
The Company has received a commitment from a major money-center bank (the
"Bank") for a secured credit facility (the "Credit Agreement") consisting of (i)
a revolving line of credit in amount equal to the lesser of (a) $11.0 million
and (b) an amount based on the sum of eligible receivables plus eligible
inventory (the "Revolving Facility") 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 the Bank owned by the Company (the
"Term Loan").
Amounts outstanding under either the Term Loan or the Revolving Facility
bear interest at a rate equal to the greater at (i) the Bank's prime rate or
(ii) the federal funds rate, plus 0.5%, plus 2.0%. The Credit Agreement has a
maturity of five years. The Term Loan provides for monthly principal payments
of $33,333 in the first year; $41,666 in the second year; $50,000 in the third
year; $58,333 in the fourth year; and $66,666 in the fifth year; provided that
upon the sale of aircraft, if no aircraft is substituted, the Company must repay
a pro rata portion of the Term Loan.
The Credit Agreement will require the Company to maintain a minimum
tangible net worth, minimum working capital and minimum fixed charge coverages,
as well as contain prohibitions on incurring additional indebtedness,
prohibitions on asset rules, limitations on dividends and other forms of cash
distributions and prohibitions on mergers, consolidations or acquisitions, in
each case without the consent of the Bank. The events of default under the
Credit Agreement will include nonpayment, misrepresentations, breach of
covenants, bankruptcy, defaults in the Company's obligations under the Employee
Retirement Income Security Act of 1974, as amended, bankruptcy and cross-
defaults to other agreements and judgments against the Company.
The execution of a definitive Credit Agreement is subject to numerous
conditions precedent customary for transactions of this type, most notably
consummation of the Restructuring and negotiation of definitive documentation.
There can be no assurances that the Company will be able to negotiate and
execute the Credit Agreement or that it will be able to satisfy all the
conditions precedent.
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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:
Year Redemption Price
---- ----------------
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%
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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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 $____, 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 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
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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 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
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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-1 (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 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,
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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.
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.
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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 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:
One Quarter with a
Consolidated Net Worth
Date of at least:
---- ----------------------
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
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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
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 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
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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 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
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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.
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
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<PAGE>
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
(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
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<PAGE>
(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 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 established public trading market for the Convertible Debentures exists.
The Convertible Debentures are traded over the counter by certain dealers who
from time to time are willing to effect transactions in the Convertible
Debentures. Holders of the Convertible Debentures also from time to time effect
transactions in the Convertible Debentures with one another. Trading in the
Convertible Debentures is, however, 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
-97-
<PAGE>
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 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.
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<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 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 permitted
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<PAGE>
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 60 days nor more than
90 days prior to the meeting; provided, however, that in the event that less
than 70 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.
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."
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<PAGE>
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
PAGE
----
Audited Consolidated Financial Statements
Report of independent certified public accountants . . . . . . . F-
Consolidated balance sheets as of May 31, 1994 and 1995. . . . . F-
Consolidated statements of operations for the years ended
May 31, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . . . F-
Consolidated statements of stockholders' equity (deficit) for
the years ended May 31, 1993, 1994 and 1995. . . . . . . . . . . F-
Consolidated statements of cash flows for the years ended
May 31, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . . . F-
Notes to consolidated financial statements . . . . . . . . . . . F-
Unaudited Condensed Consolidated Financial Statements
Condensed consolidated balance sheets as of February 28
and 29, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . F-
Condensed consolidated statements of operations for the three
months and the nine months ended February 28 and 29, 1995 and
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-
Condensed consolidated statements of cash flows for the
nine months ended February 28 and 29, 1995 and 1996. . . . . . . F-
Notes to condensed consolidated financial statements . . . . . . F-
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
International Airline Support Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1994 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended May 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company
has incurred significant operating losses and the Company is in default 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, 1995.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Miami, Florida
July 21, 1995
F-2
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
MAY 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Current assets
Cash $ 95,790 $ 848,331
Accounts receivable, net of allowance for doubtful accounts
of $940,000 in 1994 and $ 619,000 in 1995 3,817,023 2,592,463
Notes receivable (Note A) 1,120,000 313,490
Income tax refund receivable 1,930,000 -
Inventories (Notes A, C and D) 8,719,774 6,497,270
Deferred tax benefit - current, net of valuation allowance
of $2,190,000 in 1994 and $1,146,000 in 1995 (Note F) - -
Other current assets 162,055 31,480
------------ ------------
Total current assets 15,844,642 10,283,034
Property and equipment (Notes A and E)
Land 330,457 330,457
Aircraft held for lease 7,227,835 3,289,613
Building and leasehold improvements 789,340 715,772
Machinery and equipment 2,191,999 940,948
------------ ------------
10,539,631 5,276,790
Less accumulated depreciation 2,233,680 1,980,927
------------ ------------
8,305,951 3,295,863
------------ ------------
Other assets
Deferred debt costs, net (Note A) 1,224,401 931,932
Deferred tax benefit, net of valuation allowance of
$3,095,000 in 1994 and $3,894,000 in 1995 (Note F) - -
Deposits and other assets 178,322 -
------------ ------------
1,402,723 931,932
------------ ------------
$ 25,553,316 $ 14,510,829
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D) $ 3,531,228 $ 1,812,040
Long-term obligations in default classified
as current (Notes B and D) 22,156,720 18,083,334
Bank overdrafts 410,570 -
Accounts payable 4,086,998 1,650,078
Accrued expenses (Note P) 3,970,840 2,226,900
------------ ------------
Total current liabilities 34,156,356 23,772,352
Long-term obligations, less current maturities (Notes B and D) 485,020 440,377
Commitments and contingencies (Notes E, M, N and Q) - -
Stockholders' equity (deficit) (Notes G and H)
Preferred Stock - $.001 par value, authorized 500,000 shares;
0 shares outstanding in 1994 and 1995. - -
Common stock - $.001 par value; authorized 20,000,000
shares; issued and outstanding 4,041,779
shares in 1994 and 1995. 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Accumulated deficit (11,746,434) (12,360,274)
------------ ------------
Total stockholders' deficit (9,088,060) (9,701,900)
------------ ------------
$ 25,553,316 $ 14,510,829
------------ ------------
------------ ------------
</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, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Net sales $ 32,031,596 $ 16,746,932 $ 21,998,869
Lease revenue 1,473,038 1,986,450 2,984,218
------------ ------------ ------------
Total revenues 33,504,634 18,733,382 24,983,087
Cost of sales (Note O) 21,493,792 22,104,131 17,712,427
Selling, general and administrative expenses (Notes O and P) 6,469,160 6,943,147 4,358,119
Provision (recovery) for doubtful accounts 493,234 1,487,969 (334,571)
Interest expense 2,162,994 2,562,681 2,271,849
Depreciation and amortization 1,405,720 2,865,610 1,693,301
Interest and other income (65,828) (87,600) (602,943)
Unusual and nonrecurring items (Note Q) - - (177,115)
Losses of service center subsidiary (Note R) - 1,922,086 675,860
------------ ------------ ------------
31,959,072 37,798,024 25,596,927
------------ ------------ ------------
Earnings (loss) before income taxes, equity in
loss of joint venture, and extraordinary item 1,545,562 (19,064,642) (613,840)
Provision for income taxes (benefit) (Note F) 510,000 (2,475,185) -
------------ ------------ ------------
Earnings (loss) before equity in loss
of joint venture and extraordinary item, 1,035,562 (16,589,457) (613,840)
Equity in loss of joint venture (Note J) (58,543) (423,224) -
------------ ------------ ------------
Earnings (loss) before extraordinary item 977,019 (17,012,681) (613,840)
Extraordinary loss on the extinguishment of debt (Note D) - (363,022) -
------------ ------------ ------------
Net (loss) earnings $ 977,019 $(17,375,703) $ (613,840)
------------ ------------ ------------
------------ ------------ ------------
Per share data (Note A):
Weighted average shares outstanding 3,997,458 4,041,779 4,041,779
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share
and common equivalent shares
Earnings (loss) before extraordinary item $ .24 $ (4.21) $ (.15)
Extraordinary item - (.09) -
------- ------- -------
Net (loss) earnings $ .24 $ (4.30) $ (.15)
------- ------- -------
------- ------- -------
</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, 1992 3,974,112 $ 3,974 $ 2,424,579 $ 4,652,250 $ 7,080,803
Issuance of common stock 35,000 35 115,451 - 115,486
Net earnings - - - 977,019 977,019
----------- ----------- ----------- ------------ -----------
Balance at May 31, 1993 4,009,112 4,009 2,540,030 5,629,269 8,173,308
Issuance of common stock 32,667 33 114,302 - 114,335
Net loss - - - (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)
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 977,019 $(17,375,703) $ (613,840)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,405,720 3,150,062 1,693,301
Depreciation - service center - - 196,322
Gain on Express One transaction (Note R) - - (70,631)
Loss on Wellman transaction - - 33,575
(Increase) decrease in deferred tax benefit (332,000) 69,000 (23,696)
Equity in loss of joint venture 58,543 423,224 -
Decrease (increase) in accounts receivable 281,738 (83,108) 1,224,560
Decrease (increase) in notes receivable (1,920,000) 800,000 806,510
Decrease (increase) in income tax refund - (1,930,000) 1,930,000
Decrease (increase) in inventories (8,631,990) 8,243,147 (4,910,834)
Decrease (increase) in other current assets (1,098,118) 981,557 154,271
(Increase) in deferred debt costs (1,237,980) (341,326) -
Decrease (increase) in other assets (9,026) (112,999) 178,322
(Decrease) increase in accounts payable
and accrued expenses 134,576 5,012,896 (4,591,430)
(Decrease) increase in income taxes payable (1,788,676) (211,666) -
------------ ------------ ------------
Total adjustments (13,137,213) 16,000,787 6,441,938
------------ ------------ ------------
Net cash provided by (used in) operating activities (12,160,194) (1,374,916) 5,828,098
Cash flows from investing activities:
Proceeds from maturity of restricted
certificates of deposit 1,350,000 356,115 -
Purchase of restricted certificate of deposit (350,000) - -
Capital expenditures (1,960,700) (3,635,919) (135,936)
Proceeds from sale of aircraft held for lease - 1,000,000 -
Investments in joint ventures (5,000) - -
Decrease (increase) in due from affiliates 25,445 - -
------------ ------------ ------------
Net cash used in investing activities (940,255) (2,279,804) (135,936)
Cash flows from financing activities:
Net payments under line of credit (2,918,463) (1,000,000) -
Proceeds from issuance of common stock 115,486 - -
Borrowings under notes and leases 19,515,783 10,000,000 -
Repayments of debt obligations (3,312,238) (5,760,432) (4,939,621)
------------ ------------ ------------
Net cash (used in) provided by financing activities 13,400,568 3,239,568 (4,939,621)
------------ ------------ ------------
Net increase (decrease) in cash 300,119 (415,152) 752,541
Cash at beginning of period 210,823 510,942 95,790
------------ ------------ ------------
Cash at end of period $ 510,942 $ 95,790 $ 848,331
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information (Note K):
Cash paid during the year for:
Interest $ 1,843,630 $ 2,736,233 $ 2,167,279
------------ ------------ ------------
------------ ------------ ------------
Income Taxes $ 2,633,626 $ - $ -
------------ ------------ ------------
------------ ------------ ------------
</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, 1993, 1994 AND 1995
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the "Company") is
primarily engaged in the sale of aircraft, aircraft parts, leasing of
aircraft and related services. The Company previously was engaged in other
activities through the Company's wholly-owned subsidiary, International
Airline Service, Inc. Center ("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 R). 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 Q).
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.
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 then amortized as part sales take place. The amortization
is then based upon the actual sales, except in any periods where sales are
lower than expected, the estimated sales per the initial sales projection are
used (which has a maximum life of 5 years). The amount of cost amortized is
based upon the gross profit percentage as calculated from the estimated sales
value of the parts. The sales value estimates are monitored by management,
and adjusted periodically as necessary. Certain aircraft, which were
previously leased have been classified as held for sale and are included in
inventory.
At May 31, 1994 and 1995, approximately 72% and 80%, respectively, of the
ending inventory (including aircraft held for sale) was costed under the
specific identification method, and the remaining 28% and 20%, 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, 1993, 1994 AND 1995
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
e) Notes Receivable
In fiscal 1993, the Company sold certain aircraft to an African airline in
exchange for notes receivable totalling $2,590,000. In December 1994, the
remaining balance due on one of the notes was paid. A new note was executed
for $937,466 representing the current principal balance on the remaining note
plus balances due on trade accounts receivable. In addition, the note
provides for an additional $250,000 of future part sales, none of which were
delivered as of May 31, 1995. The new note bears interest at a rate of 12%,
and requires monthly payments of $70,000 until paid. Due to certain economic
conditions in Nigeria, the Company is deferring the recognition of interest
income on this note until the collection of such interest. The note is
collateralized by the aircraft sold.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
which relates to "Accounting for Creditors For Impairment of a Loan". This
Statement, which is effective for fiscal years beginning after December 15,
1994, requires that impaired loans or notes receivable be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or fair value of the collateral. Management does not
anticipate that the adoption of SFAS No. 114 will have a significant effect
on the overall financial condition or operations of the Company. The Company
intends to adopt SFAS No. 114 on June 1, 1995, as required.
f) Deferred Debt Costs
Deferred debt costs principally relate to the costs associated with obtaining
the Company's Senior Secured Notes and Convertible Subordinated Debentures.
These costs are being amortized using the interest method over the life of
the respective debt issue. Accumulated amortization at May 31, 1994 and
1995, was approximately $802,000 and $1,094,000, respectively.
g) Earnings Per Share
Earnings per share is computed by dividing the net earnings (loss) by the
weighted average number of common shares outstanding and common stock
equivalents. Stock options and warrants are considered common stock
equivalents unless their inclusion would be anti-dilutive. The Company's
Convertible Subordinated Debentures are not considered common stock
equivalents as their inclusion would be anti-dilutive and the effective yield
on the securities exceeded 66-2/3% of the average Aa corporate bond rate at
the time of issuance.
h) Revenue Recognition
Revenue 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.
i) Employee Benefit Plan
The Company established in fiscal 1992 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 1993, 1994 and 1995 were insignificant.
The Company does not provide any health or other benefits to retirees.
F-8
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
j) Reclassifications
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
k) Uninsured Cash Balances
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, 1995, the Company's uninsured cash balances
approximated $803,000.
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.
NOTE B - GOING CONCERN
Primarily as a result of the net losses experienced in fiscal 1994 and 1995,
and the classification of most indebtedness as current, the Company has a
significant deficit in working capital and stockholders' equity. Currently,
the Company is in noncompliance with certain financial and other covenants
under the loan agreements relating to the 12% Senior Secured Notes ("Notes"),
issued July 1992, and the 8% Convertible Subordinated Debentures
("Debentures"), issued September 1993 (see Long-Term Obligations Note D).
The Notes are secured by substantially all of the assets of the Company and
the Debentures are unsecured and are subordinated in right of payment to the
Notes.
Excluding amounts scheduled to be repaid in fiscal 1996 under the terms of
the agreements, $18,083,334 is subject to accelerated maturity and, as such,
has been classified as a current liability in the Consolidated Balance Sheets
at May 31, 1995. The Company intends to present a restructuring proposal to
the holders of the Notes and the Debentures during the second quarter of
fiscal 1996. There can be no assurance that the Company will be able to
consummate a restructuring of its indebtedness. If the lenders were to
accelerate maturity, the Company would not have sufficient funds to repay the
debt obligations.
As a result of the factors, there exists substantial doubt about the
Company's ability to continue in existence. However, in 1995, the Company
took a number of cost-cutting steps to reduce its operating losses including
ceasing the operations of its Service Center (see Note R), personnel
reductions and the elimination of other costs.
NOTE C - INVENTORY
Inventories at May 31, 1994 and 1995 consisted of the following:
1994 1995
---------- ----------
Aircraft parts $5,624,922 $4,063,352
Aircraft available for sale 3,094,852 2,433,918
---------- ----------
8,719,774 $6,497,270
---------- ----------
---------- ----------
F-9
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
12% Senior Secured Notes $ 14,550,000 $ 9,850,000
8% Convertible Subordinated Debentures 10,000,000 10,000,000
Mortgage note payable to bank 481,580 455,420
Notes payable due in equal monthly installments
through October 1997, bearing interest at
9.5% to 11.5% collateralized by equipment 31,823 16,363
Capitalized lease obligations (Note E) 1,109,565 13,968
------------ ------------
26,172,968 20,335,751
Less: Current maturities and long-term obligations
in default classified as current 25,687,948 19,895,374
------------ ------------
$ 485,020 $ 440,377
------------ ------------
------------ ------------
</TABLE>
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior
Secured Notes ("Notes") due July 1997. In September of 1993, the note
agreement was amended, to require a payment of $3,450,000 with the proceeds
from the issuance of the Convertible Subordinated Debentures ("Debentures")
and subsequent sinking fund payments of $3,233,333 in July 1994 and 1995 and
$4,041,667 in July 1996 and 1997. In connection with this extinguishment,
the Company recorded as an extraordinary item the loss on retirement of debt.
Such costs included a 6% prepayment penalty as well as that portion of the
deferred debt issuance costs associated with the Notes retired. During
fiscal 1995 the Company prepaid, without penalty, $1,466,333 of the amount
due in July 1995. The notes are secured by substantially all the assets of
the Company. Warrants to purchase 1,093,528 shares of common stock were
issued to the Noteholders at an exercise price of $5.375. The warrants have
a five year term and carry restrictions regarding exercise and registration
of the underlying shares. The security purchase agreement contains
restrictive covenants requiring the Company to maintain a minimum net worth
as well as certain financial ratios, restricts dividends and limits capital
expenditures, indebtedness, liens, certain business activities and inventory
purchases. The Company is in default of the loan agreement.
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 has prevented the
Company from making the scheduled interest payment on the Debentures, which
was due May 31, 1995. The Company also did not make its scheduled July 1995
principal payment to the holders of the Notes.
F-10
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE D - LONG-TERM OBLIGATIONS - Continued
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. The land and building has a total cost of
approximately $1,009,000. This property also has a junior mortgage filed by
the Senior Secured Noteholders.
The maturities of long-term obligations in each of the next five years
subsequent to May 31, 1995 are as follows: 1996 - $1,812,040, 1997 -
$4,084,204, 1998 - $4,439,507, 1999 - $0, 2000 - $0, and thereafter
$10,000,000. However, the Company is in default under the terms of the
securities purchase agreement for the 12% Senior Secured Notes, and the 8%
Convertible Subordinated Debentures. If the holders were to demand
repayment, $18,083,334, which is scheduled to be paid subsequent to May 31,
1996, would be due in fiscal 1996.
NOTE E - LEASES
The Company conducts a portion of its operations utilizing leased equipment
which has been capitalized. Substantially all of the fixed assets of the
Service Center were acquired through a leasing arrangement which was
classified as a capitalized lease. In January 1995, the Company was released
from all obligations under this lease in connection with the transfer of
assets from the Service Center, as discussed in Note R. 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, 1995.
Year ended May 31, 1995 $18,770
Amount representing interest 4,802
-------
Present value of future minimum lease payments 13,968
Current maturities 3,606
-------
Long term obligations under capital leases $10,362
-------
-------
Capitalized equipment leases are accounted for and amortized as company-owned
equipment. The following is a schedule of leased equipment under capital
leases:
1994 1995
---------- ---------
Equipment $1,412,904 $ 298,279
Less: Accumulated amortization 482,051 279,863
---------- ---------
$ 930,853 $ 18,416
---------- ---------
---------- ---------
The Company leases warehouse and hangar facilities as well as certain
equipment under long-term operating lease agreements which expire at varying
times over the next five years. Rental expense under these leases for the
years ended May 31, 1993, 1994 and 1995 was approximately $203,000, $242,000
and $220,000, respectively.
At May 31, 1995, future minimum payments on non-cancellable operating leases
are $47,900 in fiscal 1996.
F-11
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE E - LEASES - Continued
The Company leases aircraft to customers under various operating leases one
of which is month to month and the other expires in October 1995. In
addition to minimum base rentals, the lease agreements require additional
rent based upon aircraft usage. Future minimum rentals at May 31, 1995, on
non-cancellable operating leases will be $180,000 in fiscal year 1996. The
net investment in aircraft held for or leased to customers was $6,126,138
and $2,210,202 at May 31, 1994 and 1995, respectively.
NOTE F - INCOME TAXES
The provision for income taxes for the years ended May 31, 1993, 1994 and
1995:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current provision:
Federal $ 732,000 $ (2,544,185) $ -
State 110,000 - -
------------ ------------ ------------
842,000 (2,544,185) -
Deferred provision (benefit) (332,000) 69,000 -
------------ ------------ ------------
$ 510,000 $ (2,475,185) $ -
------------ ------------ ------------
------------ ------------ ------------
The tax effect of the Company's temporary differences and carryforwards are
as follows:
1994 1995
------------ ------------
Deferred tax liabilities (benefits) - current:
Reserve for overhaul costs $ (316,000) $ (545,000)
Bad debt reserve (354,000) (233,000)
Inventory capitalization (256,000) (188,000)
Inventory writedown (912,000) -
Accrued payroll (29,000) (37,000)
Accrued legal settlement costs (310,000) (116,000)
Accrued vacation (13,000) (16,000)
Accrued - other - (11,000)
------------ ------------
$ (2,190,000) $ (1,146,000)
------------ ------------
------------ ------------
1994 1995
------------ ------------
Deferred tax liabilities (benefits) - non-current:
Inventory capitalization $ (10,000) $ -
Depreciation 23,000 226,000
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (1,279,000) (702,000)
Accrued interest income (106,000) (106,000)
Net operating loss carryforward - federal (1,315,000) (2,941,000)
Net operating loss carryforward - state (315,000) (277,000)
Minimum tax credit - federal (122,000) (122,000)
Other, net (7,000) (8,000)
------------ ------------
$ (3,095,000) $ (3,894,000)
------------ ------------
------------ ------------
</TABLE>
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1994 and 1995.
F-12
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE F - INCOME TAXES - Continued
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate 34.0% (34.0)% (34.0)%
Operating losses with no current tax benefit - 19.6 34.0
Increase in taxes resulting from State income tax
less federal income tax benefit 3.6 - -
Foreign Sales Corporation (FSC) (6.0) - -
Penalties and other non-deductible items 1.4 - -
----- ----- -----
33.0% (14.4)% -%
----- ----- -----
----- ----- -----
</TABLE>
The Company has net operating loss carryforwards for federal and state
purposes of approximately $8.7 and $7.6 million, respectively. The net
operating losses will expire in the year 2010. The Company has a federal
minimum tax credit carryover of approximately $122,000 which may be utilized
in future years to the extent that regular tax liability exceeds the
alternative minimum tax. Certain provisions of the tax law may limit the net
operating loss and credit carryforwards available for use in any given year
in the event of a significant change in ownership interest.
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 of 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 AND WARRANTS
The Stockholders in October 1989 approved a Stock Option Plan pursuant to
which 350,000 shares of the Company's common stock were reserved for the
grant of options to employees and directors of the Company or its
subsidiaries. The issuance of the options and the form of the options shall
be at the discretion of the Company's Compensation Committee. Information
with respect to stock options under the plan is as follows:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------------
Reserved Outstanding Available
-------- ----------- ---------
<S> <C> <C> <C>
Balance June 1, 1993 315,000 221,500 93,500
Expired - (71,000) 71,000
------- ------- -------
Balance May 31, 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
------- ------- -------
------- ------- -------
</TABLE>
F-13
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE H - STOCK OPTIONS AND WARRANTS - 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 equalled 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 $5.125 per share. At May 31, 1995, options to
purchase 24,000 shares were vested.
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. The option price 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, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
United States $ 13,245 $ 10,978 $ 18,048
Africa and Middle East 14,354 5,249 1,204
Europe 4,514 374 1,350
Latin America 1,102 2,178 4,347
Canada 307 558 34
Asia 48 9 -
--------- --------- ---------
$ 33,570 $ 19,346 $ 24,983
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
years 1993 and 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
18%, 10% and 1% of net sales during the years ended May 31, 1993, 1994, and
1995, respectively. The Company also had sales to another African customer
which accounted for 16% and 6% of net sales for fiscal 1994 and 1995,
respectively. In 1993, the Company had sales to a Czechoslovakian customer
and a United States customer each of which accounted for 11%, of 1993 net
sales.
F-14
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
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
Chairman of the Company personally. The proceeds of the loan were advanced
to the joint venture without any specific terms regarding repayment of
principal or payment of interest, and the funds were used to purchase three
aircraft. The joint venture's operations were not successful, and the joint
venture was not able to make the required payments under the terms of the
note. The Company was in default under the terms of the note due to
nonpayment of principal and interest and in February 1994, the Company agreed
upon a settlement with the lender, whereby the lender received title to the
three (3) aircraft and $500,000 from the Company. All remaining liabilities
have been satisfied and the joint venture has been dissolved. The Company's
loss relating to the joint venture, as shown in the statement of operations
for fiscal 1994, includes its share of the joint venture operating losses
($280,000) and its loss upon dissolution ($143,224).
Summarized financial information for the joint venture for the year ended May
31, 1993 was as follows:
1993
-----------
Total assets $ 2,721,329
Total liabilities $ 2,894,416
Net loss $ 183,057
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 1994 and 1995, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Net decrease in inventory $ (9,901,144) $ (2,222,504)
Transfer of aircraft from inventory
to held for lease 4,070,430 -
Transfer of aircraft from held for lease
to inventory (250,000) (2,688,330)
Write-down of inventory through restructuring charge (2,449,458) -
Reduction in carrying value of aircraft leased and depreciated
in fiscal 1994 and classified as inventory at May 31, 1994 287,025 -
------------ ------------
Cash flow impact from change in inventory $ (8,243,147) $ (4,910,834)
------------ ------------
------------ ------------
</TABLE>
In fiscal 1994, the Company issued 32,667 shares of common stock in exchange
for certain inventory.
During the year ended May 31, 1993, the Company sold three aircraft to
several customers for $3,700,000 of which the Company received $1,100,000 in
cash, $125,000 in receivables and $2,475,000 in aircraft, which were
classified in inventory and aircraft held for lease.
F-15
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
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.
During the year ended May 31, 1993, the Company paid an outside director of
the Company a total of $203,000, including interest of $23,000, to repay a
short-term unsecured loan made to the Company during the same year.
In fiscal 1994 and 1995, the Company paid approximately $54,000 and $33,000,
respectively, to a director for certain consulting services. 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. No amounts have been earned by the director
under this new agreement.
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.
The Company previously rented an aircraft used in corporate travel from an
entity controlled by a former officer/director of the Company. The total
rent paid in fiscal 1993 was approximately $81,000. The Company also rented
a condominium unit from an entity controlled by this officer/director. Total
rent paid in fiscal 1993 and 1994 was approximately $18,000 and $9,000,
respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
On February 28, 1994, a complaint titled Ullman et al v. International
Airline Support Group, Inc. et al. was filed in the United States District
Court for the Southern District of Florida (Case No. 94-0379), alleging
certain actionable misrepresentations and non-disclosures by the Company and
certain directors under the federal securities laws, as well as claims for
common law fraud and breach of fiduciary duty. The plaintiffs allege damages
due to declines in the market price of the Company's common stock and seek to
have the action certified as a class-action complaint. The complaint seeks
unspecified damages. The plaintiffs' original complaint was dismissed by the
Court with leave to re-plead such complaint. In August 1994, an amended
complaint was filed. On June 1, 1995, the plaintiffs and the Company reached
an agreement to settle the litigation.
The Company is also a defendant in various lawsuits which arise in the
ordinary course of business. In the opinion of management, based on advice of
legal counsel, the ultimate resolution of the remaining lawsuits will not
have a material effect on the financial statements.
NOTE N - 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.
F-16
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE N - FOURTH QUARTER ADJUSTMENTS - Continued
In the fourth quarter of fiscal 1993, the Company recorded an accrual of
approximately $200,000 at May 31, 1993 relating to the settlement of certain
litigation. The Company also increased its allowance for doubtful accounts
by $215,000 in the fourth quarter of fiscal 1993 due to concerns about the
collectibility of receivable balances from various customers.
NOTE O - 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.
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 P - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Customer deposits $ 558,900 $ 426,453
Accrued repair costs 585,510 224,406
Accrued legal costs 825,000 60,000
Accrued interest 294,460 399,030
Accrued payroll 329,255 282,834
Accrued commissions - 159,536
Advance payment on customer account 600,000 -
Reserve for repair of leased aircraft 579,450 570,940
Other 198,265 103,701
----------- -----------
$ 3,970,840 $ 2,226,900
----------- -----------
----------- -----------
</TABLE>
F-17
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1993, 1994 AND 1995
NOTE P - ACCRUED LIABILITIES - Continued
In November 1994, the Company received an unfavorable judgment arising from a
lawsuit relating to commissions owed on the sale of an aircraft in 1989.
Accordingly, the Company recorded an accrual of $825,000 at May 31, 1994
relating to this settlement, as reflected in the above table. In January
1995, a settlement on the judgment was reached whereby the Company agreed to
pay $520,000 over three years. The present value of the settlement amount
was $467,997. The difference between this amount and the prior year accrual
of $825,000 is included in unusual and nonrecurring items in the Consolidated
Statements of Operations. The remaining balance of this payable of $308,875
is included in accounts payable at May 31, 1995.
NOTE Q - WELLMAN TRANSACTION
In January of 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 is recorded in accrued
liabilities. 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.
In June 1995, the counsel of the employees notified the Company that the
employees were alleging that the Company was in default to such parties in
the performance of certain of its obligations to them pursuant to the
Purchase Agreement. Counsel for employees has not threatened to institute
litigation against the Company. The Company responded by raising defenses to
the alleged breaches and alleging breaches by the employees of their
obligations to the Company. As of the current date, a settlement had not
been reached.
NOTE R - 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 ("IASC"), which was an FAA
certified repair facility for 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. 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 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.
F-18
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 1995 FEBRUARY 29, 1996
(NOTE)* (UNAUDITED)
------------ -----------------
<S> <C> <C>
Current assets:
Cash $ 848,331 $ 230,713
Accounts receivable, net of allowance for doubtful
accounts of $588,000 at February 29, 1996 and
$619,000 at May 31, 1995, respectively 2,592,463 4,104,296
Notes receivable 313,490 --
Inventories 6,497,270 7,432,857
Other current assets 31,480 147,496
------------ ------------
Total current assets 10,283,034 11,915,335
Property and equipment:
Land 330,457 330,457
Aircraft held for lease 3,289,613 2,904,760
Building and leasehold improvements 715,772 715,772
Machinery and Equipment 940,948 989,596
------------ ------------
Less accumulated depreciation 5,276,790 4,940,585
1,980,927 1,832,932
------------ ------------
3,295,863 3,107,653
------------ ------------
------------ ------------
Other assets:
Deferred debt costs, net 931,932 746,446
------------ ------------
$ 14,510,829 $ 15,769,434
------------ ------------
------------ ------------
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
F-19
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
MAY 31, 1995 FEBRUARY 29, 1996
(NOTE)* (UNAUDITED)
------------ -----------------
<S> <C> <C>
Current assets:
Current maturities of long-term obligations $ 45,354 $ 38,149
Long-term obligations in default classified as current 19,850,000 18,400,000
Accounts payable and accrued expenses 3,876,978 4,644,882
------------ ------------
Total current liabilities 23,772,352 23,083,031
Long-term obligations, less current maturities 440,377 415,799
Commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Retained earnings (deficit) (12,360,274) (10,387,770)
Total stockholders' equity (deficit) (9,701,900) (7,729,396)
------------ ------------
$ 14,510,829 $ 15,769,434
------------ ------------
------------ ------------
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
F-20
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Net sales $ 3,380,806 $ 7,318,730 $18,248,074 $16,247,134
Lease revenue 774,278 529,133 2,189,778 1,277,169
----------- ----------- ----------- -----------
Total revenues 4,155,084 7,847,863 20,437,852 17,524,303
Cost of sales 2,044,978 4,369,628 14,910,941 9,761,700
Selling, general, and
administrative expenses 1,005,113 1,141,055 3,322,197 3,046,450
Provision (recovery)for
doubtful account (194,095) 317,084 (291,602) 317,084
Financial restructuring -- 112,776 -- 305,685
costs
Interest expense 516,274 475,306 1,754,892 1,511,700
Depreciation and amortization 563,793 183,232 1,699,085 613,737
Interest and other income (352,462) (578) (590,628) (4,557)
Unusual and non-recurring items (177,115) -- (177,115) --
(Income) losses of service
center subsidiary (285,552) -- 701,317 --
3,120,934 6,598,503 21,329,087 15,551,799
----------- ----------- ----------- -----------
Earnings (loss) before income 1,034,150 1,249,360 (891,235) 1,972,504
taxes
Provision for income taxes -- -- -- --
Net earnings (loss) $ 1,034,150 $ 1,249,360 $ (891,235) $ 1,972,504
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share date:
Weighted average shares 4,041,779 4,041,779 4,041,779 4,041,779
Net earnings (loss) per common
share and common equivalent
shares
Net earnings (loss) $ 0.26 $ 0.31 $ (0.48) $ 0.49
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
F-21
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 18, 1995 FEBRUARY 29, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (891,235) $ 1,972,504
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,889,145 613,737
Provision for doubtful accounts 350,000 335,413
Gain on disposal of discontinued subsidiary (70,628) --
Changes in assets and liabilities 4,522,827 (1,817,425)
---------- ----------
Total adjustments 6,691,344 (868,275)
Net cash provided by operating activities 5,800,109 1,104,229
Cash flows from investing activities
Capital expenditures (706,482) (240,044)
---------- ----------
Net cash (used in) investing activities (706,482) (240,044)
Cash flows from financing activities:
Repayments of notes payable and debt obligations (4,913,128) (1,481,803)
---------- ----------
Net cash (used in) financing activities (4,913,128) (1,481,803)
Net (decrease) increase in cash 180,499 (617,618)
Cash at beginning of period 95,790 848,331
---------- ----------
Cash at end of period $ 276,289 $ 230,713
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
F-22
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain adjustments (consisting only of normal
and recurring adjustments) necessary to present fairly International Airline
Support Group, Inc.'s condensed consolidated balance sheets as of May 31, 1995
and February 29, 1996, the condensed consolidated statements of operations for
the three months and nine months ended February 28, 1995 and the three months
and nine months ended February 29, 1996, and the condensed consolidated
statements of cash flows for the nine month periods then ended.
The accounting policies followed by the Company are described in the
May 31, 1995 financial statements.
The results of operations for the nine months ended February 29, 1996 are
not necessarily indicative of the results to be expected for the full year. For
interim reporting purposes, certain expenses are based on estimates rather than
expenses actually incurred.
2. Inventories consisted of the following:
May 31, 1995 February 29, 1996
------------ -----------------
Aircraft parts $ 4,063,352 $ 5,120,988
Aircraft available for sale 2,433,918 2,104,354
------------ ------------
$ 6,497,270 $ 7,432,857
------------ ------------
------------ ------------
Inventories are stated at the lower of cost or market. The cost of
aircraft parts is determined on a specific identification basis for those parts
purchased individually or in lots where specific identification is practical.
For parts acquired through whole aircraft purchases, the costs are assigned to
pools which are then amortized as parts sales take place. The amortization is
based upon the actual sales, except in any periods where sales are lower than
expected, the estimated sales per the initial sales projection are used (which
has a maximum life of 5 years). The amount of cost amortized is based upon the
gross profit percentage as calculated from the estimated sales value of the
parts. The sales value estimates are monitored by management, and adjusted
periodically as necessary.
At February 29, 1996, approximately 94% of the ending inventory (including
aircraft held for sale) was costed under the specific identification method, and
the remaining 6% was costed under the pooling method.
3. Primarily as a result of net losses experienced in fiscal 1995 and 1994,
and the classification of most indebtedness as current, the Company has a
significant deficit in working capital and stockholders' equity. Currently, the
Company is in default in the payment of principal on the 12% Senior Secured
Notes ("Notes"), issued July 1992, and is in default in payment of interest on
the 8% Convertible Subordinated Debentures ("Debentures"), issued September
1993. The Notes are secured by substantially all of the assets of the Company.
The Debentures are unsecured and are subordinated in right of payment to the
Notes and to the claims of the Company's general unsecured creditors. The
entire balance of the Notes and the Debentures, amounting to $8,400,000 and
$10,000,000, respectively, are subject to accelerated maturity and, as such,
have been classified as a current liability in the Consolidated Balance Sheets
at February 29, 1996. After conducting preliminary meetings with certain
holders of the Notes and Debentures, the Company formulated a restructuring
proposal that contemplates (among other things) a deferral of the time of
payment of a portion of the principal of the Notes and a conversion of all of
the outstanding Debentures into the Company's Common Stock. The restructuring
proposal was subsequently presented to certain major holders of the Debentures.
The Company understands that, after the presentation of the restructuring
proposal, the largest holder of the Debentures sold all of the Debentures then
held by it, for a cash price equal to $150 per $1,000 principal amount of the
Debentures, to one or more substantial holders of Debentures that have also been
participating in the restructuring discussions. In November 1995, these
Debenture holders presented to the Company a preliminary counterproposal to the
Company's restructuring proposal, but the counterproposal was subsequently
F-23
<PAGE>
International Airline Support Group, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
retracted. On February 1, 1996, the Company again met with representatives of
certain major holders of the Debentures. At this meeting, the Company and the
representatives of the Debentureholders discussed the Company's proposal that
the Debentures be converted into shares of the Company's common stock.
The representatives requested that the Company update certain information
included in its original restructuring proposal and provide a revised
restructuring proposal. The Company is preparing a revised restructuring
proposal based on the assumption that the Debentureholders will agree to convert
their instruments into shares of the Company's Common Stock. Although the
Company intends to continue these restructuring discussions, there can be no
assurance that the Company will be able to consummate a restructuring of its
indebtedness. If the lenders were to accelerate the maturity of the Notes or
Debentures, or both, the Company would not have sufficient funds to repay the
debt obligations.
As a result of these factors, there exists substantial doubt about the
Company's ability to continue in existence.
During the nine months ended February 29, 1996, the Company incurred
approximately $306,000 of legal, accounting and other consulting fees in
connection with its debt restructuring activities.
4. During the fiscal year ending May 31, 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 the nine months ended
February 29, 1996.
5. The Company recorded a gain during the nine months ended February 29, 1996
relating to 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 the
inventory. The Company recorded as net sales the cost of the inventory plus the
amount of the net gain.
6. Earnings per share is computed by dividing the net earnings (loss) by the
weighted average number of common shares outstanding and common stock
equivalents. Stock options and warrants are considered common stock equivalents
unless their inclusion would be anti-dilutive. In all periods presented, stock
options and warrants are anti-dilutive because their exercise price exceeded the
market price. The Company's convertible subordinated debentures are not
considered common stock equivalents as the effective yield on the securities
exceeded 66-2/3% of the average Aa corporate bond rate at the time of issuance.
7. Supplemental cash flow disclosures:
Cash payments for interest were $940,700 and $1,695,200 for the nine month
periods ended February 29, 1996 and February 28, 1995, respectively.
F-24
<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
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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:
----------------------------------------
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<PAGE>
Attest:
By:
------------------------------------------
Title:
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A-5
<PAGE>
APPENDIX B -- PROPOSED
STOCK OPTION PLAN
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
-------------------------------------------------------------
1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN
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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;
PROVIDED, HOWEVER, that the Committee shall consist of two or more directors of
the Company, each of whom is a "disinterested person" within the meaning of Rule
16b-3 under the Exchange Act, to the extent applicable.
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H. "Company" means International Airline Support Group, Inc., a corporation
organized under the laws of Delaware, or any successor corporation.
I. "Director" means a non-employee member of the Board.
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.
B-4
<PAGE>
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
B-5
<PAGE>
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.
B-6
<PAGE>
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.
B-7
<PAGE>
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(h) 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:
B-8
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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.
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 (i) in order to insure that
Awards granted under the Plan are exempt under Rule 16b-3 or (ii) 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. Notwithstanding the other provisions of this
paragraph, (i) no provision of this Plan may be amended more than once every six
months if such amendment would result in the loss of an exemption under
Rule 16b-3 and (ii) Section VII and the other provisions of this Plan
applicable to Director's Options may not be amended more than once every six
months other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
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.
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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.
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
IMPORTANT
Any holder of Convertible Debentures who wishes to accept the Exchange
Offer should either (a) complete the Consent and Letter of Transmittal with any
required signature guarantees and forward it with such Convertible Debentures
and any other required documents to the Depositary or (b) request a broker or
bank to effect the transaction for such holder. Holders of Convertible
Debentures that are registered in the name of a broker, dealer, commercial bank,
trust company or nominee should contact such institution to tender their
Convertible Debentures. See "The Exchange Offer--How to Tender and Consent in
the Exchange Offers."
THE DEPOSITARY:
ADDITIONAL COPIES
Requests for additional copies of this Proxy Statement/Prospectus and the
forms of Letter of Transmittal should be directed to the Company. You may also
contact your local broker, dealer, commercial bank or trust company for
assistance concerning the Exchange Offer.
