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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended MAY 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-18352
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 59-2223025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8095 N.W. 64th Street, Miami, Florida 33166
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(Address of principal executive offices) (Zip Code)
(305) 593-2658
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class Name of each exchange on which registered
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Common Stock, $.001 par value None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X]
At August 15, 1996, the aggregate market value of common stock held by non-
affiliates of the Registrant was approximately $757,646.
The number of shares of the Registrant's Common Stock outstanding as of
August 15, 1996 was 4,041,779.
DOCUMENTS INCORPORATED BY REFERENCE: [NONE]
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INTERNATIONAL AIRLINE SUPPORT GROUP INC.
ANNUAL REPORT OF FORM 10-K
FOR THE YEAR ENDED MAY 31, 1996
TABLE OF CONTENTS
PAGE
PART I........................................................................1
Item 1. Business........................................................1
Item 2. Properties......................................................9
Item 3. Legal Proceedings...............................................9
Item 4. Submission of Matters to a Vote of Security Holders.............9
PART II......................................................................10
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................10
Item 6. Selected Financial Data........................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................13
Item 8. Financial Statements and Supplementary Data....................20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................20
PART III.....................................................................21
Item 10. Directors and Executive Officers of the Registrant.............21
Item 11. Executive Compensation.........................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................24
Item 13. Certain Relationships and Related Transactions.................25
PART IV......................................................................26
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................26
SIGNATURES...................................................................32
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PART I
ITEM 1. BUSINESS.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS ARE BASED ON
CURRENT EXPECTATIONS. THESE STATEMENTS ARE FORWARD LOOKING IN NATURE AND
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: 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, THE LOSS OF A PRINCIPAL CUSTOMER IN A GIVEN PERIOD IF THE
COMPANY IS UNABLE TO REPLACE SALES TO SUCH CUSTOMER AND THE OTHER RISK FACTORS
DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE
UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE
PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH,
SPEAK ONLY AS OF THE DATE MADE.
GENERAL
International Airline Support Group, Inc. (the "Company") is a worldwide
supplier of spare parts to the aviation redistribution market. The Company
sells spare parts to major commercial passenger airlines, air cargo carriers,
maintenance and repair facilities and other redistributors. The parts sold by
the Company include avionics, rotable and expendable airframe and engine
components for commercial aircraft, including Airbus, Boeing and
McDonnell-Douglas aircraft and Pratt & Whitney and Rolls-Royce jet engines.
During fiscal 1996, the Company supplied parts to over 771 customers worldwide,
approximately 676 of whom were domestic customers and approximately 95 of whom
were foreign customers. Currently, the Company specializes in replacement parts
for McDonnell Douglas DC-9 aircraft. Management believes that the Company has
one of the most extensive inventories of aftermarket DC-9 parts in the industry.
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market and that
the Company's sales represented approximately 2% of such market during fiscal
1996. The redistribution market is highly fragmented, with a limited number of
large, well capitalized companies selling a broad range of aircraft spare parts,
and numerous smaller competitors serving distinct market niches. The Company
believes that significant trends affecting the redistribution market will
continue to increase its overall size while reducing the number of competitors.
Factors causing the expansion of the redistribution market include the
increasing size and age of the world-wide airline fleet and the increasing
pressures on airlines and maintenance and repair facilities to control their
costs.
RECENT DEVELOPMENTS
On July 12, 1996, the Company announced that it did not intend to pay the
scheduled $3.7 million principal installment due on its 12% Senior Secured Notes
due July 17, 1997 (the "Senior Notes"), pending redemption of the Senior Notes
in connection with a restructuring of its indebtedness (the "Restructuring").
The Company did not make the payment, which was due on July 17, 1996. The
Restructuring is described in a Registration Statement on Form S-4 filed by the
Company with the Securities and Exchange Commission, on July 12, 1996. Pursuant
to the proposed restructuring, the Company would offer to exchange (the
"Exchange Offer") 224.54 shares of its Common Stock, $.001 par value per share,
for each $1,000 principal amount of its 8% Convertible Subordinated Debentures
due August 31, 2003 (the "Convertible Debentures"). In connection with the
restructuring, the Company also intends to solicit proxies from the holders of
its Common Stock to approve a 1-for-27 reverse stock split, to effect certain
amendments to its Certificate of Incorporation and to approve a stock option
plan. Consummation of the Restructuring is subject to certain conditions.
The Company also announced that, on July 11, 1996, the holder of a majority
of the outstanding principal amount of the Senior Notes (the "Majority
Noteholder") executed a "Standstill Agreement" with the Company pursuant to
which such holder agreed that it would refrain (to the extent provided therein)
from exercising any rights or remedies
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it may have with respect to the Event of Default with respect to the Senior
Notes that occurred upon the Company's failure to pay the July 17, 1996
installment of principal. The obligations of the Majority Noteholder pursuant
to the Standstill Agreement terminate on the earlier of (i) the 120th day
following the date of the Standstill Agreement; (ii) the consummation of the
Restructuring; and (iii) the occurrence of certain specified events, including,
among other things, the exercise by any creditor of the Company of any remedies
against the Company with respect to the Company's obligations to such creditor
and the first date on which, in the reasonable determination of the Majority
Noteholder, any one of the conditions precedent to the Restructuring is no
longer capable of being satisfied. Subsequent to July 11, 1996, the holders of
approximately $1.8 million in aggregate principal amount of the Senior Notes
executed Standstill Agreements.
COMPANY 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
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.
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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.
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
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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.
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.
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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 seller 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 inventories due to the retirement of an aircraft
type from their fleets, the downsizing of their operations or the dissolution of
their businesses 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 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
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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. In fiscal 1993 and 1994, Transafrik Corp., a cargo
carrier operating in Africa, accounted for a significant amount of the Company's
revenue. Prior to fiscal 1993, no customer accounted for more than 10% of the
Company's net revenue, except for Transafrik. In fiscal 1994, sales to
Transafrik declined significantly. Transafrik accounted for less than one
percent of the Company's total revenue in fiscal 1995 and 1996, compared with
25%, 18% and 10% of total revenues in fiscal 1992, 1993 and 1994, respectively.
During fiscal 1995, the Company sought to reduce its vulnerability to a decrease
in sales to any single customer by focusing its marketing on the identification
and solicitation of new customers. As a result, the Company obtained
approximately 240 new parts customers during fiscal 1995 and 242 new customers
during fiscal 1996. In fiscal 1995, the Company instituted new compensation
policies for its parts sales force. Pursuant to the new policies, all salesman
are paid strictly on commission, sales to new customers are encouraged and
commissions are not paid until accounts are collected. In addition, the Company
has continued to decrease its exposure to more volatile international markets.
Its domestic revenues as a percentage of total revenues has increased in each of
the last four fiscal years, to approximately 85% in fiscal 1996 from 72% in
fiscal 1995, 59% in fiscal 1994, and 40% in fiscal 1993.
During fiscal 1996 and the first seven months of calendar year 1996, the
Company's parts sales to ValuJet represented approximately 21% and 25%,
respectively, of the Company's total revenues. On June 17, 1996, ValuJet
entered into a consent decree with the FAA, pursuant to which ValuJet agreed to
ground all its aircraft until it demonstrates compliance with specified safety
and maintenance procedures. The Company also conducts business with other
customers who provide services to ValuJet. Management cannot estimate the
effect that the grounding of ValuJet has had or will have on sales to such other
customers.
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The following table lists the Company's customers which, based upon net
revenues, accounted for more than 10% of net revenues for fiscal 1995 and 1996:
<TABLE>
<CAPTION>
Customer Net Revenues (000's) Percentage of Total Net Revenues
- ------- ------------------- ---------------------------------
1995:
- ----
<S> <C> <C>
Aeroservices Carabobo C.A. $2,716 10.9
Ajax Leasing Ltd. 5,625 22.5
1996:
- ----
ValuJet Airlines, Inc. 4,771 20.6
</TABLE>
GEOGRAPHIC DISTRIBUTION OF CUSTOMERS. The Company sells aircraft and
aircraft parts and leases aircraft to foreign and domestic customers. The
footnotes to the Consolidated Financial Statements of the Company, which are set
forth elsewhere in this Annual Report on Form 10-K, provide certain information
with respect to the geographic areas in which the Company has derived revenue
during the three fiscal years ended on May 31, 1996.
ADDITIONAL SERVICES
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that its
spare parts sales opportunities are enhanced by providing its existing and new
customers with whole aircraft and engines through sale transactions. Such
transactions allow the Company to expand its customer base for spare parts and
to reduce the cost basis in its aircraft. The Company currently owns four
aircraft. As of May 31, 1996, one of the aircraft was subject to a
month-to-month operating 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.
7
<PAGE>
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal injury or
death which may result from the failure of an aircraft spare part sold by it.
In this regard, the Company maintains liability insurance in the amount of
$10 million. While the Company maintains what it believes to be adequate
liability insurance to protect it from such claims, and while no lawsuit has
ever been filed against the Company based upon a products liability theory, no
assurance can be given that claims will not arise in the future or that such
insurance coverage will be adequate. Additionally, there can be no assurance
that insurance coverages can be maintained in the future at an acceptable cost.
Any such liability not covered by insurance could have a material adverse effect
on the financial condition of the Company.
COMPETITION
The aircraft spare parts redistribution market is highly fragmented.
Customers in need of aircraft parts have access, through computer-generated
inventory catalogues, to a broad array of suppliers, including aircraft
manufacturers, airlines and aircraft service companies. The dominant companies
in the aircraft parts aftermarket are AAR Corp., Aviation Sales Company and
Banner Aerospace. These companies are larger than the Company and have greater
financial resources. The Company also competes with numerous smaller,
independent dealers, which generally participate in niche markets. The Company
believes that none of its competitors account for a significant amount of the
spare parts market for DC-8, DC-9 and MD-80 aircraft, the types of narrow-bodied
aircraft in which the Company specializes. Competition in the redistribution
market is generally based on price, availability and quality of product,
including traceability.
EMPLOYEES
As of August 15, 1996, the Company had approximately 25 employees. Of
these, two are executive officers, six are sales personnel, seven are
accounting, finance, data processing, and administrative personnel, one is a
quality assurance specialist and the remainder are inventory and warehouse
operations personnel. The Company is not a party to any collective bargaining
agreement. The Company believes its relations with its employees are good.
8
<PAGE>
ITEM 2. PROPERTIES.
The Company's executive offices and operations are located at 8095
N.W. 64th Street, Miami, Florida. On August 8, 1996, the Company entered into a
contract to sell its corporate offices and adjacent warehouse. The Company
anticipates that the sale of its property will be consummated in the second
quarter of fiscal 1997, at which time the Company will relocate its facilities
into leased space that has not yet been identified.
The Company's property, as well as substantially all the other assets of
the Company, are subject to the lien of holders of the Senior Notes and,
following the consummation of the Restructuring, will be subject to a lien
securing amounts advanced pursuant to the secured credit facility (the "Credit
Facility") that the Company expects to enter into in connection with the
Restructuring.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this Annual Report.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
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.
1995 Fiscal Year 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
1996 Fiscal Year 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
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.
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. If the
Restructuring is consummated, covenants contained in the Credit Agreement will
prohibit the Company from paying dividends on the Common Stock as long as
indebtedness issued pursuant to the Credit Agreement remains outstanding.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below for, and as of the
end of, each of the fiscal years in the five year period ended May 31, 1996 have
been derived from the Company's audited consolidated financial statements. The
consolidated financial statements of the Company as of May 31, 1995 and 1996 and
for the three-year period ended May 31, 1996 and the accountant's reports
thereon are included in Item 8 of this Form 10-K.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales $26,527 $32,032 $16,747 $21,999 $21,410
Lease revenue -- 1,473 1,986 2,984 1,795
------- ------- ------- ------- -------
Total revenues $26,527 $33,505 $18,733 $24,983 $23,205
Cost of sales 16,311 21,494 22,104 17,712 13,208
Selling, general and
administrative expenses 5,281 6,469 6,943 4,358 3,922
Provision (recovery) for
doubtful accounts 374 493 1,488 (335) 464
Depreciation and
amortization 201 1,000 2,474 1,402 1,153
Losses of service center
subsidiary -- -- 1,923 676 --
------- ------- ------- ------- -------
Total operating expenses 22,167 29,456 34,932 23,813 18,747
------- ------- ------- ------- -------
Income from continuing
operations 4,360 4,049 (16,199) 1,170 4,458
Interest expense 871 2,569 2,953 2,564 2,192
Interest and other
income, net (94) (66) (87) (603) (34)
Unusual and nonrecurring
items -- -- -- (177) --
------- ------- ------- ------- -------
Earnings (loss) before
income taxes, equity in
loss of joint
venture and extraordinary
item $ 3,583 $ 1,546 $(19,065) $ (614) $ 2,300
Provision for income taxes
(benefit) 1,370 510 (2,476) -- 14
Equity in loss
of joint venture (229) (59) (424) -- --
Extraordinary loss on
extinguishment of debt -- -- (363) -- --
------- ------- ------- ------- -------
Net earnings (loss) $1,984 $977 $(17,376) $(614) $2,286
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
PER SHARE DATA:
<S> <C> <C> <C> <C> <C>
Primary earnings (loss) per
common and common
equivalent share
Earnings (loss) before $ 0.52 $ 0.22 $(4.21) $(0.15) $ 0.57
extraordinary item
Extraordinary item -- -- (0.09) -- --
------ ------- ------- ------- ------
Net earnings (loss) $ 0.52 $ 0.22 $ (4.30) $ (0.15) $ 0.57
------ ------ -------- -------- ------
------ ------ -------- -------- ------
Weighted average shares
outstanding used in primary
calculation 3,849,852 5,312,046 4,041,779 4,041,779 4,041,779
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fully-diluted earnings (loss) per
common and common
equivalent share
Earnings (loss) before $ 0.52 $ 0.22 $ (4.21) $ (0.15) $ 0.47
extraordinary item
Extraordinary item -- -- (0.09) -- --
------ ------ -------- ---- ------
Net earnings (loss) $ 0.52 $ 0.22 $ (4.30) $ (0.15) $ 0.47
------ ------ -------- -------- ------
------ ------ -------- -------- ------
Weighted average shares
outstanding used in fully-diluted
calculation 3,849,852 5,312,046 4,041,779 4,041,779 6,541,779
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
At May 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital (deficit) $2,938 $17,088 $(18,312) $(13,489) $(10,841)
Total assets 20,303 35,709 25,553 14,511 16,132
Short-term debt 7,296 4,905 3,531 1,812 3,695
Long-term debt in
technical default
classified as current -- -- 22,157 18,083 14,042
Long-term debt 309 18,579 485 440 407
Stockholder's equity
(deficit) 7,080 8,173 (9,088) (9,702) (7,416)
</TABLE>
12
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
THE RESTRUCTURING. As of August 15, 1996, the Company had entered into
Standstill Agreements with holders of approximately 94.2% of the outstanding
principal amount of the Senior Notes and had reached an agreement in principle
with the single largest holder of the Convertible Debentures and Dabney/Resnick,
Inc. ("D/R"), an investment banking and broker-dealer firm whose clients include
a substantial number of holders of the Convertible Debentures, providing for the
Restructuring. The Company expects that consummation of the Restructuring will
result in the following:
- A reduction of its indebtedness from approximately $18.1 million to
approximately $8.1 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 a resulting cash flow adequate to
fund such obligations and operations.
- An improved operating income to fixed charge ratio.
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, it is possible that creditors
of the Company could file an involuntary petition seeking to place the Company
in bankruptcy. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of the Company rather than a liquidation, or that any
reorganization would be on terms as favorable to the holders of the Convertible
Debentures, Senior Notes and Common Stock as the terms of the Restructuring. If
a liquidation or a protracted reorganization were to occur, there is a risk that
there would be no cash or property available for distribution to holders of the
Convertible Debentures and the Common Stock and that the holders of Senior Notes
would incur a significant discount on their claims.
THE COMPANY'S CURRENT FINANCIAL CONDITION. At May 31, 1996, the Company's
total long-term debt amounted to $18.1 million, consisting primarily of $7.7
million principal amount of the Senior Notes, $10.0 million principal amount of
the Convertible Debentures and $.4 million principal amount of a mortgage loan
secured by its corporate headquarters. The entire principal amount of the
Senior Notes and the Convertible Debentures was classified as current at May 31,
1996, because of the existence of defaults under the governing documents. The
Senior Notes, which were issued during fiscal 1993, bear interest at the fixed
rate of 12% per annum, payable quarterly, and mature in 1997. The Convertible
Debentures, which were issued during fiscal 1994, bear interest at the fixed
rate of 8% per annum, payable quarterly, are convertible into shares of the
Company's Common Stock at $4.00 per share and mature in 2003.
13
<PAGE>
On May 26, 1995, the Company received a notice of payment blockage from the
Majority Noteholder. Citing a continuing Event of Default under the agreement
governing the Senior Notes as a result of the Company's noncompliance with
certain financial covenants, the Majority Noteholder demanded that the scheduled
interest payment which would otherwise have been payable on May 31, 1995 to
holders of the Convertible Debentures not be paid. As a result of the Company's
receipt of the notice of payment blockage, the Company did not make its
scheduled May 31, 1995 and August 31, 1995 interest payments due to holders of
the Convertible Debentures, totaling $400,000. Pursuant to the terms of the
Senior Notes, the Company was prohibited from making any other payments with
respect to the Convertible Debentures prior to the expiration of the payment
blockage period on November 22, 1995. Notwithstanding the expiration of the
payment blockage period, the Company did not pay the November 30, 1995 and the
February 29 and May 31, 1996 interest payments on the Convertible Debentures.
The Company does not intend to resume making payments of interest on the
Convertible Debentures.
The Company did not make its scheduled July 17, 1995 principal payment on
the Senior Notes in the approximate amount of $1.8 million. The Company cured
the default in part by making a principal payment of $1.45 million on the Senior
Notes on December 12, 1995. The Company made an additional principal payment of
$.7 million on May 13, 1996, which cured such principal payment default and
prepaid, without penalty, approximately $.35 million of the $4.1 million
principal payment due on the Senior Notes on July 17, 1996. The Company did not
make its July 17, 1996 principal payment on the Senior Notes, which was due in
the amount of approximately $3.7 million, pending redemption of the Senior Notes
in connection with the Restructuring. If the Restructuring is not consummated,
the Company will be unable to make such principal payment, the only remaining
principal payment on the Senior Notes due during the current fiscal year, and
will continue to be unable to make interest payments on the Convertible
Debentures for the remainder of the current fiscal year.
The failure to make the interest payments to the holders of the Convertible
Debentures and the principal payment to the holders of the Senior Notes due on
July 17, 1996 referred to above constituted an Event of Default under the
agreements governing the Senior Notes and Convertible Debentures. Further, the
Company is in default in the observance of certain financial covenants
applicable to the Senior Notes and the Convertible Debentures. If the Company
remains in default under the terms of the Senior Notes and Convertible
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of $17.7 million becoming immediately due and payable. The Company
would have no ability to repay such indebtedness if it were to be accelerated.
The foregoing circumstances most likely would require the Company to cease
operations or to file for protection under Chapter 11 of the Bankruptcy Code.
In addition, if the holders of any of the Company's Senior Notes or Convertible
Debentures demand repayment or if the holders of the Senior Notes seek to
realize upon the collateral securing the Senior Notes, there is a substantial
likelihood that the Company will be forced to cease operations or to file for
protection under Chapter 11 of the Bankruptcy Code.
At May 31, 1996, the Company had a working capital deficit of $10.8 million
and a current ratio of .5 to 1.0, compared to a working capital deficit of $13.5
million and a current ratio of .4 to 1.0 at May 31, 1995. The $2.7 million
reduction in the working capital deficit was primarily the result of proceeds
from the sale of certain aircraft (that were previously leased), being used to
pay down current liabilities. This is reflected in the Company's cash flows
which show cash flow provided by operating activities of approximately $2.1
million, but cash flows from financing activities using approximately $2.6
million.
The Company does not have any bank lines of credit or other sources of
liquidity beyond cash flows from operating activities due to profitable
operations, if any, or further asset sales. However, the Company does not
currently have any significant commitments for capital outlays. The Company has
received a commitment from a major money-center bank for a Credit Facility
consisting of (i) a revolving line of credit in an amount equal to the lesser of
(a) $11.0 million and (b) an amount based on the sum of eligible receivables
plus eligible inventory and (ii) a term loan in an amount equal to the lesser of
(a) $3.0 million and (b) an amount based on a percentage of the liquidation
value of aircraft approved by such bank owned by the Company. The Company
expects to enter into the Credit Facility in connection with the Restructuring.
14
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW.
The following table sets forth percentage relationships of expense items to
total revenues for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
YEARS ENDED MAY 31,
-------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Operating Data:
Net Sales 89.4% 88.1% 92.3
Lease revenue 10.6 11.9 7.7
---- ---- ---
Total revenues 100.0 100.0 100.0
Cost of sales 118.0 70.9 56.9
Selling, general and administrative expenses 37.1 17.4 16.9
Provision (recovery) for doubtful accounts 7.9 (1.3) 2.0
Depreciation and amortization expense 13.2 5.6 5.0
Losses of service center subsidiary 10.3 2.7 --
---- ---- ---
Total operating expenses 186.5 95.3 80.8
---- ---- ---
Income from operations (86.5) 4.7 19.2
Interest expense 15.8 10.3 9.4
Interest and other income, net (.5) (2.4) (.1)
Unusual and nonrecurring items - (.7) --
---- --- --
Earnings (loss) before income taxes, equity in loss (101.8) (2.5) 9.9
of joint venture and extraordinary item
Provision for income taxes (benefit) (13.2) -- 0.0
Equity in loss of joint venture (2.3) -- --
Extraordinary loss on extinguishment of debt ( 1.9) -- --
------ -- --
Net earnings (loss) ( 92.8)% ( 2.5)% 9.9%
-------- ------- ---
-------- ------- ---
</TABLE>
Inventories are valued at the lower of cost or market. The cost of
aircraft spare parts purchased individually or in lots, as opposed to whole
aircraft purchases, is determined on a specific identification basis. As of May
31, 1996, such parts represented approximately 83% of the inventory cost value.
The cost of parts acquired through whole aircraft purchases is assigned to the
pool of parts (the aircraft) based on the purchase price of the aircraft. As
parts are sold from the pool, the amount of cost amortized is based upon the
relationship of the cost basis of the pool to the estimated sales value of the
pool. As parts sales take place, the costs are charged to cost of sales based
on the estimated cost of sales percentage. As of May 31, 1996, such parts
represented approximately 3% of the inventory cost value. The revenue estimates
for the pool of parts (the aircraft) is determined by management based upon 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.
15
<PAGE>
Certain aircraft held for sale, which were previously leased, are accounted
for as inventory. As of May 31, 1996, such aircraft represented approximately
14% of the inventory cost value.
FISCAL 1996 COMPARED WITH FISCAL 1995.
Net parts sales increased by 37% or $5.1 million, from $13.8 million in
fiscal 1995 to $18.9 million in fiscal 1996. The increase in net parts sales is
primarily attributable in part to the Company's sales to ValuJet Airlines, which
sales amounted to $4.8 million in fiscal 1996 compared to $1.4 million in 1995.
Additionally, an improved operating environment within the airline industry led
to increased parts sales to new and existing customers. Aircraft sales
decreased to $2.5 million in fiscal 1996, compared to $8.1 million in fiscal
1995. Aircraft sales are unpredictable transactions and may fluctuate
significantly from year to year, dependent, in part, upon the Company's ability
to purchase an aircraft at an attractive price and resell it within a relatively
brief period of time, as well as the overall market for used aircraft. During
fiscal 1996, the Company acquired one aircraft and sold three aircraft, as
compared to fiscal 1995, during which the Company sold eight aircraft and
acquired none. Lease revenue deceased to $1.8 million in fiscal 1996 from $3.0
million in fiscal 1995, as certain leases that were in existence during the
prior year were terminated and not renewed (two of the aircraft under such
terminated leases were sold during fiscal 1996). The increase in parts sales
was insufficient to offset the decrease in aircraft sales and lease revenue and,
as a result, total revenues for fiscal 1995 decreased 7% to $23.2 million from
$25.0 million for fiscal 1995.
Fiscal 1996 lease revenues include $139,000 in revenues arising from a
fiscal 1995 transaction. During fiscal 1995, the Company accepted lease
payments from a foreign customer in the customer's local currency because
conversion restrictions precluded the customer from obtaining and paying U.S.
dollars. Due to uncertainties regarding when and at what rate the local
currency could be converted to U.S. dollars, the Company valued the local
currency at an estimated value of $200,000 as of May 31, 1995 (included in
cash), such amount being less than the then current U.S. equivalent amount at
the official exchange rate. The Company subsequently was able to convert the
funds to U.S. dollars in the amount of $339,000, resulting in a gain of
$139,000, which is included in lease revenues during fiscal 1996.
In addition, fiscal 1996 revenues were increased as a result of the
settlement of certain disputes with a customer. Pursuant to the settlement, the
customer paid the Company $660,000 and the Company canceled a note receivable
from the customer. The Company also released all claims it had against the
customer, which included, among other things, claims for the purchase price of
parts purchased by the customer on open account or pursuant to a consignment
arrangement. The customer released certain claims it had against the Company as
part of the settlement. The transaction resulted in a net gain to the Company
of approximately $345,000, consisting of the excess of cash received over the
net carrying value of the note receivable and cost of inventory. The Company
recorded as net sales the cost of the inventory plus the amount of the net gain.
As noted above, the Company's net parts sales to ValuJet Airlines amounted
to $4.8 million, or 21% of total revenues, and $1.4 million, or 6% of total
revenues, during fiscal 1996 and 1995, respectively. On June 17, 1996, ValuJet
Airlines entered into a consent decree with the FAA, pursuant to which ValuJet
Airlines agreed to ground all of its aircraft until it demonstrates compliance
with specified safety and maintenance procedures. Although ValuJet officials
have publicly stated their intentions to resume operations in the near future,
there can be no assurance that ValuJet will be able to do so. Further, the
consent decree provides that ValuJet may operate no more than 15 aircraft when
it initially resumes operations, which is less than half of its fleet. The
failure of ValuJet Airlines 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. The Company also conducts
business with other customers who provide services to ValuJet Airlines.
Management cannot estimate the effect that the grounding of ValuJet Airlines has
had or will have on sales to such other customers.
Cost of sales decreased 25.4% from $17.7 million in fiscal 1995 to $13.2
million in fiscal 1996, primarily as a result of lower sales. In addition, cost
of sales as a percentage of total revenues also decreased from 70.9% to 56.9%
respectively. The decrease in cost of sales as a percentage of total revenues
from fiscal 1995 to fiscal 1996 was primarily due to higher margin aircraft
sales in fiscal 1996 as compared to fiscal 1995. Cost of aircraft sales was
34.8% of total revenues in fiscal 1996 compared to 98.6% in fiscal 1995. The
cost of aircraft sales during fiscal 1995 was in excess
16
<PAGE>
of normal levels as the result of the sale at cost of three DC-9 aircraft. Cost
of parts sales as a percentage of total parts sales was 63.4% in fiscal 1996
compared to 66.0% in fiscal 1995.
Selling, general and administrative expenses decreased $.5 million,
amounting to $3.9 million, or 16.9% of total revenues in fiscal 1996, compared
to $4.4 million, or 17.4% of total revenues in fiscal 1995, primarily as a
result of the Company's ongoing cost reduction program.
Provision (recovery) for doubtful accounts was $464,000 in fiscal 1996
compared to $(335,000) in fiscal 1995. During fiscal 1995, the Company,
primarily through litigation, recovered approximately $700,000 of accounts
receivable which had been written off or reserved during fiscal 1994. The
recoveries were offset during fiscal 1995 by a provision for doubtful accounts
of $350,000. During fiscal 1996, the Company instituted a policy whereby it
records a provision of approximately 2% of total revenues for estimated future
write-off's of accounts receivable. There were no other significant provisions
or recoveries made during fiscal 1996.
Depreciation and amortization were $1.2 million in fiscal 1996 compared to
$1.4 million in fiscal 1995. Included in fiscal 1996 depreciation is a
writedown of $190,000 to the Company's headquarters facility to reduce its cost
to estimated market value. On August 8, 1996, the Company entered into a
contract to sell its headquarters facility. The Company anticipates that the
sale will be consummated in the second quarter of fiscal 1997. The net
reduction from fiscal 1995 to fiscal 1996 was due primarily to a decrease in
depreciation of aircraft held for lease, resulting from the sale of certain of
the Company's aircraft which were previously held for lease during fiscal 1995.
The Company incurred losses from its service center subsidiary of $676,000
in fiscal 1995. The amounts recorded relate to the Company's wholly owned
subsidiary, International Airline Service Center, Inc., which ceased operations
in fiscal 1995.
Interest expense in fiscal 1996 was $2.2 million, compared to $2.6 million
in fiscal 1995. The decrease in interest expense from fiscal 1995 to fiscal
1996 was due to a net reduction in total debt outstanding, to $18.1 million at
May 31, 1996 compared to $20.3 million at May 31, 1995.
Interest and other income for fiscal 1996 was $34,000, compared to $.6
million in fiscal 1995. Included in the fiscal 1995 amounts were several non-
recurring transactions, including approximately $340,000 of interest income
collected on notes receivable (such notes were retired during the first quarter
of fiscal 1996), a $66,000 gain on the sale of certain land located in Kentucky,
and approximately $120,000 received in connection with consulting and other
services provided to an insurance company.
During fiscal 1995, the Company incurred unusual and nonrecurring items of
$177,000. Included in these unusual and nonrecurring items is an expense of
$180,000 incurred in connection with the transactions between the Company and
Richard R. Wellman and Lynda Wellman and an affiliate of the Wellmans, and a
gain of $375,000 relating to settlement of litigation which had previously been
accrued in an amount in excess of the settlement amount. There were no unusual
and nonrecurring items in fiscal 1996.
Although the Company had net operating loss carryforwards sufficient to
offset income, during fiscal 1996 it recorded a provision for income taxes of
$14,000. The Company has fully exhausted its carryback benefits and recorded a
one hundred percent (100%) valuation allowance against the deferred tax asset
for net operating loss carryforwards. The $14,000 provision recorded in fiscal
1996 relates to alternative minimum taxes and amendments of certain prior year
state and federal tax returns.
Net earnings during fiscal 1996 were $2,286,000, or $.57 per share,
compared to a net loss of $614,000, or $.15 per share, during fiscal 1995. On a
fully-diluted basis, earnings (loss) per share were $.47 and $(.15) per share
during fiscal 1996 and 1995, respectively.
17
<PAGE>
FISCAL 1995 COMPARED WITH FISCAL 1994.
Total revenues for fiscal 1995 increased 33.4% from total revenues for
fiscal 1994, to $25.0 million from $18.7 million. The increase in total
revenues is primarily attributable to an increase in aircraft sales, from $4.1
million in fiscal 1994 to $8.2 million in fiscal 1995. During fiscal 1995, the
Company sold three DC-9 aircraft to a leasing company for $5.6 million pursuant
to a contract entered into during fiscal 1994. Aircraft sales are unpredictable
transactions and may fluctuate significantly from year to year, dependant, in
part, upon the Company's ability to purchase an aircraft at an attractive price
and resell it within a relatively brief period of time. Lease revenue increased
to $3.0 million in fiscal 1995 from $2.0 million in fiscal 1994.
Cost of sales decreased 19.9% from $22.1 million in fiscal 1994 to $17.7
million in fiscal 1995, while cost of sales as a percentage of revenues
decreased from 118.0% in fiscal 1994 to 70.9% in fiscal 1995. During fiscal
1994, the Company recorded charges to cost of sales totaling $9.5 million for
writedowns and valuation adjustments to certain parts inventory and aircraft,
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 that had been written off or reserved during fiscal 1994. The
recoveries were offset during fiscal 1995 by a provision for doubtful accounts
of $350,000. During fiscal 1994, the Company wrote off approximately $900,000
of accounts receivable which were determined to be uncollectible, and reserved
additional funds for accounts that may not be collectible.
Depreciation and amortization was $1.4 million in fiscal 1995 compared to
$2.5 million in fiscal 1994. The net reduction from 1994 to 1995 was due
primarily to a decrease in depreciation of aircraft held for lease, as several
of the Company's aircraft that were being depreciated in fiscal 1994 were sold
either during the latter part of fiscal 1994 or during fiscal 1995.
Loss of service center subsidiary was approximately $.7 million in fiscal
1995 compared to a loss of $1.9 million in fiscal 1994.
Interest expense for fiscal 1995 was $2.6 million compared to $3.0 million
in fiscal 1994. The decrease in interest expense is due to a net reduction in
total debt outstanding, from $26.2 million at May 31, 1994 to $20.3 million at
May 31, 1995. During fiscal 1995, the Company repaid $4.7 million of the
principal due on the Senior Notes.
Interest and other income was $.6 million in fiscal 1995 compared to
$88,000 in fiscal 1994. Included in interest and other income during fiscal
1995 is approximately $340,000 interest income collected on notes receivable, a
$66,000 gain on the sale of certain land located in Kentucky, and approximately
$120,000 received in connection with consulting and other services provided to
an insurance company.
Included in unusual and non-recurring items in fiscal 1995 is an expense of
$180,000 incurred in connection with the transactions between the Company and
Richard R. Wellman and Lynda Wellman and an affiliate of the Wellmans and a gain
of $375,000 relating to settlement of litigation which had previously been
accrued in an amount in excess of the settlement amount.
18
<PAGE>
Net loss was $614,000, or $.15 per share during fiscal 1995, compared to a
net loss during fiscal 1994 of $17.4 million, or loss per share before
extraordinary item of $4.21, loss per share for extraordinary item of $.09 per
share, and total loss per share of $4.30.
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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is contained in the Company's
consolidated financial statements and financial statement schedules indicated in
the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of May 31, 1996. 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
Kyle R. Kirkland (2)(3) 34 Director 1992
E. James 50 Director 1991
Mueller(1)(2)(3)
- ----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) 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.
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 D/R from June 1991 until February 1994. Dabney
acted as the placement agent for the Senior Notes and the Convertible
Debentures. Mr. Kirkland was employed as an investment banker with Canyon
Partners, Inc. and with Drexel Burnham Lambert, Inc. from March 1990 through
June 1991 and from July 1988 through March 1990, respectively. Mr. Kirkland is
also a director of Steinway Musical Instruments, Inc.
E. JAMES MUELLER has been a director of the Company since 1991. Mr.
Mueller has been a principal with J.M. Associates, Inc., a business development
consulting firm, since January 1992. From June 1978 through December 1991, Mr.
Mueller was the Vice President of Sales/Marketing of Air Cargo Associates, Inc.,
a Connecticut airline charter brokerage/sales corporation. The Company has
entered into a commission agreement with J.M. Associates, Inc., pursuant to
which J.M. Associates, Inc. is compensated for originating transactions for the
Company.
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 the 1992 fiscal
year. During the fiscal year ended May 31, 1996, the Compensation Committee met
two times.
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. During the fiscal year ended
May 31, 1996, the Audit Committee met one time.
21
<PAGE>
The Board of Directors also created an Executive Committee after the end of
the Company's 1992 fiscal year. During the fiscal year ended May 31, 1996, the
Executive Committee did not meet.
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
During the fiscal year ended May 31, 1996, the Board of Directors of the
Company met on five occasions. Each of the directors attended in excess of 75%
of the meetings of the Board of Directors and 75% of all meetings held by all
committees of the Board on which he served.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate cash
compensation paid to or earned by the Company's Chief Executive Officer, Mr.
Alexius A. Dyer III, during fiscal 1994, 1995 and 1996. At May 31, 1996, Mr.
Dyer was the sole executive officer of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
<S> <C> <C> <C> <C>
Name and Principal Position Year Salary ($) Bonus ($) Options/SARs (#)
- --------------------------- ---- ---------- --------- ----------------
Alexius A. Dyer III 1996 135,000 80,000(1) --
President and Chief 1995 133,108 -- 107,000
Executive Officer 1994 108,865 20,000 --
</TABLE>
- ----------
(1) Mr. Dyer's 1996 bonus consists of $80,000 paid to him upon execution of
his employment agreement and an additional amount to be earned by him
pursuant to the terms of his employment agreement and to be determined
by the Compensation Committee.
22
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUE
Shown below is information with respect to all unexercised options to
purchase the Company's Common Stock granted to Mr. Alexius A. Dyer, III, the
Company's sole executive officer at May 31, 1996, through the end of the fiscal
1996 under the Company's option plans. No options were granted or exercised
during fiscal 1996. At May 31, 1996, the exercise price of all such unexercised
options exceeded the market value of the underlying Common Stock.
Number of Unexercised Options of
FY-End
Name Exercisable/Unexercisable
---- -------------------------
Alexius A. Dyer III(1) 174,667/33,333(2)
- ----------
(1) All options granted under the prior stock option plan will be canceled in
connection with the Restructuring.
(2) Includes 66,667 shares of Common 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 price is $3.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee, Messrs. 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 year 1996 salaries.
COMPENSATION OF DIRECTORS
The non-employee members of the Company's Board of Directors received a
$25,000 fee for their service on the Board during fiscal 1996 pursuant to a
Director's Compensation Plan that was adopted during fiscal 1995. During fiscal
1995, the non-employee members of the Company's Board of Directors received a
$25,000 fee for their service on the Board during fiscal 1995 pursuant to the
Director's Compensation Plan. During fiscal 1994, non-employee members of the
Board of Directors received options to purchase 15,000 shares of Common Stock
upon their appointment or election to the Board. Such grants vest in increments
of 5,000 shares per year. Additional grants of 15,000 shares are made upon
election to the Board after all previous grants have vested. These additional
grants also vest in 5,000 share increments. The exercise price of all grants is
the fair market value of the Common Stock at the date of grant. All options
granted under the prior stock option plan will be canceled in connection with
the Restructuring. Directors are also reimbursed for expenses incurred in
connection with the attendance of Board meetings.
23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
The following table sets forth certain information regarding 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 as of May 31, 1996:
<TABLE>
<CAPTION>
Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------ ------------------ ------------------
<S> <C> <C>
LYNDA WELLMAN(1) 1,999,700 49.48
RICHARD R. WELLMAN(1)
7540 Loch Ness Drive
Miami Lakes, Florida 33014
SUNLIFE INSURANCE COMPANY OF AMERICA(2) 514,865 12.74
11601 Wilshire Boulevard, 12th Floor
Los Angeles, California 90025-1748
</TABLE>
- ----------
(1) 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. The proxy expires in January 1997.
(2) 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 that may be
acquired upon exercise of such warrants.
24
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1996 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:
<TABLE>
<CAPTION>
Shares
Name of Beneficial Owner or Identity Group(1) Beneficially Percentage of
- --------------------------------------------- Owned Outstanding Shares
----- ------------------
<S> <C> <C>>
Alexius A. Dyer III 175,667(2) 4.32
E. James Mueller 15,000(3) *
Kyle R. Kirkland 107,237(4) 2.65
All Directors and Executive Officers
as a Group (3 persons) 297,904 7.37
</TABLE>
- ----------
* Less than one percent of the shares of Common Stock outstanding.
(1) The address for each person listed in this table is c/o International
Airline Support Group, Inc., 8095 N.W. 64th Street, Miami, Florida 33166.
(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 67,667 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 cancelled
as part of the Restructuring and new options will be granted.
(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. The options will be
canceled as part of the Restructuring and new options will be granted.
(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. The options
will be canceled as part of the Restructuring and new options will be
granted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN RELATIONSHIPS AND RELATED 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. During fiscal 1996, the Company paid commissions
totaling $85,000 to J.M. Associates, Inc., a company controlled by E. James
Mueller, a director of the Company. Under the terms of a commission agreement,
J.M. Associates, Inc. is entitled to 3-4% of revenues originated by Mr. Mueller.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
(A) FINANCIAL STATEMENTS PAGE OR METHOD OF FILING
(1) Index to Consolidated Financial Statements Page F-1
(2) Report of Grant Thornton LLP Page F-2
(3) Consolidated Financial Statements and Notes to Page F-3
Consolidated Financial Statements of the
Company, including Consolidated Balance Sheets
as of May 31, 1995 and 1996 and related
Consolidated Statements of Operations,
Consolidated Cash Flows and Consolidated
Stockholders' Equity (Deficit) for each of the
years in the three-year period ended May 31,
1996
(B) FINANCIAL STATEMENTS SCHEDULES PAGE OR METHOD OF FILING
(1) Report of Grant Thornton LLP as to Included in the report
Consolidated Financial Statement
Schedules for listed in (a)(2) below
fiscal years ended May 31, 1996, 1995
and 1994
(2) Schedule II. Valuation and Qualifying Accounts Page S-1
</TABLE>
Schedules not listed above and columns within certain Schedules have been
omitted because of the absence of conditions under which they are required or
because the required material information is included in the Consolidated
Financial Statements or Notes to the Consolidated Financial Statements
included herein.
(c) EXHIBITS
Exhibit
Number Description Page Number or Method of Filing
------ ----------- -------------------------------
2.1.1 Form of Standstill Agreement Incorporated by reference to
dated July 8, 1996 among the Exhibit 2.1.1 to the Company's
Registrant and the holders of Registration Statement on Form
the Registrant's 12% Senior S-4 (File No. 333-08065), filed
Secured Notes due 1997 who are on July 12, 1996.
signatories thereto.
2.1.2 Form of Standstill Agreement Filed herewith.
dated July 11, 1996 among the
Registrant and the holders of
the Registrant's 12% Senior
Secured Notes due 1997 who are
signatories thereto.
26
<PAGE>
Exhibit
Number Description Page Number or Method of Filing
------ ----------- -------------------------------
2.2 Form of Warrant Agreement Incorporated by reference to
Amendment No. 1, dated as of Exhibit 2.2 to the Company's
July 9, 1996, among the Registration Statement on Form
Registrant and the holders of S-4 (File No. 333-08065), filed
the Warrants, dated July 17, on July 12, 1996.
1992, who are signatories
thereto.
2.3 Letter, dated June 7, 1996, from Incorporated by reference to
BNY Financial Corporation to the Exhibit 2.3 to the Company's
Registrant with attached Term Registration Statement on Form
Sheet. S-4 (File No. 333-08065), filed
on July 12, 1996.
3.1 Certificate of Incorporation of Incorporated by reference to
the Registrant. Exhibit 3.1 to the Company's
Annual Report on Form 10-K for
the fiscal year ended May 31,
1993 (the "1993 Form 10-K").
3.2 Restated and Amended Bylaws of Incorporated by reference to
the Registrant. Exhibit 3.2 of the 1993 Form
10-K.
3.3 Proposed Form of Amended and Incorporated by reference to
Restated Certificate of Appendix A to the Proxy
Incorporation of the Registrant. Statement/Prospectus included in
the Company's Registration
Statement on Form S-4 (File No.
333-08065), filed on July 12,
1996.
3.4 Proposed form of Amended and Incorporated by reference to
Restated Bylaws of the Exhibit 3.4 to the Company's
Registrant. Registration Statement on Form
S-4 (File No. 333-08065), filed
on July 12, 1996.
4.1 Specimen Common Stock Incorporated by reference to
Certificate. Exhibit 4.1 to the 1993 Form
10-K.
4.2 Form of Warrant issued to Incorporated by reference to
holders of Senior Notes. Exhibit 4-A to the Company's Form
8-K dated July 17, 1992 (the
"July 1992 Form 8-K").
4.3 Form of 8% Convertible Incorporated by reference to
Subordinated Debentures due Exhibit 4.3 to the 1993 Form
August 31, 2003. 10-K.
27
<PAGE>
Exhibit
Number Description Page Number or Method of Filing
------ ----------- -------------------------------
4.4 Form of 12% Senior Secured Incorporated by reference to
Notes. Exhibit 4.4 to the Company's
Registration Statement on Form
S-4 (File No. 333-08065), filed
on July 12, 1996.
10.1.1 Employment Agreement, dated as Incorporated by reference to
of December 1, 1995, between the Exhibit 10.1.1 to the Company's
Registrant and Alexius A. Dyer Registration Statement on Form
III. S-4 (File No. 333-08065), filed
on July 12, 1996.
10.2.1 Employee Stock Option Plan. Incorporated by reference to
Exhibit 10.2.1. to the 1993
Form 10-K.
10.2.2 Non-Employee Director Stock Incorporated by reference to
Option Plan. Exhibit 10.2.2 to the 1993
Form 10-K.
10.2.3 401(k) Plan. Incorporated by reference to
Exhibit 10-H to the Company's
Annual Report in Form 10-K for
the fiscal year ended May 31,
1992 (the "1992 Form 10-K").
10.2.4 Bonus Plan. Incorporated by reference to
Exhibit 10.2.4 to the 1992
Form 10-K.
10.2.5 Cafeteria Plan. Incorporated by reference to
Exhibit 10.2.5 of the 1993
Form 10-K.
10.2.6 Proposed Form of 1996 Long-Term Incorporated by reference to
Incentive and Share Award Plan. Appendix B to the Proxy
Statement/Prospectus included in
the Company's Registration
Statement on Form S-4 (File No.
333-08065), filed on July 12,
1996.
10.3.1 Form of Securities Purchase Incorporated by reference to
Agreement dated as of July 17, Exhibit 10-A to the Registrant's
1992 among Registrant and the July 1992 Form 8-K.
Purchasers listed therein, as
amended.
10.3.2 Consent, Amendment and Waiver Incorporated by reference to
dated as of September 8, 1993 Exhibit 10.9.2 to the 1993
among Registrant and the parties Form 10-K.
listed therein.
28
<PAGE>
Exhibit
Number Description Page Number or Method of Filing
------ ----------- -------------------------------
10.4 Representative Indemnity Incorporated by reference to
Agreement between Registrant and Exhibit 10.12 to the 1993
its Directors and Executive Form 10-K.
Officers.
10.5.1 Securities Purchase Agreement Incorporated by reference to
dated as of September 8, 1993 Exhibit 10.13 to the 1993
among Registrant and the Form 10-K.
Purchasers listed therein.
10.6 Form of Registration Rights Incorporated by reference to
Agreement dated as of September Exhibit 10.14 to the 1993
8, 1993, among Registrant and Form 10-K.
the Purchasers listed therein.
10.7 Settlement Stipulation, dated Incorporated by reference to
January 31, 1995, among Admark Exhibit 10.7.3 to the Company's
International, Ltd., Plaintiff Annual Report in Form 10-K for
and Norville Trading Company the fiscal year ended May 31,
Ltd., International Airline 1995 (the "1995 Form 10-K").
Support Group, Inc., and Richard
10.8 Purchase Agreement, dated Incorporated by reference to
January 1995, among Exhibit 10.1 to the Company's
International Airline Support Form 10-Q/A for the quarter ended
Group, Inc., Richard R. Wellman, August 31, 1994.
Lynda Wellman, and Custom Air
Holdings, Inc., including as an
exhibit the "General Proxy"
executed by Richard R. Wellman
and Lynda Wellman.
10.10 Assignment and Assumption Incorporated by reference to
Agreement, dated January 31, Exhibit 10.2 to the Registrant's
1995, between International Form 10-Q/A for the quarter ended
Airline Service Center, Inc. and August 31, 1994.
Express One International, Inc.
10.11 Notice of Payment Blockage, Incorporated by reference to
dated May 25, 1995. Exhibit 10.11 to the 1995
Form 10-K.
10.12 Form of Engagement Letter dated Incorporated by reference to
February 16, 1996, between the Exhibit 10.12 to the Company's
Registrant and Kirkland Messina, Registration Statement on Form
Inc. (filed herewith). S-4 (File No. 333-08065), filed
on July 12, 1996.
10.13 Form of Depositary Agreement Filed herewith.
between the Registrant and First
Union National Bank of North
Carolina.
10.14 Commission Agreement dated Filed herewith.
December 1, 1995 between the
Registrant and J.M. Associates,
Inc.
11 Statement regarding computation Filed herewith.
of per share earnings
21 Subsidiaries Filed herewith.
27 Financial Data Schedule Filed herewith.
29
<PAGE>
Exhibit
Number Description Page Number or Method of Filing
------ ----------- -------------------------------
99.1 Form of Consent and Letter of Incorporated by reference to
Transmittal for the Registrant's Exhibit 99.1 to the Company's
8% Convertible Subordinated Registration Statement on Form
Debentures due August 31, 2003. S-4 (File No. 333-08065), filed
on July 12, 1996.
99.2 Form of Notice of Guaranteed Incorporated by reference to
Delivery for the Registrant's 8% Exhibit 99.2 to the Company's
Convertible Subordinated Registration Statement on Form
Debentures due August 31, 2003. S-4 (File No. 333-08065), filed
on July 12, 1996.
99.3 Form of Proxy with respect to Incorporated by reference to
the solicitation of the holders Exhibit 99.3 to the Company's
of the Registrant's Common Registration Statement on Form
Stock. S-4 (File No. 333-08065), filed
on July 12, 1996.
30
<PAGE>
(d) REPORTS ON FORM 8-K.
The Company did not file a Current Report on Form 8-K during the last
quarter of the fiscal year covered by this Annual Report.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized this 16th day
of August, 1996.
International Airline Support Group, Inc.,
a Delaware corporation
By: /s/ Alexius A. Dyer III
-----------------------------------------
Alexius A. Dyer III
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Signature
- --------- Title Date
----- ----
/s/ Alexius A. Dyer III President and Director August 16, 1996
- -------------------------- (Principal Executive Officer)
Alexius A. Dyer III
/s/ George Murnane III Executive Vice President August 16, 1996
- -------------------------- and Chief Financial Officer
George Murnane III (Principal Financial Officer)
/s/ Robert K. Norris Vice President-Finance August 16, 1996
- -------------------------- (Principal Accounting Officer)
Robert K. Norris
/s/ Kyle R. Kirkland Director August 16, 1996
- --------------------------
Kyle R. Kirkland
/s/ E. James Mueller Director August 16, 1996
- --------------------------
E. James Mueller
32
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of independent certified public accountants . . . . . . . . . . . . F-2
Consolidated balance sheets as of May 31, 1995 and 1996. . . . . . . . . . F-3
Consolidated statements of operations for the years ended May 31,
1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated statements of stockholders' equity (deficit) for the years
ended May 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . F-5
Consolidated statements of cash flows for the years ended May 31,
1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to consolidated financial statements . . . . . . . . . . . . . . . . F-7
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, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended May 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of
International Airline Support Group, Inc. and Subsidiaries as of May 31, 1995
and 1996 and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended May
31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the
Company is in default under its debt agreements which could result in the
lenders demanding payment under the Company's long-term debt agreements,
raising substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
We have also audited Schedule II of International Airline Support Group, Inc.
and Subsidiaries for each of the three years in the period ended May 31,
1996. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Miami, Florida
July 12, 1996
F-2
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents (Note A) $ 848,331 $ 940,274
Accounts receivable, net of allowance for doubtful accounts
of approximately $619,000 in 1995 and $735,000 in 1996 2,592,463 2,014,691
Notes receivable 313,490 -
Inventories (Notes A, C and D) 6,497,270 9,277,315
Deferred tax benefit - current, net of valuation allowance
of $1,146,000 in 1995 and $960,000 in 1996 (Note F) - -
Other current assets 31,480 68,798
----------- -----------
Total current assets 10,283,034 12,301,078
Property and equipment (Notes A, D, E and R)
Land 330,457 -
Aircraft held for lease 3,289,613 2,974,760
Building and leasehold improvements 715,772 36,815
Machinery and equipment 940,948 972,507
----------- -----------
5,276,790 3,984,082
Less accumulated depreciation 1,980,927 2,051,620
Land and building held for sale, net - 750,000
----------- -----------
Property and equipment, net 3,295,863 2,682,462
----------- -----------
Other assets
Deferred debt costs, net (Note A) 931,932 762,431
Deferred tax benefit, net of valuation allowance of
$3,894,000 in 1995 and $3,011,000 in 1996 (Note F) - -
Deferred restructuring fees - 334,860
Deposits and other assets - 51,500
----------- -----------
931,932 1,148,791
----------- -----------
$14,510,829 $16,132,331
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D) $ 1,812,040 $ 3,695,108
Long-term obligations in default classified as current (Notes B and D) 18,083,334 14,041,667
Accounts payable 1,650,078 2,171,496
Accrued expenses (Note O) 2,226,900 3,233,231
----------- -----------
Total current liabilities 23,772,352 23,141,502
Long-term obligations, less current maturities (Notes B and D) 440,377 406,760
Commitments and contingencies (Notes E, M and P) - -
Stockholders' equity (deficit) (Notes G and H)
Preferred Stock - $.001 par value; authorized 500,000 shares;
0 shares outstanding in 1995 and 1996. - -
Common stock - $.001 par value; authorized 20,000,000 shares;
issued and outstanding 4,041,779 shares in 1995 and 1996. 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Accumulated deficit (12,360,274) (10,074,305)
----------- -----------
Total stockholders' deficit (9,701,900) (7,415,931)
----------- -----------
$14,510,829 $16,132,331
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Revenues
Net sales $ 16,746,932 $ 21,998,869 $ 21,410,201
Lease revenue 1,986,450 2,984,218 1,794,768
------------- ------------- -------------
Total revenues 18,733,382 24,983,087 23,204,969
Cost of sales (Note N) 22,104,131 17,712,427 13,207,671
Selling, general and administrative
expenses (Notes N and O) 6,943,147 4,358,119 3,921,795
Provision (recovery) for doubtful accounts 1,487,969 (334,571) 464,099
Depreciation and amortization 2,475,071 1,400,832 1,153,477
Losses of service center subsidiary (Note Q) 1,922,086 675,860 -
------------- ------------- -------------
Total operating costs 34,932,404 23,812,667 18,747,042
------------- ------------- -------------
Income (loss) from operations (16,199,022) 1,170,420 4,457,927
Interest expense 2,953,220 2,564,318 2,191,968
Interest and other income (87,600) (602,943) (34,058)
Unusual and nonrecurring items (Note P) - (177,115) -
------------- ------------- -------------
Earnings (loss) before income taxes,
equity in loss of joint venture, and
extraordinary item (19,064,642) (613,840) 2,300,017
Provision for income taxes (benefit) (Note F) (2,475,185) - 14,048
------------- ------------- -------------
Earnings (loss) before equity in loss of
joint venture and extraordinary item (16,589,457) (613,840) 2,285,969
Equity in loss of joint venture (Note J) (423,224) - -
------------- ------------- -------------
Earnings (loss) before extraordinary item (17,012,681) (613,840) 2,285,969
Extraordinary loss on the extinguishment of debt
(Note D) (363,022) - -
------------- ------------- -------------
Net earnings (loss) $ (17,375,703) $ (613,840) $ 2,285,969
------------- ------------- -------------
------------- ------------- -------------
Per share data:
Primary earnings (loss) per common and common
equivalent share
Earnings (loss) before extraordinary item $ (4.21) $ (.15) $ .57
Extraordinary item (.09) - -
--------- --------- --------
Net earnings (loss) $ (4.30) $ (.15) $ .57
--------- --------- --------
--------- --------- --------
Weighted average shares outstanding used in
primary calculation 4,041,779 4,041,779 4,041,779
------------- ------------- -------------
------------- ------------- -------------
Fully-diluted earnings (loss) per common and
common equivalent share
Earnings (loss) before extraordinary item $ (4.21) $ (.15) $ .47
Extraordinary item (.09) - -
--------- --------- --------
Net earnings (loss) $ (4.30) $ (.15) $ .47
--------- --------- --------
--------- --------- --------
Weighted average shares outstanding used in
fully-diluted calculation 4,041,779 4,041,779 6,541,779
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Retained
Number of Par Paid-In Earnings
Shares Value Capital (Deficit) Total
----------- -------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1993 4,009,112 $ 4,009 $ 2,540,030 $ 5,629,269 $ 8,173,308
Issuance of common stock 32,667 33 114,302 - 114,335
Net loss - - - (17,375,703) (17,375,703)
----------- -------- ------------- -------------- -------------
Balance at May 31, 1994 4,041,779 4,042 2,654,332 (11,746,434) (9,088,060)
Net loss - - - (613,840) (613,840)
----------- -------- ------------- -------------- -------------
Balance at May 31, 1995 4,041,779 4,042 2,654,332 (12,360,274) (9,701,900)
Net earnings - - - 2,285,969 2,285,969
----------- -------- ------------- -------------- -------------
Balance at May 31, 1996 4,041,779 $ 4,042 $ 2,654,332 $ (10,074,305) $ (7,415,931)
----------- -------- ------------- -------------- -------------
----------- -------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (17,375,703) $ (613,840) $ 2,285,969
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,865,610 1,693,301 1,372,979
Depreciation - service center 284,452 196,322 -
Gain on sale of aircraft held for lease - - (864,795)
Gain on Express One transaction - (70,631) -
Loss on Wellman transaction - 33,575 -
(Increase) decrease in deferred tax benefit 69,000 (23,696) -
Equity in loss of joint venture 423,224 - -
Decrease (increase) in accounts receivable (83,108) 1,224,560 577,770
Decrease in notes receivable 800,000 806,510 313,490
Decrease (increase) in income tax refund (1,930,000) 1,930,000 -
(Increase) decrease in inventories 8,243,147 4,910,834 (3,030,045)
(Increase) decrease in other current assets 981,557 154,271 (37,318)
(Increase) decrease in other assets (112,999) 178,322 (51,500)
Increase (decrease) in accounts payable and accrued expenses 5,012,896 (4,591,430) 1,527,750
(Decrease) in income taxes payable (211,666) - -
------------ ----------- -----------
Net cash provided by (used in) operating activities (1,033,590) 5,828,098 2,094,300
Cash flows from investing activities:
Proceeds from maturity of restricted certificates of deposit 356,115 - -
Capital expenditures (3,635,919) (135,936) (875,281)
Proceeds from sale of aircraft held for lease 1,000,000 - 1,450,000
------------ ----------- -----------
Net cash provided by (used in) investing activities (2,279,804) (135,936) 574,719
Cash flows from financing activities:
Net payments under line of credit (1,000,000) - -
Borrowings under notes and leases 10,000,000 - -
Increase in deferred restructuring costs - - (334,860)
Increase in deferred debt costs (341,326) - (50,000)
Repayments of debt obligations (5,760,432) (4,939,621) (2,192,216)
------------ ----------- -----------
Net cash (used in) provided by financing activities 2,898,242 (4,939,621) (2,577,076)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (415,152) 752,541 91,943
Cash and cash equivalents at beginning of period 510,942 95,790 848,331
------------ ----------- -----------
Cash and cash equivalents at end of period $ 95,790 $ 848,331 $ 940,274
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosures of cash flow information (Note K):
Cash paid during the year for:
Interest $ 2,736,233 $ 2,167,279 $ 1,206,028
------------ ----------- -----------
------------ ----------- -----------
Income taxes $ - $ - $ 36,910
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1995 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the "Company")
is primarily engaged in the sale of aircraft, aircraft parts, leasing of
aircraft and related services. Since its inception in 1982, the Company has
become a primary source of replacement parts for widely operated aircraft
models which are no longer in production such as the McDonnell Douglas DC-8
and DC-9. The Company supplies parts to over 500 customers worldwide. The
Company previously was engaged in other activities through the Company's
wholly-owned subsidiary, International Airline Service Center, Inc. ("Service
Center"), which was an FAA certified repair facility engaged in the
performance of maintenance checks required by the FAA on narrow body aircraft
(see Note Q). The Company's other wholly-owned subsidiary, Brent Aviation,
Inc. d/b/a Custom Air Transport was previously engaged in the flight
operation of cargo aircraft (see Note P).
a) Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Investments in
nonconsolidated entities are reported on the equity method.
b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Included as cash equivalents at May 31, 1996 is $1,100,000 in
certificates of deposit with a stated maturity of seven days.
Cash balances in financial institution accounts are secured by the Federal
Deposit Insurance Corporation ("FDIC") for amounts up to $100,000, per
customer. At May 31, 1996, the Company's uninsured cash balances
approximated $1,472,000.
c) Inventories
Inventories are stated at the lower of cost or market. The cost of
aircraft parts is determined on a specific identification basis for those
parts purchased individually or in lots where specific identification is
practical. For parts acquired through whole aircraft purchases, the costs
are assigned to pools which are amortized as part sales take place. The
amortization is based upon the actual sales, except in any periods where
sales are lower than expected, the estimated sales per the initial sales
projection are used (which has a maximum life of 5 years). The amount of
cost amortized is based upon the gross profit percentage as calculated from
the estimated sales value of the parts. The sales value estimates are
monitored by management, and adjusted periodically as necessary. Certain
aircraft, which were previously leased have been classified as held for sale
and are included in inventory.
At May 31, 1995 and 1996, approximately 80% and 97%, respectively, of the
ending inventory (including aircraft held for sale) was costed under the
specific identification method, and the remaining 20% and 3%, respectively,
was costed under the pooling method.
d) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated life utilizing
straight-line and accelerated methods. The estimated lives of the
depreciable assets range from 5 to 31.5 years. Overhaul costs on aircraft
held for lease are capitalized and depreciated over the estimated service
life of the overhaul. For income tax purposes, accelerated methods of
depreciation are generally used. Deferred income taxes are provided for the
difference between depreciation expense for tax and financial reporting
purposes.
F-7
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
e) Deferred Debt Costs
Deferred debt costs principally relate to the costs associated with
obtaining the Company's Senior Secured Notes and Convertible Subordinated
Debentures. These costs are being amortized using the interest method over
the life of the respective debt issue. Accumulated amortization at May 31,
1995 and 1996, was approximately $1,094,000 and $1,307,000, respectively.
f) Earnings Per Share
Primary earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding and common
stock equivalents. Stock options and warrants are considered common stock
equivalents unless their inclusion would be anti-dilutive. For the purpose
of computing common stock equivalents for stock options and warrants, the
modified treasury stock method was not used as the effect would be
antidilutive. The Company's Convertible Subordinated Debentures
("Debentures") are not considered common stock equivalents for the purpose
of computing primary earnings per share as the effective yield on the
securities exceeded 66-2/3% of the average Aa corporate bond rate at the
time of issuance.
Fully diluted earnings (loss) per shares is computed for 1996 as if the
Debentures were converted into common stock as of the beginning of the
period (see Note D). Stock options and warrants are not considered common
stock equivalents for the purpose of computing fully diluted earnings
(loss) per share as the effect would be antidilutive under the modified
treasury stock method. The Debentures and stock options and warrants are
not considered common stock equivalents in fiscal years 1994 and 1995 due
to the net losses for those periods.
g) Revenue Recognition
Revenue from the sale of parts is recognized when products are shipped to
the customer. Revenue from the sale of aircraft is recognized when all
consideration has been received and the buyer has taken delivery and
acceptance of the aircraft. Lease revenue is recognized on an accrual basis,
unless collectibility is uncertain.
h) Employee Benefit Plan
In fiscal 1992, the Company established a contributory 401(K) plan. The
plan is a defined contribution plan covering all eligible employees of the
Company, to which the Company makes certain discretionary matching
contributions based upon the level of its employees' contributions. The
amount charged to earnings in fiscal 1994, 1995 and 1996 were insignificant.
The Company does not provide any health or other benefits to retirees.
i) Stock Options
Options granted under the Company's Stock Option Plans are accounted for
under APB 25, "Accounting for Stock Issued to Employees," and related
interpretations. In November 1995, the Financial Accounting Standards Board
issued Statement 123, "Accounting for Stock-Based Compensation," which will
require additional proforma disclosures for companies that will continue to
account for employee stock options under the intrinsic value method specified
in APB 25. The Company plans to continue to apply APB 25 and the only effect
of adopting Statement 123 in fiscal 1997 will be the new disclosure
requirement.
F-8
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
j) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade receivables, and
accounts payable approximate fair value due to the short term maturities of
these instruments.
k) Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
l) Income Taxes
Income taxes are provided based on earnings reported for tax return
purposes in addition to a provision for deferred income taxes. Deferred
income taxes are provided in order to reflect the tax consequences in future
years of differences between the financial statement and tax basis on assets
and liabilities at each year end.
m) Management Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
May 31, 1995 and 1996 and revenues and expenses during the periods then ended.
The actual outcome of the estimates could differ from these estimates made in
the preparation of the financial statements.
n) Land and Building Held for Sale
The land and building (the "property") held for sale represents the Company's
corporate offices and adjacent warehouse located in Miami, Florida.
Subsequent to May 31, 1996, the Company entered into a contract to sell the
property, with an expected sales date in November 1996. As of May 31, 1995
and 1996, the net book value of the property was approximately $963,000 and
$750,000, respectively. As of May 31, 1996, the property was written down
to its market value, less estimated selling expenses. Included in
depreciation expense for the year ended May 31, 1996 is approximately
$190,000 relating to this write down.
NOTE B - GOING CONCERN
Primarily as a result of the net losses experienced in fiscal 1994 and
1995, and the classification of certain debt obligations as current, the
Company has a significant deficit in working capital and stockholders'
equity. Currently, the Company is not in compliance with certain financial
and other covenants under the loan agreements relating to the 12% Senior
Secured Notes ("Notes"), issued July 1992, and the 8% Convertible
Subordinated Debentures ("Debentures"), issued September 1993 (see Long-Term
Obligations Note D). The Notes are secured by substantially all of the
assets of the Company and the Debentures are subordinated in right of payment
to the Notes.
Excluding amounts scheduled to be repaid in fiscal 1997 under the terms of
the agreements, $14,041,667 is subject to accelerated maturity and, as such,
has been classified as a current liability in the Consolidated Balance Sheets
at May 31, 1996. The Company has presented a restructuring proposal to the
holders of the Notes and the Debentures which is described in a Registration
Statement filed on Form S-4 filed by the Company with the Securities and
Exchange Commission on July 12, 1996 (see Note R). However, there can be no
assurance that the Company will be able to consummate a restructuring of its
indebtedness. If the lenders were to accelerate maturity, the Company would
not have sufficient funds to repay the debt obligations.
F-9
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE B - GOING CONCERN - Continued
As a result of the above factors, there exists substantial doubt about the
Company's ability to continue in existence.
NOTE C - INVENTORY
Inventories at May 31, 1995 and 1996 consisted of the following:
1995 1996
----------- -----------
Aircraft parts $ 4,063,352 $ 7,938,049
Aircraft available for sale 2,433,918 1,339,266
----------- -----------
$ 6,497,270 $ 9,277,315
----------- -----------
----------- -----------
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1995 and 1996 consisted of the following:
1995 1996
----------- -----------
12% Senior Secured Notes $ 9,850,000 $ 7,700,000
8% Convertible Subordinated Debentures 10,000,000 10,000,000
Mortgage note payable to bank 455,420 429,260
Notes payable due in equal monthly
installments through October 1997,
bearing interest at 9.5% to 11.5%
collateralized by equipment 16,363 8,000
Capitalized lease obligations (Note E) 13,968 6,275
----------- ----------
20,335,751 18,143,535
Less: Current maturities and long-term
obligations in default classified
as current 19,895,374 17,736,775
----------- ----------
$ 440,377 $ 406,760
----------- ----------
----------- ----------
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior
Secured Notes ("Notes") due July 1997. In September of 1993, the note
agreement was amended, to require a payment of $3,450,000 with the proceeds
from the issuance of the Convertible Subordinated Debentures ("Debentures")
and subsequent sinking fund payments of $3,233,333 in July 1994 and 1995 and
$4,041,667 in July 1996 and 1997.
In connection with this extinguishment, the Company recorded as an
extraordinary item the loss on retirement of debt. Such costs included a 6%
prepayment penalty as well as that portion of the deferred debt issuance
costs associated with the Notes retired. In May 1996, the Company prepaid,
without penalty $383,334 of the amount due in July 1996. The notes are
secured by substantially all the assets of the Company. Warrants to purchase
1,093,528 shares of common stock were issued to the Noteholders at an
exercise price of $5.38. The warrants have a five year term and carry
restrictions regarding exercise and registration of the underlying shares.
The security purchase agreement contains restrictive covenants requiring the
Company to maintain a minimum net worth as well as certain financial ratios,
restricts dividends and limits capital expenditures, indebtedness, liens,
certain business activities and inventory purchases. The Company is in
default of the loan agreement.
F-10
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE D - LONG-TERM OBLIGATIONS - Continued
In September 1993, the Company issued $10.0 million in Convertible
Subordinated Debentures ("Debentures"), due August 2003, through a private
placement offering. The Debentures may be redeemed in whole or in part after
August 1996, upon 30 days notice by the Company. The Debentures are
convertible to the Company's common stock at a price of $4.00 per share
(2,500,000 shares). The Debentures conversion options carry restrictions
regarding conversion and registration of the underlying shares. The
Debenture holders have certain demand and piggy-back registration rights on
the underlying shares. The Debentures have a fixed annual interest rate of
8%, with such interest payable quarterly. The securities purchase agreement
contains restrictive covenants requiring the Company to maintain a certain
level of consolidated net worth and certain financial ratios related to
interest expense coverage. The Company is in default of the loan agreement.
In May 1995, the Company received a notice of payment blockage from the
holder of a majority of the Notes. The payment blockage prevented the
Company from any scheduled interest payment on the Debentures, through
November 1995. Irrespective of the payment blockage, the Company has not
made any of the scheduled interest payments on the Debentures since February
1995. Included in the May 31, 1995 and 1996, financial statements is
$200,000 and $1,000,000 representing accrued interest on the Debentures.
In September 1992, the Company entered into a promissory note and mortgage
and security agreement with a bank. The promissory note is payable in equal
monthly installments of $2,180 plus interest through September 1997 when the
remaining balance is due. The note has an interest rate of 1% above the
bank's prime rate. The note is secured by a first mortgage on the land and
building in Miami, Florida (see Note A). This property also has a junior
mortgage in favor the holders of the notes.
The scheduled maturities of long-term obligations in each of the next five
years subsequent to May 31, 1996 are as follows: 1997 - $3,695,108, 1998 -
$4,448,426, 1999 - $0, 2000 - $0, 2001 -$0 and thereafter $10,000,000.
However, the Company is in default under the terms of the securities purchase
agreement for the Notes and the Debentures. If the holders were to demand
repayment, $14,041,667, which is scheduled to be paid subsequent to May 31,
1997, would be due immediately.
NOTE E - LEASES
The Company conducts a portion of its operations utilizing leased equipment
which has been capitalized. Following is a schedule of future minimum rental
payments under capital leases together with the present value of future
minimum rentals as of May 31, 1996.
Future minimum lease payments $ 7,890
Less amount representing interest 1,615
-------
Present value of future minimum lease payments 6,275
Current maturities 5,092
-------
Long term obligations under capital leases $1,183
-------
-------
Capitalized equipment leases are accounted for and amortized as
company-owned equipment. The following is a schedule of leased equipment
under capital leases:
1995 1996
---------- ----------
Equipment $ 298,279 $ 298,279
Less: Accumulated amortization 279,863 292,244
---------- ----------
$ 18,416 $ 6,035
---------- ----------
---------- ----------
F-11
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE E - LEASES - Continued
The Company leased warehouse and hangar facilities as well as certain
equipment under long-term operating lease agreements. Rental expense under
these leases for the years ended May 31, 1994, 1995 and 1996 was
approximately $242,000, $220,000 and $53,000, respectively. At May 31, 1996,
there are no future minimum payments on non-cancellable operating leases.
The Company currently leases an aircraft to a customer under a month to
month operating lease. In addition to minimum base rentals, the lease
agreement requires additional rent based upon aircraft usage. The net
investment in aircraft held for or leased to customers was $2,210,202 and
$1,849,143 at May 31, 1995 and 1996, respectively.
NOTE F - INCOME TAXES
The provision for income taxes for the years ended May 31, 1994, 1995 and
1996 is as follows:
1994 1995 1996
------------- --------- ----------
Current provision:
Federal $ (2,544,185) $ - $ 14,048
State - - -
------------ --------- ----------
(2,544,185) - 14,048
Deferred provision 69,000 - -
------------ --------- ----------
$ (2,475,185) $ - $ 14,048
------------ --------- ----------
------------ --------- ----------
The tax effect of the Company's temporary differences and carryforwards is
as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax (benefits) - current:
Reserve for overhaul costs $ (545,000) $ (332,000)
Bad debt reserve (233,000) (276,000)
Inventory capitalization (188,000) (145,000)
Accrued payroll (37,000) -
Accrued legal settlement costs (116,000) (1,000)
Accrued vacation (16,000) (15,000)
Accrued - other (11,000) (4,000)
Accrued repair costs - (187,000)
------------ ------------
$ (1,146,000) $ (960,000)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Deferred tax liabilities (benefits) - non-current:
Depreciation $ 226,000 $ (17,000)
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (702,000) (160,000)
Accrued interest income (106,000) -
Net operating loss carryforward - federal (2,941,000) (2,467,000)
Net operating loss carryforward - state (277,000) (260,000)
Minimum tax credit - federal (122,000) (135,000)
Other, net (8,000) (8,000)
------------ ------------
$ (3,894,000) $ (3,011,000)
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE F - INCOME TAXES - Continued
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1995 and 1996. The valuation allowance has
decreased by $1,069,000 in fiscal 1996.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
1994 1995 1996
---- ---- ----
Statutory federal rate (34.0)% (34.0)% 34.0%
Operating losses with no current tax benefit 19.6 34.0 -.
Tax benefit from net operating loss carryforward -. -. (33.4)
------ ------ ------
Effective tax rate (14.4)% -. 0.6%
------ ------ ------
------ ------ ------
The Company has net operating loss carryforwards for federal and state
purposes of approximately $7.3 and $7.2 million, respectively. The net
operating losses will expire at various points through the year 2010. The
Company has a federal minimum tax credit carryover of approximately $135,000
which may be utilized in future years to the extent that the regular tax
liability exceeds the alternative minimum tax. Certain provisions of the tax
law may limit the net operating loss and credit carryforwards available for
use in any given year in the event of a significant change in ownership
interest.
NOTE G - COMMON AND PREFERRED STOCK
In July 1993, the Company amended the Articles of Incorporation to
authorize the issuance of up to 500,000 shares of preferred stock. No such
stock has been issued.
In June 1993, the Company issued 32,667 shares of common stock to an
individual in exchange for certain aircraft parts included in the Company's
inventory.
NOTE H - STOCK OPTIONS
The Stockholders in October 1989 approved a Stock Option Plan pursuant to
which 350,000 shares of the Company's common stock were reserved for the
grant of options to employees and directors of the Company or its
subsidiaries. The issuance of the options and the form of the options shall
be at the discretion of the Company's Compensation Committee. Information
with respect to stock options under the plan is as follows:
Number of Shares
--------------------------------------------
Reserved Outstanding Available
---------- ------------- -----------
Balance June 1, 1994 315,000 150,500 164,500
Granted - 265,000 (265,000)
Expired - (54,000) 54,000
Canceled - (66,500) 66,500
--------- ---------- --------
Balance May 31, 1995 315,000 295,000 20,000
Granted - - -
Expired - - -
Canceled - (25,500) 25,500
--------- ---------- --------
Balance May 31, 1996 315,000 269,500 45,500
--------- ---------- --------
--------- ---------- --------
F-13
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE H - STOCK OPTIONS - Continued
Effective in December 1994, the outstanding employee stock options were
canceled and new options were issued through an Incentive Stock Option
Agreement. Options were granted to purchase 265,000 shares at an exercise
price of $.19, which equaled the fair market value of the Company's stock on
the effective date of the grant. All options granted were fully vested at
May 31, 1995, and expire in December 1999. Included in the above table are
options granted to directors to purchase 30,000 shares at exercise prices
ranging from $4.625 to $4.875 per share.
In April 1992, the Company granted a lender options to purchase 100,000 and
50,000 shares with exercise prices of $4.875 and $4.625, respectively. The
options expire in October 1996.
In connection with the settlement of a legal dispute arising from a loan to
the Company, in April 1992, the Company issued an option to the lender to
purchase 200,000 shares at $3.25 per share, which approximated the market
price on the date of the grant.
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC
The Company sells aircraft and aircraft parts, and leases aircraft to
foreign and domestic customers. Most of the Company's sales take place on an
unsecured basis, and a majority of the sales are to aircraft operators.
The information with respect to sales and lease revenue, by geographic
area, is presented in the table below for the years ended May 31, 1994, 1995
and 1996.
(IN THOUSANDS)
1994 1995 1996
--------- --------- ----------
United States $ 10,978 $ 18,048 $ 19,800
Africa and Middle East 4,636 1,204 623
Europe 374 1,350 177
Latin America 2,178 4,347 2,454
Canada 558 34 -
Asia 9 - 151
--------- --------- ---------
$ 18,733 $ 24,983 $ 23,205
--------- --------- ---------
--------- --------- ---------
The Company had part sales to a domestic customer which accounted for
approximately 21% of net sales in fiscal 1996 and less than 10% of net sales
in fiscal 1995. The Company did not have any sales to this customer in
fiscal 1994. However, this customer has been the subject of intense scrutiny
by the FAA since the crash of one of its aircraft in early May 1996. On June
17, 1996, the customer entered into a consent decree with the FAA. Pursuant
to the consent decree, the customer agreed to ground all of its aircraft
until it demonstrates compliance with specified safety and maintenance
procedures. The customer has not yet resumed operations. Additionally,
the Company has customers which in turn do business with this customer.
There is no way to estimate the sales volumes to these other customers which
may also be impacted by the aforementioned events. No other customer
accounted for more than 10% of the Company's sales in fiscal 1996.
(continued)
F-14
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC - Continued
The Company had sales to a Venezuelan customer which accounted for
approximately 11% of net sales in fiscal 1995 and less than 10% in fiscal
year 1994. Additionally, the Company sold 3 aircraft to a United States
customer which represented 23% of net sales in fiscal 1995. The Company did
not have any sales to this customer in previous fiscal years. The Company
had sales to one African customer which accounted for less than 10% of net
sales during the years ended May 31, 1996 and 1995, and 10% of net sales
during the year ended May 31, 1994.
The Company's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, and, in the opinion of
management is believed to be set in an amount sufficient to respond to normal
business conditions. Should such conditions deteriorate or any major credit
customer default on its obligations to the Company, this allowance may need
to be increased which may have an adverse impact upon the Company's earnings.
NOTE J - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The Company had a 50% interest in A.P. Number 1, Inc., a joint venture
corporation created to purchase, sell and lease aircraft and engines. In
fiscal 1993, the Company advanced $5,000 and executed as co-maker, together
with the Company's Joint Venture partner, a promissory note for $2,900,000
due October 31, 1993. The promissory note was also signed as co-maker by the
then Chairman of the Company personally. The proceeds of the loan were
advanced to the joint venture without any specific terms regarding repayment
of principal or payment of interest, and the funds were used to purchase
three aircraft.
The joint venture's operations were not successful, and the joint venture
was not able to make the required payments under the terms of the note. The
Company was in default under the terms of the note due to nonpayment of
principal and interest and in February 1994, the Company agreed upon a
settlement with the lender, whereby the lender received title to the three
(3) aircraft and $500,000 from the Company.
All remaining liabilities have been satisfied and the joint venture has
been dissolved. The Company's loss relating to the joint venture, as shown
in the statement of operations for fiscal 1994, includes its share of the
joint venture operating losses ($280,000) and its loss upon dissolution
($143,224).
NOTE K - SUPPLEMENTAL CASH FLOW DISCLOSURE
During fiscal 1994, the Company acquired approximately $1,140,000 in
equipment under a leasing arrangement which was classified as a capital lease
obligation at May 31, 1994.
The net change in inventory in fiscal 1995 and 1996, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
<TABLE>
<CAPTION>
1995 1996
------------- -----------
<S> <C> <C>
Net increase (decrease) in inventory $ (2,222,504) $ 2,780,045
Write-down of aircraft - 250,000
Transfer of aircraft from held for lease to inventory (2,688,330) -
------------ -----------
Cash flow impact from change in inventory $ (4,910,834) $ 3,030,045
------------ -----------
------------ -----------
</TABLE>
In fiscal 1994, the Company issued 32,667 shares of common stock in
exchange for certain inventory.
F-15
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE L - RELATED PARTY TRANSACTIONS
During the year ended May 31, 1994, the Company sold an aircraft for $400,000
to a business partner of an outside director of the Company based upon
management's best estimate of the aircraft's fair market value. The Company
recorded a loss of approximately $106,000 on this transaction.
In fiscal 1994, the Company paid approximately $54,000 to a director under
a consulting agreement which originated in fiscal 1993. In 1994, the
consulting agreement was terminated and a commission agreement was entered
into. This consulting agreement, which originated in fiscal 1993, was
terminated in 1994, and a commission agreement was entered into. Under the
commission agreement, the director is entitled to 3-4% of revenues
generated from sales to customers brought in by the director. In fiscal
1995 and 1996, the Company paid commissions of approximately $33,000 and
$85,000, respectively.
In connection with the issuance of the Senior Secured Notes, the Company's
placement agent received a $720,000 placement fee, together with a warrant to
purchase 273,382 shares of common stock at $5.3875 per share. In connection
with the issuance of the Convertible Subordinated Debentures, this same
placement agent received a $600,000 placement fee. A director of the Company
was an employee of the placement agent.
In fiscal 1994, the Company rented a condominium unit from an entity
controlled by an officer/director. Total rent paid in fiscal 1994 was
approximately $9,000.
NOTE M - FOURTH QUARTER ADJUSTMENTS
The Company recorded a fourth quarter adjustment in 1994 in the amount of
approximately $2,476,000 which related to reducing certain estimated tax
benefits recorded in the third quarter, for which a 100% valuation allowance
was established at year-end. Also, an adjustment was made for $110,000
reversing an inventory part included erroneously twice in inventory in the
first, second, and third quarters. Also in the fourth quarter, certain
charges recorded initially as restructuring charges in the third quarter were
re-classified to cost of goods sold.
The Company recorded a fourth quarter adjustment in 1996 in the amount of
approximately $385,000 which related to capitalizing the costs incurred as a
result of the planned restructuring (see Note R). Approximately $306,000 of
these costs were expensed in the first three quarters of fiscal 1996.
NOTE N - COST OF SALES
In the third quarter of fiscal 1994, the Company adopted a restructuring
program designed to reduce costs, improve liquidity, and increase stockholder
value. The restructuring program included the termination of the Company's
President, other reductions in personnel, the sale of certain fixed assets
and an intensive review of the Company's product lines and inventories.
Cost of sales for fiscal 1994 includes charges aggregating $9.6 million
relating to the following:
1. Reductions of approximately $2.0 million in the carrying amount of the
Company's inventory part pools resulting from changes in sales
estimates and related inventory values, reflecting the deteriorating
economic conditions in the industry.
2. In March 1994, the Company entered into an agreement to sell three
aircraft upon completion of certain repairs and maintenance that was
expected to be completed in fiscal 1995. The Company recorded a
provision of approximately $2.4 million at May 31, 1994, for the
estimated excess of the final cost of the repairs and maintenance
over the sales price, after overhauling the aircraft to meet the
customer's contract specifications.
(continued)
F-16
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE N - COST OF SALES - Continued
3. Writedowns approximating $3.1 million relating to weak current market
conditions and the review of realizability of Company assets performed
during the Company's restructuring program.
4. Losses totaling approximately $2.1 million relating to the sale of a
leased aircraft and the write-off of another aircraft due to a default
by the lessee under the terms of the lease. In June 1995, the Company
recovered this aircraft.
NOTE O - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Customer deposits $ 426,453 $ 367,669
Accrued repair costs 224,406 187,157
Accrued legal costs 60,000 -
Accrued interest 399,030 1,165,468
Accrued payroll 282,834 399,886
Accrued property taxes 2,730 31,144
Accrued commissions 159,536 167,741
Reserve for repair of leased aircraft 570,940 480,308
Other 100,971 433,858
---------- ----------
$2,226,900 $3,233,231
---------- ----------
---------- ----------
</TABLE>
NOTE P - WELLMAN TRANSACTION
In January 1995, the Company entered into an agreement with the former
President and former Secretary of the Company whereby the Company transferred
all of the outstanding stock of Brent Aviation, a wholly-owned subsidiary, to
an affiliate of the former employees. In addition, the Company also
transferred certain spare parts, components, inventory and equipment for
B-727 series aircraft, and a McDonnell Douglas DC-4 aircraft. In
consideration, the Company received $230,000 and agreed to lease a B-727 to
the affiliate on a month-to-month basis.
In addition, the employees resigned from all positions as officers or
directors, granted a proxy to the Company enabling the Company's directors to
vote 1.98 million shares of common stock held by the employees for a period
of two years, and agreed not to compete or interfere with any of the
businesses of the Company and its remaining subsidiaries for a period of two
years. The Company further agreed to pay the former Secretary one year's
salary as severance. As of May 31, 1995, $95,000 of the accrued severance
was unpaid and was recorded in accrued liabilities. In fiscal 1996, this
liability was paid in full. The Company also agreed to terminate its
leasehold interest in a facility located at Grayson County, Texas Airport,
allowing Brent Aviation to lease such facility for its operations.
NOTE Q - DISPOSAL OF SERVICE CENTER OPERATIONS
In June 1994, the Company's Board of Directors unanimously voted to cease
operations and to sell or otherwise dispose of the Company's wholly-owned
subsidiary, International Airline Service Center, Inc. ("IASC"), which was
an FAA certified repair facility engaged in the performance of maintenance
check required by the FAA on narrow body aircraft, following the sale of
certain of the Company's aircraft being serviced under contract by IASC.
(continued)
F-17
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1994, 1995 AND 1996
NOTE Q - DISPOSAL OF SERVICE CENTER OPERATIONS - Continued
During the third quarter of 1995, IASC fulfilled its obligations to service
the aircraft and ceased operations. On January 31, 1995, IASC entered into
an agreement with a third party, pursuant to which IASC assigned its interest
in a certain equipment lease with a net book value of $826,965 at May 31,
1995, to the third party, and the third party assumed IASC's interests and
obligations under such lease. IASC's interest in the lease as of May 31,
1995 was $897,596. Thus a gain of $70,631 was recognized as a result of the
transaction. Pursuant to the transaction, IASC disposed of substantially all
of its operating assets.
As of May 31, 1995, IASC had an insignificant amount of assets and
liabilities recorded on its books.
NOTE R - SUBSEQUENT EVENTS
Subsequent to May 31, 1996, the Company entered into a contact to sell its
premises in Miami, Florida for $850,000 in cash, less applicable selling
costs. As the premises were written down to the estimated net realizable
value as of May 31, 1996, no gain or loss is expected to be recognized upon
completion on this transaction. The write down is included in depreciation
expense in fiscal 1996.
On July 12, 1996, the Company announced that it did not intend to pay the
scheduled $3.7 million principal installment due on the Notes on July 17,
1996, pending redemption of the Senior Notes in connection with a
restructuring of its indebtedness. The debt restructuring is described in a
Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission, also on July 12, 1996. Pursuant to the proposed
restructuring, the Company would offer to exchange (the "Exchange Offer")
224.54 shares of its Common Stock for each $1,000 principal amount of the
Convertible Debentures. In connection with the restructuring, the Company
also intends to solicit proxies form the holders of its Common Stock to
approve a 1-for-27 reverse stock split, to effect certain amendments to its
Certificates of Incorporation and to approve a stock option plan.
Consummation of the restructuring is subject to certain conditions.
The Company also announced that, on July 11, 1996, the holder of a majority
of the outstanding principal amount of the Notes (the "Majority Noteholders")
executed a "Standstill Agreement" with the Company pursuant to which such
holder agreed that it would refrain (to the extent provided therein) from
exercising any rights or remedies it may have with respect to the Event of
Default with respect to the Notes that will occur upon the Event of Default
with respect to the Notes that will occur upon the Company's failure to pay
the July 17, 1996 installment of principal.
The obligations of the Majority Noteholder pursuant to the Standstill
Agreement terminate on the earlier of (i) the 120th day following the date of
the Standstill Agreement; (ii) the consummation of the restructuring; and
(iii) the occurrence of certain specified events, including, among other
things, the exercise by any creditor of the Company of any remedies against
the Company with respect to the Company's obligations to such creditor and
the first date on which, in the reasonable determination of the Majority
Noteholder, any one of the conditions precedent to the restructuring is no
longer capable of being satisfied.
F-18
<PAGE>
Exhibit 2.1.2
STANDSTILL AGREEMENT
This Standstill Agreement, dated as of July 11, 1996 (this "Agreement"), is
entered into among International Airline Support Group, Inc., a Delaware
corporation (the "Company"), and the Noteholders (as defined below) identified
on the signature pages hereto.
RECITALS
1. The Company entered into a Securities Purchase Agreement dated as of
July 17, 1992 (as amended, modified and supplemented and in effect from time to
time, the "Securities Purchase Agreement"), by and between the Company and each
of the purchasers identified on Schedule 1 to the Securities Purchase Agreement
(the "Purchasers"), providing for the sale to and the purchase by the Purchasers
of the 12% Senior Secured Notes payable by the Company in the aggregate
principal amount of $18,000,000 (the "Notes"). Any person which holds any of
the Notes now or hereafter shall be referred to as a "Noteholder."
2. The Company has informed the Noteholders that it does not intend to
pay the installment of principal due on the Notes on July 17, 1996 because it
has made arrangements to prepay the entire outstanding principal amount of the
Notes in connection with a restructuring of its indebtedness.
3. The Company has requested that the Noteholders enter into this
Agreement for the purpose of setting forth certain agreements among the Company
and the Noteholders relating to the prepayment of the Notes in connection with
the restructuring of the Company's indebtedness on the terms described below.
4. The Noteholders are willing to enter into this Agreement for the
purpose of facilitating the Company's efforts to restructure its indebtedness.
AGREEMENT
The parties to this Agreement, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, hereby agree as
follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined in this
Agreement shall have the meanings given to them in the Securities Purchase
Agreement.
Section 2. AGREEMENTS OF THE NOTEHOLDERS. The Noteholders hereby agree
as follows:
(a) NON-EXERCISE OF REMEDIES. The Noteholders agree (to the
extent provided in this Agreement) to refrain from exercising any rights or
remedies they may have with respect to Events of Default pursuant to the
Securities Purchase Agreement existing on the date hereof and with respect to
the Event of Default that will occur pursuant to the Securities Purchase
Agreement upon
<PAGE>
the Company's failure to pay the installment of principal due on the Notes on
July 17, 1996. The agreement of the Noteholders set forth in the previous
sentence will terminate on the earlier of (i) the 120th day following the date
of this Agreement; (ii) the consummation of the Restructuring; and (iii) the
"Termination Date" (as defined below).
(b) TERMINATION DATE. As used in this Agreement, the term
"Termination Date" shall mean 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 Noteholders, any one
of the conditions to the Restructuring described in Section 3(d) below is no
longer capable of being satisfied. The term "Standstill Event of Default" shall
mean the first to occur of 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 any involuntary case
or proceeding, consents to the entry of an order for relief against it in any
involuntary 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, except to the extent that any of the foregoing result from the
filing of a bankruptcy petition by the Company in connection with the "Plan" (as
defined below); (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 Company 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 Company or any substantial part of its assets and such order or appointment
remains unstayed and in effect for 60 days; or (iii) the Company defaults in its
obligation to make interest payments on the Senior Notes as described below. The
Company shall promptly give notice to the Majority Noteholders of the occurrence
of any event or circumstance of which it is aware that would constitute grounds
for the Majority Noteholder to declare, pursuant to the next sentence, that the
Termination Date has occurred. If the Termination Date shall occur, the
Majority Noteholders shall give the Company notice of the occurrence. Upon the
provision of such notice, the agreement of the Noteholders set forth in Section
2(a) shall terminate and be of no further force or effect.
(c) AMENDMENT OF WARRANTS. Each Noteholder hereby consents to
the amendment of the Warrants, issued by the Company and dated July 17, 1992
(the "Warrants"), to provide that each such Warrant shall expire upon the
consummation of the Restructuring.
(d) AGREEMENT TO REFRAIN FROM TRANSFERS. Each Noteholder hereby
agrees that, prior to the Termination Date, it will not voluntarily transfer the
Notes or Warrants owned by it unless the transferee agrees to be bound by the
terms and conditions of this Agreement.
(e) WAIVER OF PENALTY INTEREST AND PREPAYMENT PREMIUM. Each
Noteholder hereby agrees to refrain, prior to the Termination Date, from
collecting from the Company, and from asserting any right to collect, any
payment of penalty interest on overdue payments of principal and interest on the
Notes with respect to payments of principal due prior to the date of this
Agreement
-2-
<PAGE>
and prior to the Termination Date. Further, each Noteholder hereby agrees that
the provisions of the Securities Purchase Agreement that require the payment by
the Company of a prepayment premium upon the optional prepayment of the Notes
shall be waived in connection with the prepayment of the Notes upon consummation
of the Restructuring.
Section 3. AGREEMENTS OF THE COMPANY. The Company hereby agrees as
follows:
(a) NO WAIVER. The Company hereby acknowledges and agrees that
the agreement with respect to non-exercise of remedies set forth in Section 2(a)
does not constitute a waiver by the Noteholders of any Events of Default with
respect to the Notes.
(b) EXCHANGE OFFER/PROXY SOLICITATION. The Company shall, as
soon as practicable, (i) submit to the holders of the Company's 8% Subordinated
Convertible Debentures due 2003 (the "Convertible Debentures") an offer to
exchange (the "Exchange Offers") shares of its $.001 par value per share Common
Stock (the "Common Stock"), that have been registered pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), for the Convertible Debentures
and (ii) solicit proxies from the holders of its outstanding shares of Common
Stock authorizing it to vote shares of the outstanding Common Stock in favor of
amendments to its Certificate of Incorporation as necessary to permit it to
consummate the Exchange Offer.
(c) NEW CREDIT AGREEMENT. The Company shall, simultaneously
with the consummation of the Exchange Offer, enter into a Credit Agreement with
BNY Financial Corporation (the "Lender"), which Credit Agreement shall have
substantially the terms set forth on Exhibit "A" hereto, and shall cause the
Lender to advance funds sufficient to permit the Company to pay to the holders
of the Notes an amount equal to (i) the principal amount of the Notes then
outstanding and (ii) the accrued and unpaid interest with respect to the Notes
at the non-default rate through the close of business on the day prior to the
receipt of such payment, which payment shall be in full satisfaction of the
Company's obligation with respect to the Notes.
(d) THE RESTRUCTURING. As used in this Agreement, the term
"Restructuring" shall mean the consummation of the Exchange Offer and the
payment to the holders of the Notes of an amount equal to (i) the principal
amount of the Notes then outstanding and (ii) the accrued and unpaid interest
with respect to the Notes at the non-default rate through the close of business
on the day prior to the receipt of such payment with the proceeds of one or more
advances pursuant to the Credit Agreement. 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 shall have
validly tendered and shall not have withdrawn their Convertible Debentures prior
to the expiration date of the Exchange Offer; (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) to certain
amendments to the terms of the Convertible Debentures; (iii) the Company's
stockholders shall have approved a 1-for-27 reverse stock split, amendments to
the Company's Certificate of Incorporation to create a seven-member classified
Board of Directors, amendments to
-3-
<PAGE>
the Company's Certificate of Incorporation to effect certain changes
regarding the governance of the Company, an increase in the authorized number
of shares of preferred stock, and a stock option plan for the officers and
employees of the Company; (iv) the Company and Lender shall have negotiated
and executed the Credit Agreement and the conditions to the effectiveness
thereof shall have been satisfied or waived; and (v) the Company shall have
received consents from the holders of at least a majority of the Stock Units
represented by the Warrants to the amendment of the expiration date of the
Warrants as contemplated by Section 2(d) of this Agreement. If the Company
elects to consummate the Restructuring pursuant to the Plan, the conditions
to the Restructuring shall be as follows: (i) the Company shall have received
acceptances of the Plan from the holders of not less than two-thirds in
principal amount and more than one-half in number of each of the Notes and
the Convertible Debentures and (ii) the Company and the Lender shall have
negotiated and executed the Credit Agreement and the conditions to the
effectiveness thereof shall have been satisfied or waived. The Company
reserves the right to waive or modify any of the conditions to the
Restructuring set forth above, provided that such waiver or modification does
not materially adversely affect the rights of the Noteholders pursuant to the
Restructuring as described in this Agreement and provided, further, that the
holders of the Notes are paid, upon consummation of the Restructuring, an
amount equal to (i) the principal amount of the Notes then outstanding and
(ii) the accrued and unpaid interest at the non-default rate with respect to
the Notes through the close of business on the day prior to the receipt of
such payment.
(e) INTEREST PAYMENTS. Pending consummation of the
Restructuring, the Company will continue to pay non-default rate interest with
respect to the Notes in accordance with their terms.
Section 4. PRE-PACKAGED PLAN ALTERNATIVE. The Noteholders hereby
agree, if requested to do so by the Company, to submit to the Company
acceptances of a "pre-packaged" plan of reorganization (the "Plan") with respect
to all the outstanding principal amount of Notes held by each of them, provided
that (i) the terms of the Plan affecting the rights of the Noteholders do not
differ in any material adverse respect from the terms set forth in this
Agreement and (ii) the Plan is filed within 120 days of the date of this
Agreement.
Section 5. REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants to each Noteholder as follows:
(a) The Company is duly organized and is validly existing and in
good standing under the jurisdiction of its incorporation.
(b) The Company has full power, authority and legal right to
execute, deliver and perform its obligations pursuant to this Agreement, and has
taken all necessary action to authorize such execution, delivery and
performance.
(c) This Agreement has been duly executed and delivered by the
Company and is enforceable against the Company in accordance with its terms,
except as enforceability may be
-4-
<PAGE>
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
(d) The execution and delivery of this Agreement by the Company
will not violate or conflict with the Company's Certificate of Incorporation or
Bylaws.
Section 6. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute one and the same
instrument.
Section 7. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without regard to the conflicts of law principles thereof.
Section 8. SEVERABILITY. If any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions and portions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
---------------------------------
By: Alexius A. Dyer
Its: President
-5-
<PAGE>
NOTEHOLDERS:
SUN LIFE INSURANCE COMPANY
OF AMERICA
By:
-------------------------------
Its:
------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
RIVERSIDE CAPITAL ADVISORS
By:
-------------------------------
Its:
------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
ORIX USA CORP
By:
-------------------------------
Its:
------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
-6-
<PAGE>
ARTHUR E. LEVINE
----------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
WILLIAM T. RATLIFF
---------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
NORMAN TULCHIN
---------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
GRENVILLE CRAIG
----------------------------------
Principal Amount of Senior Notes Owned:
$
----------------
-7-
<PAGE>
MELLON BANK NA
By:
------------------------------
Its:
-----------------------------
Principal Amount of Senior Notes Owned:
$
----------------
FRIENDLY CAPITAL PARTNERS L.P.
By:
------------------------------
Its:
-----------------------------
Principal Amount of Senior Notes Owned:
$
----------------
NORTHEAST INVESTORS TRUST
By:
------------------------------
Its:
-----------------------------
Principal Amount of Senior Notes Owned:
$
----------------
-8-
<PAGE>
DEPOSITARY AGREEMENT
August __, 1996
First Union National Bank of North Carolina
Shareholder Services Administration
Two First Union Center
Charlotte, North Carolina 28288-1154
Dear Sirs:
International Airline Support Group, Inc., a Delaware corporation (the
"Company"), is (i) soliciting (the "Solicitation") consents (the "Consents")
from the holders of its 8% Convertible Subordinated Debentures due August 31,
2003 (the "Convertible Debentures") to certain proposed amendments to the
several Securities Purchase Agreements, each dated September 8, 1993, pursuant
to which the Convertible Debentures were issued (collectively, the "Purchase
Agreements") and (ii) offering to issue 224.54 shares of its Common Stock (the
"Exchange Offer") in exchange for each $1,000.00 principal amount of the
Convertible Debentures, under the terms and subject to the conditions set forth
in the Proxy Statement/Prospectus dated August __, 1996 (the "Proxy
Statement/Prospectus"), in the related Consent and Letter of Transmittal (the
"LT"), and in the related Notice of Guaranteed Delivery (the "NGD"), including
the instructions set forth therein. Definitive copies of each document being
distributed by the Company to its debentureholders in connection with the
Exchange Offer and the Solicitation have been previously delivered to you.
The Exchange Offer and the Solicitation (together the "Offer") are being
commenced on August __, 1996 and will expire at 5:00 p.m., New York City time,
on __________, 1996, unless the Exchange Offer is extended by the Company as
provided in the Proxy Statement/Prospectus (the latest date to which the
Exchange Offer is extended and on which it expires is herein referred to as the
"Expiration Date").
<PAGE>
This will confirm our agreement with you under which you will act as the
Depositary in connection with the Offer. In such capacity you will receive, on
behalf of the Company, Convertible Debentures tendered and Consents given
pursuant to the terms of the Offer. In carrying out your duties as the
Depositary in connection with the Offer, you are to act in accordance with the
following instructions:
1. EXAMINATION. You shall examine the LTs, the NGDs, the Convertible
Debentures, and the other documents delivered or mailed to you in connection
with tenders of Convertible Debentures and Consents to ascertain whether they
are completed and executed in accordance with the instructions set forth in the
LTs or the NGDs, as the case may be. If any LT has been improperly completed or
executed, or the Convertible Debentures accompanying such LT are not in proper
form (as required by the aforesaid instructions); if any NGD has been
improperly completed or executed; or if some other irregularity in connection
with any tender of Convertible Debentures or delivery of Consents (or withdrawal
or revocation thereof) or any delivery of an LT or an NGD exists, neither you
nor the Company shall be under any duty to give notification of defects in such
tenders, deliveries, withdrawals or revocations or shall incur any liability for
failure to give such notification. Determination of all questions as to the
validity, form, eligibility (including timeliness of receipt), acceptance,
withdrawal and revocation of any Convertible Debentures, Consents, or NGDs
tendered or delivered shall be determined by you on behalf of the Company in the
first instance, but final decisions on all such matters shall be made by the
Company. The Company will reserve in the Offer the right to reject any or all
Convertible Debentures not properly tendered and Consents not validly given and
any Convertible Debentures the Company's acceptance of which would, in the
opinion of the Company or its counsel, be unlawful, and to waive any of the
conditions of the Offer as to any ineligibility of any debentureholder who seeks
to tender Convertible Debentures or consent or as to any defect or irregularity
in the tender of any Convertible Debentures and Consents, and the Company's
interpretation of the terms and conditions of the Offer will be final and
binding on all parties.
2. FORM OF TENDER. All Convertible Debentures and Consents must be
tendered in accordance with the terms and conditions set forth in the Proxy
Statement/Prospectus. All LTs and NGDs must comply with the terms and
conditions set forth therein and in the Proxy Statement/Prospectus. Upon
satisfaction or waiver of the conditions to the Exchange Offer, the Company will
accept, promptly after the Expiration Date, all properly tendered Convertible
Debentures that were not withdrawn on or prior to the applicable Expiration
Date. The Company will be deemed to have accepted validly tendered Convertible
Debentures and validly delivered Consents in the Solicitation if, as, and when
the Company gives oral or written notice to you of the Company's acceptance.
Promptly after the Expiration Date, shares of Common Stock in exchange for
Convertible Debentures accepted in the Exchange Offer will be delivered to you,
as agent for tendering debentureholders, as provided in Section 9 of this
Agreement. Holders of Convertible Debentures who desire to accept the Exchange
Offer must consent to the proposed amendments.
3. WITHDRAWAL AND REVOCATION OF TENDERED DEBENTURES AND CONSENTS. A
tendering debentureholder may withdraw Convertible Debentures tendered or revoke
Consents given as set forth in the Proxy Statement/Prospectus.
<PAGE>
4. PROGRESS REPORTS. On each business day up to and including the
Expiration Date, you shall advise by telephone, not later than 5:00 P.M., New
York City time, George Murnane III of the Company, (305) 593-2658, Phillip A.
Theodore, Esq., of King & Spalding, (404) 572-4600, and such other persons as
either of them may direct, the principal amount of Convertible Debentures with
respect to which Consents have been tendered on such day, the principal amount
of Convertible Debentures which have been duly tendered on such day, stating
separately the principal amount of Convertible Debentures tendered by NGD, the
principal amount of Convertible Debentures and Consents tendered about which you
have questions concerning validity, the principal amount of Convertible
Debentures and Consents invalidity tendered and the nature of the invalidity,
and the cumulative principal amount of Convertible Debentures and Consents
tendered through the time of such call. Promptly thereafter (by the next
business day), you shall confirm such advice to each of the above persons in
writing, to be transmitted by telecopier. Telecopier transmissions sent to the
Company shall be directed to (305) 593-2214; telecopier transmissions to the
Company's counsel shall be directed to (404) 572-5145. You shall also inform
the aforementioned persons, and such other persons as may be designated by
either of them, upon request made from time to time, of such other information
as either of them may request, including, without limitation, the names and
addresses of registered holders of tendered Convertible Debentures and Consents.
5. SUBSTITUTE TENDERS. LTs, NGDs or letters, facsimile transmissions,
telexes or telegrams submitted in lieu thereof, shall be stamped by you as of
the date and time of receipt thereof and preserved by you as permanent records
until you are otherwise instructed by the Company. You are to match NGDs
submitted with the Convertible Debentures tendered pursuant thereto. If so
instructed by the Company, you shall telephone Eligible Institutions (as defined
in the Proxy Statement/Prospectus) which have tendered a significant number of
Convertible Debentures by means of an NGD to ascertain information in connection
therewith.
6. AMENDMENT OF OFFER. The Company will notify you of, and confirm in
writing, any extension or amendment of the Offer.
7. MODIFICATION OF INSTRUCTIONS. You shall follow and act upon any
amendments, modifications or supplements to these instructions received by you,
and upon any further instructions in connection with the Offer, any of which may
be given to you by the Company or such other persons as it may authorize.
8. DEPOSITS OF SHARES FOR CONVERTIBLE DEBENTURES. The Company will
deposit or cause to be deposited with you, as agent for the tendering holders of
Convertible Debentures, within a reasonable time after the Company's acceptance
for exchange of tendered Convertible Debentures, a number of shares of its
Common Stock to be issued pursuant to the Exchange Offer in exchange for
tendered Convertible Debentures which you then hold or expect to receive
pursuant to an NGD. The Company will also deposit with you or cause to be
deposited with you cash in an amount equal to the total transfer taxes, if any,
payable by the Company in respect of the transfer of all the Convertible
Debentures tendered and accepted for exchange which you hold or expect to
receive pursuant to NGDs. You shall thereupon, as promptly as possible after
the Expiration Date, (a) purchase and affix appropriate transfer tax stamps to
any Convertible Debentures tendered and accepted which are subject to such
transfer tax, (b) cause the tendered Convertible Debentures to be
<PAGE>
transferred and delivered to the Company in accordance with written instructions
from the Company to you, and (c) effect the issuance and delivery of a whole
number of shares of Common Stock in exchange for the Convertible Debentures
tendered and accepted to, or in accordance with the instructions of, each of the
debentureholders who has tendered Convertible Debentures deposited with you;
provided, however, that you will not effect any such issuance with respect to a
Convertible Debenture tendered pursuant to an NGD unless you have received from
the debentureholder that delivered the NGD the Convertible Debentures described
therein (or a confirmation of a book-entry transfer of such debentures into your
account at the Book-Entry Transfer Facilities), and a properly completed LT (or
facsimile thereof) and any other required documents.
9. NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued in the Exchange Offer. You will aggregate all fractional shares of Common
Stock otherwise issuable in the Exchange Offer and sell them in the open market.
Promptly after the Expiration Date, but in any event no later than five business
days after the Expiration Date, you will pay to each tendering debentureholder
otherwise entitled to a fractional share of Common Stock an amount of cash in
lieu of such fractional share equal to such debentureholder's proportionate
interest in the proceeds of sales of all such fractional shares in the open
market, net of your costs in effecting such sales.
10. PARTIAL TENDER. If, pursuant to the provisions of the LT, fewer than
all the Convertible Debentures submitted to you are to be tendered, you shall,
promptly after the Expiration Date, return or cause to be returned a new
Convertible Debenture for the remainder of the Convertible Debentures not being
tendered to, or in accordance with the instructions of, each of such
debentureholders who has made a partial tender of Convertible Debentures
deposited with you.
11. RETURN OF DEPOSITED DEBENTURES. If any tendered Convertible
Debentures are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Convertible Debentures will be returned, without expense, to the
tendering debentureholders as soon as practicable following the Expiration Date.
The Company shall, prior to such return, deposit sufficient funds with you to
cover all costs necessary to effect such return.
12. OFFERING MATERIALS. Upon request by any person, you shall furnish to
such person copies of the Proxy Statement/Prospectus, any supplements to the
Proxy Statement/Prospectus, the LT, the NGD and the other materials referred to
in the Proxy Statement/Prospectus as being available to debentureholders. The
Company will supply you with copies of such documents upon your request.
13. OBLIGATIONS OF DEPOSITARY. As Depositary you:
(a) shall have no duties or obligations other than those specifically
set forth herein or as may subsequently be requested of you by the Company with
respect to the Offer and accepted or approved by you;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any
Convertible Debentures or Consents
<PAGE>
deposited with you pursuant to the Offer and will not be required and will make
no representations as to the validity, value or genuineness of the Offer;
(c) shall not initiate any legal action hereunder without written
approval of the Company and then only upon such reasonable indemnity as you may
request;
(d) may rely on and shall be protected in acting upon any
certificate, instrument, opinion, notice, letter, facsimile transmission, telex,
telegram or other documents, or any security delivered to you, and reasonably
believed by you to be genuine and to have been signed by the proper party or
parties;
(e) may rely on and shall be protected in acting upon written or oral
instructions with respect to any matter relating to your acting as Depositary
specifically covered by this Depositary Agreement, or supplementing or
qualifying any such action, of George Murnane III of the Company;
(f) may consult with counsel satisfactory to you (including counsel
for the Company) and the written advice or opinion of such counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by you hereunder in good faith and in accordance with such
advice or opinion of such counsel;
(g) shall arrange for insurance protecting the Company any yourself
against any liability arising out of the loss, destruction or non-delivery of
checks or certificates for any cause; and
(h) shall not at any time advise any person as to the wisdom of
making any tender pursuant to the Exchange Offer, the value of the Convertible
Debentures, or as to any other financial or legal aspect of the Offer or any
transaction related thereto.
14. SEGREGATED ACCOUNT. It is understood and agreed that the securities,
money, assets or property (the "Property") to be deposited by the Company with
you or received by you from the Company as Depositary constitute a special,
segregated account, held solely for the benefit or the Company and
debentureholders tendering Convertible Debentures and Consents, as their
interests may appear, and the Property shall not be commingled with the
securities, money, assets or properties of you or any other person, firm or
corporation. You hereby waive any and all rights of lien, attachment or set-off
whatsoever, if any, against the Property so to be deposited, whether such rights
arise by reason of statutory or common law, by contract or otherwise.
15. PAYMENT TO DEPOSITARY. For services rendered as Depositary hereunder,
you shall be paid the fees described in Appendix A attached hereto. In
addition, you shall be reimbursed for all of your out-of-pocket expenses
reasonably and necessarily incurred by you in acceptance and performance of your
duties hereunder. All such fees and expenses shall be payable by the Company to
you upon presentation of a statement therefor, regardless of whether any
Consents or tendered Convertible Debentures are accepted by the Company.
<PAGE>
16. COVENANTS OF THE COMPANY. The Company covenants and agrees to
indemnify and to hold you harmless against any costs, expenses (including
reasonable fees of your legal counsel), losses or damages, which may be paid,
incurred or suffered by or to which you may become subject, arising from or out
of, directly or indirectly, any claim or liability resulting from your actions
as Depositary pursuant hereto; provided, that such covenant and agreement does
not extend to, and you shall not be indemnified with respect to, such costs,
expenses, losses and damages incurred or suffered by you as a result of, or
arising out of, your gross negligence, bad faith, or willful failure to perform
your obligations hereunder. In no case will the Company be liable under this
indemnity with respect to any claim against you unless, promptly after you have
received an written assertion of a claim or have been served with summons or
other first legal process giving information as to the nature and basis of the
claim, you notify the Company, by letter or by cable or telex confirmed by
letter, of the written assertion of such claim against you or of any action
commenced against you or of the service of any summons on you, or other first
legal process giving information as to the nature and basis of the claim. The
Company will be entitled to participate at its own expense in the defense. If
the Company so elects at any time after receipt of such notices and agrees in
writing that such claim is a claim for which you are entitled to be indemnified
and held harmless hereunder or if you in such notice request and the Company
agrees, the Company will assume the defense of any suit brought to enforce any
such claim. In the event the Company assumes the defense of any such suit, the
Company may select counsel of its own choosing and reasonably satisfactory to
you, for such purpose and the Company will not be liable for the fees and
expenses of any additional counsel thereafter retained by you; provided, that
you will not be obligated to approve representation of you in any action or
proceedings by counsel which also acts as counsel to the the Company in the same
action or proceedings. The Company shall not be liable for the settlement of
any such claim if the settlement is effected without its written consent (which
consent shall not be unreasonably withheld).
17. CHOICE OF LAW. This Depositary Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia and shall inure to
the benefit of and the obligations created hereby shall be binding upon the
successors and assigns of the parties hereto.
18. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which when executed and delivered shall be an original,
but all such counterparts shall together constitute but one and the same
instrument.
19. SEVERABILITY. Each provisions of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity or
enforcement of the remainder of this Agreement.
<PAGE>
If the foregoing is acceptable to you, please acknowledge receipt of this
letter and confirm the arrangements herein provided by signing and returning the
enclosed copy.
Very truly yours,
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
By:______________________________________
Title:_________________________________
ACCEPTED AS OF THE DATE HEREOF:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:______________________________
Title:________________________
<PAGE>
EXHIBIT 10.14
EXECUTION DRAFT
COMMISSION AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of December, 1995,
by and among INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a Delaware corporation
(hereinafter referred to as "Company"), and J.M. ASSOCIATES, INC., a Connecticut
corporation (hereinafter referred to as "JMA");
W I T N E S S E T H:
WHEREAS, subject to the terms and conditions of this Agreement, Company
desires to compensate JMA for its efforts in, among other things, originating
sales of the Company's aircraft and inventory;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1. COMMISSIONS.
During the term of this Agreement, JMA shall cause its employee Mr. E.
James Mueller to use his best efforts to (i) procure customers for Company's
aircraft-spare-parts business; (ii) sell or lease the aircraft from
time-to-time owned by the Company; and (iii) procure customers for any other
line of business in which the Company may from time-to-time engage. To
compensate JMA, Company agrees to pay JMA a commission of three percent (3%) on
the "Net Cash Receipts" (as defined below) from (i) any spare parts sold to any
customer obtained by JMA; (ii) any aircraft (together with engines, parts,
accessories, equipment and/or appliances) sold to any purchaser obtained by JMA;
(iii) any rentals paid pursuant to any lease of an aircraft to a lessee obtained
by JMA; and (iv) any other product sold or service rendered by the Company to a
customer obtained by JMA. Without limiting the generality of the foregoing,
Company and JMA acknowledge and agree that JMA is entitled to receive the
commission specified above on the Net Cash Receipts attributable to Company's
lease of a Boeing 727-100 freighter aircraft (manufacturer's serial number
18896) to Custom Air Holdings, Inc., a Nevada corporation, pursuant to the
Aircraft Lease Agreement, dated January 15, 1995 (including Net Cash Receipts
after the date of this Agreement that are attributable to rentals accrued prior
to the date of this Agreement).
Commissions shall be credited to JMA's account on the Company's books
when the customer, purchaser or lessee has made payment in full in cash to the
Company. JMA shall be paid monthly, on or before the 15th day of the month, an
amount equal to the commission credited to its account on the Company's books at
the end of the previous month. "Net Cash Receipts" means the gross amount of
cash received by the Company from a customer, purchaser or lessee, less state,
<PAGE>
federal and local taxes incurred by the Company with respect to the transaction
subject to the commission and any and all out-of-pocket costs of consummating
the transaction.
SECTION 2. TERM.
This Agreement shall continue in full force and effect through the close of
business on November 30, 1998 (the "Initial Term"). Following the expiration of
the Initial Term, this Agreement shall continue in force for successive one-year
terms (each, a "Renewal Term"), unless either the Company or JMA provides not
less than ninety days' prior written notice to the other that this Agreement
shall terminate at the end of the Initial Term. During any Renewal Term, either
the Company or JMA may terminate this Agreement effective at the end of a
subsequent Renewal Term by giving the other party not less than ninety days'
prior written notice of such termination. Notwithstanding anything set forth in
this Agreement to the contrary but subject to the right of the Company to
terminate its obligations to JMA pursuant to the following sentence, JMA's right
to receive from the Company any commission earned pursuant to Section 1 shall
survive the termination of this Agreement.
Following a "Change of Control," as defined below, or the consummation of a
transaction pursuant to which the Company's obligations with respect to its
outstanding indebtedness are restructured in a manner satisfactory to the
Company's Board of Directors (a "Restructuring"), the Company may elect to
terminate this Agreement and all obligations hereunder to pay commissions to JMA
by providing not less than thirty days' prior written notice to JMA, which
notice shall be accompanied by the payment of One Hundred Fifty Thousand Dollars
($150,000.00).
A "Change of Control" shall occur upon any of the following events:
(i) the sale of all or substantially all of the Company's assets to
any person or group of persons;
(ii) the acquisition by any person or group of persons of that number
of shares of the Company's voting stock that would permit it, or such
group, as the case may be, to elect a majority of the Board of Directors of
the Company; or
(iii) the merger or consolidation of the Company with or into any
other corporation or entity.
SECTION 3. INDEPENDENT CONTRACTOR.
It is the intention of the parties that JMA and its employees be
independent contractors and not employees, agents, joint venturers, or partners
of Company. Nothing in this Agreement shall be interpreted or construed as
creating or establishing the relationship of employer and employee between the
Company and JMA or any of its employees.
-2-
<PAGE>
SECTION 4. ATLANTA OFFICE SPACE; EXPENSE REIMBURSEMENT. During the term
of this Agreement, the Company shall provide Mr. E. James Mueller with office
space within the Company's Atlanta, Georgia office without charge and shall pay
all charges for utilities and telephone service incurred by Mr. Mueller during
his use of such office space. Further, Company shall reimburse Mr. Mueller for
his out-of-pocket expenses incurred while traveling outside of the Metropolitan
Atlanta area in the performance of JMA's duties pursuant to this Agreement or
otherwise at IASG's request.
SECTION 5. MISCELLANEOUS.
5.1 BINDING EFFECT. This Agreement shall inure to the benefit of and
shall be binding upon JMA and Company and its successors; provided, however,
that JMA may not assign or otherwise delegate any of its obligations or rights
hereunder without the prior written consent of Company; provided, further,
however, that Company may not assign its rights hereunder without the prior
written consent of JMA.
5.2 PRIOR AGREEMENT. Company and JMA acknowledge and agree that this
Agreement supersedes the agreement between JMA and the Company dated March 25,
1994, that from and after the date of this Agreement such prior agreement shall
be of no further force and effect and that JMA has been paid all amounts due and
owing to it pursuant to such prior agreement.
5.3 GOVERNING LAW. This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with, the laws of the State of Georgia.
5.4 HEADINGS. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
5.5 NOTICES. Unless otherwise designated in writing by the parties
hereto, all communications provided for hereunder shall be in writing and shall
be deemed to be given when delivered in person or five (5) business days after
being sent by registered or certified mail, postage prepaid, and
(a) If to JMA, addressed to:
J.M. Associates, Inc.
P.O. Box 921955
Norcross, Georgia 30092
Attention: Mr. E. James Mueller
-3-
<PAGE>
(b) If to Company, addressed to:
International Airline Support Group, Inc.
8095 Northwest 64th Street
Miami, Florida 33166
5.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
5.7 ENTIRE AGREEMENT. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and is the complete and exclusive statement of the terms thereof
notwithstanding any representation, statement, or agreement to the contrary
heretofore made. This Agreement may be modified only by a written instrument
signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By:
-------------------------------------
A.A. Dyer, III
J.M. ASSOCIATES, INC.
By:
-------------------------------------
E. James Mueller
- 4 -
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
1994 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income (loss) before extraordinary items $(17,012,681) $ (613,840) $2,285,969
Extraordinary item (363,022) - -
------------ ---------- ----------
Net earnings (loss) $(17,375,703) $ (613,840) $2,285,969
------------ ---------- ----------
------------ ---------- ----------
Weighted average shares issued and outstanding 4,041,779 4,041,779 4,041,779
------------ ---------- ----------
------------ ---------- ----------
Primary earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (0.15) $ 0.57
Extraordinary item (0.09) - -
------------ ---------- ----------
Net earnings (loss) $ (4.30) $ (0.15) $ 0.57
------------ ---------- ----------
------------ ---------- ----------
FULLY-DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary items, as reported $(17,012,681) $ (613,840) $2,285,969
Reduced interest expense due to assumed conversion
of Convertible Debentures - - 800,000
------------ ---------- ----------
Income before extraordinary items for computing
earnings (loss) per share (17,012,681) (613,840) 3,085,969
Extraordinary item (363,022) - -
------------ ---------- ----------
Net income for computing earnings (loss) per share $(17,375,703) $ (613,840) $3,085,969
------------ ---------- ----------
------------ ---------- ----------
Weighted average shares issued and outstanding 4,041,779 4,041,779 4,041,779
Common stock equivalents, Convertible Debentures
computed using if converted method - - 2,500,000
------------ ---------- ----------
Weighted average shares for computing
fully-diluted earnings (loss) per share 4,041,779 4,041,779 6,541,779
------------ ---------- ----------
------------ ---------- ----------
Fully-diluted earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item $ (4.21) $ (0.15) $ 0.47
Extraordinary item (0.09) - -
------------ ---------- ----------
Net earnings (loss) $ (4.30) $ (0.15) $ 0.47
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Exhibit 11
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
IASG -- Virgin Islands, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 940,274
<SECURITIES> 0
<RECEIVABLES> 2,749,691
<ALLOWANCES> 735,000
<INVENTORY> 9,277,315
<CURRENT-ASSETS> 12,301,078
<PP&E> 4,734,082
<DEPRECIATION> 2,051,620
<TOTAL-ASSETS> 16,132,331
<CURRENT-LIABILITIES> 23,141,502
<BONDS> 406,760
0
0
<COMMON> 4,042
<OTHER-SE> (7,419,973)
<TOTAL-LIABILITY-AND-EQUITY> (7,415,931)
<SALES> 21,410,201
<TOTAL-REVENUES> 23,204,969
<CGS> 13,207,671
<TOTAL-COSTS> 18,747,042
<OTHER-EXPENSES> 2,157,910
<LOSS-PROVISION> 464,099
<INTEREST-EXPENSE> 2,191,968
<INCOME-PRETAX> 2,300,017
<INCOME-TAX> 14,048
<INCOME-CONTINUING> 2,285,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,285,969
<EPS-PRIMARY> .57
<EPS-DILUTED> .47
</TABLE>
